CHAPTER FOUR

ACCOUNTING FOR PARTNERSHIPS

A partnership is defined as the relationship that exists between persons carrying on a business for
profit. These persons agree to combine some or all of their property, labor, and skills. This
relationship is based on a contract. Although a written agreement is not required by law, all matters
of importance to the partnership should be clearly expressed in written form. This written
agreement is referred to as the articles of partnership or the partnership agreement.
Elements of a partnership agreement include:

The partnership deed usually contains the following particulars:

particulars:
 Name of the firm;
 Names and addresses of all partners;
 Nature and place of the business;
 Date of commencement of partnership;
 Duration of partnership, if any;
 Amount of capital contributed or to be contributed by each partner;
 Rules regarding operation of bank accounts;
 Ratio in which profits are to be shared;
 Interest, if any, on partners' capital and drawings;
 Interest on loan by the partners(s) to the firm;
 Salaries, commissions, etc. if payable to any partner(s);
 The safe custody of the books of accounts and other documents of the firm;
 Mode of auditor's appointment, if any;
 Rules to be followed in case of admission, retirement, death, of a partner;
 Settlement of accounts on dissolution of the firm; and
 Mode of settlement of disputes among the partners.
 Duties of each partner
 Procedure for ending the partnership

Characteristics of partnership
Limited life: A partnership dissolves when one or more of the partner (s) cease to be a member of
the Partnership for any reason (incapacity, bankruptcy, death - - - - and when a new partner (s) is
admitted.
Un-limited liability: Most farms of P/P are general P/P where all partners have unlimited liability
i.e. when the P/P is un able to pay its debts each partner is liable for the debts of the P/P they
contribute from their personal assets to pay the liability of P/P. In some cases we may have a
limited P/P where least one of the partners has unlimited liability.
Co-ownership of property: The assets invested in a P/P become the joint property of all the
partners.
Mutual Agency: Each partner is the agent of the partnership. The act of any partner binds all
others.
Participation in income: Each partner has the right to participate in income of P/P. Income or loss
is shared according to their agreement, with no provision they share equally.
Partnership agreement: The detail of the contract is contract is included in article of P/P. The
contract may not be in written form however.
Non taxable entity
What are the Advantages and Disadvantages of Partnership?
Advantages:
 Partnerships allow for a greater amount of money, skill, and other resources to be pooled.
 They are relatively easy to organize.
Disadvantages:
 Partnerships have a limited life.
 Each partner is subject to unlimited liability. This means that if the company fails, creditors
can take action against both the partnership and the persons who are in it.

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  Partners have mutual agency. This means that one partner can make decisions without
consulting the other(s).
Accounting for Partnership
Most of the day-to-day accounting for a partnership is the same as that studied earlier for a sole
proprietorship. The same journals and ledgers used by a sole proprietorship can be used by a
partnership. It is in the area of formation, income division, dissolution and liquidation that
partnership accounting differs from proprietorship accounting. In a sole proprietorship, there will be
a single capital account and a single drawing account for the owner in the ledger. In a partnership,
the ledger contains a capital account and a drawing account for each partner in order to determine
each owner's interest in the firm. In addition to this, it is the areas of the formation, income
distribution, dissolution, and liquidation of partnerships that transactions peculiar to partnership
arise.
Partnership Formation
A partnership is usually formed by two or more persons investing cash or assets in a business. It is
not necessary for each partner to invest the same amount of assets. In fact, it is not necessary for all
partners to make an investment; some partners may be admitted to a firm because of special skills
or special knowledge. Assets other than cash are recorded at their fair market value at the time of
contribution. If liabilities are assumed by the partnership, the appropriate liability accounts are
credited and the partner’s account will be credited for the net amount.
Case 1: When all partners contribute cash
Example: Kassa Ali and Genet Dechasa agreed to form a partnership called KasGet Décor. They
invested Br 30,000 each. Record the initial investment assuming you as the accountant of the
partnership?
Cash ..60,000
Kassa Ali, Capital .. 30,000
Genet Dechasa, Capital .. 30,000

Case 2: When at least one of partners contribute non-cash asset

Example: Biniam and Hagos agreed to form a partnership called Omega Export Trade. Biniam
contributed Br 80,000 cash whereas Hagos contributed a building with current market value of Br
200,000 and cash of Br 50,000. Record the initial investment assuming yourself as the accountant of
the partnership?
Cash ..130,000
Building 200,000
Biniam, Capital .. 80,000
Hagos, Capital .. . 250,000

