CHAPTER 1 | PARTNERSHIP FORMATION
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Exercise 1-1. True or False
Instruction: On the space provided. Write the word TRUE if the statement is true and write the word FALSE if the
statement is false.
FALSE 1. A partnership should always be constituted in writing.
It can be constituted verbally as well.
TRUE 2. A partnership includes limited life, mutual contribution, and unlimited liability for partners.
TRUE 4. A partnership must always have at least two owners.
FALSE 5. In a contract of partnership, two or more persons bind themselves to contribute money or
property to a common fund with the intention of dividing the profits among themselves.
It lacks the property because it should have been “to contribute money, property, or
industry.”
FALSE 7. The basis for valuation of non-cash assets invested should be their fair market value.
The valuation of non-cash assets should be their agreed value. In the absence of an agreed
value, the valuation will be based on the fair market value.
FALSE 9. In a limited partnership, all of the partners have limited liability for the debts of the
partnership.
There is at least one (1) partner that is a general partner that will be accountable with an
unlimited liability.
TRUE 11. Work or services, either personal, manual or intellectual efforts, may also be contributed to
the partnership. [Industrial Partners]
FALSE 13. A silent partner takes an active part in the business of the partnership and is not known by
outsiders to be a partner.
Secret partner takes an active part …
FALSE 15. The partner's capital account is debited for additional investments and credited for his share
in net income.
Credited for additional investment and debited for his share in net income. [Reverse siya
from the statement.]
TRUE 17. In revaluing the non-cash assets which has no “contra-assets" or "asset offset", the amount
or adjustment is reflected in the asset itself.
TRUE 19. An advantage of a partnership over sole proprietorship is when there is net loss because it
can be shared among partners.
FALSE 21. Juridical persons or entities are not allowed to form a partnership business.
They are allowed in the General Professional Partnership (GPP).
FALSE 22. The manner in which profits and losses are to be divided should be stipulated in the
partnership contracts.
They may not be written in the contracts and will immediately follow the law imposed on
the division of profits and losses.
TRUE 24. A partner by estoppel is one who is actually not a partner but represents himself as one.
Lahi ang definition ni partner by estoppel.
TRUE 26. A partnership may be established for charitable purposes.
Courtesy to Google.
Exercise 1-2 Multiple Choice
Instruction: Encircle the letter of the choice that best completes the statement or answers the question in the space
provided before each number.
