COLLEGE OF ACCOUNTANCY

Preliminary Examination in Financial Accounting and Reporting

NAME: _____________________________________________ SCORE: ___________ RATING: _______
YEAR/COURSE: _____________________________________

DIRECTION:
 You have three (3) hours to finish the examination.
 Use only BASIC CALCULATOR.
 Read the directions carefully.
 Avoid ERASURES.

TEST I
Direction: Analyze the following statements. Write the letter of the correct answer on the space provided before each number.

1. A partners' capital statement explains:

A. the amount of legal liability of each of the partners.
B. the types of assets invested in the business by each partner.
C. how the partnership will be capitalized if a new partner is admitted to the partnership.
D. the changes in each partner's capital account and in total partnership capital during a period.

2. Which of the following is not an advantage of the partnership form of business?

A. Mutual agency
B. Ease of formation
C. Ease of decision making
D. Freedom from governmental regulations and restrictions

3. A partner contributes, as part of her initial investment, accounts receivable with an allowance for doubtful accounts. Which
of the following reflects a proper treatment?
A. The balance of the accounts receivable account should be recorded on the books of the partnership at its net
realizable value.
B. The allowance account may be set up on the books of the partnership because it relates to the existing accounts that
are being contributed.
C. The allowance account should not be carried onto the books of the partnership.
D. The accounts receivable and allowance should not be recorded on the books of the partnership because a partner
must invest cash in the business.

4. Which of the following statements about a partnership is correct?

A. The personal assets of a partner are included in the partnership accounting records.
B. A partnership is not required to file an information tax return.
C. Each partner's share of income is taxable to the partnership.
D. A partnership represents an accounting entity for financial reporting purposes.

5. The partner in a limited partnership that has unlimited liability is referred to as the:
A. Lead partner.
B. Head partner.
C. General partner.
D. Unlimited partner.

6. The individual assets invested by a partner in a partnership:

A. revert back to that partner if the partnership liquidates.
B. determine that partner's share of net income or loss for the year.
C. are jointly owned by all partners.
D. determine the scope of authority of that partner.

7. Which of the following statements about partnerships is incorrect?

A. Partnership assets are co-owned by partners.
B. If a partnership is terminated, the assets do not legally revert to the original contributor.
C. If the partnership agreement does not specify the manner in which net income is to be shared, it is distributed
equally.
D. Each partner has a claim on assets equal to the balance in the partner's capital account.

COURSE CODE: AE 13 SUBJECT: Financial Accounting and Reporting DATE OF EXAMINATION: ____________________
TIME: _____________________ DAY: ________________ TIME OF EXAMINATION: ____________________
Page 1
 8. Which of the following would be least likely to be used as a means of allocating profit among partners who are active in the
management of the partnership?
A. Salaries
B. Bonus as a percentage of net income before bonus
C. Bonus as a percentage of sales in excess of targeted amount
D. Interest on average capital balances

9. Which of the following best describes the use of interest on invested capital as a means of allocating profits?
A. If interest on invested capital is used, it must be used for all partners.
B. Interest is allocated only if there is partnership net profit.
C. Invested capital balances are never affected by drawings of the partnerships.
D. Use of beginning or ending measures of invested capital may be subject to manipulation that distorts measure of
invested capital.

10. In a partnership, mutual agency means:

A. each partner acts on his own behalf when engaging in partnership business.
B. the act of any partner is binding on all other partners, only if partners act within their cope of authority.
C. an act by a partner is judged as binding on other partners depending on whether the act appears to be appropriate for
the partnership.
D. that partners must pay taxes on a mutual or combined basis.

11. On August 2, 2014, Sarawat and Tine formed a partnership. Sarawat contributed cash. Tine, previously a sole proprietor,
contributed property, including realty subject to a mortgage, which the partnership assumed. Tine’s capital account at August
2, 2014, should be recorded at:
A. Tine’s book value of the property at August 2, 2014.
B. Tine’s book value of the property less the mortgage payable at August 2, 2014.
C. The fair value of the property less the mortgage payable at August 2, 2014.
D. The fair value of the property at August 2, 2014.

12. Statement 1: The personal assets, liabilities and personal transactions of partners are excluded from the accounting records of
the partnership.
Statement 2: The act of any partner is binding on all other partners if the act appears to be appropriate for the partnership.
Statement 3: A major advantage of the partnership form of organization is that the partners have unlimited liability.
A. Only one statement is false.
B. Only one statement is true.
C. All statements are true.
D. All statements are false.

13. Statement 1: Unless stated otherwise in the partnership contract, profits and losses are shared among the partners in the ratio
of their capital equity balances.
Statement 2: If salary allowances and interest on capital are stipulated in the partnership profit and loss sharing agreement,
they are implemented only if income is sufficient to cover the amounts required by these features.
Statement 3: Unless the partnership agreement specifically indicates an income ratio, partnership net income or loss is not
allocated to the partners.
A. Only one statement is false.
B. Only one statement is true.
C. All statements are true.
D. All statements are false.

