The Professional CPA Review School

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ADVANCED FINANCIAL ACCOUNTING & REPORTING PROF. ROEL E.

HERMOSILLA
ACCOUNTING FOR PARTNERSHIP

PARTNERSHIP FORMATION
There are no authoritative pronouncements concerning the accounting for partnership. The principles described
have evolved through accounting practice.

Partnership Formation
The partnership is a separate accounting entity (not to be confused with a separate legal entity), and
therefore its assets and liabilities should remain separate and distinct from the individual partner’s personal
assets and liabilities.
All assets contributed to the partnership are recorded by the partnership at their fair market values. All
liabilities assumed by the partnership are recorded at their present values.
Upon formation, the amount credited to each partner’s capital account must be equal to the amount of
cash contributed or equal to the fair market value of the noncash contributed or equal to the difference
between the fair market value of the assets (including goodwill, if any) contributed and the present value of the
liabilities assumed from the partner. The capital accounts represent the residual equity of the partnership. The
capital account of each partner reflects all of the activity of an individual partner; contributions, withdrawals,
and the distributive share of net income (loss). In some cases, a drawing account is used as a clearing account
for each partner’ transactions with only the net effect of each period’s activity shown in the capital account.

Example: Partnership Formation

A and B form a partnership. A contributes cash of P50,000, while B contributed land with a fair market
value of P50,000 and the partnership assumes a liability on the land of P25,000.
The entry to record the formation of the partnership is
Cash P50,000
Land 50,000
Liabilities P25,000
A, capital 50,000
B, capital 25,000
Sometimes, a partner will contribute intangible benefit to the partnership like good management skills, good
business reputation, business connections, or anything that will bring in higher income to the business. The
partners may agree to quantify this in the form of either goodwill or bonus.

Example: C and D agreed to form a partnership, with C contributing P100,000 cash and D contributing
P150,000 cash. The partners agreed that C will also contribute an intangible benefit to the business for C to
have an initial equal interest in the partnership.

If the bonus method is to be used, the entry in the partnership books must be:
(1) To record the initial contribution of partners:
Cash P250,000
C, Capital P100,000
D. Capital 150,000

(2) To record the bonus recognized:

D, Capital P25,000
C, Capital P25,000

If the goodwill method is to be used, the entry in the partnership books must be:
(1) To record the initial contribution of partners:
Cash P250,000
C, Capital P100,000
D. Capital 150,000
(2) To record the goodwill recognized:
Goodwill P50,000
C, Capital P50,000
The use of either method must be explicitly stated in the problem, otherwise the use of bonus method is
preferable over goodwill method.
Sometimes, two or more single proprietorships may wish to combine their businesses and agree to form a
partnership. In this case, the assets and liabilities of the sole proprietors are normally restated or revalued to
their fair values in order to adjust their capital accounts prior to recording their contributions in the partnership
books. The restated or revalued capitals are now the partners’ initial contribution.

Example: Mr. Trump and Mr. Duterte decided to form a partnership on January 3, 2018, to be called the
DUTERTE Merchandising. The following are their respective balance sheets immediately before the formation:
Trump Store
Balance Sheet
December 31, 2017
Assets Liabilities and Capital
Cash P130,000 Accounts Payable P125,000
Accts. Receivable 100,000 Trump, Capital 355,000
Merchandise Inventory 200,000
Furniture 50,000_ _______
Total P 480,000 Total P480,000

Duterte Store
Balance Sheet
December 31, 2017
Assets Liabilities and Capital
Cash P 15,000 Accounts Payable P 15,000
A/R P40,000 Notes Payable 20,000
Less: ADA 4,000 36,000 Duterte, Capital 79,500
Merchandise Inventory 50,000
Furniture P15,000
Less: A/D 1,500 13,500 ________
Total P114,500 P114,500

The two partners agree to the following adjustments:

1. That P20,000 of Mr. Trump’s accounts receivable be written off.
2. That Mr. Trump’s furniture has a market value of P40,000.
3. That accrued expenses of P25,000 be recognized on Mr. Trump’s books.
4. Mr. Duterte’s estimated uncollectible accounts should be 5% of the outstanding accounts
receivable.
5. The fair value of Mr. Duterte’s furniture is P12,000.
6. Total partners’ equity should be P400,000 with Mr. Trump’s interest
representing 75%.
The most likely question will be how much capital must be recorded in the partnership books. Then
your answer must be P300,000 for Mr. Trump and P100,000 for Mr. Duterte. The partnership balance
sheet immediately after its formation will be presented as follows:

DUTERTE Merchandising
Balance Sheet
January 3, 2018

Assets Liabilities and Capital

Cash P145,000 Accounts Payable P140,000
Accts. Rec. 120,000 Notes Payable 20,000
Less: ADA 2,000 118,000 Accrued Expenses 25,000
Merchandise Inventory 250,000 Trump, Capital 300,000
Furniture 52,000 Duterte, Capital 100,000
Goodwill 20,000 _
Total P585,000 P585,000

PROBLEMS
1. On May 1, 2018, the business assets and liabilities of Ace and Jade were as follows:

Ace Jade
Cash P 8,000 P 62,000
Receivables 200,000 600,000
Inventories 120,000 200,000
Land, Building and Equipment 650,000 535,000
Other Assets 2,000 3,000
 Accounts payable (180,000) (250,000)

Ace and Jade agreed to form a partnership by contributing their net assets, subject to the following
adjustments:
• Receivables of P 20,000 in Ace’s books and P 40,000 in Jade’s books are uncollectible.
• Inventories of P 6,000 and P 7,000 in the respective books of Ace and Jade are worthless
• Other assets in both books are written off

Upon the partnership’s formation:

The respective capital of partners Ace and Jade would be ______________ ; _______________ .
The total assets of the partnership would be ________________.

2. The balance sheet as of July 31, 2018, for the business owned by Barry, shows the following assets and
liabilities:

Cash P100,000 Fixtures P328,000

Accounts Receivable 268,000 Accounts Payable 57,600
Merchandise 440,000

It is estimated that 5% of the receivable will prove uncollectible. The cash balance includes 1,000 share
certificates of PNB at its cost, P8,000; the stock last sold on the market at P70.00 per share. Merchandise
includes obsolete items costing P36,000 that will probably realize only P8,000. Depreciation has never
been recorded; the fixtures are 2 years old, have an estimated life of 10 years, and would cost P480,000 if
purchased new currently. Sundry prepaid items amount to P10,000. Ava is to be admitted as a partner
upon investing P400,000 cash and P200,000 merchandise.

What will be the total capital after the formation of the partnership?

3. Mauro and Paing establish a partnership to operate a used-furniture business under the name of Montefalco
Furniture. Mauro contributes furniture that cost P60,000 and has a fair value of P90,000. Paing contributes
P30,000 cash and delivery equipment that cost P40,000 and has a fair value of P30,000. The partners agree
to share profits and losses 60% to Mauro and 40% to Paing.

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.