1. Which of the following is a characteristic of most partnerships?
a. Unlimited life b. Mutual contribution
c. Limited liability d. Division of profits only
2. Which of the following partnership characteristics is an advantage?
a. Limited life b. Ease of formation
c. Unlimited liability d. Mutual agency
3. The person who takes on full co-ownership of a partnership including unlimited liability is a
a. Sole proprietor b. Limited partner
c. Shareholder d. General partner
4. This type of partner can only lose what he has invested into the business
a. General partner b. Sole proprietor
c. Liquidating partner d. Limited partner
5. A partner who contributes his work, labor or industry to the common fund of the partnership is a/an
a. Industrial partner b. General partner
c. Limited partner d. Secret partner
6. A partnership agreement should include [A and C are not stated in the Articles of Co-Partnership]
a. Each partner’s duties b. The purpose of the business
c. The method of allocating profits and losses d. All of these
7. Non-cash assets invested into a partnership are recorded at
a. Values agreed upon by partners b. Their original cost
c. Their carrying value d. Their fair market value
8. A partnership which comprises all the profits that the partners may acquire by their work or industry during
the existence of the partnership is called
a. De jure partnership b. Universal partnership of profits
c. Particular partnership d. Universal partnership of all present
property
9. A partnership
a. Is created by voluntary agreement of the b. is created by operation of law
parties
c. is dissolved by death of the partners d. is operated by at least two persons
10. When a partner withdraws cash or other assets, the drawing account is
a. Debited b. Credited
c. Debited and credited d. Not affected
11. The following are kinds of partnerships according to liability of partners
a. General co-partnership b. Limited partnership
c. Industrial partnership d. A and B only
12. All of the following affect a partner's capital account except
a. Payment of a liability b. Withdrawal of the partners
c. Additional investment d. Partnership net income or loss
13. A partnership which has failed to comply with one or more of the legal requirements for its establishment is
called a/an
a. Open partnership b. De facto partnership
c. De jure partnership d. Secret partnership
14. Which of these characteristics does not apply to a general professional partnership?
a. Unlimited life b. Mutual agency
c. Unlimited liability d. No business income tax
15. Two individuals who were previously sole proprietors formed a partnership. Property other than cash which is
part of the initial investment in the partnership would be recorded for financial accounting purposes at the
a. proprietor's book values or the fair value of the property at the date of the investment, whichever is
higher
b. proprietor's book values or the fair value of the property at the date of the investment, whichever is
lower
c. proprietor's book values of the property at the date of the investment
d. fair value of the property at the date of investment
Problem 1-1 (Individuals with no existing business}
A. On March 1, 2021, Ram and Dawn formed a partnership with cash contributions of P200,000 and P100,000,
respectively. In addition to Ram’s cash contribution, he contributed an office equipment costing P15,000, but
with an agreed valuation of P10,000. On the other hand, Dawn contributed a piece of land costing P150,000,
but with an agreed valuation P200,000. The land has been mortgaged in a bank for P100,000.
Instructions: Record the contribution of Ram and Dawn under the following assumptions:
1. The mortgage balance was not assumed by the partnership.
2. The mortgage balance was assumed by the partnership.
B. Mar and Jun agreed to form MJ Traders, a partnership, with a profit and loss ratio of 1:2. On July 1, Mar
contributed cash-P100,000, office equipment with a fair market value of P10,000, and a second-hand delivery
vehicle purchased last year at P200,000 but with present fair market value of P140,000. On that same date,
Jun contributed cash-P30,000, merchandise brought 2 months ago for P180,000 and a fair market value of
P200,000 and furniture with a book value of P18,000 and a fair market value of P20,000.
Instructions:
1. Record the contribution of Mar and Jun in two simple journal entries.
2. Prepare a statement of financial position for the partnership after its formation.
C. On October 1, Dan and Marvin formed a partnership with the agreement that Marvin will contribute only his
services for a 25% share in the profit and Dan will contribute P100,000 cash and a computer worth P50,000.
Instructions:
Record the contribution of Dan and Marvin in the books of the partnership
Problem 1-2 (A Sole Proprietor and Individual with no existing business)
Martin has been a sole proprietor for quite a long time, and he finally decided to venture into the partnership business
with K. Santos. Below are the account balances of Martin prior to the formation of the partnership.
Cash P85,000
Accounts receivable 60,000
Allowance for doubtful accounts 4,000
Merchandise inventory 103,000
Equipment 125,000
Accumulated depreciation-Equipment 15,000
Accounts payable 75,000
Martin, Capital ?
As agreed, Santos will contribute cash equal to one-half of the capital balance of Martin after taking into account the
following adjustments:
a. The allowance for doubtful accounts is over set-up by P3,000.
b. Merchandise inventory should be valued at P100,000.
c. The equipment is under depreciated by P10,000.
d. Accounts payable was overstated by P5,000 due to recording of an expense account.
