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UNIT I – PARTNERSHIP Formation and Operation

Lesson 1 – Definition, nature and characteristics

Partnership

 Article1767 of the Partnership Law, defines partnership, “ by contract of partnership, two or more
persons bind themselves to contribute money, property or industry to a common fund with the intention of
dividing the profits among themselves”.
 An association of two or persons to carry on, as co- owners, a business for profit (Uniform Partnership
Act, Section 6)
 Partnership in the Philippines are governed by and covered under Articles 1767 to 1867 of the Civil Code
of the Philippines.
 A partnership is formed based on “trust and confidence “ of the individual to each other.
 Only natural persons can form a partnership. A corporation is prohibited from joining a partnership

Characteristics of a Partnership
1. Juridical Personality
Article1768 of the Partnership Law states that the partnership has a juridical personality separate and
distinct from that of each of the partners. Therefore, a partnership can acquire property in its own name
and may enter into contracts.

2. Mutual agency
Each partner is a principal as well as an agent of the partnership on matters relative to the affairs of the
partnership. Any partner can bind the other partners to a contract if he is acting within his express or
implied authority.

3. Ease of formation
A partnership is perfected by a mere agreement or consent of the parties. The creation of a partnership
may be informal as a handshake or as formal with the adoption of the “ Articles of co-partnership”
agreement.

4. Unlimited Liability
Article 1768 of the Partnership Law states that the partnership has a juridical personality separate and
distinct from that of each of the partners. Legally, however, a partnership is not considered a separate
entity from the partners when it involves debts to third party creditors. All partners (except limited
partner), including industrial partner, are personally liable pro-rata with their separate properties for all
obligations contracted by the partnership after all the partnership assets have been exhausted.

5. Limited life
Any change in the partners’ agreement terminates the partnership contract or dissolve the partnership. It
may be by reason of death, withdrawal, retirement or insolvency of any partner, admission of a new
partner, when the specific purpose or objective for which the partnership was formed is achieved and
other causes as enumerated under Article 1830 of the New Civil Code.

6. Co-ownership of contributed assets

All assets contributed into the partnership are owned by the partnership and all partners have equal
rights to contributed assets. The partner investing a particular asset no longer retains any personal right
to it.

7. Division of Profits or losses

Each partner has the right to share in the profits or losses of the partnership. Any statement in the
partnership contract excluding a partner from profit sharing is null and void. Profit or loss sharing is
governed by the partnership contract, if no agreement is specified, profit or loss sharing shall be in
accordance with partners’ capital contribution.

8. Limited right to dispose of interest in partnership

A partner may dispose of his interest or investment in the partnership only with the consent from the
other partners for the partnership contract is one of trust and confidence.
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9. Income Taxes
Partnership, except general professional partnerships, are subject to tax at the rate of 30% of the taxable
income like a corporation.

10. Partners’ equity accounts – each partner has a capital account and a withdrawal account that serves
similar functions as the related accounts for sole proprietorship.

Partnership distinguished from Corporation:

Partnership Corporation
1. Formation Easier to form. A partnership is created by
a mere agreement of the partners. Created by operation of law
2. Number of
Persons Two or more persons At least persons, not exceeding 15.
3. Commencement of From the execution of the Article of From the issuance of certificate of
juridical personality Partnership incorporation by the SEC.
Every partner is an agent of the
4. Management partnership if the partners did not appoint Vested on the Board of Directors.
a managing partner
Partners (except limited partners have
5. Extent of liability unlimited liability. Stockholders have limited liability
Legal life is 50 years subject to
6. Life Can be easily dissolved renewal
Has the capacity to generate greater
7. Financing Limited ability to raise funds capital by issuing shares of capital
stock

Advantages and Disadvantages of a Partnership

Advantages Disadvantage
1. Easy formation 1. limited life
2. Better management resulting from combined abilities of 2. unlimited liability
partners
3. tax exemption for professional partnership 3. mutual agency may hold the partners
4. less government supervision 4. less effective in raising capital than
corporation

Kinds of Partnerships
a. As to nature of business
1. Trading partnership – those engaged in buying and selling of goods.
2. Non-trading business – those engaged in other forms of business activities not included in (1).

b. As to Purpose
1. Commercial partnership – one established for business purposes.
2. General professional partnership – one formed for the exercise of a profession.

c. As to Object:
1. Universal partnership
a. of all present property – all contributions become part of partnership fund.
b. of profits – all property acquired through the work or industry of the partners during the existence
of the partnership become part of the common fund.
2. Particular Partnership – one which the parties combine to pursue a single individual transaction or
enterprise and divide among themselves the benefits therefrom. It may be formed for an exercise of
profession.
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d. As to liability
1. General partnership – comprised of all general partners or a combination of general and industrial
partners. They are personally liable for the partnership debts after the exhaustion of its assets.
2. Limited partnership - comprised both limited and general partners. Only the limited partners are
liable only to the extent of their personal contributions. In a limited partnership, the law states
that there shall be at least one general partner. ” LLP” is usually affixed in the partnership name.

e. As to duration
1. Partnership with a fixed term or for a particular undertaking – formed with a specified period of
existence.
2. ‘Partnership at will - one in which no term is specified or fixed period of existence and formed for a
particular undertaking and may be terminated any time by the will of any of the partners or by
mutual agreement of the partners.

f. As to legal existence
1. De jure partnership – established and organized in accordance with all the legal requirements for
its existence.
2. De facto partnership – established and organized without complying with the legal requirements for
its existence.

Kinds of Partners

a. As to liability

1. General Partner – one who is liable to the extent of his separate property after all the assets of the
partnership are exhausted.
2. Limited partner – one who is liable only to the extent of his capital contribution.

b. As to contribution

1. Capitalist partner – one who contributes money or property to the common fund of the partnership
2. Industrial Partner – one who contributes his skills, knowledge, industry or personal service to the
partnership
3. Capitalist-industrial – contributes money, property or industry to the partnership.

c. As to participation

1. Managing Partner – one whom the partners has appointed as manage of the partnership.
2. Liquidating Partner – one who is designated to wind up or settle the affairs of the partnership after
dissolution.
3. Silent Partner –known as a partner but does not take active part in running the affairs of the
partnership.

d. As to third persons

1. Dormant Partner – not known as a partner and does not take active part in the partnership business.
2. Secret Partner – not known to be a partner but takes active part in running the partnership business.
3. Nominal Partner – one who takes no active part, makes no investment, but permits his name to be used
by the firm.

The Partnership Contract

Articles of Co-Partnership – is a written contract made by the partners. It is needed to appear in a public
instrument and to be registered in the Office of SEC if the partners contributed a real property or real rights of it
the total capital amounted to P3,000 or more. It specifies all the rights, duties and obligations of the partners
among themselves and/or in relation to the partnership.
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The partners in the formation, operation and dissolution of the partnership must observe this contact which
commonly contains the following:

1. Name of the partnership;

2. Principal place and purpose of the business
3. Effectivity and duration of the contract of partnership;
4. Names and addresses of the partners
5. Kinds of partners whether general or limited partners;
6. Contributions of the partners. For non-cash investments the agreed values and description of each.
7. Rights, powers and duties of each partner as well as any limitations upon the authority of partners.
8. Conditions for additional investments and withdrawals
9. Salary and profit and loss agreement
10. Dissolution procedures
11. Methods of resolving disputes between partners.
Failure to register the Article of Co-Partnership with SEC:

1. the partnership cannot acquire legal personality to maintain an action against third persons but the
partners may file a suit jointly against third persons,

2. will not affect the liability of the partnership and its partners to third persons.

Rights of a Partner:

1. To share in partnership profits and partnership properties;

2. To participate in the management of the partnership operations;
3. To receive his equity rights after the creditors’ right have been paid.