14. An accrued expense can be best described as an amount:

A. paid and matched with earnings for the current period
B. paid and not matched with earnings for the current period
C. not paid and matched with earnings for the current period
D. not paid and not matched with earnings for the current period

15. Which of the following is not a reason for popularity of partnerships as a legal form of business?
A. Partnerships may be formed merely by an oral agreement.
B. Partnerships can more easily generate significant amounts of capital.
C. Partnerships avoid the double taxation of income that is found in corporations.
D. In some cases, losses may be used to offset gains for tax purposes.

16. The drawing ledger accounts of limited liability partners are used:
A. To record partners’ salaries
B. To reduce the partners’ capital account balances at the end of the accounting period
C. In the same manner as the partners’ loan accounts
D. To record partners’ share of net income or loss for an accounting period

COURSE CODE: AE 13 SUBJECT: Financial Accounting and Reporting TIME: ________________ DAY: ___________ Page 2
 17. He is the one who is not really a partner, not being a party to the partnership agreement, but is made liable as a partner for the
protection of innocent third persons.
A. Nominal Partner
B. Dormant Partner
C. Ostensible Partner
D. Secret Partner

18. On June 1, 2015, Donna Cruz-Larrazabal, Regine Velasquez-Alcasid and Mikee Cojuangco-Jaworski formed a partnership
by combining their separate business proprietorships. Donna contributed cash of ₱100,000. Regine contributed property with
a ₱80,000 carrying amount, a ₱95,000 original cost, and ₱120,000 fair value. The partnership accepted the responsibility for
the ₱55,500 mortgage attached to the property. Mikee contributed equipment with a ₱65,000 carrying amount, a ₱90,000
original cost, and ₱78,000 fair value. The partnership agreement specifies that profit and loss ratio are to be shared equally
but is silent regarding capital contributions. Which partner has the largest capital balance at the beginning of the partnership?
A. Donna Cruz-Larrazabal
B. Regine Velasquez-Alcasid
C. Mikee Cojuangco-Jaworski
D. All capital account balances are equal.

TEST II
Direction: Read and analyze the following problems. Write the correct answer on the space provided after each required items.

19. On July 1, Drake and Frank formed a partnership, agreeing to share profits and losses in the ratio of 4:6, respectively. Drake
contributed a parcel of land that cost him P 25,000. Frank contributed P 50,000 cash. The land was sold for P 50,000 on July
1, four hours after formation of the partnership. How much should be recorded in Drake’s capital account on the partnership
formation?

20. Liza Soberano’s capital statement reveals that her drawings during the year were $50,000. She made an additional capital
investment of $25,000 and her share of the net loss for the year was $10,000. Her ending capital balance was $200,000. What
was Liza’s beginning capital balance?

For items 21-22:

Harley, Harvey and Harshey decided to form 3Har Partnership. It was agreed that Harley will contribute equipment with assessed
value of P100,000 with historical cost of P600,000. A day after the partnership formation, the equipment was sold for P300,000.
Harvey will contribute land and building with a carrying amount of P1,200,000 and fair value of P1,500,000. The land and building
are subject to a mortgage payable amounting to P300,000 to be assumed by the partnership. The partners agreed that Harvey will have
60% capital interest in the partnership. The partners also agreed that Harshey will contribute sufficient cash to the partnership.

21. The total agreed capitalization of 3Har Partnership:

22. How much cash should be contributed by Harshey in 3Har Partnership?

For items 23-24:

Vilma admits Nora as a partner in business. Accounts in the ledger for Vilma on November 30, 2014, just before the admission of
Nora, show the following balances:

Cash P 96,800
Accounts Receivable 84,200
Merchandise Inventory 90,000
Accounts Payable 65,000
Vilma, Capital 206,000

It is agreed that for purposes of establishing Vilma’s interest. The following adjustments shall be made:
 An allowance for doubtful accounts of 6% of accounts receivable is to be established.
 The merchandise inventory is to be valued at P 102,000.
 Prepaid salary expenses of P 2,000 and accrued rent expenses of P 5,000 are to be recognized.

Nora is to invest sufficient cash to obtain a 1/3 interest in the partnership.

23. How much is Vilma’s adjusted capital before admission of Nora?

24. The amount of cash investment by Nora is:

25. The total column of the Partners' Capital Statement for South Mega Company is as follows:
Capital, January 1 ................................................. $150,000
Additional investment............................................ 60,000
Drawings ............................................................... 90,000
Net income............................................................ 180,000

The partnership has three partners. The first two partners have ending capital balances that are equal. The ending balance of
the third partner is half of the ending balance of the first partner. What is the ending capital balance of the third partner?

