101

PROBLEMS_
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.

Ben capital $350,000

Pet capital $350,000

2. What is the total capital of the BIG partnership immediately after the assignment of the interest to Pet?

The total capital of BIG Entertainment Galley remains at $1,480,000. The amount paid by
Pet to Ben does not affect the partnership and Pet does not become a partner with the assignment of
half of Ben’s interest.

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.
D,capital 24,000
F, capital 24,000
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.
D, capital 18,000
E, capital 12,000
F, capital 30,000

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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

D, capital 18,000
E,capital 12,000
F, capital 30,000

b.2.2. Revaluation (goodwill) approach

Assets(Goodwill) 24,000
D, capital 16,800E,
E, capital 7,200

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.

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PROBLEMS 103

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.
n.2. Revaluation (Goodwill) or Bonus to Old Partners. J invests P18,000 for a 30% capital interest and
a 40% interest in profits.
n.2.1. Bonus Approach
n.2.2. Revaluation (Goodwill) Approach.
IV - Partner Admission – By Purchase and Investment
Phoenix and Tim Tucson are partners in an electrical repair business. Their respective capital balances are P90,000
and P50,000, and they share profits and losses equally. Because the partners are confronted with personal financial
problems, they decided to admit a new partner to the partnership. After an extensive interviewing process they elect
to admit Don Dallas into the partnership.
Required: Prepare the journal entry to record the admission of Don Dallas into the partnership under each of the
following conditions:
1. Don acquires one-fourth of Phil’s capital interest by paying P30,000 directly to him.
2. Don acquires one-fifth of each of Phil’s and Tim’s capital interests. Phil receives P25,000 and Tim receives
P15,000 directly from Don.
3. Don acquires a one-fifth capital interest for a P60,000 cash investment in the partnership. Total capital after
the admission is to be P200,000.
4. Don invests P40,000 for a one-fifth interest in partnership capital. Implicit goodwill (total revaluation of
asset) is to be recorded.
V - Partner Admission – By Investment
Brown and Coss have been operating a tax accounting service as a partnership for five years. Their current capital
balances are P92,000 and P88,000, respectively, and they share profits in a 60:40 ratio. Because of the growth in
their tax business, they decide that they need a new partner. Moore is admitted to the partnership, after which the
partners agree to share profits 40% to Brown, 35% to Coss, and 25% to Moore.
Required: Prepare the necessary journal entries to admit Moore in each of the following independent conditions. If
the information is such that both the bonus and goodwill (revaluation of asset) methods are appropriate, record the
admission using both methods.
1. Moore invests P90,000 in cash and receives a one-third capital interest.
2. Moore invests P120,000 cash for a 45% capital interest. Total capital after his admission is to be P300,000.
3. Moore agrees to invest P120,000 cash for a one-third capital interest, but will not accept a capital credit for
less than his investment.
4. Moore invests P40,000 cash for a one-fourth capital interest. The partners agree that assets and the firm as a
whole should not be revalued.
5. Moore invests P35,000 cash for a one-fifth capital interest. The partners agree that total capital after the
admission of Moore should be P225,000.

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6. Moore invests land in the partnership as a site for a new office building. The land, which originally cost
Moore P90,000, now has a current market value of P150,000. Moore is ad- mitted with a one-third capital
interest.
7. Moore is admitted to the partnership by purchasing a 30% capital interest from each partner. A payment of
P35,000 is made outside the partnership and is split between Brown and Coss.
VI – Comparison of Bonus and Revaluation/Goodwill Method – Admission by Investment
Mason and Norris are partners who have capitals of P 6,000 and P4,800 and who share profits in the ratio of 3:2.
Oster is admitted as a partner upon investing cash of P5,000, with profits to be shared equally.
Required:
1. Assume that Oster is allowed a 25% interest in the firm.
a. What entries would be made in recording the investment if the goodwill method is used?
b. What entries would be made if the bonus method is used? Which method will be preferred by Oster?
c. How much will Oster gain by the use of this method?
2. Assume that Oster is allowed a 40% interest in the firm.
a. What entries would be made in recording the investment if the goodwill method is used?
b. What entries would be made if the bonus method is used?
c. Which method will be preferred by Oster? How much will Oster gain by the use of this method?
VII - Withdrawal/Retirement of a Partner
Assume the following data on January 1, 20x4 for KLM Partnership had the following condensed balance sheet:
Assets Liabilities and Capital
Cash . . . . . . . . . . . . . . . . . . . . . . P 60,000 Liabilities . . . . . . . . . . . . . . . . . . . . . . . . P12,000
Noncash assets . . . . . . . . . . . . . . 48,000 K, capital (30%) . . . . . . . . . . . . . . . . . . 36,000
Loan receivable – K . . . . . . . . 6,000 L, capital(50%) . . . . . . . . . . . . . . . . . . 48,000
_________ M, capital (20%) . . . . . . . . . . . . . . . . . . 18,000
Total . . . . . . . . . . . . . . . . . . . . P 114,000 Total . . . . . . . . . . . . . . . . . . . . . . . . . . P114,000

