Chapter 3 Teachers Manual Afar Part 1

Chapter 3 Partnership – Part 3

PROBLEM 3-1: TRUE OR FALSE 1. FALSE 2. TRUE 3. TRUE 4. FALSE 5. FALSE 6. TRUE 7. FALSE (50% x 80%) = 40% 8. TRUE 9. TRUE 10. FALSE (1,000 – 100 payment) = 900

PROBLEM 3-2: THEORY & COMPUTATIONAL 1.

D

2.

Solutions:

Case #1: Requirement (a): The capital balances of the existing partners are adjusted as follows:

Cash Accounts receivable Inventory Prepaid asset Accounts payable Accrued liabilities Net assets

A, Capital (60%) B, Capital (40%)

Carrying amts. 26,000 120,000 180,000

Fair values 26,000 116,400 205,000 3,600 (62,000) (4,000) 285,000

(62,000) 264,000

Unadjusted 170,000 94,000 264,000

Sh. in adjustment (21K x 60%) = 12,600 (21K x 40%) = 8,400

1

Increase (Decrease) (3,600) 25,000 3,600 (4,000) 21,000 Adjusted 182,600 102,400 285,000

Date

B, Capital (182,600 x 1/2) C, Capital (182,600 x 1/2)

51,200 51,200

to record the admission of C to the partnership

Requirement (b): A, Capital B, Capital C, Capital

Before admission 182,600 102,400 285,000

Admission of C (51,200) 51,200 -

Requirement (c): Partner Before admission A 60% B 40% C 100%

Admission of C -20% 20%

After admission 182,600 51,200 51,200 285,000

After admission 60% 20% 20% 100%

Case #2: Scenario A Requirement (a): The fair value of the 20% interest acquired by C is computed as follows: Adjusted net assets before admission of C 285,000 Divide by: Interest of old partners (100% - 20%) 80% Grossed-up fair value 356,250 Multiply by: Interest of C 20% Fair value of C's interest 71,250

Date

Cash C, Capital

71,250 71,250

to record the admission of C to the partnership

Requirement (b): A, Capital B, Capital C, Capital

Before admission 182,600 102,400

Admission of C

71,250 71,250

285,000

2

After admission 182,600 102,400 71,250 356,250

Requirement (c): Partner Before admission A 60% B 40% C 100%

Admission of C (100% - 20%) x 60% (100% - 20%) x 40% 20%

After admission 48% 32% 20% 100%

Case #2: Scenario B Requirement (a): Date

Cash A, Capital (100K – 71,250) x 60% B, Capital (100K – 71,250) x 40% C, Capital

71,250 17,250 11,500 100,000

to record the admission of C to the partnership

Requirement (b): A, Capital B, Capital C, Capital

Before admission 182,600 102,400

Admission of C (17,250) (11,500) 100,000 71,250

285,000

After admission 165,350 90,900 100,000 356,250

Case #3: Solution: Adjusted net assets Divide by: Existing partners' interest Total net assets after investment by C Multiply by: C's interest Amt. of contribution by C

285,000 3/5 475,000 2/5 190,000

3. Solutions: Requirement (a): April

A, Capital

320,000 3

1, 20x1

B, Capital (360K – 320K) x 30%/50% C, Capital (360K – 320K) x 20%/50% Cash

24,000 16,000 360,000

to record the retirement of A from the partnership

Requirement (b): A, Capital B, Capital C, Capital

Before retirement 320,000 192,000 128,000 640,000

Requirement (c): Partner Before retirement A 50% B 30% C 20% 100%

Retirement of A (320,000) (24,000) (16,000) (360,000)

After retirement 168,000 112,000 280,000

Retirement of A -50% 30% / (30% + 20%) 20% / (30% + 20%)

After retirement 60% 40% 100%

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PROBLEM 3-3: EXERCISES – COMPUTATIONAL 1.

