AFAR 01 Partnership Accounting PDF

Page 1 of 8 | AFAR 01
Partnership
MARK ALYSON B. NGINA, CPA, CMA
PARTNERSHIP
MARK ALYSON B. NGINA, CPA CMA
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
Stages in the Life of the Partnership:

1. Formation – the first-time creation of the partnership
2. Operation – this is the reason why a partnership is formed, to operate and earn “profit”
3. Dissolution – changes in the partnership agreement or relations among the partners
4. Liquidation – realization of the assets of the partnership and settlement of partnership liabilities.
Partnership Formation
Primary formation issues include:
1. Valuation of contribution
2. Re-alignment of contribution with partnership agreement
Partnership Operation
Primary accounting issues include:
1. Profit or loss allocation
2. Periodic adjustment of capital after operation
Partnership Dissolution
Dissolution is the change in the relation of the partners caused by any partner being disassociated from the business or by
change in agreements of the partners. This may include:
1. Admission of a new partner 4. Assignment of interest by a partner
2. Retirement of a partner 5. Incorporation of the partnership
3. Death of a partner
PARTNERSHIP LIQUIDATION
Liquidation is the winding up of the partnership business. This involves:
1. Converting non-cash assets into cash (i.e. realization)
2. Settlement of liabilities (i.e. liquidation)
3. Distribution of any remaining amount to the partners
Basic Concepts on Partnership Liquidation

1. Unlimited liability
2. Right of offset
Methods of Partnership Liquidation

When the partnership is to be liquidated by the sale of assets, the following methods may be used:
1. Lump-Sum Liquidation / Total Liquidation / Single Distribution
2. Installment Liquidation / Installment Distribution
REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

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PARTNERSHIP ACCOUNTING
PARTNERSHIP FORMATION
EXERCISE 1
On June 1, 2020, Makati and Taguig decided to pool their assets and form a partnership, to be known as Petmalu Na
Partnership. Their statement of financial position on June 1, 2020 before the formation was as follows:
Makati Taguig
Cash ₱ 198,000 ₱ 316,800
Accounts receivable 1,296,000 1,440,000
Allowance for doubtful accounts (32,400) (36,000)
Notes receivable 360,000 -
Merchandise inventory 115,200 108,000
Prepaid rent - 36,000
Transportation equipment 720,000 -
Accumulated depreciation (72,000) -
Computer equipment - 576,000
Accumulated depreciation - (43,200)
Total assets ₱ 2,584,800 ₱ 2,397,600
Accounts payable – trade ₱ 36,000 ₱ 43,200
Notes payable - 360,000
Capital 2,548,800 1,994,400
Total liabilities and capital ₱ 2,584,800 ₱ 2,397,600
The new partnership is to take over the business assets and assumes business liabilities of the partners. Capitals of the
partners are to be based on net assets invested after the following adjustments:
1) 4% of the accounts receivable of Makati is estimated to be uncollectible while the accounts receivable of Taguig is
estimated to be 98% realizable.
2) Interest at 15% on notes receivable of Makati dated April 1, 2020 should be accrued.
3) The merchandise inventory of Makati should be valued at ₱110,000 and ₱8,000 of the inventory of Taguig is
considered worthless.
4) 4/5 of the prepaid rent has expired.
5) The transportation equipment of Makati is appraised at ₱660,000.
6) The replacement cost of the computer equipment of Taguig is determined to be at ₱600,000.
7) Interest at 10% on notes payable of Taguig dated May 1, 2020 should be accrued.
8) Taguig had office supplies on hand which have been charged to expense amounting to ₱8,000. These are still to
be used by the partnership.
9) Accrued expense of ₱6,000 is to be recognized in the books of Makati.
The partnership agreement provides that Makati and Taguig share profits and losses of 60% and 40%, respectively.
Required:
1. Prepare journal entries in the net partnership books to record the net assets invested by Makati and Taguig.
2. Assuming the partners further agreed to bring their capital balances proportionate to their profit and loss ratio:
A. The new capital of the partnership is based on adjusted capital of Makati so that Taguig may either withdraw or
invest additional cash.
B. The new capital of the partnership is based on adjusted capital of Taguig so that Makati may either withdraw or
invest additional cash.
C. The use of the bonus method.
D. The use of the goodwill method.
3. Assuming the partners further agreed the following adjustments:
E. Only Makati possess the technical expertise required by the business so Taguig agreed to provide 10% of his
contributed capital as bonus to Makati.
F. Owing to the business expertise of Makati and Taguig, they concurred that they will be credited with 20% goodwill
based on their contributed capital.
4. Compute the balance of the following after formation
A B C D E F
a. Total Asset
b. Total Liabilities
c. Total Capital
d. Cash
EXERCISE 2
Mandaluyong and Quezon City establish a partnership to operate a used-furniture business under the name of MQC
Furniture. Mandaluyong contributes furniture that cost ₱240,000 and has a fair value of ₱360,000. Quezon City contributes
₱120,000 cash and delivery equipment that cost ₱160,000 and has a fair value of ₱120,000. The partners agree to share
profits and losses 60% to Mandaluyong and 40% to Quezon City.
Required: Calculate the peso amount of inequity that will result if the initial noncash contributions of the partners are
recorded at cost rather than fair market value.