Case 3: When at least one of the partners contribute professional service

Example: Tigist and Gedion agreed to form a partnership called Geti Clinic. Tigist contributed Br
200,000 cash and they agreed for Gedion, a medical doctor, to contribute his professional service on
full-time basis in exchange for 40% interest in the partnership. Record the initial investment
assuming you as the accountant of the partnership?
Cash 200,000
Tigist, Capital 120,000
Gedion, Capital 80,000

Case 4: When at least one of the partners contribute business assets

Example 1: Girma Ali, the owner of Giral Trading, and Saba Seifu decide to form a partnership
called Girsab Trading by combining the assets of Girma businesses with cash investment by Saba.
Girma contributes the following to the partnership: Cash, Br 15,000; accounts receivable with a face
amount of Br 60,000 and an allowance for doubtful accounts of Br 9,000; merchandise inventory
with a cost of Br 85,000; equipment with a cost of Br 125,000 and accumulated depreciation of Br
55,000; and accounts payable of Br 20,000. Saba contributed Br 100,000 cash to the new
partnership

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They agree that:-
 Br 5,000 of the accounts receivable are completely worthless and are not to be accepted by
the partnership and Br 8,000 is a reasonable allowance for the uncollectibility of the
remaining accounts.
 The merchandise inventory is to be recorded at the current market price of Br 81,500, and
 The equipment is priced at Br 85,000
 The accounts payable will be assumed by the partnership at its carrying value.
Required: Present the partnership’s entry to record the investment of Girma and Saba.
To record Saba’s Investment
Cash 100,000
Saba Seifu, Capital ..100,000
To record Girma’s Investment
Cash................................................................15,000
Accounts Receivable......................................55,000
Merchandise Inventory.................................81,500
Equipment......................................................85,000
Allowance for Doubtful Account................................8,000
Accounts Payable.......................................................20,000
Girma Ali, Capital...................................................208,500

Division of Net Income or Net Loss

The net income of a partnership belongs to the partners, and they are free to make any division of
earnings they choose. As noted already, the division is usually set forth in the articles of
partnership. If the articles are silent as to the division of earnings, the law presumes an equal
division. If the articles provide for a division of earnings but are silent on losses, the law generally
presumes that losses will be shared in the same ratio as earnings. Profit distributions normally take
into account the amount of capital (interest allowance) and/or services (salary allowance)
contributed by each partner

Income Division Recognizing Services of Partners

When there is a difference in ability and in amount of time devoted to the business, the articles of
partnership often provide for the division of a portion of net income to the partners in the form of
salary allowance. The article may also provide for the withdrawal of cash by the partners in stead of
salary payments. Withdrawals are debited to the drawing accounts.
Example 2: The articles of partnership of Abebe and Lakew provide for monthly salary allowance
of Br 5,000 and Br 4,000, with the balance of the net income to be divided equally, and that the net
income for the year is Br 150,000.
Required: - allocate the net income
Division of income Abebe Lakew Total
Salary Allowance.............................60,000 48,000 108,000
Remaining Income.......................... 21,000 21,000 42,000
Net Income.................................. 81,000 69,000 150,000
The entry for the division of net income is as follows:
Income Summary.........................150,000
Abebe, Capital.......................................81,000
Lakew, Capital...................................... 69,000

Income Division Recognizing Service of Partners and Investment

When there is a difference in ability and in amount of time devoted to the business and the amount
of capital invested by each partner, the articles of partnership may provide for the division of a
portion of net income to the partners in the form of salary allowance and interest on capital
investment. Generally, the interest payments are percentages based on their initial capital
investments. The remaining earnings are divided according to an arbitrary ratio.

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Example 3
Tessema and Sultan are partners. Tessema invested Br 50,000 into the business and Sultan invested
Br 60,000. The articles of partnership of Tessema and Sultan provide for yearly salary allowance of
Br 25,000 to Tessema and Br 20,000 to Sultan. Besides they each receive an interest allowance of
10% of their initial capital investment. The remainder net income will be allocated equally. The net
income for this year is Br 80,000. What does each partner get?
Tessema Sultan Total
Salary Allowance...............................25,000 20,000 45,000
Interest Allowance............................ 5,000 6,000 11,000
Remainder Split Equally.................. 12,000 12,000 24,000
Total............................................ 42,000 38,000 80,000
Note: An interest allowance of 10% of their initial investment means that each year they are given
10% of what they had initially invested. In this case, since Tessema had initially invested Br
50,000, his interest allowance was Br 5,000 (Br 50,000 x 10%) per year. Therefore, after all monies
are divided, Tessema gets Br 42,000 and Sultan gets Br 38,000.

