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Chapter 2
Partnership Operations

PROBLEM 1: TRUE OR FALSE

1. FALSE
2. TRUE
3. TRUE
4. TRUE – [(100 x 10%) + (100% x 90% x 50%)] = 55
5. TRUE (100% x 90% x 50%) = 45
6. FALSE – {50 + [(100 – 50 – 30) x 50%]} = 60
7. FALSE {30 + [(-100 – 50 – 30) x 50%]} = -60
8. TRUE (360 ÷ 120%)] = 300
9. TRUE – [(160 x 12/12) + (100 x 6/12) – (40 x 3/12)] x 10% = 20
10. TRUE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. A
2. D
3. D
Only interest on liabilities is recognized as expense. Invested
capital is considered equity. Thus, interest on invested capital is
treated as an allocation mechanism for partnership profit or loss
rather than partnership expense.

4. A
5. A
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PROBLEM 3: EXERCISES

1. Solution:
Requirement (a):
A B Total
Amount being allocated 180,000
Allocation:
1. Salaries 80,000 40,000 120,000
2. Allocation of remaining profit
(180K profit – 120K salaries) =
60K
(60K x 70%); (60K x 30%) 42,000 18,000 60,000
As allocated 122,000 58,000 180,000

Requirement (b):
Monthly A, Drawings 80,000
entries B, Drawings 40,000
Cash 120,00
to record the withdrawal of salary 0
allowances
Year-end Income summary 180,00
entry A, Capital 0 122,00
B, Capital 0
to record the distribution of profit 58,000
Year-end A, Capital 80,000
entry B, Capital 40,000
A, Drawings 80,000
B, Drawings 40,000
to close the drawings accounts

2. Solution:
A B Total
Amount being allocated 200,000
Allocation:
1. Salaries 160,000 80,000 240,000
2. Allocation of remaining loss
(200K profit – 240K salaries) =
-40K
(-40 x 70%); (-40K x 30%) (28,000) (12,000) (40,000)
As allocated 132,000 68,000 200,000

3. Solution:
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A B Total
Amount being allocated 520,000
Allocation:
100,00 160,00
1. Salaries 60,000
0 0
60,00 60,00
2. Bonus after bonusa
0 0
3. Allocation of remaining profit
(520K – 160K - 60K) = 300K 150,00 150,00 300,00
(300K x 50%); (300K x 50%) 0 0 0
310,00 210,00
As allocated 520,000
0 0

a
The bonus is computed as follows:
Profit before salaries and bonus 520,000
Salaries (160,000)
Profit after salaries but before bonus 360,000
P
B = P -
1 + Br
360,000
B = 360,000 -
1 + 20%
B = 360,000 - 300,000
B = 60,000

4. Solution:
Months
outstanding ÷
Balance Total months in Weighted
s a year average
Beg. Balance 120,000 12/12 120,000
Mar. 1 additional investment 60,000 10/12 50,000
Aug. 1 withdrawal (30,000) 5/12 (12,500)
Sept. 30 additional
investment 40,000 3/12 10,000
Nov. 1 additional investment (9,000) 2/12 (1,500)
Weighted average capital balance 166,000

A B Total
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Amount being allocated 200,000

Allocation:
1. Salaries 100,000 - 100,000
2. Interest on weighted ave.
- 16,600 16,600
capital balance (166K x 10%)
3. Allocation of remaining loss
(200K – 100K - 16.6K) = 83.4K
41,700 41,700 83,400
(83.4K ÷ 2)
As allocated 141,700 58,300 200,000

5. Solution:
Beg. balance (Apr. 1) 100,000 9/12 75,000
June 30 withdrawal (21,000) 6/12 (10,500)
Sept. 30 additional investment 8,000 3/12 2,000
(333.33
Dec. 1 withdrawal (4,000) 1/12 )
66,166.6
Total 7
Multiply by: 6%
Interest on Mr. A’s weighted ave. capital balance 3,970

6. Solution:
A B Total
Amount being allocated 250,000(b)
Allocation:
1. Salaries (10,000 x 12 mos.) 120,000 - 120,000
2. Interest on capital (200K x 10%) - 20,000 20,000
3. Bonus (a) 50,000 - 50,000
4. Allocation of remainder
(250K – 120K - 20K – 50K) = 145.5K
30,000 30,000 60,000
(60K ÷ 2)
As allocated 200,000 50,000 250,000

Profit net of salaries, bonus and interest 60,000

Add back: Annual salary (10,000 x 12 mos.) 120,000
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Add back: Interest on capital (200K x 10%) 20,000

