Partnership Operations Sample Problems SEO

Partnership Operations: Sample Problems
Problem 1:
A and B formed a partnership in 20x9. The partnership agreement provides for annual salary
allowances of P55,000 for A and P45,000 for B. The partners share profits equally and losses in
a 60:40 ratio. The partnership had earnings of P80,000 for 20x9 before any allowances to
partners.
What amount of these earnings should be credited to each partner’s capital accounts?
Problem 2:
Partners A, B, and C have the following profit and loss agreement:
 A and B should receive salaries of P40,000 each.
 C gets a bonus of 10% of net income after salaries and bonus (the bonus is zero if
salaries exhaust the net income)
 Remaining profits are shared by A, B, and C in the ratio 3:4:3, respectively.
The partnership had a net income of P91,000. How much should be allocated to C?
Problem 3:
The following balance sheet was taken as of Sept 30, 2011 for ABC Partnership:
Assets Liabilities and Capital

Cash P80.000 Liabilities P200,000
Other Assets 520,000 A, Capital 100,000
B.Capital 180,000
C, Capital 120,000
Total 600,000 Total 600,000
Partners agreed the following distribution of profits:
• 6% interest on capital contribution;
• Annual salaries of P20,000 each;
• 10% bonus to A after salaries, interest and bonus:
• Remainder distributed 40%, 40% and 20% respectively.
The partnership uses a fiscal period starting October 1.
If C receives a total profit share of P20,000, compute for the total net income earned by
the business before salaries, interest and bonus for the period ending March 31. 2012.
Problem 4:
Gary, Sonny, and Letty opened an accounting practice on January 1, 2016 in Cebu City. The
business is to be operated as a partnership with Gary and Sonny serving as the senior partners
because of their years of experience. To establish the business, Gary, Sonny, and Letty
contribute cash and other properties valued at P210,000, P180,000, and P90,000, respectively.
A partnership agreement is drawn up that carries the following stipulations:
 Personal drawings are allowed annually up to an amount equal to 10% of the beginning
capital balance for the year.
Profits and losses are allocated according to the following plan:
1. Salary allowance: P8 per billable hour worked by that individual during the year.
2. Interest: 12% of the average monthly balance for the year without regard for current
income or drawings.
3. Bonus to Gary and Sonny: 10% of NI after bonus, salary allowance, and interest.
(Bonus cannot be a negative amount.
4. Remainder: Divided equally.
Because of monetary problems encountered in getting the business started, Gary invested an
additional P9,100 cash on May 1, 2016.
The billable hours for the partners during the year are as follows:
Gary 1,710 hours
Sonny 1,440
Letty 1,330
The partnership income for the year is P65,000. Each partner withdraws the maximum
allowable amount for the year.
Prepare a statement of changes in partners’ equity account for the year ending
December 31, 2016.
Problem 5:
The HIJ partnership was formed in 2012 with partner H contributing the major portion of the
capital and partners I and J providing the knowledge and experience necessary for the
operation of the business. The partnership agreement specifies that the accounting records
shall be maintained on the accrual basis and the net income shall be distributed to the partners
as follows:
1. Each partner shall receive 10% interest on the balance in his capital account at the beginning
of the year.
2. Partners I and J each receive a commission of 20% of an amount representing net income
determined by the cash basis method of accounting after deducting the normal allowance for
depreciation and the interest on capital. For this purpose all merchandise purchased is to be
treated as an expense.
3. the net income remaining after deducting the interest on capital and the commission due to I
and J shall be distributed to the three partners equally, except that the total portion of net
income distributed to partner H must not be less than 50% of the net income determined by the
accrual basis method of accounting.
HIJ Partnership
Statement of Financial Position
December December 31, 2013
31, 2012
Assets
Cash P7,000 11,120
Accounts Receivable P5,000 6,000
Allowance for bad Debts 100 4,900 120 5880
Inventory 26,000 24,000
Government bond AT COST 8,000
Fixed Assets- at cost 120,000 120,000
Accumulated Depreciation 42,500 77,500 46,300 73,700
Prepaid Expenses 1,000 800
Total Assets P116,400 P123,500
Liabilities and Equity
Accounts Payable P7,000 P4,000
Accrued wages 3,000 5,000
Accrued taxes 500 500
Deferred Income 5,900
H, Capital 80,000 80,000
I, Capital 12, 500 12,500
J Capital 7,500 100,000 7,500
Net Income for 2013 14,000 P114,000
Total liabilities and Equity P116,400 P123,500
During the year, P150 of accounts receivable were considered uncollectible and were charged
off to the allowance for doubtful accounts, and P10 was collected on accounts t5hat had been
charged to the allowance for doubtful accounts in prior years. There were no changes in the
partners’ capital account during the year
Required:
1a. Prepare a schedule showing the adjustments necessary to convert the net income for the
year 2013 from an accrual basis to a cash basis.
1b. Prepare a statement showing the distribution of the partners of net income for the year
2013.
Problem 6:
Red, White, and Blue, who are accountants, agreed to combin their individual practices into a
partnership as of January 2, 2016. The partners reach agreement on the following matters:
1. Each partner’s capital contribution was the net amount of assets and liabilities taken
over by the partnership which were as follows:
Red 40,200
White 20,200
Blue 40,600
Each partner guaranteed the collectibility of their receivables from their clients.
2. The partners decided to occupy Blue’s office space until the lease expired on June 30. The
monthly rental was P1,200, but the partners agreed that this was an excessive rate for the
space provided and that P900 monthly would be reasonable. They agreed that the excess rent
would be charged to Blue at the end of the year. When the lease expired on June 30, 2016, the
partnership moved to new office with a monthly rental of P1,000.
3. No salaries are to be paid to the partners. The individual partners are to receive 20% of the
gross fees billed to their respective clients during the first year of the partnership. After
deducting operating expenses (excluding the excess rent), the residual profit should be credited
to the partners’ capital accounts in the ratio 40:40:20 to Red, White, Blue, respectively.
4. On April 1, 2016, Green was admitted to the partnership. Green is to receive 20% of the fees
from the new business obtained after April 1, after deducting expenses applicable to the new
business. Expenses (Excluding the excess rent) are to be apportioned to the new business in
the same ratio that total expenses for the entire year, other than bad debt losses, bore to the
total gross fees.
5. The following info pertains to the partnership’s activities in 2016.
a. Fees were billed as follows
Red’s clients P44,000