Income Division When Allowances Exceeds Net Income

If net income is less than the total of the special allowances, the remaining balance will be a
negative figure that must be divided among the partners as though it is a net loss.
Example 4
Take all the data under example2 except that the net income was Br 100,000in stead of Br 150,000.
Allocate the net income.

Division of income Abebe Lakew Total

Salary Allowance.............................60,000 48,000 108,000
Remaining Income.......................... (4,000) (4,000) (8,000)
Net Income.................................. 56,000 44,000 100,000
Example 5
Take all the data under example 3 except that the net income was Br 40,000 in stead of Br 80,000.
Required: Allocate the net income.
Tessema Sultan Total
Salary Allowance...............................25,000 20,000 45,000
Interest Allowance............................ 5,000 6,000 11,000
Excess of Allowance over NI............ (8,000) (8,000) (16,000)
Total............................................ 42,000 38,000 40,000

Financial Statements for Partnership

The financial statements for partnership are the same as that of sole proprietorship except that
 Details of the division of net income should be disclosed in the financial statements prepared
at the end of the fiscal period. The disclosure may be made by adding a section called
“Division of Net Income” to the income statement or by presenting the data in a separate
statement.
 On the balance sheet of the partnership the capital of each partner will be reported
separately.
 Details of the changes in the owner’s equity of the partnership during the period should be
presented in the statement of owner’s equity.

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 Alef and Kebede
Statement of Owner’s Equity
For The Year Ended December 31, 1999
Alef Kebede Total
Capital, January1, 1999............................ 40,000 60,000 100,000
Additional Investment During the year..... - 0- -0- -0-
40,000 60,000 100,000
Net Income for the Year............................ 15,000 18,000 33,000
55,000 78,000 133,000
Withdrawal During the Year...................... 5,000 7,000 12,000
Capital, December31, 1999..........................50,000 71,000 121,000

Partnership Dissolution
Because a partnership is an association of persons, any change in its ownership results in the
dissolution of the partnership agreement, and a new agreement must be formed if the business is
going to continue. Among other causes, a partnership can be dissolved by a partner ’s withdrawal,
death, incapacity, bankruptcy, or retirement. A partnership is also dissolved if a new partner is
admitted to the firm and if the partnership agreement is expired.

Dissolution does not necessarily mean liquidation of the partnership. For example, a partnership
composed of two partners may admit an additional partner. Or if one of the partners withdraws, the
remaining partners may continue to operate the business. In all such cases, a new partnership is
formed and new articles of partnership should be prepared. That is legally the old partnership is
dissolved and a new partnership created, but from the accounting point of view it is more realistic to
make appropriate adjustments in the existing partnership books, rather than close them off and start
afresh.

Admission of a Partner
Admitting a new partner dissolves the old partnership and creates a new partnership. Because
partnerships have unlimited liability and mutual agency, the admission of a new partner requires the
approval of the existing partners. When this occurs, the partners may also rewrite certain aspects of
the partnership agreement, such as the basis for distribution of earnings. A new partner may be
admitted to a partnership through either of two procedures:-
 Purchase of an interest from one or more of the current partners
 Contribution of assets to the partnership

1. Admission by purchase of an interest from existing partner(s)

New partner may purchase all or part of the interest of one or more of the existing partner by
payment to the existing partner. This is a personal transaction between individuals, not the
partnership. The only entry needed is the transfer of the proper amounts of the owner ’s equity from
the capital account of the selling partners to the capital account established for the incoming partner.
Example 6
Gebru, Martha, and Sisay are partners in GMS Trading. Dawit is admitted into the partnership by
purchasing 50% of the ownership interest of Gebru for Br 45,000. When Dawit is admitted into the
partnership the ownership interest of Gebru is Br 60,000.
Required: Record the admission of Dawit
Gebru, Capital.............................30,000
Dawit, Capital.....................................30,000
Note that this transaction does not change the total amount of the assets and equity of the
firm.

