Author PAUL ANTHONY DELA FUENTE DE JESUS, CPA, MBA Faculty, Far Eastern University ~ Manila Reviewer in Advance Financial Accounting and Reporting (AFAR) ICARE Review Center CPA Review Center of the Philippines (CPAR) CPAR Batangas Center for Training and Development, Incorporated, Makati (CTD!) CPAR Dagupan Former Faculty/Special Lecturer/Reviewer: Far Eastern University — Silang, Cavite Lyceum of the Philippines University - Manila Adamson University Emilio Aguinaldo University - Dasmarinas, Cavite Colegio de San Juan de Letran - Calamba University of the East - Manila University of Santo Tomas AMV College of Accountancy Colegio de San Juan de Letran - Manila Central Colleges of the PhilippinesPhilippine Copyright, 2021 By Paul Anthony Dela Fuente De Jesus No part of this book covered by the copyright hereon may be reproduced, or used in any form or by any means - electronic or mechanical including photocopy without the written permission of the author. Any copy of this book without the corresponding number seal and not bearing the original signature of the author is unauthorized and shall be considered as proceeding from an illegal source. All Rights Reserved Printed and Published by: NEW OMORI PRINTING PRESS 278 C ERMIN GARCIA Avenue, Quezon, City Contact Number +63 (24412141PREFACE This book is designed to help the B.S. Accountancy students achieved their dreams to become Certified Public Accountants (CPA). It tackles the subject ‘Advance Financial Accounting & Reporting (AFAR) in the CPA Licensure Examination which deals with the topics Advance Accounting and Cost ‘Accounting. This book contains multiple choice problems and theories with clear and comprehensive solutions. ‘This book is a labor of love which I humbly contribute to the accounting education. Each chapter of this book is designed and planned to explore and significantly understand the different topics covered in AFAR such as Partnership, Corporate Liquidation, Revenue Recognition (under IAS 18 and PFRS 15), Consignment Sales, Home Office and Branch, Business Combination (PFRS 3), Consolidated Financial Statements (PAS 27), Joint Arrangements (PFRS 11), Joint Venture for SME (PFRS for SME Sec. 15), Foreign Currency ‘Transaction and Translation (PAS 11 and 21), Cost Accounting topics, Service Concession Arrangements (IFRIC 12), Insurance Contracts (PFRS 4), Not for Profit Organization and the Government Accounting Manual (for Government Accounting). I express my sincerest gratitude to: 1. GOD almighty, who gives me strength, and a bonus life to enjoy my family, friends and this lovely world. 2. My wife (Marie), and my children (Irish, Ivan, Irvin, Ivonne and ram) for always understanding and loving me. 3. To Parents Dante and Soledad and My Siblings Irene, Julius and John 4. My fellow CPAR reviewers (Atty. Conrado Valix, Pedro Guerero, Atty. Chris Liamado, Atty. Jack De Vera, Atty. Tristan Lopez, Atty. Dante Dela Cruz, Atty. Regie Laco, Christian Valix, Ronald Valix, Dean Archimedes Ibay, Rodel Roque, Gerry Roque, Tom Siy, Rodiel Ferrer, Jamil Saripada, and most specially to Brian Lim and Christopher German for their support and encouragement. 5. My students, friends (Joven, Johnson and Jay), professors who gives me inspiration to write this book. 6. My classmates (Rey and Beth Ocampo, Filamer Naguit, Christine Vallejo, Ronald Ricafort, Monette Fabros, Shiela Alcid, Cecille and Roman Reyes, Ronita Casas, Angie Domingo, Kaye Fajilan, Elena Manalungsung Karen Gutierrez, Tet Garcia, Jill Oliveros, Faye Torres, Ryan Mendoza, and Aris Ocania who help me during my dying times in my life. “The third step to achieve your dream is to TRUST GOD” PAUL ANTHONY DELA FUENTE DE JESUSTABLE OF CONTENTS Chapter 1 Partnership Formation Chapter 2 Partnership Operation Chapter 3 Partnership Dissolution Chapter 4 Partnership Liquidation Chapter 5 Corporate Liquidation Chapter 6 Long Term Construction Contracts — PFRS 15 Chapter 7 Franchise / Licenses Chapter 8 Consignment Sales Chapter 9 Home Office and Branch Chapter 10 Business Combination Date of Acquisition Chapter 11 Business Combination Subsequent to Date of Acquisition Chapter 12 Joint Arrangement/Joint Venture SME Chapter 13 Foreign Currency Transaction and Translation Chapter 14 Job Order Costing Chapter 15 Process Costing Chapter 16 Joint and By-Product Costing Chapter 17 Activity Based Costing and Backflush Costing Chapter 18 Standard Costing Chapter 19 Not for Profit Organization Chapter 20 Government Accounting Chapter 21 Insurance Contracts and Service Concession Arrangements Chapter 22: Installment Sales PAS 18 Chapter 23 Simulated Examination 22 53 92 115 151 216 255 271 309 390 544 642 676 79 743 759 790 823 864 892 918yt pres Partecrshit, Formation 1 PARTNERSHIP FORMATION Partnership - is a contract of two or more’ persons who bind themselves to contribute money, property or industry to a common fund'with the intention of dividing the profits among themselves. Valuation of Contributions Money or Cash - Face Value ~ Property or Non-Cash Assets — Agreed value;-Fair market value; Book value Liability Assumed by the partnership ~ Present value~ Services or Industry - Memorandum entry is made — Capital Contribution|="Capital Interest (Agreed Capital) ‘Net™InvestmienteMethod - if the initial capital contribution is equal to the amount credited to his capital account. Capital Contribution ‘not equal Capital Interest (Agreed Capital) a. Bonus Method - Transfer of capital from one or more partner to another partner, ‘Rule: Total Contributed capital = Total Agreed capital b. Revaluationmethod - The asset contributed of the partners are adjusted because it might be over or under valued. ‘Rule: Undervaluation: Total Contributed capital < Total Agreed capital, Rule: Overvaluation; Total Contributed capital > Total Agreed capital Loan Accounts This is an additional financing coming from the partners. A Lean from a partner (Due toa Partner) is shown as loan payable on the partnership books. On the-other hand, a partnership may also lend money to a partner, In this case it will be recorded as a Loan Receivable from a partner (Due from a) Partner), Therefore, it is accounted either as a liability or receivable, it is not considered” as part of the capital. Assumed Liability Any asset contributed with an attached liability that is assumed by the Partnership is deducted