Illustration 1.

1: Salaries (w/ remaining profit) – different P/L ratios

A and B formed a partnership. The partnership agreement stipulates the following:

 Annual salary allowances of P50,000 for A and P30,000 for B. Salary allowances
are to be withdrawn by the partners throughout the period and are to be debited
to their respective drawings accounts.
 The partners share profits equally and losses on a 60:40 ratio.

During the period the partnership earned profit of P100,000 before salary allowances.

Requirements:
a. Compute for the respective shares of the partners in the profit.
b. Provide journal entries

Solution:

Requirement (a):

A B Total
Amount being allocated 100,000
Allocation:
1. Salaries 50,000 30,000 80,000
2. Allocation of remaining profit
(100K profit – 80K salaries) = 20K
(20k x 50%); (20K x 50%)
10,000 10,000 20,000
As allocated 60,000 40,000 100,000

Notes:
 ® Salaries are provided first and the remaining amount is allocated based on the
profit sharing ratio.
® The sum of the amounts allocated to the partners is equal to the amount being
allocated (i.e., 60K + 40K = 100K)

Requirement (b):

Monthly A, Drawings 50,000

Entries B, Drawings 30,000
Cash 80,000
To record the withdrawal of salary allowances
Year-end Income summary 100,000
Entry A, Capital 60,000
B, Capital 40,000
To record the distribution of profit

A, Capital 50,000
Entry B, Capital 30,000
A, Drawings 50,000
B, Drawings 30,000
To close the drawings accounts

Illustration 1.2: Salaries (no remaining profit) – different P/L ratios

A and B formed a partnership. The partnership agreement stipulates the following:

o Annual salary allowances of P80,000 for A and P40,000 for B.
o The partners share profits equally and losses on a 60:40 ratio.

During the period there partnership earned profit of P100,000.

Requirement: Compute for the respective shares of the partners in the profit.
Solution:

A B Total
Amount being allocated 100,000
Allocation:
1. Salaries 80,000 40,000 120,000
2. Allocation of remaining profit
(100K profit – 120K salaries) = -20K
(-20k x 60%); (-20K x 40%)
-12,000 -8,000 -20,000
As allocated 68,000 32,000 100,000

Notes:
® After the salaries are provided, the remaining amount is negative (i.e., loss); thus,
it is allocated based on the stipulated loss ratio of 60:40.
® The sum of the amounts allocated to the partners is equal to the amount being
allocated (i.e., 68K + 32K = 100K)

Illustration 1.3: No P/L ratio

A and B formed a partnership on January 1, 20x1. Their contributions were credited to

their respective capital accounts as follows:
Capital
accounts
A, Capital 150,000
B, Capital 250,000
400,000

During the year, the partnership earned profit of P1,000,000. There was no stipulation in
the agreement on how profits are to be shared by the partners.
Requirement: Compute for the respective shares of the partners in the profit.

Solution:

A B Total
Amount being allocated 1,000,000
Allocation: (based on contributions)
1M x (150K/400K) 375,000 375,000
1M x (250K/400K) 625,000 625,000
As allocated 375,000 625,000 1,000,000

Illustration 2.1: Bonus (with profit)

A and B formed a partnership. The partnership agreement stipulates the following:

 Annual salary allowances of P48,000 for A and P30,000 for B.
 Bonus to A of 10% of the profit after partner’s salaries and the bonus.
 The partners share profits and losses on a 60:40 ratio.

During the period the partnership earned profit of P100,000 before deductions for
salaries and bonus.

Requirement:

Compute for the respective share of the partners in the profit.

Solution:
A B Total
Amount being allocated 100,000
Allocation:
1. Salaries 48,000 30,000 78,000
 2. Bonus after bonusa 2,000 2,000
3. Allocation of remaining profit
(100K-78K-2K) = 20K
(20Kx60%); (20Kx40%)
12,000 8,000 20,000
As allocated 62,000 38,000 100,000

a
The bonus is computed as follows:

Profit before salaries and bonus 100,000

Salaries (78,000)
Profit after salaries but before deduction of 22,000
bonus

The bonus scheme is “bonus after bonus.” The formula is as follows:

P
B= P - 1 + Br

Where: B = bonus
P = profit before bonus and tax
Br = bonus rate or bonus percentage

22,000
B= 22,000 - 1 + 10%
B= 22,000 - 20,000
B= 2,000
Illustration 2.2: Bonus (with loss)

A and B formed a partnership. The partnership agreement stipulates the following:

  Annual salary allowances of P25,000 for A and P4,000 for B.
 Bonus to A of 10% of the profit after partner’s salaries and bonus.
 The partners share profits and losses on a 60:40 ratio.