White’s clients 24,000
Blue’s clients 22,000
New clients acquired after January 2, 2013
Before April 1 P6,000

After April 1 24,000
b. Total expenses for 2016 were P38,700, excluding depreciation and uncollectible accounts
expenses but including the total amount paid for rent. Depreciation was tp be computed at the
rate of 10% on original cost of the following depreciable assets invested by the partners on
January 2, 2016.
Red P8,000
White 5,000
Blue 12,400
Depreciable assets were purchased during 2016 for P10,000, on which one half year’s dep’n
was to be taken.
c. Cash withdrawals charge to the partners accounts during the year were:
Red P10,400
White 8,800
Blue 11,600
Green 5,000
d. Of Red’s and White’s receivables, P2,400 and P900, respectively, proved to be uncollectible.
A new client billed in March for P3,000 had been adjudged bankrupt, and a settlement of 40
cents on the peso was made.
Prepare a Statement of Changes in Partners’ Equity for the year ended December 31,
2016.
PARTNERSHIP OPERATIONS
Closing the books at the end of the accounting period:
1. Merchandise Inventory xx
Income Summary xx
To set up ending inventory
2. All Nominal Accounts with Credit Balances xx

Income Summary xx
To close all nominal accounts with credit balances to income summary.
3. Income Summary xx
All Nominal Accounts with Debit Balances xx
To close all nominal accounts with debit balances to income summary.
NET Income
4. Income Summary xx
Partners’ Drawing xx
To distribute profits to partners
NET Loss
4. Partners’ Drawing xx
Income Summary xx
To distribute losses to partners
INCREASES/DECREASES IN CAPITAL & DRAWING ACCOUNTS
CAPITAL DRAWING
Decrease Increase Increase Decrease
Permanent withdrawal0 Initial investment Temporary withdrawal Share in Net Income
Sale of equity Additional Investment Share in Net Loss
Payment of partnership Partnership pays the
liability from personal personal liability of a
funds partner
Debit balance in Credit balance in
drawing drawing
DIVISION OF PROFITS & LOSSES
Profits and Losses may be shared partners according to the following agreements:
1. equally
2. arbitrary ratio
a. percentage
b. fraction
3. capital ratio
a. original/beginning capital
b. ending capital
c. average capital
4. allowing interest on partners’ capital balances

5. allowing salaries to partners
6. bonus to managing partner based on net income
EXAMPLE
JOHN CAPITAL MARTHA CAPITAL

5/1 10,000 1/1 400,000 7/1 50,000 1/1 300,000
10/31 50,000 7/1 160,000 4/1 200,000
9/30 150,000
NET INCOME FOR THE PERIOD –P 150,000
DIVISION OF PROFITS & LOSSES
1. equally
Income Summary 150,000
John, Drawing 75,000
Martha, Drawing 75,000
2. arbitrary ratio
a. percentage 40%:60%
b. fraction 2/5:3/5

3. Capital RATIO
a. Beginning Capital Ratio : 400:300 or 4/7:3/7

John, Drawing 85,714.29
Martha, Drawing 64,285.71
b. Ending Capital Ratio 500: 600 or 5/11:6/11

c. Average Capital Ratio

COMPUTATION OF AVERAGE CAPITAL

Date Capital No. of Months Peso Months Average Capital
Balance Unchanged
John
‘Jan 1 400,000 4 P1,600,000
‘May 1 390,000 2 780,000
‘July1 550,000 4 2,200,000
Oct 31 500,000 2 1,000,000
Martha P5,580,000/12 P465,000
‘Jan 1 300,000 3 P900,000
April 1 500,000 3 1,500,000
‘July1 450,000 3 1,350,000
Sept 30 600,000 3 1,800,000
P5,550,000/12 462,500
Computation Share in Net Income of P150,000
Average Capital:
John P465,000 150,000 x 465000/927,500= P 75,202.16
Martha 462,500 150,000x 462,500/927,500 = P 74,797.84
P927,500
=======
4. Allowing interest on partners’ capital balances
10% interest on beginning capital, balance equally
Schedule of Distribution of Profits