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2. Admission by Contribution of Assets
Instead of buying an interest from the current partners, new partner may invest (or contribute assets)
directly in the partnership organization. The payment of cash or other assets increases the amount of
the partnership’s total assets as well as its total owners' equity.
When partners for a partnership receives a request for admission by a new partner, the partnership
may revalue its assets before admitting a new partner if the partnership structure has not changed
for an extended period of time or when asset values have changed substantially.
If the existing partnership assets have a fair market value in excess of their recorded book values,
the increase in value represents a gain and is distributed to the original partners ’ capital accounts
based on their profit and loss sharing agreement. If the fair market value of the assets is less than
their recorded book values, the decrease in value represents a loss and is distributed to the original
partners’ capital accounts based on their profit and loss sharing agreement.
If a number of assets are revalued, the adjustments may be debited or credited to a temporary
account entitled “Asset Revaluation”. After all adjustments are made, the account is closed to the
capital account.

Example 7
Hassen and Kuku partnership has total assets of Br 200,000 and total liabilities of Br 40,000.
Hassen’s and Kuku’s capital are Br 90,000 and Br 70,000, respectively. Kibrom is admitted into the
partnership contributing Br 50,000. At the time when Kibrom is admitted into the partnership it is
agreed that the market value and the book value of all assets are equal except that the market value
of merchandise inventory exceeds its book value by Br 5,000. Hassen and Kuku share gains and
losses equally. Prior to the admission of Kibrom the revaluation would be recorded as follows
Merchandise Inventory..................................5,000
Hassen, Capital.................................................2,500
Kuku, Capital....................................................2,500
Kibrom’s admission would be recorded as follows:
Cash..................................50,000
Kibrom, Capital..........................50,000

When a new partner is assigned more capital than his/her contribution, the excess amount is
deducted from the capital of the old partners and when a new partner is assigned capital less than
his/her contribution, the difference is added to the capital of the old partners.
Example 8: Girma and Kidist are partners in a partnership with capital balances of Br. 90,000 and
Br. 80,000, respectively. The partnership has total liabilities of Br. 20,000. Girma receives 60% of
the partnership’s earnings, with the remainder going to Kidist. A new partner, Teshome, is admitted
to the partnership by paying Br. 60,000. At the time of his admission the market value and the book
value of the partnership’s all assets were equal.
Make journal entry to record the admission of Teshome assuming Teshome is assigned a
capital of:
a) Br. 60,000. c) Br. 56,000.
b) Br. 65,000.
a. Cash..................................60,000
Teshome, Capital..........................60,000
b. Cash..................................60,000
Girma, Capital.................. 3,000
Kidist, Capital.................. 2,000
Teshome, Capital..........................65,000
c. Cash.......................................60,000
Teshome, Capital..........................56,000
Girma, Capital.............................. 2,400
Kidist, Capital.............................. 1,600

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Example 9: Asset Contributed is equal to Capital Recognized
On April 1, the partnerships of A and B admits C, who is to contribute cash of 15,000 and
machinery with current market price of 25,000. The Capital balances of A and B after assets are
adjusted to current market price are 50,000 and 64,000, respectively. The partners agree, however,
that the partnership is worth 130,000 considering good will to existing partners. The old partners
have been sharing income in the ratio of 2:3.
Required:
a) Prepare the journal entries on April 1, to record admission of the new partner, and
b) What is the interest of each partner’s capital balance over the total partnerships equity?
Solution
Total Owner’s Equity before Admission (50,000 + 64,000) 114,000
Revaluation of the partnerships 130,000
Goodwill attributable to the old partners 16,000
a) (1) Good will . 16,000
A’s, Capital (2/5x16, 000) .6, 400
B’s, Capital (3/5x16, 000) ... .9, 600

(2) Cash 15,000

Machinery ..25,000
C’, Capital ..40,000

b) Total capital =A’s Capital (50,000+6,400) = 56,400

B’s Capital (64,000+9,600) = 73,600
C’s Capital (15,000+25,000) = 40,000
Total Capital 170,000
Interest of A = 56,400/170,000 = 33.18%
Interest of B = 73,600/170,000 = 43.29%
Interest of C = 40,000/170,000 = 23.53%

Example 10: Asset Contributed is less than Capital Recognized

Abebe and Bekele are partners with capital balance of 20,000 and 60,000 respectively. Chala is
admitted on Jan. 1 by investing Birr. 15,000. The old partners agree to recognize Birr 5000 of
goodwill attributable to Chala for his special skill.

