UNIVERSITY OF LA SALETTE,INC

COLLEGE OF ACCOUNTANCY
ACCOUNTING 009
ADVANCED ACCOUNTING I

COURSE REQUIREMENT
This course requirement will refine the knowledge of students towards the subject matter and apply the principles and concepts
acquired over classroom lectures and discussions.

Course Requirement Criteria:

Correctness of the answer of the requirement 70%

Cleanliness of the submitted requirement 20%
Ability to meet the set deadline 10%
TOTAL 100%

PARTNERSHIP FORMATION

INSTRUCTION: Read and answer each question carefully. Avoid erasures in answering your requirement. Write your
answers legibly. Use black pen.

PROBLEMS. Provide what is being asked in each item. No solution, no credit.

1. The balance sheet of H on November 30, 20x4 before accepting I as his partner to form HI

ASSETS
Cash P120,000
Accounts receivable P48,000
Less: Allowance for doubtful accounts. 3,000 45,000
Notes receivable 60,000
Merchandise inventory 27,000
Equipment P72,000
Less: Accumulated depreciation 6,000 66,000
Total assets P318,000

LIABILITIES AND CAPITAL

Accounts Payable P 12,000

Notes Payable 60,000
H, Capital 246,000
Total Liabilities and Capital P 318,000

It is agreed that for purposes of establishing H's interest the following adjustments shall be made:
a. The accounts receivable is estimated to be 90% realizable.
b. Interest at 8% on notes receivable dated March 1, 20x4 is to be accrued.
c. The merchandise inventory is to be valued at P21,000.
d. The equipment is under-depreciated by P4,800.
e. Prepaid expenses of P2,400 and accrued expenses of P7,200 are to be recognized.

I is to invest cash to obtain a one-third interest in the partnership.

Required:
1. Prepare the following entries in the books of H, as to:
a. Adjustments
b. Closing
c. Investments
2. Prepare the balance sheet after the formation of the partnership.

2. Two sole proprietors, L and M, agreed to form a partnership on January 1, 20x4. The trial balance
L M
Book Value Fair Value Book Value Fair Value
Cash P 40,000 P 40,000 P 30,000 P 30,000
Accounts receivable (net) 60,000 52,000 70,000 56,000
Merchandise Inventory 100,000 94,000 100,000 114,000
Building (net) 280,000 320,000 250,000 280,000
Furniture and Fixtures (net) 60,000 64,000 40,000 44,000
Accounts payable 110,000 110,000 80,000 80,000
Mortgage payable 200,000 200,000 150,000 150,000
 L, Capital 230,000
M, Capital 260,000

The LM partnership will take over the assets and assume the liabilities of the proprietors as of January 1, 20x4.

Required: Determine the following items after formation of the partnership.

1. Total assets 2. Total liabilities 3. Total capital

3. Max, Jones and Waters shared profits and losses 20%, 40% and 40% respectively and their partnership capital balance
is P 10,000, P30,000 and P50,000 respectively. Max has decided to withdraw from the partnership. An appraisal of the
business and its property estimates the fair value to be P200,000. Land with a book value of P30,000 has a fair value
of P45,000. Max has agreed to receive P20.000 in exchange for her partnership interest. What amount should land be
recorded on the partnership books?

4. On July 1, ML and PP formed a partnership, agreeing to share profits and losses in the ratio of 4:6, respectively. ML
contributed a parcel of land that cost her P25,000. PP contributed P50,000 cash. The land was sold for P50.000 on
July 1, four hours after formation of the partnership. How much should be recorded in ML's capital account on the
partnership formation?

5. Paul, Jeremy, and Juan are forming a partnership. Juan contributes a building having ah historical cost, accumulated
depreciation, and market value of P290.000, PI00,000, and P400,000, respectively. The building is initially recorded
on the partnership's books at Juan's book value (PI 90,000). Two years later the building is sold for a P270,000 gain.
What portion of the profit or loss should be allocated to Juan?

6. Albert, Claude, and Jamie form a partnership by contributing P25.000, P70,000, and P80,000, respectively. In
addition, the partners agree that Albert should receive P20.000 of goodwill because of his special skills relevant to this
business. What amount of capital will exist for Claude when the partnership is formed?

