LECTURE NOTES

FORMATION

The initial investments of the partners are recognized at FAIR VALUES and credited to the partner’s capital
accounts in the agreed INTEREST RATIO. Partnership goodwill is no longer recognized under IFRS.
Therefore, the total of the contributions of the partners is deemed to be also the total agreed capital to
be allocated to individual partners’ CAPITAL ACCOUNTS per their agreement. For example:

A and B formed a partnership on January 2, 2018 by contributing the following net assets from their
respective proprietorships:

A B
Cash P30,000 P20,000
Non cash assets 620,000 730,000
Liabilities (450,000) (530,000)
Net assets P200,000 P220,000
The non-cash assets of A is overstated by P24,500 while the liabilities of B is understated by P5,500. They
agreed on an interest capital ratio of 48:52 to A and B, respectively
The compound journal entry to record the formation of the partnership is
Cash P50,000
Non cash assets 1,325,500
Liabilities P985,500
A, capital 187,200
B, capital 202,800
The above agreement resulted in a bonus of P11,700 from B to A, which is the excess of B’s contribution
of P214,500 against a smaller capital credit of P202,800, or the excess of A’s capital credit of P187,200
over the amount contributed of P175,500. This is referred to as BONUS METHOD. If no bonus is to be
recognized the partners should have used their contribution ratio, 45:55 as capital ratio to A and B
respectively. This is referred to as NET INVESTMENT METHOD.

OPERATIONS
During the operations of the partnership, loan by a partner to the partnership (Loans Payable) or by the
partnership to partner (Loans Receivable) may be recognized; temporary drawings in anticipation of
profits may occur; additional investments may also be made by the partners; and the result of operations
during the period is reported.
Partnership income or loss is allocated to partners in many ways. Generally, agreement items for income
or loss allocation conform with the following remunerations:
a. Income allocations on the basis of capital balances to reward partners in proportion to their
respective investments through interest;
b. Income allocations on the basis of service contributions to reward partners for their respective
service to the partnership through salaries;
c. Income allocations on the basis of effective management of the partnership through bonuses;
and
d. Any numeral ratio. e.g. 3:2:5 will apply to the residual profit or loss after allocations made for (a),
(b), and (c) above.
For example:
In continuation of the same illustrative case. Partner A invested additional capital on May 1, 2018 for
P30,000 cash; contributed merchandise with a fair value of P24,000 on September 1, 2018; and
withdrew permanently cash of P12,000 on December 1, 2018. Partner B had no additional
investments nor permanent withdrawals during 2018.
They agreed to divide profits and losses as follows
a. Interest of 6% on average capital of each partner
b. Salaries of P4,000 each month to both partners
c. Bonus to A of 10% of net income after interests and salaries; and
d. The balance is agreed to be divided equally
e. Both partners withdrew temporarily 60% of their respective salaries
The reported profit of P150,000 for 2018 will be divided as follows:
A B TOTAL
Interests P12,852 P12,168 P25,020
Salaries 48,000 48,000 96,000
Bonus 2,898 2,898
Balance 13,041 13,041 26,082
Total P76,791 P73209 P150,000
The journal entry to transfer the net income for 2018 to capital is
Income Summary 150,000
A, Capital 76,791
B, Capital 73,209
Average capital for Partner A is computed as follows:
1/01/18 187,200 x 12/12 P187,200
5/01/18 30,000 x 8/12 20,000
9/01/18 24,000 x 4/12 8,000
12/01/18 (12,000) x 1/12 (1,000)
 Average capital P214,200
Multiply by 6%
Interest P12,852
Ave. capital of B: P202,800 x 6% P12,168
The financial statements prepared for partnerships are similar to those prepared for corporations,
except for the following basic differences:
a. In the balance sheet, ownership equity for a partnership will be partners’ capital balance; in a
corporation, capital stock, additional paid-in capital, and retained earnings done for corporations,
partnerships present a statement of partners’ capital in support of its ownership equity on the
balance sheet.
b. A statement of partners’ capital balances will show initial of beginning balances, additional
investments, withdrawal of capital, temporary drawings, share of net income or loss, and
partners’ compensation treated as operating expenses.
For example:
Continuing with the same illustrative case, the statement of partners’ capital balances during 2018
follows:
A B TOTAL
BB P167,200 P202,800 P390,000
AJ 54,000 54,000
Withdrawal of C (12,000) (12,000)
Drawings (28,800) (28,800) (57,600)
SONI 76,791 73,209 150,000
EB 277,191 247,209 524,400
As illustrated per GAAP, partners’ compensation items such as interests, salaries, and bonuses, are
simply items selected by partners to make the profit distribution fair. Nevertheless in some cases,
partners’ remuneration items are treated as operating expenses and accordingly included in the
income statement. This later case requires additional accounting procedures and the profit
agreement will then apply to the decreased net income as a consequence of the increased operating
expenses.
For example:
Continuing with the same illustrative case. The following journal entry will be recorded to validate the
compensation items as operating expenses
Interest expense 25,020
Salary expense 96,000
Bonus expense 2,898
 A, capital 63,750
B, capital 60,168
The reduced net income of P26,082 (P150,000 - P123,918) will be recorded as follows
Income summary 26,082
A, capital 13,041
B, capital 13,041
Although the revised schedule of capital balances will have new details, (2 items instead of just one
over the net income), the ending capital balances will be identical since the profit or loss agreement
remained effectively the same.

