PARTNERSHIP ACCOUNTING

TABLE OF CONTENTS:

PARTNERSHIP FORMATION, OPERATION & DISSOLUTION

Testing Objectives
Nature of Partnership Organization
Investments and Withdrawals
Partnership Operations
Changes in Partnership Operations
Investing in an Existing Partnership
Dissolution of a continuing partnership through death or retirement

PARTNERSHIP LIQUIDATION
Schedule of Safe Payments
Installment Liquidations
Partner vulnerability ranking
Insolvent partners and partnerships

PARTNERSHIP FORMATION, OPERATIONS & DISSOLUTION

Testing Objectives

1. Determine the nature, scope, and objective of the partnership.

2. Differentiate partnership from sole proprietorship and corporation.
3. Concepts, principles of partnership accounting
4. Determine, compute and account the initial capital contribution of the partners.
5. Determine, compute and account the changes in partner’s capital balances of the partners.
6. Compute the settlement amount of partners during the liquidation.

Nature of Partnership Organization

1. The partnership is defined as an association of two or more persons to carry on as co-owners of a business for profit.

2. Characteristics
a. Limited life. The legal life of a partnership terminates with the admission of a new partner, withdrawal or death of an old
partner, voluntary dissolution by the partners, or involuntary dissolution.

b. Mutual agency. Each partner is assumed to be an agent for the partnership with the power to bind all the other partners by
his/her actions on behalf of the partnership.

c. Unlimited liability. Each partner is liable for all partnership debts.

3. Articles of partnership (the partnership agreement) should be written (but oral agreements may be legal and binding).

A. The agreement should specify:

a. The types of products and services to be provided and other details of the business,

b. Rights and responsibilities of partners,

c. Initial investments and provisions for additional investments,

d. Asset drawing provisions,

e. Profit and loss sharing formulas, and

f. Procedures for dissolving the partnership

B. Profits and losses are divided equally if there is no specific partnership agreement.

4. Partners own their share of the partnership but do not have ownership shares in the individual assets of the entity.
Investments and Withdrawals

1. Initial investments
a. All property brought into the partnership or acquired by the partnership is partnership property.

b. The initial investment is recorded in the partner’s capital accounts at its fair value at the time of transfer to the partnership.

c. Unidentifiable assets in initial investment arise when partners agree on relative capital interests not aligned with
investments of identifiable assets.

d. Under the bonus approach, the unidentifiable asset is not recorded on the partnership books, and the capital accounts are
adjusted to meet the conditions of the partnership agreement.

That is, the other partners give a “bonus” to the incoming partner whose share of capital exceeds his investment.

2. The same valuation rules apply for additional investments as apply for initial investments.

3. Withdrawals are large and irregular disinvestments charged directly to partners’ capital accounts.

4. Drawings, drawing allowances, and salary allowances are:

a. Regular amounts that are withdrawn in anticipation of profits and charged to individual partner drawings accounts.

b. Closed to the capital accounts at the end of each accounting period, before preparation of the partnership balance sheet.

5. Loans and advances

a. Loans made to the partnership by a partner earn interest and are considered liabilities of the partnership.

b. Loans made to a partner by the partnership are partnership assets.

Partnership Operations

1. Financial statements of a partnership include a balance sheet, an income statement, a statement of partnership capital, and a
statement of cash flows.

2. Profit and loss sharing agreements provide for the division of profits.

a. Salaries and bonuses to partners and interest on capital accounts are not expenses and do not affect the measurement of
partnership income.

b. The order of the partnership agreement is followed regardless of the income or loss experienced by the partnership.

c. Absence of a specific agreement; losses are divided the same as profits.

d. Capital to be considered in profit and loss sharing agreements may be beginning, ending, or average capital balances.
Average capital means weighted average unless otherwise specified in the partnership agreement.

Changes in partnership interests

1. Assignment of an interest:

a. The partnership is not dissolved.

b. An assignee does not become a partner.

c. The assignee is entitled to partner’s share of profits and losses and a share of partnership assets in the event of liquidation.

d. The only accounting necessary is to record the capital transfer from the assignor to the assignee.

2. Admission of a new partner, either by purchasing an interest from old partners or investing in an existing partnership

a. Admission of a new partner requires the consent of all existing partners.

b. The old partnership is dissolved.

 c. A new partnership agreement is developed.

d. Absence of a new agreement; profit and losses are divided equally among the partners.

3. Purchase of interest from existing partners

a. The partnership receives no new capital.

b. Revaluation procedure

1. The revaluation should be completed before the admission of the new partner.

2. Since the partnership receives no money, the amount paid to the old partners provides little evidence for revaluation
and appraisals must be relied on for an equitable distribution of total partners’ capital.

3. An entry is made to transfer capital from the selling partner(s) to the new partner.

4. Non-revaluation/bonus procedure

a. The bonus procedure requires an entry be made to transfer the capital of old partners to the new partner’s capital account.

b. Without revaluation, the new partner’s capital account may not equal his or her payments to the old partners.

