ILLUSTRATIVE PROBLEMS - METHODS OF DIVIDING PROFITS OR LOSSES

I. EQUALLY

Partners A and B agreed to divide their profits or losses equally.

Case 1 – Profit is P 100,000.

Income and Expense Summary 100,000

A, Drawing 50,000
B, Drawing 50,000
To distribute profit equally.

Case 2 – Loss is P100,000.

A, Drawing 50,000
B, Drawing 50,000
Income and Expense Summary 100,000
To distribute loss equally.

II. ARBITRARY RATIO

a. Fractional Ratio

Partners A and B agreed to divide profits in the ratio of 3:2. The profit
amounted to P100,000.

Income and Expense Summary 100,000

A, Drawing ( 100,000 x 3/5 ) 60,000
B, Drawing ( 100,000 x 2/5 ) 40,000
To distribute profit to partners.

b. Percentages

Partners A and B agreed to divide profits as follows: A - 70% and B - 30%.

The profit is P100,000.

Income and Expense Summary 100,000

A, Drawing ( 100,000 x 70% ) 70,000
B, Drawing ( 100,000 x 30% ) 30,000
To distribute profit to partners.

III. CAPITAL RATIO

Assume that capital accounts in the ledger show the following information:

A, Capital
Aug. 1 P 10,000 P 60,000 Jan. 1
20,000 Oct. 1
________ ________
P 10,000 P 80,000

P 70,000 Balance end

 B, Capital
Nov. 1 P 20,000 P 40,000 Jan. 1
10,000 June 1
________ ________
P 20,000 P 50,000

P 30,000 Balance end

The profit is P 20,000.

a. Beginning Capital Ratio

The beginning capital of partners:

Fractional Share Share in Profit
A P 60,000 60000/100000 or 6/10 x 20,000 = P 12,000
B 40,000 40000/100000 or 4/10 x 20,000 = 8,000
Total P100,000 P 20,000

Income and Expense Summary P 20,000

A, Drawing P 12,000
B, Drawing 8,000
To distribute profit to partners.

b. Ending Capital Ratio

The ending capital balance of the partners are:

A P 70,000 70,000/100000 or 7/10 x 20,000 =P 14,000

B 30,000 30,000/100000 or 3/10 x 20,000= 6,000
Total P100,000 P 20,000

Income and Expense Summary P 20,000

A, Drawing P 14,000
B, Drawing 6,000
To distribute profit to partners.

c. Average Capital

Average Capital of A:
No. of Months
Date Debit Credit Balance Unchanged Peso Month
Jan. 1 60,000 60,000 X 7 = P 420,000
Aug. 1 P10,000 50,000 X 2 = 100,000
Oct. 1 20,000 70,000 X 3 = 210,000
12 P 730,000/12
Average Capital of A = P 60,833

Average Capital of B:
No. of Months
Date Debit Credit Balance Unchanged Peso Month

Jan. 1 40,000 40,000 X 5 = P 200,000

June 1 10,000 50,000 X 5 = 250,000
Nov. 1 20,000 30,000 X 2 = 60,000
12 P 510,000 / 12
 Average Capital of B = P 42,500

Average Capital Fractional Share Share in Profit

A 60, 833 60,833 / 103,333 X 20,000 = P 11,774.17
B 42,500 42,500 / 103,333 X 20,000 = 8,225.83
103,333 P 20,000

Income and Expense Summary 20,000

A, Drawing 11,774.17
B, Drawing 8,225.83
To distribute profit to partners based on average
Capital ratio.

IV. ALLOWING INTEREST ON CAPITAL AND REMAINDER ON AGREED

RATIO

A and B are partners with beginning capital balances of P80,000 and P60,000
respectively. They agreed to allow 10% interest each based on their respective
beginning capital balances and the remainder is equally divided.

Case 1 - The profit for distribution is P30,000.

Schedule of Profit Distribution

Partners
Total A B

Interest allowed to Partners:

A ( 10% X 80,000 ) P 8,000 P 8,000
B ( 10% X 60,000 ) 6,000 P 6,000
Total P14,000
Remainder, equally divided:
( 30,000 – 14,000 = 16,000) 16,000 8,000 8,000
Profit as distributed P 30,000 P16,000 P 14,000

Income and Expense Summary 30,000

A, Drawing 16,000
B, Drawing 14,000
To distribute profit to partners.

Case 2 - The profit for distribution is P 10,000.

Schedule of Profit Distribution

Partners
Total A B
Interest allowed to Partners
A P 8,000 P 8,000
B 6,000 P6,000
P14,000
Remainder (Loss), equally divided:
( 10,000 – 14,000 = - 4000 ) ( 4,000) ( 2,000 ) ( 2,000 )
As distributed P10,000 P 6,000 P 4,000

Income and Expense Summary 10,000

A, Drawing 6,000
B, Drawing 4,000
To distribute profit to partners.
 Case 3 – The loss for distribution is P 12,000.

Schedule of Loss Distribution

Partners
Total A B
Interest allowed to Partners
A P 8,000 P8,000
B 6,000 P 6,000
14,000
Remainder(Loss), equally divided:
( -12,000 – 14,000 = - 26,000) ( 26,000) ( 13,000 ) ( 13,000 )
As distributed ( P 12,000) ( P 5,000) ( P 7,000 )

A, Drawing P 5,000
B, Drawing 7,000
Income and Expense Summary P 12,000
To distribute loss to partners.