Required:
a) Record the entry
b) Determine the interest of each partner over the total partnerships equity.

Solution
Jan. 1 A. Cash 15,000 B. A’s Capital = 20,000
Goodwill.. 5,000 B’s Capital = 60,000
Chala, Capital 20,000 C’s Capital = 20,000
Total Capital = 100,000

 N.B: goodwill is recognized to the new partner because of the extra special quality,
efficiency and the expectation to improve the fortunes of the firm.
 If bonus is given to a new partner, it will be deducted from the old partners.

Withdrawal of a Partner

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When an existing partner retires or for some other reason wishes to withdrew from the partnership,
his share of the partnership assets must be calculated and transferred to him. Unless all the
partnership assets and liabilities are correctly valued in the books, the partner’s capital account total
will not show his actual entitlement.
Normally the true worth of the partnership will exceed the book figure of net assets, and so various
assets/liabilities will have to be re-valued and goodwill taken into account, if only on a temporary
basis. When the assets are re-valued, any profit or losses on revaluation are entered, in the profit
sharing ratio, in the partners’ capital accounts. For the business to continue without apparent
interruption, a partner's withdrawal may occur in one of three ways.
 His or her interest may be purchased by one or more of the remaining partners. On the
partnership books, this involves an exchange of capital only and thus the only entry required
by the partnership is a debit to the capital account of the withdrawing partner and a credit to
the capital account of the partner or partners acquiring the assets.
 His or her interest may be purchased by an outsider seeking admission to the partnership.
For the partnership, this involves an exchange of capital only.
 His or her interest may be purchased by the partnership itself. Its effect is to reduce the
assets and the owner’s equity of the firm. In the event that the cash or the other available
assets are insufficient to make complete payment at the time of withdrawal, a liability
account should be credited for the balance owed to the withdrawing partner.

Death of a Partner
The death of a partner dissolves the partnership. In the absence of any contrary agreement, the
accounts should be closed as of the date of death, and net income for the fractional part of the year
should be transferred to the capital accounts. If the surviving partners want to continue the business,
the balance in the capital account of the deceased partner is transferred to the estate following the
procedure outlined earlier for the withdrawal of a partner from the business.

Liquidation of Partnership
Since a partnership is created voluntarily, it can be terminated at any time the partners choose. The
termination process, known as liquidation, involves selling all non-cash assets (called realization),
paying all debts to creditors, and dividing any remaining cash among the partners. Any gain or loss
resulting from the sale of noncash assets is divided among the partners according to their
distributive shares. The final distribution of cash, however, is made to the partners according to the
balances in their capital accounts. The steps can be outlined in a liquidation schedule.

Types of Liquidations:
1. Lump sum liquidation = all non cash assets are realized before any distribution is made to
partners.
2. Installment liquidation = payments are made to partners over time as cash is available from
selling non cash assets over time.
The liquidation process is summarized in a statement called Statement of Liquidation
There are three possible scenarios (among others):
 Assets sold for a gain
 Assets sold for a loss but absorbed by capital balances
 Assets sold for a loss when a partner‘s capital is insufficient to absorb the loss

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Example: Hana, Lulu and Getu are partners in HLG Trading. They share income and loss in the
ratio of 4:4:2. On July 18, after discontinuing the ordinary business operations of their partnership
and closing the accounts, the following summary of the general ledger is prepared.
Cash......................................................50,000
Noncash assets...................................100,000
Liabilities..............................................20,000
Hana, Capital........................................70,000
Lulu, Capital.........................................20,000
Getu, Capital.........................................40,000
Consider each of the above cases independently

Gain on Realization
Requirement1: Assuming that noncash assets are sold for Br 140,000, prepare liquidation schedule.
HLG Trading
Statement of Partnership Liquidation
For the Period July
Capital
Cash + NCA = Liabilities + Hana+ Lulu + Getu
Balance Before Realization..........50,000 100,000 20,000 70,000 20,000 40,000
Sell of NCA & division of gain...140,000 100,000 -0- 16,000 16,000 8,000
Balance after Realization............190,000 -0- 20,000 86,000 36,000 48,000
Payment of Liabilities................. 20,000 - 20,000 - - --
Balance after Pym of Liab.......... 170,000 -0- -0- 86,000 36,000 48,000
Cash Distribution to Partners..... 170,000 -0- -0- 86,000 36,000 48,000
Final Balance.................................. 0 0 0 0 0 0
The entries to record the several steps in the liquidation process are as follows:-
To record the sale of assets
Cash....................................140,000
Noncash Assets....................................100,000
Loss and Gain on Realization................ 40,000
To record the division of gain
Loss and Gain on Realization.............40,000
Hana, Capital......................................16,000
Lulu, Capital..........................................16,000
Getu, Capital.......................................... 8,000
To record payment of liabilities
Liabilities..................................20,000
Cash.................................................20,000
To record distribution of cash to partners
Hana, Capital.....................86,000
Lulu, Capital................... 36,000
Getu, Capital....................48,000
Cash......................................170,000