Investing in an existing partnership

1. The old partnership is legally dissolved.

2. Noncash investments are valued using the same valuation techniques as used for initial investments.

3. Investment of the new partner is recorded under the provisions of the new partnership agreement.

4. The basis for revaluation of the partnership

a. If the new partner’s capital interest in the total of the old capital plus new investment is less than the new partner’s
investment, there is an implication that the old partnership had unrecorded asset value.

a.1 Revaluation is determined by dividing the new partner’s capital investment by his or her interest in the new
partnership.

a.2 The bonus approach may recognize the unrecorded asst value.

a.2.1 Under the bonus approach, the assets are not revalued, but the different between the new partner’s
investment and his/her capital credit is divided among the old partners in their old profit-sharing
ratios.

b. If the new partner’s capital interest in the total of the old capital plus new investment is greater than the new partner’s
investment, there is an implication that the new partner is bringing unidentifiable assets into the partnership.

b.1 The total capital of the new partnership is determined by dividing the old partners’ capital by the old partners’
interest retained in the new partnership.

b.2 The unidentifiable asset value from the incoming partner can be recognized by either the goodwill or the bonus
approach.

1. Under the goodwill approach, assets are revalued to their fair values, and goodwill to the new partner is
recorded.

2. Using the bonus approach

2.1 Assets are not revalued

2.2 Capital balances of the old partners are reduced for the bonus to the new partner and the new
partner’s capital account.
Dissolution of a continuing partnership through death or retirement

1. The old partnership is dissolved, and the retiring partner (or estate of a deceased partner) receives a settlement. A partner can
dissociate at any time.

2. If the partnership agreement does not specify a settlement.

a. Buyout price = amount that would have been distributable to the dissociating partner if assts were sold equal to the greater
of liquidation value or value based on the sale of the entire business.

b. The retiring partner, or estate of the deceased partner, receives that amount plus interest as an ordinary creditor.

b.1 If there is a time lapse between the dissolution and settlement dates, the capital balance is reclassified as a liability.

b.2 Any interest on the liability up to the settlement date is an expense of the partnership.

b.3 Recording the settlement with a retiring or deceased partner;

c. If the retiring partner receives an amount equal to his or her final capital balance, the only entry is a debit to the capital
account and a credit to cash.

d. If the retiring partner receives more than the balance in his or her capital account, an undervaluation of the partnership
books is implied. The excess payment can be recorded in one of three ways.

d.1 If a bonus is paid to the retiring partner, the excess payment to the retiring partner is charged to the remaining partners
in their relative profit sharing ratios.

d.2 if the retiring partner receives less than the balance of his or her account, the partners may agree that the partnership
is worth less than its book value.

1. Overvalued assets should be written down to fair values in the partners’ profit-sharing ratios before settlement
with the retiring partner.

2. If a bonus to continuing partners is to be recorded, a bonus equal to the excess of the retiring partner’s capital
account over the cash paid by the partnership in settlement of the retiring partner’s interest is credited to the
continuing partners’ capital account balances in their relative profit-sharing ratios.

PARTNERSHIP LIQUIDATION

1. A partnership liquidation is the termination of a partnership as a business entity.

2. Overview of the liquidation process for a solvent partnership (partnership assets are greater than partnership liabilities):

a. Noncash assets are converted into cash.

b. Gains and losses and expenses incurred during the liquidation period are recognized.

c. Liabilities are settled.

d. Cash is distributed to the partners according to the final balances in their capital accounts.

3. Order of distribution of assets in a liquidation of a partnership

a. Amounts owed to creditors other than partners and amounts owed to partners other than capital for profits.

b. Amounts due to partners liquidating their capital balances upon conclusion of the liquidation of partnership assets and
liabilities.

b.1 All profits, losses, and drawing balances are closed to capital accounts before any distributions are made.

4. Partnership liquidation statement is a summary of transactions and balances during the liquidation stage.

5. Debit capital balances in a solvent partnership may result from recognizing losses during the liquidation process.
 a. The partners with debit balances are normally obligated to use their personal assets to settle their partnership
obligations.

b. If the partners with debit capital balances have inadequate personal assets, the partners with credit balances normally
assume losses equal to the debit capital balances and share the losses in their relative profit and loss sharing ratios.

c. If the partnership has a loan balance from an insolvent partner

c.1 No cash should be distributed for the loan without agreement from all partners.

c.2 A partner’s personal creditors have a prior claim on personal assets.

Schedule of Safe Payments

1. Safe payments are distribution to partners that can be made with the assurance that any resources distributed will not have to
be returned to the partnership (assumes a worst-case scenario).

2. In calculating safe payments, the following assumptions are made:

a. All partners are considered personally insolvent.

b. All noncash assets are considered possible losses.

c. Some cash may be withheld to cover liquidation expenses, unrecorded liabilities, and general contingencies. The cash
withheld is considered a loss in determining safe payments.

3. The safe payments schedule for determining advance distributions to partners is prepared after non-partner liabilities have been
paid.

a. The schedule begins with each partner’s equity (each partner’s capital account plus loans to the partnership and fewer loans
from the partnership).

b. Possible losses (from noncash assets and cash withheld balances) are allocated to the partners in the profit and loss sharing
ratios and deducted from the equity balances.

c. Any negative partner equity is allocated to partners with equity in their relative profit and loss sharing ratios.

d. Step 3 is repeated until no remaining partners show negative equity.

e. The amount shown for partners with equity will equal the cash available for distribution.

f. Advance distributions require approval from all partners.

Installment liquidations:

a. Installment liquidation involve the distribution of cash to partners as it becomes available during the liquidation period and before
all liquidation gains and losses have been realized. Installments to partners can be determined by a safe payment schedule for
each installment distribution.

b. When the partners’ capital accounts are aligned in the profit and loss sharing ratios, safe payment schedules will not be necessary.

c. Once all the partners are included in an installment distribution, future installment payments to the partners will be in the profit-
sharing ratios. Thus, additional safe payment schedules are not necessary.

