Midterm Exercises 1 Problems

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MIDTERM EXERCISES 1

I - Assignment of Interest to a Third Party


Capital balances and profit and loss sharing ratios of the partners in the BIG Entertainment Galley are as follows:

Ben capital (50%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 700,000


Irv capital (30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480,000
Geo capital (20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 1,480,000
Ben needs money and agrees to assign half of his interest in the partnership to Pet for P180,000 cash. Pet pays
P180,000 directly to Ben.
Required:
1. Prepare the journal entry to record the assignment of half of Ben’s interest in the partnership to Pet.
2. What is the total capital of the BIG partnership immediately after the assignment of the interest to Pet?
II - Admission by Purchase of an Interest
Assume that after operations and partners’ withdrawals during 20x2 and 20x3. DE Partnership has a book value of
P120,000 and profit and loss (P&L) percentage on January 1, 20x4 as follows:

Capital P&L
Balances Percentage
D.......................... P 72,000 70
E.......................... 48,000 30
Total . . . . . . . . . . . . . . . . . . . . . . . P 120,000 100
On this date, G is admitted to the partnership.
Required:
1. Prepare journal entries to record the admission of F, assuming:
a. Purchase of Interest from One Partner. F paid P28,800 directly to D in exchange for one-third (1/3)
interest.
b. Purchase of Interest from All Partners. This situation gives rise to three assumptions:
b.1. Purchase at Book Value. F purchases a one-fourth (1/4) interest in the firm. One-fourth of each
partner’s capital is to be transferred to the new partner. F pays the partner’s P30,000.
b.2. Purchase at More than Book Value. F purchased one-fourth of D’s interest for P21,600 and one-
fourth of F’s interest for P14,400, making payment directly to D and E. The new partner will
have a ¼ profit and loss ratio and the old partners continue to use their old profit and loss ratio.
b.2.1. Book value (BV) approach
b.2.2. Revaluation (goodwill) approach
b.3 Purchase at Less than Book Value. F purchased one-fourth of D’s interest by paying P26,400
directly to D and E. The new partner will have a ¼ profit and loss ratio and the old partners
continue to use their old profit and loss ratio.
b.3.1. Book value (BV) approach
b.3.2. Revaluation (goodwill) approach

2. What are the capital balances of the partners immediately after admission?
III - Admission by Investment

Assume the following data for GH Partnership had the following condensed balance sheet:
Assets Liabilities and Capital
Cash . . . . . . . . . . . . . . . . . . . . P 3,000 Liabilities . . . . . . . . . . . . . . . . . . . . . P 9,000
Noncash assets . . . . . . . . . . . 39,000 G, capital 60%) . . . . . . . . . . . . . . . 24,000
G, loan . . . . . . . . . . . . . . . . . . 3,000 H, capital(40%) . . . . . . . . . . . . . . . 12,000
Total . . . . . . . . . . . . . . . . . . . . P45,000 Total . . . . . . . . . . . . . . . . . . . . . . . . P45,000
The percentages in parentheses after the partner’s capital balances represent their respective interests in profits and
losses. The partners agree to admit J as a member of the firm.
Required:
1. Prepare journal entries to record the admission of J, assuming:
a. No Bonus or No Revaluation. J invests P12,000 for a ¼ interest in the firm. The total firm capital is to
be P48,000.
b. Bonus to New Partner. J invests P12,000 for a 35% interest in the firm. The total agreed capital after
admission is P48,000.
c. Revaluation (Goodwill) to New Partner. J invests P12,000 for a 1/3 interest in the firm and is allowed
a credit of P18,000 for his capital.
d. Bonus to Old Partners. J conveyed a tangible assets with a fair value of P30,000 with an assumed
mortgage of P6,000 in exchange for a 30% interest in capital with bonus being to be recognized,
keeping in mind that J would be acquiring a 1/4 interest in profits. Before the admission of J, GH
Partnership had an equipment of P4,800 with a fair value of P8,400.
e. Revaluation (Goodwill) to Old Partners. J must invest or contribute cash of P28,800 equivalent to
37.50% interest in a total agreed capital of P76,800. Included in the noncash assets is an equipment
undervalued by P8,400.
f. Bonus and Revaluation (Goodwill) to New Partner. J invests P12,000 for a 45% interest in the firm.
The total agreed capital after admission is P60,000.
g. Bonus and Revaluation to Old Partners. J invests P18,000 for a 20% interest in the firm. The total
agreed capital after admission is P72,000.
h. Revaluation (Goodwill) to New and Old Partners. J invests P18,000 for a 30% interest in the firm. The
total agreed capital after admission is P72,000.
i. Bonus to Old Partners with Bonus Amount Given. J invests P24,000 in the firm. P6,000 is considered
a bonus to Partners G and H. The book values of partnership assets and liabilities are equal to fair
values, except for a machinery with a book value of P3,600 and a fair value of P8,400.
j. Bonus to New Partner with an Indication of Bonus. J invests P7,200 for a 30% interest in the firm. G
and H transfer part of their capitals to that of J as a bonus. An equipment used in the business with a
book value of P6,000 and a fair value of P3,600.
k. Revaluation (Goodwill) to Old Partners with an Indication of a Revaluation (Goodwill). J invests
P18,000 for a ¼ interest in the firm. GH Partnership’s had other assets with a book value of P6,600 and
a fair value of P12,600. Revaluation (goodwill) approach is recorded on the firm books prior to J’s
admission.
l. Revaluation (Goodwill) to New Partner with Revaluation Amount Given. J invests P24,000 in the firm
and is allowed a credit of P7,200 for revaluation (goodwill).
m. Withdrawals Instead of Revaluation. J invests P24,000 for a 50% interest in the firm. The total firm
capital is to be P48,000 and partners agreed that their capital balances should made to equal to their
new profit and loss ratio.
n. Bonus and Revaluation (Goodwill) When Not Specifically Stated.
n.1. Revaluation (Goodwill) or Bonus to New Partner. J invests P18,000 for a 40% capital interest and
a 25% interest in profits.
n.1.1. Bonus Approach
n.1.2. Revaluation (Goodwill) Approach.

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