PARTNERSHIP ACCOUNTING

Phases of a partnership
INTRODUCTION
Phases Major considerations
The law governing partnerships in the Philippines is the Republic Act No. 386 (R.A.
Formation ➢ Accounting for initial investments to the
386). This act is known as the Civil Code of the Philippines.
partnership.
Operations ➢ Division of profits and losses.
A partnership is defined as an association of two or more persons who contribute
Dissolution ➢ Admission of a new partner,
money, property, or industry to a common fund with the intention of dividing the
retirement/withdrawal/death of a partner, and
profits among themselves.
incorporation of a partnership.
Liquidation ➢ Winding-up of affairs.
A partnership is created by either an oral or a written agreement. Since partnerships
are required to be registered with the Securities and Exchange Commissions (SEC), it
is necessary that the partnership agreement be in writing. In this case,
misunderstandings among the partners according to the nature and terms of the
PARTNERSHIP FORMATION
partnership contract may be avoided or minimized. The written contract of a • Each partner must have his or her own capital and drawings account.
partnership is called the articles of co-partnership. This governs the formation, • Pro-forma entry for investment in the partnership:
operations, and dissolution of a partnership. It contains the following: Asset xx – Valuation?
1. The official name of the partnership; A, Capital xx
2. The names and addresses of the partners and classes of partners; B, Capital xx
3. The effective date of the partnership contract;
4. The term of which the partnership is to exist; Guidelines on the valuation of investment
5. The nature and purpose(s) of the business; Form of investment Valuation
6. Place where the principal office of the partnership is located; • Cash ➢ Face amount
7. The capital of the partnership, the amount of investments of each • Non-cash Level of priority:
partner, their description and agreed values; 1. Agreed value
8. The rights and duties of each partner; 2. Fair value (in the absence of agreed value) also
9. The manner of dividing profits and losses between or among the known as market value, appraised value, or sound
partners; value
10. The conditions under which the partners may invest assets in the 3. Carry value or cost
partnership;
11. The conditions under which the partners may withdraw assets from
the partnership for personal use; Accounting for business liabilities of a sole proprietor
12. The manner of maintaining the books of accounts; A sole proprietorship usually incurs obligations and liabilities in the ordinary course
13. The causes for dissolution; and of his business. These are called business liabilities. In such a case, when one of the
14. The provision for arbitration in settling disputes partners is a sole proprietor, there is a need for the partners to agree on a provision
whether those business liabilities are to be assumed by the partnership.