7. Max, Ike, and Tony are forming a partnership. The appraised value of assets contributed is P60,000, P80,000, and
PI00,000, respectively. In addition, Max and Tony agree that Ike's experience is worth P30,000. The partners desire to
apply the bonus method where applicable. What is the total capital recorded at the date the partnership is formed?

8. Richardson, Peterson, and Wilkerson are forming a partnership. The partners contribute cash and noncash assets
valued at P30,000, P50,000, and P25.000, respectively. The partners choose to apply the bonus method where
applicable. If the partners agree to establish equal capital account balances when the partnership is formed, how much
of a bonus is received by Richardson?

9. Bill and Ken enter into a partnership agreement in which Bill is to have a 60% interest in capital and profits and Ken
is to have a 40% interest in capital and profits. Bill contributes the

Cost Fair Value

Land P 10,000 P 20,000
Building P 100,000 P 60,000
Equipment P 20,000 P 15,000
There is a P30,000 mortgage on the building that the partnership agrees to assume. Ken contributes P50,000 cash to
the partnership. Bill and Ken agree that Ken's capital account should equal Ken's P50.000 cash contribution and that
goodwill (revaluation of asset) should be recorded. Goodwill (revaluation of asset) should be recorded in the amount
of:

10. WW and MM drafted a partnership agreement that lists the following assets contributed at the partnership formation:
WW MM
Cash P 20,000 P 30,000
Inventory 15,000
Building 40,000
Furniture and Equipment 15,000
The building is subject to a PI0,000 mortgage, which the partnership has assumed. The partnership agreement also
specifies that profits and losses are to be distributed evenly. What amounts should be recorded as capital for WW and
MM at the formation of the partnership?

11. Jones and Smith formed a partnership with each partner contributing the following items:

Jones Smith
Cash P 80.000 P 40,000
Building - Cost to Jones 300,000
- Fair value 400,000
Inventory - Cost Smith 200,000
- Fair value 280,000
Mortgage Payable 120,000
Account Payable 60,000

Assume for tax purposes Jones and Smith agree to share equally in the liabilities assumed by the Jones and Smith
partnership. What is the balance in each partners capital account for financial reporting purposes?
Modified True-or-False: If your answer is false, justify such answer. (2 pts each)
1. A partnership is a taxable entity.
2. A partnership is a tax-reporting entity but not a tax-paying entity.
3. In a general partnership, only a majority of partners need to have unlimited liability to partnership creditors.
4. When a partnership agreement has provisions that are contrary to laws pertaining to partnerships, law is controlling.
5. Partnerships are separate legal entities, like corporations.
6. A partner's drawing account is merely a contra-capital account.
7. A partner's drawing account is substantively a loan account.
8. Under the Partnership Law, partnerships must follow GAAP.
9. Only individuals are allowed to be partners in a partnership.
10. Proprietorships and partnerships are similar in that they are both easily formed.
11. Proprietorships and partnerships are different in that proprietors have unlimited legal liability while each partner's
legal liability is limited to his/her percentage ownership in the partnership.
12. Partnerships are not required to prepare financial statements in accordance with Generally Accepted Accounting
Principles unless they have publicly traded debt or are required to follow GAAP by a creditor.
13. Most small partnerships maintain their financial information in accordance with Generally Accepted Accounting
Principles.
14. Tax authorities basically view partnerships and proprietorships as extensions of their owners. Partnerships are not
required to pay any taxes.
15. The proprietary theory of equity is based on the notion that a business entity is distinct from the owners.
16. The entity theory of equity is based on the notion that a business entity is distinct from the owners.
17. An individual partner's personal responsibility for partnership debts is an example of the entity theory of equity.
18. Appraisals are not necessarily required when assigning value to noncash assets contributed to the partnership.
19. Assigning a noncash asset contributors carrying value could result in a misallocation of gain or loss if the asset is
sold.
20. An assets carrying value should not be considered when establishing the initial capital accounts of partners.
21. The assumption of a liability by the partner\ship with regard to a noncash asset contributed to the partnership by a
partner will affect the value assigned to the partners capital account.

PARTNERSHIP OPERATION
PROBLEMS. Provide what is being asked in each item. No solution, no credit.