John Martha Total
10% Interest on beginning Capital
John (400,000 x 10%) P40,000
Martha (300,000 x 10%) P30,000 P70,000
Balance equally(150,000-70,000) 40,000 40,000 80,000
Share in Net Income P80,000 P70,000 P150,000

5.Allowing salaries to partners

Salary allowance of P50,000 to John and P40,000 to Martha, balance in the ratio of 2:3

John Martha Total
Salary allowance P50,000 P40,000 P90,000
Balance 2:3 24,000 36,000 60,000

6.Bonus to managing partner based on net income

20% Bonus to John, the managing partner, balance equally
John Martha Total
20% Bonus to John P30,000 P30,000
Balance equally 60,000 60,000 120,000

7. Allowing interest on partners’ capital balances, salaries and bonus, balance equally.
-5% interest on ending capital,

-salary allowance to John, P30,000; Martha, P40,000
-10% bonus to John
-balance equally

John Martha Total
10% interest on ending capital
John- 500,000 x5% P25,000
Martha- 600,000 x 5% P30,000 P55,000
Salary allowance 30,000 40,000 70,000

10% Bonus to John 15,000 15,000
Balance equally 5,000 5,000 10,000

8. Allowing interest on partners’ capital balances, salaries and bonus, balance equally. (NET INCOME IS INSUFFICIENT)

-20% bonus to John
-balance equally

John Martha Total
John- 500,000 x10% P50,000
Martha- 600,000 x 10% P60,000 P110,000

20% Bonus to John 30,000 30,000
Excess equally (50,000) (50,000) (100,000)

NET LOSS- P150,000
9. Allowing interest on partners’ capital balances, salaries and bonus, balance 4:6
-20% bonus to John
-balance 4:6
Schedule of Distribution of Net Loss

John Martha Total
John- 500,000 x10% P50,000
Martha- 600,000 x 10% P60,000 P110,000

Balance 4:6 (148,000) (222,000) (370,000)
Share in Net Income (P48,000) (P102,000) (P150,000)
• No bonus since Bonus is always based on net income.

To distribute losses to partners
PREPARATION OF INCOME STATEMENT & STATEMENT OF PARTNERS’ EQUITY
The following selected ledger balances were taken from the books of NMA Company
Depreciation Expense-Office Equipment 3,830

Discount Lost 250
Doubtful Accounts Expense 2,340
Freight in 1,250
Freight out 680
Gain on Sale of Office Equipment 351
Interest Expense 4,850
Interest Income 1,420
Marlon, Drawing 5,500
Marlon, Capital 120,000
Miranda, Drawing 10,500
Miranda, Capital 100,000
Merchandise Inventory, January 1 188,500
Merchandise Inventory, December 31 77,777
Office Supplies used 520
Purchases 366,200
Purchase Discount 3,653
Purchase Returns and Allowances 18,265
Rent Expense 30,000
Salaries & Wages 54,200
Sales 642,775
Sales Commission 18,935
Sales Discount 10,580
Sales Returns & Allowances 4,560
NMA Company
Income Statement
For the Year Ended, December 31, 2006
Note
Net Sales 1 P627,635
Cost of Sales 2 (456,225)
Gross Profit P171,410
Other Income 3 1,771
Gross Profit and Other Income P173,181
Operating expenses
General and Administrative expense 4 P90,890
Selling expenses 5 19,615
Other expenses 6 250 110,775
Operating Income P62,426
Interest expense (4850)
NET INCOME P57,576
======

Marlon Miranda Total
10% interest on beginning capital
Marlon- 120,000 x10% P12,000
Miranda- 100,000 x 10% P10,000 P22,000
Balance equally 17,788 17,788 35,576

====== ====== ======
NOTES TO FINANCIAL STATEMENTS
Note 1 Net Sales

Sales P 642,775
Sales Discount P 10,580
Sales Returns & Allowances 4,560 15,140
Net Sales Revenue P 627,635
Note 2 Cost of Sales
Merchandise Inventory, January 1 P 188,500

Add: Net cost of purchases
Purchases P 366,200
Purchase Discounts P 3,653
Purchase Returns and Allowances 18,265 21,918
Net purchases P 344,282

Add: Freight in 1,250 345,532
Total goods available for sale P 534,032

Merchandise Inventory, December 31 77,777
Cost of Sales P 456,255
Note 3 Other Income
Gain on Sale of Office Equipment P 351

Interest Income 1,420
Total P 1,771
Note 4 General and Administrative Expenses

Salaries & Wages P 54,200
Rent Expense 30,000
Depreciation Expense-Office Equipment 3,830
Doubtful Accounts Expense 2,340
Office Supplies used 520
Total P 90,890
Note 5 Selling Expenses

Sales Commission P 18,935
Freight out 680
Total P 19,615
Note 6 Other expense

Discount lost P 250
=========
NMA Company
Statement of Changes in Partners’ Equity
For the Year Ended, December 31, 2006
Marlon Miranda Total

Capital balances, January 1 P120,000 P100,000 P220,000
Net Income 29,788 27,788 57,576
Sub-total P149,788 P127,788 P277,576
Partners’ Drawing (5,500) (10,500) (16,000)
Capital balances, December 31 P144,288 P117,288 P261,576
======== ======== ========
PARTNERSHIP DISSOLUTION
Dissolution – termination of the legal life of the partnership.

