Baliwag Polytechnic College

Dalubhasaan Kong Mahal

Institute of Business and Accountancy

ACT13 – Partnership and Corporation Accounting M. Manayao, CPA

Chapter 1 – Basic Considerations and Formation

PROBLEMS

Problem 1
Froilan Labausa contributed land, inventory, and P280,000 cash to a partnership. The land has a book value
of P650,000 and a market value of P1,350,000. The inventory has a book value of P600,000 and a market
value of P510,000. The partnership also assumed a P350,000 note payable owed by Labausa that was used to
purchase the land. Rosalie Balhag agreed to put up cash equivalent to Labausa’s net investment.

Required: Prepare the journal entry to record Labausa’s and Balhag’s investment in the partnership.

Solution:
Cash 280,000
Inventory 510,000
Land 1,350,000
Note Payable 350,000
Labausa, Capital 1,790,000
To record investment of Labausa.

Cash 1,790,000
Note Payable 1,790,000
To record investment of Balhag.

Problem 2
Gogola and Paglinawan have just formed a partnership. Gogola contributed cash of P1,260,000 and computer
equipment that cost P540,000. The fair value of the computer is P360,000. Gogola has notes payable on the
computer of P120,000 to be assumed by the partnership. Gogola is to have 60% capital interest in the
partnership. Paglinawan contributed only P900,000. The partners agreed to share profit and loss equally.

Required: Gogola should make and additional investment or (withdrawal) of _____________.

Solution:
Paglinawan, Capital 900,000
Divided by: Capital interest 40%
Total Agreed Capital 2,250,000
Multiplied by: Capital interest (Gogola) 60%
Required capital of Gogola 1,350,000
Contributed capital of Gogola -1,500,000
Withdrawal -150,000

Problem 3
Mulles, the owner of a successful fertilizer business, felt that it is time to expand operations. Mulles offered
to form a partnership with Lucena, the owner of a nearby warehouse. The partnership would be called Mulles
& Lucena Storage and Sales. Lucena accepted Mulles offer and the partnership was formed on July 1 2019.

CHAPTER 01 – ACT15 | M. MANAYAO, CPA 1

Presented below is the trial balance of Mulles Fertilizer Supply on June 30, 2019:

Cash P 229,500
Accounts receivable 2,103,000
Allowance for uncollectible accounts P 117,000
Inventories 1,012,500
Prepaid rent 29,250
Store equipment 390,000
Accumulated depreciation 97,500
Accounts payable 505,500
Notes payable 330,000
Mulles, Capital 2,714,250
P 3,764,250 P 3,764,250

The partners agreed to share profits and losses equally and decided to invest an equal amount in the
partnership. Lucena and Mulles agreed that Lucena’s land is worth P500,000 and his building is P1,450,000.
Lucena is to contribute cash in an amount sufficient to make his capital account balance equal to Mulles.
An agreement is reached by the two partners on the following items:
a. The accounts receivable are to be valued at P1,799,000 and the allowance for uncollectible accounts will
be eliminated.
b. Inventory is to be decreased by P112,500.
c. The prepaid rent is for warehouse used by Mulles. All merchandise will be transferred to Lucena’s building.
No refund will be received on the unused rent paid in advance.
d. The store equipment has a fair value of P300,000.
e. All other assets and liabilities are to be transferred at their book values.

Required: Prepare the necessary journal entries in the books of Mulles. Also, record the formation of the
partnership in a new set of books.

Solution:

CHAPTER 01 – ACT15 | M. MANAYAO, CPA 2

Mulles, Capital 321,250
Allowance for uncollectible accounts 117,000
Accumulated depreciation 7,500
Accounts receivable 304,000
Inventories 112,500
Prepaid rent 29,250
To adjust the books of Mulles.

Accounts receivable:
Agreed value 1,799,000
Per record 2,103,000
Adjustments -304,000

Store equipment
Agreed value 300,000
Per record (390,000 - 97,500) 292,500
Adjustments 7,500

Accumulated depreciation 90,000

Store equipment 90,000
To record the write-down of the assets.

Mulles, Capital 2,393,000

Accounts payable 505,500
Notes payable 330,000
Cash 229,500
Accounts receivable 1,799,000
Inventories 900,000
Store equipment 300,000
To close the books of Mulles.

Cash 229,500
Accounts receivable 1,799,000
Inventories 900,000
Store equipment 300,000
Accounts payable 505,500
Notes payable 330,000
Mulles, Capital 2,393,000
To record the investments of Mulles.

Cash 443,000
Land 500,000
Building 1,450,000
Lucena, Capital 2,393,000
To record the investments of Lucena.

