AFAR 1

1.0 Partnership Accounting

NATURE, SCOPE AND OBJECTIVES

Partnership
Legal Definition:
Art. 1767. By the 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. Two or more persons may also form a partnership for the exercise of a
profession.
Partnership is treated as an artificial being created by operation of law with a legal
personality separate and distinct from partners thereof. Philippine partnerships operate
under the concept of unlimited liability and unless otherwise agreed upon by partners, each
one of them acts as managers and agents of the partnership and consequently, their acts
bind the partnership.
Partnership in the Philippines are governed by and covered under Article 1767 to
1867 of the Civil Code of the Philippines. These are provisions of law which govern all
aspects of partnership from their creation, formation, existence, operation and management
to their dissolution and liquidation, including the obligation of the partners to one another, to
the public or third persons and to the government.

Characteristics of Partnership
1. Separate Personal Entity – partnership has a juridical personality separate from the
partners
2. Ease of Formation – does not require many formalities
3. Co-ownership of Partnership Property and Profits – all assets invested in the
partnership becomes the property of the partnership.
4. Limited Life – any change in the agreement of the partners terminates the
partnership program.
5. Mutual Agency – each partner has an equal right to act for the partnership and to
enter into contracts binding upon it, as long as he acts within the normal scope of
business organization.
6. Unlimited Liability – each partner may be held liable for all the debts of the
partnership

Articles of Partnership
Articles of partnership is a voluntary contract between/among two or more persons to
place their capital, labor, and skills into business, with the understanding that there will be a
sharing of the profits and losses between/among partners.

REQUIREMENTS
1. Name of partnership
2. Address of partners
3. Rights and responsibility of each partners
4. Purpose of the partnership
5. Initial investment and additional investment
6. The withdrawals that may be made
7. Profit and loss ratio
8. The procedures in dissolving the partnership

Types of Partnership
 General Partnership
a. Ease of creation - no state filing is required. The partnership is created when
the partners begin business activities.
b. Low cost of operation - because general partnerships are not formed by
means of a state filing, they are not required to pay a formation filing fee,

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1.0 Partnership Accounting

ongoing state fees or franchise taxes. The partnership must still obtain the
business licenses and permits required for operation however.
c. Few ongoing requirements - unlike corporations, general partnerships are not
required to hold annual meetings of the owners, issue partnership interest,
and keep personal asset separate from business assets. Having a partnership
agreement that outlines how the partnership will be managed, the roles of
each partner, and what events will cause the partnership to end operations is
recommended.
 Limited Partnership
a. Unlimited liability for general partners only - in a limited partnership (LP), at
least one partner has unlimited liability—the general partner(s). The other
partners (limited partners) have limited liability, meaning their personal
assets typically cannot be used to satisfy business debts and liabilities. The
amount of their liability is limited to their investment in the LP.
b. Limited partners are not involved in management - the general partners
oversee the day-to-day operations of the LP. Limited partners are basically
silent investors.
c. Short-term projects/ventures - LPs are often the business type of choice for
special situations versus true businesses. For example, films are often
formalized as LPs and family estate planning often utilizes LPs.
 Limited Liability Partnership
o Professional service businesses - limited liability partnerships (LLPs) can only
be created by certain types of professional service businesses, such as
accountants, attorneys, architects, dentists, doctors, and other fields treated
as professionals under each state’s law.
o Personal asset protection - the personal assets of the partners in an LLP
typically cannot be used to satisfy business debts and liabilities. The LLP does
not shield the partners for liability for their personal acts. Put simply, the LLP
cannot limit the liability of owners for their own malpractice.

Types of Partners
 As to Contribution:
o Capitalist partner - one who contributes money or property to the common
fund.
o Industrial partner - one who contributes only his industry or personal service.
 As to Liability:
o General partner - one whose liability to third persons extends to his separate
property, he may either be a capitalist or industrial partner.
o Limited partner - one whose liability to third person is limited to his capital
contribution.
 As to Classification/Kind:
o Ostensible Partner - names are disclosed to public as actual partners
o Dormant/Nominal Partner - disclosed as a partner to public or not, entitled to
shares of profits and losses, yet inactive in business activity
o Silent Partner - contributes to business but has no say in the business' daily
operations
o Secret Partner - contributes to business and participates in business activity,
operates anonymously, due to reputation from previous business or prefers
not to be disclosed to public)
 As to Activity:
o Trading Partnership
- Merchandising (Buy and Sell)
- Manufacturing (Producing and Sell)
o Non-Trading Partnership

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1.0 Partnership Accounting

- Professional Services (Accounting, legal, etc.)

- Non-professional Services (Gardening, make-up, etc.)

Partnership Ledger Accounts

 Capital Accounts
 Drawings Account
 Loan Accounts – withdrawal of a partner with an assumption of its repayment.

