Republic of the Philippines

City of Caloocan
St. Vincent de Ferrer College of Camaranin, Inc.
SVFC Compound, San Vicente de Ferrer Rd. Area D, Brgy. 179, Caloocan City
COURSE TITLE: Accounting for Special Transactions Professor: Orland L. Adrigado, CPA

PARTNERSHIP OPERATION

Division of Profits and losses

Philippine Civil Code provides the following rules in profit and loss sharing of partners:

A. If only the share of profits has been agreed by the partners, the share of loss shall be in
the same proportion as profit.
B. In the absence of stipulation, the share of each partner in the profit or loss shall be in
proportion to their capital contribution.

Kind of Partners as to P&L

1. Industrial partner - only contributes services or industry to the partnership. They also not
share in the partnership loss moreover, as to profit they will received just and equitable share.
2. Capitalist partner - one who contributes cash or another non cash to the partnership.
3. Capitalist-industrial partner - contributes money, property or industry.

C. (Art. 1798) the designation of losses and profits cannot be entrusted to one of the partners.
Art. 1799) a stipulation which excludes one or more partners from any share in the profits
and losses is void.
In addition to profit and loss sharing, the partnership agreement may also includes

1. Salaries - normally industrial partner receives salary in addition to his share in partnership
as compensation for his services.
2. Bonuses - managing partner may be entitled to a bonus for excellent management
performance. Unlike salary, bonus is given only if partnership earns profit. The partner is not
entitled for a bonus if it incurs loss.
3. Interest on capital contributions - the partnership may agree that capitalist partners are
entitled for annual interest in their capital contributions.

Problem 1
The capital accounts of Fernando and Arabela at the end of the year 2021 follows:
FERNANDO
January 1 Balance P280,000
May 1 Investment 120,000
October 1 Withdrawal (80,000)
Ending capital 320,000
ARABELA
January 1 Balance 200,000
April 1 Withdrawal (40,000)
Ending Capital 160,000

Profit for the year ended December 31, 2021, is P360,000.

Requirement: Compute for the share in the net income of Fernando and Arabela under each
of the following assumptions.
I. SALARIES

1. Salaries of P160,000 and P128,000 are allowed to Fernando and Arabela respectively, and
the balance of the net Profit is divided in the ratio of investments at the end of the period.

Solution:
Fernando Arabela Partnership
Profit 360,000
Salary 160,000 128,000 288,000
Remaining 48,002.40 23,997.60 72,000
Total share in D. Income 208,002.40 151,997.60 360,000

2. Assume net income before salaries is 250,000. Salaries of P160,000 and P128,000 are
allowed to Fernando and Arabela respectively, and the balance of the net Profit is based
on 60:40 P&L ratio for Fernando and Arabella respectively.

Solution:
Fernando Arabela Partnership
Profit 250,000
Salary 160,000 128,000 288,000
Remaining (22,800) (15,200) (38,000)
Total share in D. Income 137,200 112,800 250,000

II. BONUS

3. Fernando is allowed a bonus of 10% of net income and the balance is divided equally.

Fernando Arabela Partnership

Profit 360,000
Bonus 10% 36,000 0 36,000
Remaining 162,000 162,000 324,000
Total share in D. Income 198,000 162,000 360,000

4. Annual salaries of 194,000 for Fernando and 100,000 for Arabela. Fernando is allowed a
bonus of 10% of net income after salaries and bonus and the balance is divided equally.

Fernando Arabela Partnership

Profit 360,000
Salary 194,000 100,000 294,000
Bonus 10% 6,000 - 6,000
Remaining 30,000 30,000 60,000
Total share in D. Income 230,000 130,000 360,000
Computation for bonus after salary and bonus
Profit before salaries and bonus 360,000
Salaries (294,000)
Profit after salaries but before bonus 66,000
Formula for bonus after bonus: B = PASBB - (P/1+BR)
B = 66,00 - (66,000/1+10%)
B= 66,000 - 60,000 = 6,000
5. Using the data in no. 4 but the partnership incurs a loss of 10,000. Profit and loss ratio is
60% for fernando and 40% for arabella.
Fernando Arabela Partnership
Profit (10,000)
Salary 194,000 100,000 294,000
Bonus 10% 0
Remaining (182,400) (121,600) (304,000)
Total share in D. Income 11,600 (21,600) (10,000)

Bonus with limit

6. Tricia and Kyla form a Partnership with the following stipulation

1st Tricia will receive 10% bonus of profit up to 100,000 and 20% over 100,000.
2nd Kyla will receive a 5% of the remaining profit over 150,000
Any remainder will be divided equally.The partnership profit is 300,000

Tricia Kyla Partnership

Profit 300,000
Bonus to Tricia:
First 100,000 (100,000*10%) 10,000 10,000
Over 100,000 (300k-100k)*20% 40,000 40,000
Bonus to Kyla:
Rem. Prof. (300,000-10k-40k-150k)*5% 5,000 5,000

Remaining 122,500 122,500 245,000

Total share in D. Income 172,500 127,500 300,000

Bonus with choice of profit sharing scheme

7. Rhea a partner of Oraa Panit Co., is deciding whether to accept a salary of 10,000 or a
salary of 5,000 plus 10% bonus of profit after deducting salaries and bonus. The salary of
other partner is 20,000.