Solutions:

Case #1: Requirement (a): The capital balances of the existing partners are adjusted as follows: Carrying Fair Increase amts. values (Decrease) Cash 30,000 30,000 Accounts 140,000 receivable 120,000 (20,000) Inventory 200,000 160,000 (40,000) Equipment 500,000 450,000 (50,000) Accounts payable (80,000) (80,000) Accrued liabilities (20,000) (20,000) Net assets 790,000 660,000 (130,000)

Apple, Capital (60%) Banana, Capital (40%)

Unadjusted 515,000 275,000

Adjustment -130K x 60% = -78K -130K x 40% = -52K

Adjusted 437,000 223,000 660,000

790,000 Date

B, Capital (223,00 x 1/2) C, Capital (223,00 x 1/2)

111,500 111,500

to record the admission of C to the partnership

Requirement (b): A, Capital B, Capital C, Capital

Before admission

Admission of C

After admission

437,000 223,000 -

(111,500) 111,500

437,000 111,500 111,500

660,000

-

660,000

Admission of C

After admission 60% 20% 20% 100%

Requirement (c): Partner Before admission A 60% B 40% C 100%

-20% 20%

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Case #2: Requirement (a): The fair value of the 20% interest acquired by C is computed as follows: Adjusted net assets before admission of C 660,000 Divide by: Interest of old partners (100% - 20%) 80% Grossed-up fair value 825,000 Multiply by: Interest of C 20% Fair value of C's interest

Date

165,000

Cash C, Capital

165,000 165,000

to record the admission of C to the partnership

Requirement (b): Before admission A, Capital B, Capital C, Capital

Admission of C

After admission

-

165,000

437,000 223,000 165,000

660,000

165,000

825,000

437,000 223,000

Requirement (c): Partner Before admission A 60% B 40% C 100%

Admission of C (100% - 20%) x 60% (100% - 20%) x 40% 20%

After admission 48% 32% 20% 100%

Case #3: Requirement (a): Date

Cash A, Capital (165K – 100K) x 60% B, Capital (165K – 100K) x 40% C, Capital to record the admission of C to the partnership

6

100,000 39,000 26,000 165,000

Requirement (b): A, Capital B, Capital C, Capital

Before admission 437,000 223,000

Admission of C

-

(39,000) (26,000) 165,000

After admission 398,000 197,000 165,000

660,000

100,000

760,000

Case #4: Requirement (a): Date

Cash C, Capital A, Capital (165K – 125K) x 60% B, Capital (165K – 125K) x 40%

165,000 125,000 24,000 16,000

to record the admission of C to the partnership

Requirement (b): Before admission A, Capital 437,000 B, Capital 223,000 C, Capital -

Admission of C

660,000

24,000 16,000 125,000

After admission 461,000 239,000 125,000

165,000

825,000

Case #5: Adjusted net assets Divide by: Existing partners' interest Total net assets after investment by Carrots Multiply by: Carrots’ interest

660,000 3/5 1,100,000 2/5 440,000

Amt. of contribution by Carrots

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2.

Solutions:

Case #1: The adjusted capital balances of the partners on the date of A’s retirement are computed as follows:

Jan. 1 Sh. In profit Drawings Sept. 1

A (50%) 320,000 400,000 (40,000) 680,000

B (30%) 192,000 240,000 (60,000) 372,000

C (20%) 128,000 160,000 (30,000) 258,000

Requirement (a): Sept. 1, 20x1

A, Capital B, Capital (700K – 680K) x 30%/50% C, Capital (700K – 680K) x 20%/50% Cash

680,000 12,000 8,000 700,000

to record the retirement of A from the partnership

Requirement (b): A, Capital B, Capital C, Capital

Before retirement

Retirement of A

680,000 372,000 258,000

(680,000) (12,000) (8,000)

After retirement 360,000 250,000

1,310,000

(700,000)

610,000

Requirement (c): Partner Before retirement A 50% B 30% C 20% 100%

Retirement of A -50% 30% / (30% + 20%) 20% / (30% + 20%)

8

After retirement 60% 40% 100%

Case #2: Solutions: Requirement (a): Sept. 1, 20x1

A, Capital Cash B, Capital (680K – 650K) x 30%/50% C, Capital (680K – 650K) x 20%/50%

680,000 650,000 18,000 12,000

to record the retirement of A from the partnership

Requirement (b): A, Capital B, Capital C, Capital

3.