ACCOUNTING FOR PARTNERSHIP FORMATION

 Book Value - the value of a security or asset as entered in a company's books.
 Fair Market Value - is the estimated price at which an asset can be sold or a liability
settled in an orderly transaction to a third party under current market conditions.
 Appraised Value - is an evaluation of a property's value based on a given point in
time. The evaluation is performed by a professional appraiser during the mortgage
origination process.
 Assessed Value - is the value assigned to a property to measure applicable taxes.
(Not used in formation)
 Each partner’s initial contribution is recorded on the partnership’s books. These
contributions are recorded at the fair value of the asset at the date of transfer. All
partners must agree to the valuation being recorded (agreed value).

Ways of Partnership Formation

1. Individuals with no existing business formed a partnership
2. A sole proprietor and an individual without existing business form a partnership
3. Two or more sole proprietorship formed a partnership

Individuals with No Existing Business Formed a Partnership

On July 1, 2019, Gerry Fernando and Joanne Java agreed to form a partnership. The
partnership agreement specified that Fernando is to invest cash of P700,000 and Java is to
contribute land with a fair market value of P1,300,000 with P300,000 mortgages to be
assumed by the partnership.
To record Fernando’s investment;
Cash 700,000
G. Fernando, Capital 700,000
To record Joanne’s investment;
Land 1,300,000
Mortgage Payable 300,000
J. Java, Capital 1,000,000

A Sole Proprietor and an Individual without Existing Business Form a Partnership

 Books of Proprietor
o Adjust the assets and liabilities in accordance with the agreement
o Close the book
 Book of Partnership
o Open the book
The statement of financial position of Leopoldo Medina on October 1, 2019, before accepting
Challoner Matero as partners is shown below;

Medina Company
Statement of Financial Position
October 1, 2019
Assets Liabilities and Equity
Cash P60,000 Notes Payable P40,000

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Note Receivable 30,000 Accounts Payable 100,000

Accounts Receivable 240,000 L. Medina, Capital 314,000
Allowance for Uncollectible (10,000)
Accounts
Merchandise Inventory 80,000
Furniture and Fixtures 60,000
Accumulated Depreciation (6,000)
Total Assets P454,000 Total Liabilities and Equity P454,000
Challenor Matero offered to invest cash to get a capital credit equal to one-half of L.
Medina’s capital after giving effect to the adjustments below. Medina accepted the offer.
1. Merchandise inventory is to be valued at P74,000.
2. The accounts receivable is 95% collectible.
3. Interest accrued in the notes receivable will be recognized: P10,000, 12% dated July
1, 2019 and P20,000, 12% dated August 1, 2019.
4. Interest on note payable to be accrued at 14% annually from April 1, 2019.
5. The furniture and fixtures are to be valued at P46,000
6. Office supplies on hand that have been charged to expense in the past amounted to
P4,000. These will be used by the partnership.

Accounts Unadjusted Adjustments Adjusted

Cash P60,000 P60,000
Note Receivable 30,000 30,000
Interest Receivable P700 700
Accounts 240,000 240,000
Receivable
Allowance for P10,000 P2,000 P12,000
Uncollectible
Accounts
Merchandise 80,000 6,000 74,000
Inventory
Office Supplies 4,000 4,000
Furniture and 60,000 60,000
Fixtures
Accumulated 6,000 8,000 14,000
Depreciation
Notes Payable 40,000 40,000
Interest Payable 2,800 2,800
Accounts Payable 100,000 100,000
L. Medina, Capital 314,000 6,000 700 299,900
2,000 4,000
2,800
8,000
Total P470,00 P470,00 P23,500 P23,500 P468,70 P468,70
0 0 0 0

Two or More Sole Proprietorship Formed a Partnership

Profit and Loss Ratio is the ratio in which the profits or losses of a business are
shared. For a partnership, the profit-sharing ratios will be set out in the partnership
agreement. If no specific agreement has been made, profits and losses will be shared
equally
Pinnacle and Maginhawa decided to form a partnership on March 15, 2019. Their
Statement of Financial Position on this date was:
Assets Pinnacle Maginhawa
Cash P65,625 P164,063

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Accounts Receivable 1,487,500 896,875

Merchandise Inventory 875,000 885,937
Equipment 656,250 1,268,750
Total P3,084,375 P3215625
Liabilities and Equity
Accounts Payable P459,375 1,159,375
Pinnacle, Capital 2,625,000
Maginhawa, Capital 2,056,250
Total P3,084,375 P3,215,635
They agreed to the following adjustments;
1. Equipment of Pinnacle is under depreciated by P87,500 and that Maginhawa is over
depreciated by P131,250.
2. Allowance for doubtful account to be set up amounting to P297,500 for Pinnacle and
P196,875 for Maginhawa.
3. Inventories of P21,875 and P15,320 are worthless in the books of Pinnacle and
Maginhawa respectively.
4. The partnership agreement provides for a profit and loss ratio of 6:4 for Pinnacle and
Maginhawa respectively.
5. Capital balances are to be equalled to their P&L ratio.

