Solution manual fundamentals of accounting by cabrera chapter 05 SM

Chapter Accounting for Partnership Dissolution Review Questions 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 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 Four events dissolve a partnership: withdrawal of a partner, death of a partner, admission of a new partner, and liquidation of the partnership 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 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 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 The admission of a new partner may be recorded by the goodwill approach (or revaluation approach) or by the bonus approach (or nonrevaluation approach) 2 Chapter 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 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 Accounting for Partnership Dissolution 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 Partners’ equity in the partnership: a Bravo’s balance Ramos’ Jose’s balance P 50,000 100,000 -0- b Partnership capital before Bravo is admitted (P100,000 + P50,000) Bravo’s investment Partnership capital after Bravo is admitted P150,000 50,000 P200,000 Bravo’s capital in the partnership (P200,000 x ¼) Ramos’ capital in the partnership Jose’s capital in the partnership Total partnership capital c Partnership capital before Bravo is admitted (P100,000 + P50,000) Bravo’s investment Partnership capital after Bravo is admitted Bravo’s capital in the partnership (P220,000 x ¼) Ramos’ capital in the partnership P100,000 + [(P70,000 – P55,000) x 1/2)] Jose’s capital in the partnership P50,000 + [(P70,000 – P55,000) x 1/2] Total partnership capital P 50,000 100,000 50,000 P200,000 P150,000 70,000 P220,000 P 55,000 107,500 57,500 P220,000 Chapter Exercise GENERAL JOURNAL Date a b c Account Titles and Explanation Jose, Capital Bravo, Capital Debit 50,000 Credit 50,000 Cash Bravo, Capital 50,000 Cash Bravo, Capital Ramos, Capital (P15,000 x ½) Jose, Capital (P15,000 x ½) 70,000 50,000 55,000 7,500 7,500 Exercise 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: Cunto, 40% x P3,000 Yui, 60% x P3,000 P1,200 1,800 P3,000 Exercise 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 Bonus allocation Remaining partners’ capital balances Ling P27,000 (1,250) P25,750 Cheli P36,000 (1,875) P34,125 Honey P45,000 (1,875) P43,125 Accounting for Partnership Dissolution 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 Bonus allocation Remaining partners’ capital balances Ling P27,000 1,750 P28,750 Cheli P36,000 2,625 P38,625 Honey P45,000 2,625 P47,625 Exercise Requirement (1) Rainee, capital Nic, capital P70,000 P70,000 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 Capital balances after Mega is admitted when assets are not revalued: Kilo capital Byte capital Mega capital Total capital Old Capital P140,000 x 40% 60,000 x 40% P200,000 Capital Transfer P(56,000) (24,000) 80,000 New Capital P 84,000 36,000 80,000 P200,000 Chapter Exercise 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 Cash P120,000 Janny, capital 3,600 Ping, capital 2,400 Julz, capital 4,000 Faye, capital To record Faye’s admission to a 25% interest in the partnership capital and earnings P130,000 Capital accounts after Faye’s admission to the partnership: Janny capital (P140,000 – P3,600) Ping capital (P100,000 – P2,400) Julz capital (P160,000 – P4,000) Faye capital P136,400 97,600 156,000 130,000 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 Accounting for Partnership Dissolution Exercise Entry to write-up assets to fair value Assets P20,000 Heng, capital Son, capital Kim, capital P10,000 8,000 2,000 Entry to record settlement with Son Son, capital Heng, capital (5/6 x P3,000 excess payment) Kim, capital (1/6 x P3,000 excess payment Son, loan Cash P38,000 2,500 500 P10,000 31,000 Heng capital (P30,000 + P10,000 – P2,500) P37,500 Kim capital (P10,000 + P2,000 – P500) P11,500 Test Material Test Material 5-1 Requirement (1) Current total capital Adjustment for losses Net contributed capital P320,000 (50,000) P270,000 Let X = Amount of Jim’s investment 1/3 (P270,000 + X) P90,000 + 1/3X P90,000 P135,000 = = = = X X 2/3 X X Chapter Requirement (2) The settlement among the partners is determined as follows: Partner Trina Enzo Gabe Total Original Capital P175,000 100,000 45,000 P320,000 Share of Adjustment for Loss P(25,000) (15,000) (10,000) P(50,000) Capital Balance Needed to Conform with P/L Ratio P135,000 81,000 54,000 P270,000 Revised Capital P150,000 85,000 35,000 P270,000 