Instruction:
1. Compute for the capital account balance of Martin before partnership formation.
2. Prepare the necessary journal entries in the books of Martin.
3. Prepare a journal entry to close the books of Martin.
4. Prepare the journal entries to record the contribution of Martin and Santos in the books of the partnership.
5. Prepare a statement of financial position after the partnership formation.
Problem 1-3 (A Sole Proprietor and Individual with no existing business)
On September 1, 2021, Myka and Ivan formed a partnership. Myka is to invest assets at fair value which are yet to be
agreed upon. She is to transfer her liabilities and is to contribute sufficient cash to bring her total capital to P210,000,
which is 70% of the total capital of the partnership. Details regarding the book values of Myka’s business assets and
liabilities and their corresponding valuations are:
Accounts Book Values Agreed Values
Accounts receivable P58,000 P58,000
Allowance for doubtful accounts 4,200 5,000
Merchandise inventory 98,400 107,000
Store Equipment 32,000 32,000
Accumulated depreciation-Store Equipment 19,000 16,400
Office Equipment 27,000 27,000
Accumulated depreciation- Office Equipment 14,200 8,600
Accounts payable 56,000 56,000
Ivan agrees to invest cash of P42,000 and merchandise valued at current market value price.
Instructions:
1. Compute for the following:
a. The value of the merchandise to be contributed by Ivan.
b. The amount of cash to be invested by Myka.
2. Prepare the journal entries to record:
a. The adjustments in Myka’s books.
b. The closing entry in the books of Myka.
c. The opening entries in the books of the partnership to record the investments of Myka and Ivan.
Problem 1-4 (Two Proprietors Form a Partnership)
J. Hernandez and O. Bingo have agreed to merge their business under a new name “HB Construction”. The following
were the account balances of each proprietor as of June 30, 2021, prior to the formation of the partnership:
Accounts Hernandez Bingo
Cash P420,000 P450,000
Accounts receivable 82,000 60,000
Allowance for doubtful accounts 8,500 7,500
Merchandise inventory 100,000 250,000
Equipment 130,000
Accumulated depreciation-Store Equipment 15,000
Hernandez, Capital ?
Bingo, Capital ?
They agreed to adjust their respective sole proprietorship books as follows:
a. Their respective accounts receivable should be written-off in their books prior to the formation of the
partnership. Collection will be done by each sole proprietor.
b. Merchandize inventory of Hernandez and Bingo should have a net realizable value of P90,000 and P230,000,
respectively.
c. The equipment of Hernandez should have a net book value of P120,000.
Instructions:
1. Compute for the unadjusted capital of Hernandez and Bingo.
2. Prepare the journal entries to record:
a. The adjustments in the books of Hernandez and Bingo
b. The closing entry in the books of Hernandez and Bingo
c. The opening entries in the books of the partnership to record the investments of Hernandez and Bingo.
Problem 1-5 (Two Proprietors Form a Partnership)
On August 1, 2021, the business accounts of Mari and Anne appear below:
Accounts Mari Anne
Cash P11,000 P22,354
Accounts receivable 234,536 567,890
Inventories 120,035 260,102
Land 603,000 -
Building - 428,267
Furniture and fixtures 50,345 34,789
Other assets 2,000 3,600
Accounts payable 178,940 243,650
Notes payable 200,000 345,000
Mari, Capital 641,976
Anne, Capital 728,352
Mari and Anne agreed to form a partnership, Marianne Rentals, contributing their assets, liabilities, and equities
subject to the following adjustments:
a. Accounts receivable of P20,000 in Mari’s books and P35,000 in Anne’s books are uncollectible.
b. Inventories of P5,500 and P6,700 are worthless in Mari’s and Anne’s respective books.
c. Other assets of P2,000 for Mari and P3,600 for Anne are to be written off.
Instructions:
1. Prepare the adjusting journal entries in the books of Mari and Anne.
2. Prepare the statement of financial position of the new partnership right after formation.
Problem 1-6 (Open-ended Questions)
Instruction: Please provide the necessary solutions to your final answer to each question.
1. Marion invests in a partnership some land which cost his father P200,000. The land had a market value of
P450,000 when Marion inherited it six years ago and currently the land is independently appraised at
P900,000 even though Marion insists that he “wouldn’t take P1,000,000 for it”. At what amount should the
land be recorded in the accounts of the partnership?