Addis Ababa, Ethiopia

Loss on realization-No capital deficiencies

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Requirement 2: Assuming the noncash assets are sold for Br 90,000, prepare a liquidation schedule
HLG Trading
Statement of Partnership Liquidation
For the Period July
Capital
Cash + NCA = Liabilities + Hana+ Lulu + Getu
Balance Before Realization..........50,000 100,000 20,000 70,000 20,000 40,000
Sell of NCA & division of gain....90,000 100,000 -0- (4,000) (4,000) (2,000)
Balance after Realization............140,000 -0- 20,000 66,000 16,000 38,000
Payment of Liabilities................. 20,000 - 20,000 - - --
Balance after Pymt of Liab......... 120,000 -0- -0- 66,000 16,000 38,000
Cash Distribution to Partners..... 120,000 -0- -0- 66,000 16,000 38,000
Final Balance.................................. 0 0 0 0 0 0
The entries to record the several steps in the liquidation process are as follows:-
To record the sale of assets
Cash........................................................90,000
Loss and Gain on Realization................ 10,000
Noncash Assets.............................................100,000
To record the division of loss
Hana, Capital.........................................4,000
Lulu, Capital..........................................4,000
Getu, Capital..........................................2,000
Loss and Gain on Realization....................10,000
To record payment of liabilities
Liabilities..................................20,000
Cash.................................................20,000
To record distribution of cash to partners
Hana, Capital.....................66,000
Lulu, Capital......................16,000
Getu, Capital.................... 38,000
Cash......................................120,000
Loss on realization- Capital deficiencies

Requirement 3: Assuming the noncash assets are sold for Br 20,000, prepare a liquidation schedule
HLG Trading
Statement of Partnership Liquidation
For the Period July
Capital
Cash + NCA = Liabilities + Hana+ Lulu + Getu
Balance Before Realization..........50,000 100,000 20,000 70,000 20,000 40,000
Sell of NCA & division of gain....20,000 100,000 -0- (32,000) (32,000) (16,000)
Balance after Realization............ 70,000 -0- 20,000 38,000 (12,000) 24,000
Payment of Liabilities................. 20,000 - 20,000 - - --
Balance after Pym of Liab.......... 50,000 -0- -0- 38,000 (12,000) 24,000
Division of Deficiency................ -0- -0- -0- (8,000) 12,000 (4,000)
Claims to partnership cash............. -0- -0- -0- 30,000 -0- 20,000
Cash Distribution to Partners..... (50,000) -0- -0- (30,000) -0- (20,000)
Final Balance.................................. 0 0 0 0 0 0

The entries to record the several steps in the liquidation process are as follows:-
To record the sale of assets

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 Cash........................................................20,000
Loss and Gain on Realization................ 80,000
Noncash Assets.............................................100,000
To record the division of loss
Hana, Capital.........................................32,000
Lulu, Capital..........................................32,000
Getu, Capital..........................................16,000
Loss and Gain on Realization....................80,000
To record payment of liabilities
Liabilities..................................20,000
Cash.................................................20,000
To record distribution of cash to partners
Hana, Capital.....................30,000
Getu, Capital.................... 20,000
Cash......................................50,000

Note: If a partner has a deficit and is personally insolvent then the other partners must make it up
by taking from their own capital accounts according to their profit and loss sharing ratio. These
solvent partners now have a legal claim against the insolvent partner. Partner’s' personal assets are
first used to pay personal creditors and then to pay partnership creditors and then to repay partners
who contributed in their behalf.