Before retirement

Retirement of A

680,000 372,000 258,000

(680,000) 18,000 12,000

After retirement 390,000 270,000

1,310,000

(650,000)

660,000

Solution:

Cash Equipment Capital balances - Jan. 1 Sh. In profit (120K x 150K/480K (a)); (120K x 160K/480K); (120K x 170K/480K) Capital balances - Dec. 31

A 100,000 50,000 150,000

B 160,000 160,000

C 50,000 120,000 170,000

Total 310,000 170,000 480,000

37,500 187,500

40,000 200,000

42,500 212,500

120,000 600,000

Since the problem does not state the partnership agreement on the sharing of profits and losses, it is assumed that the sharing is based on the partners’ respective contributions.

4. Solutions: Requirement (a): The adjustments to the capital balances of A and B are computed as follows: A B 600K x 20% [187.5K ÷ (187.5K + 200K)] (58,065) 600K x 20% [200K ÷ (187.5K + 200K)] (61,935)

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Jan. 1, 20x2

A, Capital B, Capital D, Capital (600,000 x 20%)

58,065 61,935 120,000

to record the admission of D to the partnership

Requirement (b): Before admission Admission of D After admission

5.

A 187,500 (58,065) 129,435

B 200,000 (61,935) 138,065

C 212,500 212,500

D 120,000 120,000

Total 600,000 600,000

Solutions:

Requirement (a): Dec. 31, 20x1

B, Capital Cash A, Capital (200K – 164K) x 40%/60% C, Capital (200K – 164K) x 20%/60%

200,000 164,000 24,000 12,000

Requirement (b): Before withdrawal Withdrawal of B After withdrawal

A 187,500 24,000 211,500

Requirement (c): Partner Before retirement A 40% B 40% C 20% 100%

B 200,000 (200,000) -

C 212,500 12,000 224,500

Retirement of A 40% / (40% + 20%) -40% 20% / (40% + 20%)

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Total 600,000 (164,000) 436,000

After retirement 66.67% 33.33% 100%

6. Solutions: Requirements (a) and (b): A 11,000 214,536 114,535 603,000

Cash Accounts receivable Inventory Land Building Equipment Other assets Total assets Accounts payable Notes payable Net assets

B 22,354 532,890 253,402

50,345 993,416 (178,940) (200,000) 614,476

Requirement (c): Adjusted net assets Divide by: (100% - 20%) Grossed up fair value Multiply by: C's interest Amount of need contribution

428,267 34,789 1,271,702 (243,650) (345,000) 683,052

Totals 33,354 747,426 367,937 603,000 428,267 85,134 2,265,118 (422,590) (545,000) 1,297,528

1,297,528 80% 1,621,910 20% 324,382

Requirement (d): A (40%)

B (40%)

C (20%)

Total

614,476

683,052

324,382

1,621,910

(1,621,910 x 40%); (1,621,910 x 40%); (1,621,910 x 20%)

648,764

648,764

324,382

1,621,910

Cash settlement (payment)/ receipt

(34,288)

34,288

-

Fair value of net asset contribution Required capital balance

Requirement (e): Adjusted capital balances, Jan. 1 Share in profit (325K x 40%); (325K x 40%); (325K x 20%) Drawings Capital balances, Dec. 31

11

A (40%) 648,764

B (40%) 648,764

C (20%) 324,382

130,000 (50,000) 728,764

130,000 (65,000) 713,764

65,000 (28,000) 361,382

7.

Solution:

Before retirement Revaluation of equipt. (24K ÷ 3) Adjusted Retirement of C After retirement

A 600,000

B 600,000

C 400,000

Total 1,600,000

8,000 608,000

8,000 608,000

608,000

608,000

8,000 408,000 (408,000) -

24,000 1,624,000 (408,000) 1,216,000

PROBLEM 3-4: CLASSROOM ACTIVITY Case #1: Solutions: Income summary 50,000 A, Capital (50,000 x 40%) B, Capital (50,000 x 60%)

20,000 30,000

Requirement (a): B, Capital [(40,000 + 30,000) x ½] C, Capital

35,000

35,000

Requirement (b): A, Capital (40%) (160,000 + 20,000) B, Capital (30%) (40,000 + 30,000 – 35,000) C, Capital (30%)

180,000 35,000 35,000

Requirement (c): No. It seems unfavorable because the ₱30,000 payment is lower than the ₱35,000 decrease in B’s capital account.

