Question
PARTNERSHIP FORMATION, OPERATION, & DISSOLUTION On June 1, 2014, A and B formed a partnership with cash investments of 1,155,000 and 1,470,000, respectively. Upon formation,
PARTNERSHIP FORMATION, OPERATION, & DISSOLUTION
On June 1, 2014, A and B formed a partnership with cash investments of 1,155,000 and
1,470,000, respectively. Upon formation, the partners agreed to bring their capital ratio in proportion with
their profit and loss ratio which is 30% to A and 70% to B and partner B is to invest or withdraw sufficient
amount of cash to conform with the agreement.
Profit allocation were as follows: monthly salaries to A amount to 126,000 and to B amount to
105,000. The partners will be allowed with interest of 12% of their capital balances at the end of the year
(before profit/loss allocation) for the first year and interest of 15% of the beginning capital in excess of
2,520,000 for the subsequent year. B receives a bonus of 20% of net income after deducting the bonus
and his salary. Any remainder is based on profit and loss ratio.
On August 1, 2014, A invested additional 280,000 cash and withdrew 105,000 on October 1, 2014.
On September 1, 2014, B invested additional 168,000 cash and withdrew 63,000 on December 1, 2014.
In 2014, the partnership reported net income of 1,575,000 before any deductions and each partner
has drawings of 525,000 distributed at year-end against share in net income. Loans due to A as of
December 31, 2014 amount to 133,000.
On January 1, 2015, C was admitted as a partner by purchasing 1/3 interest of B, paying the selling
partner the amount of 966,000. C also invested 805,000 for a 20% interest in capital of the partnership.
There were no investments/withdrawals during the year. The profit sharing agreement was modified to also
include an annual salary to C of 945,000 and C receives a bonus of 15% of net income after deducting
the salaries.
The profit and loss ratios were also revised to 24%, 56% and 20% for A, B, and C, respectively. During
2015, the partnership resulted to income of 3,780,000 before any deductions and distributed an amount
210,000 higher than last year to each partner during 2015 against share in net income.
On January 1, 2016, B sold its interest in the partnership to C for 2,975,000. After which A and C
agreed to share annual profits of 3,220,000 in the ratio of 2:3, A and C respectively. During 2016, A and
C had additional investments of 315,000 and 210,000, respectively. Each partner received a 840,000
distribution at year end.
On January 1, 2017, A decided to retire from the partnership and was paid 3,745,000 cash for his
total partnership interest. It was agreed that assets with a book value of 1,015,000 would be adjusted to
reflect their fair values of 826,000. Immediately after A's retirement, D invested cash of 3,360,000 for a
30% interest in the partnership. The agreed capital of the partnership is 10,500,000.
1. Capital balance of B at the end of 2014
a. 2,798,000
b. 3,016,230
c. 2,990,110
d. 3,025,750
2. Capital balance of A immediately after
admission of C
a. 1,854,293
b. 1,638,770
c. 1,928,340
d. 1,712,307
3. Capital balance of A immediately after
withdrawal of B's interest in the partnership.
a. 1,854,293
b. 3,278,345
c. 2,129,260
d. 2,543,345
4. Capital balance of C at the end of 2016
a. 5,210,485
b. 5,793,655
c. 4,980,275
d. 9,875,125
5. Capital balance of C immediately before
admission of D
a. 5,680,255
b. 5,050,450
c. 5,299,000
d. 5,145,500
6. Increase in the asset of the partnership upon
admission of D
a. 1,841,000
b. 3,150,000
c. 5,201,000
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