1. The net income of A and B Partnership for 20x4 amounted to P504.000. A, as the managing partner, is allowed as a
bonus.
Required: Determine the amount of bonus, assuming:
1. Bonus of 20% of net income before the bonus is deducted (bonus is treated as an allocation of distribution of
net income).
2. Bonus of 20% of net income after deduction of the bonus (bonus is treated as an expense in computing the
bonus amount).

2. The net income of A and B Partnership for 20x4 amounted to P504,000. A, is the managing partner. Assume that the
partners agreed on the allocation of net income as follows:
Bonus of 20% to A;
Salaries to A, P48,000 and B, P72,000;
Interest on average capital balances - A, PI 4,400 and B, P9.600.
Residual balance in net income be allocated to A and B in the ratio of 2:1 ratio.

Required: Prepare a schedule to allocate net income, assuming:

1. Bonus is based on net income before bonus, salaries and interest.
2. Bonus is based on net income after bonus but before salaries and interest.
3. Bonus is based on net income after bonus and salaries but before interest.
4. Bonus is based on net income after bonus, salaries and interest.
5. Bonus is based on net income after salaries but before bonus and interest.
6. Bonus is based on net income after interest but before bonus and salaries.
7. Bonus is based on net income before bonus but after income tax (tax rate is 35%).
8. Bonus is based on net income, that is, after bonus and income tax of 35%:

3. Rodgers and Michael formed a partnership on January 2, 20x4. Michael invested P120,000 in :ash. Rodgers invested
land valued at P30.000, which he had purchased for P20,000 in 20x0. In addition, Rodgers possessed superior
managerial skills and agreed to manage the firm. The partners agreed to the following profit and loss allocation
formula:
a. Interest - 8% on original capital investments. Salary - P5,000 a month to Rodgers.
b. Bonus - Rodgers is to be allocated a bonus of 20% of net income after subtracting the bonus, interest, and
salary.
c. Remaining profit is to be divided equally.
At the end of 20x4 the partnership reported net income before interest, salaries, and bonus of PI 68,000.
Required: Calculate the amount of bonus to be allocated to Rodgers.

4. James, Keller and Rivers have the following capital balances; P48.000, P70,000 and P90,000 respectively. Because of
a cash shortage James invests an additional P12,000 on June 1st. Each partner withdraws PI ,000 per month. James,
 Keller and Rivers receive a salary of PI3,000, P15,000 and P20,000, respectively, for work done during the year. Each
partner receives interest of 8% on their weighted average capital balance without regard to normal drawings. Any
remaining profits are split 20%, 30% and 50% respectively. The net income for the year is P30,000.
Required: What are the ending capital balances for each partner?

5. Carey and Drew formed a partnership on January 1, 20x4. Carey invested PI00,000, Drew P70,000. Each partner
withdrew capital of PI2,000 on each of the following dates during 20x4: February 1, August 1, and November 1.
These withdrawals in total were equal to salaries for the year. Interest of 8 percent was to be paid partners on the basis
of their average capital balances excluding net income. Additionally, Carey was to get a 20 percent bonus based on
partnership net income after the bonus, but before the salaries and interest.
Any remaining profit (or loss) was to be allocated equally among the partners.
Required: If partnership net income was PI50,000, how was it to be allocated between Carey and Drew?

6. Cable and Jones are considering forming a partnership whereby profits will be allocated through the use of salaries
and bonuses. Bonuses will be 10% of net income after total salaries and total bonuses. Cable will receive a salary of
P30.000 and a 10% bonus. Jones has the option of receiving a salary of P40,000 and a 10% bonus or simply receiving
a salary of P52,000.
Required: Determine the level of income that would be necessary so that Jones would be indifferent to the profit-
sharing option selected

7. Partner Alta had a capital balance on January 1, 20x4 of P45,000 and made additional capital contributions during
20x4 totaling P50,000. During the year 20x4, Alta withdrew P8.000 per month. Alta's post-closing capital balance on
December 31, 20x4 is P30.000. Alta's share of 20x4 partnership income is:

8. Partners A and B have a profit and loss agreement with the following provisions: salaries of P20,000 and P25,000 for
A and B, respectively; a bonus to A of 10% of net income after bonus; and interest of 20% on average capital balances
of P40,000 and P50.000 for A and B, respectively. Any remainder is split equally. If the partnership had net income of
P88,000, how much should be allocated to Partner A?