Requisites of a Partnership

The New Civil Code of the Philippines provides the essential elements in the formation of the partnership,
involves:

1. A voluntary and valid agreement among the parties

2. A lawful purpose for which the partnership is organized
3. Contribution of money, property or industry
4. An association for profit to be divided among the partners
5. Mutual agency among the partners
6. A practice of transparency on the records and transactions of the partnenrship
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Unit I – Partnership Formation and Operation

Lesson 1 – Nature, Definition and characteristics of Partnership

Name: __________________________ Score__________

Section _________________________ Date:____________

Activity : Instruction: Answer as directed.

1. Explain the difference between the accounting entity concept and the unlimited liability characteristic of a
partnership.

2. One of the advantages of a partnership is tax exemption for professional partnership. Explain.

3. Explain the significance of the “Articles of Co-Partnership.

4. Can a nominal partner be at the same time a secret partner? Explain

5. Distinguish partnership from corporation.

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UNIT I – PARTNERSHIP FORMATION AND OPERATION

Lesson 2 - Partnership Formation

Partnership Accounting –

a) The generally accepted accounting principles used in accounting for single proprietorship are also the
same principles to be used in accounting for a partnership business.

b) Plurality of Capital and Drawing accounts – each partner has capital and a drawing account.

Partner’s Capital Account

Debit Credit
permanent withdrawals of capital original investment
debit balance of drawing account at the end of additional investment
period
share in net loss (this may be debited to credit balance of the drawing account at the
drawing account ) end of the period
share in net income (this may be credited to
drawing account

Partner’s Drawing Account

Debit Credit
advance withdrawals of share in net income Partner’s salaries
Personal liability paid or assumed by the Partnership liability assumed or paid by the
partnership partner
Partnership receivable collected but not remitted by Personal receivables of partner collected and
the partner retained by the partnership.

c) Partner’s loan – partner’s may lend money to the partnership other than their capital contributions: Such
loans are credited to:
1. Loan Payable account; or
2. Notes Payable account if the loan is evidenced by a note duly signed in the name of the
partnership.

d) Partner’s Borrowings – a partnership may lend money to the partners. Such amount are debited to:
1. Loans receivable account; or
2. Notes receivable account if the advance is supported by a note signed by the partner.

e) Partner’s Salaries
The partners may agree to allow salaries to them. The salary allowances to the partners are
purely a method of profit distribution. Salaries to partners are not true business expenses

f) Pro-forma entries:
Transactions Journal Entries
1) Investment with liability Dr. Asset xx
assumed by partnership Cr. Accounts payable xx
Cr. Partner’s, capital xx

2. Temporary withdrawal Dr. Partner’s, drawing xx

Cr. Asset xx
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3. Permanent withdrawal Dr. Partner’s, capital xx

Cr. Asset xx

4. Loan to partner by partnership Dr. Loans receivable - partner xx

Cr. Cash xx

5. Loan to partnership by partner Dr. Cash xx

Cr. Loan payable- partner xx

Partnership Formation

 Methods:
1. Net Investment
2. Bonus Method
3. Goodwill method ( no longer applicable due to PFRS 3)

 If non-cash assets are invested the following should be the basis for valuation according to level
of priority:
1. Fair market value of the property at the time of investment. The agreed value should be
equivalent to the fair market value.
1. Book value or carrying value – in case no available fair market value.

 WAYS OF FORMING A PARTNERSHIP

1. Formation of a partnership for the first time.

2. Conversion of a single proprietorship to a partnership.
a. A sole proprietor allows another individual, who has no business of his own to join his business.
b. Two single proprietors agree to join their businesses to form a partnership.

1. FORMATION OF A PARTNERSHIP FOR THE FIRST TIME

 Partnership books
 record the investment of the partners.
 non-cash assets should be recorded at fair market value.

Illustration 1: (Net Investment Method)

On October 1, 2020, Franz, Genny and Anne agreed to form FGA Enterprises with the following investments.

Genny Anne
Cash P 40,000 P 50,000
Land - Cost 100,000
- FMV 130,000
Equipment – carrying value 65,000
- FMV 50,000
Furniture 55,000

An outstanding liability of P 5,000 on the furniture still exists and will be assumed by the partnership.
Franz is an industrial partner.

REQUIRED: Prepare the journal entries to record the investment of the partners and prepare the
Statement of Financial Position immediately after the formation of the partnership.

Solution: Partnership Books

GENERAL JOURNAL
Date Particulars PR Debit Credit
2020.
Oct. 1 Cash 40,000
Land 130,000
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Genny, Capital 170,000

To record investment

Cash 50,000
Equipment 50,000
Furniture 55,000
Accounts Payable 5,000
Anne, Capital 150,000
To record investment

Franz, Capital
Franz is an industrial partner

The Partnership Statement of Financial Position on October 1, 2020:

FGA Enterprises
Statement of Financial Position
October 1, 2020

Cash P 90,000 Accounts Payable P 5,000

Equipment 50,000 Genny, Capital 170,000
Furniture 55,000 Anne, Capital 150,000
Land 130,000 Franz, capital (industrial partner) .
Total Assets P 325,000 Total liabilities & Partners’ Equity P 325,000

Illustration 2 (Bonus Method: The Total Agreed Capital (TAC) is equal to Total Contributed Capital (TCC))

The partnership of Sean and Timmy was formed on July 1, 2020. On this date, Sean invested P 600,000 cash
and furniture valued at P 360,000. Timmy invested P 440,000 cash , fixtures valued at P 320,000 and building
valued at P 1,200,000, subject to a notes payable of P 600,000 which was assumed by the partnership. The
partnership provides that Sean and Timmy share profits and losses 40:60, respectively. The agreement further
provides that the partners’ capital must be in conformity with their profit and loss ratio upon formation.

Solution: Partnership Books

GENERAL JOURNAL
Date Particulars PR Debit Credit
2020.
July 1 Cash 600,000
Land 360,000
Sean, Capital 960,000
To record investment

Cash 440,000
Furniture and Fixtures 320,000
Building 1,200,000
Notes Payable 600,000
Timmy, Capital 1,360,000
To record investment

Sean, Capital 32,000

Timmy, Capital 32,000
Bonus to Timmy .
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To compute for Bonus given to Sean from Timmy:

Contributed capital (CC) Agreed Capital (AC) Difference
Sean, 960,000 (40%) 928,000 * (32,000)
Timmy 1,360,000 (60%) 1,392,000 32,000
Total 2,320,000 2,320,000

* Sean, Capital is decreased by P 32,000 which represents transfer of capital (Bonus) from Sean to
Timmy to make their capital balance in conformity with their profit and loss ratio.