As a rule, the partnership will assume the business liabilities of the sole proprietor
unless otherwise agreed upon by the partners.
 Problem 1:
Accounting for liability attached to a property invested in the partnership - Mortgage Sergio admits Andres to a partnership interest in his business. Accounts in the
payable ledger of Sergio on December 31, 2021, before Andres’ admission, show the
There are cases when a partner contributes property (i.e. building) that has a liability following:
attached to it. In such a case, there is a need for the partners to agree on a provision Debit Credit
Cash P100,000
whether the liability attached to the property is to be assumed by the partnership or
Accounts receivable 75,000
not.
Inventory 80,000
Accounts payable P76,500
As a rule, the partnership will assume the liability attached to the property invested Sergio, Capital 178,500
by a partner unless otherwise agreed upon. 255,000 255,000
➢ This is based on the concept of common fund stating that any property
invested by each partner becomes the property of the partnership. Hence,
It is agreed that for the purpose of establishing the interest of Sergio, the following
the partnership becomes the owner of all the properties invested. adjustments shall be made:
(a) An allowance for doubtful accounts must be established at 10% of
CAPITAL INTEREST DIFFERENT FROM CAPITAL CONTRIBUTION accounts receivable.
Capital interest is the percentage of equity that each of the partner will have in the (b) The inventory is understated by P32,000.
net assets of the partnership. (c) Prepaid expenses of P40,000 and accrued expenses of P25,000 are to
be recognized.
Capital interest vs. Profit and loss interest
Requirement:
➢ A partner’s capital interest (or equity percentage) is his/her claim against
1. How much is the adjusted capital of Sergio prior to Andres’
the net assets of the partnership. It represents his ownership or capital in
admission? 218,000
the partnership.
2. How much cash shall Andres invest to acquire a one-third interest in
➢ A partner’s profit and loss interest determines how his/her capital interest the partnership? 109,000
will increase/decrease as a result of subsequent operations. (net 3. Assuming Andres is to invest an equipment with carrying value and
income/loss) fair value of P30,000 and P37,500, respectively. How much cash
shall Andres invest in addition to the equipment to secure a 20%
The partners may agree on the following with regard to their initial capital interests: interest in the partnership? 17,000
1. Net / Full investment method - Under this method, capital interest
Assume Andres is to invest a building with carrying value, fair value and an agreed
and capital contribution of a partner are the same.
value of P90,000, P100,000 and P120,000, respectively. The building is subject to
2. Transfer of Capital / Bonus method - Under this method, one of the
real mortgage at PCI Bank amounting to P50,000. How much shall be credited to
partners will transfer a portion of his/her capital to the other partner.
Andres’ capital if:
3. Invest or withdraw method - Under this method, one of the partners’
1. The partnership will assume the mortgage in full? 70,000
capital contribution will become the basis for the total partnership 2. The partnership will only assume half of the mortgage? 95,000
capital and the other partner will invest additional assets (or withdraw 3. The partnership will not assume the mortgage? 120,000
assets) to (or from) the partnership to conform to their agreement.
Requirement #1 Problem 2:
Sergio’s Capital per TB / Unadjusted On March 1, 2021, HELSINKI and NAIROBI decide to combine their businesses and
Capital 178,500 form a partnership. After forming the partners agreed to share profits and losses in
a) Est. of Allow. For DA Sergio’s, Cap. 7,500 the ratio of 75:25, respectively. Their adjusted trial balances on March 1, 2021
(7,500) ADA 7,500
(75,0000 x 10%) showed the following:
b) ↓ Inventory Inventory 32,000
32,000 Sergio’s Cap. 32,000
c) Recognition of prepaid Prepaid expense 40,000 HELSINKI NAIROBI
Sergio’s Cap. 40,000 Cash 9,000 3,750
expenses 40,000
Recognition of accrued Sergio’s Cap. 25,000 Accounts receivable 18,500 13,500
Accrued expense 25,000
expenses (25,000) Inventories 30,000 19,500
Sergio’s Adjusted Capital 218,000 Furniture and fixtures 30,000 9,000
Office equipment 11,500 2,750
Requirement #2 Prepaid expenses 6,375 3,000
Partnership Sergio ➢ 218,000 Cost of goods sold 70,000 48,000
(100%) (2/3) Operating expenses 20,000 37,000
327,000 Andres ➢ 109,000 Cash 109,000
Total 195,375 136,500
(218,000 x 3/2) (327,000/3) Andres, Capital 109,000
(1/3)
Allowance for bad debts 500 900
Requirement #3
Accumulated Depreciation – Furniture and fixtures 9,000 1,200
Partnership Sergio ➢ 218,000
Accumulated Depreciation – Office equipment 1,500 500
(100%) 80%
272,500 Andres ➢ 54,500 ➢ Equipment Equipment 37,500 Accounts payable 21,000 18,000
(218,000 / 0.80)
20% (272,500 x
(FV) Cash 17,000 Capital 61,375 35,900
20%) Andres,
37,500 Sales 100,000 80,000
Capital
➢ Cash – 54,500 Miscellaneous income 2,000 -
17,000 195,375 136,500
Independent Case They agreed to have the following items adjusted in their books:
Assume Full Assume Half Will not assume (a) 5% of the accounts receivable of HELSINKI and NAIROBI are estimated to
Building (AV) 120,000 120,000 120,000 be uncollectible.
Less: Mortgage (50,000) (25,000) 0 (b) The inventory of HELSINKI should be valued at P32,000 while 10% of
Amount to be 70,000 95,000 120,000 NAIROBI’s inventory is to be considered obsolete and worthless, therefore,
credited to must be written off.
Andres’ Capital (c) HELSINKI’s furniture and fixtures should be carried at P24,500, while
Building 120,000 Building 120,000 Building 120,000 NAIROBI’s office equipment is under-depreciated by P1,000.
Mortgage payable Mortgage Andres,
(d) Rent expense incurred previously by HELSINKI was not yet recorded
50,000 payable Capital
Andres, Capital 25,000 120,000 amounting to P1,000, while salary expense incurred by NAIROBI was not
70,000 Andres, also recorded amounting to P800.
Capital 95,000
What are the capital balances of HELSINKI and NAIROBI, respectively, after Case 1 - Invest / withdraw method
adjustments? H 77,450; N 27,375 Helsinki (75%) Nairobi (25%)
Capital per agreement 77,450 27,375
Case 1: After adjustments, HELSINKI will either invest or withdraw cash to make his Additional investment 4,675 -
capital proportionate to his profit or loss ratio. Required capital 82,127 27,375
(27,375 / 0.25 x 0.75)
1. What are the capital balances of the partners immediately after formation?
H 82,127; N 27,375
Case 2 - Bonus method
2. How much is the cash to be invested (withdrawn) by HELSINKI to make his
Helsinki Nairobi Total
capital balance proportionate to his profit or loss ratio? 4,765
(75%) (25%)
Capital per agreement 77,450 27,375 104,825
Case 2: After adjustments, the partners will adjust their capital balances by the use
Bonus / Transfer of capital +1,168.75 -1168.75 - Nairobi, Capital
of transfer of capital (or bonus method) to make their capital balances proportionate 1,168.75
Required capital 78,618.75 26,206.25 104,825
to their profit and loss ratio. Helsinki,
1. What are the capital balances of the partners immediately after the Capital
1,168.75
formation? H 78,618.75; N 26,206.25
2. How much capital was transferred to (from) NAIROBI? -1168.75
PARTNERSHIP OPERATIONS
Manner of distribution of Profits and Losses
Net investment method
1. Profits and losses shall be divided between or among the partners based
Helsinki Nairobi on their agreement.
Capital per trial balance 61,375 35,900 2. If only the profit allocation has been agreed upon, the share of each
+/- Profit (Loss) 12,000 (5,000) partner in the losses shall be in the same proportion with the profit
Adjusted capital 73,375 30,900 allocation.
(a) (425) 225 3. If no agreement as to distribution of profits and losses, the allocation shall
(b) 2,000 (1,950) be in proportion to what they have contributed (original capital
contribution).
(c) 3,500 (1,000)
✓ RATIONALE: Profit and loss ratio should be established at the
(d) (1,000) (800)
time of the formation. Since the original capital is the only
Capital per agreement 77,450 27,375 available capital balance at the time of formation, the original
capital contribution shall be used.
Helsinki Nairobi Helsinki Nairobi
Sales 100,000 80,000 A/R 18,500 13,500
-COGS (70,000) (48,000) x% 5% 5%
Profit Loss
GP 30,000 32,000 ABD per With agreement
+OTHER INC 2,000 0 agreement 925 675 Profit and loss ratio √ √
-OPEX (20,000) (37,000) ABD per
Profit ratio √ √
P/L 12,000 (5,000) TB 500 900
Adj. to Loss ratio Original capital √
F&F, net -
21,000 cap. (425) 225 contribution ratio
Helsinki
F&F, net - Without agreement Original capital contribution ratio
24,500
Helsinki
Problem 1:
+3,500
On January 1, 2020, ARTURO, MONICA, and DENVER put up a partnership with Requirement #2
original capital contribution ratio of 1:3:4 for a total agreed capitalization of Arturo Monica Denver
P2,000,000. The profit or loss ratio agreement provides that profits shall be Beg. Capital (1:3:4 x 2,000,000) 250,000 750,000 1,000,000
distributed in the ratio of 4:2:4 during the first six months of operations and in the + Additional investments - - -
ratio of 3:2:5 thereafter while losses shall be distributed in the ratio of 2:2:6. Net - Withdrawals (50,000) (100,000) -
income is earned evenly throughout the year. +/- Share in P/L 420,000 240,000 540,000
End. Capital (12/31/2020) 620,000 890,000 1,540,000
For the year ended December 31, 2020, the partnership reported net income of
+ Additional investments - 80,000 -
P1,200,000 with ARTURO and MONICA withdrawing P50,000 and P100,000,
respectively. - Withdrawals - - (120,000)
+/- Share in P/L (2:2:6 x 250,000) (50,000) (50,000) (150,000)
For the year ending December 31, 2021, the partnership suffered a net loss of End. Capital (12/31/2021) 570,000 920,000 1,270,000
P250,000 with MONICA investing an additional P80,000 and DENVER withdrawing
P120,000.
Different Methods of Dividing Profits and Losses
REQUIRED: There are several ways to divide profits and losses between or among the
partners. The partners may distribute profits and losses:
1. Compute for the 2020 profit share of each partner. A 420,000; M ✓ Equally
240,000; D 540,000 ✓ In arbitrary ratio (Fraction / Percentage / Decimal / Ratio)
2. Compute for each partner’s capital balance on December 31, 2021. ✓ Based on capital ratio
A 570,000; M 920,000; D 1,270,000 ➢ Original capital – the capital contributions of the partners at the
inception of the partnership (its time of formation).
Requirement #1 ➢ Beginning capital – the capital balances of the partners at the
beginning of the period.
➢ Arturo (40%) ➢ 240,000
01/01 – 06/30/20 ➢ Ending capital – the capital balances of the partners at the end of
➢ Monica (20%) ➢ 120,000 the period before closing of net income.
600,000
2020 Profit ➢ Denver (40%) ➢ 240,000
1,200,000 ➢ Arturo (30%) ➢ 180,000 Ending capital is computed as:
07/01 – 12/31/20
➢ Monica (20%) ➢ 120,000 Beginning capital xx
600,000
➢ Denver (50%) ➢ 300,000 Additional investments xx
Permanent withdrawals (xx)
2020 Arturo Monica Denver Ending capital balance xx
01/01 – 06/30 240,000 120,000 240,000
07/01 – 12/31 180,000 120,000 300,000 NOTE: The ending capital above is only for the purpose of
Share in Profit 2020 420,000 240,00 540,000 establishing the ending capital ratio.
➢ Average capital – the amount of capital invested multiplied by the
time during which such capital are actually used by the firm.
✓ With interest on invested capital
✓ With salary allowances to partners
✓ With bonus to partners
Interest on invested capital ➢ Bonus is based on profit after deducting interests and salaries but
• Incentives given to partners to give recognition to the differences in before bonus.
capital contributions but does not take into account the time and
effort that a partner may devote in running the partnership’s business Problem 2:
operations RAQUEL, ANGEL, and SUAREZ put up a partnership on April 1, 2020. The partners
• Interest on invested capital may be computed using any one of the invested the following amounts on that date:
following as basis:
RAQUEL P94,000
➢ Interest on original capital contributions.
ANGEL 114,000
➢ Interest on beginning capital. SUAREZ 70,000
➢ Interest on ending capital.
➢ Interest on average capital. During the year, RAQUEL withdrew P10,000 cash while SUAREZ invested a property
➢ Interest on capital in excess of a certain amount. with a fair value of P22,000.