Adjustments:
Pinnacle Maginhawa
Unadjusted Capital P2,625,000 P2,056,250
Equipment (87,500) 131,250
Allowance for Doubtful Accounts (297,500) (196,875)
Inventory __(21,875) (15,320)
Adjusted Capital P2,218,125 P1,975,305

Bonus Method - used to grant a new partner additional capital in a partnership when the
person is adding goodwill or some other intangible asset to the partnership.
Goodwill Method – used with an assumption that an implied value can be estimated
mathematically and recorded for any intangible contribution made by a partner.

Pinnacle, Capital 2,218,125

Maginhawa, Capita 1,975,305
Contributed Capital 4,193,430
Pinnacle Maginhawa
Contributed Capital 2,218,125 1,975,305
Pinnacle (P4,193,430 x 0.6%) (2,516,058)
Maginhawa (P4,193,430 x 0.4%) (1,677,372)
Bonus/Goodwill (297,933) 297,933
To record bonus granted;
Pinnacle, Capital 297,933
Maginhawa, Capital 297,933
To record goodwill granted;
Goodwill 297,933
Maginhawa, Capital 297,933

PARTNERSHIP OPERATION AND DIVISION OF PROFIT AND LOSS

 Profits and Losses are to be divided in accordance with the partners’ agreement.
 If no agreement, profits and losses are to be divided according to original capital
contributions.

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Provisions
1. Salaries
Terry and Paul are partners who have an agreement to share profit and loss in the
following manner:
Terry Paul
Monthly Salaries P20,000 P40,000
Remainder 50% 50%
The partnership generated a profit of 90,000.
Terry Paul Total
Salaries 20,000 40,000 60,000
Remainder 15,000 15,000 30,000
Total 35,000 55,000 90,000

2. Interest Revenue
On Jan. 1, partners Pluto and Mars formed a partnership with Pluto contributing
P50,000 and Mars contributing P30,000. Partnership realized a profit of P20,000 for
the month of January. Below is the summary of additional investment and withdrawal
of the partners during the month:
Pluto Additional Drawings Mars Additional Drawings
Investment Investment
Jan. 4 P6,000 Jan. 10 P5,000
Jan. 6 P3,000 Jan. 16 P3,500
Profit is distributed to the partners according to the following provisions:
 Interest of 10% each based on average capital balances.
 Balance; Pluto – 40%, Mars – 60%

Computation for: Average Capital Balances

Pluto Mars
Beginning Balance 50,000 30,000
Additional Investment 6,000 5,000
Drawings 3,000 3,500
Ending Balance 53,000 31,500
Average Capital Balance = 51,500 30,750
(Beginning + Ending) / 2

Pluto (40%) Mars (60%) Total

Interest (10% x 1/12) 430 256 686
Remainder 7,726 11,588 19,314
Total 8,156 11,844 20,000

3. Bonus
a. Bonus before deducting bonus and income tax B= BR(NI)
b. Bonus after deducting bonus but before deducting income tax B = BR(NI-B)
c. Bonus before deducting the bonus after deducting income tax B = BR(NI-T)
d. Bonus after deducting bonus and income tax B = BR(NI-T-B)

Moon Partnership Net Income: P250,000

Tax Expense: P25,000
Partner A: 2% Bonus before deducting bonus and income tax
B = 0.02 (250,000)
Bonus = 5,000
Partner B: 2% Bonus after deducting bonus but before deducting income tax
B = 0.02(250,000-B)
B = 5,000 – 0.02B

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1.02B = 5,000
Bonus = 4,902
Partner C: 3% Bonus before deducting the bonus after deducting income tax
B = 0.03(250,000-25,000)
B = 0.03(225,000)
B = 6,750
Partner D: 3% Bonus after deducting bonus and income tax
B = 0.03(250,000-25,000-B)
B = 0.03(225,000-B)
B = (6,750-0.03B)
1.03B = 6,750
Bonus = 6,553

Possible Methods of Dividing Net Income / Net Loss

1. Equally
Net Income: P100,000
Division of Profit (P100,000 / 4 Partners = P25,000)
To record distribution of profit;
Partner A, Capital 25,000
Partner B, Capital 25,000
Partner C, Capital 25,000
Partner D, Capital 25,000
Income Summary 100,000
2. Profit and Loss Ratio
Nate and Raul are partners who have an agreement to share profit and loss in the
following manner:
Nate Raul
Annual Salaries P250,000 P400,000
Interest on average balances 10% 10%
Bonus (net income after 10%
salaries and interest)
Profit and Loss Ratio 60% 40%

Nate and Raul’s average capital balances for the year ended 2020 are P600,000 and
P300,00, respectively. The partnership generated a profit of P900,000 in that year.
Nate Raul Total
Salaries 250,000 400,000 650,000
Interest 60,000 30,000 90,000
Bonus =BR(NI-S-I) 16,000 16,000
Remainder 86,400 57,600 144,000
Total P412,400 P487,600 P900,000

3. Original Capital Contribution Ratio

Anne Jake Total
Original Capital Contribution (Jan. 1) 30,000 50,000 80,000
Original Capital Contribution Ratio 37.5% 62.5% 100%
Net Income (Month ended of Jan.) 22,500 37,500 60,000

4. Beginning Capital Balances Ratio

Lily Robin Total
Beginning Capital Balances (Jan. 1) 25,000 75,000 100,000
Beginning Capital Balances Ratio 25% 75% 100%
Net Income (Month ended of Jan.) 21,417.5 64,252.5 85,670

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1.0 Partnership Accounting

DISSOLUTION OF A PARTNERSHIP
The dissolution of a partnership is the change in the relation of the partners caused
by any partner ceasing to be associated in the carrying on as distinguished from winding up
of the business of the partnership.
Any change in the membership will result to dissolution. A partnership may be
dissolved without being terminated.