- termination of the original relationship among partners
*Note: Revaluation of Assets and recognition of net income or loss are necessary before admission of a
new partner.
Causes of dissolution:
o Admission of a new partner/s
o Withdrawal/retirement of a partner
o Death or incapacity of a partner
o Incorporating a partnership
Types of Admission of a Partner

o Admission by purchase of interest
o Admission by investment
ADMISSION OF A PARTNER
ADMISSION BY PURCHASE OF INTEREST

• A personal transaction between the selling and the buying partner
• Any gain or loss incurred, is considered as personal gain or loss of the selling partner.
• Interest of a partner can be sold at book value, more than book value or less than book value of
interest sold.
• No increase in the total partners’ equity ( transfer of capital from the selling to the buying partner).
PROFORMA ENTRY:
Selling Partner’s Capital xx

Buying Partner’s Capital xx
To record admission of a partner
TRANSACTIONS:
Data: M, Capital P200,000

N, Capital 300,000
Profit and Loss Ratio 2: 3
1. O purchased 1/4 interest of M for P50,000.

2. O purchased 1/2 interest of M and N for P250,000.
3. O purchased 1/3 interest of N for P120,000.
4. O purchased 1/4 interest of M and N for P200,000.
5. M sold 1/5 of his interest to O for P20,000.
6. N sold 1/2 of her interest to O for P100,000.
Journal Entries
1 M Capital 50,000
O Capital 50,000
To record admission of O
2 M Capital 100,000
N Capital 150,000
O Capital 250,000
3 N Capital 100,000
O Capital 100,000
4 M Capital 50,000
N Capital 75,000
O Capital 125,000
5 M Capital 40,000
O Capital 40,000
6 N Capital 150,000
O Capital 150,000
ADMISSION BY INVESTMENT
Terms:
Total Agreed Capital (TAC) – new capitalization of the newly formed partnership.
Total Contributed Capital (TCC) – total investments of the old and new partners.
Capital Credit – interest or equity of a partner in the newly formed partnership.
Percentage/Fraction of Interest - interest or equity of a partner expressed in fraction or percentage.
Goodwill – An intangible advantage a business possesses by which it is able to earn more than what is
normal in its business operations.
Bonus - A transfer of portion of the partner’s capital to the credit of another in consideration of the latter’s
business advantage.
INVESTMENT ENTRY
• A new partner invested cash or non cash assets in the partnership
Proforma entry:
Cash xx
Non-cash assets xx
New Partner’s Capital xx
To record investment
BONUS is allowed either to the new or old partners
• Total Agreed Capital of the new partnership is equal to the Total Contributed Capital.
(TAC=TCC)
If the Capital Credit of the new partner is greater than his contribution, bonus is given to the
new partner.
Proforma entry
Cash xx
Non-cash assets xx
Old Partners’ Capital xx
To record investment and bonus
If the Capital Credit of the old partners is greater than their contributions, bonus is given to
the old partners.
Cash xx
Non-cash assets xx
To record investment.
Old Partners’ Capital xx
To record bonus to old partners.
BONUS METHOD:
Example:
Sonie Capital P200,000
Windy Capital 300,000
Profit and Loss ratio 2:3
BONUS TO OLD PARTNERS

Rica invested P100,000 for 10% interest in the new firm’s capital of P600,000.
Cash 100,000
Rica, Capital 60,000
Sonie, Capital 16,000
Windy, Capital 24,000
To record Rica’s investment and bonus to old
partners
Computation:
TAC TCC BONUS
Sonie, Capital 216,000 200,000 16,000
Windy, Capital 324,000 300,000 24,000
Rica, Capital (10%) 60,000 100,000 (40,000)
600,000 600,000 200,000
Note: The bonus was given by the new partner to the old partners since the new partner’s
capital credit was less than her capital contribution. The bonus was shared by the old
partners according to their old capital ratio.
BONUS TO NEW PARTNER
Rica invested P100,000 for 30% interest in the new firm’s capital of P600,000.
Cash 100,000
Sonie, Capital 32,000
Windy, Capital 48,000
Rica, Capital 180,000
To record Rica’s investment and bonus to
old partners
Computation:
TAC TCC BONUS
Sonie, Capital 168,000 200,000 (32,000)
Windy, Capital 252,000 300,000 (48,000)
Rica, Capital (30%) 180,000 100,000 80,000
600,000 600,000 200,000
Note: The bonus was given by the old partners to the new partner since the new
partner’s capital credit was greater than her capital contribution. The bonus
was shared by the old partners according to their old capital ratio.
Total Agreed Capital of the New Partnership is not specifically stated:
 In the absence of an expressed agreements, bonus method is used.
 To determine the BONUS, the TAC of the new partnership is assumed to be

equal to the TCC of the partners.
WITHDRAWAL/RETIREMENT OF A PARTNER
When a partner retires or withdraw from the partnership, the partnership is dissolved, but the
remaining partners may continue operating the business.
1. The equity of the withdrawing/retiring partner may increased or decreased by the
following:
- withdrawal
- share in income or loss
- changes in valuation of all assets and liabilities
2. Interest or Equity of the withdrawing/retiring partner can be sold to:

a. existing partners
b. outsiders
c. partnership
3. The retiring/withdrawing partner may receive a settlement :

a. equal to his equity
b. more than his equity
c. less than his equity
Example:
The capital accounts of the partners are as follows:
A Capital P100,000
B Capital 200,000
C Capital 200,000
The partners share profit & loss in the ratio 20:40:40. Net income for six months prior to B’s
retirement amount to P120,000. The partners decided to revalue the assets of P250,000 to
P420,000.
Required 1. Compute for the adjusted capital of B.
2. Journalize the withdrawal of B if his equity was sold to:
a. G for P300,000
b. A for P240,000
c. Partnership for
c1. - P316,000
c2 - P450,000
c3 - P280,000
Entries:
A Capital 24,000
B Capital 48,000
C Capital 48,000
Distribution of net profits.
Assets 170,000
A Capital 34,000
B Capital 68,000
C Capital 68,000
Revaluation of assets
COMPUTATIONS:
ADJUSTED CAPITAL OF B:
B Capital before adjustment P200,000
Add: Share in Net Income
( 120,000 x 40%) P48,000
Share in Asset Revaluation
(170,000 x 40%) 68,000 116,000
B Capital after adjustment P316,000
=======
JOURNAL ENTRIES to record the withdrawal of B:
a. B Capital 316,000
G Capital 316,000
B’s equity sold to G.
b. B Capital 316,000
A Capital 316,000
B’s equity sold to A.
c. 1) B Capital 316,000
Cash 316,000
Partnership settles the equity of B.
2)B Capital 316,000

A Capital 44,667
C Capital 89,333
Cash 450,000
Partnership settles the equity of B.
Note : The amount of payment is greater than B’s Capital. The difference is considered as
bonus from the remaining partners and shared by them according to their remaining
profit and loss ratio.
3 B Capital 316,000
Cash 280,000
A Capital 12,000
C Capital 24,000
Partnership settles the equity of B
Note : The amount of payment is lesser than B’s Capital. The difference is considered as
bonus to the remaining partners and shared by them according to their remaining
profit and loss ratio.
sPARTNERSHIP DISSOLUTION
The dissolution of a partnership is the change in relation of the partners caused by any partner ceasing
to be associated in the carrying on as distinguished from the winding up of the business of the
partnership (Civil Code of the Philippines, Article 1828).
CAUSES OF DISSOLUTION:
 Admission of a partner
 Withdrawal or retirement of a partner
 Death of a partner
 Incorporation of a partnership
ADMISSION OF A PARTNER
A new partner can only be admitted into a partnership with the consent of all the continuing partners.
This is based on the principle of DELECTUS PERSONAE
*A person may become a partner in an existing partnership by either of the following:

 Purchase of an interest from one or more of the existing partners.
 Investment of assets in the partnership by the new partner.
PURCHASE OF AN INTEREST FROM EXISTING PARTNERS
With the consent of all the partners, a new partner may be admitted in an existing partnership by
purchasing a capital equity interest directly from one or more of the old partners.
Pro-Forma Entry:
(Name of Seller), Capital xxx
(Name of Buyer), Capital xxx
The purchase price of the interest sold to a new partner may be:
1. Equal to the book value of the interest sold.

2. Less than the book value of the interest sold.
3. More than the book value of the interest sold.
ILLUSTRATIVE PROBLEM:
Bianca and Shaira are partners with capital balances of P100,000 and P50,000 respectively. They share
profits and losses equally. Jam is a new partner.
Case 1a: Purchase at book value from one partner only.
Jam purchased a 1/5 interest from Bianca by paying P20,000.
ENTRY:
Bianca, Capital 20 000
Jam, Capital 20 000
Case 1b: Purchase at book value from more than one partner.
Jam purchased 1/5 interest from the old partners by paying P30 000.
ENTRY:
Shaira, Capital 10 000
Jam, Capital 30 000
Case 2: Purchase at less than book value. Jam purchases 1/5 interest from the old partners by paying
P25, 000.
ENTRY:
Jam, Capital 30 000
Case 3: Purchase at more than book value. Jam pays P 40, 000 for a 1/5 interest of the old partners.
ENTRY:
Jam, Capital 30 000
Asset Revaluation upon Admission of a New Partner by Purchase
Bianca and Shaira are partners with capital balances of P100,00 and P50,000 respectively. They share
profits and loses equally. Jam is a new partner who purchase a 1/5 interest from Bianca and Shaira
paying P40,000. However, before the admission of Jam, partnership assets are to be revalued using as
basis amount to be paid by Jam.
Step 1- The new partnership capital is equal to the amount paid by the incoming partner divided by his
fraction of interest.
New partnership Capital = P40,000 / 1/5
= P200,000
Step 2 - the amount of asset revaluation is equal to the new partnership capital less old partnership
capital.
Asset revaluation = P200,000 – P150,000
= P50,000
Step 3 – the allocation of the amount of the asset revaluation among the old partners is as follows:
P50,000 / 2 = 25, 000 per partner (old)
Step 4 – the capital balances of the old partners after asset revaluation is equal to their old capital
balances plus their share on asset revaluation.
Bianca Shaira
Capital balances before revaluation P100,000 P50,000
Share on asset revaluation 25,000 25,000
Capital balances after revaluation P125,000 P75,000
Step 5 – the amount of interest transferred by the old partners to the new partner is based on the new
capital balances (capital balances after asset revaluation).
Bianca Shaira
Capital balances after revaluation P125,000 P75,000
Interest transferred 1/5 1/5
Capital transferred after revaluation P25,000 P15,000
Step 6 – the journal entries to record the revaluation of asset and admission of Jam are as follows:
ENTRY:
Asset 50 000 Bianca, Capital 25 000
Bianca, Capital 25 000 Shaira, Capital 15 000
Shaira, Capital 25 000 Jam, Capital 40 000
GOODWILL METHOD
*Same procedure with the positive asset revaluation*
ENTRY
Goodwill 50 000 Bianca, Capital 25 000
Bianca, Capital 25 000 Shaira, Capital 15 000
Shaira, Capital 25 000 Jam, Capital 40 000
INVESTMENT OF ASSETS IN A PARTNERSHIP
It is a transaction between the original partnership and the new partner. A person may be admitted into
a partnership by investing cash or other assets in the business (Invests /Contributes). Increase in Total
Assets and Total Partner’s Equity.
Problems relating to Admission of a new Partner by Investment
1. Agreed capital is given
a. No Bonus, No Asset Revaluation