Partner vulnerability ranking

1. Cash distribution plans involve ranking partners regarding their vulnerability to possible losses, preparing a schedule of assumed
loss absorption, and preparing a cash distribution plan.

2. How vulnerable a partner is to possible losses (vulnerability ranking) is determined by dividing each partner’s equity by his or her
profit-sharing ratio.

3. This amount is the maximum loss that the partner could absorb without reducing his or her equity below zero.

The schedule of assumed loss absorption is prepared using the vulnerability rankings.
 a. The schedule begins with pre-liquidation equities and charges each partner’s equity with its share of the partnership
loss that would exactly eliminate the equity of the most vulnerable partner.

b. The schedule begins with pre-liquidation equities and charges each partner’s equity with its share of the partnership
loss that would exactly eliminate the equity of the most vulnerable partner.

c. This process is repeated until the equities of all, but the least vulnerable partner has been reduced to zero.

4. A cash distribution plan is prepared from the schedule of assumed loss absorption.

a. Under the plan, the first cash available for distribution goes to pay non-partner liabilities.

b. Next, the least vulnerable partner will receive an amount of cash that will align that partner’s equity in the relative
profit and loss sharing ratio with the next least vulnerable partner.

c. This process is continued until all partners’ capital balances are aligned.

d. Remaining distributions are in the profit and loss sharing ratio.

5. A cash distribution schedule can be prepared from the cash distribution plan. The schedule shows how cash is distributed as it
becomes available.

Insolvent partners and partnerships

1. Partnership creditors must first seek recovery of their claims from partnership property.

a. Creditors of individual partners must first seek recovery of their claims from an individual property.

2. Often with a solvent partnership, but insolvent partner:

a. Partnership creditors recover their claims from partnership property.

b. An insolvent partner’s personal creditors have a claim against partnership assets to the extent of the insolvent partner’s
equity in such assets.

c. Creditors of an insolvent partner with a credit capital balance may have a claim against the personal assets of a solvent
partner with a debit capital balance to the extent of the debit capital balance.

d. Partners with debit capital balances are obligated to the partnership for the amount of the debit balance; however, if
the partner with the debit balance is insolvent, that partner’s assets will go to his personal creditors.

TEST BANK

1. Which of the following procedures is not necessary steps affecting a dissolution of partnership?
a. Revaluing partnership assets
b. Recognizing undistributed profit or loss share of partner at dissolution date.
c. Closing of partnership books.
d. Revising partners’ equity.

Answer: D

2. In case of general partnership liquidation, which of the following credits shall be settled first by the liquidating partner?
a. Those owing for partner’s capital contribution.
b. Those owing to third persons.
c. Those owing for the share in partnership profits.
d. Those owing to partners for their advances to partnership.

Answer: B

3. Which of the following transactions will not affect the total equity of a partnership?
a. Recognition of impairment loss in case of admission of a new partner by investment.
b. Withdrawal by a partner.
c. Admission of a new partner by purchase of existing partner’s interest below its book value.
d. Retirement of an existing partner with payment of above the book value of such interest.
Answer: C

4. A partner was admitted in an existing partnership through investment of cash equivalent to ¼ of the new capitalization. If the
capital balance of the old partners increases, what is the most valid reason under Philippine GAAP?
a. Asset revaluation of existing partnership’s assets
b. Impairment loss of existing partnership’s assets
c. Recognition of goodwill of existing partnership
d. Receipt of bonus from the new partner

Answer: A

5. Which of the following statements is correct regarding a partner’s debit capital balances?
a. The partner should make contributions to reduce the debit balance to whatever extent possible.
b. If contributions are not possible, the other partners with credit capital balances will be allocated a portion of the debit
balance based on their proportionate profit-and-loss sharing percentages.
c. Partners who absorb another’s debit capital balance have a legal claim against the deficient partner.
d. All of these statements are correct.

Answer: D

6. If a partnership has only non-cash assets, all liabilities have been properly disbursed, and no additional liquidation expenses are
expected, the maximum potential loss to the partnership in the liquidation process is
a. The fair market value of the non-cash assets
b. The book value of the non-cash assets
c. The estimated proceeds from the sale of the assets less the book value of the non-cash assets
d. None of the statements are correct

Answer: B

7. Under the bonus method, when a new partner is admitted to the partnership, the total capital of the new partnership is equal to
a. The book value of the previous partnership plus the fair market value of the consideration paid to the existing partnership
by the incoming partner.
b. The book value of the previous partnership plus any necessary asset write ups from book value to market value plus the fair
market value of the consideration paid to the existing partnership by the incoming partner.
c. The book value of the previous partnership minus any asset write downs from book to market value plus the fair market
value of the consideration paid to the existing partnership by the incoming partner.
d. The fair market value of the new partnership as implied by the value of the incoming partner’s consideration in exchange
for an ownership percentage in the new partnership.

Answer: C

8. If a bonus is traceable to the previous partners rather than an incoming partner, it is allocated among the partners according to
the
a. Profit-sharing percentages of the previous partnership
b. Profit-sharing percentages of the new partnership
c. Capital percentages of the previous partners
d. Capital percentages of the new partnership

Answer: A

9. A partnership agreement calls for allocation of profits and losses by salary allocations, a bonus allocation, interest on capital, with
any remainder to be allocated by present ratios. If a partnership has a loss to allocate, generally which of the following procedures
would be applied?
a. Any loss would be allocated equally to all partners
b. Any salary allocation criteria would not be used
c. The bonus criteria would not be used
d. The loss would be allocated using the profit and loss ratios, only.