9. BB and and GG formed a partnership in 20x4. The partnership agreement provides for annual salary allowances of
P55.000 for BB and P45,000 for GG. The partners share profits equally and losses in a 60:40 ratio. The partnership
had earnings of P80,000 for 20x5 before any allowance to partners. What amount of these earnings should be credited
to each partner's capital account?

10. Partners A and B have a profit and loss agreement with the following provisions: salaries of
P30.000 and P45.000 for A and B, respectively; a bonus to A of 12% of net income after salaries and bonus; and
interest of 10% on average capital balances of P50,000 and P65.000 for A and B, respectively. One-fourth of any
remaining profits are allocated to A and the balance to B. If the partnership had net income of PI08,600. How much
should be allocated to Partner A?

11. Partners A and B have a profit and loss agreement with the following provisions: salaries of P40,000 and P45,000 for
A and B, respectively; a bonus to A of 10% of net income after salaries and bonus; and interest of 15% on average
capital balances of P40,000 and P60,000 for A and B, respectively. One-third of any remaining profits or losses are
allocated to B and the balance to A. If the partnership had net income of P52.000. How much should be allocated to
Partner A?

12. Partners Acker, Becker & Checker have the following profit and loss agreement:
a. Acker &Becker receive salaries of P40.000 each
b. Checker gets a bonus of 10 percent of net income after salaries and bonus (the bonus is zero if salaries
exhaust net income)
c. Remaining profits are shared by Acker, Becker & Checker in the following ratios respectively: 3:4:3.
The partnership had a net income of P91,000. How much should be allocated to Checker?

13. Partners A and B have a profit and loss agreement with the following provisions: salaries of P41,600 and P38,400 for
A and B, respectively; a bonus to A of 10% of net income after salaries and bonus; and interest of 10% on average
capital balances of P20,000 and P35,000 for A and B, respectively. One-third of any remaining profits are allocated to
A and the balance to B. If the partnership had a net income of P36,000. How much should be allocated to Partner A?

14. Partners Tuba and Drum share profits and losses of their partnership equally after 1) annual salary allowances of
P25,000 for Tuba and P20,000 for Drum and 2) 10% interest is provided on average capital balances. During 20x4,
the partnership had earnings of P50,000; Tuba's average capital balance was P60,000 and Drum's average capital
balance was P90.000. How should the P50,000 of earnings be divided?

15. Mack and Ruben are partners operating an electronics repair shop. For 20x4, net income, after salaries expense of
PI50,000 was P50,000. Mack and Ruben have salary allowances of P90,000 and P60.000, respectively, and remaining
profits and losses are shared 6:4. The division of salaries and profits in total to Mack and Ruben would be:

16. Robbie and Ruben are partners operating a portable toilet lease and maintenance operation. For 20x4, net income was
P50,000 (without taking into consideration the salary allowances). Robbie and Ruben have salary allowances of
P90,000 and P60,000, respectively, and remaining profits and losses are shared 6:4. If their agreement specifies that
 salaries are allowed only to the extent of income, based on a pro-rata share of their salary allowances, the division of
profits would be:

17. James has a bonus as part of his partner profit allocation. The bonus is based on the partnerships net income. James
receives a bonus equal to 5 percent that the net income exceeds PI50,000. If the net income in the current year is
P180,000, how much bonus does James receive?

18. Cheryl is the manager of a local store. She is also a partner in the company and she receives a bonus as part of the
profit and loss allocation. Cheryl's bonus is based on the increase in revenues recorded during the period. The bonus
arrangement is that Cheryl receives 1 percent of net income for every full percentage point growth for revenues in
excess of a 5 percent revenue growth. During the most recent period, revenues grew from P500,000 to P540,000 and
net income grew from P98,000 to P120,000. How much bonus does Cheryl receive for this period?

19. Johnson and Pritchard are partners. They are changing the profit and loss ratios from the current 60/40 to 70/30. At the
date of the change, vacant land owned by the partnership has a book value of P50,000 and a market value of P60,000.
The partners choose to prepare an itemized list of assets with market values different from book values. If the land is
sold in the future for P80,000, how much of the gain will be assigned to Johnson?