Occurrence that Dissolves Partnership

 Admission of a partner
 Retirement of a partner
 Death of a partner
 Incorporation of partnership

Admission of a Partner
 A new partner may purchase all or part of the interest of one or more of the existing
partners.
Oman is admitted into the partnership for a 50% interest in the profits and
losses of the partnership. The old partners Libya, Morocco and Nepal are to retain
their original capital and profit-sharing relationships to each other and are to transfer
sufficient amount (50%) of their own capital accounts to Oman to accomplish his
admission as planned. Oman agreed to pay P50,000 to Libya, Morocco and Nepal.
The capital balances of Libya, Morocco and Nepal before admission of Oman
are P20,000, P20,000 and P30,000 respectively. Their P&L ratios are 20:30:50,
respectively.
Partner Capital Balance Interest Paid by Oman
(50%)
Libya 20,000 10,000
Morocco 20,000 10,000
Nepal 30,000 15,000
Total 70,000 35,000
To record the transaction;
Libya, Capital 10,000
Morocco, Capital 10,000
Nepal, Capital 15,000
Oman, Capital 35,000

Cash Receipt Distribution

Libya Morocco Nepal Total
P&L Ratio 20% 30% 50% 100%
Interest 10,000 10,000 15,000 35,000
acquired by
Oman
Remainder 3,000 4,500 7,500 15,000
Cash Receipt 13,000 14,500 22,500 50,000
from Oman
This transaction is not recorded in the book of partnership since it is a personal
transaction among partners.

 Another way is investment of asset in the partnership

Kris and Lea are partners who shares profit and losses in the ratio of 60:40
respectively. On January 1, 2020, their respective capital accounts were as follows;
Kris 60,000
Lea 50,000

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1.0 Partnership Accounting

On that day, Ash was admitted as a partner with one-third interest in capital,
and profits for an investment of P40,000. The new partnership began with a total
capital of P150,000.
Partners Unadjusted Capital Adjustments Adjusted Capital
Kris (60%) 60,000 (6,000) 54,000
Lea (40%) 50,000 (4,000) 46,000
Ash (1/3 interest) 40,000 10,000 50,000
Total 150,000 150,000
To record Ash’s investment;
Cash 40,000
Ash, Capital 40,000
To record bonus granted;
Kris, Capital 6,000
Lea, Capital 4,000
Ash, Capital 10,000

Retirement of a Partner
Vicky, Bianca and Abby were partners with capital balances on January 1, 2020 of
P300,000, P200,000 and P100,000 respectively.
On July 1, 2020, Vicky retires from the partnership. On the date of retirement, the
partnership net loss P60,000 and the partner agrees that certain asset is to be revalue at
P80,000 from its original cost of P50,000.
The partners agreed further to pay back Vicky P225,000 in settlement of her interest.
The remaining partners continue to operate under a new partnership, Netflix.
(Since there is no P&L ratio, original capital contribution ratio will be used)
Vicky Bianca Abby
Unadjusted Capital 300,000 200,000 100,000
Loss (30,000) (20,000) (10,000)
Asset Revaluation 15,000 10,000 5,000
Adjusted Capital 285,000 190,000 95,000
To record adjustments;
Vicky, Capital 15,000
Bianca, Capital 10,000
Abby, Capital 5,000
Asset Revaluation 30,000
Income Summary 60,000

To record transaction;
Vicky, Drawings 225,000
Vicky, Capital 60,000
Cash 225,000
Gain 60,000

(Since Vicky’s book are now closed, the new partnership will update their original capital
contribution ratio)
Bianca Abby Total
Adjusted Capital 190,000 95,000 285,000
Gain 40,000 20,000 60,000
Total Capital 230,000 115,000 345,000
Balances
To record gain distribution;
Gain 60,000
Bianca, Capital 40,000
Abby, Capital 20,000

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Death of a Partner
In the event of the death of a partner, the estate of the deceased partner is entitled
to receive the amount of his interest in the partnership at the date of his death. The
deceased partner’s capital is adjusted using his profit and loss share percentage for changes
in asset value arising from revaluation and the profits from the date were last closed.
The balance of his capital account after considering the adjustments should be
transferred to a liability account pending settlement.
To transfer capital account to liability;
Deceased Partner, Capital xxx
Liability xxx

INCORPORATION OF A PARTNERSHIP
When a partnership is converted into a corporation, the corporation takes over the
assets and assumes the liabilities of the partnership in exchange for share of stocks. The
stock received by the partnership is distributed to the partners in settlement of their
interest. The partners now become stockholders of the newly formed corporation.