COURSE CODE: AE 13 SUBJECT: Financial Accounting and Reporting TIME: ________________ DAY: ___________ Page 3
For items 26-27:
On July 1 of the current year, Regine and Ogie form a partnership. Regine is to invest certain business assets at values which are yet to
be agreed upon. She is to transfer her business liabilities and is to contribute sufficient cash to bring her total capital to P180,000,
which is 60% of the capital as had been agreed upon. Details regarding the book values of Regine’s business assets and liabilities and
their corresponding valuations below:
Book Value Agreed Valuations
Accounts Receivable 54,000 54,000
Allowance for Doubtful Accounts 3,600 6,000
Merchandise Inventory 96,600 105,000
Store Equipment 27,000 -
Accumulated Depreciation – Store Equipment 18,000 13,200
Office Equipment 18,000 -
Accumulated Depreciation – Office Equipment 9,600 4,800
Accounts Payable 48,000 48,000

Ogie agrees to invest cash of P 30,000 and merchandise valued at current market price.

26. How much is the value of the merchandise to be invested by Ogie?

27. How much cash should Regine contribute?

For items 28-30:

Mil admits Phukong for partnership interest in her business. The balance sheet accounts of Mil on November 30, 2014 prior to the
admission of Phukong are as follows:
Cash xx
Accounts Receivable 96,000
Merchandise Inventory 144,000
Accounts Payable 49,600
Mil, Capital xx

It is agreed that for purposes of establishing Mil’s interest, the following adjustments should be made:
 An allowance for doubtful accounts of 2% of accounts receivable is to be established.
 The merchandise inventory is to be valued at P160,000.
 Prepaid expenses of P 5,200 and accrued expenses of P 3,200 are to be recognized.

Phukong is to invest cash of P 113,640 to give her one-third (1/3) interest in the firm.

28. How much is the cash balance of Mil before the adjustments?
29. How much is the balance of Mil’s capital before any adjustments?
30. How much will be the total assets of the partnership after the formation?

For items 31-33:

On December 1, 2014, Sarawat and Tine agreed to invest equal amounts and share profits equally to form a partnership. Sarawat
invested P3,120,000 cash and a piece of equipment. Tine invested some assets which are shown below:

Book Value Market Value Assessed Value

Accounts Receivable 250,000 400,000 350,000
Inventory 1,000,000 1,120,000 1,100,000
Machineries 2,200,000 2,240,000 2,000,000
Intangible Assets 1,000,000 950,000 900,000

The assets invested by Tine are not properly valued. P32,000 of the accounts receivable is proven uncollectible. Inventories are to be
written down to P1,040,000. Included in the machineries is an obsolete apparatus acquired for P384,000 with accumulated
depreciation balance of P336,000. Part of the intangibles is a patent with a carrying amount of P56,000 which was sued upon by a
competitor. Tine unsuccessfully defended the case and the final decision of the court was released on November 29, 2014.

31. How much is the fair value of the equipment invested by Sarawat?
32. How much should be the net adjustment on Tine’s books?
33. How much will be the total assets of the partnership?

For items 34-35:

Adrian, Monica and Nicole operate a partnership with a complex profit and loss sharing agreement. The average capital balance for
each partner on December 31, 2006 is $300,000 for Adrian, $250,000 for Monica, and $325,000 for Nicole. An 8% interest allocation
is provided to each partner. Adrian and Monica receive salary allocations of $10,000 and $15,000, respectively. If partnership net
income is above $25,000, after the salary allocations are considered (but before the interest allocations are considered), Nicole will
receive a bonus of 10% of the original amount of net income. All residual income is allocated [Link] to Adrian, Monica and Nicole,
respectively. Net income of the year is $250,000.

34. How much of the net income will be allocated to Nicole?

35. How much will be Monica’s capital after closing net income?
COURSE CODE: AE 13 SUBJECT: Financial Accounting and Reporting TIME: ________________ DAY: ___________ Page 4
For items 36-37:
Irene, Natoy and Clara have a retail partnership business selling personal computers. The partners are allowed an interest allocation of
8% on their average capital. Capital account balances on the first day of each month are used in determining weighted average capital,
regardless of additional partner investment or withdrawal transactions during any given month. Drawings are disregarded in
computing average capital, but temporary withdrawals of capital that are debited to the capital account are used in the average
calculation. Partner capital activity for the year was:

Capital accounts Irene Natoy Clara

Jan 1 balance 200,000 300,000 250,000
Feb 2 investment 50,000
Mar 6 investment 10,000 20,000
Apr 20 withdrawal ( 10,000 )
Jul 3 withdrawal
and investment ( 7,000 ) 10,000
Sep 29 investment 5,000 4,000 5,000
Nov 5 investment 5,000

36. What is the weighted-average capital of Irene?

37. What amount of interest should be allocated to Natoy?

38. The partnership agreement of Mori, Klang and Angge provides for the year-end allocation of net income in the following
order:
 First, Mori is to receive 10% of net income up to P200,000 and 20% over P200,000.
 Second, Klang and Angge each are to receive 5% of the remaining income over P300,000.
 The balance of income is to be allocated equally among the three partners.