4. The balance sheet of the proprietorship of Jacob as of June 30, 2018 showed the following assets and
liabilities:
Cash P 40,000
Accounts Receivable 53,600
Inventory 88,000
Equipment 65,600
Accounts Payable 63,520

The cash balance included a 200- share certificate of BW Resources common at acquisition cost of P 1,600;
the current market quotation is 70 per share. Of the accounts receivable, an estimated 5% is considered to
be doubtful of collection. Certain inventory items, booked at a cost of P 22,960, are currently worth P
16,000. Depreciation has not been recorded; the equipment, acquired two years ago, has a remaining
useful life of about eight more years. Prepaid expense of P 12,800 and accrued expense of P 6,120 have
not been properly recognized. Emily and Bert will join Jacob in a partnership. Jacob will invest the net
assets of his business, after effecting the appropriate adjustments, and he will be allowed credit for goodwill
equal to 10% of his initial capital credit. Emily and Bert will each contribute cash to secure the respective
interests of 1/3 and 1/6, respectively.

a. Jacob’s goodwill credit would be:

b. Emily’ cash investment would be:
c. Total capital would be:
d. Total assets would be:

5. Anna and Salve are partners sharing profits 60:40. A balance sheet prepared for the partnership on April 1,
2018 shows the following:
Cash 48,000 Accounts Payable 89,000
Accounts Receivable 92,000 Anna, Capital 133,000
Inventory 165,000 Salve, Capital 108,000
Equipment 70,000
Accumulated depreciation (45,000)
330,000 330,000
 On this date, the partners agree to admit Connie as a partner. The terms of the agreement is that assets
and liabilities are to be restated as follows:
a. An allowance for possible uncollectible Salve of P4,500 is to be established
b. Inventories are to be restated at their present replacement values of P170,000
c. Equipment are to be restated at a value of P35,000
d. Accrued expenses of P4,000 are to be recognized

Anna, Salve, and Connie will divide profits in the ratio of 5:3:2. Capital balances for the new partners are to
be in this ratio with Anna and Salve making cash settlement outside of the partnership for the required
capital adjustment between themselves and Connie investing cash in the partnership for his interest.

Questions: 1. How much cash Connie should contribute?

2. How will you state the settlement between Anna and Salve?

6. Ana, Bea and Carol decided to form a partnership contributing the following items. Ana is to invest her
existing business in the partnership consisting of the following accounts; cash of P20,000; accounts
receivable of P50,000; inventory P30,000; fixtures of P40,000; payables of P12,000. Bea on the other
hand is to invest cash of P15,000 and a delivery truck costing P30,000 but is mortgaged with the bank for
P20,000. The partners agree that the receivables will re have a 90% realizable value. The inventory
would be valued at P20,000. P5,000 of the payables would be paid prior to the formation of the
partnership. The delivery truck would have a 20% increase in its market value. The partnership will
shoulder only 80% of the mortgage and Carol is to invest cash to be able to have a 40% interest in the
partnership.

How much cash should Carol invest in the newly formed partnership?
A. 61,200 B. 138,000 C. 60,800 D. 102,000

7. Batman and Robin agree to form a partnership. Batman is to contribute 135,600 cash and equipment that
has a carrying value of 135,000 and a fair value of 115,000. The equipment however, has a mortgage
attached to it and it is agreed by the partners that they will assume it. Robin, on the other hand
contributed 240,000 cash. They share profits and losses in the ratio of 4:5. Furthermore, part of their
agreement is to bring their initial capital in conformity with their profit and loss ratio.

How much is the mortgage of the equipment?

A. 58,600 B. 10,600 C. 78,600 D. 34,600

8. On January 1, 2019, R, J and N formed a partnership with profit or loss sharing agreement of 2:3:5.

R contributed land with assessed value from the city assessor in the amount of P1,000,000. The land is
subject to real estate mortgage, which is annotated to the title of the land in the amount of P800,000.
The appraised value of the land is P2,400,000. J contributed a building with a cost of P2,000,000 and
accumulated depreciation of P1,500,000. The fair value of building is P800,000. N contributed investment
in trading securities with historical cost of P6,000,000. The trading securities have quoted price in active
market of P3,000,000.

The partners decided to bring their capital balances in accordance with their profit or loss sharing
agreement. The total agreed capitalization of the partnership is P10,000,000.

Which of the following statements is correct?

A. The agreed capital of N is P500,000.
B. R should contribute additional capital in the amount of P1,800,000
C. J should contribute additional capital in the amount of P2,200,000.
D. N is entitled to withdraw in the amount of P1,000,000.

9. The partnership of BROTHER and SISTER was formed on March 31, 2018. On this date, BROTHER invested
P50,000 cash and office equipment valued at P 30,000. SISTER invested P 70,000 cash,
merchandise valued at P110,000 and furniture valued at P 100,000 subject to a note payable of P50,000
(which the partnership assumes). The partnership provides that BROTHER and SISTER share profits and
losses 25:75, respectively. The agreement further provides that partners should initially have an equal
interest in the partnership capital. Under the goodwill and the bonus method, what is the total capital of
the partners after formation?
Bonus Goodwill Method
A. P 310,000 P 460,000
B. P 360,000 P 510,000
C. P 300,000 P 410,000
D. P 350,000 P 400,000
 PARTNERSHIP OPERATIONS
Allocation of Partnership Income (Loss)
The partners should have a written agreement, called articles of co-partnership, specifying the manner in
which partnership income (loss) is to be distributed. Note that in the absence of a predetermined agreement,
the profit and loss (P&L) is divided according to original capital contributed by partners.
A number of issues arise which complicat
e the allocation of partnership income (loss).
1. Partners may receive interest on their capital balances. If so, it must be determined what constitute the
capital balance (e.g., the year-end amount of some type of weighted-average).
2. Some of the partners may receive a salary.
3. Some of the partners may receive a bonus on distributable net income. If so, you need to determine if
the bonus should be computed before or after salary, interest and bonus allocations.
4. A formula needs to be determined for allocating the remaining income. The formula agreed upon is
usually termed the residual, remainder, or profit (loss) sharing ratio.

Finally, the partners should decide upon how income is to be allocated if net income is insufficient to cover
partner’s salaries, bonuses, and interest allocations. These allocations are usually made even if the effect is to
create a negative remainder. This is important to note that partners may choose to allocate losses (or a
negative remainder) in a different manner than income.
Example: Partnership P & L Distribution
A, capital P300,000; B, capital P100,000; and C, capital P50,000
Partners receive 5% interest on beginning capital balances
Partner B receives a P60,000 salary
Partner C receives a 10% bonus after interest and salaries
The P&L ratios are A – 50%; B – 30%; C – 20%
Assuming partnership net income of P182,500, the distribution schedule would be prepared:
A B C Total
5% interest on beginning capital P15,000 P 5,000 P 2,500 P 22,500
Salary to partner B 60,000 60,000
Bonus to partner C after interest 10,000* 10,000
& salaries
Remaining distribution 50:30:20: 45,000 27,000 18,000 90,000
Total share P60,000 P92,000 P30,500 P182,500

*(P182,500 – P22,500 – P60,000) x .10 = P10,000

Note that if the interest, salary, and bonus allocation had exceeded net income, the excess would have
been deducted on the distribution schedule in the P&L ratio.