Answer: C

10. If Alfred retires from the partnership and he is paid an amount in excess of his capital account balance at the time of his
retirement. The excess payment will be
a. Charged against the capital accounts of the remaining partners.
b. Credited to the capital account of the remaining partners.
c. Charged to the bonus account.
d. Charged to the asset account.
Answer: A

11. Josh is admitted into the partnership by investing cash equivalent to ¼ of the capital. Which of the following is true after the
admission of Josh.
a. Assets of the partnership will increase
b. Total partner’s equity remain the same
c. The capital of original partners decreased by ¼
d. Assets of the partnership will remain the same

Answer: A

12. When A retired from the partnership of A, B and C, the final settlement of A’s interest is less than his capital balance. Under the
bonus method, the excess would
a. Reduce the capital balances of B and C
b. Increase the capital balances of B and C
c. Be recorded as an expense
d. Had no effect on capital of B and C

Answer: B

13. On July 1, a partnership was formed by A and B. A contributed cash. B previously a sole proprietor, contributed property other
than cash including realty subject to a mortgage which was assumed by the partnership. B’s capital account at July 1, should be
recorded at
a. B’s book value of the property less the mortgage payable at July 1
b. The fair value of the property less the mortgage payable at July 1
c. The fair value of property at July 1
d. B’s book value of property at July 1

Answer: B

14. D, E and F are partners who share income in a 5:4:3 ratio. Each has a capital balance of P60,000. D retires from the partnership
and is paid P95,000. In recording the retirement, no entry was made to E’s capital account. Which method of recording the
retirement was used
a. Bonus
b. Partial goodwill
c. Total goodwill
d. Transfer of assets

Answer: B

15. Which of the following is not considered a legitimate expense of the partnership?
a. Depreciation on assets contributed to the partnership by the partners.
b. Salaries for managers hired by firm.
c. Supplies used in the partners’ office.
d. Interest to partners on the amount of their invested capital.

Answer: D

16. Michael, Gabriel and Raphael are partners sharing profits on a 5:3:2 ratio. On January 1, 2020, Joshua was admitted into the
partnership with a 20% share in profits. The old partners continue to participate in profits in their original ratios.

For the year 2020, the partnership book showed a net income of P25,000. It was disclosed, however, that the following errors
were committed:

2019 2020
Accrued expenses not recorded at year-end P1,200
Inventory overstated P3,100
Purchases not recorded, for which goods have been
received inventories 2,000
Income received in advance not adjusted 1,500
Unused supplies not taken up at year-end 900

The new profit and loss ratio of Michael, Gabriel, Raphael and Joshua, respectively for 2020 is
a. 45%; 30%; 15%; and 20%
b. 50%; 20%; 10%; and 20%
c. 40%; 25%; 15%; and 20%
d. 40%; 24%; 16%; and 20%
Answer: D

Michael (50% x 80%) 40%

Gabriel (20% x 80%) 24%
Raphael (20% x 80%) 16%
100%

The share of partners Michael in the 2020 corrected net income is:

Net income per books P25,000

Accrued expenses not recorded at the end of 2019 1,200
Inventory overstatement at the end of 2020 (3,100)
Purchases not recorded in 2020 (2,000)
Income received in advance not adjusted at the end of 2019 1,500
Unused supplies not taken up at the end of 2020 900
Adjusted net income P23,500
40%
Profit share of Michael P 9,400

17. Cesar and Cane are partners whose total capital is P1,200,000. The capital ratio is 6:4 and the profit and loss ratio is 3:2 to Cesar
and Cane, respectively. David is admitted as a partner upon investing P600,000 for a ¼ interest in the fir, and profits are to be
shared 3:2:3 to Cesar, Cane and David, respectively. Given the choice between goodwill and bonus methods, David will
a. Prefer goodwill method due to David’s advantage of P150,000
b. Prefer bonus method due to David’s advantage of P150,000
c. Prefer bonus method due to David’s advantage of P75,000
d. Prefer goodwill method due to David’s advantage of P75,000

Answer: C

Equity in net assets (1/4) 25%

Equity in profit and loss (3/8) 37.5%
Difference in rate 12.5%
X Implied goodwill 600,000
Advantage of bonus P75,000

Agreed capital (P600,000/1/4) P2,400,000

Less: Contribution 1,800,000
Implied goodwill P 600,000

PRACTICE PROBLEMS

1. Total assets before partnership formation are P800,000 and Fernando’s assets are P45,000. Total liabilities before partnership
formation are P400,000 and Fer’s liabilities are P175,000. They decided to become partners on January 1, 2020. They agreed on
the following adjustments: Fer’s assets are understated by P15,000 and thee is a note payable that he wants to settle outside of
the partnership agreement which is still included in his books amounting to P13,000. On the other hand, Fernando has an
accounts receivable with an overvalued allowance for bad debts of P12,000. During the year, Fer withdrew P17,000 on March 21
and made an investment of P35,000 on August 8, while Fernando made an investment of P55,000 on April 8 and made another
investment of P12,500 on November 14. For the year, the partnership had a credit balance in the income summary account of
P450,000. The tax rate during the year is 32%. They also agreed that the net income or loss should be distributed as follows: 8%
interest on the beginning capital and the remainder will be shared in the ratio 2:3 for Fernando and Fer respectively. The net
income is earned or net loss in incurred evenly during the year.