The partnership’s 2011 net income was P500,000 before any allocations. What amount should be allocated to Mori?

For items 39-42:

A partnership began its first year of operations with the following capital balances:
Michaellen, Capital 143,000
Justinianne, Capital 104,000
Jeromeen, Capital 143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following manner:
 Michaellen was to be awarded an annual salary of P26,000 with P13,000 salary assigned to Jeromeen.
 Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year.
 The remainder was to be assigned on a [Link] basis, respectively.
 Each partner was allowed to withdraw up to P13,000 per year.

Assume that the net loss for the first year of operations was P26,000 with net income of P52,000 in the second year. Assume further
that each partner withdrew the maximum amount from the business each year.

39. What is Michaellen’s share of loss for the first year?

40. What is Justinianne’s capital account at the end of the first year?
41. What is Jeromeen’s share on net income or loss for the second year?
42. What is Michaellen’s capital account balance at the end of the second year?

For items 43-45:

On January 1, 2014, Benedict, Pamela, Kyo and Mika formed the Best Vlog Trading, a partnership with capital contributions as
follows: Benedict – P 150,000; Pamela – P 75,000; Kyo – P 75,000 and Mika – P 60,000. The partnership agreement stipulates that
each partner shall receive a 5% interest on capital contributed and that Benedict and Pamela shall receive salaries of P15,000 and
P9,000, respectively. The agreement further provides that Kyo shall receive a minimum of P7,500 per annum and Mika a minimum of
P18,000, which is inclusive of amounts representing interest and their respective share in partnership profits. The balance of the profits
shall be distributed among the partners in the ratio of [Link].

43. What is the amount must be earned by the partnership in fiscal year 2014, before any charge for interest and partners’
salaries, in order that Benedict may receive an aggregate of P37,500 including interest, salary and share of profits?
44. What is the profit share of Kyo?
45. What is the profit share of Mika?

For items 46-48:

On February 1, 2020, Mimiyuuuh, Ms. Everything and Ivana began a partnership in which Mimiyuuuh and Ivana contributed cash of
P255,000 each. Ms. Everything contribute property with a fair value of P500,000 and a tax basis of P450,000. Ms. Everything receives
a 5% bonus of partnership income after deducting the salaries, her interest and bonus. Mimiyuuuh and Ivana receive salaries of
P10,000 per month, each. The partnership agreement of Mimiyuuuh, Ms. Everything and Ivana provides all partners to receive a 5%
interest on capital and that profits be divided by a [Link] ratio and loss be divided by a [Link]. The net income for the year is P355,000.

COURSE CODE: AE 13 SUBJECT: Financial Accounting and Reporting TIME: ________________ DAY: ___________ Page 5
 46. How much will be the bonus of Ms. Everything?
47. How much of the net income will be allocated to Mimiyuuuh?
48. How much will be the ending capital of Ivana after closing net income?

For items 49-50:

Partners Alma, Bernadette and Charito had a beginning capital balances on January 1: P 200,000, P 300,000 and P 400,000,
respectively. On December 31, they divided profits of P 98,000 as follows:
 Paid salaries of P10,000 each.
 Paid interest of 5% of beginning capital balances to each one.
 Paid bonus of 15% of income after salaries, interest and bonus to Bernadette.
 Divided the remainder based on the agreed profit and loss ratio.
 Alma received an aggregate of P24,000 and Bernadette shared in the remainder on the profits after salaries, interest and
bonus equal to twice that of Alma.

49. What is the profit and loss ratio of partners Alma, Bernadette and Charito?
50. What should be the amount received by Charito?

-o0o-
“Don’t close the book when bad things happen in your life just turn the page and
begin a new chapter.”
Good Luck!

Prepared by: Ms. ANGELA MICHELLE LEI P. SARMIENTO, CPA

Instructor, Financial Accounting and Reporting (AE 13)

Checked by: Ms. KATHIA MARCELINA A. ENCARNACION, CPA, MBA

Program Coordinator, College of Accountancy

Noted by: Atty. ALLEN GABRIEL C. JAMILLA, CPA, MSA

Dean, College of Accountancy

COURSE CODE: AE 13 SUBJECT: Financial Accounting and Reporting TIME: ________________ DAY: ___________ Page 6