ADVANCED FINANCIAL

ACCOUNTING AND
REPORTING
G.P. COSTA

Definition of a Partnership
A partnership is “a contract whereby two or more
persons bind themselves to contribute money, property,
or industry to a common fund, with the intention of
dividing the profits among themselves.”
Two or more persons may also form a partnership for
the exercise of a profession. Article
1767, Civil Code of the Philippines
VALUATION:
1. Cash – Face Value
2. Inventory – Lower of Cost and Net Realizable Value (LCNRV)
3. Non-current Assets
a. Agreed Value b. Fair Value c. Appraised Value d. Carrying Value/Book Value
4. Liabilities – considered assumed by the partnership if the problem is silent
5. Capital
5.1. Bonus Method
5.2. Exact Method

Bonus Method: Under this method, the new partner’s investment may or may not equal
the book value of the capital interest that has been purchased. If it exceeds the book
value of the capital interest, then the difference, which is referred to as a bonus, will be
distributed to the old partners. If the investment made by the new partner is less than
the book value of the capital interest that has been purchased, then the bonus will be
allocated to that new partner.
Exact Method: Under this method, the investment made by the new partner equals the
book value of the capital interest that they have purchased.
Partnership goodwill is no longer recognized under IFRS.
Problem 1
On December 1, 2019, AA and BB formed a partnership with contributing the following
assets at fair market values:
AA BB
Cash P 9,000 P 18,000
………………………………………
Machinery and equipment ….. 13,500 -
Land - 90,000
………………………………………
Building - 27,000
…………………………………
Office Furniture ……………………. 13,500 -

The land and building are subject to a mortgage loan of P54,000 that the partnership will
assume. The partnership agreement provides that AA and BB share profits and losses, 40%
and 60%, respectively and partners agreed to bring their capital balances in proportion to
the profit and loss ratio and using the capital balance of BB as the basis. The additional
cash investment madeby AA should be:
a. P18,000.00 c. P134,000.00 b. P85,500.00 d. P166,250.00
Problem 2
Jason and Kidd have just formed a partnership. Jason contributed cash of P920,000
and office equipment that costs P422,000. The equipment had been used in his sole
proprietorship and had been 70% depreciated. The current value of the equipment is
P295,000. Jason also contributed a note payable of P87,000 to be assumed by the
partnership. The partners agreed on a profit and loss ratio of 50% each. Jason is to
have a 70% interest in the partnership. Kidd contributed only a merchandise inventory
from her sole proprietorship carried at P550,000 on a first-in- first- out basis. The
current fair value of the merchandise is P525,000.

To consummate the formation of the partnership Jason should make additional

investment or (withdrawal) of:

A. P224,000 C. P97,000
B. P(30,000) D. P(80,000)
Problem 3
Green admits Lantern as a partner in business. Accounts in the ledger of Green on June
1, 2018,just before the admission of Lantern, show the following balances:

Cash P26,000 Accounts Payable P264,000

Accounts Receivable 120,000 Green, Capital 62,000
Merchandise Inventory 180,000

It is agreed that for purposes of establishing Green’s interest, the following adjustments
shouldbe made:

• An allowance for doubtful accounts of 2% of accounts receivable is to be established

• The merchandise inventory is to be valued at P202,000.
• Prepaid expenses of P6,500 and accrued expenses of P4,000 are to be established

Lantern is to invest sufficient funds in order to receive a 1/3 interest in the partnership.