Profit before annual salary and interest but after
bonus 200,000

Profit before salary and interest but after bonus 200,000

Divide by: (100% less 20% bonus rate) 80%
(b)
Profit before salary, interest and bonus 250,000
Multiply by: Bonus rate 20%
(a)
Bonus (bonus before bonus scheme) 50,000

7. Solution:
The interest on the excess or deficiency on capital contribution is
computed as follows:
A B
Capital balance to be maintained 200,000 300,000
Actual average balance 240,000 220,000
Excess (deficiency) 40,000 (80,000)
Multiply by: Interest rate 12% 12%
Multiply by: Months outstanding 9/12 9/12
Interest to (from) 3,600 (7,200)

A B Total
Amount being allocated 120,000
Allocation:
1. Interest to (from) 3,600 (7,200) (3,600)
2. Allocation of remainder
[120K – (-3.6K)] = 123.6K
61,800 61,800 123,600
(123.6K ÷ 2)
As allocated 65,400 54,600 120,000

Year-end Income summary 120,00

entry A, Capital 0 65,400
B, Capital 54,600

8. Solution:
Profit (after salaries but before bonus and interest) 588,000
Add back: Monthly salaries (8K x 9 mos.) 72,000
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Profit before salaries, bonus & int. (Amt. to be allocated) 660,000

A B Total
Amount being allocated (see computation above) 660,000
Allocation:
1. Salaries 72,000 72,000
2. Bonus a 60,000 - 60,000
3. Interest b - 32,000 32,000
4. Allocation of remainder
(660K - 72K - 60K – 32K) ÷ 2 248,000 248,000 496,000
As allocated 380,000 280,000 660,000

a
The “bonus after bonus” is computed as follows:
P
B = P -
1 + Br
660,000
B = 660,000 -
1 + 10%
B = 660,000 - 600,000
B = 60,000

b
Beg. balance (Apr. 1) 400,000 9/12 300,000
July 1 additional investment 44,000 6/12 22,000
Dec. 1 withdrawal (24,000) 1/12 (2,000)
Total 320,000
Multiply by: 10%
Interest on B’s weighted ave. capital balance 32,000

A B
Capital, beg. 200,000 400,000
Additional investment - 44,000
Share in profit 380,000 280,000
Drawings (72,000)* (24,000)
Capital, end. 508,000 700,000
* the monthly salaries
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PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. B
Solution:
Red White Total
Amount being allocated 80,000
Allocation:

1. Salaries 55,000 45,000 100,000

2. Allocation of remaining profit
(80K profit – 100K salaries) =
-20K
(-20 x 60%); (-20K x 40%) (12,000) (8,000) (20,000)

As allocated 43,000 37,000 80,000

2. A
Solution:
A B C Total
560,00
Amount being allocated
0
Allocation:
1. Salaries 80,000 80,000
2. Bonus (560K - 80K) x 10% 48,000 48,000
4. Allocation of remainder:
(560K - 80K - 48K) = 44K;
(432K x 2/9); (432K x 3/9); (432K x 432,00
4/9) 96,000 144,000 192,000 0
224,00 560,00
As allocated
0 144,000 192,000 0

3. Solution:
Annual salaries:
 A: (10,000 x 12 months) = 120,000
 B: (4,000 x 12 months) = 48,000

Profit before salaries = 360,000 + 120,000 + 48,000 = 528,000

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A B Total
Amount being allocated 528,000
Allocation:
1. Salaries 120,000 48,000 168,000
2. Allocation of remaining profit
(528K profit – 168K salaries) =
360K
(360K x 50%); (360K x 50%) 180,000 180,000 360,000

As allocated 300,000 228,000 528,000

4. C Solution:
A B Total
Amount being allocated 2,500,000
Salary 100,000 100,000
Bonus (a) 400,000 400,000
Allocation: (based on contributions)
2M x (300K / 800K) 750,000 750,000
2M x (500K / 800K) 1,250,000 1,250,000
1,250,00
As allocated 1,250,000 2,500,000
0

(a)
2.5M – 100K = 2.4M;
2.4M – (2.4M ÷ 120%) = 400,000

5. C
Solution:
A B Total
Amount being allocated 100,000
Allocation:
1. Salaries 48,000 30,000 78,000
2. Bonus after bonus a 2,000 2,000
3. Allocation of remaining profit
(100K – 78K - 2K) = 20K
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(20K x 60%); (20K x 40%)

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 bonus 22,000

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

6. B
Solution:
A B Total
Amount being allocated (10,000)
Allocation:
1. Salaries 25,000 4,000 29,000
2. Bonus after bonus b - - -
3. Allocation of remaining loss
(-10K – 29K) = -39K
(23,400) (15,600) (39,000)
(-39K x 60%); (-39K x 40%)
As allocated 1,600 (11,600) (10,000)
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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.