Salary allowances to partners The partners agreed to distribute the profits as follows:
• Compensation given to partners in proportion to the time devoted to • Annual salary of P30,000 to ANGEL and P25,000 to SUAREZ.
the business.
• Allow a 5% interest to each partner on their capital at the beginning of the
• This recognizes the time and effort that a partner may devote in period.
running the partnership’s business operations but does not take into
• Allow a 20% bonus to RAQUEL based on net income after salaries, interests,
consideration the differences in capital contributions.
and bonus.
• Similar to interest on capital, salary allowances are also a function of
• Any remaining undistributed profit or loss will be distributed in the
passage of time.
following manner:
➢ In the ratio 2:3:5, if under-allocated (UA if + ang undistributed amount)
Bonus to partners
➢ Equally, if over-allocated (OA if - ang undistributed amount)
A bonus is an incentive normally given to the managing partner in recognition of
his/her managerial skills. A bonus is usually a percentage of profit.
Case 1: The partnership realized profit of P100,000 during the year 2020.
• If the operations resulted to a profit, bonus may or may not be given.
1. How much is the bonus given to RAQUEL? 8,054
• If the operations resulted to a loss, bonus is not allowed to be given.
2. How much is the share of each partner in the 2020 net income? R 19,633;
A 38,856; S 41,511
Bonus may be computed using any one of the following as basis:
3. What are the capital balances of the partners on December 31, 2020? R
➢ Bonus is based on profit before any deductions for bonus and income
103,633; A 152,856; S 133,511
tax.
4. Assume the net income of the partnership during the year 2021 is
➢ Bonus is based on profit after deducting bonus but before income tax.
P150,000. How much is the share of each partner in the 2021 net income
➢ Bonus is based on profit after deducting bonus and income tax. if there were no additional investments nor withdrawals made? R 30,348;
➢ Bonus is based on profit before any deductions for interests, salaries, A 56,518; S 63,134
and bonus.
➢ Bonus is based on profit after deducting interests but before salaries
and bonus.
Case 2: the partnership realized profit of P45,000 during the year 2020. Case 1 No. 4
1. How much is the bonus given to RAQUEL? 0 Raquel Angel Suarez Total
2. How much is the share of each partner in the 2020 net income? R 1,300; Salaries (12 months) - 30,000 25,000 55,000
A 24,550; S 19,150 Interest (12 months) 5,182 7,643 6,676 19,501
(103,633 x 0.05) (152,856 x 0.05) (133,511 x 0.05)

Bonus 12,583 - - 12,583

Case 1 No. 1 & 2
Undistributed P/L
Raquel Angel Suarez Total
(2:3:5) 12,583 18,875 31,458 62,916
Salaries (9/12 months) - 22,500 18,750 41,250
(30,000 x 9/12) (25,000 x 9/12) Share in Profit 30,348 56,518 63,134 150,000
Interest (9/12 months) 3,525 4,275 2,625 10,425
(94,000 x 0.05 x 9/12) (114,000 x 0.05 x (70,000 x 0.05 x 9/12)
9/12)
B = 0.20 (150,000 – 55,000 – 19,501 – B)
Bonus 8,054 - - 8,054 Work back B = 0.20 (75,499 – B)
UA if + B = 15,100 – 0.20B
Undistributed P/L
OA if –
(2:3:5) 8,054 12,081 20,136 40,271 1.2B / 1.2 = 15,100 / 1.2
Share in Profit 19,633 38,856 41,511 100,000 Net Income B = 12,583

B = 0.20 (NI – S – I – B) Case 2

B = 0.20 (100,000 – 41,250 – 10,425 – B) Raquel Angel Suarez Total
B = 0.20 (48,325 – B) Salaries (9/12 - 22,500 18,750 41,250
(30,000 x 9/12) (25,000 x 9/12)
B = 9,665 – 0.20B months)
B + 0.20B = 9,665 Interest (9/12 3,525 4,275 2,625 10,425
(94,000 x 0.05 x 9/12) (114,000 x 0.05 x (70,000 x 0.05 x 9/12)
1.2B / 1.2 = 9,665 / 1.2 months) 9/12)

B = 8,054 Bonus 0 - - 0
Undistributed P/L
Case 1 No. 3 (OA = divided equally) (2,225) (2,225) (2,225) (6,675)
Raquel Angel Suarez Share in Profit 1,300 24,550 19,150 45,000
Beg. Capital – 04/01/20 94,000 114,000 70,000
+ Additional investments 22,000 B = 0.20 (45,000 – 41,250 – 10,425 – B)
- Withdrawals (10,000) B = 0.20 (-6,675 – B)
+/- Share in P/L 19,633 38,856 41,511 B=0
End. Capital – 12/31/20 103,633 152,856 133,511
Average Capital Balance (ACB) Problem 3:
➢ ACB takes into account how long the capital balance was at a specific TOKYO and RIO are partners engaged in a partnership which began operations several
amount during the period. years ago. Transactions affecting the partners’ capital accounts in 2020 are as follows:
➢ There are two methods to compute for the ACB:
1. Weighted average method TOKYO, Capital RIO, Capital
2. Moving average method DR. CR. DR. CR.
➢ ACB considers only the beginning capital, additional investments, and Beg. Bal 150,000 175,000
permanent withdrawals. 4/1 40,000
5/31 25,000
Withdrawals Account 7/31 25,000
Partners normally withdraw regular amounts of cash on a weekly or monthly basis. 8/1 50,000
These are called drawings or 9/30 40,000
withdrawals. Partners can withdraw: 10/1 15,000
➢ Cash - cash withdrawals should be valued at face amount. 11/30 10,000 10,000
➢ Non-cash assets – non-cash withdrawals shall be valued at their fair 12/31 35,000
market values at the time they were withdrawn.
Shown below are the partners’ drawing accounts during 2020:
There are two classes of withdrawals:
1. Permanent withdrawals – these withdrawals directly affect the capital TOKYO, Drawing RIO, Drawing
account balances of the partners. 2/1 15,000 4/30 21,000
➢ This is a direct debit to capital accounts. 7/31 27,000 10/1 12,000
➢ Considered in computing ending capital for the purpose of
establishing the ratio. REQUIRED: What are the average capital balances of TOKYO and RIO, respectively?
➢ Considered in the computation of average capital balance. TOKYO 172,500 ; RIO 201,250

2. Temporary withdrawals – these withdrawals are initially charged (or

debit) to drawing accounts of the partners.
➢ These are drawings from share in net income or withdrawals in
anticipation of profits.
➢ Not considered in computing ending capital for the purpose of
establishing the ratio.
➢ Not considered in the computation of average capital balance.