1. How much is the adjusted capital of Green?

2. How much cash should Lantern invest?
3. How much is the total assets of the partnership?
 Problem 4
On July 1, 2019, XX and YY decided to form a partnership. The firm is to take over
business assets and assume liabilities, and capitals are to be based on net assets
transferred after the following adjustments:

a) XX and YY’s inventory is to be valid at P31,000 and P22,000, respectively.

b) Accounts receivable of P2,000 in XX’s book and P1,000 in YY’s books are uncollectible.
c) Accrued salaries of P4,000 for XX and P5,000 for YY are still to be recognized in the books.
d) Unused office supplies of XX amounted to P5,000, while that of YY amounted to P1,500.
e) Unrecorded patent of P7,000 and prepaid rent of P4,500 are to be recognized in the books
of XX and YY, respectively.
f) XX is to invest or withdrew cash necessary to have a 40% interest in the firm.
Balance sheets for XX and YY on July 1 before adjustments are given below:

XX YY
Cash Php 31,000 Php 50,000
Accounts Receivable 26,000 20,000
Inventory 32,000 24,000
Office Supplies 5,000
Equipment 20,000 24,000
Accumulated Depreciation - Equipment (9,000) (3,000)
Total Assets Php 100,000 Php 120,000

Accounts Payable Php 28,000.00 Php 20,000.00

Capitals 72,000 100,000
Total Liabilities and Capital Php 100,000 Php 120,000
Determine:

1. The net adjustments – capital in the books of XX and YY:

a. XX, P7,000 net debit; YY, P2,000 net credit
b. XX, P5,000 net debit; YY, P7,000 net credit
c. XX, P7,000 net credit; YY, P2,000 net debit
d. XX, P5,000 net credit; YY, P7,000 net debit

2. The adjusted capital of XX and YY in their respective books.

a. XX – P65,000; YY – P102,000 c. XX – P77,000; YY – P98,000
b. XX – P63,000; YY – P107,000 d. XX – P77,000; YY – P93,000

3. The additional investment (withdrawal) made by XX:

a. P(15,000.00) c. P3,000.00
b. P( 6,666.50) d. P8,377.50
4. The total assets of the partnership after formation:
a. P235,333.50 c. P220,333.50
b. P230,000.00 d. P212,000.00

5. The total liabilities of the partnership after formation:

a. P57,000.00 c. P54,000.00
b. P48,000.00 d. P51,000.00

6. The total capital of the partnership after formation:

a. P180,000.00 c. P163,333.50
b. P178,333.50 d. P155,000.00

7. The capital balances of XX and YY in the combined balance sheet:

a. XX, P81,250; YY, P72,000 c. XX, P100,000; YY, P75,000
b. XX, P81,250; YY, P75,000 d. XX, P 62,000; YY, P93,000
Problem 5
A, B and C formed the ABC Partnership on July 1, 2018, with the following assets,
measured atbook values in their respective records, contributed by each partner:
A B C
Cash P 200,000 P 150,000 P
150,000
Accounts receivable 38,500 68,900
Inventory 135,000 118,000 67,000
Plant, Property and Equipment (PPE) 950,000 460,000 380,000

A part of A’s contribution, P25,000, comes from his personal borrowings. Also, the PPE of A
and B are mortgaged with the bank for P160,000 and P16,500, respectively. The partnership
is to assume responsibility for these PPE mortgages. The fair value of the accounts
receivable contributed by C is P43,000 and her PPE at this date has a fair value P365,000.
All the other assets contributed are fairly valued. The partners have agreed to share profits
and losses on a 5:3:2 ratio, to A, B and C, respectively.

How much is the contribution of each partner? Calculate their contribution ratio.

What is the capital balance for each partner at July 1, instead, if the interest ratio is
agreed at 4:3:3 to A, B and C, respectively?
Problem 6
CC and DD are joining their separate business to form a partnership. Cash and non-cash
assets are to be contributed for a total capital of P150,000. The non-cash assets to be
contributed andliabilities to be assumed are:
CC DD
Book Value Fair Value Book Value Fair Value
Accounts Receivable … P11,250.00 P11,250.00
Inventories ……………….. 11,250.00 16,875.00 P30,000.00 P33,750.00
Equipment …………………18,750.00 15,000.00 33,750.00 35,625.00
Accounts Payable …..... 5,637.50 5,625.00 3,750.00 3,750.00
The partner’s capital accounts are to be equal after all contributions of assets and
assumptions of liabilities.
Determine:
1. The total assets of the partnership.
a. P159,375.00 c. P140,625.00
b. P150,000.00 d. P112,500.00
2. The amount of cash that each partner must contribute:
a. CC – P37,500; DD – P9,375 c. CC – P80,625; DD – P78,750
b. CC – P37,500; DD – P5,625 d. CC – P63,750; DD – P5,625
Problem 7
The Peter and Wendy Partnership was formed on January 2, 2019. Under the
partnership agreement, each partner has an equal initial capital balance. Partnership
net income or loss is allocated 60% to Peter and 40% to Wendy. To form the
partnership, Peter originally contributed assets costing P30,000 with a fair value of
P60,000 on January 2, 2019, and Wendy contributed P20,000 cash. Drawings by the
partners during 2019 totaled P3, 000 by Peter an P9,000 by Wendy. The partnership
net income in 2019 was P25,000