to the capital contribution of-such partner. If it not assumed, do not add or deduct the amount of assets contributed to determife the capital contribution. YertoREDPartucrshifp Formation 2 EXERCISES Problem 1: M and O decide to form a partnership on June 1, 2030. The partnership will take over their assets as well as assume their liabilities. As of June 1, 2030, the net assets of M and O are P220,000 and P309,375 respectively. Liabilities of M are 55% less than the value of its net assets while liabilities of O are 40% more than the value of its net assets. The partners agreed on a 25:75 profit and loss ratio. Furthermore, the partners arrive on the following agreements: M’s inventory is undervalued by P11,000. An allowance for doubtful account is to be set up in the books of M and O at 10% of the accounts receivable balances (M P27,500 and O P41,250) accrued salary of 20,250 was not recognized in 0's books. Req. 1: How much cash should M invest/(withdraw) so that their capital interest would be equal to their profit and loss ratio? a. P95,000 c. P133,250 b. P(133,250) d. P(95,000) Req. 2: What are the total assets of the partnership immediately after formation if the partners’ capital interest should be equal to their profit and loss ratio through withdrawal and additional investment? a. P912,125 c, P932,375 b. P934,125 d. P380,000 Answer 1) B 2) C Suggested Solution: Req. 1 M ° Net Assets 220,000 309,375 Inventory - ‘ 11,000 Allowance for doubtful accounts M (27,500 x 10%) (2,750) 0 (41,250 x 10%) (4,125) Accrued Salary 20,250 Adjusted Capital 228,250 285,000 O's Capital Contribution 285,000 + interest of O 75% Total Partnership capital 380,000 x interest of M ; 25% Capital interest of M 95,000 Capital Contribution of M 228,250 Withdrawal of M (133,250) eaePartucrshifs Formation 3 Req. 2 Total Partnership Capital 380,000 Add: Total Liabilities M's Liabilities (220,000 x 45%) 99,000 O's Liabilities (309,375 x 140%) 433,125 Accrued Expenses 20,250 Total Assets 932,375 Problem 2: Paul and Marie formed DF Company. Paul and Rod contributed their business in the partnership. Paul and Marie agreed on 6:4 profit and loss ratio, respectively. Paul Marie Cash 350,000 Accounts Receivable Ime 175,000 Inventory 4 zyeh 280,000 Land 175,000}! Building 420,000 | Total 805,000 __ 595,000 Notes Payable 210,000 Mortgage Payable - Land 35,000 Paul, capital 595,000 e Rod, capital 560,000 805,000 595,000 sae Additional Information: es ‘The accounts receivable amounting to P25,000 is written-off. (105 The partners agreed that inventory will be valued at 270,000. . The unpaid mortgage of the land is assumed by the partnership. lo The building is over-depreciated by P52,500 = ‘The building has an unpaid mortgage of P20,000, the mortgage is assumed by the partnership. - © f. - Recognition of discount on note payable amounting to P10,000. 4. ~ Req. 1: Using the capital balance of partner Paul, how much is the additional » cash contribution/withdrawal of Rod to bring the partners’ capital in conformity to their profit and loss ratio? fc wco 4K a. P(190,000) ©. P318,750 2c pop LIABILIy Problem 6: On December 1, 2030, Anna invited Medy to join him in his business. Medy agreed provided that Anna will adjust the accumulated depreciation of his Equipment account to a certain amount, and will recognize additional accrued expenses of P10,000. After that, Medy is to invest additional pieces of equipment to make her interest equal to.45%. If the capital balances of Anna before and after adjustment were P139,000 and P121,000 respectively, what is the effect in the carrying value of the equipment as a result of the admission of Medy? (@ P91,000 c. P99,000 ' B. P(8,000) d. (81,000)5 Partecslit Formation g Answer A Suggested Solution: Capital before adjustments 139,000 Equipment (8,000) Accrued expenses. 10,000} Capital after adjustments of Alba 121,000 Capital after adjustments of Alba 121,000 + interest of Alba 55% Total Partnership capital 220,000 x interest of Medy 45% Equipment Contribution of Medy 99,000 Adjustment to Equipment account of Alba (8,000) Equipment Contribution of Medy 99,000 Effect in the Carrying Value of Equipment — 91,000 Problem 7: On August 1, 2030, the business accounts of Chris G and Paul DJ appear below: Assets Chris G Paul DJ Cash P_11,000_|P_ 22,354 ‘Accounts Receivable 84,536 | 217,890 Tnventories 100,035 | 240,102 Land 603,000 | 428,267 Buildings 200,345 | 384,789 Other Assets 22,000 23,600 Liabilities and Capital ‘Accounts Payable P.178,940_| P 243,650 Notes payable 200,000 345,000 Chris G., Capital 641,976 Paul DJ., Capital 728,352 “Chris G and Paul DJ agreed to form a partnership contributing their respective assets and liabilities subject to the following adjustments: Accounts Receivable of P20,000 and P35,000 are uncollectible in Chris G and Paul Du’s respective books. Inventories of P5,500 and P6,700 are worthless in Chris G and Paul DJ's “ respective books. Other assets of P2,200 and P3,600 in Chris G and Paul DJ’s books are written off.ee ee eee ee ee Partuership Formation 9 After five days Brian L was offered to join Chris G and Paul DJ and will contribute for a 20% interest in the firm. They also agreed to divide profits and 7 losses in the ratio of 40:40:20, same ratio based on their capital credit as agreed upon formation. As a result of the said agreement, as a personal transaction Req. 1: How much should the cash settlement be between Chris G and Paul DJ? a. P33,602 c. P32,930 b. P34,388 d. P32,272 Req. 2: How much is the capital contribution of Brian L? a. P324,332 c. P331,257 b. P342,582 d. P342,582 Answer 1) B 2) A Suggested Solutio Req. 1 Chris G Paul DJ Unadjusted Capital 641,976 728,352 a. Accounts Receivables (20,000) (35,000) b. Inventories c. Other Assets Adjusted Capital Contribution TCC TAC Settlement Chris G 614,276 50% © 648,664 «34,388 Paul DJ 50% _ 648,664 (34,388) 1,297,328 Req. 2 Chris G 614,276 Paul DJ 683,052 Total Capital Contribution of Old Partners 1,297,328 + Interest of Old Partners 80% Total Partnership Capital 1,621,660 x Interest of Brian L 20% Brian L, capital 324,332 Problem 8: On December 1, 2030, Monique and Cecille agreed to invest equal amounts and share profits equally to form a partnership. Monique investedPartacrshi, Formation 10 P780,000 cash and a piece of equipment. Cecille invested some assets which are shown