AFAR 2 Partnership Dissolution

Comprehensive Problems
1. On May 1, 2014, the capital accounts of S, T and C are P 1,260,000; P
787,500 and P 472,500, respectively. At this time, I is admitted to the firm,
he purchased a 1/6 interest in the firm for P 288,750. Afterwards, all the
partners agree to divide profits and losses equally. The new partnership
closes its books on June 30, 2014 reporting profit of P 44,100 for two
months. Each partner made the following withdrawals: S and C P 2,625 per
month while T and I, P 3,500 per month. On June 30, 2014, I invest enough
cash to increase his capital to a 1/3 interest in the partnership. How much
cash is to be invested by I?

2. The balance sheet of the proprietorship of Puno as of June 30, 2016 showed
the following assets and liabilities:
Cash: 40,000
Accounts receivable: 53,600
Inventory: 88,000
Equipment: 65,600
Accounts payable: 63,520

The cash balance included a 200-share certificate of SMC Inc. common at

acquisition cost of P1,600; the current market quotation is P70 per share. Of
the accounts receivable, an estimated 5% is considered to be doubtful of
collection. Certain inventory items, booked at a cost of P22,960 are
currently worth P16,000. Depreciation has not been recorded; the
equipment, acquired two years ago, has a remaining useful life of about
eight more years. Prepaid expense of P12,800 and accrued expense of
P6,120 have not been properly recognized. Justin and Bong will join Puno in
a partnership. Puno will invest the net assets of his business, after effecting
the appropriate adjustments, and he will be allowed credit for goodwill
equal to 10% of his initial capital credit. Justin and Bong will each
contribute cash to secure their respective interests of 1/3 and 1/6,
respectively.
a. How much would be Puno’s goodwill credit?
b. How much would be Justin’s cash investment?
c. How much would be Bong’s initial capital credit?
d. How much would be Justin’s initial capital credit?
e. How much would be Puno’s initial capital credit?

3. On January 1, 2021, the partnership of Distracted, Proactive and Focused

started with an initial contribution from the partners of P100,000, P200,000,
and P300,000, respectively. The partners stipulated that in case of death of
 any partner, the parties will compute profits up to the nearest month and to
provide for 20% annual interest for the deceased partner interest prior to its
settlement.
On July 1, 2021, Distracted suffered a heart-attack and instantly died. The
newly hired accountant of the partnership prepared the following entries
during the year:

7/1/2021 Distracted, Capital 100,000

Payable to Distracted’s estate 100,000
(To set-up Distracted’s capital as liability)

12/31/2021 Interest Expense 10,000

Payable to Distracted’s estate 10,000
(To recognize interest on Distracted’s estate)

12/31/2021 Sales 700,000

Inventory, end 50,000
Purchases 300,000
Operating expenses 160,000
Interest expense 10,000
Profit and loss summary 280,000
(To close nominal accounts)

12/31/2021 Profit and loss summary 280,000

Proactive, capital (40%) 160,000
Focused, capital (30%) 120,000
(To close profit and loss to Proactive and Focused’s remaining P&L
sharing ratio)
Profits were evenly earned throughout the year.

What are the correct capital balances of Proactive and Focused as of December
31, 2021?

4. Jose Reyes is a well-known lawyer in Manila. He wants to start a business

and convinces Pedro Santos, a Certified Public Accountant, to contribute the
capital to form a partnership. On January 1, 2010, Santos invests in a
building worth P52,000 and equipment valued at P16,000 as well as P12,000
in cash. Although Reyes makes no tangible contribution to the partnership,
he will operate the business and be an equal partner in the beginning
capital balances.
The partnership contract provided the following agreement:
 Santos will be credited annually with interest equal to 20 percent of
the beginning capital balance for the year.
 Santos will also have added to his capital account 15 percent of
partnership income each year (without regard for the preceding
 interest figure) or P4,000, whichever is greater. All remaining income
is credited to Reyes.
 Neither partner is allowed to withdraw funds from the partnership
during 2010. Therefore, they can each draw out P5,000 annually or 20
percent of the beginning capital balance for the year, whichever is
greater.