b. Bonus to old Partners, No Asset Revaluation
c. Bonus to New Partner, No Asset Revaluation
d. Asset Revaluation (Positive & Negative), No Bonus
2. Agreed Capital is not given.
a. Bonus Method
b. Asset Revaluation method (Positive & Negative)
3. Agreed Capital is not given but basis for its computation is indicated in the terms of admission
4. The amount of the Contribution of the New partner is not given
5. Fraction of Interest is not given.

1. Agreed capital is given
Case 1– No Bonus, No Asset Revaluation
Ely invests P100,000 for a ¼ interest in the agreed capital of P400,000
Solution: Contributed Capital Agreed Capital
Jac P 200,000 P200,000
Cess 100,000 100,000
Ely 100,000 100,000
TOTAL P 400, 000 P 400,000
ENTRY:
Cash 100 000
Ely, Capital 100 000
Case 2 – Bonus to the old partners, no Asset revaluation
Ely invests P100, 000 for a 1/5 interests in the new firm capitalization of P400, 000.
Solution: Contributed Capital Agreed Capital Bonus
Jac P 200, 000 P 210, 000 P 10, 000
Cess 100, 000 110, 000 10, 000
Ely 100, 000 80, 000 (20, 000)
TOTAL P 400, 000 P 400, 000 ---
ENTRY:
Cash 100 000 Ely, Capital 20 000
Ely, Capital 100 000 Jac, Capital 10 000
Cess, Capital 10 000
Case 3 – Bonus to new partner, no asset revaluation
Ely invests P60,000 for a ¼ interest in the total capitalization of P360,000.

Jac P 200, 000 P 185, 000 (P 15, 000)
Cess 100, 000 85, 000 (15, 000)
Ely 60, 000 90, 000 30, 000
TOTAL P360, 000 P 360, 000 ---
ENTRY:
Cash 60 000
Jac, Capital 15 000
Ely, Capital 90 000
Case 4 – Positive Asset Revaluation, no Bonus
Ely invests P100, 000 for a 1/5 interest in the agreed capital of P500, 000.
Solution: Contributed Capital Agreed Capital Asset Revaluation/Goodwill
Jac P 200, 000 P 250, 000 P 50, 000
Cess 100, 000 150, 000 50, 000
Ely 100, 000 100, 000 ---
TOTAL P 400, 000 P 500, 000 P 100, 000
ENTRIES:
Other assets 100 000 Cash 100 000
Jac, Capital 50 000 Ely, Capital 100 000

*GOODWILL METHOD
ENTRY
Goodwill 100 000 Cash 100 000
Case 5 – Negative Asset Revaluation, No Bonus
Ely invests P60,000 for a 1/5 interest in the agreed capital of P300,000.
Solution: Contributed Capital Agreed capital Asset Revaluation
Jac P 200,000 P170, 000 (P 30,000)
Cess 100,000 70, 000 (30, 000)
Ely 60,000 60, 000 ---
TOTAL P 360, 000 P 300, 000 (P 60, 000)
ENTRIES:
Jac, Capital 30 000 Cash 60 000
Cess, Capital 30 000 Ely, Capital 60 000
Other assets 60 000
2. Agreed Capital is not given.
Ely invests P100, 000 for a 1/5 interest
A. Bonus Method
Jac P 200, 000 P 215, 000 P 15, 000
Cess 100, 000 105, 000 5,000
Ely 100, 000 80, 000 (20, 000)
TOTAL P 400, 000 P 400, 000 ---
ENTRY:
Cash 100 000
Ely, Capital 80 000
Jac, Capital 15 000
Cess, Capital 5 000
B. Positive Asset Revaluation Method
Solution: Contributed Capital Agreed Capital Asset revaluation
Jac P 200, 000 P 275, 000 P 75, 000
Cess 100, 000 125, 000 25,000
Ely 100, 000 100, 000 ---
TOTAL P 400, 000 P 500, 000 P 100, 000
ENTRIES:
Other Assets 100 000 Cash 100 000
C. Negative Asset Revaluation Method
Solution: Contributed Capital Agreed Capital Asset revaluation
Jac P 200, 000 P155, 000 (P 45, 000)
Cess 100, 000 85 , 000 (15,000)
Ely 80, 000 80, 000 ---
TOTAL P 380, 000 P 320, 000 (P 60, 000)
ENTRIES:
Jac, Capital 45 000 Cash 80 000
Cess, Capital 15 000 Ely, Capital 80 000

