Reference no: EM132635501

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.

Problem 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

Problem 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

Problem 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

Problem 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

Problem 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

Problem 6. Increase in the asset of the partnership upon admission of D

a. ?1,841,000

b. ?3,150,000

c. ?5,201,000