Requirement: at what amount of profit would Rhea be indifferent between choices?

option 1: 10,000 salary option 2: 5,000 salary plus 10% bonus

Solution: use algebraic expression

Let x= profit after salaries and bonus
10%X = bonus after bonus
10,000=5,000+10%X
10%X = 10,000-5,000 Profit after salaries and bonus 50,000
10%X = 5,000 multiply by bonus rate 10%
X = 50,000 Bonus 5,000

Profit after salaries and bonus 50,000

Add back: salaries (5k + 20k) 25,000
Add back: Bonus 5,000
Profit before salaries and bonus 80,000
Therefore, if partnership’s profit is 80,000, Rhea can either choose the option 1 or 2 for it will
result to same amount.
Checking:
Option 1: 10,000 salary = 5,000 salary + bonus

Profit before salaries and bonus 80,000

Salaries (25,000)
Profit after salaries but before bonus 55,000

B = P - (P/1+BR) 55,000 - (55,000/1.10) = 5,000

option 1. 10,000 salary EQUALS option 2. 5,000 salary + 5,000 bonus

III. INTEREST ON CAPITAL

The capital accounts of Ashley and Michelle at the end of the year 2021 follows:
Ashley
January 1 Balance P280,000
May 1 Investment 120,000
October 1 Withdrawal (80,000)
Ending capital 320,000
Michelle
January 1 Balance 200,000
April 1 Withdrawal (40,000)
Ending Capital 160,000
Profit for the year ended December 31, 2021, is P360,000.

8. Profit is divided in the ratio of ending capital

Ashlely Michelle Partnership

Ending capital 320,000 160,000 480,000
Ratio (320k/480) 66.67% (160k/480) 33.33% 100%
Profit 240,012 119,988 360,000

9. Profit is divided in the ratio of average capital

Capital Ashlely Michelle Partnership

Jan 1 (280,000*12/12) 280,000

May 1 (120,000*8/12) 80,000
Oct 1 (80,000*3/12) (20,000)
Total Ave. Cap 340,000

Jan 1 (200,000*12/12) 200,000

April 1 (40,000*9/12) (30,000)
Total Ave. Cap 170,000 510,000
Rate 66.67% 33.33%
NET 240,012 119,988 360,000
10. In addition to the above information:
Ashley will receive 50,000 salary
Michelle will received 20% interest based on weighted ave. Capital
Profit or loss ratio is 60:40
Ashlely Michelle Partnership
Income 360,000
Salary 50,000 50,000
Interest (20%) (170,000*.20) 34,000 34,000
Remaining 165,600 110,400 276,000
Total share in D. Income 215,600 144,400 360,000

INTEREST ON CAPITAL AND BONUS

11. In addition to the above information:

Ashley will receive 5,000 monthly salary
20% bonus to Ashley based on profit before deductions for salary, interest and bonus
Michelle will received 10% interest based on weighted ave. Capital
The partnership profit of 30,000 net of salary, interest and bonus
Profit or loss ratio is 60:40

Solution:
Profit after salary, interest and bonus 30,000
Add back: Salary (5,000*12) 60,000
Add back: Interest (170k 10%) 17,000
Profit before salary and interest but after bonus 107,000

Profit before salary and interest but after bonus 107,000

Divide: (100%-20%) 80%
Profit before salary, interest and bonus 133,750
Multiply: Bonus rate 20%
Bonus (bonus before bonus) 26,750

Ashlely Michelle Partnership

Profit 133,750
Salary 60,000 60,000
Bonus 26,750 26,750
Interest (20%) (170,000*.10) 17,000 17,000
Remaining 18,000 12,000 30,000
Total share in D. Income 104,750 29,000 133,750
INTEREST ON CAPITAL -partial year

Dadiro De Paz Co., form their partnership on Mar. 1, 2021 with the following information:
Dadiro De Paz
March 1 Balance P100,000 80,000
July 31 Withdrawal 30,000
September 30 Investment 40,000
September 30 Withdrawal 50,000
October 31 Investment 80,000
December 31 Investment 20,000

12. Compute for the average capital

Partners will receive 5,000 monthly salary
10% bonus to Dadiro based on profit after deductions for salary, interest and bonus
De Paz will received 10% interest based on weighted ave. Capital
The partnership profit of 300,000
Profit or loss ratio is 70:30

Dadiro De Paz Partnership

Profit 300,000
Salary 50,000 50,000 100,000
Interest 10% 6,417 6,417
Bonus 10% 17,598 17,598
Remaining 123,189.50 52,795.50 175,985
Total share in D. Income 190,787.50 109,212.50 300,000

Weighted average computation for De Paz

De Paz
March 1 Balance 80,000* 10/12 66,667
July 31 Withdrawal 30,000* 5/12 (12,500)
September 30 Investment 40,000* 3/12 10,000
December 31 Investment 20,000 0
TOTAL 64,167

Computation for bonus after salary, interest and bonus

Profit before salaries, interest and bonus 300,000
Salaries (100,000)
Interest (6,417)
Profit after salaries and interest but before bonus 193,583
Fomula for bonus after bonus: B = P - (P/1+BR)
B = 193,583 - (193,583/1+10%)
B= 193,583 - 175,985 = 17,598