Note also, that if the bonus is based on net income after interest, salary and bonus then, bonus would have
been computed as follows: P182,500 – P22,500 – P60,000 divided by 110% x 10%.

Sometimes, problems in the CPA board exam will require the examinee to determine first the net income
before allocation is made. In this case, the method of determining net income must first be determined in order
to compute the distributed net income. If the problem is silent as to the method used, then the generally
accepted method must be the accrual basis of accounting net income.

PROBLEMS
1. David and Ruby organized the DR Partnership on January 1, 2018. The following entries were made in their
capital accounts during 2018:
Debit Credit
David, capital:
January Ruby 1 P180,000
April 1 P50,000
October 1 10,000
Ruby, capital;
January Ruby 1 P60,000
March 1 P10,000
September 1 20,000
November 1 10,000

Required:
 If the partnership net income, computed before salaries, interest or 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 Ruby, 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 David and Ruby 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 David, a salary of P16,000 is allowed to
Ruby, and remaining profits and losses are shared equally. (The bonus is regarded as an expense
for purposes of calculating the bonus amount).

2. The following account balances appear in the ledger for the firm of X and Y at the end of 2018 before the
profit for the year has been transferred to the partners’ accounts:

X, drawing P 72,000
Y, drawing 125,000
X, loan P175,000
X, capital 500,000
Y, capital 500,000
Profit and loss 302,500

The following information is to be considered in closing the profit and loss account and the drawing
accounts:
1. The cost of installing equipment at the beginning of 2018, P27,000, was charged to expense. The
installation relates to equipment with a 10-year life.
2. The loan to the firm was made by X on March 1, 2018. No entry has been made for interest on the
loan, which is 6% and is to be paid to X at the time the loan is repaid.
3. The partnership agreement permits X and Y to withdraw weekly sums of P1,500 and P2,250,
respectively, these amounts to be regarded as salaries. Actual withdrawals by partners differed from
allowed amounts and are summarized in the drawing accounts.
4. Y, the managing partner, is entitled to a special bonus of 25% of the net profit after deduction of all
special allowances to partners (including the bonus), and any remaining profit is to be distributed
equally.

How much should be the Dec. 31 ending capital balance of each partner?

3. The following Balance Sheet for the partnership of Apple, Sam and Sophia were taken from the books on
October 1, 2018.
ASSETS LIABILITIES & CAPITAL
Cash P 100,000 Liabilities P 200,000
Other Assets 400,000 Apple, capital 120,000
Sam, capital 95,000
________ Sophia, capital 85,000
Total Assets P 500,000 Total Liabilities and Capital 500,000
The partners agreed to distribute profits as follows:
1) Annual salaries to Apple and Sam of P 5,000 each
2) Annual interest of 5% on beginning capital
3) Bonus of 15% to Sophia based on income after salaries, interest and bonus
4) Remaining profit: 25% to Apple, 35% to Sam and 40% to Sophia

The partnership began its operations on October 1, 2018 and net income as of December 31, 2018 is P
69,500. Which of the following is true?
A. The bonus to Sophia is P 5,804
B. Net Income after salaries, interest and bonus is P 38,696.
C. Sam’s total share in the net income is P 21,688.
D. Sophia’s share on the profit after salaries, interest and bonus is P13,543.

4. X, Y, and Z, doctors, 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, income from fees are P900,000, while expenses total P480,000.
How much of the profit should be credited to X?, to Y?, to Z?

5. NEGOSYO TO Company 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 further 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.
6. The income statement of Analiza-Carmela Partnership for the year ended Dec. 31, 2018 appear below:

Sales P600,000
Less: Cost of goods sold 380,000
Gross profit 220,000
Less: Operating expenses 60,000
Net income P160,000
Additional information:
1. Analiza and Carmela began the year with a capital balance of P81,600 and P224,000, respectively.
2. On April 1, Analiza invested an additional P30,000 into the partnership and on August 1, Carmela
invested an additional P40,000 into the partnership.
3. Throughout 2018, each partner withdrew P800 per week in anticipation of partnership net income.
The partners agreed that these withdrawals are not to be included in the computation of average
capital balances for purposes of income distributions.

Analiza and Carmela have agreed to distribute partnership net income according to the following:
Analiza Carmela
1. Interest on average capital balances 6% 6%
2. Bonus on net income before the bonus but after
interest on average capital balances 10%
3. Salaries P 50,000 P 60,000
4. Residual (if positive) 70% 30%
5. Residual (if negative) 50% 50%

a. The share of Analiza and Carmela on the net income:

b. The ending capital balance of Analiza and Carmela:

7. Lino is trying to decide whether to accept a bonus of 25% of net income after salaries and bonus or a salary
of P97,500 plus a bonus of 10% of net income after salaries and bonus as a means of allocating profit
among partners. Salaries traceable to the other partners are estimated to be P450,000.

What amount of income would be necessary so that Lino would consider the choices equal?

8. The partnership of EL, OOH, ARE and DEE reflected capital balances before the distribution of the net
income amounting to P125,000; P100,000, P175,000 and P150,000. The partners are to divide profits and
losses among themselves based on the following stipulations that they agreed on:
A) Salary of P30,000 to EL, OOH and DEE.
B) 10% interest on the capital balance before the distribution of income to the partners.
C) A 20% bonus after bonus and interest to AREis to be given to ARE.
D) The balance is to be divided on a 3:4:2:1 ratio.

If OOH receives P70,000 from the partnership results of operations, what is the net income of the
partnership?
a. 300,625 b. 260,500 c. 270,625 d. 277,500

9. Princess and Lora are partners operating a small chain of convenience stores. Their business has grown
substantially over the last six years and they amended their partnership agreement to provide the following
distribution of profits and losses:

Princess Lora
Salaries 49,000 None
Commission on gross sales None 4%
Interest on average capital balances 7% 9%
Bonus to Princess is 10% of net income after salary,
commissions, interest and bonus.
Remainder 40 60

Gross sales for 2016 was 3,000,000. Income after deducting salaries, commissions and interest was
132,000. Average capital balances were 720,000 and 540,000 for Princess and Lora.
 How much profit share will Princess receive?
a. 158,920 b. 152,800 c. 159,400 d. 152,500

10. A and B formed a partnership to operate a retail store of various merchandise. They agreed on the
following distribution of profits and losses.

A B
Salaries 400,000 350,000
Interest on ending balances before distribution of 25% 30%
profit/(loss)
Bonus on net income after salaries and interest but 15% 12%
before bonuses
Remainder 40% 60%

Only 80% of the partners’ share in net income is distributed. The remaining 20% is retained as partners’
capital. Partnership’s net income amounted to P2,500,000 at the end of the year. A’s and B’s ending
capital balances prior to distribution of profit/(loss) amounted to P1,250,000 and P1,100,000, respectively.