PARTNERSHIP OPERATION
EXERCISE 1
Caloocan and Valenzuela formed a partnership on January 1, 2019 by contributing ₱800,000 and ₱1,200,000, respectively.
As of January 1, 2020, their partnership capital was ₱900,000 and ₱1,100,000, respectively.
Situations:
A. No profit-sharing agreement C. Profit is divided equally
B. No loss-sharing agreement D. Loss divided 30:70, respectively
Required: Compute the share of Caloocan and Valenzuela assuming:
₱400,000 profit ₱400,000 loss
*Situational Cases Caloocan Valenzuela Caloocan Valenzuela
1. A and B
2. B and C
3. A and D
4. C and D
5. C and D with guaranteed ₱250,000
minimum profit sharing to Valenzuela
EXERCISE 2
Meycauayan and Marilao are partners in a gold trading business. Their capital accounts in the Bulacan Partnership for the
year were as follows:
Meycauayan Marilao
January 1, balances ₱450,000 ₱600,000
March 1, withdrawal - 120,000
May 1, investment 240,000 -
June 1, investment - 90,000
June 30, drawings 80,000 100,000
October 1, withdrawal 180,000 -
December 1, investment - 60,000
December 31, investment 50,000 10,000
The partnership agreement provides for the following distribution of profit and losses:
• Interest of 8% on weighted average capital balances.
• Meycauayan receives a salary of ₱150,000 and a bonus of 3% of income after all bonuses
• Marilao receives a salary of ₱100,000 and a bonus of 2% of income after all bonuses
• Profit is divided in a 6:4 ratio by Meycauayan and Marilao, respectively. Loss is divided equally by Meycauayan and
Marilao.
The income summary has a credit balance amounting to ₱315,000.
Required: Prepare a schedule of profit and loss distribution
EXERCISE 3
Bocaue, Balagtas and Guiguinto are partners in a glutathione trading business. Interest to be credited to each partner is
10%. Their capital accounts in the Bulacan Partnership for the year were as follows:
Bocaue Balagtas Guiguinto
April 1, investment ₱145,000 ₱260,000 ₱250,000
May 1, withdrawal - 120,000 -
June 1, investment - - 100,000
August 1, investment 120,000 - -
October 1, investment - 90,000 -
December 1, withdrawal - - 30,000
Required: Compute for the following:
Bocaue Balagtas Guiguinto
1. Weighted average capital
2. Interest
EXERCISE 4
Pulilan and Apalit shares profit and loss equally after providing for annual salaries of ₱150,000 and ₱180,000, respectively,
and a 10% bonus on net income after salaries and bonus to Pulilan. The profit and loss statement of the partnership for
whole year is shown below:
Sales ₱ 6,000,000
Less: Cost of sales 3,000,000
Gross profit ₱ 3,000,000