ST Company
Statement of Financial Position
July 1, 2020

Cash P 1,040,000 Notes Payable P 600,000

Furniture and Fixtures 320,000 Sean, Capital 928,000
Land 360,000 Timmy, Capital 1,392,000
Building 1,200,000 .
Total Assets P 2,920,000 Total liabilities & Partners’ Equity P 2,920,000

* If Goodwill method is used: ( Note: no longer applicable due to PFRS 3: TAC is greater than TCC)
a) compute for total agreed capitalization which should be greater than total contributed capital
1. based on Sean contributed capital:
Total Agreed Capitalization (TAC)= 960,000 / 40% = P 2,400,000

2. based on Timmy’s contributed capital:

Total Agreed Capital (TAC) = 1,360,000/ 60% = P 2,266,667 (lesser than the Total
Contributed Capital (TCC) of P 2,320,000 )

b there is a goodwill of P 80,000 ( difference between TAC and TCC)

Contributed capital Agreed Capital Difference
Sean, 960,000 (40%) 960,000 ---
Timmy 1,360,000 (60%) 1,440,000 80,000
Total 2,320,000 2,400,000 80,000

Solution: Partnership Books

GENERAL JOURNAL
Date Particulars PR Debit Credit
2020.
July 1 Cash 600,000
Land 360,000
Sean, Capital 960,000
To record investment

Cash 440,000
Furniture and Fixtures 320,000
Building 1,200,000
Notes Payable 600,000
Timmy, Capital 1,360,000
To record investment

Goodwill 80,000
Timmy, Capital 80,000
Goodwill to Timmy .
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ST Company
Statement of Financial Position
July 1, 2020
Cash P 1,040,000 Notes Payable P 600,000
Furniture and Fixtures 320,000 Sean, Capital 960,000
Land 360,000 Timmy, Capital 1,440,000
Building 1,200,000 .
Goodwill 80,000
Total Assets P 3,000,000 Total liabilities & Partners’ Equity P 3,000,000

3. CONVERSION OF A SINGLE PROPRIETORSHIP INTO A PARTNERSHIP.

A. A sole proprietor allows another individual, who has no business of his own to join his business.
New set of books will be used for the partnership
Steps:
 In the books of the single proprietorship:
a. adjust the books according to the agreement of the partners.
Adjustment may be for:
 undervaluation/overvaluation of assets
 unrecorded assets and/or liabilities
 unrecorded income and/or expenses (credit and/or debit sole prorprietor’s capital
account)
b. close the book

 In the books of the Partnership:

Open the partnership books by recording the investments of the partners.

Note: Depreciable assets are recorded in the books of the partnership at net of accumulated
depreciation.
Illustration 3: A sole proprietor allows another individual, who has no business of his own to join his business.
On August 1, 2020, Karlo and Peter, who has his own retail business decided to form partnership wherein
they will participate in the ratio of 60% and 40%, respectively. The partnership is to be known as KAP Trading.
The statement of financial position of Peter on this date is presented below:

Peter Trading
Statement of Financial Position
August 1, 2020

Assets
Cash P 40,000
Accounts receivable P 160,000
Less: Estimated uncollectible accounts 16,000 144,000
Merchandise Inventory 100,000
Furniture and Fixtures P 150,000
Less: Accumulated depreciation 40,000 110,000
Total assets P 394,000
Liabilities and Capital

Accounts Payable P 44,000

Peter, Capital 350,000
Total liabilities and capital P 394,000

Conditions agreed upon before the formation of the partnership:

a) The accounts receivable of Peter is estimated to be realizable at 80%.
b) The furniture and fixtures of Pepe is under depreciated by P 5000.
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c) The merchandise inventory is to be valued at P 110,000.

d) All the payables are to be assumed by the partnership.
e) The capital of the partnership is based on the adjusted capital balance of Peter, and Karlo is to
contribute cash in order to make the partner’s capital balances proportionate to the profit and loss ratio.
f) A new set of books will be used by the partnership.

REQUIRED:
1. Prepare the necessary journal entries in the books of Peter.
2. Prepare the journal entries in the books of the partnership.
3. Prepare the statement of financial position of the partnership

Solution:
Req. 1: adjust and close the books of Peter (Sole Proprietor)
GENERAL JOURNAL
Date Particulars PR Debit Credit
2020.
Aug. 1 Peter, capital 16,000
Estimated uncollectible accounts 16,000
To adjust estimated uncollectible accounts
to 20% of accounts receivable

Peter, Capital 5,000

Accumulated depreciation – furniture & fixtures 5,000
To adjust accumulated depreciation

Merchandise inventory 10,000

Peter, capital 10,000
To adjust inventory account

Accounts Payable 44,000

Estimated uncollectible accounts 32,000
Accumulated depreciation 45,000
Peter, capital 339,000
Cash 40,000
Accounts receivable 160,000
Merchandise inventory 110,000
Furniture and Fixtures 150,000
To close the books

 The adjusted capital balance of Peter is:

Peter, Capital
Debit Credit
8/1/20 16,000 balance 350,000
5,000 8/1/20 10,000
21,000 360,000
adjusted bal. 339,000

Req. 2 – Journal Entries in the Partnership Books

Partnership Books
GENERAL JOURNAL
Date Particulars PR Debit Credit
2020.
Aug. 1 Cash 40,000
Accounts receivable 160,000
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Merchandise inventory 110,000

Furniture and Fixtures 105,000
Accounts Payable 44,000
Estimated uncollectible accounts 32,000
Peter, capital 339,000
Investment of Peter

Cash 508,500
Karlo, Capital 508,500
Investment of Karlo.

 To compute for the cash investment of Karlo in the partnership:

 Total agreed capital of the partnership: (Peter, capital P 339,000/40%)= P 847,500
 Cash investment by Karlo = (TAC x p/l ratio of Karlo) P 847,500 x 60% = P 508,500

KAP TRADING
Statement of Financial Position
August 1, 2020

Cash P 548,500 Accounts Payable P 44,000

Accounts Receivable 160,000
Less: Est. Uncol. Accts 32,000 128,000 Peter, capital 339,000
Merchandise inventory 110,000 Karlo, capital 508,500
Furniture and Fixtures 105,000
Total Assets P 891,500 liabilities & Partners’ Equity P 891,500

B. Two or more single proprietors agree to join their businesses to form a partnership.

New set of books will be used for the partnership

Steps:
 In the books of the single proprietorships:
b. adjust the books according to the agreement of the partners.
Adjustment may be for:
 undervaluation/overvaluation of assets
 unrecorded assets and/or liabilities
 unrecorded income and/or expenses (credit and/or debit sole prorprietor’s capital
account)
c. close the book

 In the books of the Partnership:

Open the partnership books by recording the investments of the partners.
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Unit I – Partnership Formation and Operation

Lesson 2 – Partnership Formation

Activity 1 –

1. On October 1, 2020, JC Construction and GB builders decided to form a partnership to be known as JCGB
Construction Company. Their Statement of financial Position on this date were:

JC Construction GB Builders
Cash P 250,000 P 260,000
Accounts Receivable 400,000 390,000
Allowance for bad debts (15,000) (13,000)
Inventory 600,000 700,000
Equipment , net 800,000 1,000,000
Total 2,035,000 2,337,000

Accounts Payable 335,000 550,000

Amanda Capital 1,700,000
Diana, Capital _________ 1,787,000
Total 2,035,000 2,337,000

They agreed the following adjustments shall be made:

1. Equipment of JC Construction is under depreciated by P 10,000 and that GB Builders is over
depreciated by P 15,000.
2. Allowance for bad debts shall be equal to 10% of Accounts Receivable.
3. The value of Inventories of JC is to be increased by P 8,000 and for GB Builders, P 5,000 are
worthless.
4. The assets and liabilities at their adjusted values shall be assumed by the partnership.

REQUIRED:
1. Prepare the necessary journal entries in the books of JC Construction and GB Builders.
2. Prepare the journal entries in the books of JCGB Construction Company
3. Prepare the statement of financial position of the partnership

2. Using the same data in problem 1: except that the partnership provides that JC and GB share profits and
losses 40:60, respectively. The agreement further provides that the partners’ capital must be in conformity
with their profit and loss ratio upon formation.

Q1. Assuming the use of transfer of capital method, how much is the agreed capital of JC to bring the
capital balances proportionate to their profit and loss ratio? _______________________________

Q2. The total assets of the Partnership after the formation is ___________________________________

Q3. Prepare journal entries to record the formation of the partnership.