Problem 4:
ANDRES and PALERMO formed a partnership on March 1, 2020 and agreed to share
profit 80% and 20%, respectively. ANDRES invested cash of P150,000. PALERMO
invested no assets but has a specialized expertise and manages the firm full time.
There were no other investments nor withdrawals during the year. The partnership
contract provides for the following:
• Capital accounts are to be credited annually with interest at 10% of
original capital contribution.
• PALERMO is to be paid a monthly salary of P 3,000.
• PALERMO is to receive a bonus of 20% of profit before deducting
interest on capital, salary, and the bonus.
The 2020 condensed income statement for the partnership includes the following:
Revenues P 550,000
Expenses (including interest, salary and bonus) (375,000)
Net income 175,000
1. How much is the bonus given to PALERMO in 2020? 54,375
2. How much net income was realized by the partnership for the year 2020?
271,875
3. How much is PALERMO’ profit share for 2020? 119,375
PARTNERSHIP DISSOLUTION
Nature of dissolution
Dissolution is defined as the change in the relation of the partners caused by any
partner ceasing to be associated in the carrying on as distinguished from the winding
up of the business. (Art. 1828, Civil Code)
In simple terms, dissolution is the termination of the life of an existing partnership.
Only the partnership contract is dissolved, not the business itself. It does not mean
the termination of the business nor an interruption in its operations. The business
continues its operations but as a new partnership and the remaining partners shall
submit to the SEC new articles of partnership.
A partnership is automatically dissolved whenever there is a change in the
relationship of the partners or change in the ownership structure of the
partnership.
Result of dissolution
Dissolution may result to either of the following:
(1) Formation of a new partnership/continuation of the operations of the
old partnership under a new partnership contract; or
(2) Liquidation/winding-up of affairs of the partnership
DISSOLUTION vs. LIQUIDATION
Dissolution and liquidation are not synonymous.
Liquidation is the termination of the business activities carried on by the
partnership and the winding up of the affairs of the partnership.
 A partnership is said to be dissolved when the original association
for purposes of carrying on activities has ended.
 A partnership is said to be liquidated when the business is terminated.
Dissolution does not necessarily result to liquidation but liquidation is always
preceded by dissolution.
Causes of dissolution
Some of the causes of dissolution for accounting purposes are:
1. Admission of a new partner
2. Retirement, withdrawal, or death of a partner
3. Incorporation of a partnership
1. Admission of a new partner
A partnership is automatically dissolved whenever there is a change in the
relationship of the partners or change in the ownership structure of the
partnership. When a partner is admitted in an existing partnership, the existing
partnership is dissolved and a new partnership is created.
However, it is to be emphasized that a new partner may be admitted in an existing
partnership only with the consent of all the partners. Remember that partnership is
based on agreements. The relationship of the partners is based on mutual trust and
confidence.
Types of admitting a new partner
Admitting a new partner is of two types:
1. Admission by purchase of interest
2. Admission by investment of assets
Admission by purchase of interest
Under this type of admission, the new partner(s) purchases a certain percentage or
the total equity of the selling partner(s) or of the partnership to have an ownership
interest.
A purchase of interest is a personal transaction between the new partner and the
selling partner(s). The only entry in the books of the partnership is the transfer of
capital from the selling partner(s) to the new partner(s). This type of admission does
not, in any way, change the amount of total assets, liabilities, and equity of the
partnership since this is a personal transaction.
The journal entry to record the admission of a new partner by purchase of interest is
as follows: (Assume A is the selling partner and E is the incoming partner)
A, Capital XX
E, Capital XX
The amount to be debited or credited is equal to the interest sold or bought and not
equal to the amount received or paid.
No cash and gain or loss will be recognized in the books of the partnership since this
is a personal transaction between the selling partner and the incoming or new
partner. The difference between the cash paid for the equity and the interest
purchased is called the personal gain or loss.
 If cash paid for the equity < interest purchased, a personal loss to the
selling partner (or personal gain to the incoming partner) arises.
 If cash paid for the equity > interest purchased, a personal gain to the
selling partner (or personal loss to the incoming partner) arises.
 If cash paid for the equity = interest purchased, no personal gain or loss
arises.
Upon admission of a new partner, not only the capital accounts of the original
partners change but also their profit and loss ratio.
The value of a partnership is high when it has sustained a favorable operating
performance. This may also imply that the partnership has already acquired an
intangible asset that improves its profitability above the normal level. This
intangible asset is known as goodwill.
Goodwill is the advantage that a business has acquired through its brand and good
reputation.
 It provides earnings to the business more than the normal level.
 It is attributable to the whole business; hence, it could not stand alone.
 It cannot be separated from the business.
However, International Financial Reporting Standards (IFRS) 3, Business
Combination, prohibits the recognition of goodwill in partnership. Forming a
partnership or admission of a new partner is not considered as business combination.
 ➢ However, if the net assets are not fairly valued, there is a need to adjust
Upon admission of a new partner, not only the capital accounts of the original the amount of the net assets of the partnership before admitting a new
partners change but also their profit and loss ratio. partner so that there will be a fair transaction between the selling
partner(s) and the buying partner(s). If the fair value of the net assets is:
For example, A and B share profits and losses in the ratio of 60:40, respectively. They ▪ Higher than the recorded amount per books, the difference is
agreed to admit C in the partnership with 25% share in the profits and losses. How can upward (positive) asset revaluation. The entry to record the upward
the profit and loss ratio of the original partners change? revaluation of assets is: (Assume that A and B are the old partners)

➢ One alternative is that the original partners should agree on a new Asset xx
profit and loss ratio. For example, they can agree that A is to share A, Capital xx
55% of the profits and losses, B is to share 20%, and C is to share 25% B, Capital xx
(55:20:25, respectively). Or they can agree that A is to share 40% of
the profits and losses, B is to share 35%, and C is to share 25% ▪ Lower than the recorded amount per books, the difference is
(40:35:25, respectively).
downward (negative) asset revaluation. The entry to record the
downward revaluation of assets is:
➢ If there is no agreement as to the new profit and loss ratio among the
original partners, another alternative is to maintain their profit and A, Capital xx
loss percentage proportionately. Since C is admitted in the partnership B, Capital xx
with 25% share in the profits and losses, the original partners Asset xx
retained only 75% share in the profits and losses. Therefore, the profit
and loss ratio of A and B is adjusted to 45% (75 x 60%) and 30% (75 x
40%), respectively. If we present this alternative in a tabular format, ▪ Equal to the recorded amount per books, there is no asset
this is what it looks like: revaluation.