ADMISSION OF A NEW PARTNER

Any major change in partnership, such as admission of a new partner, or withdrawal of a partner from
an existing partnership dissolves the entity. Dissolution of a partnership entity does not however
imply liquidation for oftentimes the business entity continues its operations undisturbed.
There are two ways a new partner can get admitted into the partnership:
a. Admission by investment is one of which new partner transfers net assets into the partnership.
Thus the net assets of the partnerships increases by the amount contributed and also increase
total capital by the same amount. Capital credits to all partners upon the admission of a new
partner will depend upon the agreement.
For example:
Continuing with the problem, assume C was admitted as a partner in the AB Partnership by
investing P200,000 for a 40% interest in capital and in profits.

The total contributions by the partners will be P724,400 (P277,191 + P200,000). The acquired
interest is P289,760 at 40%, resulting in P89,760 excess credit over the amount contributed. The
journal entry to be recorded upon C’s admission is:
Cash P200,000
A, capital (89,760 x ½ ) 44,880
B, capital 44,880
C, capital P289,760
The new profit or loss ratio would probably be
Partner A (50% x ½ ) 30%
Partner B 30%
Partner C 40%
b. Admission by purchase interest is one of which the new partner transfers assets directly to one
or more partners (NOT THE PARTNERSHIP) in consideration for the purchased interest. Thus, the
net assets of the partnerships remain the same even after the admission of a new partner.
For example:
Continuing with the same illustrative case, and assuming the old partner sells 40% of their
respective interest for a total consideration of P200,000, the journal entry to be recorded upon
C’s admission is:
 A, capital P110,000
B, capital 98,884
C, capital P209,760
The total old capital remains at P524,400 after C’s admission and the consideration of P200,000
is divided between Partner A and Partner B as follows:
To A (P277,191 x 40%) – (P9,760 x ½ ) P105,996
To B (P247,209 X 40%) – (P9,760 x ½) 94,004
Total P200,000
The P9,760 is total loss to old partners, (P209,760 acquired interest less consideration paid of
P200,000).