Accounting Procedures for Incorporation of Partnership

 Partnership Books Retain
o Revaluate the assets and recognize goodwill, if any.
o Close the partner’s capital account
 New Books Opened for the Corporation
o Revaluate the assets and recognize goodwill, if any.
o Close the partnership books by transferring the assets and liabilities to the
corporation
o Open the new books for the corporation and record the distribution of stocks
to the partners.

Partnership Books Retained

Reyes and Cruz, partners who share profits in an 80% and 20% ratio, organized the
RC Corporation to take over the partnership business. The RC Corporation is authorized to
issue 10,000 shares of P20 par value capital stock, of which 5,500 shares are issued at P30 a
share to the partners in accordance with their adjusted capital accounts. RC Corporation also
issued 1,000 shares for cash to the other incorporators at P30 a share. The statement of
financial position of the partnership as of June 30, 2011, the date of the incorporation is
shown;
Reyes and Cruz
Statement of Financial Position
June 30, 2011
Assets
Cash P24,000
Accounts Receivable 56,200
Allowance for Bad Debts (1,200)
Inventories 51,000
Equipment 120,000
Accumulated Depreciation (52,000)
Total Assets P198,000
Liabilities and Equity
Notes Payable P40,000
Accounts Payable 30,000
Reyes, Capital 95,980
Cruz, Capital 32,020
Total Liabilities and Equity P198,000

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The partners agree to make the following adjustments

 Increase allowance for bad debts account to P2,000.
 Increase the cost of inventories to P60,000.
 Increase the cost of equipment for its reproduction cost to P140,000 and
accumulated depreciation increased for P61,000.
 Recognize accrued expenses of P2,200.
 Recognize goodwill of P20,000.
Unadjusted Adjustments Adjusted
Cash P24,000 P24,000
Accounts Receivable 56,200 56,200
Allowance for Bad Debts (1,200) P(800) (2,000)
Inventories 51,000 9,000 60,000
Equipment 120,000 20,000 140,000
Accumulated Depreciation (52,000) (9,000) (61,000)
Goodwill ________ 20,000 20,000
Total Assets P198,000 P39,200 P237,200
Notes Payable P40,000 P40,000
Accounts Payable 30,000 30,000
Accrued Expense P2,200 2,200
Reyes, Capital (80%) 95,980 29,600 125,580
Cruz, Capital (20%) 32,020 7,400 39,420
Total Liabilities and Equity P198,000 P39,200 P237,200
To record adjustments;
Inventories 9,000
Equipment 20,000
Goodwill 20,000
Allowance for Bad Debts 800
Accumulated Depreciation 9,000
Accrued Expenses 2,200
Reyes, Capital 29,600
Cruz, Capital 7,400
Book of Corporation
Shareholder Capital Shares Issued OSC (with par Share
(P30 per share) value P20,000) Premium
Reyes P125,580 4,186 P83,720 P41,860
Cruz 39,420 1,314 26,280 13,140
Total P165,000 5,500 P110,000 P55,000
To record transaction;
Reyes, Capital 125,580
Cruz, Capital 39,420
Ordinary Share Capital 110,000
Premium Share 55,000

New Books Opened for the Corporation

1. To record adjustments;
Inventories 9,000
Equipment 20,000
Goodwill 20,000
Allowance for Bad Debts 800
Accumulated Depreciation 9,000
Accrued Expenses 2,200
Reyes, Capital 29,600
Cruz, Capital 7,400
2. To close partnership books;

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Allowance for Bad Debts 2,000

Accumulated Depreciation 61,000
Notes Payable 40,000
Accounts Payable 30,000
Accrued Expenses 2,200
Reyes, Capital 125,580
Cruz, Capital 39,420
Cash 24,000
Accounts Receivable 56,200
Inventories 60,000
Equipment 140,000
Goodwill 20,000
3. To open new books for corporation;
Cash 24,000
Accounts Receivable 56,200
Inventories 60,000
Equipment 140,000
Goodwill 20,000
Allowance for Bad Debts 2,000
Accumulated Depreciation 61,000
Notes Payable 40,000
Accounts Payable 30,000
Accrued Expenses 2,200
Ordinary Share Capital 110,000
Premium Share 55,000

LIQUIDATION OF A PARTNERSHIP
The liquidation of a partnership is winding up its business activities characterized by
sale of all non-cash assets, settlement of all liabilities, and distribution of the remaining cash
to the partners.
The conversion of non-cash assets into cash is referred to as realization. This may
result to a gain or loss on realization and shall be divided in the profit and loss of the partner.
In some cases, a substantial loss on realization may yield for a partner a capital deficiency,
which is the excess of a partner’s share in losses over the capital credit balance.

