The statement of financial position of Pedro Castro on October 1, 2019 before accepting Pablo Bunag as his partner is shown below:

Pedro Castro

Statement of Financial Position October 1, 2016

Assets

Cash

6,000.00

Notes Receivable

3,000.00

Accounts Receivable

24,000.00

Less: Allowance for Bad Debts

1,000.00

23,000.00

Merchandise Inventory

8,000.00

Furniture and fixtures

6,000.00

Less: Accumulated Depreciation

600.00

5,400.00

Total Assets

45,400.00

Liabilities and Equity

Notes Payable

4,000.00

Accounts Payable

10,000.00

Pedro Castro, Capital

31,400.00

Total Liabilities and Equity

45,400.00

Pablo Bunag offers to invest cash to give him a capital credit equal to one-half (1/2) of Pedro Castro's capital after giving effect to the adjustment of the items below. Pedro Castro accepts the offer.

1.The merchandise is to be valued at P7,400.

2.The accounts receivable is estimated to be 95% realizable.

3.The interest accrued on the notes receivable enumerated below is to be reflected.

P1,000, 6% dated July 1, 2016.

P2,000, 6% dated August 1, 2016.

4.Interest accrued at 5% annually from April 1, 2016 on the notes payable is to be recorded.

5.The furniture and fixtures is to be valued at P4,600.

6.Office supplies on hand which have been charged to expense in the past amounted to P400. These are still to be used by the partnership.

Required:

1. Prepare the necessary journal entries in all the books to record the formation of the partnership if:

a)The books of Pedro Castro will be retained by the partnership.

b)A new set of books will be used.