WITHDRAWAL or RETIREMENT of a PARTNER

If a partner withdraws form the partnership, the partnership must liquidate the withdrawing
partner’s ownership equity as follows:
a. Payment to withdrawing partner will not come from partnership assets. The
withdrawing partner may just sell his/her interest to the remaining partners or to an
outsider with the permission of the remaining partners. In this case the entity
required to be recorded in the books of the partnership is simply the transfer of
interest from the withdrawing partner to the buying partner(s) account(s).
For example:
Continuing with the same illustrative case and assuming partner A succumbed to head
injuries from a car accident a day after C’s admission by investment, the journal entry to
be recorded by the partnership if the heirs of A sold the partnership equity to D (with B
and C’s permission) for P300,000 is
A, capital P232,311
D, capital P232,311
The total capital of the partnership remains the same at P724,400.
b. Payment to the withdrawing partner will come from partnership assets. Under this
agreement, one of three situations can occur:
i. Payment is equal to the interest withdrawn, which is easily recorded by a
debit to the capital account of the withdrawing partner and a credit for the
payment made since both amounts are equal.
ii. Payment is less than the interest withdrawn, which is recorded with a bonus
to the remaining partners divided in the remaining profit and loss ratio.
iii. Payment is more than the interest withdrawn, the excess is recorded as a
bonus to the retiring partner and charged to the remaining partners in the
remaining profit and loss ratio.
For example:
Continuing with the illustrative case, but this time payment to A’s heirs will be P240,109
from the partnership assets, the journal entry to record A’s withdrawal by death is
A, capital P232,311
B, capital 3,342
 C, capital 4,456
Cash P240,109
The total capital after the withdrawal of Partner A will be P484,291 i.e Partner B, P198,987
and Partner C, P285,304. The bonus to Partner A of P7,798 is divided between B and C in
the remaining profit ratio of 3:4.
LIQUIDATION OF A PARTNERSHIP
A liquidation winds up all operations of the partnerships, converts all partnership assets into cash and
distributes to creditors of the partnerships, then to accounts with partners.
Statement of liquidation
A statement of liquidation summarizes all liquidation activities including payments to partners. There are
two types of distribution in partnership liquidation, as follows:
a. Liquidation in which all distributions are made in a single time following the sale of all non-cash
assets. This is called lump-sum, or total, liquidation process upon its completion. It is one in which
at a time cash is distributed to partners non cash assets had been already disposed and the full
loss or gain on realization reflected in partners’ capital balances.
For example:
AB Partnerships is to be liquidated on September 30, 2018. On this date, its balance sheet is as follows:
Cash P185,000
Non cash assets 645,000
A, loan 20,000
Accounts Payable (96,000)
B, loan (12,000)
A, capital (386,000)
B, capital (356,000)
AB divide profits and losses on a 3:4 ratio to A and B, respectively.
The following are liquidation transactions:
In October, 2018:
10/1-31/18 realized cash of P285,000 from a sale of non-cash assests of P300,000
10/10/18 paid liquidation expenses of P4,000
10/15/18 paid third party creditors P50,000
10/31/18 paid partners cash of P370,000
In November, 2018
11/2-30/18 realized P312,000 from the sale of the remaining non cash assets
 11/15/18 paid liquidation expenses of P6,000
11/25/18 paid third party creditors in full
11/30/18 paid partners cash of P300,000 in final settlement
Lump-sum Liquidation
Cash NCA A/P A B
BBL 195,000 645,000 96,000 366,000 368,000
Sale 597,000 (645,000) (14,400) (19,200)
LQ Exp (10,000) (4,286) (5,714)
AP Pd. (96,000) (96,000)
Pd to P (676,000) (347,314) (343,086)
Balances 0 0 0 0 0
b. Liquidation in which there are several distributions during the course of liquidation, often times
at points when there are unrealized noncash assets and unpaid third-party creditors. This is called
installment liquidation.
By- installment Liquidation:
October Liquidation
Cash NCA A/P A B
BBL 185,000 645,000 96,000 366,000 368,000
NCA Sale 285,000 (300,000) (6,429) (8,571)
Exp Pd (4,000) (1,714) (2,286)
A/P Pd (50,000) (50,000)
Pd. To P (370,000) (210,000) (160,000)
Bals. 46,000 345,000 46,000 147,857 197,143

Computation for safe payments to partners

A B TOTAL
Balances,10/31 357,857 357,143 715,000
TPL(345,000) (147,857) (197,143) (345,000)
Free interests 210,000 160,000 370,000
November Liquidation
Cash NCA A/P A B
Bals, 11/1 46,000 345,000 46,000 147,857 197,143
NCA sale 312,000 (345,000) (14,143) (18,857)
Expenses (6,000) (2,571) (3,429)
A/P Paid (46,000) (46,000)
Cash to P (306,000) (131,143) (174,857)
Balances 0 0 0 0 0
No need for safe payment computations because the partners’ capital and profit ratios have become
identical by the end of October, 2018.
Distribution of partnership cash in liquidation must be made to creditors first, and then to partners’
accounts which are always based on free interest computations. Loan accounts are prioritized over capital
balances only if they belong to the same partner and only after the amount payable to the partner has
been established by free interest calculations
Safe payment computations is required for every distribution to partners when noncash asset remain
unsold (and the profit or loss ratio and the interest ratio at that point are not identical). The purpose of
this calculation is to determine who among the partners have the free interest to deserve the payment
from the partnerships.
Cash distribution program- Alternate method to avoid preparing the calculation for safe payment
everytime there is an installment distribution, a cash distribution to partners is prepared. This statement
is prepared just before the start of liquidation, i.e. before any realization of assets and replaces the safe
payment calculations by the use of just one schedule for the numerous distributions to partners normally
occurring in liquidation.
For example:
Continuing with the current illustrative case
Interest Payments
A B A B TOTAL
BBL 366,000 368,000
/PLR 3/7 4/7
LAA 854,000 644,000
P#1 (210,000) 90,000 - 90,000
LAA 644,000 644,000 90,000 - 90,000
P#2 payments to both partners in the original P&L ratio
October Payment