Less: Expenses 2,450,000

Net profit ₱ 550,000
Required: Compute for the bonus in each of the following independent scenario:
1. The expense is exclusive of bonus and salaries
2. The expense is inclusive of the salaries
3. The expense includes bonus and salaries
EXERCISE 5
On January 2, San Simon and San Fernando formed a partnership to be located in Pampanga. San Simon contributed
capital of ₱175,000 and San Fernando, ₱25,000. They agreed to share profits and losses 80% and 20%, respectively. San
Fernando is the general manager and works in the partnership full time and is given a salary of ₱5,000 a month; an interest
of 5% of the beginning capital (of both partner) and a bonus of 15% of net income before the salary, interest and the bonus.
Salaries, interest and bonus is regarded as an expense of the partnership.
The profit and loss statement of the partnership for the year ended December 31 is as follows:
Net Sales ₱ 875,000
Less: Cost of Goods Sold 700,000
Gross Profit ₱ 175,000
Less: Expenses 143,000
Net Income ₱ 32,000
1. The amount of bonus to San Fernando
2. The share in net income of San Simon
3. The share in net income of San Fernando
EXERCISE 6
The Mexico Co., a partnership was formed on January 1, with four partners, C, P, A, and S. Capital contributions were as
follows: C - ₱1,000,000; P - ₱500,000; A - ₱500,000; and S - ₱400,000. 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 ₱100,000
and P a salary of ₱60,000. The agreement further provides that A shall receive a minimum of ₱50,000 per annum from the
partnership and S a minimum of ₱120,000 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%.
Required:
1. Calculate the share of each partner if the partnership earned ₱440,000 before salaries and interest.
2. Calculate the amount that must be earned by the partnership, before any charge for interest on capital or partners’
salaries, in order that C may receive an aggregate of ₱250,000, including interest, salary and share of profits.
3. Calculate the share of each partner if the partnership earned ₱646,667 before salaries and interest.
EXERCISE 7
Mr. Angeles and Ms. Mabalacat are partners in a construction business located in Pampango. The profit and loss are
distributed in the following order of priority:
1) Salaries of ₱35,000 and ₱40,000 for Angeles and Mabalacat, respectively.
2) A bonus to Angeles equal to 10% of net income after the bonus.
3) Interest on weighted average capital at the rate of 8%. Annual drawings in excess of ₱20,000 are considered reduction
of capital for purposes of this calculation.
4) Any balance to be divided 40:60 for Angeles and Mabalacat, respectively.
Capital and drawing activity of the partners for the year are as follows:
Angeles Mabalacat
Capital Drawing Capital Drawing
Beginning balance ₱120,000 ₱ 0 ₱ 60,000 ₱ 0
April 1 20,000
June 1 15,000 20,000
September 1 30,000
November 1 . 15,000 40,000 .
Ending balance ₱170,000 ₱ 30,000 ₱100,000 ₱20,000
Net income for the year is ₱132,000 before any allocations.
Angeles Mabalacat
1. Weighted average capital
2. Share in the net income
3. Ending capital (after closing)


EXERCISE 8
Concepcion is trying to decide what compensation package is more beneficial:
Option 1: Bonus of 25% of net income after salaries and bonus or;
Option 2: Salary of ₱107,250 plus a bonus of 10% of net income after salaries and bonus
Salaries and bonus are regarded as a means of allocating profit among the partners. Salaries traceable to the other partners
are estimated to be ₱495,000.
1. The indifference point (NI B4 S & B)
2. The amount of bonus under Option 1
3. The amount of bonus under Option 2
PARTNERSHIP DISSOLUTION
EXERCISE 1
Tarlac and Victoria sells inventory through their partnership. They expand their business and decide to admit Gerona to the
partnership. Before the admission of Gerona, the statement of financial position of Tarlac and Victoria are as follows:
Cash ₱ 40,000 Accounts payable ₱70,000
Accounts receivable 60,000 Loan from Victoria 50,000
Inventory 140,000 Tarlac, capital (60%) 300,000
Plant assets-net 360,000 Victoria, capital (40%) 240,000
Loan to Tarlac 60,000 .
Total assets ₱660,000 Total liab. & equity ₱660,000
Required: Record the admission of Gerona for each of the following situations:
1) Gerona invests ₱139,500 for half of Victoria’s capital. The money goes to Victoria.
2) Gerona directly purchases a one-fourth interest from Tarlac and Victoria by paying Tarlac, ₱96,000 and Victoria,
₱108,000. The equipment account is undervalued before Gerona’ admission.
3) Gerona invests the amount needed to give him one-third interest in the capital of the partnership. No goodwill or bonus
is recorded.
4) Gerona invests ₱156,000 for a one-fourth interest. Tarlac and Victoria agree that some of the inventory is obsolete
before Gerona’ admission.
5) Gerona invests ₱168,000 for a one-fourth interest. Unidentifiable asset is to be recorded.
6) Gerona invests ₱180,000 for a one-fifth interest. Profits and loss are to be shared by Tarlac, Victoria and Gerona
45:30:25. Goodwill is not recorded.
7) Gerona invests ₱300,000 for a 1/3 interest. Profits and loss are to be shared by Tarlac, Victoria and Gerona equally.
Capital of the partnership after Gerona’s admission is to be ₱900,000.
EXERCISE 2
Pura and Ramos are partners who have capital balances of ₱300,000 and ₱240,000 and shares profits in the ratio of 6:4.
Anao is admitted as a partner upon investing ₱250,000 for a 20% interest in the firm. Profits and loss are to be shared 3:3:2.
Given the choice between goodwill and bonus method, Anao will
1. Prefer goodwill or bonus method, and
2. By what amount?
EXERCISE 3
The partnership of Cuyapo, Rosales and Villasis has been in business for 25 years. On December 31, Villasis decided to
retire from the partnership. The statement of financial position before the retirement of Villasis is presented below:
Cash ₱ 40,000 Accounts payable ₱ 70,000
Accounts receivable 60,000 Notes payable 80,000
Inventory 140,000 Loan from Rosales 50,000
Plant assets-net 400,000 Cuyapo, capital (20%) 150,000
Loan to Cuyapo 30,000 Rosales, capital (30%) 200,000
Loan to Villasis 40,000 Villasis, capital (50%) 160,000
Total assets ₱710,000 Total liab. & equity ₱710,000
Required: Record the withdrawal of Villasis under each of the following independent cases:
1) Villasis was paid ₱100,000 cash upon retirement.
2) Villasis was paid ₱180,000 cash upon retirement. Capital of the partnership after Villasis’ retirement was to be ₱290,000.
3) Villasis was paid ₱150,000 cash upon his retirement. The portion of goodwill attributable to Villasis was recorded by the
partnership.
4) Assume the same facts as in (3) above except that partnership goodwill attributable to all the partners were recorded.
5) Due to the limited cash of the partnership, Villasis was paid merchandise with a fair value of ₱100,000 and a note
payable for ₱50,000. The carrying amount of the merchandise was ₱60,000. Capital of the partnership after Villasis’
retirement was ₱360,000.