Under the bonus method, what is Wendy’s initial capital balance in the partnership?
A. 20,000 C. 40,000
B. 25,000 D. 60,000
Problem 8
Selected balance sheet accounts of Silvano on December 31, 2019 are shown below:

Cash P30,000
Accounts receivable 25,000
Inventory 45,000
Furniture 32,000
Accounts payable 8,000
The following adjustments are to be made before he agrees to admit Pegasus as a partner
in exchange for his investment of P20,000 cash:

3% bad debts should be provided.

The fair value of the furniture is P27,000.
P5,000 of the inventory is obsolete but can still be sold for P3,000.

1. After adjustment, how much capital should be reflected in the books of Silvano?
a. P115,250 b. P116,250 c. P124,000 d. P132,250

2. How much is the total assets of the new partnership?

a. P116,250 b. P124,000 c. P124,250 d. P144,250
ADVANCED FINANCIAL ACCOUNTING
AND REPORTING
G.P. COSTA
Partnership Operations
The Partnership Law provides that if the profit allocation has been agreed
upon, the share of each partner in the losses shall be in the same proportion
with the net income allocation. It also provides that on the absence of
agreement, the share of each partner in the profits and losses shall be in
proportion to what they have contributed (based on capital contributions), but
the industrial partner shall receive such share as may be just and equitable
under the circumstances. However, the law is not clear as to what capital
balances shall be applied, whether the capital balances refer to original capital,
beginning or end of each period or the average capital during the period. In as
much as the law does not clearly specify the capital balance, it is therefore,
presumed to be the original capital. In the absence of such original capital, it
should be the beginning capital.
Methods of profit and loss allocation
Profit and loss can be shared in many ways among partners of a partnership.
Most profit and loss sharing formula includes one or more of the following
features or techniques:
1) Equally
2) Arbitrary ratio
3) In the ratio of partner’s capital account balances and dividing the balance on agreed ratio:
a) Original capital – the initial investment/capital at the time of formation
b) Beginning capital of the period
c) Ending capital of the period
d) Average capital d1) Simple average
D2) Weighted average

4) Interest on partners’ capital accounts and dividing the balance on agreed ratio
5) Salaries to partners and dividing the balance on agreed ratio
6) Bonus to partners and dividing the balance on agreed ratio
7) Interest on capital account balance, salaries and bonus to partners and dividing the
balance on agreed ratio.
Because of its simplicity, the equally or the arbitrary ratio approach is the most
common of allocating profit or loss. It is simple because it ignores capital
balances. Assigning profit based equally or on an arbitrary ratio may be simple,
but this approach is not necessarily equitable to all partners. No single ratio is
likely to reflect properly the various contributions made by a partner. Indeed, an
unlimited number of alternative allocation plans could be devised in hope of
achieving fair treatment for all parties.