GENERAL JOURNAL
Date Particulars PR
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(Note: Please use this General Journal format. Do not copy the problem.)
3. AB and CD decided to form a partnership on August 1, 2020. Their balance sheets on this date are:

AB CD
Cash P 15,000 P 37,500
Accounts Receivable 340,000 205,000
Merchandise Inventory 200,000 202,500
Equipment 200,000 350,000
Accumulated depreciation ( 50,000) ( 60,000)
Total P 705,000 P 735,000
Accounts Payable P 105,000 P 265,000
Capital 600,000 470,000
Total P 705,000 P 735,000

They agreed to have the following adjustments :

1. Equipment of AB is underdepreciated by P 20,000 and that of CD is overdepreciated by P 10,000.

2. Allowance for doubtful accounts is to be set up amounting to P 68,000 for AB and P 45,000 for CD.
3. Inventories of P 5,000 and P 15,000 are worthless in AB’s and CD’s books, respectively.
4. The partnership agreement provides for a profit and loss ratio and capital interest of 70% to AB and 30%
to CD.

1. How much cash must AB invests to bring the capital balances proportionate to their profit and loss ratio?
______________________

2. Prepare journal entries in the books of the sole proprietors and partnership books.
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Unit I – Partnership Formation and Operation

Lesson 2 – Partnership Formation

Activity 2 – Answers must be supported with computations. .

On January 1, 2020, Anne, and Betty decided to form a partnership. The firm is to take over the assets and
assume liabilities and capital are to be based on net assets transferred after the following adjustments:

a. Anne and Betty’s inventory is to be valued at P 31,000 and P 22,000, respectively.

b. Accounts receivable of P 2,000 in Anne’s books and P 1,000 in Betty’s books are uncollectible.
c. Accrued salaries of P 4,000 to Anne and P 5,000 to Betty are still to be recognized in the books.
d. Unused office supplies of Anne amounted to P 5,000 while that of Betty amounted to P 1,500.
e. Unrecorded patent of P 7,000 and prepaid rent of P 4,500 are to be recognized in the books of Anne
and Betty, respectively.
f. Anne is to invest or withdraw cash necessary to have a 40% interest in the firm.

Balance sheets for Anne and Betty on January 1, 2020, before adjustments are given below:
Anne Betty
Cash P 31,000 P 50,000
Accounts receivable 26,000 20,000
Inventory 32,000 24,000
Office supplies --- 5,000
Equipment 20,000 24,000
Accumulated depreciation – equipment (9,000) (3,000)
Total assets P 100,000 P 120,000

Accounts payable P 28,000 P 20,000

Capitals 72,000 100,000
Total assets P 100,000 P 120,000

1. The net adjustments – capital in the books of Anne and Betty:

a) Anne, P 7,000 net debit, and Betty, P 2,000 net credit
b) Anne, P 5,000 net debit, and Betty, P 7,000 net credit
c) Anne, P 7,000 net credit, and Betty, P 2,000 net debit
d) Anne, P 5,000 net credit, and Betty, P 7,000 net debit

2. The adjusted capital of Anne and Betty in their respective books:

a) Anne, P 65,000; Betty, P 102,000 c) Anne, P 77,000; Betty, P 98,000
b) Anne, P 63,000; Betty, P 107,000 d) Anne, P 77,000; Betty, P 93,000

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

a) P ( 6,666.50) b) P (15,000) c) P 3,000 d) P 8,377.50

4. The total assets of the partnership after formation:

a) P 212,000 b) P 220,333.50 c) P 230,000 d) P 235,333.50
5. The total Liabilities of the partnership after formation:
a) P 48,000 b) P 51,000 c) P 54,000 d) P 57,000

6. The total capital of the partnership after formation:

a) P 155,000 b) P 163,333.50 c) P 178,333.50 d) P 180,000

7. The capital balances of Anne and Betty in the partnership balance sheet:
a) Anne, P 81,250; Betty, P 72,000 c) Anne, P 100,000; Betty, P 75,000
b) Anne, P 81,250; Betty, P 75,000 d) Anne, P 62,000; Betty, P 93,000
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8. On January 1, 2020 PS and RT agreed to form a partnership. The following are their assets and
liabilities:
Accounts PS RT
Cash P 136,000 P 76,000
Accounts Receivable 88,000 48,000
Inventories 304,000 364,000
Machinery 480,000 440,000
Accounts Payable 216,000 144,000
Notes Payable 140,000 60,000

PS decided to pay-off his notes payable from his personal assets. It was also agreed that RT inventories
were overstated by P 24,000 and PS machinery was overdepreciatedi by P 20,000. RT is to invest/withdraw
cash in order to receive a capital credit that is 20% more than PS’ total net investment in the partnership.

How much cash will be presented in the partnership’s statement of financial position?
a) P 274,400 b) P 410,400 c) P 450,400 d) P 486,400

9. On December 1, 2019, DJ and BF agreed to invest equal amounts and share profits equally to form a
partnership. DJ invested P 3,120,000 cash and a piece of equipment. BF invested some assets which are
shown below: Book value
Accounts Receivable P 400,000
Inventory 1,120,000
Machineries, net 2,240,000
Intangibles, net 920,000

The assets invested by BF are not properly valued . P 32,000 of the accounts receivable are proven
uncollectible. Inventories are to be written down to P 1,040,000. Included in the machineries is an obsolete
apparatus acquired for P 384,000 with an accumulated depreciation balance of P 336,000. Part of the
intangibles is a patent with a carrying value of P 56,000 which was sued upon by a competitor . BF
unsuccessfully defended the case and the final decision of the court was released on November 29, 2019.

What is the fair value of the equipment invested by DJ?

a) P 968,000 b) P 1,344,000 c) P 1,400,000 d) P 1,560,000

10. On September 3, 2020, MM admits VV for an interest in his business. On this date MM’s capital account
shows
a balance of P 452,000. The following were agreed upon before the formation of the partnership:

1. Prepaid expenses of P 25,750 and accrued expenses of P 17,500 are to be recognized.

2. 8% of the outstanding accounts receivable of MM amounting to P375,000 is to be recognized as
uncollectible.
3. VV invested P 260,000 worth of merchandise and is to be credited with a one-third interest in the
partnership.
4. MM is to invest or withdraw cash to earn his interest.

Which of the following is not true regarding the partnership formation?

a) The total agreed capital upon formation is P 780,000

b) The total contributed capital of the partnership is P 690,250.
c) MM invest additional cash of P89,750 to earn his interest in the partnership.
d) A net debit adjustment of P 21,750 affected the capital balance of MM upon formation.

11. A and B have just formed a partnership. A contributed cash of P 882,000 and office equipment that cost
P 378,000. the equipment had been used in his sole proprietorship and had been 70% depreciated, the
current market value of the equipment is P 252,000. A also contributed a note payable of P 84,000 to be
assumed by the partnership. A is to have 60% interest in the partnership. B contributed only P 630,000
merchandise inventory at fair market value. The partner’s .capital must be in conformity with their profit and
loss ratio upon formation. Which of the following is true?

a) The agreed capital of A upon formation is P 1,008,000.

