Solution manual fundamentals of accounting by cabrera chapter 05 SM

When a partner resigns from the partnership and receives assets greater than her capital balance, the excess is shared by the other partners based on their profit-and-loss ratio.. A bonu

Accounting for Partnership Dissolution

Review Questions

1 When a partner resigns from the partnership and receives assets greater than her capital balance, the excess is shared by the other partners based on their profit-and-loss ratio

2 Dissolution is the termination of a partnership Dissolution may occur

because of the admission of a new partner, the withdrawal or death of an

existing partner, or the liquidation of the business Liquidation is the process

of going out of business by selling the assets, paying all business debts, and disbursing any remaining cash to the owners

3 Four events dissolve a partnership: withdrawal of a partner, death of a partner, admission of a new partner, and liquidation of the partnership

4 The sale of a partnership interest to a third party dissolves the old partnership

if the continuing partners accept the third party purchaser as their partner In this case, the relation among the partners is changed and a new partnership agreement is necessary

5 A partnership is both a legal entity and a business entity The partnership as

a legal entity is dissolved by the death or retirement of a partner as provided

by the Partnership Act But the partnership as a business entity continues until the business entity is liquidated, irrespective of the changes in the interests held by individual partners

6 When a new partner acquires an interest by purchase from existing partners, the partnership receives no new assets because the payment for the new partner’s interest is distributed to the old partners Alternatively, an investment in a partnership increases the net assets of the partnership This difference is important in accounting for the admission of a new partner

7 The admission of a new partner may be recorded by the goodwill approach (or revaluation approach) or by the bonus approach (or nonrevaluation approach)

8 A bonus procedure for recording an investment in a partnership involves adjusting the partnership capital account to the extent necessary to meet the new partnership agreement without a revaluation of the assets and liabilities

of the old partnership

If a new partner receives a capital credit in excess of his or her investment, the excess is a bonus to the new partner A bonus to a new partner is charged against the old partners’ capital balances in relation to their old profit sharing ratios

If a new partner’s investment exceeds his or her capital credit, the excess is a bonus to the partners A bonus to the old partners is credited to the old partners’ capital balances in accordance with the old partners’ profit sharing ratios

9 Any change in the association of the individual partner, including the withdrawal of a partner, results in a dissolution of the partnership However, this change does not result necessarily in the termination of the basic business purpose of the partnership The remaining partners may continue to operate the business through a subsequent creation of a new legal entity instead of a liquidation of the old partnership

10 When an incoming partner acquires an interest in the partnership for less than book value, any bonus attributable to the difference in values would be traceable to the new partner Therefore, the new partner must bring to the business some intangible such as business expertise, an established clientele, etc If there are no intangibles being contributed by the incoming partner, the new partner is paying less than book value because the old partnership has overstated new assets and/or has earnings which are below established levels for similar companies

11 This statement is incorrect The bonus method is used in most cases involving ownership changes because it retains the historical cost concept for accounting purposes

12 The bonus method adheres to the historical cost concept for all assets of the business It is objectively calculated and is more convenient to use than the goodwill method

13 Under the entity theory of accounting, the business or partnership is viewed

as a separate and distinct entity, possessing its own existence apart from the

owners or partners Therefore, the admission of a new partner through a direct purchase or an existing partner’s interest is viewed as a transaction with the individual not the partnership

Exercises

Exercise 1

Partners’ equity in the partnership:

-0-b Partnership capital before Bravo is admitted

Partnership capital after Bravo is admitted P200,000 Bravo’s capital in the partnership

c Partnership capital before Bravo is admitted

Partnership capital after Bravo is admitted P220,000 Bravo’s capital in the partnership

Ramos’ capital in the partnership

P100,000 + [(P70,000 – P55,000) x 1/2)] 107,500 Jose’s capital in the partnership

P50,000 + [(P70,000 – P55,000) x 1/2] 57,500

Exercise 2

GENERAL JOURNAL

Exercise 3

Total invested capital of the new partnership equals P85,000 (P25,000 + P40,000 + P20,000) Rebby’s 20% interest of P17,000 indicates a P3,000 bonus to the previous partners (P20,000 – P17,000) The bonus would be allocated based on the profit and loss ratios existing prior to Rebby’s admission as follows:

P3,000

Exercise 4

Requirement (1)

The payment of P37,000 to Anne for the remaining partners’ share in the partnership represents a bonus of P5,000 (P37,000 – P32,000) attributable to Anne Allocation of the bonus to remaining partners is as follows:

Beginning capital balances P27,000 P36,000 P45,000 Bonus allocation (1,250) (1,875) (1,875) Remaining partners’ capital balances P25,750 P34,125 P43,125

Requirement (2)

The payment of P25,000 to Anne for the remaining partners’ share in the partnership represents a bonus of P7,000 (P32,000 – P25,000) attributable to the remaining partners Allocation of the bonus to remaining partners is as follows:

Beginning capital balances P27,000 P36,000 P45,000

Remaining partners’ capital balances P28,750 P38,625 P47,625

Exercise 5

Requirement (1)

Requirement (2)

The total capital of Abstract Entertainment and Gallery remains at P400,000 The amount paid by Nic to Rainee does not affect the partnership and Nic does not become a partner with the assignment of half of Rainee’s interest

Exercise 6

Capital balances after Mega is admitted when assets are not revalued:

Old Capital

Capital Transfer

New Capital

Mega capital 80,000 80,000

Exercise 7

Requirement (1)

Investment of P120,000 in the partnership with no revaluation:

P400,000 old capital + P120,000 additional investment = P520,000

Faye’s interest = P520,000 x 25% = P130,000

Therefore, the old partners are giving a bonus to Faye of P10,000

To record Faye’s admission to a 25% interest in

the partnership capital and earnings

Capital accounts after Faye’s admission to the partnership:

P520,000

Requirement (2)

The profit and loss sharing ratios of the new partnership will depend on the provisions of the new partnership agreement If the old partners wish to maintain their old partnership relationship, one possible division would be to reduce each

of the old partners’ ratio by 25% (in other words, a new ratio of 27:18:30:25) However, if the issue is not addressed in the new partnership agreement, the partners will share profits equally, 25:25:25:25

Exercise 8

Entry to write-up assets to fair value

Entry to record settlement with Son

Heng, capital

(5/6 x P3,000 excess payment) 2,500

Kim, capital

(1/6 x P3,000 excess payment 500

Heng capital (P30,000 + P10,000 – P2,500) P37,500

Test Material

Test Material 5-1

Requirement (1)

Let X = Amount of Jim’s investment

1/3 (P270,000 + X) = X

P90,000 + 1/3X = X

P90,000 = 2/3 X P135,000 = X

Requirement (2)

The settlement among the partners is determined as follows:

Partner Original Capital

Share of Adjustment for Loss Revised Capital

Capital Balance Needed to Conform with P/L Ratio

Settlement: Withdrawal (Investment)

-0-Requirement (3)

The entry to record the adjustments is:

Allowance for doubtful accounts 25,000

Requirement (4)

Capital accounts after Jim’s admission are:

Test Material 5-2

Requirement (1)

GENERAL JOURNAL

To record transfer of Lopez’s equity in the

partnership to Bautista.

Requirement (2)

GENERAL JOURNAL

To record transfer of Lopez’s equity in the

partnership to Pascua and Bali.

Requirement (3)

GENERAL JOURNAL

To record withdrawal of Lopez from the

partnership.

Requirement (4)

GENERAL JOURNAL

To record withdrawal of Lopez from the

partnership.

Requirement (5)

GENERAL JOURNAL

To revalue the building and allocate the

loss in value to the partners.

To record withdrawal of Lopez from the

partnership.

Test Material 5-3

Requirement (1)

GENERAL JOURNAL

To record transfer of Kristine’s equity in

the partnership to Rain.

Requirement (2)

GENERAL JOURNAL

To record transfer of Krstine’s equity in

the partnership to Nico and Baby.

Requirement (3)

GENERAL JOURNAL

To record withdrawal of Kristine from the

partnership.

Requirement (4)

GENERAL JOURNAL

To record withdrawal of Kristine from the

partnership.

Requirement (5)

GENERAL JOURNAL

To revalue the equipment and allocate the

gain in value to the partners.

To record withdrawal of Kristine from the

partnership.

Test Material 5-4

Requirement (1)

Income Allocation Schedule

Requirement (2)

Revenue and Expense Summary P30,000

Allocate partnership net income for the year to the partners

Close the drawing accounts to the capital accounts

Requirement (3)

Capital Accounts

J & F Partnership Statement of Partners’ Capital For the year ended December 31, 2007

Capital balances January 1, 2007 P496,750 P268,250

Capital balances December 31, 2007 P500,000 P280,000