20. Karen and Andrea are currently changing their partnership profit and loss ratios from 75/25 to 60/40. They have
created a list of assets that have market and book value differences. One of the assets is a building with a P300,000
market value and P200,000 book value. Two years after changing the profit and loss ratios, the building is sold for
P380,000. How much of the profit is allocated to Karen?

21. Peter and Ronald are partners. They have shared profits and losses 65/35 for a number of years. Peter has indicated
that he is going to reduce his involvement in the partnership so the profit and loss ratio is being modified to 45/55. At
the date of the change in the profit and loss ratio, the partnership own vacant land with a market value of P300,000
and a book value of PI00,000. Peter and Ronald compile a list of assets with market and book value differences. Two
years after the change in the profit and loss ratios, the land is sold for P450.000. How much of the gain is allocated to
Ronald?

22. Jennifer and Robert are partners who are changing their profit and loss ratios from 60/40 to 45/55. At the date of the
change, the partners choose to revalue assets with market value different from book value. One asset revalued is land
with a book value of P50,000 and a market value of PI 20,000. Two years after the profit and loss ratio is changed,
the land is sold for P200,000. What is the amount of change to Robert's capital account at the date the land is
revalued?

23. Eric and Phillip have been partners for several years. During that time they have shared profits and losses (60/40).
They are currently revising the profit and loss ratios to (70/30). Eric and Phillip decide to adjust the capital accounts
at the date of the change to reflect the difference between market value and book value of assets and liabilities. At the
date of the change, the partnership owns a building with a book value of P350,000 and a market value of P60C000.
How much will Phillip's capital account be adjusted at the date of the change in the profit and loss ratios?

Modified True-or-False: If your answer is false, justify such answer. (2 pts each)
1. The ability of partners to withdraw resources from the partnership is controlled exclusively by the laws of the state where
the partnership resides.
2. The articles of partnership often control the size of withdrawals partners are allowed to make.
3. If a partnership makes a payment on behalf of a partner, a withdrawal has occurred.
4. Partnerships are required to indicate the manner in which profits and losses are to be allocated among the partners.
5. With the exception of the residual profit and loss ratio, partners can agree to apply profit and loss allocation components
in any order.
6. The interest component of partnership profit and loss allocation rewards the partner for labor and expertise brought into
the partnership.
7. The purpose of the interest on capital balances component of partnership profit and loss allocation is to reward partners
for contributing economic resources to the partnership.
8. The interest on capital balances component of partnership profit and loss allocation is always based on each partner's
beginning or period capital balance.
9. The interest on capital balances component of partnership profit and loss allocation is generally stated as a percentage of
the capital balance.
10. The salary portion of the profit and loss allocation is set in the articles of partnership and will not change over time.
11. The salary portion of the partnership profit and loss allocation is not included in the partnership's income statement.
12. The salary portion of the partnership profit and loss allocation is used to compensate partners for the time and effort
expected in the business.
13. Partnerships are required to have bonus clauses in the articles of partnership.
14. Bonus to partners can be based on any criteria on which the partners agree.
15. Partnership bonus arrangements must consider net income as part of the bonus calculation.
16. A residual interest is always a component of partnership profit and loss allocation.
17. Partnership profit and loss residual percentages must be equal.
18. Partnership profit and loss residual percentages must be the same for profits as they are for
19. losses.
20. Partnership profit and loss residual percentages are used to allocate any remaining profit or loss to partners after all other
allocation components have been considered.
21. Partnership residual profit and loss percentages may be changed by agreement of the partners.
22. Partnership residual profit and loss percentages do not have to be the last component applied in the profit and loss
allocation process.
23. When partnership profit and loss ratios are changed, the difference between market and book values should be
determined and allocated to partners based on the currently existing profit and loss ratios.
24. Partnerships must revalue assets up and/or down when the profit and loss ratios are adjusted.
25. When an error is discovered in the financial records of a partnership, it should be corrected immediately. Allocation of
any change to capital accounts as a result of an error correction should be based on the profit and loss ratios that existed
when the error occurred.
26. The value assigned to noncash assets invested by partners in a limited partnership is the cost of the assets or the current
fair value of the assets at the time of investment, whichever is lower.
27. Partners are also employees if they are active in the business of the partnership.
28. Theoretically, salary allowances paid to partners should not be reflected as salary in the general ledger.
29. Interest on partnership capital is mandatory in dividing profits and losses.