below: Book Value Accounts Receivable P100,000 Tnventory 280,000 Machineries, net P560,000 Intangibles, net. 230,000 The assets invésted by Cecille are not properly valued. P8,000 of the accounts receivable are proven uncollectible. Inventories are to be written down to 260,000. Included in the machineries is an obsolete apparatus acquired for 96,000 with an accumulated depreciation balance of P84,000. Part of the intangibles is a patent with a carrying value of P14,000 which was sued upon by a competitor. Cecille unsuccessfully defended the case and the final decision of the court was released on November 29, 2030. What is the fair value of the equipment invested by Molina? a. P336,000 c. P242,000 b. P350,000 d. P390,000 Answer A Suggested Solution: ‘Accounts Receivable 100,000 Inventory 280,000 Machineries, net 560,000 Intangibles, net 230,000 Total Assets of Cecille 1,170,000 Accounts Receivable - uncollectible (8,000) Inventory write down (20,000) Machineries (96,000 - 84,000) - obsolete (12,000) Patent adjustment 14,000) Capital Contribution of Cecille 7,116,000 Capital Interest of Monique - same as Cecille (equally) 1,116,000 Cash investment of Monique 780,000 Equipment investment of Monique 336,000 Problem 9: On December 1, 2030, Criz and Tonio are combining their separate businesses to form a partnership. Cash and noncash assets are to be contributed. The noncash assets to be contributed and the liabilities to be assumed are as follows:Pertucrshit Formation 11 Criz Tonio Book Value _| Fair Value | Book Value _| Fair Value Accounts Receivable | P 100,000 [P 105,000 | P 80,000 | P_78,000 Inventory 160,000 180,000, ‘80,000 83,000 PPE 400,000 365,000 _| 345,000 329,000 Accounts Payable 60,000 60,000 45,000 45,000 Criz and Tonio are to invest equal amounts of cash such that the contribution of Criz would be 10% more than the investment of Tonio. What is the amount of cash presented in the partnership’s Statement of Financial Position on December 1, 2030? a. P1,105,000 «. P1,005,000 b. 2,210,000 d. 2,010,000 Answer D Toni Suggested Solution: Cols = Fair Value Fair Value Accounts Receivable 105,000 78,000 Inventory 180,000 83,000 PPE 365,000 329,000 Accounts Payable Capital Contribution 590,000 445,000 Criz Tonio 590,000 + Cash = (Cash + 445,000) x 110% 590,000 + Cash = 110%Cash + 489,500 100,500 = 10% Cash Cash = 100,500 / 10% Cash = 1,005,000 each Total Cash 1,005,000 x 2 = 2,010,000 Problem 10; On January 1, 2030, Moses and Drix form La Gracia Partnership, with firm to take over their business assets and liabilities. The partners’ individual assets and liabilities before forming the partnership follow: Accounts Moses Drix Assets 262,500 395,500 Liabilities 17,500 120,750 The partners agree on the following adjustments: Drix inventory is to be increased by P14,000; an allowance for doubtful accounts of P3,500 and P5,250 are to be set up in the books of Moses and Drix, respectively; and accounts payable of P14,000 is to be recognized in the books of Moses. The Partners agree to distribute profit and loss 60% and 40% respectively.eee eee Partnership Formation 12 Req. 1: What is the capital balance of Moses and Drix upon formation, respectively? a. P227,500 and P283,500 ¢. P360,600 and P204,400 b. P240,625'and P270,375 d. P227,500 and P266,000 Req. 2: Using the information in number 1; assuming the partners agreed to bring their capital balances proportionate to their profit and loss ratio. What is the capital balance of Moses and Drix upon formation, respectively? a. P311,850 and P207,900 ¢. P306,600 and P204,400 b. P240,625 and P270,375 d. P227,500 and P266,000 Answer 1) A.2)C Suggested Solution: Req. 1 Unadjusted Capital Contribution 245,000 274,750 Inventory 14,000 Allowance for doubtful account (3,500) (5,250) Accounts Payable 14,000) Adjusted Capital Contribution 227,500 283,500 = P511,000 Req. 2 Moses: 60% x P511,000 = P306,600 Drix: 40% x P511,000 = P204,400 Problem 11: Allan and Bea decided to combine their businesses and form a partnership. Below are their Statement of Financial Position before any adjustments: Allan Bea Cash 48,400 98,360 Accounts receivable 1,031,960 2,498,716 Inventories 528,160 1,144,448 Property & Equipment (net) 2,613,380 1,852,224 Other Assets 8,800 15,840 Total Assets ; 4,230,700 5,609,588 Accounts Payable 787,336 1,072,060 Notes Payable 1,000,000 - 7 = Mortgage Payable - 1,440,000 4, Capital 2,443,364 Capital 3,097,528 - Total Liabilities & Equity 4,230,700 __ 5,609,588 4,230,700 5,609,588OT Partucrshif, Formation 13 ‘The partners agreed that the property, plant and equipment of Allan is under depreciated by P80,000 and that of Bea is over depreciated by P200,000. Accounts receivable of P108,000 in Allan’s book and P140,000 in Bea’s book are uncollectible. The partnership decided to assume the mortgage liability of Bea. The partnership agreement provides for a profit and loss ratio and capital interest of 60% to A and 40% to Bea. Bea is willing to invest or withdraw cash from the partnership to comply with the agreement. Req. 1: Compute for the capital balances of Allan and Bea right after the formation. a. P6,896,292 ; P4,597,528 b. P6,896,292 ; P3,157,528 c. P2,255,364 ; P1,503,576 d. P2,255,364 ; P3,157,528 Req. 2: Compute for the total assets after the formation a. PS5,618,336 c. P6,618,336 b. P8,058,336 d. P9,840,288 Answer 1) C 2) B Suggested Solution: Req. 1 Allan Bea Unadjusted Capital 2,443,364.00 3,097,528.00 a, Depreciation (80,000.00) 200,000.00 b. Accounts Receivable - uncollectible (108,000.00) (140,000.00) _ Adjusted Capital Contribution 2,255,364.00 _3,157,528.00 Allan Capital Contribution 2,255,364 + interest of Allan 60% Total Partnership capital 3,758,940 x interest of Bea 40% Capital interest of Bea 1,503,576 Capital Contribution of Bea 3,157,528 Withdrawal of Bea (1,653,952.00) Req. 2 . Total Partnership capital 3,758,940 Add: Total Liabilities Accounts Payable (787,336 + 1,072,060) 1,859,396 Notes Payable 1,000,000 1,440,000 Mortgage payable Total Assets 8,058,336Partecrshife Formation 14 Problem 12: Shey and Thea decided to form a partnership on May 1, 2030, Assets contributed by the partners are: Shey Thea Book Fair Book Fair Value_| Value | Value Value Cash 375,000 | 375,000 | 875,000 | __875,000 Merchandise Inventory 95,000 | 125,000 Furniture and Fixtures 350,000 |_312,500 | 872,500 |_937,500 ‘Transportation equipment 3,262,500 | 2,812,500 The transportation equipment is subject to a mortgage loan of P1,125,000, which is to be assumed by the partnership. The partnership agreement provides that Shey and Theo share profits and losses of 30% and 70% respectively. Assuming that the partners agreed to bring their respective. capital in proportion to their profit and loss ratio, using Theo capital as a base. How much additional cash is to be (withdrawn) invested by Shey? a. P(687,500) : c. P875,000 b. P(987,500) d. P687,500 Answer D ‘Suggested Solution: ‘Theo Capital Contribution (4,625,000 - 1,125,000) 3,500,000 interest of Theo 70% Total Partnership Capital 5,000,000 x interest of Shey 30% Capital interest of Shey 1,500,000 Capital Contribution of Shey 812,500 Investment of cash of Shey 687,500 Problem 13: A, B and C formed a partnership on August 1, 2030 with the following assets contributed by each partner measured at fair values: A B c Cash 37,500] 45,000 | 112,500 Merchandise Inventory S 13,125 9,375 Office Equipment 562,500 |__105,000 é Furniture and Fixtures 31,875 19,125 Total 631,875 | 182,250 | 121,875Partecrshit Formation 15 The office equipment contributed by A has a mortgage note of P337,5000 and the partnership is to assume responsibility for the loan. The partners agree to equalize their interest. Cash settlements among the partners are to be made outside the partnership using the bonus method as follows: a. B should pay A P94,875 and C P77,625, b. C should pay A P94,875 and B P17,250 c. Ashould pay B and C 94,875 each d. Band C should pay A P17,250 and P77,625 respectively Answer D Suggested Solution: TCC TAC Difference ‘A (631,875 - 337,500) 294,375 «1/3. 199,500 (94,875) B 182,250 1/3 199,500 17,250 Cc 121,875 1/3 _199,500 77,625 598,500 598,500 Problem 14: Andres and Bonifacio decided to form a partnership on Oct 1, 2030. Their Statement of Financial Position on this date was: Andres Bonifacio Cash P 65,625 P164,062.50 Accounts Receivable 1,487,500 896,875 Merchandise Inventory 875,000 885,937.50 Equipment 656,250 1,268,750 Total 3,084,375 3,215,625, Accounts Payable 459,375, 1,159,375, Andres, capital 2,625,000 Bonifacio, Capital 2,056,250 Total 3,084,375 3,215,625 ‘They agreed to have the following adjustments: + Equipment of Andres is under-depreciated by P87,500 and that Bonifacio is over-depreciated by P131,250. + Allowance for doubtful accounts is to be set up amounting to P297,500 for Andres and P196,875 for Bonifacio. - Inventories of P21,875 and P15,312.50 are worthless in Andres and Bonifacio books respectively. - The partnership agreement provides for a profit and loss ratio and capital interest ratio of 70% to Andres and 30% to Bonifacio.Partacrshife Formation 16 Which of the following statements is wrong? Assuming the use of transfer of capital method, Andres’s agreed capita} a. must be P2,935,406.25 to bring the capital balances proportionate to their profit and loss ratio. b. Assuming the use of transfer of capital method, Bonifacio will debit his capital account in the amount of P717,281.25 to bring the capital balances proportionate to their profit and loss ratio. c. Assuming Andres will invest/withdraw cash to bring the capital balances Proportionate to their profit and loss ratio, Andres will invest cash in the amount of P2,390,937.50. _ d. Assuming Bonifacio will invest/withdraw cash to bring the capital balances proportionate to their profit and loss ratio, Bonifacio will invest cash in the amount of P1,024,687.50 Answer D Suggested Solution: Andres Bonifacio Unadjusted Capital 2,625,000.00 2,056,250.00 a. Equipment (87,500.00) 131,250.00 b, Allowance for doubtful accounts (297,500.00) (196,875.00) c. Inventories (21,875.00) _(15,312.50) 2,218,125.00 1,975,312.50 Adjusted Capital 2,218,125.00 Andres, Capital + Interest of Andres 70% Total Partnership capital 3, 168,750.00 x interest of Bonifacio 30% Capital Interest of Bonifacio 950,625.00 Capital Contribution of Bonifacio 1,975,312.50 Withdrawals (1,024,687.50) Choice A and B Tcc TAC Difference Andres —_2,218,125.00 70% 2,935,406.25 717,281.25 Bonifacio _1,975,312.50_ 30% _1,258,031.25 (717,281.25) Total 4,193,437.50 4,193,437.50 Choice C Bonifacio, capital 1,975,312.50 + Interest of Bonifacio 30% Total Partnership capital 6,584,375.00 x Interest of Andres 70% Capital Interest of Andres 4,609,062.50 2,218,125.00 Capital Contribution of Andres Additional Investment 2,390,937.50Partecrohip Formation 17 Problem 15: On January 1, 2022, AB and QR agreed to form a partnership. ‘The following are their assets and liabilities: ‘Accounts AB OR Cash P_136,000 | P 76,000 “Accounts Receivable 88,000 | 48,000 Inventories 304,000 | 364,000 __}*! ‘Machinery = -480,000 [440,000 ‘Accounts Payable 216,000 | 144,000 Notes Payable 140,000 [60,000 AB decided to pay-off his notes payable from his personal assets. It was also agreed that QR inventories were overstated by P24,000 and AB machinery was over depreciated by P20,000. QR is to invest/withdraw cash in order to receive a capital credit that is 20% more than AB's total net investment in the partnership. How much cash will be presented in the partnership's statement of financial position? a 486,400 c. 410,400 b. P450,400 d. P274,400 Answer A Suggested Solution: QR’s capital interest (AB, capital P812,000 x 120%) P974,400 QR’s capital contribution 700,000. Additional cash investment of QR 274,400 - Cash investment of QR 76,000 Cash investment of AB 136,000 Total Cash investment P486,400 Accounts AB QR Cash P136,000 —_P76,000 Accounts Receivable 88,000 48,000 Inventories 304,000 364,000 Machinery 480,000 440,000 Accounts Payable (216,000) (144,000) Notes Payable 140,000) _ (60,000) Contributed 652,000 724,000 Note Payable 140,000 Inventories (24,000) Machinery 20,000 Adjusted Contribution P812,000___ P700,000_ Partncrshife Formation 18 Problem 16: Sheila and Grace (formed’a partnership and agreed to distribute profit and loss 70% to Grace and 30% to Sheila. The following are the trial balance of their respective business prior to.formation of partnership business, Grace Sheila Cash 49,500 100,593 Accounts Receivable 1,055,412 2,555,505 Inventories 540,158 1,170,459 Land 2,713,500 - Building - 1,927,202 Furniture and Fixtures 235,553 172,751 Total 4,594,122 5,926,509 Accounts Payable 805,230 1,096,425 Notes Payable 900,000 1,552,500 