A net loss of P10,000 is reported by the partnership during the first year of
its operation. On January 1, 2011, Paulo Cruz becomes a third partner in
this business by contributing P15,000 cash to the partnership. Cruz receives
a 20 percent share of the business's capital. The profit and loss agreement is
altered as follows:
 Santos is still entitled to (1) interest on his beginning capital balance
as well as (2) the share of partnership income just specified.
 Any remaining profit or loss will be split on a 6:4 basis between Reyes
and Cruz, respectively.
Partnership income for 2011 is reported as P44,000. Each partner
withdraws the full amount that is allowed.

On January 1, 2012, Cruz falls ill and sells his interest in the partnership
(with the consent of the other two partners) to Juan Diaz. Diaz pays P46,000
directly to Cruz. Net income for 2012 is P61,000 with the partners again
taking their full drawing allowance.
On January 1, 2013, Diaz elects to withdraw from the business for personal
reasons. The partnership contract contains a provision stating that any
partner may leave the partnership at any time, and it’s entitled to receive
cash in an amount equal to the recorded capital balance at that time plus 10
percent.
Required:
a. Prepare journal entries to record the preceding transactions on the
assumption that the bonus (or no revaluation) method is used. Drawings
need not be recorded, although the balances should be included in the
closing entries.

5. Lina, Mina, and Nina are partners sharing profits on a 5:3:2 ratio and have
the following capital account balances: P150,000, P90,000, and P60,000,
respectively. On January 1, 2010, Olga was admitted into the partnership by
investing P40,000 with a 20% share in the profits. The old partners continue
to participate in profits proportionate to their original ratios.

For the year 2010, the partnership books showed a net profit of P50,000. It
was disclosed, however that the following errors were made:
 2009 2010
Unrecorded accrued expenses at 2,400
year end
Inventory overstated 6,200
Unrecorded purchases, for which
goods have been received and 4,000
inventoried
Income received in advance not 3,000
adjusted
Unused supplies not taken up at 1,800
year end

On January 1, 2011, Lina sold her interest to Mina for P100,000. After which
Mina, Nina and Olga agreed to share annual profits of P300,000 equally
among themselves. During 2011, Mina withdrew P20,000; Nina withdrew
P10,000 and Olga also withdrew P5,000.

At the end of 2012, Mina decided to retire from the partnership and was
paid P425,360 cash. It was agreed that the inventory with a book value of
P50,000 would be adjusted to reflect their fair value of P35,000 and that
total goodwill is to be recognized. Net income for the year was P195,000.
Required:
a. What is the share of partner Lina in the 2010 corrected net income?
b. What is the capital balance of Mina on December 31, 2010?
c. What is the capital balance of Olga on December 31, 2011?
d. What is the capital balance of Nina on December 31, 2012?

6. The statement of financial position of D and T, a partnership appear as

follows:

DT Partnership
Statement of Financial Position
As of October 31, 2021
Assets
Current Assets:
Cash P 41,100
Accounts Receivable P 212,160
Allowance for Bad 8,000 204,160
Debts
 Inventories 241,100
Prepaid Expenses 10,140
P 496,500
Noncurrent Assets:
Furniture and P 259,700
Fixtures
Accumulated 68,200 191,500
Depreciation
Total Assets P 688,000
Liabilities and Capital
Current Liabilities:
Accounts Payable P 161,400
Accrued Expenses 20,000 P 182,200

Partner’s Capital:
D, Capital P 269,700
T, Capital 236,100 505,800
Total Liabilities and P688,000
Capital

Additional Information:
 D and T share profits and losses equally
 The partners incorporate as Relevant Corporation with an authorized
capital of 5,000 shares at P100 par stock, of which 4,400 are issued to
the partners in exchange for their interest in the net assets of D and T,
and the remainder are issued at P120 per share for cash. The partners
agree that the following adjustment should be recorded:
o Allowance for bad debts decreased by P 4,000
o Inventories increased by 12,000
o Accumulated depreciation decreased by 6,200
Required:
a. How much is the share premium contributed by D and T to the new
corporation?
b. How many shares will D and T receive, respectively?

“Success isn’t some distant goal waiting for

you to stumble upon it—it's built from the
grind, from the hours no one sees, the
sacrifices no one applauds.”