PARTNERSHIP (Cont.

PARTNERSHIP OPERATIONS
• Divisions of Profit/Loss (in the order of priority)

• Additional allowances for partners [SIB]

1. Salaries
• Salary is a compensation, therefore, normally given to industrial partners.
2. Interest
• Because of the capital that they have chosen to partnership other than in
any other investment opportunity, they can stipulate to have an annual
interest on their capital contributions.
• Will the basis be the original capital contribution like the profit/loss of
Capitalist partners? - it depends on the stipulation, it can be either:
o Original
o Beginning bal.
o Additional
o Weighted
3. Bonus
• Bonus is usually given as a reward; only given if the partnership earns profit
• Thus, a managing partner may be entitled to a bonus for excellent
management performance.
• Withdrawals
o Timing of deduction:
▪ Temporary Withdrawal - deducted at the end of the period
▪ Permanent Withdrawal - deducted at the time of withdrawal
• In Computing the weighted average capital (usually used in computing the
interest):
▪ Temporary Withdrawal - not deducted
▪ Permanent Withdrawal - deducted
• Journal Entry:

Edited by:
Mishe Ghail M. Coz

Made by:
Anne Gwyneth S. Reyes (2021)
 ▪ Temporary Withdrawal - withdrawal in anticipation of profits (withdrawal of
SIB allowance)
▪ Dr. Drawing
▪ Cr. Cash
▪ The drawing account will be closed at the end of the period
• Permanent Withdrawal - withdrawal as direct reduction from capital
o Dr. Capital
o Cr. Cash

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PARTNERSHIP DISSOLUTION
• Dissolution: Change in the relationship of the partners
o Liquidation is the termination of the business
• Why does partnership need to be dissolved if it’s just a change in the relationship?
o Because partnership is a contract and change in relationship has to be reflected in
the articles of partnership.
▪ Thus, new articles of partnership should be drawn up.
• Change of ownership structure:
1. Admission of a new partner
2. Withdrawal, retirement, or death of a partner
3. Incorporation of a partnership

Admission of a new partner

• 2 types:
o Admission by purchase of interest
o Admission by investment
A. Admission by purchase of interest
• Transaction: between selling partner and new partner
o Gain/Loss from this transaction will not affect the partnership
o Thus, not recorded in the partnership’s books
▪ The transaction only resulted to transfer within equity
• Total asset/capital of the partnership will not change

B. Admission by investment
• Transaction: between Partnership and the new partner
o Any payment will increase the asset and capital of partnership
o Should there be gain/loss
▪ None

Edited by:
Mishe Ghail M. Coz

Made by:
Anne Gwyneth S. Reyes (2021)
 ▪ The difference is accounted for as Bonus.
▪ Transfer from one partner to another

Revaluation of Assets:
• Upon dissolution, a new partnership will be created.
o Thus, the assets and liabilities have to be restated to their fair values.
• Who will receive a share in the increase/decrease from revaluation?
o The adjustment must be allocated first to the partners before a new partner will be
admitted.
SAMPLE PROBLEM:

A. Admission by purchase of interest

The balance of the partnership on January 1, 2021 is presented below:

On August 1, 2021, JPI partnership admitted A as a new partner in the partnership by purchasing
20% interest, with a profit and loss share of 15% and paid PhP550,000. The net income of the
partnership prior to admission amounted to PhP200,000.

1. Capital interest of the partners after admission.

• Net income of PhP200,000 was distributed first before the admission of a new partner.

Edited by:
Mishe Ghail M. Coz

Made by:
Anne Gwyneth S. Reyes (2021)
• The Total Capital Interests were multiplied by 80% since the new partner just purchased
the 20%.
• Notice that the total capital interest of PhP3,050,000 did not change after admitting the
new partner.
o The settlement will be made outside the partnership.
• Notice also that the 15% profit and loss ratio of the new partner was ignored. The sample
problem wants to emphasize the difference between the capital ratio and profit/loss ratio.
• Journal entry:

• No Cash was included in the entry because the transaction was only a transfer
within equity.

2. Amount received by the partners from the PhP550,000 paid by new partner
A.
• Do not directly multiply the payment (550k) to their original interest.
• “Make bawi muna” of the interest sold. (The amounts are those reflected in the JE
above)

• The “Interest Sold” amounted to 610,000 but the payment received was only
550,000.
o Therefore, the partners incurred a loss of 60,000.