Grace, capital 2,888,892 =. Sheila, capital 3,277,584 Total 4,594,122 5,926,509 Sheila and Grace agreed to contribute their respective assets and liabilities in their separate business to the partnership subject to the following adjustments: - The allowance for doubtful accounts is to be set up in the both Grace and Sheila’s books amounting to P90,000 and P157,500, respectively. - Inventories are to be written down by P24,750 and P30,150, respectively. - Other assets of P9,000 and P16,200 are to be written off. Req. 1: How much is the totalinvestmént (withdrawal)lof Sheila, assuming they agree to bring their capital balances proportionate to their profit and loss ratio? a. P(1,888,673) c. P1,888,673, b. P(988,796) d. P988,796 Req. 2: How much is the total assets of the company? a. P10,193,031 , c. P3,950,203 b. 10,520,631 (d. P8,304,358 Answer 1) A2)D = Suggested Solution: Req. 1 Grace _Sheii E , ila Unadjusted capital 2,888,892 3,277,584 Allowance for doubtful account (90,000) (157,500) Inventories (24,750) (30,150) ler assets 9,000) _(16,200 *"" »sted capital before adjustment ~ 2,765,142 3,073,734Adjusted capital of Grace 2,765,142 Divide by Interest of Grace 70% Total Partnership Capital 3,950,203 x Interest of Sheila 30% Capital of Sheila 1,185,061 Capital Contribution of Sheila 3,073,734 withdrawal of Sheila 1,888,673) Req. 2 ~ Total Partnershi Copital 3,950,203 Add: Total Liabi Accounts Payable (805,230 + 1,096,425) 1,901,655 Notes Payable (900,000 +1,552,500) _ 2,452,500 _ Total Assets —8:308,358_ Problem 17: The partnership agreement is an express contract among the partners. Such an agreement generally does not iriclude (a) A limitation on a partner’s liability to creditors The rights and duties of the partners ¢. The allocation of income between the partners. , Credited for debit balance of the drawing account at the end of the period Credited for credit balance of the drawing account at the end of the period Problem 31: Which of the following is a characteristic of most partnerships? a. Limited liability 17 1») 6 Partucrshif, Operating 2 PARTNERSHIP OPERATION Rules for the Distribution of Profits and Losses The losses and profits shall be distributed in conformity with the agreement, j only the share of each partner in the profits has been agreed upon, the share of each in the losses shall be in the same proportion. In the absence of a stipulation, the share of each partner in the profits ang losses shall be in proportion’ to what he may have contributed, but the industrial partner shall not be liable'for the losses. As for profits, the partner shall receive such share as may be just and equitable under the circumstances. If, besides his services he has contributed capital, he shall also receive a share in the profits in proportion to his capital. (Article 1797) A stipulation which excludes one or more partners from any share in the profits or losses is void. (Article 1799) The summary of the above provision of the Civil Code is as follows: A. As to Capitalist Partner Distribution of Profits 1. Profits shall be divided according to the partners’ agreement. ; 2. If there is no agreement, the profits shall be based in proportion to their capital contribution. Distribution of Losses 1. Losses shall be distributed according to the partners’ agreement. 2. If there is no agreement as to distribution of losses, but there is_an agreement as to profits, the losses shall be distributed according to the Profit sharing ratio. 3. In the absence of agreement, the losses shall be based in proportion to their capital contribution. B. As to Industrial Partner Distribution of Profits 1. Profits shall be divided according to the partners’ agreement. 2. If there is no agreement, industrial partner receives a just and equitable under the circumstances. Industrial partner shall receive such share, which may be satisfied first before the capitalist partners divide the profits. Note: The partners shall determine what equitable share of the industrial Partner is. However, in case the parties cannot agree on what is just and ae gp.Partecrshit, Operation 23 equitable share, the court will determine the just and equitable share of the industrial partner. Distribution of Losses 1, Losses shall be distributed according to the partners’ agreement. 2. In the absence of agreement, industrial partner is not lizble for losses. The partners may agree with any of the following schemes of distribution of profits and losses: 2. ATbIEaRY ratio any prteeD Ren? 3. a, Original Capital - e#¥ert conrad b.. Beginning capital c. Ending capital d. Average capital I. Simple Average Ow +eH0/2 Il, Weighted Average (Peso-Month/ Peso-day Average capital] . SalarysAllowance and thetbalancetomitheagreederation . qnterestAllowanee and th . i d the balanceion:thegreediratio distribution schemes if profits are not sufficient to cover the salary and interest allowances. Nous FOR EQUITY OF DISTRIBUTION OF NET INCOME ALLOWANCES ARE GIVEN a. Salary Allowance - it is given to recognize the time rendered by the partners to the entity. b. Interest Allowance - it is given to recognize the difference in the capital contributed to the partnership c. Bonus allowance — it is given if the partnership realized a profit a profit to give recognition to the managerial skills of the partner. Permanent vs Temporary Withdrawals A. Permanent (capital Withdrawals) - it affects the computation of average capital. It is a withdrawal against the invested capital) B. Temporary (personal withdrawals) — it does not affects the computation of average capital. It is a withdrawal in anticipation of profitEXERCISES Problem 1: RONALD, GINO and RIZA are manufacturers’ representative in the wholesale business. Their capital accounts in the AQX Partnership for 2030 were as follows: RONALD | _GINO RIZA January 1, Balances 135,000 | 180,000 | P75,000 March 1, withdrawal 36,000 April 1, investment 30,000 May 1, investment 72,000 June 1, investment 27,000 August 1, withdrawal 9,000 October 1, withdrawal 54,000 December 1, investment 18,000 Required: For each of the following independent income-sharing agreements, prepare an income distribution schedule. Monthly salaries are P30,000 to RONALD, P50,000 to GINO and P45,000 to RIZA. RONALD receives a bonus of 5% of net income after deducting his bonus. Interest is 12% of ending capital balances. Any remainder