EXERCISE 4
The statement of financial position of R and S, a partnership appears as follows:
R AND S PARTNERSHIP
Statement of Financial Position
October 31, 2020
ASSETS
Current Assets:
Cash ₱ 41,100
Accounts Receivable ₱212,160
Allowance for bad debts 8,000 204,160
Inventories 241,100
Prepaid expenses 10,140
₱496,500
Plant Assets:
Furniture and Fixtures ₱ 241,000
Accumulated Depreciation 68,200 172,800
Total assets ₱669,300
LIABILITIES AND CAPITAL
Current Liabilities:
Accounts payable ₱161,400
Accrued expenses 20,000 ₱182,200
Partner’s capital:
R, capital ₱260,350
S, capital 226,750 487,100
Total Liabilities and capital ₱669,300
Additional information:
• R and S share profits and losses equally.
• The partners incorporate as Urdaneta Corporation with an authorized capital of 5,000 shares at ₱100 par stock, of
which 4,400 are issued to the partners in exchange for their interest in the net assets of R and S, and the remainder
are issued at ₱120 per share for cash. The partners agree that the following adjustment should be recorded:
Allowance for bad debts decreased by ₱ 4,000
Inventories increased by 12,000
Accumulated depreciation decreased by 6,200
• Goodwill is to be recognized in an amount which will cause the net assets of the partnership to equal the cash issuance
price of the shares to be issued.
Required:
a. How much is the share premium contributed by R and S to the new corporation?
b. How much goodwill is to be recognized in the corporation’s books?
c. How many shares R will receive?
EXERCISE 5
On January 1, 2020, the partnership of D, E and F started with an initial contribution from the partners of ₱100,000, ₱200,000
and ₱300,000, respectively. The partners stipulated that in case of death of any partner, the parties will compute profits up
to the nearest month and to provide for 20% annual interest for the deceased partner interest prior to its settlement.
On July 1, 2020, D was heart-attacked and instantly died. The newly hired accountant of the partnership prepared the
following entries during the year:
7/1/2020 D, capital 100,000
Payable to D’s estate 100,000
To set-up D’s capital as a liability
12/31/2020 Interest expense 10,000
Payable to D’s estate 10,000
To recognize interest on D’s estate
12/31/2020 Sales 700,000
Inventory, end 50,000
Purchases 300,000
Operating expenses 160,000
Interest expense 10,000
Profit and loss summary 280,000
To close nominal accounts