10/31/18 payment, P370,000

A B TOTAL

Priority 1 90,000 90,000

Priority 2 120,000 160,000 280,000

Totals 210,000 160,000 370,000

November payment of 306,000 will be made paid in the original profit and loss ratio of 3:4 to A and B
respectively

To A: P306,000 x 3/7 P131,143

To B: P306,000 x 4/7 P174,857

Please note that payment to partners (AFTER the first P90,000 payment to A ) will henceforth be in the
original P&L ratio because the capital and profit ratios of the partners have become identical after the
said priority payment.

TRUE or FALSE

1. Salary and Interest allowances in a partnership agreement do not affect the measurement of
total partnership income.
2. Partnership drawings are withdrawals of the partners that are closed to the capital accounts
at the end of the period.
3. When noncash property is contributed to a partnership. It is recorded in the books of the
partnership at its fair market value.
4. All property brought into the partnership or acquired by the partnership is partnership
property.
5. If an asset is contributed to the partnership subject to the liability, the amount credited to the
contributing partner’s capital account is still equal to the full fair market value of the asset
6. It is possible to admit a new partner into the partnership without the said partner investing
any assets into the partnership.
7. If salary and interest allocation methods are being used to allocate partnership profits, such
methods would not be applied in accounting periods when there is a partnership loss.
8. All dissolution are liquidations but not all liquidations are dissolutions.
9. It is illegal for a partnership to pay a partner’s personal expenses out of partnership assets.
10. When an incoming partner purchases a partnership interest by making a payment directly to
the current partner, no entry will be needed on the partnership books.
11. A partnership interest is considered a personal asset of the partner and may be sold or gifted
or conveyed to others in any manner that is legal and acceptable to the other partners.
12. Drawing accounts are debited for partner’s withdrawal and for the partners’ personal
expenses paid by the partnership
 13. The amount of the partnership profits and losses that are allocated to the partners using
salary and interest allocation procedures also produce deductions to the partnership for
salary and interest expense.
14. It is highly unusual to find profit and loss sharing agreements that would include salary
allocations, and bonus payments all in the same agreement.
15. If Partner A invested twice as much as Partner B, and there are only two partners, the income
must be divided in a ratio of 2:1 respectively.

PARTNERSHIP FORMATION

Andro, Braulio and Celso formed ABC Partnership on November 1, 2018, with the following assets,
measured at book values in their respective records contributed by each partner.

Andro Braulio Celso

Cash P200,000 P150,000 P150,000

A/R 38,500 68,900

Inventory 135,000 119,250 67,000

PPE 450,000 360,000 380,000

A part of Andro’s cash contribution, P25,000, comes from his personal borrowings. Also, the PPEs of
Andro, Braulio, and Celso are mortgaged with the bank for P95,730, P61,00, and P122,675, respectively.
The partnership is to assume responsibility for these PPE mortgages. The fair value of the PPE contributed
by Andro is P400,000; the accounts receivable contributed by Braulio has a fair value of P35,505; and the
fair value of Celso’s inventory is P56,500. All the other assets contributed are fair valued. The partners
have agreed to share profits and losses on a 4:3:3 ratio to Andro, Braulio and Celso, respectively.

1. How much is the contribution of each partner? Calculate their contribution ratio.
2. What is the capital balances of each partner at the opening of business on November 1 as per
above information?
3. Prepare the journal entry for the above assumption.
4. What is the capital balance of each partner at November 1, instead, if the interest ratio agreed
at 4:3:3 to Andro, Braulio, and Celso, respectively?
5. Prepare the journal entry for the revised assumption.
6. Explain why partner Celso was unaffected by the bonus feature in the ownership agreement
among the partners.