During the period the partnership incurred loss of P10,000 before deduction for salaries.

Requirements:
a. Compute for the respective shares of the partners in the profit.
b. By what amount did A’s capital account change?

Solutions:

Requirement(a):

A B Total
Amount being allocated (10,000)
Allocation:
1. Salaries 25,000 4,000 29,000
2. Bonus after bonusb - - -
3. Allocation of remaining loss
(-10K-29K) = -39K
(-39Kx60%); (-39Kx40%)
(23,400) (15,600) (39,000)
As allocated 1,600 (11,600) (10,000)

b
No bonus is allocated because the partnership incurred a loss. However, salaries are
provided whether the partnership earns profit or incurs loss because salaries are
compensation for services rendered.

Illustration 2.3: Bonus – with Limit

A and B formed a partnership. The partnership agreement stipulates the following:

  First, A shall receive 10% profit up to P100,000 and 20% over P100,000.
 Second, B shall receive 5% of the remaining profit over P150,000.
 Any remainder shall be shared equally.

During the year, the partnership earned profit of P280,000.

Requirement: Compute for the respective shares of the partners in the profit.

Solution:

A B Total
Amount being allocated 280,000
Allocation:
1. Bonus to A
First 100K: (100Kx10%)
Over 100K: [(280K-100K)x20%] 10,000 10,000
36,000 36,000
2. Bonus to B on remaining profit
(280K-10K-36K-150K)x5%
4,200 4,200
3. Allocation of remaining profit
(280K-10K-36K-4.2K) / 2
114,900 114,900 229,800
As allocated 160,900 119,100 280,000

Illustration 2.4: Bonus – choice of profit-sharing scheme

Mr. A, a partner in ABC Co., is deciding on whether to accept a salary of P8,000 or a

salary of P5,000 plus a bonus of 10% of profit. The bonus shall be computed on profit
after salaries and bonus. Salaries of the other partners amount to P20,000.

Requirement: What amount of profit would be necessary so that Mr. A would be

indifferent between the choices?
Solution:
An algebraic equation is developed from the two choices above.

Let X = profit after salaries and bonus

10%X = bonus after bonus

Choice #1 Choice #2
8,000 salary = 5,000 salary + 10%X

X is computed from the equation above as follows:

8,000 = 5,000 + 10%X

10%X = 8,000 – 5,000
X = 3,000 / 10%
X = 30,000

Profit after salaries and bonus (X) 30,000

Multiply by: Bonus rate 10%
Bonus 3,000

Profit after salaries and bonus 30,000

Add back: Salaries (5K to Mr. A + 20K to other 25,000
partners)
Add back: Bonus 3,000
Profit before salaries and bonus 58,000

If the profit of the partnership is P58,000, it does not matter whether Mr. A chooses to
receive a salary of P8,000 (‘choice #1’) or a salary of P5,000 plus a 10% bonus (choice
#2); he will receive the same amount.
Checking:

Choice #1 Choice #2
8,000 salary = 5,000 salary + bonus

The bonus is computed as follows:

Profit before salaries and bonus 58,000

Salaries (5K + 20K) (25,000)
Profit after salaries but before bonus 33,000

P
B= P - 1 + Br

33,000
B= 33,000 - 1 + 10%
B= 33,000 - 30,000
B= 3,000

Choice #1 Choice #2
8,000 salary = 5,000 salary + 3,000 bonus

Illustration 2.5: Bonus – comparison of profit-sharing scheme

A and B formed a partnership. The partnership agreement stipulates the following:

 Bonus to A of 10% of the profit before bonus.
 The partners share profits equally and losses in the ratio of 2:3, respectively.