3. Revaluation of equipment: Overvalued by PhP300,000. Capital interest of

partners after admission.

Edited by:
Mishe Ghail M. Coz

Made by:
Anne Gwyneth S. Reyes (2021)
 • The profit and revaluation must be distributed among the original partners.
• Journal entries:
Revaluation:
J, Capital 75,000
P, Capital 105,000
I, Capital 120,000
Non-cash Asset 300,000

Adjustment of Capital:
J, Capital 145,000 *(725k x 20%)
P, Capital 173,000 *(865k x 20%)
I, Capital 232,000 *(1.16m x 20%)
A, Capital 550,000

B. Admission by investment
The capital balances of the partners in JPI Co. are as follows:

Edited by:
Mishe Ghail M. Coz

Made by:
Anne Gwyneth S. Reyes (2021)
 1. A’s investment - 60,000 cash for a 25% interest in the partnership’s net assets and
profits.

• Capital of A;
o Contributed capital = 60,000 cash
o Agreed capital = 240,000 x 25% (agreed interest in the partnership)
▪ PhP60,000
• TCC = TAC

• Since TCC = TAC, there will be no adjustment in the capital of other partners.

• Journal entry:

Cash 60,000
A, Capital 60,000

2. A’s investment - 80,000 cash for a 25% interest in the partnership’s net assets
and profits.

Edited by:
Mishe Ghail M. Coz

Made by:
Anne Gwyneth S. Reyes (2021)
• Capital of A:
o TCC = 80,000 cash
o TAC = 260,000 x 25% (agreed interest in the partnership)
▪ PhP65,000
• TCC > TAC

• Since A’s TCC(80,000) > TAC (65,000), there will be a bonus to old partners.

• How much will be the bonus to old partners?

o 195,000 - 180,000 = 15,000

Edited by:
Mishe Ghail M. Coz

Made by:
Anne Gwyneth S. Reyes (2021)
 • Distribute the 15,000 bonus based on their P/L ratio. (40%, 30%, 30%)

• Journal entry:

3. A’s investment - 52,000 cash for a 25% interest in the partnership’s net assets
and profits.

Edited by:
Mishe Ghail M. Coz

Made by:
Anne Gwyneth S. Reyes (2021)
• Capital of A:
o TCC = 52,000 cash
o TAC = 232,000 x 25% (agreed interest in the partnership)
▪ PhP58,000
• TCC < TAC
• Since A’s TCC(52,000) > TAC (58,000), there will be a bonus to new partner.

• How much will be the bonus to the new partner?

o 174,000 - 180,000 = (6,000)

• Distribute the (6,000) based on their P/L ratio. (40%, 30%, 30%)

Edited by:
Mishe Ghail M. Coz

Made by:
Anne Gwyneth S. Reyes (2021)
 • Journal entry:

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Withdrawal, retirement or death of a partner

• Same rule as to Admission of a new Partner
o Adjust the partners’ capital for:
▪ Net income
▪ Prior period error
▪ Revaluation
• Retiring partner may sell his interest to:
1. Outsider (new partner)
• Accounting: same as admission by purchase
o Between new partner and retiring partner
2. Remaining partners
• Accounting: same as admission by purchase
o Between remaining partners and retiring partner
3. Partnership
• Between partnership and the retiring partner

SAMPLE PROBLEM:
The January 1, 2021 balance sheet of PDF Co. is presented below:

Edited by:
Mishe Ghail M. Coz

Made by:
Anne Gwyneth S. Reyes (2021)
The partners share profits and losses as follows: P 20%; D 30%; and F 50%. Partner D is retiring
from the partnership and the partners have agreed that the non-cash assets should be adjusted
to their fair value of PhP1,200,000 at December 31, 2021. The partnership net income for 2021
is PhP250,000. They further agree that D will receive PhP554,250 cash for his interest exclusive
of the loan, which is to be paid in full by the partnership.

Suggested Solution:
• First, distribute the profit and the amount of revaluation among the partners.