How much is the ending capital of Fernando on December 31, 2020?

Answer: 489,380

Fer Fernando
Capital before formation P175,000 P225,000
Understated assets (Fer) 15,000 -
Note payable not assumed (Fer) 13,000 -
Overstated allowance (Fernando) - 12,000
Capital after formation on January 1, 2020 P203,000 P237,000

Fer Fernando Total

Interest P 16,240 P 18,960 P 35,200
Remainder 248,880 165,920 414,800
P265,120 P184,880 P450,000
 Fer Fernando
Capital, January 1, 2020 P203,000 P237,000
Withdrawal, March 21 (17,000) -
Investment, April 8 - 55,000
Investment, August 8 35,000 -
Investment, November 2020 - 12,500
Share in net income 265,120 184,880
Capital, December 31, 2020 P486,120 P489,380

2. A and B are partners sharing profits and losses in the ratio of 1:2 respectively. On August 1, 2020, they decided to form the ABC
Corporation by transferring assets and liabilities from the partnership to the Corporation in exchange of its stocks. The following
is the post-closing trial balance of the partnership.

Dr Cr
Cash P45,000 P0
Accounts receivable 60,000 -
Inventory 90,000 -
Fixed assets 174,000 -
Liabilities - 60,000
A, capital - 94,800
B, capital - 214,200
P369,000 P369,000

It was agreed that adjustments be made to the following assets to be transferred to the corporation:

Accounts receivable P40,000

Inventory 68,000
Fixed assets 180,600

The corporation was authorized to issue P100 par preference shares and P10 par ordinary shares. A and B agreed to receive for
their equity in the partnership, 720 shares of the ordinary shares each, plus even multiple of 10 shares of preference shares for
their remaining interest.

What is the total number of shares of preference and ordinary share issued by the corporation in exchange of the assets and
liabilities of the partnership respectively?

Answer: 2,592 and 1,440 shares

Issue and outstanding stock (720 x 2) 1,440

Capital of partners before adjustments P309,000

Decrease in accounts receivable (20,000)
Decrease in inventory (22,000)
Increase in Fixed assets 6,600
Adjusted capital of partners P273,600
Issued outstanding stock (1,440 x 10) (14,400)
Issued preference shares P259,200
Divided by 100
Issued preference shares 2,592

3. Partners Hermie and Bhert engaged into a business together and share profits and losses 5:6. Total assets after formation are
P1,500,000. Bhet’s capital before formation is P450,000. It is agreed by both that all of their liabilities will be assumed by the
partnership and only the following are not reflected at fair value in Bhert’s books. Bhert’s equipment should be valued to a quarter
of its historical cost. Equipment’s carrying amount is P250,000 and its accumulated depreciation is P50,000. Bhert’s accounts
payable is also understated by P18,500. After adjustments, Hermie’s capital is twice as much as Bhert’s capital. The liabilities
carried forward to the partnership books for Bhert amount to P375,000. Hermie’s contribution is cash and building.

What is the amount of total assets of Hermie after formation?

Answer: 868,500

Bhert’s capital before formation P 450,000

Overstated equipment (175,000)
Understated accounts payable (18,500)
Bhert’s adjusted capital 256,500
Bhert’s liabilities carried to partnership books 375,000
Total assts of Bhert P 631,500
 Total assets of partnership after formation P 1,500,00
Total assets of BHert (P631,500)
Total assets of Hermie P 868,500

4. Hannah and Blanca, having capital balances of P140,000 and P75,000 respectively, decided to admit Jet into their partnership.
Jet is to invest sufficient amount in order to have a 25% interest in the partnership. If Hannah and Blanca share profit in a
proportion of 3:1, respectively, and Blanca’s capital balance after Jet’s investment is P84,250, how much was invested by Jet?

Answer: 121,000

Blanca’s capital before Jet’s admission P75,000

Blanca’s capital after Jet’s admission (84,250)
Increase of 9,250
Total bonus of old partners (9,250/25%) P37,000

Old partner’s capital, adjustment P252,000

Jet’s capital credit (252,000 / 75%) x 25% 84,000
Add: bonus to old partners 37,000
Cash invested by Jet P121,000

5. The following are the information regarding partnership business:

Barry, capital P60,000

Bunny, capital 30,000
Bannie, capital 90,000

Profit and losses are split as follows: Barry (20%), Bunny (30%) and Costello (50%). Costello wants to leave the partnership and is
paid P100,000 from the business based on provisions in the articles of partnership. If the partnership uses the bonus method,
what is the balance of Burn’s capital account after Costello withdraws?

Answer: 24,000
A P10,000 bonus is paid to Costello (P100,000 is paid rather than the P90,000 capital balance). This bonus is deducted from the two
remaining partners according to their profit and loss ratio (2:3). A reduction of 60% (3.5) is assigned to Bunny or a decrease of P6,000 which
drops that partner’s capital balance from P30,000 to P24,000.

Amount paid P100,000

Less: Book value of interest of Costello (50%) 90,000
Bonus to retiring partners 10,000
Bunny, capital: 30,000 – (10,000 x 3/5) P 24,000

6. A partnership has the following balance sheet just before the final liquidation is to begin:

Cash P 26,000 Liabilities P 50,000

Inventory 31,000 Art Capital (40%) 18,000
Other assets 62,000 Raymond Capital (30%) 25,000
Darby’s Capital (30%) 26,000
Total P119,000 Total P119,000

Liquidation expenses are estimated to be P12,000. The other assets are sold for P40,000. What distribution can be made to the
partners?