CHAPTER 01 – ACT15 | M. MANAYAO, CPA 3

Problem 4
Medina and Loqueloque are fierce competitors who sell hunting equipment. They finally decided to join forces
in order to increase their business and reduce costs. An agreement is reached between the tow to begin
operations as a partnership on March 1, 2019.

Medina and Loquesloque have decided to share profits or losses in the ratio of 60:40, respectively.

The statements of financial position of Medina and Loqueloque as at March 1, 2019 are as follows:

Medina Loqueloque
Cash P 42,000 P 30,000
Accounts receivable 389,200 169,200
Allowance for uncollectible accounts -22,400 -14,400
Merchandise inventory 461,600 300,800
Prepaid rent 6,000
Office supplies 30,400 4,000
Land 40,000
Building 128,000
Accumulated depreciation - Building -32,000
Office equipment 24,000 62,000
Accumulated depreciation - Office equipment -6,000 -13,200
Repair Equipment 172,000
Accumulated depreciation - Repair equipment -68,000
Total Assets P 1,158,800 P 544,400

Accounts payable P 170,000 P 111,600

Notes payable 120,000
Mortgage payable 200,000
Medina, Capital 668,800
Loqueloque, Capital 432,800
Total Liabilities and Owners' Equity P 1,158,800 P 544,400

The name of the partnership will be Medina and Loqueloque Hunting Gears. The partners have agreed to
effect the following adjustments:
a. Medina’s merchandise inventory is to be reduced by P105,200. The inventory of Loqueloque will be
increased by P7,200.
b. The following are the fair market values of the various assets:

Medina Loqueloque
Land P 108,000
Building 192,000
Office equipment 16,000 P 40,000
Repair equipment 124,000

c. One half of the notes payable of Medina are personal notes. All other liabilities of the partners are assumed
by the partnership.
d. The prepaid rent in the books of Loqueloque will be consumed by the partnership.
Required: Prepare the journal entries to record the formation of the partnership.

CHAPTER 01 – ACT15 | M. MANAYAO, CPA 4

Solution:

Books of Medina
Land 68,000
Building 64,000
Accumulated depreciation - building 32,000
Accumulated depreciation - repair equipment 20,000
Notes payable 60,000
Merchandise inventory 105,200
Accumulated depreciation - office equipment 2,000
Medina, Capital 136,800
To adjust the books of Medina.

Adjustments:
Inventories -105,200
Land 68,000
Building 64,000
Accum. Dep. - Building 32,000
Accum. Dep. - Office equipment -2,000
Accum. Dep. - Repair equipment 20,000
Notes payable 60,000
Net adjustments 136,800

Allowance for ucollectible accounts 22,400

Accumulated depreciation - office equipment 8,000
Accumulated depreciation - repair equipment 48,000
Accounts payable 170,000
Notes payable 60,000
Mortgage payable 200,000
Medina, Capital 805,600
Cash 42,000
Accounts receivable 389,200
Merchandise inventory 356,400
Office supplies 30,400
Land 108,000
Building 192,000
Office equipment 24,000
Repair equipment 172,000
To close the books of Medina.

Books of Loqueloque
Merchandise inventory 7,200
Loqueloque, Capital 100
Accumulated depreciation - office equipment 8,800
To adjust the books of Loqueloque.

Adjustments:
Inventories 7,200
Accum. Dep. - Office equipment -8,800
Net adjustments -1,600

CHAPTER 01 – ACT15 | M. MANAYAO, CPA 5

Allowance for uncollectible accounts 14,400
Accumulated depreciation - office equipment 22,000
Accounts payable 111,600
Loqueloque, Capital 431,200
Cash 30,000
Accounts receivable 169,200
Merchandise inventory 308,000
Prepaid rent 6,000
Office supplies 4,000
Office equipment 62,000
To close the books of Loqueloque.

New partnership books

Cash 42,000
Accounts receivable 389,200
Merchandise inventory 356,400
Office supplies 30,400
Land 108,000
Building 192,000
Office equipment 16,000
Repair equipment 124,000
Allowance for ucollectible accounts 22,400
Accounts payable 170,000
Notes payable 60,000
Mortgage payable 200,000
Medina, Capital 805,600
To record the investment of Medina.

Cash 30,000
Accounts receivable 169,200
Merchandise inventory 308,000
Prepaid rent 6,000
Office supplies 4,000
Office equipment 40,000
Allowance for uncollectible accounts 14,400
Accounts payable 111,600
Loqueloque, Capital 431,200
To record the investment of Loqueloque.

- End -

CHAPTER 01 – ACT15 | M. MANAYAO, CPA 6