Partnership and Corporation

Name: ____________________________________________________________
True or False
1. One of the partners in a proposed partnership is a multi-millionaire. The stipulation in the
articles of partnership that this partner shall be excluded from sharing in the profits of the
partnership is void.
2. When the partners invest assets other than cash in a partnership, their capital accounts
should be credited with the current fair values of the assets.
3. All partners in a general partnership are personally liable for all debts incurred by the
partnership.
4. As long as the action is within the scope of the partnership, any partner can bind the
partnership.
5. A partnership with a capital of ₱3,000 or more is valid even if it is unregistered with the
Securities and Exchange Commission.
6. When a partner invests assets in a partnership, the assets are recorded at the partner’s
book value.
7. An advantage of the partnership form of business is that each partner’s potential loss is
limited to that partner’s investment in the partnership.
8. A public instrument needs to be executed when movable property are contributed to the
partnership.
9. Adjustment prior to formation may be omitted since these will not affect the partner’s
capital credits.
10. There is no income tax imposed on a partnership.
11. In the absence of a specific agreement, the law requires that partnership profits be divided
equally among the partners.
12. The use of salaries in the allocation of profit or loss allows for the differences in the
services that partners provide the business.
13. A partnership contract should be drawn up at the end of each year, prior to distributing
profit or loss.
14. A stipulation excludes one or more partners from any share in the profits or losses are
valid.
15. The salary, interest and stated ratio method of allocation cannot be applied when a loss
has occurred.
16. When ending capital balances are used, additional investments during the year are
encourage.
17. Under the pure capital ratio plan of allocating profits, the partner who invested more
capital will ultimately shoulder a bigger share of the loss.
18. The basis on which profits or losses are shared is a matter of agreement among the
partners and may not necessarily be the same as their capital contribution ratio.
19. The income summary account is credited in the entry to record distribution of profits.
20. The form and content of the statement of comprehensive income of a partnership
resemble those of a sole proprietorship with no exceptions.
Multiple Choice. Write the letter of the best answer before each number.
1. Ibana Awali owns and operates a hardware store in Cebu City that employs about forty-
five personnel. She delegates some of the decision making to two supervisors. Awali’s
business is organized as
a. Corporations c. Sole Proprietorship
b. Partnership d. Limited Partnership
2. After Jolo has maximize his standby credit limit from the BBO Bank and still cannot
cope with the working capital needs of his fast-growing business, what is his recourse if
he wants his company to continue growing?
a. Build a tall building
b. Hire more employees
c. Obtain a partner or form a corporation to access more funds
d. Hold a fund raising campaign
3. The partner who can lose only what he has invested in a business is the
a. Stockholder partner c. Limited partner
b. General partner d. Husband
4. SARAH AND MATHEO decided to go into business together. They start by the essential
terms of their agreement along with their rights and duties. SARAH AT MATHEO
created a(n)
a. Articles of partnership
b. Licensing agreement
c. Division of partnership agreement
d. Pre-nuptial agreement
5. Partner’s investment may include which of the following?
a. Cash
b. Non-cash assets
c. Non-cash assets with liabilities to be assumed
d. All of the above
6. The most equitable distribution of partnership profit based on capital contributions uses
which of the following capital concept?
a. Beginning capital
b. Average capital
c. Ending capital
d. Equally
7. If the partnership agreement does not specify how profit is to be allocated, profits or
losses should be allocated
a. Equitably so that partners are well compensated for their time and effort
b. In proportion to the average of capital invested during the period
c. In accordance with their capital contribution
d. Equally
8. Which of the following is not considered a legitimate expense of the partnership
a. Interest paid to partners based on the amount of their invested capital
b. Depreciation on assets contributed to the partnership by the partners
c. Salaries for management hired to run the business
d. Supplies used in the partners’ office
9. A partner who contributes money or property as well as his work or industry to the
capital of the partnership is called
a. Managing partner
b. Capitalist-industrial partner
c. Industrial partner
d. Capitalist partner
10. Which of the following distributions would be made last in dividing the profits to the
partners when interest on capital balances and salary allowances are involved?
a. Salary Allowances
b. Equally
c. Specified ratio
d. Interest on capital balances
Problem 1
John and Kenneth are joining their separate business to form a partnership. Cash and non-cash
assets are to be contributed for a total capital of P300,000. The non-cash assets to be contributed
and liabilities to be assumed are:
John Kenneth
Book Value Fair Value Book Value Fair Value
Accounts 22,500 22,500
Receivable
Inventories 22,500 33,750 60,000 67,500
Equipment 37,500 30,000 67,500 71,250
Accounts Payable 11,275 11,250 7,500 7,500
The partner’s capital accounts are to be equal after all contributions of assets and assumptions of
liabilities.
Prepare Journal Entries in the partnership books upon formation
Problem 2
Alisuag, Go and Palatino formed a partnership on Jan 1, 2015 with capital contributions of
300,000, 500,000 and 200,000 respectively. For the year ended December 31, 2015, the
partnership reported a profit of 450,000.
Requirement:
Determine the partners’ share in the profit under each of the following independent situations
and prepare the entry to record the profit allocation of individual capital accounts:
1. Profit is allocated on the basis of the initial capital contributions.
2. Each partner is allotted an interest of 7% on initial capital contributions and remainder is
divided among Alisuag, Go, and Palatino in the ratio of 4:3:1 respectively
3. Salaries of 50,000, 40,000 and 30,000 are given to Alisuag, Go and Palatino
respectively.; 5% interest on initial capital contributions; and any remainder is divided in
the ratio 4:3:1, respectively.
4. Salaries of 30,000, 45,000 and 65,000 are given to Alisuag, Go and Palatino,
respectively; 5% interest on initial capital contributions; Bonus to Alisuag of 8% of profit
after deducting bonus but before deducting salaries and interest; and any remainder
divided equally.