A) How much is B’s share in the partnership net income?

A. 1,018,985 B. 950,000 C. 1,297,985 D. 997,985

B) How much is B’s ending capital after the distribution of the net income?
A. 1,359,597 B. 2,418,985 C. 1,600,000 D. 2,397,985

11. On January 1, 2017, Anna, Bea, and Cara formed a partnership with original capital contribution ratio of
4:5:1 for a total agreed capitalization of P5,000,000. The profit or loss ratio agreement provides that
profits shall be distributed in the ratio of 3:2:5 while losses shall be distributed in the ratio of 6:1:3.

During 2017, the partnership reported net income of P2,000,000 with Anna and Bea withdrawing P500,000
and P300,000, respectively. During 2018, the partnership reported net loss of P1,000,000 with Bea and
Cara withdrawing P200,000 and P400,000 respectively.

What is the capital of Bea on December 31, 2018?

A. 2,600,000 B. 2,500,000 C. 2,300,000 D. 2,400,000

12. The partnership agreement of ADAM, MARC, and VIC provides for the year – end allocation of net income
in the following order:
• First, ADAM is to receive 10% of net income up to P200,000 and 20% over P200,000.
• Second, MARC and VIC each are to receive 5% of the remaining income over P300,000.
• The balance of income is to be allocated equally among the three partners.

The partnership’s 2019 net income was P500,000 before any allocations to partners. What amount should
be allocated to ADAM?
A. P216,000 B. P222,000 C. 202,000 D. 206,000
 CHANGES IN PARTNERSHIP
Partnership Dissolution (Changes in Ownership)
Partnership dissolution occurs whenever there is a change in ownership (e.g., the addition of a new
partner, or the retirement, withdrawal or death of an existing partner). We will also include in this handout the
incorporation of a partnership, that is, change from a partnership form of organization to a corporation.
Partnership dissolution should not be confused with partnership liquidation which is the winding up of
partnership affairs and termination of the business. Under dissolution the partnership business continues, but
under different ownership.
When partnership dissolution occurs, a new accounting entity exists. The partnership should first adjust
its records so that all accounts are properly stated at the date of dissolution. After the income (loss) has been
properly allocated to the existing partners’ capital accounts, all assets and liabilities should be adjusted to their
fair market value and their present values, respectively. The latter step is performed because the dissolution
results in a new accounting entity.
After all adjustments have been made, the accounting for dissolution depends on the type of transaction
that caused the dissolution.
These transactions can be broken down into two types:
* Transactions between the partnership and a partner (e.g., a new partner contributes assets, or a
retiring partner withdraws assets).
* Transactions between partners (e.g., a new partner purchases an interest from one or more existing
partners, or a retiring partner sells his/her interest to one or more existing partners).

a. Transactions Between a Partner and the Partnership

(1) Admission of a New Partner
When a new partner is admitted to the partnership essentially three cases can result. The
new partner can invest assets into the partnership and receive a capital balance.
(a) Equal to his/her purchase price.
(b) Greater than his/her purchase price.
(c) Less than his/her purchase price.

If the new partner’s capital balance is equal to the assets invested, then the entry debits the asset(s)
contributed and credits the new partner’s capital account for the fair value of the asset(s) contributed.

If the new partner’s capital balance is not equal to the assets invested (as in situation (b) and (c) above),
then either the bonus or goodwill method must be used to account for the difference.
Bonus method - The old partnership capital plus the new partner’s asset contribution is equal to the new
partnership capital. The new partner’s capital is allocated his purchase share (e.g., 40%) and the old
partner’s capital accounts are adjusted as if they had been paid (or as if they paid) a bonus. The
adjustment to the old partners’ capital accounts is made in accordance with their profit (loss) sharing ratio.

The bonus method implies that the old partners either received a bonus from the new partner, or they
paid a bonus to the new partner. As a result the old partners’ capital accounts are either debited to reflect a
bonus paid, or credited to reflect a bonus received. The new partner’s capital account is never equal to the
amount of assets contributed in a case where the bonus method is used.

Goodwill method - The old partnership capital plus the new partner’s asset contribution is not equal
to the new partnership capital. This is because goodwill is recorded on the partnership books for the
difference between the total identifiable assets of the partnership (not including goodwill) and the deemed
value of the partnership entity (which includes goodwill). An adjustment is made to the capital accounts of
the existing partners to reflect the goodwill (whether acquired or given) in their profit (loss) sharing ratio.
Under the goodwill method, valuation of the partnership is the objective.
How the value of the partnership is determined depends on whether the book value acquired is greater
or less than the asset(s) invested. If the book value acquired is less than the asset(s) invested, the value is
determined based upon the new partner’s contribution, and goodwill is allocated to the old partners’
accounts. If the book value acquired is greater than the asset(s) contributed, the value is based upon the
existing capital accounts, and goodwill is attributed to the new partner.
Example: A & B Partnership admit C by investing to the business P50,000 for a 1/5 interest. The capital
balances of A and B before the admission are P100,000 and P80,000, respectively. The goodwill can be
determined as follows:

Total contributed capital to the business

 (100,000 + 80,000 + 50,000) P230,000
Capital interest of C the new partner x 1/5
Book value of the interest acquired P 46,000
The assets contributed is greater than the book value acquired, therefore the total implied capital must be
based on the new partner’s contribution which is P50,000. The total implied capital in this case must be
P250,000, (50,000 ÷ 1/5). The goodwill must be P20,000 to old partners. (250,000 – 230,000).
Assuming that the interest of C will be ¼, then the book value acquired must be P57,500, (230,000 x
¼), greater than the assets contributed by C, then the total implied capital must be based on the old
partners’ contributions which is P180,000. The implied total capital must be P240,000, (180,000 ÷ ¾). The
goodwill in this case must be P10,000, (240,000 – 230,000) and the goodwill will now be given to the new
partner. So, it is just like bonus method. In the above example wherein the interest of C is 1/5, the bonus
goes to the old partners, but inasmuch as no bonus recognized but rather goodwill then the goodwill goes
to the old partners. In the situation wherein C’s interest is ¼ the bonus goes to the new partner but under
the goodwill method, then goodwill and not bonus to new partner.

You can also determine the goodwill by simply dividing the contributed capital of old partners to their
capital interest and also the contributed capital of the new partner to his/her capital interest. The amount
that was computed which is greater than the total contributed capital would be the implied or deemed total
capital. The goodwill must be the difference between the total implied or deemed capital over the total
contributed capital. If the total implied capital was based on the old partners’ contribution then goodwill
must be given to the new partner, but if the total implied capital is based on the new partner’s contribution
then the goodwill must be given to the old partner.