12/31/2020 Profit and loss summary 280,000

E, capital (40%) 160,000
F, capital (30%) 120,000
To close profit and loss to E and F’s remaining P&L sharing ratio.
Profits were evenly earned throughout the year.
Required: What are correct capital balances of E and F as of December 31, 2020, respectively.
PARTNERSHIP LIQUIDATION
EXERCISE 1
The partnership of Urdaneta, Binalonan, and Pozorrubio was dissolved. By August 1, 2020, all assets had been converted
into cash and all partnership liabilities were paid. The partnership statement of financial position on August 1, 2020 (with
partner residual profit and loss sharing percentages) was as follows:
Cash ₱ 50,000 Urdaneta, capital (30%) ₱ 4,000
Binalonan, capital (20%) (60,000)
. Pozorrubio, capital (50%) 106,000
Total assets ₱ 50,000 Total equity ₱ 50,000
The value of partners' personal assets and liabilities on August 1, 2020 were as follows:
Urdaneta Binalonan Pozorrubio
Personal assets ₱ 74,000 ₱ 120,000 ₱ 56,000
Personal liabilities 72,000 80,000 60,000
Required:
Prepare the final statement of liquidation
EXERCISE 2
On December 31, the accounting records of Sison, Rosario and Pugo Partnership included the following information:
Sison, drawings (debit balance) ₱( 24,000)
Pugo, drawings (debit balance) ( 9,000)
Rosario, loan 30,000
Sison, capital 123,000
Rosario, capital 100,500
Pugo, capital 108,000
Total assets amounted to ₱478,500, including ₱52,500 cash and liabilities totaled ₱150,000. The partnership was liquidated
on December 31 and Pugo received ₱83,250 cash pursuant to the liquidation. Sison, Rosario and Pugo share net income
and losses in a 5:3:2, respectively.
3. The loss on realization 3. The amount realized from sale of non-cash assets
4. The cash balance after payment of liabilities 4. Cash distributed to each partner
EXERCISE 3
D, E and F are partners sharing profits in the ratio of 40:35:25, respectively. On December 31, they agree to liquidate. The
statement of financial position prepared on this date follows:
Cash ₱ 20,000 Liabilities ₱ 60,000
Other Assets 460,000 E, Loan 50,000
F, Loan 25,000
D, capital (40%) 144,500
E, capital (35%) 125,500
. F, capital (25%) 75,000
Total assets ₱480,000 Total liab./equity ₱480,000
The results of liquidation are summarized below:
Cash W/held at
Realization Cash Expenses of end of month for
s Book Value Realized Realization estd. Future exps. Liability paid
January ₱120,000 ₱105,000 ₱5,000 ₱20,000 ₱40,000
February 70,000 60,000 7,500 12,500 20,000
March 150,000 100,000 6,000 5,000 ---
April 120,000 40,000 4,000 --- ---
All cash available, except the amount withheld for future expenses and any unpaid liabilities, is distributed at the end of
each month.


Required:
1. Compute for the partner’s equity/partner’s interest
2. Prepare a
a. Partnership liquidation schedule
b. Safe payments schedule
c. Cash priority program
3. Determine the share of each partner every month of distribution.
D E F Total
January
February
March
April
EXERCISE 4
The following is the condensed statement of financial position of Darnasuncion Company.
Cash ₱ 180,000 Accounts payable ₱ 220,000
Other assets ? Due to A 20,000
Due from C 30,000 Due to B 30,000
A, Capital (4) 200,000
B, Capital (4) 250,000
C, Capital (2) 300,000
C is an insolvent and limited partner.
Based from the information given, determine the following
a. The partner with first priority is
b. If the partner with least priority received ₱150,000 as total settlement of his interest and liquidation expenses of
₱15,000 was incurred, how much is the selling price of the non-cash asset?
c. If the partner with first priority received ₱150,000 as total settlement of his interest, how much did the partner with
second priority received?
d. If the partnership was able to sell non-cash assets with a book value of ₱365,000, how much is the gain or loss
realized from the sale if the partner with least priority received ₱20,000?
“Make it a habit to view your failure as stepping stones to success.”
“Success is achieved not by doing only what is comfortable and convenient.
Success is built by doing what must be done to reach it.”
☺ -- END OF HANDOUT -- ☺


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Page 1 of 8 | AFAR 01

Stages in the Life of the Partnership:

Basic Concepts on Partnership Liquidation

Methods of Partnership Liquidation

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CPA, CMA

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CPA, CMA

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CPA, CMA

Less: Expenses 2,450,000

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CPA, CMA

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CPA, CMA

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CPA, CMA

12/31/2020 Profit and loss summary 280,000

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

MARK ALYSON B. NGINA, CPA, CMA

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

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