Methods of Partnership Liquidation

 Lump-Sum Method – all non-cash assets are realized and the related gain or losses
distributed and all liabilities are paid before a single final cash distribution is made to
the partners.
 Instalment Method – the realization of non-cash assets is accomplished over an
extended period of time. When cash is available, creditors may be partially or fully
paid. Any excess may be distributed to the partners in accordance with a program of
safe payments or a cash priority program.

Lump-Sum Method
1. Realization of non-cash assets and distribution of gain or loss on realization among
partners based on their profit and loss ratio.
2. Payment of liquidation expenses, if any.
3. Payment of liabilities to third parties.
4. Elimination of partner’s capital deficiencies. Deficiency must be eliminated by using
one of the following methods, in order of priority.

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a. If the deficient partner has a loan balance, then exercise right of offset.
b. If the deficient partner is solvent, then he should invest cash to eliminate his
deficiency.
c. If the deficient partner is insolvent, then the other partners should absorb his
deficiency.
5. Payment to partners, in order of priority;
a. Loan accounts
b. Capital accounts
The statement of partnership liquidation provides a visual summary of the
partnership liquidation, noting the loss realization for the partners.

The partnership of A, B and C was liquidated on May 31, 2020 and the account
balances on July 1, 2020 along with residual profit and loss ratios, are;
Cash 20,000 Accounts Payable 1,200,000
Non-Cash Assets 3,400,000 A, Capital (30%) 950,000
B, Capital (30%) 550,000
C, Capital (40%) 720,000
The personal assets and liabilities of the partners at July 1, 2020 are;
Partner Personal Assets Personal Liabilities Net Assets
A 525,000 320,520 204,480
B 420,000 472,500 (52,500)
C 997,500 420,000 577,500

Step 1: Realization of non-cash assets and distribution of gain or loss on realization among
partners based on their profit and loss ratio.
Assumption: Non-Cash assets are sold at 1,700,000
Non-Cash Assets 3,400,000
Sale of Non-Cash Asset 1,200,000
Loss 2,200,000
To record realization of non-cash assets and distribution of
gain or loss on realization among partners;
Cash 1,200,000
A, Capital 660,000
B, Capital 660,000
C, Capital 880,000
Non-Cash Assets 3,400,000

Step 2: Payment of liquidation expenses, if any.

Assumption: No liquidation expenses incurred

Step 3: Payment of liabilities to third parties.

To record payment of liabilities;
Accounts Payable 1,200,000
Cash 1,200,000

Cash Non-Cash Account A, Capital B, Capital C, Capital

Assets Payables (30%) (30%) (40%)
Unadjusted P20,000 P3,400,000 P1,200,000 P950,000 P550,000 P720,000
Realization 1,200,000 (3,400,000) (660,000) (660,000) (880,000)
Payment (1,200,000) (1,200,000)
Adjusted P20,000 P0 P0 P290,000 P(110,000) (160,000)
Step 4: Elimination of partner’s capital deficiencies.
 No partner has a loan balance.

MARZAN - 2020
 AFAR 14
1.0 Partnership Accounting

 Solvent partner should invest cash to eliminate his deficiency.

Cash A, Capital B, Capital C, Capital

(solvent) (insolvent) (solvent)
Balances P20,000 P290,000 P(110,000) P(160,000)
Investment 160,000 ________ __________ 160,000
Adjusted P180,000 P290,000 P(110,000) P0

 Other partners should absorb insolvent partner’s deficiency in updated P&L ratio.
Cash A, Capital B, Capital C, Capital
(solvent) (insolvent) (solvent)
Balances P180,000 P290,000 P(110,000) P0
Absorption (47,143) 110,000 (62,857)
Investment _ 62,857 ________ _________ 62,857
Adjusted P242,857 P242,857 P0 P0

To record transaction;
Cash 222,857
A, Capital 47,143
C, Capital 160,000
B, Capital 110,000

Effect on Partner’s Personal Net Assets

Partner A Partner B Partner C
Net Assets 204,480 (52,500) 577,500
Investment (222,857)
Adjusted 204,480 (52,500) 354,643

Step 5: Payment to partners

Since there are no loan accounts the partnership will proceed to payment of capital
accounts.
Cash A, Capital B, Capital C, Capital
(3/7) (insolvent) (4/7)
Balances P242,857 P242,857 P0 P0
Payment (242,857) (242,857)
Adjusted P0 P0 P0 P0
To record transaction;
A, Capital 242,857
Cash 242,857

Statement of Partnership Liquidation

Assets Liabilities Capital
Cash Non-Cash Account A, Capital B, Capital C, Capital
Assets Payables (30%) (30%) (40%)
Balance P20,000 P3,400,000 P1,200,000 P950,000 P550,000 P720,000
Realization 1,200,000 (3,400,000) _________ (660,000) (660,000) (880,000)
Balance P1,220,000 P0 P1,200,000 P290,000 P(110,000) (160,000)
Payment (1,200,000) _________ (1,200,000) ________ _________ ________
Balance P20,000 P0 P0 P290,000 P(110,000) (160,000)
Elimination 222,857 _________ _________ (47,143) 110,000 160,000
Balance P242,857 P0 P0 P242,857 P0 P0

MARZAN - 2020
 AFAR 15
1.0 Partnership Accounting

Payment (242,857) _________ _________ (242,857) _________ ________

Balance P0 P0 P0 P0 P0 P0
Instalment Method
Under this method, the realization of non-cash assets is accomplished over an
extended period of time. When cash is available, creditors may be partially or fully paid.