Using the same example above, C’s interest is 1/5, then total implied capital of business can be
determined as follows:

Capital contributed by old partners or new partner divide by their interest whichever is higher then that
should be the total implied capital.
Capital balances of A & B P180,000 Capital contributed by C P 50,000
Interest of A & B ÷ 4/5 Interest of C ÷ 1/5
Implied total capital P225,000 Implied total capital P250,000

The amount greater than the total contributed capital must be the total implied capital which is P250,000.
Therefore, if the basis of the agreed capital is the contribution of the new partner, then the goodwill of
P20,000 must be credited to the old partners. Try it to C’s ¼ interest and you will arrive at the same
conclusion that this time the goodwill goes to the new partner.
The decision as to whether the bonus or goodwill method should be used rests with partners involved.
In other words, the bonus and goodwill methods are alternative solutions to the same problem. For CPA
Board exam, if the method is not clearly indicated in the problem then the generally acceptable and
preferable method must be the bonus method.
Example: Admission of a New Partner - Bonus Method
Total old capital for ABC Partnership is P600,000.
Partner A B C
Capital Balances P100,000 P200,000 P300,000
P&L Ratio 40% 40% 20%
Case I
D is admitted to the partnership and is given a 20% interest in the capital in return for a cash
contribution of P300,000. The entry to record the admission of D should be
Cash P300,000
D, capital P180,000
A, capital 48,000
B, capital 48,000
C, capital 24,000
The total partnership capital to be shown on the books is P900,000 (P600,000 + P300,000) of which D
is entitled to a 20% interest, or a capital balance of P180,000. The remaining P120,000 is treated as a
bonus to the old partners and is allocated to their capital accounts in accordance with their P&L ratio.
Case 2
D is admitted to the partnership and is given a 20% interest in the capital in return for a cash
contribution of P100,000. The entry to record the admission of D in this case should be
Cash P100,000
A, capital 16,000
B, capital 16,000
C, capital 8,000
D, capital P140,000
The total partnership capital to be shown on the books is P700,000 (P600,000 + P100,000) of which D
is admitted to a 20% interest, or a capital balance of P140,000. The difference of P40,000 (P100,000 -
P140,000) is allocated to the old partners’ capital accounts as if they had paid a bonus to the new partner.
Example: Admission of a New Partner - Goodwill Method
 Use the same original data as given above
Case I
D is admitted to the partnership and is given a 20% interest in the capital in return for a cash
contribution of P200,000. The partners elect to record goodwill. The book value acquired (P600,000 +
P200,000) x 20% = P160,000 is less than the asset contributed.
The value of the partnership is determined based upon the contribution of the new partner. In this case it is
assumed that the partnership value is P1,000,000 (P200,000/20%). The resulting goodwill is P200,000
(P100,000 - P800,000). The P800,000 represents the total current capital exclusive of goodwill, P600,000 of
which is attributable to the old partners and P200,000 of which is attributable to the new partner. The entry
to record the admission of D should be:
Goodwill P200,000 Cash P200,000
A, capital P80,000 D, capital P200,000
B, capital 80,000
C, capital 40,000
Goodwill was allocated to the old partners in their P&L ratio. Also note that the capital balance of D
represents 20% of the total capital of the partnership.

Case 2
D is admitted to the partnership and is given a 20% interest in the capital in return for a cash
contribution of P100,000. The partners elect to record goodwill. The book value acquired (P600,000 +
P100,000) x 20% = P140,000 is greater than the asset contributed.
The partnership value is based upon the capital accounts of the existing partners. Because D is entitled
to a 20% interest, the P600,000 capital of the old partners must represent 80% of the capital. This means
that the total value of the partnership is P750,000 (P600,000/80%). D’s total contribution consists of the
P100,000 in cash and P50,000 of goodwill. The goodwill is determined as the difference between the cash
contribution and the 20% of the partnership capital.

Cash P100,000
Goodwill 50,000
D, capital P150,000

Note that in this last case no adjustment is made to the capital accounts of partners A, B, and C
To summarize the above explanations, under the goodwill method, goodwill can be determined by
simply dividing the capital contributions of either the new partner or the old partners, to get an amount
higher than the total contributed capital. The higher amount is now called the total implied capital after
goodwill or otherwise known as total agreed capital. The total agreed capital is then compared to the total
contributed capital to get the total amount of implied goodwill that should be recognized in the books. If the
new partner’s contribution was used to get the total agreed capital, then goodwill should be credited to the
old partners’ capital in accordance with their P&L ratio. But if the old partners’ capital was used to get the
agreed capital then goodwill should be credited to the new partner’s capital.
The table below summarizes the bonus and goodwill situations discussed above:
When to Apply Bonus Method
New Partnership Capital = Old Partners Capital + New Partner’s Asset Investment
Which Partner(s) Receive Bonus
New Partner
New Partner’s Capital Credit > New Partner’s Asset Investment
Old Partners
New Partner’s Capital Credit < New Partner’s Asset Investment
(The difference represents the bonus allocated to old partners in
their P&L ratio.)
When to Apply Goodwill Method
New Partnership Capital > Old Partners Capital + New Partner’s Asset
Investment
Which Partner’s Goodwill is Recognized
New Partner’s Goodwill
New Partner’s Capital Credit > New Partner’s Asset Investment
(The difference represents goodwill)
Old Partners’ Goodwill
New Partner’s Capital Credit = New Partner’s Asset Investment
(Goodwill is allocated to old partners in their P&L ratio)

Total Capital Agreed After Admission

Sometimes partners agreed as to the total capital of the partnership after the admission of a new partner
that might either result in:
(1) goodwill to old partners only or new partner only or both, or
(2) bonus to old partners only or new partner only but it can never be both, or
(3) goodwill and bonus to either old partners or new partner.
 Situations wherein goodwill to old partners only or new partners only and bonus to old partners only or
new partner only were already discussed above except that the total agreed capital was not specified in the
example. It was assumed using the bonus method or goodwill method. Cases explained below pertain to
situations wherein goodwill and at the same time bonus were either credited to old partners’ capital based
on their P&L ratio or to new partner’s capital.

Case 1
Using the previous example for ABC Partnership, wherein D invested P300,000, but this time all
partners agreed that the total capital after D’s admission should be P1,000,000 and D’s interest in the
partnership net assets is 20%.
The partnership should therefore recognized goodwill of P100,000 (P1,000,000 agreed capital minus
P900,000 contributed capital; P600,000 attributable to old partners and P300,000 attributable to new
partner). D should be credited for P200,000 (P1,000,000 x 20%) only, inspite of his contribution of
P300,000. Therefore, the old partners in this case should receive the goodwill of P100,000 and the bonus
from the new partner of P100,000 distributed based on their P&L ratio. The entry to record the admission of
D should be:

Goodwill P100,000 Cash P300,000

A, capital P40,000 D, capital P200,000
B, capital 40,000 A, capital 40,000
C, capital 20,000 B, capital 40,000
C, capital 20,000
Case 2
Using the previous example in case 1 above, except, this time D invested P250,000, and all partners
agreed that the total capital after D’s admission should be P900,000 and D’s interest in the partnership’s net
assets is 40%.
The partnership should recognized goodwill of P50,000 (P900,000 agreed capital minus P850,000
contributed capital). D should be credited for P360,000 (40% x P900,000).
If the capital credit to D is P360,000 but his capital contribution is just P250,000, then the goodwill of
P50,000 should be credited to him as well as a bonus of P60,000 from the old partners (to make the total
capital of D P360,000) deducted from them based on their P&L ratio. The entry to record the admission of
D should be:
Goodwill P50,000 A, capital P24,000
D, capital P50,000 B, capital 24,000
Cash P250,000 C, capital 12,000
D, capital P250,000 D, capital P60,000