 17

b) The capital of B will decrease by P 42,000 as a result of the transfer of capital.

c) The total agreed capital of the partnership is P 1,750,000.
d) There is an investment or withdrawal of asset under the bonus method.
12. On June 1, 2020, AJ the sole proprietor of AJ Company, expands the company and establish a partnership
with DJ and PJ. The partners plan to share profits and losses as follows: AJ, 40%, DJ, 35% and PJ 25%. AJ
asked DJ to join the partnership because his image and reputation are expected to be valuable during the
formation. DJ is also contributing P 420,000 cash and a building that was acquired for P 4,040,000, with
carrying amount of P3,480,000 and a fair market value of P 1,960,000. The building is subject to a P 792,000
mortgage that the partnership did not assume. PJ is contributing P848,000 cash and marketable securities
costing P 1,344,000 to PJ but are currently worth P1,900,000 AJ’s investment in the partnership is the AJ
Company. The Statement of Financial Position for the AJ Company follows:
Cash P 1,560,000 Accounts Payable P 1,748,000
Accounts Receivable 1,824,000 Notes Payable 2,368,000
Merchandise Inventory 1,576,000 AJ, Capital 3,316,000
Equipment, net 2,472,000 __________
P 7,432,000 P 7,432,000

The partners agree that 35% of the inventory is considered worthless, the equipment is worth ¾ of its carrying
amount, and 85% of the accounts receivable is collectible. AJ plans to pay off the accounts payable with his
personal assets. The other partners have agreed that partnership will assume the notes payable. The partners
agreed that their capital balances upon formation will be in conformity with their profit and loss ratio.
Which of the following statements is false?
a) Assuming the partners will either invest or withdraw cash, using AJ as the base, DJ will invest cash
of P 788,200and PJ will withdraw cash of P 485,000. .
b) Assuming the partners will either invest or withdraw cash , using DJ as the base, AJ and PJ will both
withdraw cash with a total amount of P 1,948,800.
c) Assuming the partners will either invest or withdraw cash, using PJ as the base, AJ and DJ will both
invest cash with a total amount of P 2,243,200.
d) If the transfer of capital method is used, the capital accounts of AJ and PJ will be debited in the
amount of P 560,800 and P 121,280, respectively.

13. On June 1, 2020, AD invited MP to join him in his business. Mp agreed provided that AD will adjust the
accumulated depreciation of his Equipment account to a certain amount and will recognize additional
accrued expenses of P 40,000. After that, MP is to invest additional pieces of equipment to make her interest
equal to 45%. If the capital balances od AD before and after adjustments were P 556,000 and P 484,000,
respectively, what is the effect in the carrying value of the equipment as a result of the admission of MP?
a) P 364,000 b) P 32,000 c) P 396,000 d) (P 324,000)

14. Net assets of DD, EE and CC before formation are P 135,000, P 165,000 and P 251,000, respectively. The
partners agreed that certain assets and liabilities had to be adjusted. DD’s note payable of P 15,000 bearing
an interest of 12% should be included in the partnership books and other assets undervalued by P 24,000.
The interest is personally paid by DD. EE’s prepaid expenses should be P 5,000 less than what is stated in
the financial statements. CC’s liabilities were understated by P 14,500.
How much is the capital of DD after the formation?
a) P 174,000 b) P 144,000 c) P 142,200 d) P 127,800

15. On June 1, 2020, MM and AA are combining their separate businesses to form a partnership. Cash and non-
cash assets are to be contributed. The noncash to be contributed and the liabilities to be assumed are :

MM AA
Book value Fair Value Book Value Fair value
Accounts Receivable P 25,000 P 26,250 P 20,000 P 19,000
Inventory 40,000 45,000 20,000 20,750
Property, Plant and Equipment 100,000 90,700 86,250 82,250
Accounts Payable 15,000 15,000 11,250 11,250

MM and AA are to invest equal amounts of cash such that the contribution of MM would be 10% more than the
investment of AA. What is the amount of cash presented on the partnership’s Statement of Financial Position on
June 1, 2020?
 18

a) P 251,250 b) P 276,250 c) P 502,500 d) P 552,500

Unit I – Partnership Formation and Operation

Lesson 3 – Partnership Operation

Partnership Operations

 Accounting for Partnership transactions

 The accounting process of partnership operation is basically the similar to other businesses engaged
to generate profits - sole proprietorship and corporations - from journalization up to closing the
nominal accounts and determining the net income.
 The difference is that the net income or loss as determined is distributed to the partners in
accordance with the profit and loss agreement.
 The Financial Statement are prepared similar to that of a sole proprietorship. The Statement of
Changes in Partner’ Equity shows the details of changes in the partners’ capital and drawing
accounts, including the distribution of partnership profits or losses.

 Profit or loss Distribution

 Partnership net income – represents the amount available for distribution to the partners before the
distribution of partners salaries, interest on capital and bonuses.
 Profit and loss ratio – the ratio in which partnership profits and losses are divided.

 The partnership profit or loss may be distributed using the following rules:
 according to agreement of the partners.

 If an agreement does not exist, according to capital contributions (original capital, if cannot be
determined then based on beginning capital of the year). Industrial partners should be given a
share in the profit what is just and equitable under the circumstances.

 If only an agreement as to profits exists, losses are distributed according to the profit
distribution agreement. However, industrial partners do not share in the losses of the
partnership.

 PROFIT OR LOSS MAY BE DISTRIBUTED ACCORDING TO THE FOLLOWING:

1. Equally
2. Arbitrary ratio
3. Capital Contribution
a. Ending capital balance
b. Beginning capital balance
c. Average capital balance
1. Simple average method
2. Weighted average or peso months method
4. By allowing salaries, interest on capital and/or bonus to the partners and the remainder to be divided
using an arbitrary ratio.

 The following points regarding the distribution of partnership profits and losses are important:
1. Payment of salaries should be treated as part of profit distribution.
2. Interest on capitals is treated as part of the distribution of profit.
3. If there is a bonus agreement, determine the basis of the bonus which may be on net income
before deducting bonus or net income after deducting bonus.
4. Bonus is not applicable if the base is negative.
4. Salaries and interest on capital are allowed regardless of whether there is profit or loss.
5. If there is an industrial partner:
a. If there is a profit
 he gets the first according to the profit sharing agreement, before the capitalist partners
divide
the balance in accordance with the profit or loss agreement.
 19

 If there is no specified profit sharing for an industrial partner, he will receive “just and
equitable” or equal to
the share of the capitalist partner having the smallest share.

b. If there is a loss ,
 he will share in according to their loss sharing agreement, if any. If there is no
agreement with regards to industrial partner sharing in the loss, he is exempted from
sharing in the partnership loss

6. If there is a capitalist-industrial partner:

a. If there is a profit
 he gets the first according to the profit sharing agreement, and another share as a capitalist
partner in accordance with the profit or loss agreement.
. b. If there is a loss ,
 If there is no agreement with regards to industrial partner sharing in the loss, as a capitalist,
loss sharing is in accordance with the profit or loss agreement.

7. Average capital means weighted average or peso months method unless another interpretation of
average capital is specified in the agreement. The weighted average capital method is the best
alternative compared to other capital balances because it provides the most equitable basis for
allocating partnership income by considering additional investments and permanent withdrawals.

STATEMENT OF CHANGES IN PARTNERS’ EQUITY

 shows the changes/composition of partners’ capital accounts. It presents in summarized form the following
information.
a) Beginning balances
b) Additional investments during the period
c) Capital withdrawal
d) Share in net income or net loss
e) Personal drawing

Illustrative Problem: (Distribution of Profit or Loss)

The capital accounts of Castro and Diaz show the following facts for the fiscal year ended December 31, 2019.
Castro Diaz
Jan. 1 Balance P 260,000 Jan. 1 Balance P 165,000
Mar. 30 Investment 30,000 May 18 Investment 50000
May 10 Investment 70,000 Aug. 24 Withdrawal 20000
July 25 Withdrawal 40,000 Dec. 31 Balance 195,000
Dec. 31 Balance 320,000

The Income Summary account shows a credit balance of P 240,000 on December 31, 2019.

REQUIRED:
A. Prepare a schedule of profit distribution and journal entries to close the Income Summary account under
the
following independent agreements on the division of profits and losses:
1. Equally
2. 2:1 ratio
3. Capital Balances
a) Beginning capital balances
b) Ending capital balances
c) Average capital balances
1. simple average
2. peso months method (weighted average) Investments and withdrawals are to be
considered as made at the beginning of the month if made before the middle of the
month, and are to be considered as made at the beginning of the following month if
made after the middle of the month.