Problem – 1. Distribution of Earnings

Kibur and Hanna had capital balances on Meskerem 1, 1999, of Br. 48,000 and Br. 20,000,
respectively. On Yekatit 1 Kibur contributed Br. 6,000 cash to the partnership. On Miazia 1, 1999,

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Hanna contributed a car worth Br. 12,000 to the partnership. On Hidar 30, 1999, Kibur and Hanna
withdrew Br. 8,000 and Br.6,000, respectively. On Ginbot 30, 1999, they withdrew Br. 14,000 and
Br. 10,000, respectively. The net income for 1991 was Br. 25,000.
Required: Prepare journal entries to record the closing of the income summary account and
distribution of the partnership net income under each of the following independent alternatives:
a) Earnings are divided equally.
b) Earnings are divided 60% to Kibur and 40% to Hanna.
c) Earnings are divided in the ratio of the partners’ average capital balances.
d) Interest of 10% is provided on the average capital balances with the remainder divided equally.
e) Salaries of Br.18,000 and Br.15,000 are allocated to Kibur and Hanna, with the remainder
divided equally.
f) Salaries of Br.12,000 and Br.8,000 are allocated to Kibur and Hanna, interest of 10% is
provided on beginning capital balances, and the remainder is divided equally.
Problem – 2: Admission of a New Partner
Fana and Taye are partners in a company with capital balances of Br.75,000 and Br.50,000,
respectively. The partnership has assets consisting of cash of Br.40,000, inventory of Br.45,000,and
property and equipment of Br.80,000. Liabilities total Br.40,000. Fana receives 70% of the
partnership’s earnings, with the remainder going to Taye. A new partner, Daniel, is admitted to the
partnership by paying Br. 30,000.
Required:
Prepare journal entries to record the admission of Daniel to the partnership under each of the
following independent alternatives:
a) Daniel pays Br.30,000 to Fana and Taye directly for 20% of each of their interests.
b) Daniel pays Br.30,000 to the partnership and is assigned a capital balance of Br.30,000.
c) Daniel pays Br.30,000 to the partnership and is assigned a capital balance of Br.25,000.
d) Daniel pays Br.30,000 to the partnership and is assigned a capital balance of Br.34,000.
e) Daniel pays Br.30,000 to the partnership and is given a 20% interest in capital.
f) Daniel pays Br.30,000 to the partnership and is given a 15% interest in capital.
Problems – 3: Withdrawal of a Partner
The balance sheet of the Maru, Hailu, and Netsanet engineering partnership on Yekatit 30, 1999, is
as follows:
MARU, HAILU AND NETSANET
Balance Sheet
Yekatit 30, 1999

Assets Liabilities and Owners’ Equity

Cash Br.15,000 Accounts payable Br.10,000
Accounts receivable 20,000 Note payable 5,000
Inventory 10,000
Property and equipment 40,000 Maru, capital 20,000
Less: Accumulated Hailu, capital 10,000
depreciation (10,000) Netsanet, capital 30,000
Total Liabilities and
Total Assets Br.75,000 Owners’ Equity Br.75,000
Earnings are distributed among Maru, Hailu, and Netsanet in a 2:1:3 ratio. Hailu decides to
withdraw from the partnership. An audit reveals that an allowance for uncollectible accounts of
8.5% of accounts receivables should be established and that the property and equipment is worth
Br.35,000.

Required:
1. Prepare the journal entry to record the revaluation.
2. Prepare the journal entry to record the withdrawal of Hailu under each of the following
independent alternatives:
a) Hailu receives partnership cash equal to his capital balance.
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 b) Hailu receives partnership cash equal to 80% of his capital balance.
c) Hailu receives partnership cash equal to 120% of his capital balance.
d) Hailu receives partnership cash equal to his capital balance and also receives inventory with
a cost of Br.4,000.
e) Hailu sells his interest to Maru who pays him Br.45,000.
Problem – 4: Liquidation of a Partnership
The balance sheet of the Elleni and Mohammed law partnership on Tahissas 15, 1999, is as follows:
ELLENI AND MOHAMMED
Balance Sheet
Tahissas 15, 1999