Other Assets 60 000
GOODWILL METHOD
*whichever is higher between new partner’s investment and old partners’ investment by dividing their
respective interest ratio to their capital investments.
New Partner (ELY) Old partners (JAC & CESS)
100 000 / 1/5 = 500 000 300 000/ 4/5 = 375 000
In goodwill method, agreed capital must be greater than the contributed capital. Therefore, agreed
capital is 500 000.
Solution: Contributed Capital Agreed Capital Goodwill
Jac P 200, 000 P 275, 000 P 75, 000
Cess 100, 000 125, 000 25,000
Ely 100, 000 100, 000 ---
TOTAL P 400, 000 P 500, 000 P 100, 000
ENTRIES:
Goodwill 100 000 Cash 100 000
WITHDRAWAL AND RETIREMENT OF A PARTNER
The partnership may allow any of its partners to withdraw or retire from the firm. The business may
continue after such withdrawals; on the other hand, the interest of the retiring or withdrawing partner
may be:
1. sold to a new partner (outsider)

2. sold to continuing (remaining) partners
3. sold to the partnership
*The purchase price or amount of settlement by the partnership to the retiring partner may be:
a. Equal to the interest of the retiring partner (at book value)

b. Less than the interest of the retiring partner (at less than book value)
c. More than the interest of the retiring partner (at more than the book value)
* When the payment to the retiring partner is less than or more than his capital interest, the difference
between the purchase price and the capital interest may be accounted for using:
1. bonus method
2. asset revaluation method
3. goodwill method
CALCULATION OF RETIRING PARTNER’S INTEREST
Investment
- Withdrawals
+ Share in partnership profits to date of retirement or
- Share in partnership losses to date of retirement
+ Loans and advances to the partnership or
- Loans and advances from the partnership
+ Revaluation of assets increasing their recorded values or
- Revaluation of assets decreasing their recorded values
Interest upon retirement
Illustrative Problem A: The statement of financial position of the partnership

of Bea, Biboy, and Bill on December 31, 2016 follows:
Asset Liabilities and Capital
Cash 110,000 Liabilities 20, 000
Other Asset 30,000 Bea , Capital 20, 000
Biboy, Capital 40, 000
Diaz, Capital 60, 000
P140,000 Total Liabilities and Capital P 140,000
The partners share profits and losses in the ratio of 4:2:4. On July 1, 2017, Bill asked to be allowed to
withdraw from the partnership. The partners decided to close the books as of these date so as to
determine the capital interest of Bill. Profit for 6 months ended amounted P60,000 while drawings of
Bea, Biboy and Bill amount to P4,000 , P6,000 and P2,000, respectively. Profits and losses are to be
shared equally after the retirement
of Bill.
The following entries will be prepared prior to the retirement of Bill from the partnership:
Income Summary 60,000 Bea, Capital 4,000

Bea, Capital 24,000 Biboy, Capital 6,000
Biboy, Capital 12, 000 Bill, Capital 2,000
Bill, Capital 24, 000 Bea, Drawing 4,000
Biboy, Drawing 6,000
Bill, Drawing 2,000
After considering the preceding entries, the capital interest as of the partners as of July 1,2017 may
now be computed as follows:
Bill Bea Biboy
Capital balance, Dec. 31,2016 P 60,000 P 20,000 P 40,000
Share in profit from Jan. 1 – June 30 24,000 24,000 12,000
Withdrawals ( 2,000 ) ( 4,000 ) ( 6,000 )
P 82,0000 P 40,000 P 46,000
Assumption 1- Sale of interest to a new partner. Bill sold his interest to Doque for P 100,000.
Bill, Capital 82,000

Doque, Capital 82,000
Assumption 2 – Sale of interest to the continuing partners. Bill sold his interest to Bea and Biboy for
P75,000; the interest being divided equally by the remaining partners. Profits and losses after the
retirement of Bill will be divided equally.

Bea, Capital 41,000
Biboy, Capital 41,000
Assumption 3 – Sale of interest to the partnership. Bill sold his interest to the partnership. The partners
agreed to make immediate cash settlement to the retiring partner. Profits and losses after the retiring of
Bill will be divided equally.
Case A – Settlement to retiring partner is equal to his capital interest. The partnership paid Bill
P82,000.