4. Interest of 24% on average capitals, salaries to Castro and Diaz of P 72,000 and P 48,000,
 20

respectively and any balance equally. (Investments and withdrawals are to be considered as in 3.c.2.

5. Allowance to Castro of a bonus of 20% of the net profit before bonus, interest of 10% to be allowed
on beginning capitals and any balance in the ratio of 3:2 to Castro and Diaz, respectively.

6. Allowance to Castro of a bonus of 20% of net profit after bonus, interest of 10% to be allowed on
ending capital balances, Annual Salaries to Castro and Diaz of P 80,000 and P 75,000, respectively
and balance divided in equally.
7. Salaries of P 8,000 and P 6,000 a month to Castro and Diaz, respectively, 10% interest on ending
Capital balances, 25% bonus to Castro on net profit after deducting salaries, interest and bonus, any
Balance divided equally.

8. Salaries of P 11,000 and P 10,000 a month to Castro and Diaz, respectively, 10% interest on ending
capital balances, 25% bonus to Castro on net profit after deducting salaries, interest and bonus, any
balance divided equally.

9. Salaries of P 12,000 and P 10,000 a month to Castro and Diaz, respectively, provided annual
earnings
are sufficient to cover salary allowance; if earnings are insufficient, the profit shall be distributed in
the salary ratio; if operations result in a loss, it shall be distributed equally.

B. Assuming the Income Summary account shows a debit balance of P 75,000, prepare journal entries and
schedule of profit and loss distribution under req. A – 2 and 7.

C. Prepare a Statement of Changes in Partners’ Equity for req. A. 7.

Solution:
A.1 – Equally
Date Particulars PR Debit Credit
2019
Dec. 31 Income Summay 240,000
Castro, capital 120,000
Diaz, Capital 120,000
Profit distributed equally

Schedule of profit distribution - equally:

 Equally : P 240,000 / 2 = P 120,000

2. Arbitrary ratio : 2:1 ratio

Date Particulars PR Debit Credit
2019
Dec. 31 Income Summay 240,000
Castro, capital 160,000
Diaz, Capital 80,000
Profit distributed 2:1 ratio

Schedule of profit distribution based on 2:1 ratio:

Castro = 2/3 x P 240,000 = P 160,000
Diaz = 1/3 x P 240,000 = P 80,000

3. Capital balances:

a) Beginning Capital Balances:

Date Particulars PR Debit Credit
2019
Dec. 31 Income Summay 240,000
 21

Castro, capital 146,824

Diaz, Capital 93,176
Profit distributed based on beginning
capital balances.

Schedule of profit distribution based on beginning Capital balances:

Castro = 260,000 = 260/425 x 240,000 = 146,824
Diaz = 165,000 = 165/425 x 240,000= 93,176
425,000 240,000

b) Ending Capital balances

Date Particulars PR Debit Credit

2019
Dec. 31 Income Summay 240,000
Castro, capital 149,126
Diaz, Capital 90,874
Profit distributed based on ending capital
balances

Schedule of profit distribution based on ending capital balances:

Castro = 320,000 = 320/515 x 240,000 = 149,126
Diaz = 195,000 = 195/515 x 240,000 = 90,874
515,000 240,000

c. Average Capital

1. Simple Average:
Date Particulars PR Debit Credit
2019
Dec. 31 Income Summay 240,000
Castro, capital 148,085
Diaz, Capital 91,915
Profit distributed based on simple
average capital balances

Schedule of Profit distribution based on Simple average capital balances:

Castro Diaz Total
Balance, January 1 260,000 165,000
December 31 320,000 195,000
Total 580,000 360,000

Simple average capital (Total/2) 290,000 180,000 470,000

Computation:
Castro= 290,000/470,000 x 240,000 148,085 140,085
Diaz = 180,000/470,000 x 240,000 91,915 91,915
Profit distributed 148,085 91,915 240,000

2. Weighted Average or Peso Months Method

Date Particulars PR Debit Credit

2019
Dec. 31 Income Summay 240,000
 22

Castro, capital 148,085

Diaz, Capital 91,915
Profit distributed based on simple
average capital balances

Schedule of Profit distribution:

Castro = 312,500 = 312,500/500,000 x 240,000 = 150,000
Diaz = 187,500 = 187,500/500,000 x 240,000 = 90,000
500,000 240,000

To compute for weighted average capital balances:

Castro, Capital: Diaz, Capital :

Date Capital Fraction of Average Date Capital Fraction of Average
Balance Year Capital Balance Year Capital
Unchanged Unchanged
1/1 260,000 3/12 65,000 1/1 165,000 5/12 68,750
4/1 290,000 1/12 24,167 6/1 215,000 3/12 53,750
5/1 360,000 3/12 90,000 9/1 195,000 4/12 65,000
8/1 320,000 5/12 133,333 Average capital 187,500
Average capital 312,500

4. Interest of 24% on average capitals, salaries to Castro and Diaz of P 72,000 and P 48,000, respectively
and any balance equally. (Investments and withdrawals are to be considered as in 3.c.2.

Date Particulars PR Debit Credit

2019
Dec. 31 Income Summay 240,000
Castro, capital 147,000
Diaz, Capital 93,000
Profit distribution.

Schedule of Profit distribution:

Castro Diaz Total
24% interest on average capital 75,000 45,000 120,000
Salaries 72,000 48,000 120,000
Net income distribution 147,000 93,000 240,000

5. Allowance to Castro of a bonus of 20% of the net profit before bonus, interest of 10% to be allowed on
beginning capitals and any balance in the ratio of 3:2 to Castro and Diaz, respectively.

Date Particulars PR Debit Credit

2019
Dec. 31 Income Summay 240,000
Castro, capital 163,700
Diaz, Capital 76,300
Profit distribution.

Schedule of profit distribution

Castro Diaz Total
 23

20% bonus to Castro 48,000 48,000

10% interest on beginning capital 26,000 16,500 42,500
Balance 3:2 89,700 59,800 149,500
163,700 76,300 240,000

 To compute bonus = 240,000 x 20% = 48,000

6. Allowance to Castro of a bonus of 20% of net profit after bonus, interest of 10% to be allowed on ending
capital balances, Annual Salaries to Castro and Diaz of P 80,000 and P 75,000, respectively and balance
divided in equally.
Date Particulars PR Debit Credit
2019
Dec. 31 Income Summay 240,000
Castro, capital 148,750
Diaz, Capital 91,250
Profit distribution.

Schedule of Profit distribution:

Castro Diaz Total
20% bonus of net profit after bonus 40,000 40,000
10% interest on ending cap 32,000 19,500 51,500
Salaries 80,000 75,000 155,000
Balance – equally ( 3,250) ( 3,250) ( 6,500)
148,750 91,250 240,000

To compute bonus: Bonus is 20% of Net income after Bonus:

Net income before bonus 120% 240,000
Less: Bonus 20% 40,000
Net income after bonus 100% 200,000

Net income after bonus = 240,000/120% = P 200,000

Bonus = 200,000 x 20% = 40,000

7. Salaries of P 8,000 and P 6,000 a month to Castro and Diaz, respectively, 10% interest on ending capital
balances, 25% bonus to Castro on net profit after deducting salaries, interest and bonus, any balance
divided equally.