Capital structure prior to C’s admission in the partnership ➢ It is to be emphasized that only the original partners are entitled to the
100% asset revaluation. The new partner(s) shall have no share in the asset
Capital structure A B revaluation. The asset revaluation will be shared by the original partners
Profit and loss ratio 60% 40% based on their old profit and loss ratio.

Capital structure after C’s admission in the partnership

100% Admission by investment of assets
75% 25% Another type of admission of a new partner is the admission by investment of
Capital structure A (60%) B (40%) C assets. Under this type, the new partner invests assets to the partnership to have an
ownership interest.
Profit and loss ratio 45% 30% 25%
The journal entry to record the investment of the incoming partner is as follows:
Asset adjustments prior to admission of a new partner (Assume E is the incoming partner)
➢ Generally, net assets are fairly valued prior to the admission of a new
partner. If the problem is silent or stated that net assets are fairly valued, Asset XX
the difference between the cash paid and interest purchased is treated as E, Capital XX
personal gain or loss of the selling partner(s).
Observe that in the above entry, asset was debited. That is because the
transaction under this type of admission of new partner is between the
partnership and the incoming partner(s).
Basic terminologies
1. Old partners’ capital (OPC) – this refers to the capital balances of the old
or original partners prior to the admission of a new partner.
2. New partner’s investments (NPI) – also known as capital investment (CI).
This refers to the actual amount of assets invested by a new partner to
the partnership.
3. Total contributed capital (TCC) – This refers to the sum of old partners’
capital and new partner’s investments.
4. Asset revaluation – refers to the adjustments in asset valuation upon
admission of a new partner.
a. Relates only to the old partners of an existing partnership.
a. A bonus may be given to the old partners or to the new
partner(s) in order to satisfy the amount of capital credits.
 When bonus is given to the new partner(s) or in the
case of CC > NPI, the capital is transferred from the old
partners to the new partner(s). This will decrease the
capital of the old partners.
 When bonus is given to the old partners or in the case
of CC < NPI, the capital is transferred from the new
partner(s) to the old partners. This will increase the
capital of the old partners.
 There is no bonus if CC = NPI
 It must be emphasized that the total partnership capital
will remain the same after the transfer of capital (or
bonus) between or among the partners. But the capital
credit of each partner will change.
Problem 1: (Admission by Purchase of Interest)

X and Y are partners sharing profits and losses on a 40:60 ratio and have the
5. Total agreed capital (TAC) – the amount of new capital set by the following capital balances: P100,000 and P200,000, respectively. Z directly
partners for the partnership after the admission of the new partner.
purchased a 30% interest in the partnership by paying X P40,000 and Y P60,000.
a. It may be equal to, more than, or less than the TCC.
i. If TAC = TCC, there is no asset revaluation CASE 1: Net assets are fairly valued prior to Z’s admission. What are the capital
ii. If TAC < TCC In this case, net assets is overstated, balances of the partners immediately after’s Z’s admission?
therefore there is a downward (negative) asset
revaluation.
iii. If TAC > TCC In this case, net assets is understated,
therefore there is an upward (positive) asset
revaluation.
b. If the partners expressly agreed on the new partnership capital,
that agreement must be followed accordingly. However, if there
is no agreement as to the new capital of the partnership after
the admission of the new partner, then it is assumed that the
TAC is equal to their TCC.

6. Capital credit (CC) – this refers to the interest or capital or equity that a
new partner is credited.
a. It is the ownership interest of a partner in the firm.
b. It may be equal to, more than, or less than the investment by the
new partner into the partnership.
c. The CC is to be computed based on TAC, not on TCC.

7. Bonus – the amount of capital transferred from one partner to another.

CASE 2: Assets are undervalued by P20,000 prior to Z’s admission.
1. How much is the gain or loss that will be recognized in the
partnership books upon purchase of interest by Z? 0
2. What are the capital balances of the partners immediately after’s Z’s
admission?
CASE 3: Assets are overvalued by P30,000 prior to Z’s admission.
1. How much is the gain or loss that will be recognized in the
partnership books upon purchase of interest by Z? 0
2. What are the capital balances of the partners immediately after Z’s
admission?
Problem 2: (Admission by Investment)
HAYABUSA and HANABI are partners with capital balances of P78,400 and P117,600,
respectively. They share profits and losses in the ratio of 2:3. HAYABUSA and
HANABI decided to admit KAGURA as a new partner with 20% interest.
CASE 1: The assets and liabilities are fairly valued on the balance sheet provided.
1. What amount should KAGURA invest into the partnership assuming no
bonus is to be recognized?
2. Assuming KAGURA invested a total of P34,000 into the partnership, how
much is the bonus upon admission of KAGURA?
3. In connection with item no. 2, what are the capital balances of the
partners immediately after the admission of KAGURA?
 4. Assuming KAGURA invested a total of P74,000 into the partnership, how
much is the bonus upon admission of KAGURA?
5. In connection with item no. 4, what are the capital balances of the
partners immediately after the admission of KAGURA?