is divided by RONALD, GINO and RIZA in a 25:40:35 ratio. The Income Summary account has a credit balance of P2,835,000 before closing. Interest is 10% of weighted average capital balances. Annual salaries are P480,000 to RONALD, P630,000 to GINO and P510,000 to RIZA. GINO receives a bonus of 25% of net income after deducting the bonus and his salary. Any remainder is divided in a 2:3:4 ratio by RONALD, GINO and RIZA, respectively. Net income was P1,050,000 before any allocations. s RIZA receives a bonus of 20% of net income after deducting the bonus and the salaries. Annual salaries are P600,000 to RONALD, P540,000 to GINO and P750,000 to RIZA. Interest is 15% of the ending capital in excess of P140,000. Any remainder is to be divided by RONALD, GINO and RIZA in the ratio of their beginning capital balances. Net income was P1,740,000 before any allocations. d. Monthly salaries are P32,000 to RONALD, P40,000 to GINO and P42,000 to RIZA. GINO receives a bonus of 10% of net income after deducting his bonus. Interest is 25% on the excess of the ending capital balances over the beginning capital balances. Any remainder is to be divided byDeora rcr ccc ce nce rece ee i 7 Partuership Operation 25 RONALD, GINO and RIZA in a 3:2:1 ratio. The Income Summary account has a debit balance of P750,000 before closing. Answers Suggested Solution: Req. A RONALD GINO RIZA Total Salaries 360,000 600,000 540,000 1,500,000 Bonus 135,000 135,000 Interest 18,360 22,680 11,520 52,560 Balance 25:40:35 286,860 458,976 _- 401,604 _ 1,147,440 Profit Share 800,220 1,081,656 953,124 2,835,000 Interest Ronald Gino Riza Ending Capital 153,000 189,000 96,000 x Interest 12% 12% 12% Interest Allowance 18,360 22,680 ‘11,520 B= 5% (NI- B) B = 5%(2,835,000 - B) B = 141,750 - 5%B 105% B = 141,750 B = 135,000 Req. B RONALD GINO RIZA Total Interest 10% 16,950 16,725 9,375. 43,050 Salaries 480,000 630,000 510,000 1,620,000 Bonus 84,000 84,000 Balance 2:3:4 154,900) (232,350) _ (309,800) (697,050) Profit Share 342,050 498,375 209,575 __ 1,050,000 Interest Ronald Gino Riza Weighted Average Capital 169,500 _ 167,250 93,750 x Interest —10%_10%__10%__ Interest Allowance 16,950 16,725 9,375 Average Capital Ronald Gino Jan. 1 135,000 x 4/12 45,000 Jan. 1 180,000x2/12 30,000 May 1 207,000 x 5/12 86,250 Mar. 1144,000x 3/12 36,000 Jun 1 171,000 x 6/12 85,500, Dec. 1 189,000 x 1/12 _ 15,750 Average Capital 167,250 Oct. 1 153,000 x 3/12 Average Capital 38,250Partecrshifp Operation 26 Riza Bonus Jan. 175,000 x 3/12 18,750 B= 25% (1,050,000 - B - 630,000) Apr. 1 105,000 x 4/12 35,000 B= 25% (420,000 - B) Aug. 1 96,000 x 5/12 40,000 B= 105,000 - 25%B Average Capital 93,750 __ 125% B = 105,000 B = 84,000 Req. © RONALD _ GINO RIZA Total Bonus - Salaries _ 600,000 540,000 750,000 1,890,000 Interest 1,950 7,350 - 9,300 Balance ratio of beg. capital (135:180:75) 55,142) _ (73,523) __(30,635)_(159,300) Profit Share 546,808 _ 473,827 719,365 _ 1,740,000 Interest Ronald Gino Riza Ending Capital 153,000 189,000 —-96,000 —140,000__140,000__140,000__ Excess 13,000 49,000 x Interest 15% 15% 15% Interest Allowance 950 Bonus B = 20% (NI- B-S) B = 20% (1,740,000 - B - 1,890,000) B = 20% (-150,000 - B) B = -30,000 - 20%B 120% B = -30,000 B= -25,000 Req. D RONALD GINO RIZA Total Monthly Salaries 384,000 480,000 504,000 —1,368,000 Bonus e z Interest 4,500 2,250 5,250 12,000 Balance ratio (3:2:1) 1,065,000) (710,000) _ (355,000) _ (2,130,000) Profit Share (676,500) (227,750) _154,250__(750,000} Interest Ronald Gino Riza Ending Capital 153,000 189,000 96,000 Beginning Capital —135,000__180,000_75,000__ Excess 18,000 9,000 21,000 x Interest SDS I 85% Lo TOS % Interest Allowance 4,500 2,250 5,250 *No Bonus because there is a Net Loss! Partucrshi Operation 27 Problem 2: The capital accounts of Chris and Toper shows the following information for the year 2020: : Chris Toper ae January 1 520,000] 330,000. |x“ March 14 30,000 ‘March 20 (temporary) (15,000) ‘April 30 24,000 _|s ‘May 25 (permanent) (22,500)_| (12,000) July 1 5,000 September 10 (temporary) (15,000) ‘October 1 30,000 - PTT. 7 eS The income summary account shows a credit balance of P450,000 on December 31, 2020. The profit and loss of the partnership shall be distributed in the following manner: Salary allowance of P200,000 to Chris and P230,000 to Toper. wh set - Interest allowance of 12% on average capitals ~ Bonus of 10% on net income after salary and interest but before: Toper._ T - Balance divided equally. ‘ Req. 1: What is the ending capital of the Toper? a.) P585,728 c. P584,377 b. P599,377 4. P600,727 Answer A Suggested Solution: Chris Toper Total Salary 200,000 230,000 430,000 Interest — 12% of average cap. 64,125 41,580 105,705, Bonus ) Balance (42,853) (42,853 (85,705) Net Income share 221,273 228,728, 450000 Beginning capital 520,000 330,000 Additional Investment,~ 35,000 54,000 Temporary Drawing (15,000) (15,000) Permanent drawing (22,500) 12,000) Total 738,773 585,728 B = 10% (450,000 - 430,000 - 105,705) B = 10% (-85,705) B = -8,570.50Be Partecrships Operation 28 Average Capital Chris Toper Jan. 1:520,000x2/12= 86,666.67 Jan. 1: 330,000x 4 /12= 110,000 Mar 14: 550,000 x3/12= 137,500.00 Apr 30: 354,000x 1/12 29,500 May 25: 527,500 x 1/12= 43,958.33 May 31: 342,000 x 4/12 = 114,000 Sul 1: 532,500 x6/12= — 266,250.00_ Oct 1: 372,000 x 3/12= —_93,000__ Average Capital 534,375.00 Average Capital 346,500 x Interest 12% _ x Interest 12% Interest Allowance 64,125.00_ Interest Allowance 41,580 Problem 3: The partnership of Mark, Luke and John was formed on January 1, 2030. The original investments were as follows: Mark, P840,000; Luke, P1,260,000; John, P1,890,000. According to the partnership agreement, net income or loss will be divided among the respective partners as follows: (1) salaries of P126,000 for Mark, P105,000 for Luke, and P84,000 for John. (2) Interest of 8% on the average capital balance during the year to each partner, (3) The remainder is divided equally. ‘Additional information is as follows: Net income of the partnership for the year ‘ended December 31, 2030 was P735,000. Mark invested an additional 210,000 in the partnership on July 1, 2030. John withdrew P315,000 from the partnership on October 1, 20130. Mark, Luke and John made regular drawings against their shares of net income during 2030 of P105,000 each. [ihe partner's capital balances as of December 31, 2030 are: Mark Luke John a. P1,179,500 P1,393,700 P1,731,800 b. 1,074,500 1,288,700 1,626,800 c 966,000 . 