Quiz 2 - Unit I – Partnership Formation and Operation

Lesson 3 – Partnership Operation

I – Modified True or False: On your answer sheet, write “ True” if the statement is correct and if the statement is
incorrect, write the word or group of words that makes the statement false.

1. A net loss results when the salary and interest allocations for the partners exceed net income for the period.
2. Bonus is allowed only when there is sufficient net income.
3. The partnership profit and loss ratio is always the same as the partner’s capital contribution ratio.
4. In the absence of the loss agreement, losses shall not be divided among the partners.
5. No bonus is allocated to any partner when the partnership incurred loss during the period.
6. As a rule, partner’s salary and interest on capital are treated as ordinary operating expense.
7. An industrial partner is not exempted from sharing in the loss of the partnership if he is also a capitalist partner.
8. if part of the agreed profit and loss distribution is the allocation of bonus to the managing partner, such allocation
shall be given in spite of the insufficiency of the partnership net income.
9. if part of the agreed profit and loss distribution is the allocation of interest on capital balances, such allocation
shall be given in spite of the insufficiency of the partnership net income.
10. Interest on the partner’s capital is a profit sharing device.

II – Multiple Choice:

1. This average method should be used in the absence of an agreement of profit or loss:
a) simple average c) weighted average
b) basic capital average d) not given

2. This allowance for profit distribution is granted only if there is profit?

a) Salary b) interest c) Bonus a) all of the above

3. Interest on the money borrowed by the partner from the partnership shall be treated as:
a) profit sharing device c) operating expense
b) finance cost d) revenue

4. Which of the following is not considered legitimate expense of a partnership?

a) supplies used by partners’ offices
b) depreciation on assets contributed to the partnership by partners.
c) interest paid to partners based on the amount of invested capital
d) interest paid on the moneyborrowed from the partners.

5. As a general rule, in computing the partner’s average capital, the temporary withdrawals are:
a) regarded in the computation of the average capital
b) not considered in the computation of average capital
c) considered in the computation of average capital if the drawing is made in anticipation for accruing
profit.
d) all of the above

6. Which of the following statements about partnership financial statement is true?

a) Details of the distribution of net income are shown in the owners’ equity statement.
b) The distribution of the net income is shown in the statement of financial position.
c) Only the total of all partner capital balances is shown on the statement of financial position.
d) the owners’ equity statement is called partner’ capital statement.

7. This method of profit sharing relative to capital balances is discourages additional investments during the
accounting period.
a) original capital balances c) beginning capital balance of the fiscal year
b) average capital balance of the year d) ending capital balance of the fiscal year

8. If the primary consideration is the partner’s capital contribution, the most equitable profit and loss distribution is
made on the basis of:
a) equal share c) beginning capital balances
b) ending capital balances d) weighted average capital balances
9. This item is not treated as operating expense of the partnership:
a) salaries of manager employed by the partnership c) Bonus to the managing partner
b) interest on the partnership outstanding loan d) Office supplies used

10. A 1:3:2 ratio is the same as:

a) 10%: 30%:20% b) 1/10; 3/10: 2/10 c) 1/6:3/6:2/6 d) 20%: 50%: 30%

11. Closing entries of partnership includes entries to:

a) close income and expense accounts to the income summary account and then close the profits or losses to
the capital accounts.
b) close the profits or losses and dividends declared accounts to retained earnings
c) record distribution of cash to the partners
d) eliminate the capital accounts and record the distribution of assets to partners to effect the partnership
termination and liquidation.

12. Which of the following is not a component of the formula used to distribute profit?
a) salary allowances to the managing partners
b) interest on the average capital investments
c) interest on notes payable to partners
d) after all other allocations, the remainder divided according to the profit and loss sharing ratio.

13. Which of the following distributions would be made last in dividing profits to the partners when interest on capital
balances and salary allowances are involved?
a) salary allowances b) interest on capital balances c) equally d) Specified ratio

14. In conformity with the GAAP, the following are treated as an income-sharing device, except:
a) partners’ salary c) partners’ interest on capital contribution
b) partner’s bonus d) partners’ interest on loans to partnership.

15. What is true regarding partnership operation?

a) Interest allowance to partners as means of distributing profit is recorded by debiting interest expense.
b) When partners receive varying amount of share in the net income or loss of the partnership, the method used
is equally.
c) A bonus agreement is applicable only when the results of operation is a gain. It is unenforceable when the
result of operation is a loss.
d) Salary and interest allowances shall be allowed to partners only when the income is sufficient to cover salary
and interest allowances.

III –Practice:

1. On August 1, 2020, Eddie and Fred agreed to form a partnership to sell and install office security
systems. The partners decide that Eddie will invest cash, P 500,000; equipment with a cost of P 300,000
but with a current fair value of P250,000.

Fred will contribute a service vehicle with a fair value of P 400,000. The book value of the service vehicle is
P 650,000. In addition, Fred is to invest sufficient cash to equal Eddie’s investment.

Which of the following is true?

a) The total agreed capital of the partnership is P 1,500,000.
b) The contributed -capital of Eddie is P 800,000.
c) Fred invests additional cash of P 150,000
d) Service Vehicle is to be recorded in the partnership books at P 650,000.

2 Mark and Nick agreed to form a partnership on July 1, 2020, for the purpose of manufacturing and selling
custom stainless kitchen wares. Both are master crafters and have their own tools and equipment, which
they will invest in the business.

Mark and Nick determined that their tools and equipment have fair values of P 180,000 and P 240,000,
respectively. They further resolved to invest sufficient cash such that each partner will have beginning
capital balance of P500,000.