The percentages in parentheses after the partner’s capital balances represent their respective interests in profits and
losses. On May 1, 20x4, K retires from the partnership. The net income of the partnership to date of retirement
amounted to P24,000. The partnership paid cash to the retiring partner also on the retirement date.
Required:
1. Determine the total interest of K, L and M immediately before the retirement of K.
2. Prepare journal entries to record the retirement of K, assuming:
a. Payment at Book Value (Settlement price is equal to the interest of retiring partner). The partnership paid
K, P37,200.
b. Payment at More than Book Value ((Settlement price is greater than the interest of retiring partner). The
partnership paid K, P42,000. Included in the noncash assets is an inventory costing P7,200 with a fair
value of P12,000. The remaining partners continue to use their old profit and loss ratio.
b.1. Bonus to Retiring Partner
b.2. Partial Revaluation (Goodwill) to Retiring Partner
b.3. Total Revaluation (Goodwill) to Retiring Partner
c. Payment at Less than Book Value ((Settlement price is less than the interest of retiring partner). The
partnership paid K, P31,200.
c.1. Bonus to Remaining Partner
c.2. Partial Revaluation/Write-down of Specific Assets (Share of Retiring Partner)
c.3. Total Revaluation (/Write-down of Assets (Entire Entity)
VIII – Withdrawal of a Partner
Portney, Grey, and Ross are partners with capital balances of P80,000, P200,000, and P120,000, respectively. Profits
and losses are shared in a 3:2:1 ratio. Grey decided to withdraw and the partnership revalued its assets. The value of
inventory was decreased by P20,000 and the value of land was increased by P50,000. Portney and Ross then agreed
to pay Grey P230,000 for his withdrawal from the partnership.
Required: Prepare the journal entry to record Grey’s withdrawal under the
1. Bonus method, assuming that revaluation increase and decrease was agreed by all partners to be recognized
2. Full goodwill (asset revaluation) method.

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PROBLEMS 105

IX – Withdrawal of a Partner
The partners in the ABC partnership have capital balances as follows:
A – P70,000; B - P70,000; C - P105,000
Profits and losses are shared 30%, 20%, and 50%, respectively. On this date, C withdraws and the partners agree to
pay him P140,000 out of partnership cash.
Required:
1. Prepare journal entries to show three acceptable methods of recording the withdrawal. (Tangible assets are
already stated at values approximating their fair market values.)
a. Bonus
b. Partial-goodwill (revaluation of asset)
c. Total goodwill (revaluation of asset)
2. Which alternative would you recommend if you determined that the agreement to pay C P140,000 was not
the result of arms length bargaining between C and the other partners? Why?
X – Withdrawal of a Partner
Agler, Bates and Colter are partners who share income in a 5:3:2 ratio. Colter, whose capital balance is P150,000,
retires from the partnership.
Required: Determine the amount paid to Colter under each of the following cases:
1. P50,000 is debited to Agler capital account; the bonus approach is used.
2. Goodwill (or revaluation of asset) of P60,000 is recorded; the partial goodwill (or revaluation of specific
asset) approach is used. P66,000 is credited to Bates’ capital account; the total goodwill approach is used.
XI - Incorporation of a Partnership
Assume that AA and BB, partners of AB Partnership (who share net income and loss in 80%:20%) organize A & B
Corporation to take over the net assets of the partnership. The balance sheet of the partnership on June 31, 20x4, the
date of incorporation, is as follows:
AB Partnership
Balance Sheet
June 30, 20x4
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 14,400
Trade accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 33,720
Less: Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 720 33,000
Inventories, first in, first out cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,600
Equipment at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 72,000
Less: Accumulated depreciation of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 31,200 _ 40,800
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 118,800
Liabilities and Partner’s Capital
Liabilities:
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 42,000
Partner’s capital:
AA, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 57,588
BB, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,212 __76,800
Total liabilities and partner’s capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. P118,800