INSTALMENT PROGRAM
 Schedule of Safe Payments – distribution of available cash based on a schedule of
safe payments which assumes;
o possible losses due to inability of the partnership to dispose or part or all of
the remaining non-cash assets
o possible losses due to failure of partners with deficiencies to make additional
contribution.
 Cash Priority Program – permits the partners to determine how cash should be safely
distributed if and when it becomes available.

Schedule of Safe Payments

The partners of ABC Company share profit and losses as follows; Athens 65%, Berlin
20% and Chicago 15%. On March 31, 2019, they agree to liquidate their partnership. Prior to
liquidation, the statement of financial position is shown below;

Assets Liabilities and Equity

Cash 20,000 Liabilities 6,000
Non-Cash Assets 70,000 Berlin, Loan 2,000
Athens, capital 20,000
Berlin, Capital 32,000
Chicago, Capital 30,000
Total Assets 90,000 Total Liabilities and Equity 90,000
The following data relates to the realization of non-cash assets;
 Assets having book value of P54,000 sold on April for P30,000.
 Assets having book value of P14,000 sold on May for P8,000.
 The remaining assets having book value P2,000 cannot be sold and realized as loss
on June.
Step 1 - Realization of non-cash assets and distribution of gain or loss on realization among
partners based on their profit and loss ratio, payment of liquidation expenses, and payment
of liabilities to third parties.
Book Value 54,000
Sale 30,000
Loss 24,000
Statement of Partnership Liquidation
Cash NCA Liab Berlin, Athens, Berlin, Cairo,
Loan Capital Capital Capital
(65%) (20%) (15%)
Balance P20,000 P70,000 P6,000 P2,000 P20,000 P32,000 P30,000
Reali- 30,000 (54,000) (15,600) (4,800) (3,600)
zation
(April)
Payment (6,000) _______ (6,000) _______ _______ _______ _______
of Liab.
Balance P44,000 P16,000 P0 P2,000 P4,400 P27,200 P26,400

Step 2 – Preparation of Schedule of Safe Payments

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 AFAR 16
1.0 Partnership Accounting

Assumptions: possible losses due to inability of the partnership to dispose or part or all of
the remaining non-cash assets and failure of partners with deficiencies to make additional
contribution.
Cash NCA Berlin, Athens, Berlin, Cairo,
Loan Capital Capital Capital
(65%) (20%) (15%)
Balance P44,000 P16,000 P2,000 P4,400 P27,200 P26,400
Possible _______ (16,000) _______ (10,400) (3,200) (2,400)
Loss (NCA)
Balance 44,000 0 2,000 (6,000) 24,000 24,000
Possible _______ _______ _______ 6,000 (3,429) (2,571)
Loss
(Capital
Deficiency
)
Balance 44,000 0 2,000 0 20,571 21,429
Loan (2,000) (2,000)
SSP (42,000) P0 P0 P0 (20,571) (21,429)

Step 3: Payment
Statement of Partnership Liquidation
Cash NCA Liab Berlin, Athens, Berlin, Cairo,
Loan Capital Capital Capital
(65%) (20%) (15%)
Balance P20,000 P70,000 P6,000 P2,000 P20,000 P32,000 P30,000
Reali- 30,000 (54,000) (15,600) (4,800) (3,600)
zation
(April)
Payment (6,000) _______ (6,000) _______ _______ _______ _______
of Liab.
Balance P44,000 P16,000 P0 P2,000 P4,400 P27,200 P26,400
Loan (2,000) (2,000)
SSP (42,000) _______ _______ _______ _______ (20,571) (21,429)
(April)
Balance P0 P16,000 P0 P0 P4,400 P6,629 P4,971

May Instalment:
Book Value 14,000
Sale 8,000
Loss 6,000
Statement of Partnership Liquidation
Cash NCA Athens, Berlin, Cairo,
Capital Capital Capital
(65%) (20%) (15%)
Balance P0 P16,000 P4,400 P6,629 P4,971
Reali- 8,000 (14,000) (3,900) (1,200) (900)
zation (May)
Balance P8,000 P2,000 __P500 P5,429 P4,071
Schedule of Safety Payment
Cash NCA Athens, Berlin, Cairo,
Capital Capital Capital

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 AFAR 17
1.0 Partnership Accounting

(65%) (20%) (15%)