Requirement: Which partner has a greater advantage when the partnership has a profit
or when it has a loss?
Solution:

Let: B = bonus
P = profit after deducting bonus
L = loss without deducting any bonus

1. When there is profit, the profit shall be shared as follows:

A’s share B’s share

Bonus + (50%P) > 50%P

2. When there is loss, the loss shall be shared as follows:

A’s share B’s share
2/5 L < 3/5 L

From the analyses above, we can conclude that A has a greater advantage
whether the partnership earns profit or incurs loss.

Illustration 3.1: Interest on capital

A and B formed a partnership. The partnership agreement stipulates the following:

 Annual salary allowance of P50,000 for A.
 Interest of 10% on the weighted average capital balance of B.
 The partners share profits and losses on a 60:40 ratio.

During the period, the partnership earned profit of P100,000.

The movements in B’s capital account are as follows:

B, Capital
 6,000 Beg
20,000 April 1 additional investment
Jul 31 withdrawal 30,000 40,000 Sept 30 additional investment
10,000 Dec 31 additional investment
End 10,000

Requirement:
Compute for the respective shares of the partners in profit.

Solution:
The weighted average balance of B’s capital account is computed as follows:

Months
outstanding
/ Total
months in a Weighted
year Average
Balances
Beg. Balance 60,000 12/12 60,000
April 1 additional investment 20,000 9/12 15,000
July 31 withdrawal (30,000) 5/12 (12,500)
Sept 30 additional investment 40,000 3/12 10,000
Dec 31 additional investment 10,000 0/12 -
Weighted average capital balance 72,500

A B Total
Amount being allocated 100,000
Allocation:
1. Salaries 50,000 - 50,000
 2. Interest on weighted ave. capital
Balance (72.5K x 10%)
- 7,250 7,250
3. Allocation of the remaining profit
(100K-50K-7.250K) = 42.750K
(42,750 x 60%); (42,750 x 40%)
26,250 17,100 42,750
As allocated 76,650 24,350 100,000

Illustration 3.2: Interest on capital and bonus

A and B formed a partnership. The partnership agreement stipulates the following:

 Monthly salary of P5,000 for A.
 20% bonus to A, before deductions for salary, interest, and bonus.
 10% interest on the weighted average capital of B.
 Salary, bonus and interest are considered partnership expenses.

The results of operations show the following:

Revenues 150,000
Expenses (including salary, interest, and bonus) (120,000)
Profit 30,000

The weighted average capital balance of B’s capital account is P100,000.

Requirement: How much is the bonus of A?

Solution:

Profit (given) 30,000

Add back: Annual salary (5,000 x 12 mos.) 60,000
Add back: Interest on capital (100K x 10%) 10,000
Profit before annual salary and interest but after 100,000
bonus

Profit before salary and interest but after bonus 100,000

Divide by: (100% less 20% bonus rate) 80%
Profit before salary, interest and bonus 125,000
Multiply by: Bonus rate 25%
Bonus (bonus before bonus scheme) 25,000

Illustration 3.3: Interest on capital – Partial year

A and B formed a partnership on March 1, 20x1. The partnership agreement stipulates
the following:
 Annual salary allowance of P50,000 for A.
 Interest of 10% on the weighted average capital balance of B.
 The partners share profits and losses on a 60:40 ratio.

During the period, the partnership earned profit of P100,000.

The movements in B’s capital account are as follows:

B, Capital
80,000 Mar 1 initial investment
Jul 31 withdrawal 30,000 40,000 Sept 30 additional investment
10,000 Dec 31 additional investment
End 100,000

Requirement: Compute for the interest on B’s weighted average capital.

Solution:
 Months
outstanding
/ Total
months in a Weighted
year Average
Balances
March 1 Beg. Balance 80,000 10*/12 66,667
July 31 withdrawal (30,000) 5/12 (12,500)
Sept 30 additional investment 40,000 3/12 10,000
Dec 31 additional investment 10,000 0/12 -
Weighted average capital balance 64,167
Multiply by: Interest rate 10%
Interest on weighted average 6,417
capital

*Months outstanding (March 1 to December 31)

Notice that the solution above is similar to the solution we had in ‘Illustration 3.1’ for a
full year.