1,071,000 1,416,800 d. 1,284,500 1,393,700 1,731,800 Answer A Suggested Solution: Mark Luke John Total Salaries 126,000 105,000 84,000 315,000 Interest - 8% 75,600 100,800 144,900 —-321,300 Balance 32,900 32,900 32,900 98,700 Share in Net Income (loss) ~ 234,500 238,700 261,800 735,000 ° Beginning Capital 840,000 1,260,000 1,890,000 3,990,000 Additional Investment 210,000 210,000 Drawings - Permanent (315,000) (315,000) Drawings - Temporary 105,000) (105,000) _ (105,000) _ (315,000) 822500 2:393,700 1,731,800 _ 4,305,000, Ending Capital 1,179,500 _ 1,393,700 1,731,800 4,305,000.fee Te oe eR Et Partecrehie Operation 29 Interest Mark Luke John Weighted Average Capital 945,000 1,260,000 1,811,250 x Interest 8% 8% 8% Interest Allowance 75,600 100,800 144,900 Average Capital Mark John Jan 1 840,000 x 6/12 420,000 Jan. 1 1,890,000 x 9/12 1,417,500 Jul. 1 1,050,000 x 6/12 _525,000_ Oct. 1 1,575,000 x 3/12 _ 393,750 Average Capital 945,000_ Average Capital 1,811,250. Problem 4: FRANCIS, CHINO and APRIL formed a partnership on January 1, 2030, with each partner contributing P600,000 cash. The partnership ‘agreement provided that APRIL receives a salary of P30,000 per month for managing the partnership business. APRIL has never withdrawn any money from the partnership. FRANCIS withdrew P120,000 in each of the years 2030 and 2031, and CHINO invested an additional P240,000 in 2030 and withdrew 240,000 during 2031. Due to an oversight, the partnership has not maintained formal accounting records, but the following data as of December 31, 2031 is available. Cash P 855,000 Accounts payable P570,000 Accounts receivable 600,000 Notes payable 315,000 Merchandise inventory 1,200,000 Computer equipment, net 1,110,000 Prepaid expenses 120,000 Total 3,885,000 Total 885,000 Additional data: 1, The partners agree that income for 2031 was about half of the total income for the first two years of operations. 2. The partnership agreement provides that profits, after allowance for APRIL’s salary, are to be divided each year on the basis of the beginning of the year capital balances. For the year ended December 31, 2031, the capital balances of the partners are: uM FRANCIS CHINO APRIL - Scale P600,000 P960,000 P1,080,000 @ P561,818 P850,909 P1,587,273 us 480,000 P720,000 1,080,000 ~~‘ d. P561,818 720,000 P1,587,273 PP, acdPartucrshit, Operation 30 Answer B Suggested Solution: Year 2030 r Francis) Chino April Total serie 360,000 360,000 Balance equally —120,000 __120,000__120,000__360,000__ Share in Profit 120,000 120,000. 480,000 720,000* Beginning Capital 600,000 600,000 ~—«600,000 -—‘1,800,000 Drawings (120,000) (120,000) Additional Investments =§__240,000___240,000__ Capital ending 2030 _ 600,000 960,000 7,080,000 2,640,000 Year 2031 Francis Chino ‘April oe Salaries 360,000 360,000 . Balance: using beg.cap. of the year (60:96:108) 81,818.18 130,909 __147,273 360,000 _ Share in Profit 81,818 130,909 507,273 720,000 j Beginning Capital of 2031 600,000 960,000 1,080,000 2,640,000 Drawings (120,000) (240,000) (360,000) ‘Additional Investments Capital ending 2031 361,818 850,909 1,587,273 5,000,000 Computation of Net Income Capital ending - 2031 (Total Assets 3,885,000 - Total Liab. 885,000) 3,000,000 Total Drawings (120,000 + 120,000 + 240,000) 480,000 Total Beginning Capital 2030 (1,800,000) Additional Investment of Chino '240,000) Net Income for years 2030 and 2031 1,440,000 Divide by 2 Net Income for each year 720,000" Problem 5: AB Partnership has net income of P50,000 for the year. Partner A contributed P90,000 and partner B contributed P60,000. The partners agree to share profits and losses as follows: - Salary allowance of P15,000 and P30,000 of A and B, respectively. - Interest allowance of P 10% based on average capital. - Bonus of 10% based on net income to be given to A. - Balance equally. The net income is allocated up to the extent of earning only by giving first priority to salary, then interest and then to bonus. 4 3 Req. 1: Compute the share of B in the net income u 46 @) P32,000 c, P28,500 5 b. P31,000 d. P36,000 :Recent Operation 31 Req. 2: Using the information in above, except that the net income is P61, 000, what is the net income share of A? a. P27,550 c. P30,100 ata c e 25,000 d. P33,450 : ) : : Answer 1) A2)B Fe, es Suggested Solution: Req. 1 A B Total Salary 15,000 30,000 45,000 Interest (9,000:6,000) 3,000 2,000 5,000 Bonus - Total 18,000 32,000 50,000 - use the interest allowance ratio to distribute the balance Req. 2 A B Total Salary 15,000 30,000 45,000 Interest 9,000 6,000 15,000 Bonus 1,000 1,000 Total 25,000 36,000 61,000 B= 10% (61,000) B=6,100 Bonus is only 1,000 Problem 6; Ely and Marcus are partners engaged in a manufacturing business. Transactions affecting the partners’ capital accounts in 2030 are as follows: Ely Marcus Debit Credit Debit Credit Beg. Balance P.50,000 P 70,000 April 1 30,000 | P 20,000 June 30 P 25,000 =| 50,000 Sept. 1 45,000 60,000 Oct. 1 70,000 | 40,000 The income summary has a debit balance of P45,000. ~ LS Agreement between Ely and Marcus are as follows: © Interest on average capital at 8% © Salaries of P25,000 and P35,000 are given to Ely and Marcus, respectively © Bonus to Marcus at 25% of net income after deducting interest and salaries but before deducting bonus © Balance is to be divided equally. -Partucrshife Operation 32 How much is the net increase/decrease in Marcus's capital account during 2015? ‘ayP 33,600 c. P (6,400) b. P(16,400) d.P 1,400 Answer A ted Solution: eee Ely Marcus Total a 5,000 7,200 12,200 st , ” 9 ‘Galaciea’ 25,000 35,000 60,000 ‘lait 58,600) (58,600) __(117,200) Balance equally Share in Net Loss Additional Investments (28,600) (16,400) (45,000) 100,000 110,000 —_210,000 (70,000) (60,000) 130,000) rawings Net increase (Decrease) in capital 1,400 33,600 35,000. *Net loss, therefore no bonus Ely Marcus Jan, 150,000x3/12 12,500 Jan 1 70,000 x 3/12 17,500 ‘Apr 1 80,000 x 3/12 20,000 Apr 150,000 x 3/12 12,500 Jun 30 55,000x2/12 9,167 Jun 30 100,000 x 2/12 16,667 Sep 1 10,000 x 1/12 833 Set 1 160,000 x 1/12 13,333 Oct 1 80,000 x 3/12 20,000 Oct 1 120,000 x 3/12 30,000 Average Capital Average Capital Interest** Ely Marcus Weighted Average Capital 62,500 90,000 ! x Interest 8% 8% Interest Allowance 