Case 3
Using again the above example in case 1 and this time D invested P200,000 but he should be credited
for P250,000 a 25% interest in the partnership net assets. The partners also agreed that the total capital
should be P1,000,000 after D’s admission.
The goodwill therefore in this case is P200,000 (P1,000,000 agreed capital minus P800,000 contributed
capital), and D should be credited for P250,000 (25% x P1,000,000). Inasmuch as the amount of
identifiable assets contributed by D is just P200,000, but he should be credited for P250,000, then it is
implied that D is bringing in goodwill of P50,000. Therefore, the goodwill should be distributed as follows:
P50,000 to D and the balance of P150,000, is the implied goodwill of the business prior to D’s admission
and should be credited to old partners based on their P&L ratio. The entry to record D’s admission should
be
Goodwill P200,000 Cash P200,000
A, capital P60,000 D, capital P200,000
B, capital 60,000
C, capital 30,000
D, capital 50,000

Partner’s Interest Different From P&L Sharing Ratio

Normally, the partner’s interest in the partnership’s net assets is equal to his or her P&L ratio. If in
case, the interest in net assets differs from the share in the profit or loss of the partnership, then the use of
either bonus method or the goodwill method might be advantageous to the new partner in recording his or
her admission.
Example: Interest Greater Than P&L Ratio
Case 1
Using the same information of ABC Partnership above except that D was admitted into the partnership
for a 25% interest and D’s P&L ratio is only 20%, after investing P300,000.
Using the bonus method D should be credited for P225,000 (P900,000 x 25%) and based on this you
can now say that D, the new partner is giving bonus to old partners of P75,000 (P300,000 - P225,000),
distributed to A, B & C based on their P&L ratio.
 Using the goodwill method, D’s capital contribution will be the basis of computing the agreed capital of
P1,200,000 (P300,000/25%). The goodwill of P300,000 (P1,200,000 - P900,000) will be credited to old
partners based on their P&L ratio. Under the goodwill method, the goodwill determined is normally recorded
in the books. The goodwill once recorded in the books should be written off for a period of not exceeding
40 years (GAAP rule) and thus the effect is reduction in the capital of all partners. Since D’s P&L ratio is just
20%, D’s share on the goodwill amortization would be P60,000 (20% x P300,000), and D’s capital will
reduce to P240,000. Therefore, it will be advantageous for D to use the goodwill method because the
capital is still P240,000, rather than the bonus method wherein the capital is only P225,000, and the
advantage will be P15,000, or to simplify the computation, just get the difference between the interest and
P&L share, then multiply by the amount of goodwill. (25% - 20%) = 5% of P300,000 goodwill. To
summarize the above explanations the following computations were made.
Bonus method:
Capital credit to D (25% x P900,000 agreed capital) P225,000
Goodwill method:
Capital credit to D initially (25% x P1,200,000)
equal to his capital contribution P300,000
Less: Share on the goodwill amortization
(20% x P300,000) 60,000 240,000
Advantage of goodwill method over bonus method P 15,000
OR simply the difference between the interest and P&L multiply by the goodwill recognized under the
goodwill method. (5% x P300,000) = P15,000.
Example: Interest Less Than P&L Ratio

Case 2
Using the same information, but this time the interest is 20% and D’s P&L ratio is 25%.
Bonus method:
Capital credit to D (20% x P900,000) P180,000
Goodwill method:
Capital credit to D (20% x P1,500,000) P300,000
Less: Share on the goodwill amortization
(25% x P600,000) 150,000 150,000
Advantage of Bonus method over Goodwill method P 30,000

OR simply the difference between the interest and P&L multiply by the goodwill recognized under the
goodwill method (5% x P600,000) = P30,000.
The table below summarizes the situations discussed above.
Bonus method advantageous and the amount of advantage.
Partner’s interest in the net assets
< Partner’s P&L ratio, difference x Goodwill.
Goodwill method advantageous and the amount of advantage
Partner’s interest in the net assets
> Partner’s P&L ratio, difference x Goodwill.
Neither bonus nor goodwill advantageous (general rule)
Partner’s interest in the net assets = Partner’s P&L ratio,
difference x Goodwill.

(2) Partner Death or Withdrawal or Retirement

The death or withdrawal or retirement of a partner is treated in much the same manner as the
admission of a new partner. However, there is no new capital account to be recorded; we are dealing only
with the capital accounts of the original partners. Either the bonus or goodwill method may be used. The
key thing to remember in regard to a partner’s withdrawal from the partnership is that the withdrawing
partner’s capital account must be adjusted to the amount that the withdrawing partner is expected to
receive.
Example: Partner Withdrawal
Assume the same partnership data as given for the ABC partnership earlier.

Case 1
Assume that A withdraws from the partnership after reaching an agreement with partners B & C that
would pay him P160,000. The remaining partners elect not to record goodwill. The entry to record the
withdrawal of A should be:
B, capital P40,000 A, capital P160,000
C, capital 20,000 Cash P160,000
A, capital P60,000
The P 60,000 bonus is determined as the difference between the current balance of A’s capital account
and the amount of his buyout agreement. This “bonus” is then allocated between the remaining partners’
capital accounts in proportion to their P&L ratios.
Case 2
Assume again that A withdraws from the partnership pursuant to the same agreement except that this
time the partners elect to record goodwill.
The first step is to determine the amount of goodwill to be recorded. In this case we know that A’s
capital account must have a balance of P160,000, the agreed buyout payment A is to receive. In order to
accomplish this the total partnership assets must be increased by some amount of which P60,000
represents 40%, A’s P&L ratio. Therefore, the amount of goodwill to be recorded is P150,000
(P60,000/40%). The entry therefore, to record A’s withdrawal should be:
Goodwill P150,000 A, capital P160,000
A, capital P60,000 Cash P160,000
B, capital 60,000
C, capital 30,000
Note that in this case all of the partners’ capital accounts are adjusted to record the goodwill in
accordance with their P&L ratios.