Settlement: Withdrawal (Investment) P15,000 4,000 (19,000) -0- Requirement (3) The entry to record the adjustments is: Trina, capital 25,000 Enzo, capital 15,000 Gabe, capital 10,000 Marketable securities Allowance for doubtful accounts Requirement (4) Capital accounts after Jim’s admission are: Trina Enzo Gabe Jim Total P135,000 81,000 54,000 135,000 P405,000 25,000 25,000 Accounting for Partnership Dissolution Test Material 5-2 Requirement (1) GENERAL JOURNAL Date Dec 31 Account Titles and Explanation Lopez, Capital Bautista, Capital To record transfer of Lopez’s equity in the partnership to Bautista Debit 50,000 Credit 50,000 Requirement (2) GENERAL JOURNAL Date Dec 31 Account Titles and Explanation Lopez, Capital Pascua, Capital Bali, Capital To record transfer of Lopez’s equity in the partnership to Pascua and Bali Debit 50,000 Credit 25,000 25,000 Requirement (3) GENERAL JOURNAL Date Dec 31 Account Titles and Explanation Lopez, Capital Cash Note Payable to Lopez To record withdrawal of Lopez from the partnership Requirement (4) Debit 50,000 Credit 15,000 35,000 10 Chapter GENERAL JOURNAL Date Dec 31 Account Titles and Explanation Lopez, Capital Santos, Capital (P30,000 x 28/.62) Sena, Capital (P30,000 x 34/.62) Cash Note Payable to Lopez To record withdrawal of Lopez from the partnership Debit 50,000 13,548 16,542 Credit 10,000 70,000 Requirement (5) GENERAL JOURNAL Date Dec 31 Dec 31 Account Titles and Explanation Santos, Capital (P30,000 x 28) Lopez, Capital (P30,000 x 38) Sena, Capital (P30,000 x 34) Building (P310,000 – P280,000) To revalue the building and allocate the loss in value to the partners Debit 8,400 11,400 10,200 Lopez, Capital (P50,000 – P11,400) Cash Note Payable to Lopez To record withdrawal of Lopez from the partnership 38,600 Test Material 5-3 Credit 30,000 14,100 24,500 Accounting for Partnership Dissolution 11 Requirement (1) GENERAL JOURNAL Date Dec 31 Account Titles and Explanation Kristine, Capital Rain, Capital To record transfer of Kristine’s equity in the partnership to Rain Debit 38,000 Credit 38,000 Requirement (2) GENERAL JOURNAL Date Dec 31 Account Titles and Explanation Kristine, Capital Nico, Capital Baby, Capital To record transfer of Krstine’s equity in the partnership to Nico and Baby Debit 38,000 Credit 19,000 19,000 Requirement (3) GENERAL JOURNAL Date Dec 31 Account Titles and Explanation Kristine, Capital Cash Note Payable to Kristine To record withdrawal of Kristine from the partnership Requirement (4) GENERAL JOURNAL Debit 38,000 Credit 5,000 33,000 12 Chapter Date Dec 31 Account Titles and Explanation Kristine, Capital Summer, Capital (P2,000 x 4/7) Ingrid, Capital (P2,000 x 3/7) Cash Note Payable to Kristine To record withdrawal of Kristine from the partnership Debit 50,000 1,143 857 Credit 20,000 20,000 Requirement (5) GENERAL JOURNAL Date Dec 31 Dec 31 Account Titles and Explanation Equipment (P150,000 – P130,000) Kristine, Capital (P20,000 x 30) Summer, Capital (P20,000 x 40) Ingrid, Capital (P20,000 x 30) To revalue the equipment and allocate the gain in value to the partners Debit 20,000 Kristine, Capital (P38,000 + P6,000) Cash Inventory To record withdrawal of Kristine from the partnership 44,000 Test Material 5-4 Requirement (1) Credit 6,000 8,000 6,000 10,000 34,000 13 Accounting for Partnership Dissolution Income Allocation Schedule Jo Net income Bonus to Jo Remainder Salary allowance Remainder 50/50 split Remainder P30,000 (1,500) 28,500 (25,000) 3,500 (3,500) -0- Fran Total 1,500 1,500 10,000 15,000 25,000 1,750 P13,250 1,750 P16,750 3,500 P30,000 Requirement (2) Revenue and Expense Summary P30,000 Jo Capital P13,250 Fran Capital 16,750 Allocate partnership net income for the year to the partners Jo Capital P15,000 Jo Drawing P15,000 Fran Capital P10,000 Fran Drawing P10,000 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 Add: Additional investments Deduct: Withdrawals Deduct: Drawings Add: Net income Capital balances December 31, 2007 Jo P496,750 5,000 (15,000) 13,250 P500,000 Fran P268,250 5,000 (10,000) 16,750 P280,000 ... with the old partners’ profit sharing ratios Any change in the association of the individual partner, including the withdrawal of a partner, results in a dissolution of the partnership However,... 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. .. entity theory of accounting, the business or partnership is viewed as a separate and distinct entity, possessing its own existence apart from the Accounting for Partnership Dissolution owners