Details about profit and loss allocation methods

1) Equally – this method may be proper when the capital or service contribution of the
partners are considered to be the same.
2) Arbitrary ratio – this method may be employed to recognize the difference in capital
and service contribution of the partners.
3) Capital balances – this method is not only easy to apply but can also prevent certain
inequities from occurring among partners if the partnership is liquidated.
4) Original capital– the reason behind the usage of original capital is that, if at the time
of formation there is no agreement, the law should apply, and the only available capital
balance is the original capital
Problem 1
Kenny, a senior partner in a law firm, has a 30% participation in the firm’s profit and
losses. During 2018, Kenny withdrew P130,000 against her capital but contributed
property with a fair value of P25,000. Kenny’s capital increased by P15,000 during
2018.
The net income of the partnership for 2018 is
A. P150,000 C. P.350,000
B. P400,000 D. P550,000
Problem 2
JJ and MJ are partners operating a chain of retail stores. The partnership agreement provides forthe
following:
JJ MJ
Salaries ………………………………………………… P5,000 P2,500
Interest on capital balances ………………… 10% 10%
Bonus …………………………………………………… 20% of net income
before interest but
after bonus & salaries
Remainder ……………………………………………. 30% 70%
The income summary account for year 2019 shows a credit balance of P25,500
before any deductions. Average capital balances for JJ and MJ are P25,000 and
P37,500, respectively. The share of JJ and MJ in the P25,500 net income would
be:
a. JJ, P12,031.25; MJ, P13,468.75 c. JJ, P11,750; MJ, P13,750
b. JJ, P13,275.75; MJ, P12,229.25 d. JJ, P13,125; MJ, P12,375
Problem 3
Denver and Nuggets organized a partnership on January 1, 2018. the
following entries were made in their capital accounts during 2018:
Debit Credit
Denver, capital:
January 1 180,000.00
April 1 50,000.00
October 1 10,000.00
Nuggets, capital
January 1 60,000.00
March 1 10,000.00
September 20,000.00
November 1 10,000.00
Required:
If the partnership net income, computed before salaries, interest and bonus is
P56,000 for 2018, indicate its division between the partners under each of the
following independent profit-sharing agreements:
a. Interest at 4% is allowed on average capital investments, and the balance
is divided equally.
b. A salary of P24,000 is to be credited to Nuggets, 4% interest is allowed on
each partner on their ending capital balance, and the balance in the ratio of
beginning capital balances.
c. Salaries allowed to Denver and Nuggets in the amounts of P34,000 and
P38,000. respectively, and remaining profits and losses are divided in the ratio
of average capital balances.
d. A bonus of 10% of partnership net income is credited to Denver, a salary of
P16,000 is allowed to Nuggets, and remaining profits and losses are shared
equally. (The bonus is regarded as an expense for purposes of calculating the
bonus amount).
Problem 4

X,Y and Z, agree to form a partnership and to share profits in the ratio
5:3:2. they also agreed that Z is to be allowed a salary of P140,000 and
that Y is to be guaranteed P105,000 as his share of the profits. During the
first year of operations, reported net income was P420,000.

How much of the profits should be credited to X, Y, and Z?

 Problem 5
XX and YY formed a partnership on January 2, 2019 and agreed to share profits and loss in the ratio
of 90% and 10%, respectively. XX contributed capital of P6,250. YY contributed no capital but has a
specialized expertise and manages the firm full time. There were no withdrawals during the year. The
partnership agreement provides for the following:
• Capital accounts are to be credited annually with interest at 5% of the beginning capital
• YY is to be paid a salary of P250 a month
• YY is to receive a bonus of 20% of net income calculated before deducting his salary and interest
on both capital accounts
• Bonus, interest, and YY’s salary are to be considered as partnership expenses

The partnership’s income statement for 2019 follows:

Revenues
……………………………………………………………………………
P24,112.50 Less: Expenses (including salary, interest, and
bonus)…… 12,425.00 Net Income
…………………………………………………………………………
11,687.50
1. What is YY’s 2019 bonus?
a. P2,922.00 c. P3,750.00
b. P3,000.00 d. P3,934.50
2. How much is the total share of YY on the 2019 partnership net income?
a. P7,084.50 c. P7,918.75
b. P7,162.50 d. P8,097.00
 Problem 6