MULTIPLE CHOICE

Baser and Justine have just formed a partnership. Baser contributed cash of P920,000 and office
equipment that costs P422,000. The equipment had been used in his sole proprietorship and had been
70% depreciated. The current value of the equipment is P295,000. Baser also contributed a note payable
of P87,000 to be assumed by the partnership. The partners agreed on a profit and loss ratio of 50% each.
Baser is to have a 70% interest in the partnership. Justine contributed only a merchandise inventory from
her sole proprietorship carried a P550,00 on a first-in first-out basis. The current fair value of the
merchandise is P525,000
 1. To consummate the formation of the partnership, Baser should make an additional cash
investment or (withdrawal) of
a. P224,000
b. P(30,000)
c. P97,000
d. P(80,000)

In 2018, NORMA and CELSO agreed to form a new partnership under the following general agreements:

(1) Partners CONTRIBUTIONS will be on a 5:4 ratio; (2) PROFIT & LOSS , 5:5, and (3) CAPITAL CREDITS,
57:43 ratio respectively to NORMA and CELSO. Their respective contributions will come from old
proprietorship they owned.

NORMA contributed the following items and amounts:

Cash 748,000

Equipment( at book value per

her proprietorship records) 512,000

CELSO contributed the following items at their carrying amounts in the proprietorship records:

Accounts receivable 96,000

Inventory 268,800

Furniture and fixtures 514,560

Intangibles 220,800

All the non-cash contributions are not properly valued. The two partners have agreed that (a) P7,680 of
the accounts receivable are uncollectible; (b) the inventories are overstated by P19,200; (c) the furniture
and fixtures are understated by P11,520; and the intangibles includes a patent with a carrying value of
P13,440, which must now be derecognized upon a court order. The rest of the intangible items are fairly
valued.

2. How much is the total depreciable fixed asset recorded by the partnership?
a. P1,060,800
b. P403,200
c. P1,116,480
d. 1,041,480
3. What is the capital balance of CELSO after the formation of the partnership?
a. P1,036,541
b. P1,339,225
c. P1,325,808
d. P1,071,360
PARTNERSHIP OPERATIONS

On January 1, 2019, GEORGE and NORRIE formed a partnership by initially contributing cash of P350,000
and P270,000, respectively. The changes in their capital balances during 2019 are summarized as follows:

George Norrie

Capital balances

January 1 350,000 220,000

Investment in April 1 32,000

Withdrawal July 1 (50,000)

Investment September 1 93,000

Withdrawal October 1 (4,000)

Investment December 31 8,000

Ending bal, Dec. 31 378,000 271,000

The partnership reported a net income of P406,000 in 2019 and the profit and loss agreement are as
follows:

a. Interest at 5% is allowed on average capital balances,

b. Salaries of P2,500 per month each partner
c. Bonus to GEORGE of 10% of net income after interest, salaries, and bonus; and
d. Balance to be divided in the ratio of 6:4 to GEORGE and NORRIE, respectively

Both partners withdrew one fourth of their salary allowance in 2019.

Required:

1. Prepare a schedule for the division of net preofit for 2019 with supporting computations when
appropriate.
2. Prepare a statement of the partners’ capital balances for 2019.

MULTIPLE CHOICE

LYNNIE and MAR created a partnership to own and operate a health-food store. The partnership
agreement provided that LYNNIE receives an annual salary of P10,000 and MAR a salary of P5,000 to
recognize their relative time spent in operating the store. Remaining profits and losses were divided 60:40
to LYNNIE and MAR, respectively. Income of P13,000 for 2017, the first year of operations, was allocated
P8,800 to LYNNIE and P4,200 to MAR. On January 1, 2018, the partnership agreement was changed to
reflect the fact that MAR could no longer devote any time to the store’s operations. The new agreement
allows LYNNIE a salary of P18,000, and the remaining profits and losses are divided equally. In 2018, an
error was discovered such that the 2017 reported income was understated by P4,000. The partnership
income of P25,000 for 2018 included this P4,000 related to 2017.
 1. The reported net income of P25,000 for the year 2018, LYNNIE would have
a. P21,900
b. P 0
c. P17,100
d. P12,500

DERHA, a senior partner in a law firm, has a 30% participation in the firm’s profit and losses. During 2018.
DERHA withdrew P130,000 against her capital but contributed property with a fair value of P25,000.
DERHA’s capital increased by P15,000 during 2018.

