Question

On January 1, 2021, Aga and Ace formed a partnership and agreed to share profits and losses in the ratio of 3:7, respectively. Aga contributed a parcel of land that cost him P100,000. Ace contributed P400,000 cash. The land was sold for P180,000 immediately after the formation of the partnership. What amount should be recorded in Aga's capital account for his investment?

a. P150,000
b. P174,000
c. P180,000
d. P100,000
e. None of the above

Answer 1

The amount to be recorded in Aga's capital account for the contribution of land is the original cost to him, which is P100,000. This amount is recorded regardless of the land's subsequent sale price or the profit generated from that sale.

Step-by-step explanation:

The amount that should be recorded in Aga's capital account for his investment when forming a partnership with Ace is based on the value of the land he contributed upon entering the partnership, not necessarily the cost to him or the subsequent sale price. As Aga contributed a parcel of land he purchased for P100,000, and it was not mentioned that it was revalued upon contribution, the initial amount recorded in his capital account should be the cost of the land at the time he contributed it, which is P100,000. The profit from the sale of the land (P180,000 sale price minus P100,000 cost) is P80,000, and this amount should be shared based on the agreed profit-sharing ratio after recording the initial investments in the capital accounts.