Solution manual fundamentals of accounting by cabrera chapter 03 SM

The current market value of the assets contributed to a partnership determines the amount of the credit to the partner’s capital account.. Fair market values represent the realistic wort

Accounting for Partnership Formation and Operating Transactions

Review Questions

1 The current market value of the assets contributed to a partnership determines the amount of the credit to the partner’s capital account

2 Partner withdrawals of cash for personal use do not affect the sharing of profits and losses by the partners Their shares of profits and losses are based

on the profit-and-loss ratio, which is determined separately from their cash withdrawals

3 Fair market values represent the realistic worth of the assets invested This means that if these assets were to be purchased at their particular date, they are being turned over to the partnership, the amount that would be needed is equivalent to the value determinable as of that date

4 A written partnership contract is highly desirable to have a clear and definite basis in operating a partnership Future disagreements and confusion will be avoided The matters to be included in a typical partnership contract are found on pages 51-52 The accountant can use the contract in the recording

of transactions involving financial matters such as the partners’

(a) investment and drawings

(b) sharing of income or loss

The contract will also be used as reference in determining the accounting period to be used, the nature of accounting records, financial statements, audit and so forth

5 To have a separate and distinct accounting for each partner’s investment and drawings

6 Noncash investments of partners should be recorded at their fair values in order to provide equitable treatment to the individual partners The recoding

of noncash assets at less than fair value will result in allocating the amount of understatement between the partners in their relative profit and loss sharing

ratios as the undervalued assets are used for partnership business or when they are sold by the partnership

7 Conceptually, there is no difference between the drawings and the withdrawals of partners since both represent disinvestments of resources from the partnership entity From a practical viewpoint, the distinction between withdrawals and drawings may be important because allowable drawings are not usually deducted in determining the amount of partnership capital to be used for purposes of dividing profits among the partners Since withdrawals are deducted, the distinction can affect the division of profits and losses

8 Three kinds of transactions affect the capital account of any partner: investments, withdrawals, and periodic closings of income, expense, and drawing accounts

9 Capital invested represents permanent investment in the partnership and will only be returned to the partners upon withdrawal and liquidation of the partnership while loan represents resource made available to the partnership but which is expected to be repaid at some future date

The amounts used represent the fair value of the assets being invested in the partnership

11 To have a realistic and fair valuation of the assets to be transferred to the partnership

12 Refer to page 63 of the textbook

Exercise 1

Exercise 2

* Should be allocated between land and building based on their fair market value.

** Should be allocated between tools and machinery based on fair market value or acquisition cost.

Exercise 3

To record Torres’ investment in the partnership

Exercise 4

Cash 200,000

Exercise 5

Accounts receivable (150,000 + 100,000) 250,000

Supplies inventory (199,500 + 161,500) 361,000

Furniture, fixtures and equipment (95,000 + 70,000) 165,000

Accumulate depreciation – furniture, fixtures

Exercise 6

Test Materials

Test Material 3-1

If the partners’ contributions were erroneously recorded at cost rather than fair market value, the account balances would be:

P130,000

P130,000 Inequity is calculated as follows:

Snoopy’s appreciation (P30,000) P18,000 P12,000 P30,000 Kitty’s depreciation (P10,000) (6,000) (4,000) (10,000)

Test Material 3-2

Capital balance per books for each partner is equal to the fair market value of contributed net assets:

Assets contributed to partnership P162,000 P66,000 Liabilities assumed by partnership (41,000) (28,000)

Test Material 3-3

Requirement (1)

GENERAL JOURNAL

Date Accounts and Explanation Post Ref Debit Credit

Allowance for Doubtful Accounts 1,360

To record Lazo’s investment

in the partnership.

To record Roman’s investment in the partnership.

Requirement (2)

Roman and Lazo Statement of Financial Position March 15, 20xx

Cash P 48,560 Accounts payable P 22,300 Accounts receivable P12,000

Less: Allowance for

doubtful accounts 1,360 10,640 CAPITAL

Prepaid expenses 2,400 Lazo, capital 48,560 Store equipment 26,600 Total liabilities and

Total assets P119,420 capital P119,420

Test Material 3-4

Requirement (1)

GENERAL JOURNAL

Date Accounts and Explanation Post Ref Debit Credit

Allowance for Doubtful Accounts 1,050

To record Azures’

investment in the partnership.

To record Roca’s investment

in the partnership.

Requirement (2)

Azures and Roca Statement of Financial Position

June 30, 20xx

Cash P 40,450 Accounts payable P 19,100 Accounts receivable P7,200

Less: Allowance for

doubtful accounts 1,050 6,150 CAPITAL

Inventory 24,100 Azures, capital 40,450 Prepaid expenses 1,700 Roca, capital 40,450 Office equipment 27,600 Total liabilities and

Total assets P100,000 capital P100,000