CASE 3: KAGURA invested a total of P75,000 into the partnership. After the
admission of KAGURA, the total partnership capital will be P250,000.
1. What is the amount of the asset revaluation?
2. What is the amount of bonus upon admission of KAGURA?
CASE 2: KAGURA invested P88,000 cash in the partnership. After the admission of 3. What are the capital balances of the partners immediately after the
KAGURA, the total partnership capital will be P460,000. admission of KAGURA?
1. How much is the asset revaluation?
2. What is the amount of bonus upon admission of KAGURA?
3. What are the capital balances of the partners immediately after the
admission of KAGURA?
2. Retirement Or Withdrawal Of A Partner
We cannot deny the fact that there will always be a risk of disagreements between
or among the partners because in a partnership, there are two or more persons
managing the partnership. Every person has their own unique style of managing a
business.
A partnership is also dissolved when a partner retires or withdraws from the
partnership because this will also change the ownership structure.
The total interest of the retiring or withdrawing partner is computed at the time
of retirement or withdrawal. When a partner ceases to be associated with the
partnership by way of retirement or withdrawal, the interest of the retiring or
withdrawing partner may be:
1. Sold to a new partner or outsider
2. Sold to the remaining partner(s)
3. Sold to the partnership
Sold to a new partner or outsider
➢ In this type of sale of interest, the transaction is similar to the
admission of a new partner by purchase of interest. This is also
a personal transaction between the outgoing partner and the
incoming partner. Also, the consent of all the partners is still a
requirement. If not all of the remaining partners consent, the sale
of interest to the new partner cannot materialize.
➢ The entry to record the retirement or withdrawal of a partner by
selling his interest to an outsider is: (Assume A, B, and C are the
partners, B is the retiring partner and X is the new partner or an
outsider)
B, Capital XX
X, Capital XX
The difference between the cash paid and the interest transferred is
treated as personal gain or loss to the retiring or withdrawing
partner.
 If cash received for the interest = interest transferred, no
personal gain or loss arises.
 If cash received for the interest > interest
transferred, a personal gain to the selling
(retiring/withdrawing) partner arises.
 If cash received for the interest < interest
transferred, a personal loss to the selling
(retiring/withdrawing) partner arises.
Partnership asset adjustments before retirement or withdrawal of a partner
➢ Generally, net assets are fairly valued prior to the retirement or
withdrawal of a partner. If the problem is silent or stated that net
assets are fairly valued, the difference between the cash paid and
interest purchased is treated as personal gain or loss of the selling
partner(s).
➢ However, if the net assets are not fairly valued, there is a need to
adjust the amount of the net assets of the partnership before
retirement or withdrawal of a partner so that there will be a fair
transaction between the selling partner(s) and the buying partner(s).
If the fair value of the net assets is:
▪ Higher than the recorded amount per books, the difference is
upward (positive) asset revaluation. The entry to record the
upward revaluation of assets is: (Assume that A, B, and C are the
partners and B is the retiring or withdrawing partner)
Asset XX
A, Capital XX
B, Capital XX
C, Capital XX
▪ Lower than the recorded amount per books, the difference is
downward (negative) asset revaluation. The entry to record the
downward revaluation of assets is:
A, Capital XX
B, Capital XX
C, Capital XX
Asset XX
▪ Equal to the recorded amount per books, there is no asset
revaluation.
➢ Unlike in the admission of a new partner, all the partners (excluding
the outsider or the incoming partner) will share in the asset
revaluation.
Sold to the remaining partner(s)
➢ This type of sale of interest, similar to the sale of interest to an
outsider, is also a personal transaction
between the retiring or withdrawing partner and the buying partner.
➢ The entries in this type of sale of interest are very similar to the
sale of interest to an outsider except that the buying partner is a
remaining partner, not an outsider.
➢ The entry to record the retirement or withdrawal of a partner by
selling his interest to a remaining partner is as follows: (Assume
A, B, and C are the partners, B is the retiring partner and A is the
buying partner)
B, Capital XX
A, Capital XX
➢ The entry to record the retirement or withdrawal of a partner by
selling his or her interest to the remaining partners is as follows:
(Assume A, B, and C are the partners, B is the retiring partner)
B, Capital XX
A, Capital XX
C, Capital XX
The capital to be credited to A and C will depend on their
agreement. For example, they agreed to purchase B’s interest of
P200,000 (which is also equal to his capital account) equally.
Therefore, the amount to be credited to their capital account is
P100,000 each. Another example, they agreed to purchase B’s
interest of P200,000 (which is also equal to his capital account) in
the ratio of 60:40 to A and C, respectively. The capital to be
credited to A is P120,000 (200,000 x 60%) and P80,000 (200,000
x 40%) to C.
Sold to the partnership
➢ This type of sale of interest is not a personal transaction. It is a
transaction between the partnership and the retiring or
withdrawing partner(s). Total assets and capital are decreased
due to the retirement or withdrawal of the partner(s).
➢ This is the counterpart of the admission of a new partner by
investment.
➢ The entry to record the retirement or withdrawal of a partner by
selling his or her interest to the partnership is as follows:
(Assume A, B, and C are the partners and B is the retiring or
withdrawing partner)
B, Capital XX
Cash XX
➢ The concepts under admission of new partner by investment is
also applicable under this type of sale of interest.
➢ The total interest of the retiring or withdrawing partner may be paid
as follows:
1. Equal to the book value
2. More than the book value
3. Less than the book value
EQUAL TO THE BOOK VALUE
➢ There is no bonus nor asset revaluation in this case.
MORE or LESS THAN THE BOOK VALUE
➢ The difference between the cash to be paid and the book value of
the retiring or withdrawing partner’s total interest may be a bonus
or a share in the asset revaluation. Generally, the difference is
treated as a bonus.
However, if the problem stated that the difference is attributable to an
undervaluation or overvaluation of assets, then it is a share in the asset
revaluation.
 If total interest = cash to be paid, no bonus nor asset
revaluation.
 If total interest > cash to be paid, there may be a bonus to
the remaining partners or downward asset revaluation.
▪ Generally, the difference is treated as a bonus to the
remaining partners.
▪ Use asset revaluation method only if there is
information in the problem that the asset revaluation
method should be used. To get the total downward
asset revaluation, divide the difference by the profit
and loss ratio of the retiring or withdrawing partner.
 Computation of the total interest of an outgoing partner
 If total interest < cash to be paid, there may be a bonus to The total interest of an outgoing partner is computed as follows:
the retiring or withdrawing partner or Adjusted capital balance XX
upward asset revaluation. Add: Loan from partner XX
▪ Generally, the difference is treated as a bonus to the Less: Advances to partner (XX)
retiring or withdrawing partner(s). Total interest XX

▪ Use asset revaluation method only if there is
information in the problem that the asset revaluation
method should be used. To get the total upward
asset revaluation, divide the difference by the profit
and loss ratio of the retiring or withdrawing partner.
Death of a partner
The death of a partner dissolves the partnership. It also results to a change in
ownership structure. In a similar manner with that of the retirement or
withdrawal of a partner, the capital balance of the deceased partner is
computed at the time of his or her death. The total interest of the deceased
partner will form part of his/her gross estate and will be paid to the heirs or
beneficiaries by way of succession.
Problem 3: (Retirement of a partner – The incoming/remaining partners paid the
retiring partner)
A, B, and C are partners with capital balances of P80,000, P200,000 and P120,000,
respectively. Profits and losses are shared in a 3:2:1 ratio. B decided to retire and
the partnership revalued its assets. The value of inventory was decreased by
P20,000 and the value of land was increased by P50,000.
Required: Prepare the journal entry to record B’s withdrawal under each of the
following independent assumptions:
1. As agreed by all the partners, B sold his interest to D, an outsider, for
P250,000.
2. As agreed by all the partners, B sold 60% his interest to A and 40% to C for
a total of P250,000.

The entry to record the settlement of the deceased partner’s total interest is:
(Assume A, B, and C are the partners and B is the deceased partner)

B, Capital xx
Cash xx

In the event that the amount due to the deceased partner could not be paid
immediately, the deceased partner’s total interest will be reclassified as
liability. The entry is:

B, Capital xx
Payable to B’s estate xx

The concepts under retirement or withdrawal of a partner are also applicable in

this topic.
Problem 4: (Retirement of a partner – Partnership paid the retiring partner)
You are given the following information together with the profit and loss ratio of the
partners as of March 31, 2021:

Assets P1,200,000
Liabilities to outsiders 308,000
Due to P (utang ni 19,000
Partnership kay P)
Loan from A 33,000
C, Capital (30%) 432,000
P, Capital (50%) 241,000
A, Capital (20%) 167,000

P decided to retire from the partnership. The partners agreed that the assets of the
partnership are to be adjusted to their fair value of P1,500,000 at March 31, 2021.