Balance P8,000 P2,000 P500 P5,429 P4,071
Possible Loss _______ (2,000) (1,300) (400) (300)
(NCA)
Balance P8,000 P0 P(800) P5,029 P3,771
Possible Loss _______ _______ 800 (457) (343)
(Capital
Deficiency)
Balance 8,000 P0 P0 P4,572 21,429
SSP (8,000) P0 P0 P(4,572) P(3,428)
Payment
Statement of Partnership Liquidation
Cash NCA Athens, Berlin, Cairo,
Capital Capital Capital
(65%) (20%) (15%)
Balance P8,000 P2,000 P500 P5,429 P4,071
SSP (8,000) _ _ P(4,572) P(3,428)
Balance P0 P2,000 _P500 P,857 P643

June Instalment
Statement of Partnership Liquidation
NCA Athens, Capital Berlin, Capital Cairo, Capital
Balance P2,000 P500 P,857 P643
Loss (2,000) 1,300 400 300
Balance P0 P(800) P457 P343
Capital 800 (457) (343)
Deficiency
Balance P0 P0 P0 P0

Cash Priority Program

To prepare the Cash Priority Program;
1. Get the total of equity or interest of each partner by combining the capital and loans
payable less the advances for receivable.
2. Compute for the Loss Absorption Balance and rank them afterwards. (Equity / P&L
Ratio)
3. Determine the payment priority by bringing their adjusted capital at same amount.
(Deduct from the partner/s with highest loss absorption balance to have the same
amount as to the second highest loss absorption balance)
4. Prepare the Cash Priority Program (Cash Priority Amount x P&L Ratio)

The partnership of Neil, Sam, Eric and Will was formed several years ago. Some of
the partners have recently undergone personal financial problems and decided to terminate
operations and liquidate the business.
Statement of Financial Position
Cash P15,000 Liabilities P74,000
Accounts Receivable 82,000 Eric, Loan 35,000
Inventory 101,000 Neil, Capital 120,000
PPE 253,000 Sam, Capital 88,000
Eric, Capital 74,000
________ Will, Capital 60,000
Total Assets P451,000 Total Liabilities and P451,000
Equity

MARZAN - 2020
 AFAR 18
1.0 Partnership Accounting

At the time of liquidation, expenses of P16,000 are anticipated. The P&L ratio of the partners
are Neil 30%, Sam 10%, Eric 20% and Will 40%. The following are the transactions during
the liquidation of partnership.
1. Of the total receivable, 80% are collectible with the rest judged as uncollectible, PPE
are sold for P150,000.
2. Safe payments are made
3. Will become personally insolvent.
4. All liabilities are paid.
5. All inventories are sold for P71,000.
6. Safe payments again are maid.
7. Liquidation expense of P11,000 was paid.
8. Final cash payments to partners are made to the partners based on assumption that
all partners other than West are personally solvent.

Step 1: Prepare the Cash Priority Program

Neil (30%) Sam (10%) Eric (20%) Will (40%)
Capital Balances 120,000 88,000 74,000 60,000
Loan 35,000
Total 120,000 88,000 109,000 60,000
L.A.B. 400,000 880,000 545,000 150,000
Priority 1 (Sam) (335,000)
Balance 400,000 545,000 545,000 150,000
Priority 2 (Sam (145,000) (145,000)
& Eric)
Balance 400,000 400,000 400,000 150,000
Priority 3 (Sam, (250,000) (250,000) (250,000)
Eric & Neil)
Balance 150,000 150,000 150,000 150,000

Neil (30%) Sam (10%) Eric (20%) Will (40%) Total

Priority 1 33,500 33,500
Priority 2 14,500 29,000 43,500
Priority 3 75,000 2,500 50,000 127,500
Total 75,000 50,500 79,000 204,500

Step 2: Journalize each transactions

(Before distributing safe payments, allocate cash first to liabilities and expenses. Cash
excess will be distributed depending on ratio.)
Statement of Partners Liquidity (in thousand peso)
Cash AR Inv PPE Liab Eric, Neil Sam Eric Will
Loan
Bal. 15 82 101 253 74 35 120 88 74 60
(1) 215.6 -82 -253 -35.82 -11.94 -23.88 -47.76
Bal. 230.6 0 101 0 74 35 84.18 76.06 50.12 12.24
(2) -140.6 -35 -31.8 -58.6 -15.2
Bal. 90 0 101 0 74 0 52.38 17.46 34.92 12.24
(3)
(4) -74 -74
Bal. 16 0 101 0 0 0 52.38 17.46 34.92 12.24
(5) 71 -101 -9 -3 -6 -12

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 AFAR 19
1.0 Partnership Accounting

Bal. 87 0 0 0 0 0 43.38 14.46 28.92 0.24

(6) -71 -35.5 - -
11.83 23.66
3 7
Bal. 16 0 0 0 0 0 7.88 2.627 5.253 0.24
(7) -11 -3.3 -1.1 -2.2 -4.4
Bal. 5 0 0 0 0 0 4.58 1.527 3.053 -4.16
(8) -5 -4.58 -1.527 -3.053 4.16
Bal. 0 0 0 0 0 0 0 0 0 0

MARZAN - 2020