UNIT 1: PARTNERSHIP ACCOUNTING

ILLUSTRATIVE 1: FORMATION
Xerox, Yves, and Zeus formed the XYZ Partnership on June 1, 2020, with the following assets and liabilities,
measured at book values in their respective records, contributed by each partner:
Xerox Yves Zeus

Cash P160,000 P120,000 P120,000

Accounts receivable 28,180 30,800 55,120
Inventory 108,000 95,400 53,600

Plant, Property, & Equipment (PPE) 360,000 288,000 304,000

Accounts payable (32,000) (40,000) 48,000
Long-term debt (80,000) (96,000) 104,000
Net assets P544,180 P398,200 P380,720

Except for the plant assets and the long-term debts, the partners have agreed that the proprietorship net assets are
fairly valued.

The agreed fair valuation of net asset items where the book value is not the fair value follows:

Xerox Yves Zeus

PPE P404,000 P277,920 P260,100
Long-term-debt 92,000 100,000 120,720

Required:
1. How much is the contribution of each partner? Calculate their contribution ratio.
2. What is the capital balance for each partner at the opening of business on June 1 as per above
information?
3. Prepare the journal entry in the partnership books for the above assumption.
4. What is the capital balance for each partner at June 1, instead, if the interest ratio is agreed at 4:3:3 to
Xerox, Yves, and Zeus, respectively?
5. Prepare the journal entry for the revised assumption.
6. Explain why Partner Yves was unaffected by the bonus feature in the ownership agreement among
the partners

ILLUSTRATIVE 2: OPERATIONS
On January 1, 2020, Chris and Nikki formed a partnership by initially contributing cash of P 280,000 and
P176,000, respectively. The changes in their capital balances during 2020 are summarized as follows:
Chris Nikki
Balances, January 1 P 280,000 P 176,000
Investment, April 1 25,600
Withdrawal, July 1 (40,000)
Investment, September 1 74,400
Withdrawal, October 1 (3,200)
Investment, December 31 6,400
Balances, December 31 P 302,400 P 216,800

The partnership reported a net income of P324,960 in 2020 and the profit and loss agreement are as follows:
a. Interest at 5% is allowed on average capital balances.
b. Salaries of P 2,000 per month to each partner.
c. Bonus to Chris of 10% of net income after interest, salaries, and bonus.
d. Balance to be divided in the ratio of 6:4 to Chris and Nikki, respectively.

Both partners withdrew one-fourth of their salary allowances in 2020.

Required:
1. Prepare a schedule for the division of net profit for 2020 with supporting computations when
appropriate.
2. Prepare a statement of the partners’ capital balances for 2020.
ILLUSTRATIVE 3: ADMISSION OF A NEW PARTNER
Elmo and Lito are partners sharing profits and losses in the ratio of 60% and 40%, respectively. The partnership
balance sheet at April 30, 2020 follows:

Cash P 40,000 Accounts Payable P 90,800

Inventory 60,000 Elmo, Loan 4,400
Land 64,000 Elmo, capital 380,000
Buildings 404,000 Lito, capital 104,800
Lito, Loan 12,000
Total P 580,000 Total P580,000

The partners agreed to admit Romy for a one-tenth interest for a P56,000 consideration. At the time of admission,
the fair market value of the land is appraised at P144,000 and the market value of the inventory is P120,000.

Required:
1. Assume Romy is admitted by purchase of each of the original partners’ interest and paid the partners:
A. Prepare the journal entries on the revaluation of assets and the admission of Romy
B. Calculate the capital balances of the partners after the admission of Romy.
C. Calculate the amounts received by Elmo and by Lito for their respective partnership interest
transferred to Romy
D. Explain why no amount of bonus was recognized despite the difference between Romy’s investment
and his acquired partnership interest.

2. Now assume Romy is admitted by investing the P56,000 to the partnership for a 10% interest
A. Calculate the partners’ capital balances after the admission of Romy.
B. Prepare the journal entry for the admission of Romy.