CASE 1: It was agreed that the partnership will pay P P450,000 cash for his total
interest in the partnership.
1. How much is the bonus upon P’s retirement?
2. What are the capital balances of C and A immediately after P’s
retirement?
 3. Incorporation Of A Partnership
Partnership is converted into a corporation. The corporation acquires all the
assets and assumes the liabilities of the partnership in exchange for shares

Problem 5: (Incorporation of a Partnership)

X and Y, partners of XY Partnership (who share profit and loss in 80:20 ratio)
organized XY Corporation to take over the net assets of the partnership. The
CASE 2: It was agreed that the partnership will pay P P360,000 cash for this total balance sheet of the partnership on September 30, 2020, the date of incorporation,
interest in the partnership.
contains the following accounts:
1. How much is the bonus upon P’s retirement?
2. What are the capital balances of C and A immediately after P’s
Cash P14,400
retirement?
Accounts receivable (net) 33,000
Inventory 30,600
Equipment (net) 40,800
Accounts payable 42,000
X, capital 57,588
Y, capital 19,212

After an appraisal of the equipment and an audit of the partnership’s financial

statements, the partners agree that the following adjustments are required to
restate the net assets of the partnership to current fair value:
▪ Increase the allowance for doubtful accounts by P480.
▪ Increase the inventories to current replacement cost of P36,000.
▪ Increase the equipment to its current fair value of P47,400.
▪ Recognize accrued liabilities of P1,320.
▪ Recognize prepaid expenses of P12,000.

XY Corporation is authorized to issue 12,000 shares of P10 par common stock. It

issues 9,000 shares of common stock valued at P11 a share to the partnership in
exchange for the net assets of the partnership.

1. How many shares of common stocks were issued to X and Y,

 respectively, upon incorporation?
2. Immediately after effecting the transfer of the net assets,
and the issuance of common stocks, XY Corporation’s
additional paid-in capital account would be credited for what
amount?
(d) Those owing to partners in respect of profits*.
*For accounting purposes, item (d) in (2) should already be closed to the
partners’ capital accounts prior to the liquidation process.
Where a partner has become insolvent or his estate is insolvent, the claims
against his separate property shall rank in the following order:
(a) Those owing to separate creditors;
(b) Those owing to partnership creditors;
(c) Those owing to partners by way of contribution.

RULES ON PAYMENT OF CLAIMS

A basic rule in partnership liquidation is that no distribution of assets may be
made to partners until all outside partnership creditors have been satisfied.

TYPES OF LIQUIDATION
There are two types of liquidation:
1. Lump-sum liquidation – mabilisan / isang bagsakang bayaran
2. Installment liquidation

LUMP-SUM LIQUIDATION
➢ Refers to the type of liquidation where all non-cash assets are
PARTNERSHIP LIQUIDATION converted into cash in one transaction or in several transactions but
within a short period of time.
LIQUIDATION DEFINED
Liquidation refers to the process by which a partnership is brought to an end and
PROCESS OF LIQUIDATION:
the assets of the partnership are paid out to creditors and partners.
1. Realization of non-cash assets. – converting NCA into cash
➢ It is the process of converting partnership non-cash assets into cash
2. Payment of outside liabilities.
(known as realization) and cash is used as payment of claims (known
3. Payment of partners’ claims.
as liquidation).
➢ It is the phase of a partnership’s operations which begins after
Golden rule:
dissolution and ends with the winding up of partnership affairs.
- No distribution of assets may be made to partners until all outside partnership
➢ When the partnership is liquidated, the following events take place:
creditors have been satisfied.
1. The assets of the partnership are sold.
2. The liabilities are paid or settled.
3. The interests of the partners are paid or settled. REALIZATION GAIN OR LOSS
➢ There is gain on realization if the proceeds > carrying value of the
non-cash assets sold.
The liabilities of the partnership shall rank in order of payment, as follows:
(a) Those owing to creditors other than partners,
The entry to record the sale of non-cash assets at a gain and distributing the gain
(b) Those owing to partners other than for capital and profits,
on realization between or among the partners is:
(c) Those owing to partners in respect of capital,
 Cash XX (1) If the deficient partner (whether solvent or insolvent) has a loan
Non-cash assets XX balance, he may exercise the right of offset.
X, Capital XX (2) If the deficient partner is solvent, additional investment is a must.
Y, Capital XX (3) If the deficient partner is insolvent, the remaining partners will
Sale of non-cash assets at a gain absorb the capital deficiency.

➢ There is loss on realization if the proceeds < carrying value of the CAPITAL DEFICIENCY
non-cash assets sold. Capital deficiency – the term used to describe a debit capital balance.
The entry to record the sale of non-cash assets at a loss and distributing the loss ➢ Also called deficit.
on realization between or among the partners is: ➢ This is usually eliminated by additional investments.

Cash XX SOLVENT vs. INSOLVENT PARTNER

X, Capital XX ➢ A partner is said to be solvent if his personal assets exceed his
Y, Capital XX personal liabilities. (Personal Assets > Personal Liabilities)
Non-cash assets XX ➢ A partner is said to be insolvent if his personal liabilities exceed his
Sale of non-cash assets at a loss personal assets. (Personal Assets <
Personal Liabilities)
LIQUIDATION EXPENSES
➢ Liquidation expenses is treated as an expense arising from Right of offset – the legal right to apply part or all of the amount owing to a
liquidation and must be allocated to partners in accordance partner on a loan balance against deficiency in his capital account resulting
with the partnership agreement. from losses in the process of liquidation.
➢ Liquidation expenses is not included in the computation of gain
or loss on realization. It is included in the computation of gain or The entry to record the offsetting of a capital deficiency capital against the loan of
loss on liquidation. a partner to the partnership is:

The entry to record the payment of liquidation expenses is: Z, Loan XX

Z, Capital XX
X, Capital XX
Y, Capital XX The entry to record the absorption of capital deficiency of an insolvent partner is:
Cash XX
Payment of liquidation expenses X, Capital XX
Y, Capital XX
PAYMENT TO OUTSIDE CREDITORS Z, Capital XX
The entry to record the payment of liabilities to outside creditors is:
To record the payment of partners’ claims is:
Liabilities XX
Cash XX X, Capital XX
Payment of liabilities to outside creditors Y, Capital XX
Cash XX
➢ Capital deficiency is the excess of a partner’s share on losses over his Payment of partners’ claims
capital.
➢ To eliminate capital deficiency,
Problem 1: (Lump sum liquidation)
On December 31, 2020, A, B, and C decided to liquidate their partnership. The
statement of financial position accounts consisted of the following prior to
liquidation:

Cash P100,000 Liabilities to outsiders P603,000

Loan to B 25,000 Due to C 32,000
Other assets 1,075,000 A, Capital 216,000
B, Capital 187,000
C, Capital 162,000

TOTAL ASSETS 1,200,000 TOTAL 1,200,000

A, B, and C share profits and losses in the ratio of 4:4:2, respectively. CASE 2: The partnership was able to sell all the other assets for P500,000 and paid
liquidation expenses of P5,000. A and C are personally solvent while B is
CASE 1: The partnership was able to sell all the other assets for P1,120,000 and personally insolvent. How much cash should C receive?
paid liquidation expenses of P10,000. How much cash should A, B, and C receive?
 INDEPENDENT CASE – WHAT IF HANGGANG 40T lang ang kayang I absorb ni A?
CASE 3: B received a total of P161,000 and liquidation expenses of P10,000 were
paid.
1. How much is the amount of gain or loss on realization of other assets?
7,500 Gain
2. How much is the total proceeds from sale of other assets? 1,802,500
3. How much cash did A and C received? A 215,00; C 193,500
INSTALLMENT LIQUIDATION
➢ Refers to the type of liquidation where assets are realized on a little-by-
little basis.
➢ Under this type of liquidation, cash is distributed to partners as it
becomes available even before all non-cash assets are converted
into cash.
Schedules to determine cash distribution to partners
Under installment liquidation, there are two schedules which may be used to
determine cash distribution to partners:
1. Schedule of safe payments
2. Cash priority program
These two produces the same results. Their difference is the timing of the
preparation. These two does not eliminate the necessity of preparing a
statement of liquidation report.
Schedule of safe payments
➢ This schedule is prepared every time a non-cash asset is sold and once
cash becomes available.
➢ Partnership creditors are entitled to full payment before anything is paid
to partners.
Assumptions
 To distribute assets of the partnership to the partners fairly and
equitably, the following assumptions are used:
(1) All unsold non-cash assets are unrealizable.
(2) A capital deficient partner is personally insolvent.
All unsold noncash assets are unrealizable
➢ This assumption implies that the remaining non-cash assets of the
partnership can no longer be sold. Meaning, the carrying value of the
non-cash assets is considered a loss. This loss is called theoretical or
hypothetical loss. Theoretical or hypothetical loss is allocated among
the partners based on their profit-and-loss ratio.
Maximum possible loss
Maximum possible loss is defined as the worst loss that could possibly occur in
the future.
It is comprise of:
1. Carrying value of the unsold non-cash assets
2. Cash withheld for anticipated liquidation expenses and unrecorded
liabilities.
 Under this schedule, cash is distributed to partners who have free interest. Free ASSETS LIABILITIES AND
interest refers to a positive amount of a partner’s interest after absorbing his EQUITY
or her share of maximum possible loss and absorbing of any other partner’s Cash 2,000 Liabilities 20,000
capital deficiency. Non-cash assets 32,500 Sergio, loan 1,000
Andres, loan 500 Sergio, Capital 4,000
Cash priority program Andres, Capital 6,000
➢ Also known as pre-distribution plan. Palermo, Capital 4,000
➢ Prepared before any sale of non-cash assets. TOTAL ASSETS 35,000 TOTAL 35,000
➢ In this method, the advance cash distribution schedule shows
how cash is allocated to the partners once it becomes available. The result of liquidation are summarized below:
➢ Partnership creditors are entitled to full payment before anything is paid
to partners. Book Cash Liquidation Outside Cash withheld
Value - realized expenses liabilities for
NCA paid paid anticipated
Procedures in preparing cash priority program:
expenses
1. Determine each partner’s total interest. January 12,000 9,000 800 7,500 1,500
2. Partners are ranked based on their loss absorption potential.
February 10,000 13,500 700 10,000 900
3. Partners are ranked based on their vulnerability to losses.
March 7,500 3,000 200 2,500 500
4. The highest loss absorption balance is reduced to the next highest
April 3,000 1,500 100 --- ---
and so on until all of the partners have equal loss absorption
balance.
5. Once all the partners have equal loss absorption balance, cash Cash available, if any is distributed to the partners at the end of each month.
distributions are made based on their profit and loss ratios.
1. How much is the maximum possible loss in the safe payments schedule for
Loss absorption potential the month of January? 22,000
Loss absorption potential is the loss that the partnership will have to incur in 2. How much cash was withheld during January? 2,700
order that the partner’s total interest will become zero. a. Total CWH = CWH for AE & UL and CWH for unpaid liabilities
3. How much cash did each partner received in January? 0
The partner with the lowest loss absorption potential is considered to be the 4. How much is the maximum possible loss in the safe payments schedule for
the month of February? 11,400
most vulnerable to partnership losses; while the partner with the highest loss
5. How much cash was withheld during February? 3,400
absorption potential is the first to receive cash as it becomes available.
6. How much cash was paid to the partners during February? 2,100
7. How much cash did each partner received during February? S 1,640; A 460;
REDUCTION OF THE HIGHEST LOSS ABSORPTION BALANCE TO THE NEXT
P0
HIGHEST LOSS ABSORPTION BALANCE
8. How much is the maximum possible loss in the safe payments schedule for
Each reduction in the loss absorption balance requires payments to partners.
the month of March? 3,500
This is computed by multiplying the amount of reduction by the partner’s
9. How much cash was withheld during March? 500
profit and loss ratio. 10. How much cash was paid to the partners during March? 3,200
11. How much cash did each partner received during March? S 1,280; A 1,920;
Problem 2: (Schedule of Safe Payments) P0
Sergio, Andres, and Palermo are partners sharing profits and losses in the ratio 12. How much cash did each partner received during April?
2:3:5, respectively. On December 31, 2020, they decided to liquidate their 13. How much cash in total did each partner received during the course of
partnership. A statement of financial position prepared on this date follows:
liquidation?

STATEMENT OF LIQUIDATION
Problem 3: (Cash priority program)

Hyatt, Mariotte, and Bien are partners who share profits and losses in the ratio of
1:1:2, respectively. Due to financial difficulties, they decided to liquidate the
partnership. You were hired to account for the partnership liquidation and the
following information were provided:

Cash P 225,000
Liabilities 760,000
Loan to Hyatt 40,000
Receivable from Mariotte 60,000
Payable to Bien 50,000
Hyatt, Capital 520,000
Mariotte, Capital 480,000
Bien, Capital 450,000

The following information was available during the 3-month liquidation period:
Proceeds Liquidati Pay Cash withheld for
from on ment to anticipated
realizat expenses outside l
ion paid creditors iquidation
expenses and
unrecorded
liabilities
January P825,000 P10,000 P285,000 P100,000
February 200,000 5,000 475,000 45,000
March 58,000 3,000 - -
(final)

1. The partner most vulnerable to partnership losses on liquidation is…

Bien
2. How much is the cash available for distribution to the partners during
January, February and March, respectively?
3. How much cash was received by each partner during January?
4. How much cash was received by each partner during February?
5. How much cash was received by each partner during March?
6. How much cash in total did each partner received during the course
of liquidation?