7. B [140K + (40K x 6/12) – (15K x 5/12) = 153.75K x 10% =

15,375
8. C
Step 1: Prepare a pro-forma allocation table.
Burto
Clif Total
n
Amount being allocated ?
Allocation:
100,00
1. Salaries - 100,000
0
2. Bonus ? - ?
3. Allocation of remaining profit ? ? ?
296,00
As allocated ? ?
0

Step 2: ‘Squeeze’ for Burton’s share in remaining profit.

Burto
Clif Total
n
Amount being allocated ?
Allocation:
100,00
1. Salaries - 100,000
0
2. Bonus ? - ?
3. Allocation of remaining profit
296,00
? ?
0
296,00
As allocated ? ?
0

Step 3: ‘Squeeze’ for some missing amounts.

Burto
Clif Total
n
Amount being allocated ?
Allocation:
1. Salaries 100,000 - 100,000
2. Bonus ? - ?
3. Allocation of remaining profit
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1,036,000(b 296,00 1,332,000(a

) )
0
296,00
As allocated ? ?
0

(a)
296,000 ÷ (2/9) or 296,000 x 9/2 = 1,332,000 remaining profit
(b)
1,332,000 x 7/9 = 1,036,000

Step 4: Compute for Cliff’s bonus.

Profit after salary and bonus 1,332,000

Divide by: 100% - 10% ‘bonus before bonus’ scheme 90%
Profit after salary but before bonus 1,480,000
Multiply by: Bonus rate 10%
Bonus to A 148,000

Step 5: ‘Squeeze’ the other missing amounts.

Burto
Clif Total
n
1,580,000
Amount being allocated (c)

Allocation:
1. Salaries 100,000 - 100,000
2. Bonus 148,000 - 148,000
1,036,00 296,00
3. Allocation of remaining profit 1,332,000
0 0
1,284,00 296,00
As allocated 1,580,000
0 0

(b)
100K + 148K + 1.332M = 1,580,000

9. C
Solution:
A B Total
Amount being allocated 480,000(a)
Allocation:
1. Salary 60,000 60,000 120,000
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2. Bonus 60,000(b) 60,000

3. Allocation of remainder
(480K – 120K - 60K) = 300K ÷ 2 150,000 150,000 300,000
As allocated 270,000 210,000 360,000

(a)
Profit before salaries and bonus is computed as follows:
Profit after salaries but before bonus 360,000
Salaries (60K x 2) 120,000

Profit before salaries and bonus 480,000

(b)
The bonus is computed as follows:
P
B = P -
1 + Br
Where: B = bonus
P = profit before bonus and tax but after salaries
Br = bonus rate or bonus percentage

360,000
B = 360,000(c) -
1 + 20%
B = 360,000 - 300,000
B = 60,000

Note: The phrase “treated as expenses” means the bonus is

computed on profit after deducting both the salaries and the
bonus.
(c)
This is the amount of profit given in the problem.

10. D
Solution:
A, Capital
- beg.
Withdrawals 120,000 80,000 Additional investment
60,000 Share in profit (squeeze)
end. 20,000

A's share in profit 60,000

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Divide by: A's P/L ratio 25%

Partnership's profit 240,000

PROBLEM 5: CLASSROOM ACTIVITY

The answers vary depending on the assumptions made by the
students.

PROBLEM 6: FOR CLASSROOM DISCUSSION

1. Solutions:

Case 1:
A B C Total
100,00
Amount being allocated
0
Allocation:
12,00
1. Salaries
0 8,000 20,000
2. Bonus (100K - 20K) x 10% 8,000 8,000
3. Interest on cap.
(100K x 10%);(60K x 10%);(120K x 10,00
10%) 0 6,000 12,000 28,000
4. Allocation of remainder:
(100K - 20K - 8K - 28K) = 44K;
(44K x 40%); (44K x 30%); (44K x 17,60
30%) 0 13,200 13,200 44,000
47,60 100,00
As allocated
0 19,200 33,200 0

Case 2:
A B C Total
Amount being allocated 10,000
Allocation:
1. Salaries 12,000 8,000 20,000
2. Bonus (N/A) - -
2. Interest on cap.
(100K x 10%);(60K x 10%);(120K x 10%) 10,000 6,000 12,000 28,000
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3. Allocation of remainder
(10K - 20K - 28K) = -38K
(-38K x 40%); (-38K x 30%); (-38K x
30%) (15,200) (11,400) (11,400) (38,000)
As allocated 6,800 (5,400) 8,600 10,000