Assets Liabilities and Owners’ Equity

Cash Br. 5,000 Accounts payable Br.5,000
Accounts receivable 10,000 Notes payable 7,000
Prepaid rent 2,000
Equipment 30,000
Less: Accumulated Elleni, capital 8,000
depreciation (25,000) Mohammed, capital 2,000
Total liabilities and
Total assets Br.22,000 Owner’s Equity Br.22,000
The amount shown in accounts receivable is for services performed for a client who is now in jail
and the amount is unlikely to be paid. The prepaid rent is for the next 2 months, and the partners do
not expect to be able to rent the building to others. The equipment is sold forBr.7,500. Interest on
the notes payable is accrued to date and is included in the notes payable balance. The partners share
earnings equally.
Required:
1. Prepare journal entries to record the liquidation of the partnership if both partners can contribute
cash to the partnership.
2. Prepare journal entries to record the liquidation of the partnership if Mohammed cannot
contribute cash to the partnership.
3. Assuming additional Br. 5,000 cash and a third partner, Dawit, with a capital balance of Br.
5,000, prepare journal entries to record the liquidation of the partnership if:
a) The equipment is sold for Br. 18,500.
b) The equipment is sold for Br. 15,500.
c) The equipment is sold for Br. 8,000 and Mohammed is:
(i) able to recover his capital deficiency in full.
(ii) able only to recover half of his capital deficiency.
(iii) unable to pay the capital deficiency.
Problem – 5: Liquidation of a Partnership
Daniel, Genet and Sofia are partners of DGS Merchandise. They share income and loss in the ratio
of 1:2:1 On December 4, after discontinuing the ordinary business operations of their partnership
and closing the accounts, the following summary of the general ledger is prepared.
Cash....................................................200,000 Daniel, Capital............280,000
Noncash assets....................................400,000 Sofia, Capital..............160,000
Liabilities..............................................80,000 Genet, Capital.............. 80,000
Required: Prepare liquidation schedule
1. Assuming that noncash assets are sold for Br 560,000.
2. Assuming that noncash assets are sold for Br 360,000.
3. Assuming that noncash assets are sold for Br 80,000.

Problem 5: Comprehensive
The balance sheet of the Bekalu, Kine, and Wudu industrial design partnership on Meskerem 1,
1998,is as follows:
BEKALU, KINE, AND WUDU
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Balance sheet
Meskerem 1,1998

Assets Liabilities and Owners’ Equity

Cash Br.30,000 Accounts payable Br.35,000
Accounts receivable 15,000
Inventory 40,000
Property and equipment 30,000 Bekalu, capital 30,000
Less: Accumulated Kine, capital 18,000
Depreciation (20,000) Wudu, capital 12,000
Total liabilities and
Total Assets Br.95,000 Owners Equity Br.95,000
Bekalu, Kine, and Wudu share earnings in the ratio 50%, 30%, and 20%, respectively, after a salary
allocation of Br.14,000, Br.10,000,and Br.11,000, respectively, and an interest provision of 10% on
beginning capital balances. The following summarized events occurred during 1998.
a) Made sales of Br.93,000 on account.
b) Collected accounts receivable of Br.90,000.
c) Purchased inventory on account for Br.32,000.
d) Paid accounts payable of Br.33,000.
e) Paid wages to employees of Br.15,000.
f) The property and equipment is being depreciated on a straight-line basis over 15 years to a
zero residual value.
g) Ending inventory was Br.46,000.
On Meskerem 1, 1999, Bekalu withdrew from the partnership. At that time the value of the
accounts receivable was reduced by Br.3,000 and the value of the property and equipment increased
by Br.8,000. Bekalu received cash equal to 90% of the value of his equity after revaluation.
On Meskerem 2, 1999, Getachew was admitted to the partnership by paying Br. 17,600 to the
partnership for a capital balance of Br. 16,000. His share of the earnings is to be 30% after a salary
allocation of Br. 5,600 and an interest provision of 10% on his beginning capital balance. Kine ’s
and Wudu’s salary allocations and interest provisions remain the same as in 1998. Their share of the
earnings after the salary allocations and interest provisions are 42% and 28%, respectively. Between
Meskerem 1, 1999, and Hidar 31, 1999,the following summarized events occurred:
a) Sales of Br.35,000 on account.
b) Wages paid to employees were Br.4,000.
c) Ending inventory was Br.4,000.
On Hidar 31, 1999, the partnership was liquidated. All noncash assets were sold at an auction for
Br. 63,000. All three partners were able to contribute cash to the partnership to cover any negative
capital balances. Salary distributions and interest allocations were made on a proportional basis for
the partial year. Getachew receives an interest allocation on the basis of his Br. 16,000 initial capital
balance. The partnership uses the periodic inventory system.
Required:
1. Prepare journal entries (including closing entries) to record the preceding events for each year.
2. Prepare the 1998 partnership income statement, the 1998 statement of changes in partners’
equity, and the balance sheet at Nehassie 31, 1998.

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