Answer: Art (0); Raymond (1,500); Darby (2,500)

Art Raymond Darby Total

Reported balances P18,000 P25,000 P26,000 P69,000
Possible loss (26,000) (19,500) (19,500) (65,000)
(8,000) 5,500 6,500 4,000
Possible insolvency (3:3) 8,000 (4,000) (4,000) 0
Payment to partners P - P 1,500 P 2,500 P 4,000

7. Steve, Spencer and Sean intended to start a business together that will be organized as a partnership. The partners are considering
adopting one of the following two alternative profit-sharing agreements:

Agreement 1 Agreement 2
Salaries
Steve P70,000 P29,200
 Spencer 30,000 30,000
Sean
Bonus to Steve as a percentage of profit 5% 15%
after bonus
Interest on average capital 8 10
Estimated average capital balances
Steve P50,000 P50,000
Spencer 100,000 100,000
Sean 150,000 150,000
Remaining profit percentage
Steve 40% 50%
Spencer 40% 35%
Sean 20% 15%

Steve seeks your advice as to which agreement would be best for him to accept. Calculate the level of income at which Steve is
indifferent between the choices.

Answer: 254,673

Agreement 1:
Steve Spencer Sean Total
Salaries P70,000 P30,000 P0 P100,000
Bonus = 5%/105% x net income ? - - ?
Interest of 8% on average 4,000 8,000 12,000 24,000
capital balance (40:40:20)
Total ?

Agreement 2:
Steve Spencer Sean Total
Salaries P29,200 P30,000 P0 P59,200
Bonus = 15%/115% x net income ? - - ?
Interest of 10% on average 5,000 10,000 15,000 30,000
Capital balance (50:35:15) ? ?
Total ?

Net income = P254,673

Agreement 1:

Steve Spencer Sean Total

Salaries P 70,000 P30,000 P0 P100,000
Bonus = 5%/105% x net income 12,127 - - 24,000
Capital balance (40:40:20) 47,418 118,546
Total P133,545 P254,673

Agreement 2:

Steve Spencer Sean Total

Salaries P 29,200 P30,000 P0 P 59,200
Bonus = 15%/115% x net income 33,218 - - 33,218
Interest of 10% on average 5,000 10,000 15,000 30,000
Capital balance (50:35:15) 66,127 132,255
Total P133,545 P254,673

8. The following are the capital account balances and profit and loss ratio of the partners in ABC Company.
Capital P&L Ratio
A P120,000 25%
B 160,000 50%
C 400,000 25%

On January 2, 2020, D is admitted to the partnership under the following agreement:

1. D is to share 1/3 in the profits and losses while the other partners continue to participate in profits and loss ratio in their
original ratio.

2. D is to pay B, P48,000 for a ¼ interest of the latter’s capital in the partnership net assets and is to invest P280,000 cash in
the partnership.
 3. The total capital after D’s admission is to be 1,040,000 of which, D’s capital account is to show P300,000.

What is the capital account of partners after D’s admission?

Answer: A (P145,000); B (P170,000); C (P425,000)

A B C D
Capital balances
before admission P120,000 P160,000 P400,000 P0 -
¼ interest of B
transferred to D - (40,000) - (40,000) -
Investment of D - - - 280,000 -
Contributed capital
balances P120,000 P120,000 P400,000 P320,000 P 960,000
Undervaluation
of an asset 20,000 40,000 20,000 - 80,000
Bonus to old partners 5,000 10,000 5,000 (20,000) -
Agreed capital
Balances P145,000 P170,000 P425,000 P300,000 P1,040,000

9. The capital balances of partners X and Y before admission of Z are P50,000 and P55,000 respectively. Z invested a certain amount
for 25% interest in the partnership. As a result of his admission he received a bonus of P3,750.

How much did Z invest for his 25% interest in the partnership?

Answer: 30,000

Capital before admission P105,000

Bonus to Z (3,750)
Capital of old partners representing 75% interest P101,250

Capital of partners after admission (101,250/.75) 135,000

25%
Capital credit to Z P33,750
Bonus to Z (3,750)
Investment of Z P30,000

10. A partnership begins its first year with the following capital balances:

Diane, capital P60,000

Dada, capital 80,000
Debbie, capital 100,000

The articles of partnership stipulate that profits and losses be assigned in the following manner:

a. Each partner is allocated interest equal to 10% of the beginning capital balance.
b. Dada is allocated compensation of P20,000 per year.
c. Any remaining profits and losses are allocated on a 3:3:4 basis, respectively.
d. Each partner is allowed to withdraw up to P5,000 cash per year.

Assuming that the net income is P50,000 and that each partner withdraws the maximum amount allowed, what is the balance in
Debbie’s capital account at the end of that year?

Answer: 107,400

Diane Dada Debbie Total

Interest, 10% of beginning capital P6,000 P 8,000 P10,000 P24,000
Salary 20,000
Balance/Remainder (3:3:4) 1,800 1,800 2,400 6,000
Total P7,800 P29,800 P12,400 P50,000

Statement of Capital:
Diane Dada Debbie Total
Beginning capital P60,000 P 80,000 P100,000 P240,000
Net income (above) 7,800 29,800 12,400 50,000
Drawings (given) (5,000) (5,000) (5,000) (5,000)
Ending capital P62,800 P104,800 P107,400 P275,000

11. A, B and C are partners with average capital balances during 2020 of P472,500, P238,650 and P162,350; respectively. The
partners receive 10% interest on their average capital balances; after deducting salaries of P122,325 to A and P82,625 to C, the
residual profit or loss is divided equally.