Case 3:
A B C Total
Amount being allocated (20,000)
Allocation:
1. Salaries 12,000 8,000 20,000
2. Bonus (N/A) - -
2. Interest on cap.
(100K x 10%);(60K x 10%);(120K x 10%) 10,000 6,000 12,000 28,000
3. Allocation of remainder
(-20K - 20K - 28K) = -68K
(-68K x 40%); (-68K x 30%); (-68K x
30%) (27,200) (20,400) (20,400) (68,000)
(20,000
As allocated
(5,200) (14,400) (400) )

2. Solutions:

Case 1
A B Total
Amount being allocated 90,000
Allocation:
1. Salaries (4,000 x 12 mos.) 48,000 - 48,000
2. Bonus (a) 7,000 - 7,000
3. Interest on weighted ave. capital
(b) - 4,140 4,140
4. Allocation of remaining profit
(90K – 48K - 7K – 4,140) = 30,860
(30,860 x 50%); (30,860 x 50%)
15,430 15,430 30,860
As allocated 70,430 19,570 90,000

(a)
(90,000 – 48,000) = 42,000;
Bonus = 42,000 – (42,000 ÷ 120%) = 7,000

(b)

Months
Weighte
outstanding ÷
Balance Total months in d
s a year average
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Beg. balance 30,000 12/12 30,000

July 1 additional investment 10,000 6/12 5,000
Oct. 1 withdrawal (4,000) 3/12 (1,000)
Nov. 30 additional
investment 6,000 1/12 500
Weighted average capital balance 34,500
Multiply by: 12%
Interest on weighted average capital balance 4,140

Year- Income summary 90,000

end A, Capital 70,430
entry B, Capital 19,570

Case 2:
A B Total
Amount being allocated 90,000
Allocation:
1. Salaries (4,000 x 8 mos.) 32,000 - 32,000
2. Bonus (a) 9,667 - 9,667
3. Interest on weighted ave. capital
(b) - 2,940 2,940
4. Allocation of remaining profit
(90K – 32K – 9,667 – 2,940) = 45,393 22,696.5 22,696.5
45,393
(45,393 x 50%); (45,393 x 50%) 0 0
64,363.5 25,636.5
As allocated 90,000
0 0

(a)
(90,000 – 32,000) = 58,000;
Bonus = 58,000 – (58,000 ÷ 120%) = 9,667

(b)

Months
Weighte
outstanding ÷
Balance Total months in d
s a year average
Beg. balance (May 1, 20x1) 30,000 8/12 20,000
July 1 additional investment 10,000 6/12 5,000
Oct. 1 withdrawal (4,000) 3/12 (1,000)
Nov. 30 additional
investment 6,000 1/12 500
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Weighted average capital balance 24,500

Multiply by: 12%
Interest on weighted average capital balance 2,940

Year- Income summary 90,000

end A, Capital 64,363.5
entry B, Capital 0
25,636.5
0

3. Solutions:

Step 1: Prepare a pro-forma allocation table.

A B Total
Amount being allocated ?
Allocation:
1. Salaries 20,000 - 20,000
2. Bonus ? - ?
3. Allocation of remaining profit ? 32,000 ?
As allocated ? 32,000 ?

Step 2: ‘Squeeze’ for A’s share in remaining profit.

A B Total
Amount being allocated ?
Allocation:
1. Salaries 20,000 - 20,000
2. Bonus ? - ?
3. Allocation of remaining profit
(32K ÷ 40%) = 48,000
48,000 32,000 ?
As allocated ? 32,000 ?

Step 3: Compute for the bonus.

A B Total
Amount being allocated ?
Allocation:
1. Salaries 20,000 - 20,000
2. Bonus (a) 8,000 - 8,000
3. Allocation of remaining profit
(32K ÷ 40%) = 48,000
48,000 32,000 ?
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As allocated ? 32,000 ?

(a)
Profit after salary and bonus (48K + 32K (see ‘3.’ above)) 80,000
Multiply by: Bonus rate ('bonus after bonus' scheme) 10%
Bonus to A 8,000

Step 4: ‘Squeeze’ the other missing amounts.

A B Total
Amount being allocated 108,000
Allocation:
1. Salaries 20,000 - 20,000
2. Bonus 8,000 - 8,000
3. Allocation of remaining profit 48,000 32,000 80,000
As allocated 76,000 32,000 108,000