Date Particulars PR Debit Credit

2019
Dec. 31 Income Summay 240,000
Castro, capital 140,300
Diaz, Capital 99,700
Profit distribution.

Schedule of profit distribution

Castro Diaz Total

Salaries 96,000 72,000 168,000
10% interest ending 32,000 19,500 51,500
25% bonus 4,100 4,100
Balance – equally 8,200 8,200 16,400
140,300 99,700 240,000

To compute bonus: Bonus is 25% of Net income after Salaries, interest and Bonus:

Net income before bonus 240,000

 24

Less: Salaries 168,000

Interest 51,500 219,500
Net income after salaries and interest but before bonus 20,500 125%
Less: Bonus 4,100 25%
Net income after bonus 16,400 100%

Net income after salaries and interest but before bonus = 20,500/125% = P 16,400
Bonus = 16,400 x 25% = 4,100

 Base is always equal to 100%

8. Salaries of P 11,000 and P 10,000 a month to Castro and Diaz, respectively, 10% interest on ending capital
balances, 25% bonus to Castro on net profit after deducting salaries, interest and bonus, any balance divided
equally.

Date Particulars PR Debit Credit

2019
Dec. 31 Income Summay 240,000
Castro, capital 132,250
Diaz, Capital 107,750
Profit distribution.

Schedule of Profit distribution:

Castro Diaz Total
Salaries 132,000 120,000 252,000
10% on ending cap. 32,000 19,500 51,500
Balance equally ( 31,750) ( 31,750) ( 63,500)
132,250 107,750 240,000

To compute bonus: Bonus is 20% of Net income after Salaries, interest and Bonus:
Net income before bonus 240,000
Less: Salaries 252,000
Interest 51,500 303,500
Net income after salaries and interest but before bonus (63,500)

 Bonus is not applicable because the base is negative.

9. Salaries of P 12,000 and P 10,000 a month to Castro and Diaz, respectively, provided annual earnings are
sufficient to cover salary allowance; if earnings are insufficient, the profit shall be distributed in the salary
ratio; if operations result in a loss, it shall be distributed equally.

Date Particulars PR Debit Credit

2019
Dec. 31 Income Summay 240,000
Casto, capital 130,909
Diaz, Capital 109,091
Profit distribution.

Schedule of Profit distribution based on salary ratio:

Castro Diaz Total
Castro: 144,000/264,000 x 240,000 131,908 130,909
Diaz: 120,000/264,000 x 240,000 109,924 109,091
240,000
 25

Net income is not sufficient to cover salary allowances:

Castro salary = 12,000 x 12 (12 months) 144,000
Diaz, salary = 10,000 x 10 (12 months) 120,000
Total Salaries 264,000

 Net income is not sufficient to cover salary allowances, profit is to be distributed based on
salary ratio.
B. Assuming the Income Summary account shows a debit balance of P 75,000, prepare journal entries and
schedule of profit and loss distribution under req. A - 2 and 7.

A.2. Arbitrary ratio : 2:1 ratio

Date Particulars PR Debit Credit
2019
Dec. 31 Castro, capital 50,000
Diaz, Capital 25,000
Income Summay 75,000
Loss distribution

Schedule of loss distribution based on 2:1 ratio:

Castro = 2/3 x 75,000 = 50,000
Diaz = 1/3 x 75,000 = 25,000

A.7 Salaries of P 8,000 and P 6,000 a month to Castro and Diaz, respectively, 10% interest on ending capital
balances, 25% bonus to Castro on net profit after deducting salaries, interest and bonus, any balance
divided equally.

Date Particulars PR Debit Credit

2019
Dec. 31 Castro, capital 19,250
Diaz, Capital 55,750
Income Summay 240,000
Profit distributed 2:1 ratio

Schedule of profit distribution

Castro Diaz Total
Salaries 96,000 72,000 168,000
10% interest ending 32,000 19,500 51,500
Balance (147,250) (147,250) (294,500)
( 19,250) ( 55,750) (75,000)

C. Prepare a Statement of Changes in Partners’ Equity for req. A. 7.

Castro and Diaz

Statement of Partners’ Equity
For the Year December 31, 2019

Castro Diaz Total

Capital balances, January 1, 2019 260,000 165,000 425,000
Add: additional investment 100,000 50,000 150,000
Total 360,000 215,000 575,000
Less: withdrawal 40,000 20,000 60,000
Capital balance before net income distribution 320,000 195,000 515,000
Net income distributed as follows:
Salaries 96,000 72,000 168,000
 26

10% interest ending 32,000 19,500 51,500

25% bonus 4,100 4,100
Balance – equally 8,200 8,200 16,400
Net share 140,300 99,700 240,000
Capital balances after net income distribution 460,300 294,700 755,000
Less: drawing (amounts assumed) 20,000 20,000 40,000
Capital balances, December 31, 2019 440,300 274,700 715,000

General Professional Partnership

 Formed for the exercise of profession and usually renders services based on the partners’ acquired
profession. Examples are CPAs, medical doctors, dentists, engineers and lawyers.

 Partnership net income is exempted from income tax.

 The partners’ distributive shares on the profit of the partnership shall be taxed in their separate and
individual capacities as individual taxpayers.

To illustrate:

Manny and Timmy formed a partnership named MT Partnership with a net income before tax of P 200,000. It
was agreed that the partners should share profits and loss equally.

a) If the partnership is a general partnership

1) To record the tax liability of the partnership ( taxed like a corporation = 30% of taxable income)
Date Particulars PR Debit Credit
2019
Dec. 31 Income tax expense 60,000
Income tax payable 60,000
Income tax payable.

2) to record the disitribution of profit

Date Particulars PR Debit Credit
2019
Dec. 31 Income Summary 140,000
Manny, capital 70,000
Timmy, capital 70,000
Profit distribution

b) If the partnership is a general professional partnership

1) Exempted from income tax liability

2) to record profit distribution:

Date Particulars PR Debit Credit
2019
Dec. 31 Income Summary 200,000
Manny, capital 100,000
Timmy, capital 100,000
Profit distribution

Partnership Working Papers and Financial Statements

 27

 The principle of preparing the worksheet and financial statements of a partnership is the same as that of
the sole proprietorship except that in the partnership there are more than one accounts representing
partner’s capital and partner’s drawing.

Unit I – Partnership Formation and Operation

Lesson 3 – Partnership Operation

Activity 1

Problem 1:

The partnership of Dino and Dante are engaged in trading. Dino’s original capital was P 40,000 and
Dante was P 600,000. They agree to share profits and losses as follows:
Dino Dante
Annual salaries P 68,000 P 80,000
As interest on original capital 10% 10%
Bonus on net income after salaries, interest but
before deducting bonus 25%
Remaining profits and losses 30% 70%

Prepare the schedule of profit distribution and journal entry to close Income Summary account for the year
ended December 31, 2020, assuming:

1. The Income Summary account shows a credit balance of P 280,000.

2. The Income Summary account shows a credit balance of P 125,000.

3. The Income Summary account shows a debit balance of P 120,000.

(Note: for journal entries, please use the general journal format below. )

Date Particulars PR Debit Credit

Problem 2:

The following balance sheet for MTJ Partnership is dated September 30, 2020:

Cash P 40,000 Liabilities P 100,000

Other Assets 360,000 M, Capital 74,000
T, Capital 130,000
________ J, Capital __96,000
P 400,000 P 400,000

The partners agreed to distribute the profits as follows:

1. Allow annual salaries to M and T of P 48,000 each.
2. Allow interest of 6% on beginning capital of all partners.
3. Allow bonus to T of 10% of net income after salaries, interest and bonus
4. Remaining: 40% to M, 40% to T and 20% to J.

If the net income of the partnership was P 61,500 during the three-month period ending December 31, 2020,
 28

determine the share of each partner on the net income.

Problem 3:

SS and GG are partners in SG Partnership begins its first year of operations on June 1, 2019 with the following
capital balances:
SS, Capital P 1,440,000
GG, Capital 720,000

According to the partnership agreement, all profits and losses will be distributed as follows:
 SS will be allowed an annual salary of P 960,000 will GG will be allowed a monthly salary of P 112,000.
 The partners will be allowed with an interest equal to 15% of the capital balance as of the first day of the
year.
 GG will be allowed a bonus of 12% of the net income after bonus.
 The remainder will be divided equally.
 Each partner is allowed to withdraw up to P 72,000 on the first year and up to P 96,000 the following
year and for the next three years.