Case 3
Sometimes partners wish to record only the goodwill paid to A and not the total goodwill, which is
known as the “alternative goodwill method”. In this case, using the information in case 2 above, the entry
to record A’s withdrawal should be:
Goodwill P60,000 A, capital P160,000
A, capital P60,000 Cash P160,000

b. Transactions between Partners

The sale of a partnership interest is a transaction only between the partners. Thus, the treatment
accorded the transaction is determined by the partners involved.
There are two means of dealing with such a transaction. The first is to simply transfer a portion of the
existing partners’ capital to a new capital account for the buying partner.
Example: Sale of a Partnership Interest - No Goodwill Recorded
Assume the following for the AB partnership:
Partner A B
Capital P500,000 P500,000
P&L ratio 60% 40%
Case 1
Assume that C wishes to enter the partnership by buying 50% of the partnership interest from both A
and B for a total of P800,000. It is important to note that the P800,000 is being paid to the individual
partners and not to the partnership. Thus, we are only concerned with the proper adjustment between the
capital accounts, not the recording of the cash. This approach ignores the price that C paid for the
partnership interest. The entry to record C’s capital should be:
A, capital P250,000
B, capital 250,000
C, capital P500,000
The other method available for recording a transaction between partners is the recording of implied
goodwill.
Example: Sale of Partnership Interest - Recording Goodwill
Assume the same facts presented above for the sale of the partnership interest except that in this case
the partners elect to record goodwill.

Case 2
Assuming that C paid P800,000 for a 50% interest in the partnership, the implied value of the
partnership assets is P1,600,000 (P800,000/50%). Because total capital prior to the purchase is only
P1,000,000, the amount of goodwill that must be recorded is P600,000. The goodwill is allocated to the
partners’ capital accounts in proportion to their P&L ratios. Note that this entry is made before an
adjustment is made to reflect C’s admission to the partnership.
Goodwill P600,000
A, capital P360,000
B, capital 240,000

Now we can record the sale of the partnership interest to C. The capital balance of A is now P860,000
(P500,000 + P360,000) while the capital balance of B is P740,000 (P500,000 + P240,000). Recall that C is
to receive 50% of each balance.
A, capital P430,000
B, capital 370,000
C, capital P800,000
Notice that in this situation the capital balance of C after the purchase is equal to the amount of the
purchase price. Again no entry is made to record the receipt of cash because the cash goes directly to the
individual partners, A and B.
PROBLEMS
1. A condensed balance sheet for the AA, BB and CC partnership at December 31, 2018, and their profit and
loss sharing percentages on that date are as follows:
Cash P 15,000 Liabilities P50,000
Other assets 185,000 AA, Capital (50%) 75,000
BB, Capital (30%) 50,000
CC, Capital (20%) 25,000
P200,000 P200,000

On January 1, 2019 the partners decided to bring DD into the partnership under the following independent
assumptions:
Questions:
a. Assuming that DD would purchase one-half of AA's capital and right to future profits directly from AA
for P60,000, how much capital is to be credited to DD?
b. Assuming that DD would purchase one-fourth of each of the partner's capital and rights to future
profits by paying a total of P45,000 directly to the partners, the partnership net assets are to be
revalued. How much will be the capital balance of BB after DD's admission?
c. Assuming that DD would invest P55,000 cash in the partnership for a 25 percent interest in capital.
Future profits would be divided 37-1/2 percent, 22-1/2 percent, 15 percent and 25 percent for AA, BB,
CC and DD respectively. Partnership net assets are not to be revalued. How much capital is to be
credited to DD?

2. Capital balances and profit sharing percentages for the partnership of Aaron, Nimrod, and Elijah on
January 1, 2018 are as follows:
Aaron (36%) P140,000
Nimrod (24%) 100,000
Elijah (40%) 160,000
On January 3, 2018 the partners agree to admit Ruth into the partnership for a 25% interest in capital
and earnings for her investment in the partnership of P120,000. Partnership assets are not to be
revalued.

a. The capital balances of Aaron, Nimrod , Elijah and Ruth, immediately after the admission of Ruth
would be:
b. What will be new profit and loss ratio for Aaron, Nimrod, Elijah and Ruth, if old partners will share
profits using the old ratio?

3. The balance sheet of the Dylan and Samuel Partnership at December 31, 2018, appears below:
Assets: Liabilities and Capital:
Cash P 15,000 Accounts Payable P 35,000
Accounts Receivable (net) 45,000 Notes Payable 25,000
Inventories 75,000 Accrued Liabilities 40,000
Property, Plant, and Mortgage Payable 110,000
Equipment, (net) 225,000 Dylan, Capital 60,000
Samuel, Capital 90,000
P360,000 P360,000
Determine the capital balances of partners immediately after the admission of Sebastian under the following
independent situations:
a. Sebastian acquired a 25 percent interest in partnership capital directly from Dylan and Samuel for
P50,000. Sebastian paid P18,750 directly to Dylan and P31,250 directly to Samuel. Total assets of the
partnership after the admission of Sebastian were P360,000. How much must be the capital balance of
Dylan immediately after the admission of Sebastian?

b. Assume the same facts as in a except that total assets of the partnership were P410,000 after the
admission of Sebastian. At January 1, 2019, inventories had a fair value of P85,000, while property,
plant, and equipment (net) had a fair value of P265,000. Both Dylan and Samuel decided to revalue
 the partnership’s assets before the admission of Sebastian. Determine the capital balance of Samuel
immediately after the admission of Sebastian.

c. Sebastian acquired a 25 percent interest in capital by investing P50,000 of cash into the partnership.
Total capital of the Dylan-Samuel-Sebastian Partnership on January 1, 2019, amounted to P200,000.
Determine the capital balance of Sebastian immediately after his admission.

d. Sebastian acquired 25 percent interest in capital by investing P80,000 of cash into the partnership.
Total capital of the Dylan-Samuel-Sebastian Partnership after Sebastian’s admission amounted to
P320,000. The fair value of the inventories was P85,000 and the fair value of the property, plant, and
equipment (net) was P305,000 on January 1, 2019. Determine the capital balance of Dylan, Samuel
and Sebastian immediately after Sebastian’s admission.

4. A, B and C have capital balances of P112,000, P130,000 and P58,000, respectively, and share profits in the
ratio 3:2:1. D invest cash in the partnership for a one-fourth interest.

A) D receives a one-fourth interest in the assets of the partnership, which includes credit for 25,000 of
goodwill that is recognized upon admission. How much cash D invest?

B) D receives a one-fourth interest in the assets of the partnership and B is credited with P15,000 of the
bonus from D, how much cash D invest?

5. I and H are partners who have capitals of P60,000 and P48,000 and who share profits in the ratio of 3:2. I
is admitted as a partner upon investing cash of P50,000 with profits to be shared equally.
Questions:
a. Assume that I is allowed a 25 percent interest in the firm, which method (goodwill or bonus) will
benefit I, and how much?
b. Assume that I is allowed a 40 percent interest in the firm, which method (goodwill or bonus) will
benefit I, and how much?

