Noy and Mar enter into a partnership agreement in which Noy is to have 60% interest in capital and profits. Noy contributes the following:Cost Fair ValueLand P 500,000 ?Building 5,000,000 60% of costEquipment 1,000,000 75% of costThere is a P1,000,000 mortgage on the building which the partners agree to assume. Mar contributes cash of P2,500,000 and the partners agreed that this should be his capital credit. Land should be recorded in the amount of?
Question
Noy and Mar enter into a partnership agreement in which Noy is to have 60% interest in capital and profits. Noy contributes the following:Cost Fair ValueLand P 500,000 ?Building 5,000,000 60% of costEquipment 1,000,000 75% of costThere is a P1,000,000 mortgage on the building which the partners agree to assume. Mar contributes cash of P2,500,000 and the partners agreed that this should be his capital credit. Land should be recorded in the amount of?
Solution
To answer this question, we first need to determine the total capital contribution of Noy and Mar.
Noy's contribution:
- Land: The fair value is not given, so we will use the cost, which is P500,000.
- Building: The fair value is 60% of the cost, so it's 60/100 * 5,000,000 = P3,000,000. However, there is a P1,000,000 mortgage on the building which the partners agree to assume. So, the net value of the building is 3,000,000 - 1,000,000 = P2,000,000.
- Equipment: The fair value is 75% of the cost, so it's 75/100 * 1,000,000 = P750,000.
So, the total contribution of Noy is 500,000 (Land) + 2,000,000 (Building) + 750,000 (Equipment) = P3,250,000.
Mar's contribution is cash of P2,500,000.
The total capital of the partnership is 3,250,000 (Noy's contribution) + 2,500,000 (Mar's contribution) = P5,750,000.
Noy's 60% interest in capital is 60/100 * 5,750,000 = P3,450,000.
Since Noy's total contribution (P3,250,000) is less than his 60% interest in capital (P3,450,000), the land should be recorded in the amount of 3,450,000 - 3,250,000 = P200,000 to make Noy's contribution equal to his 60% interest in capital.
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