How much cash will be presented in the partnership’s statement of financial position? ___580,000_____
3 – 4:
Pepe and Pilar formed a partnership on July 1, 2020. Pepe contributed equipment with a book value of P300,000
and a fair market value of P 400,000 with P 100,000 mortgage to be assumed by the partnership. Pilar invests cash
of P 100,000 and equipment recorded as P 150,000 with accumulated depreciation of P60,000 and with and agreed
valuation of P 80,000.

Journalize the investments of Pepe and Pilar.

Date Particulars PR Debit Credit
2020
July 1 Equipment 400,000
Mortgage Payable 100,000
Pepe, Capital 300,000
investment

Cash 100,000
Equipment 80,000
Pilar, capital 180,000
Investment

5. MM, NN, and LL formed a partnership on July 1, 2020 with the following assets, measured at their fair
market values, contributed by each partner:
MM NN LL
Cash P 20,000 P 22,000 P 40,000
Delivery trucks 250,000 228,000 ---
Computers 48,000 51,000 ---
Office furniture 9,500 22,500
Totals P 318,000 P 310,500 P 62,500

Although LL has contributed the most cash to the partnership, he did not have the full amount of P40, 000 available
and was forced to borrow P20, 000. The delivery truck contributed by MM has a Mortgage of P 100,000 and the
partnership is to assume responsibility for the loan. The profit and loss sharing agreement is 40%, 40%, and 20%,
respectively, for MM, NN, and LL. The agreement further provides that the partners’ capital must be in conformity
with their profit and loss ratio upon formation.

Which of the following is not true?

a) The total agreed capital of the partnership is P 591,000.
b) The capital of NN will decrease by P 74,100 as a result of the transfer of capital.
c) The agreed capital of LL is P 118,200.
d) The capital of MM will increase by P 55,700 as a result of the transfer of capital.

Solution:
Partners Contributed Capital Agreed capital Difference
MM (40%) 218,000 236,400 18,400
NN (40%) 310,500 236,400 (74,100)
LL (20%) 62,500 118,200 55,700
Total 591,000 591,000

The capital accounts of Blake and Drake partners on December 31, 2021 are shown below:

Blake Capital: Drake Capital:

Debit Credit Debit Credit
1/1 P 72,000 1/1 P 108,000
4/1 P15,000 2/1 P 16,000
6/1 20,000 5/1 35,000
9/1 22,000 10/1 25,000

For 6 –12 Determine the share of each partner if Net income for the year is P 106,000 under the following
independent agreement:

6. the profit is divided to Blake and Drake on the basis of 1:2 ratio
Blake = 106,000 x 1/3 = 35,333
Drake = 106,000 x 2/3 = 70,667
7 . the profit is divided on the basis of beginning capital ratio:
Blake = 72,000 = 72,000/180,000 x 106,000 = 42,400
Drake = 108,000 = 108,000/180,000 x 106,000 = 63,600
180,000

8. the P/l ratio is based on ending capital ratio

Blake = 99,000 = 99,000/251,000 x 106,000 = 41,809
Drake = 152,000 = 152,000/251,000 x 106,000 = 64,191
251,000

9. the P/l ratio is based on simple average capital:

Blake = (72,000 + 99,000)/2 = 85,500/215,500 x 106,000 = 42.056
Drake = (108,000 + 152,000)/2 = 130,000/215,500 x 106,000 = 63,944
215,500

10. P/l ratio is based on weighted average capital:

Blake , capital Drake, Capital

Capital balance Fraction of year Average Capital balance Fraction of year Average
unchanged Capital unchanged Capital
1/1 72,000 3/12 18,000 1/1 108,000 1/12 9,000
4/1 57,000 2/12 9,500 2/1 92,000 3/12 23,000
6/1 77,000 3/12 19,250 5/1 127,000 5/12 52,917
9/1 99,000 4/12 33,000 10/1 152,000 3/12 38,000
79,750 122,917

Blake = 79,750 = 79,750/202,667 x 106,000 = 41,711

Drake = 122,917 = 122,917/202,667 x 106,000 = 64,289
202,667

11. Assume Blake gets 25% bonus on income before bonus and the balance equally.

Blake Drake Total

25% Bonus ( 25% x 106,000) 26,500 26,500
Balance, equally 39,750 39,750 79,500
66,250 39,750 106,000

12. Assume Blake gets 25% on net income after bonus and balance divided 1:3 ratio

Blake Drake Total

25% Bonus ( 25% x (106,000/125%) 21,200 21,200
Balance, 1:3 (Blake ¼: Drake ¾) 21,200 63,600 84,800
42,400 63,600 106,000

13. C, D and E share in the partnership’s profit and losses in the ratio of 3:4:5. During the year, the partnership’s
distributive income is P 1,500,000. What is the amount of E’s share from the partnership’s income?

a) P 750,000 b) P 625,000 c) P 500,000 d) P 125,000

14. A partnership showed the following account balances: sales, P 70,000; cost of sales, P 40,000; operating expenses,
P 10,000; partners’ salaries P 13,000; interest paid to banks, P 2,000 and partners’ drawings, P 8,000. The
partnership profit (loss) is:

a) P 20,000 b) P 18,000 c) P 5,000 d) P (3,000)

15. RR and SS have the following profit and loss agreement: Salaries of P 30,000 and P 45,000 for RR and SS,
respectively; a bonus to RR of 10% of profit after salaries and bonus; and interest of 10% on average capital
balances of P 20,000, P 35,000 for RR and SS, respectively. One-third of any remaining profit is allocated to
RR and the balance to SS. If the partnership had a profit of P 102,500, how much should be allocated to SS?

a) P 41,000 b) P 44,250 c) P 41,167 d) P 61,500