6. O, P and Q share profits in the ratio of 5:3:2. S is permitted to withdraw from the firm on December 31,
2018. Profits after the withdrawal of Q are to be shared 3:2. The partnership balance sheet on this date is
as follows:
Receivable from Q P10,000 Liabilities P80,000
Goodwill 80,000 Payable to P 30,000
Other assets 190,000 O, capital 70,000
P, capital 60,000
Q, capital 40,000
P280,000 P280,000

Questions:
a. Assuming that Q is paid P44,000 in full settlement of the capital interest and P10,000 claim balance,
using the bonus method of recording the withdrawal of Q, how much are the capital balances of O and
P after Q's withdrawal?
b. Using the data in question A, using the goodwill method of recording Q's withdrawal, how much are
the capital balances of O and P after Q's retirement?
c. In relation to A & B, which method is preferred by GAAP in recording Q's withdrawal and why?
d. Assuming that Q is paid P24,000 in full settlement of the capital interest and P10,000 claim balance,
using the bonus method, how much are the capital balances of O and P after withdrawal of Q?
e. Using the data in question d, using the goodwill method, how much are the capital balances of O and
P after Q's withdrawal?
f. In relation to D and E, which method is preferable by GAAP?
And why?

7. Philip, of Philip and Romy, partners sharing profits in the ratio of 60% and 40% wants to retire. The
partners agree that the fixed assets are undervalued by P20,000, that goodwill is worth P15,000, and
that Philip’s share of these increases shall be recorded and creditable to his capital account. Since the
working capital is only P70,000, it is decided that Philip shall receive only one-third of his adjusted capital
credit in cash. For the remainder, he accepts securities, which have been carried as other assets at their
book value and market value of P12,000, and a six-month note payable.

The balance sheet, which is then prepared, appears as follows:

Current assets P 53,000 Current liabilities P 52,000
Other assets 3,000 Romy, capital 50,000
 Fixed assets 37,000 Goodwill
9,000 -
P102,000 P102,000

Questions:
a. Current assets before Philip’s retirement must be:
b. Current liabilities before Philip’s retirement must be:
c. Fixed assets before Philip’s retirement must be:
d. Other assets before Philip’s retirement must be:
e. Philip’s adjusted capital balance must be:

8. The balance sheet of R and S, a partnership appears as follows:

R AND S PARTNERSHIP
Balance Sheet
October 31, 2018
ASSETS
Current Assets:
Cash P 41,100
Accounts Receivable P212,160
Allowance for bad debts 8,000 204,160
Inventories 241,100
Prepaid expenses 10,140
P496,500
Plant Assets:
Furniture and Fixtures P 241,000
Accumulated Depreciation 68,200 172,000
Total assets P669,300

LIABILITIES AND CAPITAL

Current Liabilities:
Accounts payable P161,400
Accrued expenses 20,000 P182,200
Partner’s capital:
R, capital P260,350
S, capital 226,750 487,100
Total Liabilities and capital P669,300

R and S share profits and losses equally.

The partners incorporate as H & G Corporation with an authorized capital of 5,000 shares at P100 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 P120 per share for cash. The partners agree that the following adjustment should
be recorded:

Allowance for bad debts decreased by P 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 therefore.
Questions:
a. How much is the additional paid-capital contributed by R and S to
the new corp.?
b. How much goodwill is to be recognized in the corporation’s
books?
c. How many shares R will receive?

9. The partnership of T, U and V is being absorbed by ACE Corp. The latter will issue 19,000 shares of P100
par value capital stock in exchange for the net assets of the partnership. As of this date, the net assets of
the partnership amount to P1,500,000 and the capital balances of T, U and V are proportionate to their
profit sharing ratio of 5:3:2. It has been agreed upon by all parties that the merchandise inventory of the
partnership should be adjusted upwards by P150,000.
Questions:
A) How much is the partnership goodwill as implied in the above
transactions?
 B) How much are the capital account balances of T, U and V, respectively, immediately before the
turnover of the net assets to the corporation?

10. Partners King and Queen have capital balances of 358,500 and 300,000 respectively before admitting
Jack. King and Queen share profits and losses in the ratio of 6:4. Jack paid 225,000 in exchange for 30%
interest in the partnership as well as the profits and losses.

A) How much is the capital of partner King after the admission of Jack?
a. 250,950 c. 279,480
b. 250,590 d. 269,580

B) How much is debited from the capital of partner Queen upon Jack’s admission?
a. 120,000 c. 79,020
b. 90,000 d. 105,360

C) Assume that an equipment is undervalued, how much is the undervaluation of the equipment and the
capital balance of partner Queen after admission of Jack respectively?
a. 85,000 and 336,600 c. 91,500 and 336,600
b. 100,980 and 235,620 d. 91,500 and 235,620

11. NOEL and CHRISTIAN have capital balances of 150,000 and 180,000 respectively. GRACE is to invest
60,000 for 15% in the partnership interest and also in the profits and losses. There is an undistributed net
income in the amount of 80,000. Partners NOEL and CHRISTIAN share profits and losses 65:35.

A) How much is the capital credit of GRACE after her admission?

a. 60,000 c. 72,000
b. 61,500 d. 70,500

B) How much is the bonus to partner NOEL from partner GRACE?

a. 10,500 c. 3,675
b. 6,825 d. 0

C) Assume that an equipment is overvalued, how much is the share of partner CHRISTIAN in the
overvaluation of the equipment?
a. 24,500 c. 10,500
b. 45,500 d. 28,000

12. Partners E, F and G have capital balances of 120,000, 155,000 and 115,000 respectively. The partnership
generated net loss of 140,000 during the year. They share profits and losses 2:5:1 respectively. Due to
internal problems, F wants out of the partnership. Before retirement, the value of their inventory
increased from 85,000 to 97,000. The partners decided to pay partner F 70,000 upon retirement.

A) How much is the capital balances of partners E and G after the retirement of partner F?
a. 84,667 and 97,333 c. 91,333 and 100,667
b. 89,000 and 99,500 d. 87,000 and 98,500

B) Assume that another asset, an equipment, is overvalued, how much is the overvaluation of the
equipment and the capital balances of partners E and G after retirement of partner F?
a. 5,000, 91,333 and 100,667
b. 8,000, 89,000 and 99,500
c. 5,000, 84,667 and 97,333
d. 8,000, 86,000 and 98,000

13. On January 1, 2017, Lana, Bina and Mara formed LBM Partnership with original contribution of
P4,000,000; P1,000,000 and P5,000,000, respectively. The articles of co-partnership provides that profit
or loss shall be distributed under the following terms:
• Lana, Bina and Mara shall be entitled to monthly salary of P10,000, P20,000 and P30,000,
respectively.
• 10% interest on original capital contribution.
• As managing partner, Bina shall receive bonus equal to 10% of net income after salaries and
interest but before bonus.
• The remainder shall be distributed on the basis of original capital contribution ratio.

During 2017, the partners regularly withdrew ¼ of their monthly salary. The December 31, 2017
Statement of Financial Position of LBM Partnership shows that the capital of Lana is P5,310,800. On
January 1, 2018, Mara decided to retire from the partnership and it was agreed that Mara shall receive
 P6,000,000. The retiring agreement provides that any bonus shall be distributed on the basis of original
capital contribution.

What is the net income of the partnership for the year ended December 31, 2017?
a. 3,772,000 c. 2,872,000
b. 1,720,000 d. 4,000,000

What is the capital balance of Bina after the retirement of Mara on January 1, 2018?
a. 1,872,400 c. 1,890,400
b. 1,932,400 d. 1,854,400

/reh