In 2020, the partnership had net loss of P125,624 before interest and salaries to partner.

What amount should A and C capital change respectively?

Answer: P30,267 increase and P40,448 decrease

A B C Total
Interest P 47,250 P 23,865 P 16,235 P 87,350
Salaries 122,325 - 82,625 204,950
Remainder (139,308) (139,308) (139,308) (417,924)
P 30,267 (P115,443) (P40,448) (P125,624)

12. The JPB Partnership reported net income of P160,000 for the year ended December 31, 2020. According to the partnership
agreement, partnership profits and losses are to be distributed as follows:

J P B
Salaries P50,000 P60,000 P30,000
Bonus on net income 10% 5% 10%
Remainder (if positive) 60% 30% 10%
Remainder (if negative) 30% 40% 30%

How should partnership net income for 2020 be allocated to J, P and B?

Answer: J (58,000); P(64,000) B (38,000)

J P B Total
Salaries P50,000 P60,000 P30,000 P140,000
Bonus 16,000 8,000 16,000 40,000
Remainder (3:4:3) (6,000) (8,000) (6,000) (20,000)
Total P60,000 P60,000 P40,000 P160,000

13. The partnership of Joaquin, Larry and Philip is to be liquidated as soon as possible and all cash on hand except for P20,000
contingency balance is to be distributed at the end of the month until the liquidation is complete. Profit and losses are shared
5:3:2 to Joaquin, Larry and Philip, respectively. A balance sheet of the partnership at December 31, 2019 contains the following:

In January 2020, the loan to Philip was offset against his capital balance, the goodwill is written off, P400,000 was realized from
the other assets, and cash is distributed.

If available cash is distributed on January 31, 2020, Joaquin, Larry and Philip should receive

Answer: P0, P132,000, P8,000

Joaquin Larry Philip Total

TE P340 P360 P160 P860
Loss (360) (216) (144) (720)
Cash available (20) P144 16 140
for distribution
AI 20 (12) (8) -
Distribution P0 P132 P8 P140

14. Dorian and Donnie are partners who share profit and losses in a 2:3 ratio. The partnership will be liquidated in installments. Some
noncash assets have been sold, but other assets with a book value of P126,000 remain. Liabilities are not P16,000, and liquidation
expenses are expected to be P7,200. The capital balances are P92,000 for Dorian and P68,000 for Donnie.

Assuming the available cash is distributed, how much is the share of Dorian?

Answer: 26,800
 Liabilities still unpaid P 16,000
Capital of Dorian 92,000
Capital of Donnie 68,000
Total P176,000
Less: Noncash assets (126,000)
Cash balance P 50,000
Less: Anticipated expenses (7,200)
Liabilities to be paid (16,000)
Available to owners P 26,800

Dorian Donnie Total

Capital balance P92,000 P68,000 P320,000
Liquidation loss (53,280) (79,920) 133,200
Deficiency (11,920) 11,920 26,800
Cash Distribution P26,800 P0 (P26,800)

15. The partners of the M&N Partnership started liquidating their business on July 1, 2020, at which time the partners were sharing
profits and losses 40% to M and 60% to N. The balance sheet of the partnership appeared as follows:

Assets Liabilities and Capital

Cash P8,800 Accounts payable P 32,400
Receivable 22,400 M, Capital 31,000
Inventory 39,400 M, Drawing 5,400
Equipment 65,200 N, Capital 33,200
Accumulated Depreciation 30,800 N, drawing 200
N, loan 140,000
Total P105,000 Total P105,000

During the month of July, the partners collected P600 of the receivables with no loss. The partners also sold during the month
the entire inventory on which they realized a total of P32,400.

How much of the cash was paid to M’s capital on July 31, 2020?

Answer: 320

Cash beginning P8,000

Add:
Proceeds from receivables 600
Sale merchandise 32,400
Less: Payment of accounts payable 32,400
Payment to partners P9,400

M N Total
Total interests P25,600 P47,000 P72,600
Reduction in interest (25,280) (37,920) (63,200)
Payment to partners P 320 P 9,080 P 9,400

16. Karen and Andrea are currently changing their partnership profit and loss ratios from 75/25 to 60.40. They have created a list of
assets that have market and book value differences. One of the assets is a building with a P300,000 market value and P200,000
book value. Two years after changing the profit and loss ratios, the building is sold for P380,000. How much of the profit is
allocated to Karen?

Answer: 123,000

(P300,000 – P200,000) (.75) + (P380,000 – P300,000) (.60) = P123,000

17. At year-end, the Eine Partnership has the following capital balances:

Montana, capital P130,000

Rice, capital 110,000
Craig, capital 80,000
Taylor, capital 70,000

Profits and losses are split on a 3:3:2:2 basis, respectively. Craig decides to leave the partnership and is paid P90,000 from the
business based on the original contractual agreement. If the goodwill method is to be applied, what is the balance of Montana’s
capital account after Craig withdraws?
Answer: 145,000

Craig receives an additional P10,000. Since Craig is assigned 20% of all profits and losses, this allocation indicates total goodwill of P50,000.

20% of goodwill = P10,000

Goodwill = P50,000

Montana is assigned 30% of all profits and losses and would, therefore, record P15,000 of this goodwill, an entry that raises this partner’s
capital balance from P130,000 to P145,000.