Alternative Solution #1:

Months
outstanding /
Total
months in a Weighted
year Average
Balances
March 1Beg. Balance 80,000 10/10* 80,000
July 31 withdrawal (30,000) 5/10 (15,000)
Sept 30 additional investment 40,000 3/10 12,000
Dec 31 additional investment 10,000 0/10 -
Total 77,000
Multiply by: Interest rate 10%
Total 7,700
Multiply by: 10/12
Interest on weighted average 6,417
capital

Alternative solution #2:

No. of
months the
running
balance is
outstandin
g until the
next
transaction

Amount of Running
transaction balance
Totals
s
a B= c d=bxc
previous
bal. + a
March 1Beg. Balance 80,000 80,000 5* 400,000
July 31 withdrawal (30,000) 50,000 2** 100,000
Sept 30 additional 40,000 90,000 3 270,000
investment
Dec 31 additional 10,000 100,000 0 -
investment
Total 770,000
Divide by: No. of months in 10
the period
Total 77,000
Multiply by: Interest rate 10%
Multiply by: Months 10/12
outstanding
Interest on weighted 6,417
average capital

*
(from March 1 to July 31 is 5 months)
**
(from July 31 to Sept. 30 is 2 months)
Illustration 3.4: Interest on capital – With limit

A and B formed a partnership. The partnership agreement stipulates the following:

 A and B shall maintain average investments of P100,000 and P150,000,
respectively. Interest on the excess or deficiency in a capital contribution is to be
computed at 10% per annum.
 After interest allowances, the partners share profits and losses on a 60:40 ratio.

During the first six months of operations, the partnership incurred loss amounting to
P60,000. The average capital balances of the partners during this period were
P120,000 and P110,000, respectively.

Requirement: Compute for the respective shares of the partners in the loss.

Solution:
The interest on the excess or deficiency on capital contribution is computed as follows:

A B
Capital balance to be maintained 100,000 150,000
Actual average balance 120,000 110,000
Excess (deficiency) 20,000 (40,000)
Multiply by: Interest rate 10% 10%
Multiply by: Months outstanding 6/12 6/12
Interest to (from) 1,000 (2,000)
 A B Total
Amount being allocated (60,000)
Allocation:
1. Interest to (from) 1,000 (2,000) (1,000)
2. Allocation of remaining loss
[-60K-(-1K)] = -59K
(-59K x 60%); (-59K x 40%)
(35,400) (23,600) (59,000)
As allocated (34,400) (25,600) (60,000)

Illustration 4.1: Partner’s capital account

A and B formed a partnership and began operations on March 1, 20x1. A invested

P100,000 cash while B invested equipment with a book value of P300,000 and a fair
value of P180,000. On August 31, 20x1, A invested additional cash of P20,000. The
partnership agreement stipulates the following:
 Monthly salary allowances of P2,000 and P10,000 to A and B, respectively,
recognized as expenses.
 20% bonus on profit before salaries and interest but after bonus to B.
 12% annual interest on the beginning capital of A.
 Balance equally.

The monthly salaries are withdrawn by the partners at each month-end. The
partnership earned profit of P210,000 during the period before deductions of bonus and
interest.

Requirement: Compute the ending balances of the capital accounts of the partners.

Solution:
The amount of profit given in the problem is already net of the monthly salaries which
were recognized as expenses. Thus, the gross amount of profit subject to allocation
needs to be recomputed first.

Profit (after deduction of monthly salaries) 210,000

Add back: Monthly salaries (2K x 10 mos.) + 10K x 10 120,000
mos)
Profit before salaries (Amount to be allocated) 330,000

The interest on capital and bonus are not yet deducted from the profit figure given in the
problem. Unlike for monthly salaries which are withdrawn periodically (i.e., monthly
basis), interests and bonuses are normally computed only at year-end.

Thus, we cannot validly assume that these items were already recognized during the
period.