5,000 7,200 Problem 7: PLANET GARAPATA was organized and began operations on May 1, 2030. On that date, Buddy invested P1,000,000 cash and Raymond invested land and building with current fair values of 1,750,000 and 850,000, respectively. The average capital balances of Buddy and Raymond were determined to be 1,223,890 and 1,222,090, respectively. The partnership contract includes the ff. Remuneration plan: Buddy Raymond ‘Annual salaries 152,200 151,800 Annual interest on Ave. balance 20% 30% Remainder 60% 40% og ods ot te eee ae ee aePartacrhip Operation 33 ‘During the year ended April 30, 2030, the partnership had net sales of” 3,000,000, cost of goods sold amounting to 1,000,000 and operating expenses of 391,090. The partner’s salaries had been recorded as part of the operating expenses. ‘ N jw much is the total share of Buddy in the net income for the period? ~ @)p843,281 c. P995,481 Se agua 2 b. P795,829 d. P917,429 WERE Het Answer A Suggested Solution: gr} at Buddy - Raymond Total Interest 244,778 366,627 611,405 (7,20 ‘ Balance (6:4) 399,002 997,505 _— Profit Share 765,629 1,608,910 Net Sales 3,000,000 cocs (1,000,000) OPEX (including salaries) (391,090 Net Income 1,608,910 Interest Buddy Raymond Average Capital 1,223,890 1,222,090 x Interest 20% 30% Interest Allowance 244,778 366,627 Note: Do not include the salaries because it is not part of net income (it is recorded as part of operating expenses). Problem 8: On January 2, 2030, Berny and Cyrus formed a partnership. Berny contributed capital of 350,000 and Cyrus P50,000. They agreed to share profits and losses 80% and 20% respectively. Cyrus is given a salary of P10,000 a month; interest of 5% of the beginning capital of both partners and a bonus of 15% of net income [before salary, interest and bonus. The income statement of the partnership for the year ended December 31, 2030 is as follows: Revenues | ; 1,780,000 coGs ho 2 1,400,000 Gross Profit { 350,000 Expenses (including partners salary, interest and bonus) 286,000 Net Income | 64,000 What is the amount of bonus to Cyrus in 2030? a. P41,400 | (© P36,000 b. P32,912 vy d. P26,800Partnerships Operation 34 Answer C Suggested Solution: Computation of Bonus B = 15% (NI before S, I and B) B = 15% (64,000 + 120,000 + 20,000 + B) B = 15% (204,000 + B) B = 30,600 + 15%B B = 30,600 / 85% B = 36,000 Berny cyrus Total Salaries 120,000 120,000 Interest 17,500 2,500 20,000 Interest Berny Cyrus Beginning Capital 350,000 50,000 x Interest 5% 5% Interest Allowance 17,500 2,500 Problem 9: Irish is trying to decide whether to accept a salary of P120,000 or a salary of P75,000 plus a bonus of 10% of net income after salary and bonus as ‘a means of allocating profit among the partners. Salaries traceable to other partners are estimated to be P300,000. What amount of income would be necessary so that Irish would consider the choices to be equal? a. P795,000 c. P495,000 b. P915,000 4. P870,000 / Answer D : ‘Suggested Solution: 120,000 = 75,000 + B B= 45,000 B = 10% (NI-S - B) 45,000 = 10% (NI - (300,000 + 75,000) - 45, | , ~ 45,000} 45,000 = 10% (NI - 420,000) ; 45,000 = -42,000 + 10%NI 87,000 = 10%NI NI = 870,000Partnershife Operation 35 Problem 10: April, Bing, Cris and Deo own a publishing company that they operate as a partnership. The partnership agreement includes the following: - April receives a salary of P20,000 and a bonus of 3% of income after all bonuses - Bing receives a salary of P10,000 and a bonus of 2% of income after all bonuses All partners are to receive a 10% interest on their average capital balances The average capital balances are as follows: April P50,000; Bing P45,000; Cris 20,000 and Deo P47,000. Any remaining profits and losses are to be divided equally among the partners Determine how a profit of P105,000 would be allocated among the partners, a. April P39,700; Bing P29,200; Cris P16,700; and Deo P19,400 b. April P41,450; Bing P29,950; Cris P15,450; and Deo P18,150 c. April P28,000; Bing P16,500; Cris P2,000; and Deo P4,700 d. Cannot be determined Answer B Suggested Solution: April Bing Cris = Deo —‘Total Salaries 20,000 10,000 - - 30,000 Bonus 3,000 2,000 5,000 Interest 5,000 4,500 2,000 4,700 16,200 Balance equally 13,450. 13,450 13,450 __13,450__ 53,800 41,450__29,950_15,450_18,150_105,000 B = 5% (NI- B) B = 5% (105,000 - B) B= 5,250 - 5%N B= 5,000 April 5,000 x 3/5 = 3,000 Bing 5,000 x 2/5 = 2,000 Problem 11: Partners Roman and Net have profit and loss agreement with the following provisions: Salaries of P90,000 and P135,000 for Roman and Net, Tespective: a bonus to Roman of 10% of net income after salaries; and interest of 10% on average capital balances of P60,000 and P105,000 for Roman andPartnership Operation 36, Net, respectively. One-third of any remaining profit will be allocated to Roman and the balance to Net. If the partnership had net income of P66,000. How much should be allocated t Partner Roman, assuming that the profit and loss agreement are ranked by order of priority starting with salaries? a. P26,400 c, P39,600 b. P36,000 d. P37,500 Answer A Suggested Solution: oe Roman Net Total ies (90:135) 26,400 39,600 66,000 Sees 26,400 39,600 66,000 is insufficient to provide all the allowances and based on the agreement the profit and loss are ranked by order of priority starting with Solaries. Therefore, we use the salary ratio since it cannot provide the entire salary allowance of P225,000. Share of Roman 90/225 x 66,000 = 26,400 Share of Net 135/225 x 66,000 = 39,600 The profit If the problem is silent Roman Net Total Salaries 90,000 135,000 225,000 Bonus - : - Interest 6,000 10,500 16,500 Balance (1:2) 58,500) _(117,000)__ (175,500) Total share 37,500 28,500 66,000 Problem 12: A and B formed a partnership on January 2, 2030 by contributing capital of P262,500 and P37,500. They agreed to share profits and losses, 70% and 30%, respectively. B manages the partnership and is given a salary of P5,000 a month and bonus of 20% of net income before salary, interest and bonus. Interest of 5% of the beginning capital is to be given to each partner and any remainder is to be divided according to their profit and loss ratio. For the year ended December 31, 2030, the partnership generated a net income of P48,000 after salaries, interest and the bonus. Compute for the amount that each partner should receive in the distribution of profit.