• Notice that the capital of D was not adjusted for the amount that he loaned to the
partnership.
o That will be settled by the partnership in the normal operation.
• Since the payment is greater than the capital interest of D, he will receive a bonus
o 554,250 - 535,000 = 19,250

• The 19,250 bonus to D will be deducted from P’s and F’s capital.
o P(20%) = 19,250 x 20/70 = 5,500
o F(70%) = 19,250 x 50/70 = 13,750

Edited by:
Mishe Ghail M. Coz

Made by:
Anne Gwyneth S. Reyes (2021)
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Incorporation of a Partnership
• Partnership is converted into Corporation
• The created Corporation will:
o Acquire the assets
o Assume the liabilities
o In return, will issue shares of stocks to the owners
• The capital of the partners have to be adjusted for:
o P/L
o Revaluation gain/losses
• The books will have to be closed and will subsequently open the book of the
corporation.

SAMPLE PROBLEM:
PDF Co. is converted into a corporation on Jan. 1, 2021.

Edited by:
Mishe Ghail M. Coz

Made by:
Anne Gwyneth S. Reyes (2021)
The corporation was authorized to issue PhP100 par preference shares and PhP10 par ordinary
shares. The partners agreed to receive 1,000 ordinary shares each and preference shares for
their remaining interest.

Suggested Solution:

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Edited by:
Mishe Ghail M. Coz

Made by:
Anne Gwyneth S. Reyes (2021)
PARTNERSHIP LIQUIDATION

Statement of Liquidation - a financial report that highlights the realization and the liquidation of
a partnership.

Methods of partnership liquidation

• Lump-sum method
o It takes place when all the non-cash assets of the partnership are sold
simultaneously, or within a very short period of time, and the proceeds are used to
settle first all the liabilities and any remaining amount is paid to the partners under
a lump-sum payment.
o It may be possible when there is a contracted buyer of all the non-cash assets or
the assets are sold on a package deal basis.

• Installment method
o It takes place when the partners’ claims are settled on an installment basis as cash
becomes available, but only after all partnership liabilities are fully settled.

Summary of differences in accounting under lump-sum and installment methods

Lump-sum method Installment method

1. All of the non-cash assets are 1. Some of the non-cash assets are converted to cash.
converted to cash.

2. The total gain or loss on the 2. The carrying amount of any unsold non-cash
sale is allocated to the partners’ asset is accounted as a loss to be allocated to the
capital balances based on their P/L partners’ capital balances based on their P/L ratios.
ratios.

3. Actual liquidation expenses 3. Actual and estimated future liquidation expenses

are allocated to the partners’ are allocated to the partners’ capital balances based on
capital balances based on their P/L their P/L ratios.
ratios.

4. The liabilities to outside 4. The liabilities to outside creditors are partially or

creditors are fully settled. fully settled.

Edited by:
Mishe Ghail M. Coz

Made by:
Anne Gwyneth S. Reyes (2021)
 5. The liabilities to inside 5. The liabilities to inside creditors are partially or
creditors are fully settled. fully settled but only after the full settlement of the
liabilities to outside creditors.

6. Any remaining cash is 6. If both the liabilities to outside and inside creditors
distributed to the owners in full are fully settled, any remaining cash less cash set aside
settlement of their interests. for future liquidation expenses is distributed to the owners
as partial settlement of their interests.

Order of priority of the settlement of claims

1. Outside creditors
2. Inside creditors
3. Owners’ capital balances

SAMPLE PROBLEM
At the beginning of the year 2020, the partners of Elite Co. decided to liquidate their
partnership. The following information was made available:

In addition, the following relates to the conversion of non-cash assets:

1. P45,000 was collected on the accounts receivable; the balance is uncollectible.
2. The amount received from the sale of the entire inventory was P85,000.
3. The equipment was sold at P375,000.
4. The partnership has paid P3,500 for liquidation expenses.

Requirement: Determine the amounts of cash distributed to the partners in the final settlement of
their interest.

SUGGESTED SOLUTION
To start with the computation of the cash distributed to the partners, we should first
determine the net cash proceeds from the sale of the non-cash assets. We should also note that
this problem is to be accounted for under the lump-sum method.