2. On May 1, 2021, Mike and Minny formed a partnership and agreed to share profits and losses in the ratio of
7:3, respectively. Mike contributed a parcel of land that cost P250,000. Minny contributed P300,000 cash. The
land was sold for P900,000 on May 1, 2021, immediately after the formation of the partnership. What amount
should be recorded in Mike’s capital account on the formation of the partnership?
3. Kim and Kara formed a partnership on March 1, 2021, and contributed the following assets:
Kim Kara
Cash P400,000
Equipment (at market value) P250,000
The equipment was subject to a chattel mortgage of P50,000 that was assumed by the partnership. The
partners agreed to share profits and losses equally. How much is the amount of Kara’s capital to be recorded
in the partnership books?
4. Adela, Belle, and Claire are forming a new partnership in accounting. Adela is to invest cash amounting to
P100,000 and an equipment originally costing P120,000 but has a second-hand value in the market for
P50,000. Belle is to invest cash amounting to P160,000. Claire, whose family is engaged in selling
photocopying equipment, is to contribute cash amounting to P50,000 and a brand-new photocopying
equipment to be used by the partnership, with a regular price of P120,000 but their family bought it for
P110,000. Partners agreed to share profits and losses equally. What is the capital balance of each partner upon
formation?
5. Trina invested a used delivery vehicle to a new partnership. This vehicle was formerly used in Trina’s other
business. The book of that other business revealed that the vehicle costs was P500,000 and it has an
accumulated depreciation of P300,000. However, a car dealer estimated that the fair market value of the
vehicle was P250,000. At what amount should Trina’s delivery vehicle be recorded as investment in the new
partnership book?
6. On February 28, 2021, Allan, Bernie, and Carlo formed a printing company by combining their separate
properties. Allan contributed cash amounting to P50,000. Bernie contributed property with a P36,000 carrying
value, a P40,000 original cost, and P80,000 fair market value. The partnership accepts the responsibility of the
P35,000 mortgage attached to the property of Bernie. Carlo contributed equipment with a P30,000 carrying
amount, a P75,000 original cost, and P55,000 fair value. The agreement specifies that profits and losses are to
be shared equally but is silent regarding capital contributions. Which partner has the largest capital balances
on February 28, 2021?
7. Flow and Gerby formed a partnership. Flow contributed cash of P30,000 and a computer costing P60,000.
Gerby contributed equipment costing P60,000. The current market values of the non-cash assets are:
computer-P45,000 and equipment-P75,000. The partnership will not assume the P15,000 liability on the
equipment contributed by Gerby. What amount will be credited to each partner’s capital accounts?
8. Sue and Carmen started a partnership. Sue contributed a building that she purchased 10 years ago for
P100,000. The accumulated depreciation on the building on the date of formation of the partnership is
P25,000 and the fair value is P110,000. For what amount will Sue’s capital account be credited on the books
of the partnership?
9. Ave, Bernice, and Clarice form a partnership on December 1, 2021. They agreed that Ace will contribute an
equipment with a total fair value of P40,000; Bernice will contribute a delivery equipment with a fair value of
P80,000; and Clarice will contribute cash. If Clarice wants a one-third interest in the capital and profits, how
much cash should she contribute?
10. On July 1, Emma and Ulysses pooled their assets to form a partnership, with the firm to take over their
business assets and assume the liability. Partnership capitals are to be based on net assets transferred after the
adjustments. Profits and losses are allocated equally.
The inventory of Ulysses is to be increased by P4,000; an allowance for doubtful accounts of P1,000 and
P1,500 are to be set up in the books of Emma and Ulysses, respectively; and accounts payable of P4,000 is to
be recognized in Emma’s books. The induvial trial balances on July 1, before adjustments, follow:
Emma Ulysses
Assets P75,000 P113,000
Liabilities 5,000 34,500
What is the capital of Emma and Ulysses after the above adjustments?