The profit before salaries, interest and bonus is allocated as follows:

A B Total
Amount being allocated (see computation 330,000
above)
Allocation:
1. Salaries 20,000 100,000 120,000
2. Bonusa 55,000 55,000
3. Interest (100K x 12% x 10/12) 10,000 - 10,000
4. Allocation of remaining profit
(330K – 120L – 55K – 10K) /2
72,500 72,500 145,000
As allocated 102,500 227,500 330,000

a
The bonus after bonus is computed as follows:

P
B= P - 1 + Br

330,000
 B= 330,000 1 + 20%
-
B= 330,000 275,000
-
B= 55,000

The ending balances of the partner’s respective capital accounts are computed as
follows:

A B
Capital, beg. 100,000 180,000
Additional investment 20,000 -
Share in profit 102,500 227,500
Drawings (monthly salaries) (20,000) (100,000)
Capital, end. 202,500 307,500

Illustration 4.2: Reconstruction of information

Partner A has a 25% participation in the profits of a partnership. During the year, A’s
capital account has a net increase of P10,000. Partner A made contributions of P40,000
and capital withdrawals of P60,000 during the year.

Requirement: How much profit did the partnership earn during the year?

Solution:
A, Capital
- Beg.
Withdrawals 60,000 40,000 Additional investment
30,000 Share in profit (squeeze)
End 10,000
A’s share in profit 30,000
Divide by: A’s P/L ratio 25%
Partnership’s profit 120,000

Illustration 4.3: Reconstruction of information – Required profit

The partnership agreement of partners A, B and C stipulates the following:

 A shall receive a salary of P20,000.
 Interest of 10% shall be computed on the partner’s capital contributions of
P20,000, P50,000 and P100,000.
 Balance is divided among the partners on a 2:3:5 ratio. However, the minimum
amounts that B and C shall receive if the partnership earns profit are P10,000
and P20,000, respectively, inclusive of interest and share in remaining profit.

Requirement: How much is the level of profit necessary so that A shall receive a total of
P25,000, inclusive of salaries, interest and share in remaining profit, and all of the other
partners shall receive their minimum allocable amounts?

Solution:

First step: Allocate the fixed amounts of salaries and interests to the partners.

A B C Total
20% 30% 50%
Salaries 20,000 20,000
Interests* 2,000 5,000 10,000 17,000

*(20x10%) – 2K; (50x10%) = 5K; (100x10%) = 10K

Second step: Reconstruct the profit-sharing column of partner A to his needed share of
P25,000
 A
20%
Salaries 20,000
Interests 2,000
Allocation of balance 3,000 (squeeze)

As allocated 25,000

The total amount of remaining profit for allocation to the partners is computed as
follows:

Allocation to A (from above) 3,000

Divide by: A’s P/L ratio 20%
Total amount for allocation 15,000

Third step: Allocated the computed remaining profit for allocation to partners.

A B C Total
20% 30% 50%
Salaries 20,000 20,000
Interests 2,000 5,000 10,000 17,000
Allocation of balance 3,000 4,500 7,500 15,000
As allocated 25,000 9,500 17,500 52,000

Fourth step: Adjust the shares of B and C to their minimum required shares in profit of
P10,000 and P20,000, respectively.

A B C Total
20% 30% 50%
Salaries 20,000 20,000
Interests 2,000 5,000 10,000 17,000
Allocation of balance 3,000 4,500 7,500 15,000
Additional profit (squeeze) 500 2,500 3,000
As allocated 25,000 10,000 20,000 55,000

Answer: From the table above, the partnership needs to earn profit of P55,000 so that
A shall receive a total share of P25,000 while partners B and C shall also receive their
minimum shares of P10,000 and P20,000, respectively.
Illustration 5: P/L ratio in fractions

The ABC Co., on which A, B and C are partners, reported profit of P90,000 during the
year.

Case #1:
If partners A, B and C have a profit sharing agreement of 1/6, 2/6 and 3/6, respectively,
how much are their respective shares in the profit?

Solution:
Partners Allocation of profit
A (90,000 x 1/6) 15,000
B (90,000 x 2/6) 30,000
C (90,000 x 3/6) 45,000
Total 90,000

Case #2:
If partners A, B and C have a profit-sharing agreement of 2:3:4, respectively, how much
are their respective shares in the profit?

Solution:
Partners Allocation of profit
 A (90,000 x 2/9*) 20,000
B (90,000 x 3/9) 30,000
C (90,000 x 4/9) 40,000
Total 90,000

*(9 = 2+3+4)