Edited by:
Mishe Ghail M. Coz

Made by:
Anne Gwyneth S. Reyes (2021)
 1. Collection on accounts receivable 45,000
2. Sale of inventory 85,000
3. Sale of equipment 375,000
4. Payment of liquidation expenses (3,500)
Net cash proceeds 501,500

After computing the net cash proceeds, we are to compare such amount on the carrying amounts
of the non-cash assets to determine the gain or loss on sale.

Net cash proceeds 501,500

Less: Carrying amount of non-cash assets
(70k + 150k + 450k) (670,000)
Loss on sale of non-cash assets (168,500)

The next thing to do is to allocate the loss on the partners’ capital balances and we can now
compute the amounts of cash distributed to the partners..

If you can notice, we have added the Payable to Nadia account to the capital balance of Nadia
since it is a right of offset. It is payable to a partner which has a higher priority over the partner’s
capital balance, thus, it shall be included in computing the amounts to be received by each
partner. Now, to check whether the total amount received by the partners is correct, it should be
equal to the amount of cash available for distribution to partners:

Beginning balance of cash 40,000

Add: Net cash proceeds from sale of non-cash assets 501,500
Less: Payment to outside creditors (accounts payable) (100,000)
Cash available for distribution to partners 441,500

SAMPLE PROBLEM
On January 1, 2020, the partners of Penthouse Co. decided to liquidate their partnership
over a prolonged period of time. Distributions to partners shall be made once cash becomes
available. The following information was made available:

Edited by:
Mishe Ghail M. Coz

Made by:
Anne Gwyneth S. Reyes (2021)
In addition, the following relates to the first conversion of non-cash assets:
1. P50,000 was collected on 80% of the accounts receivable.
2. The amount received from the sale of half of the inventory was P60,000.
3. The equipment was sold at P200,000, with its carrying amount at P350,000.
4. The partnership has paid P2,500 for actual liquidation expenses.
5. Estimated future liquidation expense amounted to P1,500.
6. P8,000 cash was retained in the business for potential unrecorded liabilities and
anticipated expenses.

Requirement: Determine the amounts of cash distributed to the partners from the partial
realization of partnership assets.

SUGGESTED SOLUTION
Just as what we’ve done in the previous problem, we are to first determine the net cash
proceeds from the partial sale of the non-cash assets.

1. Collection on accounts receivable 50,000

2. Sale of inventory 60,000
3. Sale of equipment 200,000
4. Payment for actual liquidation expenses (2,500)
5. Payment for estimated liquidation expenses (1,500)
6. Cash retained for future expenses (8,000)
Net cash proceeds 298,000
Note: As you can notice, since the given problem states that the liquidation process shall
run through a prolonged period of time, and that distributions shall be made once cash becomes
available, this then employs the installment method. Thus, payments for actual and estimated
liquidation expenses, along with the cash retained for future expenses, shall be deducted in
getting the net cash proceeds. Likewise, any unsold non-cash asset shall be treated as a loss to
be shared by the partners.

After computing the net cash proceeds, we are to compare such amount on the carrying amounts
of the non-cash assets to determine the gain or loss on sale.

Edited by:
Mishe Ghail M. Coz

Made by:
Anne Gwyneth S. Reyes (2021)
 Net cash proceeds 298,000
Less: Carrying amount of non-cash assets
(100k + 125k + 400k) (625,000)
Loss on sale of non-cash assets (327,000)

Now, we shall allocate the loss on the partners’ capital balances and determine the amounts of
cash distributed to the partners.

To check whether the total amount received by the partners is correct, it should be equal to the
amount of cash available for distribution to partners:

Beginning balance of cash 35,000

Add: Net cash proceeds from sale of non-cash assets 298,000
Less: Payment to outside creditors (accounts payable) (60,000)
Cash available for distribution to partners 273,000

Reference:
Ballada, W.L. (2021). Basic Financial Accounting and Reporting. Manila: DomDane Publishers.

Dayag, A. (2019). Advanced Financial Accounting and Reporting (Theories & Problems).
Manila. GIC Enterprises & Co., Inc.
Millan, Z.V. (2020). Accounting for Special Transactions (Advanced Accounting 1). Baguio
City. Bandolin Enterprise.
Various review materials in Advanced Financial Accounting and Reporting

Edited by:
Mishe Ghail M. Coz

Made by:
Anne Gwyneth S. Reyes (2021)