Assume that the results of operations in 2019 from the date of formation is P 560,000 net income and
P 280,000 net loss the following year. Assume further that each partner withdraws the maximum amount from
the business each period.

Q1. The share of SS in 2019 net income: ______________________________

Q2. The capital balance of SS at the end of 2019 ________________________

Q3. The share of GG in 2020 net loss _________________________________

Q4. Which of the following statements is wrong?

a) The capital balance of SS at the end of 2019 is P 1,242,925
b) The share of GG in the net loss in 2019 is a credit to capital account of P 14,575.
c) There is a net increase of P 97,500 in the capital account of SSS from the beginning to end of 2020.
d) The capital balance of GG at the end of year 2019 is P 1,038,500.

Problem 4.

Ace, Beni Dani and are partners whose capital accounts with the ABC Partnership as of January 1, 2020 and
the subsequent changes therein are as follows:

Jan. 1, 2020 Additional Investment Withdrawals

Ace P 300,000 P 210,000 P 90,000

Beni 200,000 120,000 160,000
Dani 150,000 100,000 50,000

Net income for 2020 amounts to P 323,000 and per agreement, this is to be distributed as follows: Salary
allowance of P10,000 per month to Ace and P 7,000 per month to Beni, 10% interest on beginning capital
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balances, 20% bonus to Ace on net income before interest but after salaries and bonus, remainder to be
divided in the ratio of 2:2:1 between Ace. Beni and Dan, respectively. The temporary withdrawals of Ace, Beni
and Dani were P 75,000, P 50,000 and P 35,000, respectively.

REQ: Prepare the statement of Partners’ Capital.

Unit I – Partnership Formation and Operation

Lesson 3 – Partnership Operation

Activity 2 – Multiple Choice Problems. Answers must be supported with computation.

1. C, D and E share in the partnership’s profit and losses in the ratio of 3:4:5. During the year, the partnership’s
distributive income is P 1,500,000. What is the amount of E’s share from the partnership’s income?

a) P 750,000 b) P 625,000 c) P 500,000 d) P 125,000

2. A and B share in the partnership’s profit in the ratio of 2:1, respectively. A received P 245,000 as his share.
How much di B receive as his share?

a) P 367,000 b) P 245,000 c) P 122,500 d) P 122,000

3 After closing the nominal accounts on December 31, 2015, the Income Summary account shows a debit
balance of P200,000. If partners D, E and F have income ratios of 50%, 30% and 20%, respectively, how
much is the share of F from the net income (loss) of the partnership?

a) 60,000 b) P 40,000 c) P (40,000) d) (P 100,000)

for 4 – 5:
X, Y and Z, a partnership formed on January 1, 2020 had the following initial investment:
X P 100,000
Y 150,000
Z 225,000

The partnership agreement states that the profits and losses are to be shared equally by the partners after
Consideration is made for the following:
 Salaries allowed to partners: P 60,000 for X, P 48,000 for Y and P 36,000 for Z.
 Average partners’ capital balances during the year shall be allowed 10%.

Additional information:
 On June 30, 2020, X invested an additional P 60,000.
 ZZ withdrew P 70,000 from the partnership on September 30, 2020
 Share on the remaining partnership profit was P 5,000 for each partner.

4. Interest on average capital balances of the partners totaled:

a) P 53,750 b) P 48,750 c) P 60,625 d) P 57,625

5. Partnership net profit at December 31, 2020 before salaries, interests and partners’ share on the remainder
was:
a) P 207,750 b) P 199,750 c) P 211,625 d) P 222,750

6. Total assets before partnership formation are P 800,000 and MM’s assets are P 450,000. Total liabilities before
partnership formation are P 400,000 and NN’s liabilities are P 175,000. They decided to become partners on
January 1, 2020. They agreed on the following adjustments: NN’s assets are understated by P 15,000 and
there is a note payable that he wants to settle outside of the partnership agreement which is still included in
his books amounting to P 13,000. On the other hand, MM has and accounts receivable with an overvalued
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allowance for bad debts for P 12,000.During the year NN withdrew P 17,000 on March 21 and made
investment
of P 35,000 on August 8, while MM made an investment of P 55,000 on April 8 and made another investment
of P 12,500 on November 14. For the year, the partnership had a credit balance in the income summary
account
of P 450,000. The tax rate during the year is 32%. They also agreed that the net income or loss should be
distributed as follows: 8% interest on the beginning capital and the remainder will be shared in the ratio 2:3
for
MM and NN respectively. The net income is earned or net loss is incurred evenly during the year.

How much is the ending capital of MM on December 31, 20120:

a) P 504,760 b) P 489,380 c) P 486,120 d) P 463,460

7. On January 2, 2020, BB and EE formed a partnership. BB contributed capital of P 175,000 and EE, P 25,000.
They agreed to share profits and losses 80% and 20%, respectively. EE is the general manager and works
in the partnership full time and is given a salary of P 5,000 a month; an interest of 5% of the beginning
capital (of both partners) and a bonus of 15% of net income before the salary, interest and bonus. The profit
and loss statement of the partnership for the year ended December 31, 2020 is as follows:

Net Sales P 875,000

Cost of good sold 700,000
Gross Profit P 175,000
Expenses ( including salary, interest and bonus) 143,000
Net income P 32,000

The amount of bonus to EE amounted to:

a) P 13,304 b) P 16,456 c) P 18,000 d) P 20,700

8. Helen and Fenny are partners operating grocery store. Their partnership agreement requires that profits and
losses be divided as follows:
Helen Fenny
Salaries P 20,000 None
Commission on gross sales None 2%
Interest on average capital balances 8% 8%
Bonus 20% of net income before None
commission and interest but
after salaries and bonus
Remainder 60% 40%

Gross Sales for 2020 were P 1,250,000. Income before deducting amounts for salary, commission, interest and
bonus were P200,000. Average capital balances of Helen and Fenny are P 400,000 and P420,000 respectively.
What are the profit share of Helen and Fenny respectively?

a) P 117,640 and P 82,360 c) P 110,640 and P 89,360

b) P 35,460 and P 23,760 d) P 117,460 and P 82,540

9. Dan, Jerry and Fred form a partnership and agree to maintain average investments of P 2,500,000,
P1,250,000 and P 1,250,000, respectively. The partners agree to divide profits and losses as follows:

 Interest of 6% on the excess or deficiency in the capital investments

 Remainder to shared in the ratio of 5:3:2 to Dan, Jerry and Fred, respectively.

Average investments made during the first six months were as follows: Dan, P 3,000,000; Jerry, P1,375,000;
Fred, P 1,000,000. A loss from operations of P 62,500 was incurred for the first six months. How is this loss
distributed among the partners?

Dan Jerry Fred Dan Jerry Fred

a) P 21,875 P 18,375 P 22,250 c) P 31,250 P 18,750 P 12,500
b) 12,500 10,000 48,500 d) 18,375 21,875 22,250
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10. On December 31, 2020, the total partnership capital for GDK partnership is P 422,000. Selected information
related to the pre-closing capital balance is as follows:
Gee Dee Kay Total
Balance, January 1 P 140,000 P 100,000 P 160,000 P 400,000
Investment, 2020 20,000 20,000 40,000
Withdrawals, 2020 (30,000) (30,000) (60,000)
Drawings, 2020 (10,000) (10,000) (10,000) (30,000)
P 100,000 P 110,000 P 140,000 P 350,000

How much is the partnership net income during the year?

a) P 72,000 b) P 102,000 c) P 42,000 d) P 22,000
End