ILLUSTRATIVE 4: RETIREMENT OF A PARTNER

The following balances as at October 31, 2020 for the Partnership of Tony, Liza, and Cory were as follows:
Cash P 66,000 Liabilities P 65,000
Liza, Loan 19,000 Tony, loan 20,500
Other Assets 500,000 Tony, capital 167,000
Liza, capital 107,500
Cory, capital 225,000
Totals P585,000 Totals P585,000

Tony has decided to retire from the partnership on October 31. Partners agreed to adjust the non-cash assets to
their fair market value of P620,000. The estimated profit to October 31 is P120 ,000. Tony will be paid P252,500
for his partnership interest exclusive of his loan which is repaid in full. Their profit and loss ratio is 4:2:4 to Tony,
Liza and Cory, respectively.

Required:
1. Prepare entries for the retirement of Tony from the partnership.
2. What will be the balance of Liza’s capital account after the retirement of Tony?

ILLUSTRATIVE 5: INCORPORATION
Partners Boba and Tess, who share profits and losses equally, have decided to incorporate thepartnership at December
31, 2020. The partnership net assets after the following adjustments will be contributed in exchange for shares of
stocks from the corporation.
i. provision of allowance for doubtful accounts, P6,250.
ii. adjustment of overstated equipment by 2,500
iii. adjustment of understated inventory by P20,000 and
iv. recognition of additional depreciation of P5,000.

The corporation’s ordinary shares is to have a par value of P312.50 each and the partners are to be issued
corresponding shares equivalent to 70% of their adjusted capital balances.

The partnership balance sheet at December 31, 2020 follows:

Cash P 112,500 Liabilities P 107,500
Accts rec 62,500 Acc. Dep 5,000
Inventory 87,500 Boba, cap. 106,250
Equipment 50,000 Tess, cap. 93,750
Total P 312,500 Total P 312,500
Required:
1. Determine the total credit to APIC upon incorporation of the partnership
2. The number of ordinary shares issued to Partner Tess is

ILLUSTRATIVE 6: LUMP-SUM LIQUIDATION

DONNA, JANICE and ELLERY plan to liquidate their partnership. They have always shared losses and gains
in a 2:3:5 ratio, and on the day of the liquidation their balance sheet appeared as follows:

DONNA, JANICE, and ELLERY

Balance Sheet
December 31, 2020

Assets Liabilities and Capital

Cash P68,750 Accounts payable P130,370
ELLERY, loan 5,000
Other assets 451,250 DONNA, Capital 76,250
JANICE, loan 50,000 JANICE, capital 250,880
ELLERY, capital 107,500
Total assets P570,000 Total equities P570,000

The other assets are sold for P212,500, and assume the following information on partners’ net assets, exclusive
of their respective partnership interests at that point.

DONNA JANICE ELLERY

Assets P687,500 P375,000 P 167,000
Liabilities 562,500 350,000 161,875

Required: Prepare general journal entries to record the sale of the other assets and the distribution of the
cash to the proper parties. Show supporting computations in good form.

ILLUSTRATIVE 7: INSTALLMENT LIQUIDATION

On December 31, 2020, the balance sheet of CDO Partnership is as follows:

Assets Liabilities
Cash P 15,360 Account Payable P51,200
SlryPyble, Celia 10,240
Noncash assets 271,360 Dave, Loan 20,480
Loan to Oleg 10,240 Celia, Capital 38,912
Dave, Capital 73,728
Oleg, Capital 102,400
P296,960 P 296,960

Profit and losses were shared as follows; Celia, 30%; Dave, 30%; Oleg, 40%. It was decided to liquidate the
business. The following is a summary of the realization and liquidation activities.

Book Value of Asset Cash Expenses Liabilities Cash Paid to

Realized Collected Paid Paid Partners
1st Period 133,120 81,920 4,100 40,000 41,980
2nd Period 76,800 51,200 4,800 11,200 40,000
3rd Period 61,440 35,840 3,600 - 38,640
Total 271,360 168,960 12,500 51,200 120,620

Required:
1. Prepare a statement of liquidation for each period.
2. Prepare a program to show how cash is to be distributed to partner