V. ALLOWING SALARIES TO PARTNERS AND REMAINDER ON AGREED

RATIO

A and B are partners who agreed that annual salaries will be allowed to them as
follows:
A P 15,000
B 35,000
Total P 50,000
The remainder is distributed on the ratio 40% - 60%.

Case 1 – The profit for distribution is P70,000.

Schedule of Profit Distribution

Partners
Total A B
Salaries allowed to Partners P50,000 P15,000 P35,000
Remainder divided 40% - 60%:
( 70,000 – 50,000 = 20,000 )
A (20,000 x 40% ) 8,000 8,000
B ( 20,000 x 60% ) 12,000 _______ 12,000
As distributed P 70,000 P 23,000 P 47,000

Income and Expense Summary P70,000

A, Drawing P 23,000
B, Drawing 47,000
To distribute profit to partners.

Case 2 - The profit for distribution is P 40,000.

Schedule of Profit Distribution

Partners
Total A B
Salaries allowed to partners P50,000 P15,000 P35,000
Remainder (Loss) divided 40% - 50%:
( 40,000 – 50,000 = -10,000)
A -10,000 x 40% = -4,000 ( 4,000 ) ( 4,000 )
 B - 10000 x 60% = -6,000 ( 6,000 ) _______ (6,000 )
As distributed P40,000 P11,000 P29,000
Income and Expense Summary P40,000
A, Drawing P 11,000
B, Drawing 29,000
To distribute profit to partners.

Case 3 - The loss for distribution is P16,000.

Schedule of Loss Distribution

Partners
Total A B
Salaries allowed to partners P50,000 P15,000 P35,000
Remainder (Loss) divided 40%-60%:
(-16,000 – 50,000 = -66,000 )
A -66000 X 40% = -26,400 ( 26,400 ) ( 26,400 )
B -66000 x 60% = -39,600 (39,600 ) (39,600)
Loss as distributed ( P16,000) ( P11,400) ( P4,600 )

A, Drawing P 11,400
B, Drawing 4,600
Income and Expense Summary P16,000
To distribute loss to partners.

VI. ALLOWING SALARIES AND BONUS TO PARTNERS AND REMAINDER

ON AGREED RATIO:

A and B are partners who received annual salaries of P20,000 and P30,000
respectively. A shall receive a 10% bonus of profit before salaries and bonus being
the managing partner. The balance of profit is divided on a 40%-60% basis. Annual
profit is P150,000.

Case 1 – Bonus is computed based on profit before deducting salaries and bonus

Schedule of Profit Distribution

Partners
Total A B
Salaries allowed P50,000 P20,000 P30,000
Bonus to A 15,000 15,000
Total P65,000
Remainder divided 40%-60%:
( 150,000 – 65,000 = 85,000 )
A 85,000 x 40% 34,000 34,000
B 85,000 x 60% 51,000 _______ 51,000
Profit as distributed P150,000 P69,000 P 81.000

Computation for bonus: P150,000 x 10% = P15,000

Income and Expense Summary P150,000

A, Drawing P69,000
B, Drawing 81,000
To distribute profit to partners.
 Case 2 – Bonus is computed based on profit after deducting salaries but before
Bonus

Using the same illustration in case 1 except that A shall receive a 10% bonus of
profit after salaries but before bonus.

Schedule of Profit Distribution

Partners
Total A B
Salaries allowed P50,000 P20,000 P30,000
Bonus to A 10,000 10,000
60,000
Remainder divided 40% - 60%:
( 150,000 – 60,000 = 90,000)
A ( 90,000 x 40% ) 36,000 36,000
B ( 90,000 x 60% ) 54,000 _______ 54,000
Profit as distributed P 150,000 P66,000 P 84,000

Computation of Bonus:
Let B = bonus
S = salaries
B = 10% ( 150,000 – S )
= 10% ( 150,000 – 50,000 )
= 10% ( 100,000 )
= P 10,000

Income and Expense Summary P150,000

A, Drawing P66,000
B, Drawing 84,000
To distribute profit to partners.

Case 3 – Bonus is computed based on profit after deducting salaries and bonus.

Using the same illustration except that A shall receive a 10% bonus after deducting
salaries and bonus.
Schedule of Profit Distribution
Partners
Total A B
Salaries allowed P50,000 P20,000 P30,000
Bonus to A 9,091
Total P59,091
Remainder divided 40% - 60%:
( 150,000 – 59,091 = 90,909)
A ( 90,909 X 40% ) 36,364 36,364
B ( 90,909 x 60% ) 54,545 _______ 54,545
Profit as Distributed P150,000 P65,455 P 84,545
Computation of Bonus:
Let B =Bonus S= salaries
B = 10% ( 150,000 – S – B ) Income and Expense Summary 150,000
= 10% ( 150,000 – 50,000 – B ) A, Drawing 65,455
= 10% (100,000 –B) B, Drawing 84,545
= 10,000 - .10B To distribute profit to partners.
B + .10B = 10,000
1.10B = 10,000
B = 10,000 / 1.10
B = P 9,091 -o0o-