Case #2: Solutions: Income summary 50,000 A, Capital (50,000 x 40%) B, Capital (50,000 x 60%) Requirement (a):

A, Capital - Jan. 1

160,000 12

20,000 30,000

B, Capital - Jan. 1 Profit Total net assets Divide by: (100% - 20%) Multiply by: Investment by C

Cash

40,000 50,000 250,000 80% 312,500 20% 62,500

62,500 C, Capital

62,500

Requirement (b): A, Capital (40% x 80% = 32%) B, Capital (60% x 80% = 48%) C, Capital ( 20%)

(160,000 + 20,000) (40,000 + 30,000)

180,000 70,000 62,500

Case #3: Solution: Land

100,000 A, Capital (100,000 x 40%) B, Capital (100,000 x 60%)

40,000 60,000

Requirement (a): Cash

60,000 C, Capital

60,000

Requirement (b): A, Capital (40% x 80% = 32%) B, Capital (60% x 80% = 48%) C, Capital ( 20%)

(160,000 + 40,000) (40,000 + 60,000)

Case #4: Solution: Cash

50,000 C, Capital

50,000

Income summary 100,000 A, Capital (100,000 x 32%)

32,000

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200,000 100,000 60,000

B, Capital (100,000 x 48%) C, Capital (100,000 x 20%)

48,000 20,000

Requirement (a): B, Capital (40,000 + 48,000) A, Capital (32,000 x 32/52) C, Capital (32,000 x 20/52) Cash

88,000 19,692 12,308 120,000

Requirement (b): A, Capital (32%/52% = 61.5%) (160,000 + 32,000 – 19,692) C, Capital (20%/52% = 38.5%) (50,000 + 20,000 – 12,308)

PROBLEM 3-5: THEORY 1. C 2. B 3. C 4. A 5. A 6. B 7. D 8. D 9. C 10. D

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172,308 57,692

PROBLEM 3-6: MULTIPLE CHOICE - COMPUTATIONAL 1. B Solution: Total capital after admission Multiply by: Interest of Lind Capital credit to Lind Contribution of Lind Bonus to Lind Multiply by: Old P/L ratio of Blau Deduction to Blau's capital Interest of Blau before admission of Lind Deduction to Blau's capital Adjusted capital of Blau after admission

150,000 1/3 50,000 (40,000) 10,000 60% 6,000 60,000 (6,000) 54,000

2. D (60K + 20K + 15K) = 95K total capital after admission x 20% = 19,000 3. A Recognition of goodwill from non-business combination transactions is prohibited under PFRSs. 4. A Solution: Payment to Eddy Capital balance of Eddy Excess payment to Eddy

180,000 160,000 20,000

Capital balances before retirement Share in excess payment to Eddy Capital balances after retirement 5. B Solution: Eddy, capital Fox, capital Grimm, capital Investment of Hamm Total partnership capital after admission Multiply by: Interest of Hamm Capital credit to Hamm 15

Fox 96,000 (12,000) 84,000

Grimm 64,000 (8,000) 56,000

160,000 96,000 64,000 140,000 460,000 25% 115,000

Investment of Hamm Bonus to old partners

140,000 (25,000)

Eddy, capital (before admission) Share in bonus to old partners (25K x 50%) Eddy, capital (after admission)

160,000 12,500 172,500

6. C Solution: Unadjusted capital balance Share in revaluation gain [(216K – 180) x (20%; 20% & 50%)] Adjusted capital balance

Coll (20%) 42,000

Maduro (30%) 39,000

Prieto (50%) 90,000

Total 171,000

7,200 49,200

7,200 46,200

21,600 111,600

36,000 207,000

The entry to record the settlement of Coll’s interest is as follows: July Coll, loan 9,000 1, Coll, Capital 49,200 20x1 Maduro, Capital (sh. in excess payment) (3K x 2/8) 750 Prieto, Capital (sh. in excess payment) (3K x 6/8) 2,250 Cash 61,200 Adjusted capital of Maduro before retirement 46,200 Share in excess payment to Coll (750) Adjusted capital of Maduro after retirement 45,450 7. D (40K + 40K + 12K) = 92K fair value of net assets – [(5,000 x 2) x 1 = 10,000 aggregate par value of shares issued] = 82,000 credit to share premium 8.

C (1M + 300K profit – 200K payment to Partner A) = 1.1M

9. A [(60,000 + 20,000) / 80%] x 20% = 20,000 20,000, unaffected 10. A [50,000 + (10,000 x 4/6)] = 56,667

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