After an appraisal of the equipment and an audit of the partnership’s financial statements, the partners agree that the
following adjustments are required to restate the net assets of the partnership to current fair value:
 Increase the allowance for doubtful accounts to P1,200.
 Increase the inventories to current replacement cost of P36,000.
 Increase the equipment to its reproduction cost new, P84,000, less accumulated depreciation on this basis,
P36,600; that is, to current fair value, P 47,400.
 Recognize accrued liabilities of P1,320.
 Recognize goodwill of P12,000.
A & B Corporation is authorized to issue 12,000 shares of P10 par common stock. It issues 9,000 shares of common
stock valued at P11 a share to the partnership in exchange for the net assets of the partnership.
Required: Prepare the required entries to incorporate a new corporation assuming:
1. Partnership books are retained
2. New books are opened for the A & B Corporation.

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XII
The balance sheet of Sade & Tipp LLP on April 30, 20x4, was as follows:
Cash . . . . . . . . . . . . . . . . . . . . . P 8,700 Notes payable . . . . . . . . . . . . P 10,000
Accounts receivable . . . . . . . 13,250 Accounts payable . . . . . . . . 9,800
Inventories . . . . . . . . . . . . . . . . 21,760 Sade, capital . . . . . . . . . . . . . 25,110
Equipment . . . . . . . . . . . . . . . . 32,400 Tipp, capital . . . . . . . . . . . . . . 20,000
Less: Accumulated
depreciation . . . . . . . . . . (11,200) ________
Total . . . . . . . . . . . . . . . . . . . . . P 64,910 Total . . . . . . . . . . . . . . . . . . . . . P 64,910
The partnership was converted to S & T Corporation, with new accounting records. Sade and Tipp received a total
of 10,000 shares of P1 par common stock in exchange for the net assets of the partnership. The accounting records
of the partnership had been maintained in accordance with generally accepted accounting principles, except that an
allowance for doubtful accounts of P800 had not been provided. The current fair values of the inventories and
equipment were P28,000 and P35,000, respectively. Sade and Tipp shared net income and losses in a 3:2 ratio,
respectively.

Required: Prepare journal entries for S & T Corporation on April 30, 20x4, to record the transfer of net assets from
the partnership and the issuance of common stock to the partners.
XIII - Comprehensive Problem
Brian Snow and Wendy Waite formed a partnership on July 1, 20x2. Brian invested P20,000 cash, inventory valued
at P15,000, and equipment valued at P67,000. Wendy invested P50,000 cash and land valued at P120,000. The
partnership assumed the P40,000 mortgage on the land.
On June 30, 20x3, the partnership reported a net loss of P24,000. The partnership contract specified that income and
losses were to be allocated by allowing 10% interest on the original capital investment, salaries of P15,000 to Brian
and P20,000 to Wendy, and the remainder to be divided in the ratio of 40:60.
On July 1, 20x3, Alan Young was admitted into the partnership with a P70,000 cash in- vestment. Alan was given a
30% interest in the partnership because of his special skills. The partners elect to use the bonus method to record the
admission. Any bonus should be divided in the old ratio of 40:60.
On June 30, 20x4, the partnership reported a net income of P150,000. The new partner- ship contract stipulated that
income and losses were to be divided in a fixed ratio of 20:50:30.
On July 2, 20x4, Brian withdrew from the partnership for personal reasons. Brian was given P40,000 cash and a
P60,000 note for his capital interest.

Required: Prepare journal entries for each of the following events. Show computations.
1. Formation of the partnership.
2. Distribution of the net loss for the first year.
3. Admission of Alan into the partnership.
4. Distribution of the net income for the second year.
5. Withdrawal of Brian from the partnership.

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