Amount paid P90,000

Less: Book value of interest of Craig (20%) 80,000
Excess P10,000
Divided by 20%
Goodwill – total implied 50,000
Montana, capital: 130,000 = (50,000 x 30%) P145,000

18. A partnership has the following capital balances:

Partners Capital
William (40% of gains and losses) P220,000
Jennings (40%) 160,000
Bryan (20%) 110,000

Darrow invests P250,000 in cash for a 30% ownership interest. The money goes to the business. After the transaction, what is
Jennings’s capital balance?

Answer: 171,200

Contributed capital Agreed capital

W P220,000 11,200 40%
J 160,000 P171,200 11,200 40%
B 110,000 5,600 20%
490,000 518,000 28,000
D 250,000 222,000 (30%) 28,000
Total P740,000 P740,000 -

19. Net assets of Breitling, Suunto, IWC before formation are P135,000, P165,000, P251,000 respectively. The partners agreed that
certain assets and liabilities had to be adjusted. Breitling’s note payable of P15,000 bearing and interest of 12% should be included
in the partnership books and other assets are undervalued by P24,000. The interest is personally paid by Breitling. Suunto’s
prepaid expenses should be P5,000 less than what it is stated in the financial statements. IWC’s liabilities were understated by
P14,500.

How much is the capital of Breitling after formation?

Answer: 144,000

Breitling capital before formation P135,000

Note payable assumed (15,000)
Undervalued other assets 24,000
Breitling capital after formation P144,000

20. TD decided to withdraw from his partnership with SM and MR. Before his withdrawal, TD’s capital balance was P58,000, while
SM’s was P64,000 and MR’s was P77,000. Also, the partnership’s total assets amounted to P450,000, but the partners agreed
that a fixed asset was under depreciated by P15,000. TD, SM and MR share profits and losses in the ratio of 2:4:4, respectively. If
TD was paid P53,200 upon his retirement, how much is the remaining partnership net assets after TD’s withdrawal?

Answer: 130,800

Net assets before TD’s withdrawal (450,000 – 251,000) P199,000

Adjustment for depreciation (15,000)
Net assets, adjusted 184,000
Payment to TD (53,200)
Share in net profit P130,800

21. X, Y and Z, a partnership formed on January 1, 2020 had the following initial investment:

X P100,000
 Y 150,000
Z 225,000

The partnership agreement states that the profits and losses are to be shared equally by the partners after consideration in made
for the following:

a. Salaries allowed to partners: P60,000 for X, P48,000 for Y, and P36,000 for Z.
b. Average partner’s capital balances during the year shall be allowed 10%.

Additional information:

1. On June 30, 2020, X invested an additional P60,000.

2. ZZ withdrew P70,000 from the partnership on September 30, 2020.
3. Share the remaining partnership profit was P5,000 for each partner.

Answer: 207,750

X Y Z Total
Salaries P60,000 P48,000 P36,000 P144,000
Interest 13,000 15,000 20,750 48,750
Balance (P5,000 each) 5,000 5,000 5,000 15,000
P207,750
Average capitals:

X
(P100,000 x 6) = P600,000
(P160,000 x 6) = P960,000
(P1,560,000/12) P130,000
Y 150,000
Z
(P225,000 x 9) = P2,025,000
(P155,000 x 3) = P465,000
(P2,490,000/12) 207,500
P487,500
Interest rate 10%
Interest on average capitals P 48,750

22. A balance sheet for the partnership of Jerome, Jason and Tin who share profits in the ratio of 2:1:1, shows the following balances
just before the liquidation:

Cash P48,000
Other assets 238,000
Liabilities 80,000
Jerome, capital 88,000
Jason, capital 62,000
Tin, capital 56,000

On the first installment of the liquidation, certain assets are sold for P128,000. Liquidation expenses of P4,000 are paid and
additional liquidation expenses are anticipated. Liabilities expenses of P4,000 are paid and additional liquidation expenses are
anticipated. Liabilities are paid amounting to P21,600 and sufficient cash is retained to insure the payment to creditors before
making payment to partners. On the first payment to partners, Jerome receives P25,000.

What is the total cash payment to partners in the first installment?

Answer: 80,000

Jerome capital Jason capital Tin capital

Capital balances before liquidation P88,000 P62,000 P56,000
Share in the total loss (63,000) (31,500) (31,500)
Cash paid to each partner P25,000 P30,500 P24,500

23. On January 1, 2020, A, B and C formed a partnership with capital contributions as follows:

A P50,000
B 25,000
C 25,000
D 20,000
The partnership agreement stipulates that each partner shall receive a 5% interest on capital contributed and that A and B shall receive
salaries of P5,000 and P3,000 respectively. The agreement further provides that C shall receive a minimum of P2,500 per annum and D a
minimum of P6,000 which is inclusive of amounts representing interest and their respective shares in partnership profits. The balance of
the profits shall be distributed among A, B, C and D in the ratio of 3:3:2:2.

What amount must be earned by the partnership in 2020, before any charges for interest and partners’ salaries in order that A may receive
an aggregate of P12,500 including interest, salary and share of profits?

Answer: 32,334
A B C D Total
5% interest on
beginning capital P 2,500 P1,250 P1,250 P1,000 P 6,000
Salaries 5,000 3,000 8,000
Balance(remainder) 5,000 5,000 3,333 3,334 16,667
Additional profit 1,663 1,663
P12,500 P- P- P6,000 P32,333