2. The net income of the partnership for 2018 is

a. P150,000
b. P400,000
c. P350,000
d. P550,000

ELMO, FRED, and GREG invest P40,000, P30,000 and P25,00 respectively, in a partnership on June 30,
2018. They agreed to divide net income or loss as follows:

a. Interest at 10% on beginning capital account balances.

b. Salaries of P10,000, P8,000 and P6,000 respectively to ELMO, FRED and GREG
c. Remaining net income or loss is divided equally
d. A minimum of P18,000 of income is guaranteed to GREG regardless of the result of
operations.
3. If the net income for the year ended June 30,2019 before interest and salary allowances to
partners was P44,000, the amount of net income credited to ELMO is
a. P21,875
b. P20,000
c. P18,334
d. P14,500

X, Y and Z are partners with average capital balances during 2018 of P120,000, P60,000, and P40,000,
respectively. Partner receive 10% interest on their average capital balances. After deducting salaries of
P30,000 to X and P20,000 to Y, the residual profit or loss is divided equally. In 2018, the partnership
sustained a P33,000 loss before interest and salaries to partners.

4. By what amount should X’s capital account change?

a. P 6,000 increase
b. P35,000 decrease
c. P11,000 decrease
d. P42,000 increase

Partners JOYCE and MARIE share profits 3:! After annual salary allowance of P4,000 and P6,000
respectively. However, if profits are not adequate to meet the salary allowances, the entire profit is to be
divided in the salary ratio. Profits of P9,000 were reported for the year 2017. In 2018, it is ascertained that
in calculating net income for the year ended December 31,2017, depreciation was overstated by P3,600
and the ending inventory was understated by P800.
 5. The amount of the net adjustments in the books of JOYCE and MARIE are:

JOYCE MARIE

a. P (3,699) P(1,813)
b. P2,950 P1,450
c. P8,188 P8,563
d. P2,300 P3,475

PARTNERSHIP DISSOLUTION

ADMISSION OF A NEW PARTNER

Elmo and Lito are partners sharing profits and losses in the ratio of 60% and 40%, respectively. The
partnership balance sheet at April 30, 2018 follows:

Cash P50,000 Accounts Payable 113,500

Inventory 75,000 Elmo, Loan 5,500

Land 80,000 Elmo, capital 475,000

Buildings 505,000 Lito, capital 131,000

Lito, Loan 15,000

Total 725,000 Total 725,000

The partners agreed to admit Romy for a one-tenth interest for a P70,000 consideration. At the time of
admission, the fair market value of the land is appraised at P180,000 and the market value of the inventory
is P150,000.

1. Assume Romy is admitted by purchase of each of the original partner’s interest and paid the
partners:
a. Prepare the journal entries on the revaluation of assets and the admission of Romy.
b. Calculate the capital balances of the partners after the admission of Romy
c. Calculate the amounts received by Elmo and by Lito for their respective partnership
interest transferred to Romy.
d. Explain why no amount of bonus was recognized despite the difference between
Romy’s investment and his acquired partnership interest.
2. Now assume Romy is admitted by investing the P70,000 to the partnership for a 10% interest
a. Calculate the partners’ capital balances after the admission of Romy
b. Prepare the journal entry for the admission of Romy.
MULTIPLE CHOICE

The capital accounts of the Sarah and Opel partnership on January 1, 2018, were:

Sarah capital (75% profit percentage) P140,000

Opel capital (25% profit percentage) 60,000

Total capital 200,000

On October 1, Tina was admitted for a 40% interest in the partnership when she purchased 40% of each
existing partner’s capital for P100,000, paid directly to Sarah and Opel. The partnership’s net income for
the year is P82,500 and 2/3 of it was carried at the last quarter of the year.