Cash 82,000
Case B – Settlement is less than the capital interest of the retiring partner (at less than book value).
The partnership paid Bill P76,000 which is P6,000 less than his capital interest of P82,000.
Bonus Method
Cash 76,000
Bea, Capital(6,000 x 4/6) 4,000
Biboy, Capital(6,000 x 2/6) 2,000
Negative Asset Revaluation Method

Bea, Capital (15,000 x 4/10) 6,000
Biboy, Capital(15,000 x 2/10) 3,000
Bill, Capital(15,000 x 4/10) 6,000
Other Assets 15,000
After the preceding entry, the capital balance of Bill is P76,000 and payment to him will be recorded as
follows:

Cash 76,000
Case C – Settlement is more than the capital interest of the retiring partner (at more than book value).
The partnership paid Bill P85,000 which is P3,000 more than his capital interest of P82,000.
Bonus Method
Bea, Capital 2,000
Cash 85,000
Positive Asset Revaluation Method

Other Assets 7,500
Bea, Capital 3,000
Bill, Capital 3,000
After the entry recording the asset revaluation, the capital balance of Bill is P85,000 and payment to him
will be recorded as follows:

Cash 85,000
Goodwill method
Adjusted Capital Balances Agreed Capital Balances Goodwill

Bill, Capital 82 000 85 000 3000
Bea, Capital 40 000 43 000 3 000
Biboy, Capital 46 000 47 500 1 500
TOTAL 168 000 175 500 *7 500
* 3000/ 40% = 7 500
Entry
Goodwill 7,500 Bill, Capital 85,000

Bea, Capital 3,000 Cash 85,000
Bill, Capital 3,000
INCORPORTION OF PARTNERSHIP
Partners Barron and Britz, who share profits and losses equally, have the following balance sheet as of
December 31, 2016:
Cash 120 000 Accounts Payable 172 000

Accounts Receivable 100 000 Accumulated Depreciation 8 000
Inventory 140 000 Barron, Capital 140 000
Equipment 80 000 Britz, Capital 120 000
TOLTAL 440 000 TOTAL 440 000
They agree to incorporate their partnership with the new corporation absorbing the net assets after the
following adjustments: provisions of allowance for bad debts of 10 000; restatement of the inventory at
its current fair value of 160 000; and recognition of further depreciation on the equipment of 3 000. The
corporation’s capital stock to have a par value of 100, and the partners are to be issued corresponding
total shares equivalent to their adjusted capital balances.
Adjusting Entry
Inventory 20 000
Accumulated Depreciation 3 000
Allowance for Doubtful Account 10 000
Barron, Capital 3 500
Britz, Capital 3 500
Closing Entry
Accounts Payable 172 000

Cash 120 000
Accounts Receivable 90 000
Inventory 160 000
Equipment 80 000
Recording the incorporation
Cash 120 000

Accounts Receivable 90 000
Inventory 160 000
Equipment 80 000
Accounts payable 172 000
*267 000/ 100 = 2670 shares

Ordinary Share Capital 143 500

Ordinary share Capital 123 500

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Partnership Operations: Sample Problems

Partners A, B, and C have the following profit and loss agreement:

 A and B should receive salaries of P40,000 each.

 Remaining profits are shared by A, B, and C in the ratio 3:4:3, respectively.

Assets Liabilities and Capital

Partners agreed the following distribution of profits:

• 6% interest on capital contribution;

• Annual salaries of P20,000 each;

• 10% bonus to A after salaries, interest and bonus:

• Remainder distributed 40%, 40% and 20% respectively.

The partnership uses a fiscal period starting October 1.

A partnership agreement is drawn up that carries the following stipulations:

Profits and losses are allocated according to the following plan:

4. Remainder: Divided equally.

Gary 1,710 hours

5. The following info pertains to the partnership’s activities in 2016.

a. Fees were billed as follows

Red’s clients P44,000

New clients acquired after January 2, 2013

Before April 1 P6,000

Closing the books at the end of the accounting period:

2. All Nominal Accounts with Credit Balances xx

INCREASES/DECREASES IN CAPITAL & DRAWING ACCOUNTS

DIVISION OF PROFITS & LOSSES

4. allowing interest on partners’ capital balances

JOHN CAPITAL MARTHA CAPITAL

DIVISION OF PROFITS & LOSSES

Income Summary 150,000

a. Beginning Capital Ratio : 400:300 or 4/7:3/7

Income Summary 150,000

b. Ending Capital Ratio 500: 600 or 5/11:6/11

Income Summary 150,000

c. Average Capital Ratio

Income Summary 150,000

COMPUTATION OF AVERAGE CAPITAL

Schedule of Distribution of Profits

Income Summary 150,000

5.Allowing salaries to partners

Schedule of Distribution of Profits

Income Summary 150,000

6.Bonus to managing partner based on net income

Income Summary 150,000

-5% interest on ending capital,

Schedule of Distribution of Profits

Salary allowance 30,000 40,000 70,000

Income Summary 150,000

-10% interest on ending capital,

Schedule of Distribution of Profits

Salary allowance 50,000 60,000 110,000

Income Summary 150,000

NET LOSS- P150,000

Schedule of Distribution of Net Loss

Salary allowance 50,000 60,000 110,000

John, Drawing 48,000

PREPARATION OF INCOME STATEMENT & STATEMENT OF PARTNERS’ EQUITY

Depreciation Expense-Office Equipment 3,830

Schedule of Distribution of Profits

Balance equally 17,788 17,788 35,576

NOTES TO FINANCIAL STATEMENTS

Note 1 Net Sales

Net Sales Revenue P 627,635

Note 2 Cost of Sales

Same procedure with the positive asset revaluation