Partnership Formation and Operations

Partnership Formation and Operations 1. As of July 1, 2012, FF and GG decided to form a partnership. Their balance sheets on this date are as follows: FF

GG

Cash………………………………………………. Accounts Receivable……………………………… Merchandise Inventory……………………………. Machinery and Equipment………………………… Total……………………………………….

15,000 540,000

37,500 225,000 202,500 270,000 735,000

Accounts Payable …………………………………. FF, Capital…………………………………………. GG, Capital…………………………………………

135,000 570,000

150,000 705,000

705,000

240,000 495,000 735,000

The partners agreed that the machinery and equipment of FF is underdepreciated by 15,000 and that of GG by 45,000. Allowance for doubtful accounts is to be set up amounting to 120,000 for FF and 45,000 for GG. The partnership agreement provides for a profit and loss ratio and capital interest of 60% to FF and 40% to GG. How much cash must FF invest to bring the partner’s capital balances to their profit and loss ratio? a. 142,500

c. 172,500

b.52,500

d. 102,500

2. CC admits DD as a partner in business. Accounts in the ledger for CC on November 30, 2012 just before the admission of DD, show the following balances: Cash…………………………………….. 6,800 Accounts Receivable………………….... 14,200 Merchandise Inventory………………… 20,000 Accounts Payable………………….…. ... 8,000 CC, Capital…………………………….. 33,000 It is agreed that for purposes of establishing CC’s interest, the following adjustments shall be made: (a) An allowance for doubtful accounts of 3% of accounts receivable is to be established. (b) The merchandise inventory is to be valued at 23,000 (c) Prepaid salary expenses of 600 and accrued rent expense of 800 are to be recognized. DD is to invest sufficient cash to obtain a 1/3 interest in the partnership. Compute for: (1) CC’s adjusted capital balance before the admission of DD; and (2) the amount of cash investment by DD:

a. (1) 35,347; (2) 11,971

c. (1) 35,374; (2) 17,687

b. (1) 36,374; (2) 18,487

d. (1) 28,174; (2) 14,087

3. MM, NN and OO are partners with capital balances on December 31, 2012 of 300,000, 300,000 and 200,000, respectively. Profits are shared equally. OO wishes to withdraw and it is agreed that OO is to take certain equipment with second hand value of 50,000 and a note for the balance of OO’s interest. The equipment are carried on the books at 65,000. Brand new equipment may cost 80,000. Compute for: (1) OO’s acquisition of the secondhand equipment will result to a reduction in capital; (2) the value of the note that OO will get from the partnership’s liquidation. a. (1) 15,000 each for MM and NN

(2) 150,000

b. (1) 5,000 each for MM, NN and OO

(2) 145,000

c. (1) 5,000 each for MM, NN and OO

(2) 195,000

d. (1) 7,500 each for MM and NN

(2) 145,000

4. AA and DD created a partnership to own and operate a health food store. The partnership agreement provided that AA receive a salary of 10,000 and DD a salary of 5,000 to recognize their relative time spent in operating the store. Remaining profits and losses were divided 60:40 to AA and DD, respectively. Income for 2012, the first year of operations, of 13,000 was allocated 8,800 to AA and 4,200 to DD. On January 1, 2013, the partnership agreement was changed to reflect the fact that DD could no longer devote any time to the store’s operations. The new agreement allows AA a salary of 18,000 and the remaining profits and losses are divided equally. In 2013, an error was discovered such that the 2012 reported income was understated by 4,000. The partnership income of 25,000 for 2013 included the 4,000 related to year 2012. In the reported net income of 25,000 for the year 2013. AA and DD would have: AA

DD

a.

21,900

3,100

b.

17,100

17,100

AA

DD

c.

0

0

d.

12,500

12,500

5. The partnership of DD and BB was formed and commenced operations on March 1, 2011, with DD contributing 30,000 cash and BB investing cash of 10,000 and equipment with an agreed upon valuation of 20,000. On July 1, 2011, BB invested an additional 10,000 in the partnership, DD made a capital withdrawal of 4,000 on May2, 2011 but reinvested the 4,000 on October 1, 2011. During 2011, DD withdrew 800 per month and BB, the managing partner, withdrew 1,000 per month. These drawings were charged to salary expense. A preclosing trial balance taken at December 31, 2011 is as follows:

Debit

Credit

Cash……………………………………………… 9,000 Receivablesnet…………………………………..15,000 Equipmentnet……………………………………50,000 Other Assets……………………………………... 19,000 Liabilities………………………………………… 17,000 DD, Capital………………………………………. 30,000 BB, Capital………………………………………. 40,000 Service Revenue………………………………….. 50,000 Supplies Expense………………………………… 17,000 Utilities Expense…………………………………. 4,000 Salaries to partners………………………………… 18,000 Other miscellaneous expenses……………………. 5,000 Compute for the share of DD and BB in the partnership net income assuming monthly salary allowances 800 and 1,000 for DD and BB, respectively; interest allowance at a 12% annual rate on average capital balances; and remaining profits allocated equally. a. DD, 10,520; BB, 13,480

c. DD, 10,800; BB, 13,200

b. DD, 12,000; BB, 12,000

d. DD, 10,600; BB, 13,400

6. WW and RR share profits and losses equally. WW and RR receive salary allowances of 20,000 and 30,000 respectively and both partners receive 10% interest on their average capital balances. Average capital balances are calculated at the beginning of each month regardless of when the capital contributions and capital withdrawals were made, and partners’ drawings were not used in determining the average capital balances. Total net income for 2011 is 120,000. WW January 1 Capital Balances…………………… 100,000 Yearly drawings (1,500 a month)…………… 18,000 Permanent withdrawals of Capital: June 3………………………………… (12,000) May 2………………………………… Additional investments of capital: July 3………………………………… 40,000 October 2……………………………..

RR 120,000 18,000

(15,000)

50,000

What is the weighted average capital for WW and RR respectively for 2011? a.110,667 and 11,583

c. 100,000 and 120,000

b.105,333 and 126,667

d. 126,667 and 105,333

7. AA and BB formed a partnership in 2012 and made the following investments and capital withdrawals during the year: AA

BB

Investment 30,000

March 1……………………………… June 1………………………………... August 1……………………………... 20,000 December…………………………….

Draws

Investment 20,000

10,000

Draws 10,000 2,000

5,000

The partnership’s profit and loss agreement provides for a salary of which 30,000 was paid to each partner for 2012. AA is to receive a bonus of 10% on net income after salaries and bonus. The partners are also to receive interest of 8% on average annual capital balances affected by both investments and drawings . Any remaining profits are to be allocated equally among the partners. Assuming net income of 60,000 before salaries and bonus, determine how the income would be allocated among the partners. a. AA, 31,138; BB, 28,862

c. AA, 30,633; BB, 29,367

b. AA, 33,537; BB, 26,463

d. AA, 30,684; BB, 29,316

8. HH, MM and AA formed a partnership on January 1, 2011, and contributed 150,000, 200,000, and 250,000 respectively. Their articles of copartnership provide that the operating income be shared among the partners as follows: as salary, 24,000 for HH, 18,000 for MM and 12,000 for AA; interest of 12% on the average capital during 2011 of the three partners ; and the remainder in the ratio of 2:4:4 respectively. The operating income for the year ending December 31, 2011 amounted to 176,000. HH contributed additional capital of 30,000 on July 1and made a drawing of 10,000 on October 1; MM contributed additional capital of 20,000 on August 1and made a drawing of 10,000 on October 1; and, AA made a drawing of 30,000 on November 1. The partner’s capital balances on December 31, 2011 are: a. HH, 179,680 ; MM, 229, 360 ; and, AA, 239, 360 b. HH, 179,760 ; MM, 229, 520 ; and, AA, 239, 520 c. HH, 189, 680 ; MM, 239, 360 ; and, AA, 269, 360 d. HH, 223,180 ; MM, 272, 060 ; and, AA, 280, 760

Theories 1. The following statements are true with respect to the characteristic elements of a partnership except: a. Partnership is consensual because it is perfected by the express or implied agreement of two or more persons. b. Partnership is innominate because the partners may determine their firm name. c. Partnership is onerous because each of the parties aspires to procure for himself a benefit through the giving of something. d. Partnership is commutative because the undertaking of each of the partner is considered as the equivalent of that of the other partners.

e. None of the above

2. Which of the following laws generally govern partnership transactions in the Philippines? a. Civil Code of the Philippines, Articles 1167 1867 b. Batas Pambansa Blg. 68 c. Civil Code of the Philippines, Articles 1767 1867 d. Batas Pambansa Blg. 1167 e. Batas Pambansa Blg. 1767 3. A limited partner may contribute: a. money

c. industry

b. property

d. all of the above

4. Which of the following is true regarding distribution of profits and losses in a partnership? a. The industrial partner shall receive a share in the profits, which must be satisfied first before the capitalist partners shall divide the profits, as may be just and equitable under the circumstances. b. The losses and profits shall be distributed not in conformity with the agreement in case capital contributions are well defined. c. Distribution of losses will be in proportion to the time spent in managing the partnership in case there is no stipulation in the contract and if there is also no profitsharing agreement. d. All of the above 5. Which of the following statements is incorrect? a. Every partner may associate another person with him in his share in the partnership. b. The associate may be admitted into the partnership even without the consent of all the other partners, provided that the partner having an associate is the managing partner. c. Every partner may associate another person with him in his share in the partnership and such associate is often referred as a subpartner. d. The associate may not be admitted into the partnership without the consent of all the other partners, even if the partner having an associate is the managing partner. 6. Which should not hold true in a limited partnership? a. A limited partnership is formed by compliance with the statutory requirements. b. One or more general partners control the business and are personally liable to creditors. c. The partnership debts are paid out of the common fund and the individual properties of the general partners.

d. One or more purely limited partners contribute to the capital and share in the profits and participate in the management of the business.