1. What are the capital balances of Sarah, Opel and Tina after Tina’s admission to the partnership?
a. P105,000, P45,000, P100,000
b. P135,875, P55,313, P127,500
c. P96,375, P40,125, P90,000
d. P112,500, P50,000, P87,500
2. How much will Sarah receive from the above from the above transaction?
a. P71,000
b. P92,500
c. P86,250
d. P118,750
3. Assume Tina is admitted by investing the P100,000 into the partnership for a 40% interest, how
much is the ending capital balance of Opel after admission and the bonus (given)/received
to/from Tina?
a. P68,750; (P6,250)
b. P79,063; (P13,125)
c. P89,063; P5,313
d. P59,125; (P2,750)

Abner, Blanche, Candy, and Donna have become partners in the ABCD Partnership under the following
circumstances:

On August 1,2018 partners Abner and Blanche had the following ownership balances in the AB
Partnership:

ABNER BLANCHE

Capital 312,500 250,000

Loan (37,000) 12,500

Total 275,000 262,500

In the morning of this date, Candy was admitted as a partner with an investment of 187,500 for 20%
interest in capital and profits or losses.
In the afternoon of the same day, over merienda, Donna learned about the nature and objectives of the
ABC Partnership and instead that she became a partner and was willing to contribute P125,000 under the
acceptable terms determined by the old partners.

The old partners, in a caucus, have agreed to allocate 15% of existing total capital, as well as 15% of profits
and losses to Donna. Over dinner Donna accepted the admission arrangement without any change. On
the other hand, the old partners will use the partners interest ratio for their share of capital transfer to
Donna. (Use 2 decimal places i.e. 44.67%). Under the old AB Partnership, profit and losses was 60% and
40% to Abner and Blanche, respectively.

4. Determine the capital balance of Candy upon her admission to the AB Partnership on August 1.
a. P145,000
b. P152,500
c. P150,000
d. P147,500
5. How much cash will Abner receive upon the transfer of part of his interest to Donna?
a. P25,000
b. P63,750
c. P43,750
d. P56,250
6. Determine the capital balances of Blanche under the ABCD Partnership in the late evening of
August 1, 2018.
a. P34,750
b. P225,250
c. P135,000
d. P112,500

RETIREMENT OF A PARTNER

The following balances as of October 31, 2018 for the partnership of Tony, Liza and Cory were as follows:

Cash 82,500 Liabilities 81,250

Liza, Loan 23,750 Tony, Loan 25,625

Other Assets 625,000 Tony, capital 208,750

Liza, capital 134,375

Cory, capital 281,250

Totals 731,250 totals 731,250

Tony has decided to retire from the partnership on October 31. Partners agreed to adjust the noncash
asset to their fair market value of P775,000. The estimated profit to October 31 is P150,000. Tony will be
paid P315,625 for his partnership interest exclusive of his loan which is repaid in full. Their profit and loss
ratio is 4:2:4 to Tony. Liza and Cory, respectively.

1. Prepare entries for retirement of Tony from the partnership

2. What will be the balance of Liza’s capital account after the retirement of Tony?
MULTIPLE CHOICE

The balance sheet at December 31,2018, for the Beth, Daisy, and Maya partnership is summarized as
follows:

Assets 1,000,000 Liabilities 250,000

Loan to Daisy 125,000 Beth, capital 375,000

Daisy, capital 375,000

Maya, capital 125,000

Totals 1,125,000 Totals 1,125,000

Daisy is retiring from the partnership. The partners agree that partnership assets, excluding Daisy’s loan,
should be adjusted to their fair value of P1,125,000 and that Daisy should receive P380,000 for her capital
balance net of the P125,000 loan.

1. How much are the capital balances of Beth and Maya immediately after Daisy’s retirement.
a. P475,000; P145,000
b. P500,000; P150,000
c. P481,250; P146,250
d. P385,416; P127,084

A, B, and C formed a partnership on January 2, 2017 with the following contributions:

A 125,000

B 250,000

C 375,000

The partners agreed on a capital ratio of 1:2:3 upon formation and P&L ratio of 3:3:4, respectively. The
partnership reported a net loss of P25,000 for 2017. Also, at the end of 2017, C has decided to withdraw
from the firm and was paid P312,500 from partnership cash.

On April 1, 2018, D was admitted as a partner with an investment of P200,000. He is given a share in
capital for 40% and in profits, 30%, the old partners have agreed to retain their old ratio over the
remaining profit and loss share of 70%. The partnership reported a net profit of P26,250 for 2018, one-
third of which is deemed earned as the end of the year’s first quarter’s operation.

