Practical Accounting 2 Straight Problem No. 4

Refer to previous problems:

P2 Straight Problem No. 3

P2 Straight Problem No. 2

We will use these answers in previous problems to answer this article. This time, this article purchases on the treatment on purchase or investment in partnerships. Solve the problem.


On January 1, 2017, the two partners agreed to admit Vanessa as a member of the firm.

The partners had decided to adjust the values of some assets due to market conditions. After consultation with the experts, the partners had reliably determined that total fair value of net assets were understated by P68,750.

Meanwhile, Vanessa had invested P2,000,000 for a 30% interest in the partnership capital and profits. This shall serve as payment for the existing partners.

Accordingly, the profit sharing method for Renzo, Pocholo, and Vanessa, respectively, was revised as follows:

  1. Salaries of P84,000, P91,200, and P87,000 per annum.
  2. Interest of 5% on average capital for all partners.
  3. Bonus to Pocholo computed as 10% of net income before tax and after his and Vanessa’s bonus. Bonus to Vanessa shall be computed as 8 percent of net income after tax.
  4. Remaining profit or loss amounts shall be divided based on revised capital ratio.

Additional Info:

  1. The prevailing income tax rate is 30%.
  2. For purposes of computing for admission by purchase/investment on this problem, use the profit and loss ratio agreed before Vanessa’s admission.
  3. Any revaluation shall be charged to account title “Other Non-current Assets”.
  4. Renzo invested P25,000 on February 28 and withdrew P18,000 on August 31.
  5. Pocholo withdrew P35,000 on April 30, and Vanessa invested P44,000 on September 30.
  6. Net profit amounted to P1,080,000 as of December 31, 2017.

Required:

  1. Total capital of the partners after Vanessa’s admission (with supporting computations)
  2. Prepare schedule of distribution of profits
  3. Prepare adjusting entries
  4. Statement of financial position for December 31, 2017.
  5. How much shall be the gain/loss on purchase/investment to be recognized by the partnership?

NOTE: We will again use the answers in this problem for our succeeding article. Keep the answers for future reference.


P2 Problem Prepared by: TweetNewscaster.


Featured Image Credit:  Audit Firm Visit photo from St. Scholastica College site. For illustrative purposes only.

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