The DEFG Company, a partnership, was formed on January 1, 2019, with four
partners, DD, EE, FF, and GG. Capital contributions were as follows: DD, P25,000; EE,
P12,500; FF, P12,500; GG, P10,000. The partnership agreement provides that partners
shall receive 5% interest in the amounts of their capital contributions. In addition, DD is
to receive a salary of P2,500 and EE a salary of P1,500. The agreement further
provides that FF shall receive a minimum of P1,250 per annum from the partnership
and GG a minimum of P3,000 per annum, both including amounts allowed as interest
on capital and their respective shares of profits. The balance of the profits is to be
shared in the following proportions: DD, 30%; EE, 30%; FF, 20%; and GG, 20%.
Calculate the amount that must be earned by the partnership during 2019, before any
charges for interest on capital or partners’ salaries, in order that DD may receive an
aggregate of P6,250 including interest, salaries and share of profits.

a. P 8,333.33 c. P15,333.33
b. P 15,000.00 d. P16,166.67
A partnership was formed on January 1, 2018, with four partners, C, P, A
and S. Capital contributions were as follows: C- P1,000,000; P-P500,000;
A- P500,000; and S- P400,000. the partnership agreement provides that
each partner shall receive 5%interest on the amount of his capital
contribution. In addition, C is to receive a salary of P100,000 and P a
salary of P60,000 which are to be charged as expenses of the business.
The agreement provides that A shall receive a minimum of P50,000 per
annum from the partnership and S a minimum of P120,000 per annum,
both including amounts allowed as interest on capital and their respective
shares of profits. The balance of the profits to be shared in the following
proportions: C- 30%; P- 30% A- 20% and S-20%.

Calculate the amount that must be earned by the partnership during 2018,
before any charge for interest on capital or partners ‘ salaries, in order that
C may receive an aggregate of P250,000, including interest, salary and
share of profits.
Problem 8
Garry and Lising created a partnership to own and operate a health-food store. The
partnership agreement provided that Garry receives an annual salary of P10,000 and
Lising a salary of P5,000 to recognize their relative time spent in operating the store.
Remaining profits and losses were divided 60:40 to Garry and Lising, respectively.
Income of P13,000 for 2017, the first year of operations, was allocated P8,800 to
Garry and P4,200 to Lising. On January 1, 2018, the partnership agreement was
changed to reflect the fact that Lising could no longer devote any time to the store’s
operations. The new agreement allows Garry a salary of P18,000, and the remaining
profits and losses are divided equally. In 2018, an error was discovered such that
2017 reported income was understated by P4,000. The partnership income of
P25,000 for 2018 included this P4,000 related to 2017.
1. In the reported net income of P25,000 for the year 2018, Garry would have

A. P21,900 B. P17,100
B. P0 D. P12,500
Problem 9

Alpha, Beta and Charlie invest P40,000, P30,000 and P25,000 respectively, in a
partnership on June 30, 2017. They agree to divide net income or loss as follows:
A. Interest at 10% on beginning capital account balances
B. Salaries of P10,000, P8,000 and P6,000, respectively to Alpha, Beta and
Charlie, respectively.
C. Remaining net income or loss is divided equally
D. A minimum of P18,000 of income is guaranteed to Charlie regardless of the
result of operations.

If the net income for the year ended June 30, 2018 before interest and salaries
allowances to partners was P44,000, the amount of the net income credited to
Alpha is:

A. P21,875 C. P18,334
B. P20,000 D. P14,500
Problem 10
Partners Pepsi and Sarsi share profits 3:1 after annual salary allowances of P4,000
and P6,000 respectively; however, if profits are not adequate to meet the salary
allowances, the entire profit is to be divided in the salary ratio. Profits of P9,000 were
reported for the year 2017. in 2018, it is ascertained that in calculating net income for
the year ended December 31, 2017, depreciation was overstated by P3,600 and the
ending inventory was understated by P800.
The amount of the net adjustments in the books of Pepsi and Sarsi are:

Pepsi Sarsi
A P(3,699) P(1,813)
B P2,950 P1,450
C P8,188 P8,563
D P2,300 P3,475