2. Determine the capital balances of A and B, respectively, as of December 31, 2017.

a. P117,500 & P242,500
b. P143,750 & P268,750
c. P242,500 & P143,750
d. P206,500 & P268,750
3. Determine the capital balances of A, B, and D respectively on December 31, 2018
a. P123,175, P94,650, P142,300
b. P117.050, P88,525, P137,050
c. P126,238, P97,713, P150,175
 d. P130,000, P255,00, P253,750

On June 30,2018 the balance sheet for the partnership of D, E, and F, together with their respective profit
and loss ratios is summarized as follows.

Assets at cost 375,000 D, loan 18,750

D, capital (20%) 87,500

E, capital (20%) 81,250

F, capital (60%) 187,500

Total 375,000

D has decided to retire from the partnership, and by mutual agreement the assets are to be adjusted to
their fair value of P450,000 at June 30, 2018. It is agreed that the partnership will pay D P127,500 cash for
his partnership interest exclusive of his loan, which is to be repaid in full,

4. After D’s retirement, what are the capital account balances of Partners E and F, respectively?
a. P81,250 and P187,500
b. P90,000 and P213,750
c. P121,250 and P307,500
d. P96,250 and P232,500

INCORPORATION

Partners Boba and Tess, who share profits and losses equally, have decided to incorporate the partnership
at December 31, 2018. The partnership net assets after the following adjustments will be contributed in
the exchange for shares of stocks from the corporation.

i. Provision of allowance for doubtful accounts, P6,250

ii. Adjustment of overstated equipment by P2,500
iii. Adjustment of understated inventory by P20,000; and
iv. Recognition of additional depreciation of P5,000

The corporation’s ordinary shares is to have par value of P312.50 each and the partners are to be issued
corresponding share equivalent to 70% of their adjusted capital balances. The partnership balance sheet
at December 31,2018 follows:

Cash 112,500 Liabilities 107,500

A/R 62,500 Acc. Dep. 5,000

Inventory 87,500 Boba, capital 106,250

Equipment 50,000 Tess, capital 93,750

Total 312,500 Total 312,500

 1. Determine the total credit to APIC upon incorporation of the partnership
a. P61,875
b. P144,375
c. P60,000
d. P140,000
2. The number of ordinary shares issued to partner Tess is
a. 210
b. 245
c. 238
d. 217

Lexy and ACE partnership’s balance sheet at December 31, 2018 reported the following balances.

Total assets 187,500

Total liabilities 37,500

Lexy, capital 75,000

Ace, capital 75,000

On January 2, 2018, LEXY and ACE dissolved their partnership and transferred all assets and liabilities to a
newly formed corporation. At the date of incorporation, the fair value of the net assets was P22,500 more
than the carrying amount of the partnership books. Of which P12,500 was assigned to tangible assets and
P10,000 was assigned to patent. LEXY and ACE were each issued 5,000 shares of corporation’s P12.50 par
common stock.

3. Immediately following incorporation, additional paid-in capital in excess of par should be credited
to
a. P160,000
b. P47,500
c. P25,000
d. P137,500

PARTNERSHIP LIQUIDATION

LUMPSUM

DONNA, JANICE and ELLERY plan to liquidate their partnership. They have always shared profits and losses
at 2:3:5 ratio and on the day of liquidation, their balance sheet follows:

DONNA, JANICE, and ELLERY

Balance sheet

December 31, 2018

Assets

(1)
MULTIPLE CHOICE

Partners EDONG, SALLY and ZARAH decided to liquidate their partnership on November 30,2017. Their
capital balances and profit and loss ratio are as follows:

Capitals P&L ratio

Edong 600,000 40%

Sally 784,000 40%

Zarah 240,000 20%

The net income from January 1, 2017 to November 30, 2017, the cash balance is P656,000. On
November 30, 2017, the cash balance is P520,000 and that of liabilities is P1,260,000

Edong is to receive P706,560 in the settlement of his interest.

1. Calculate: (1) the loss on realization, and (2) the amount to be realized from the sale of non cash
assets?
a. (1) 389,600; (2) 2,540,400
b. (1) 248,000; (2) 5,100,000
c. (1) 620,000; (2) 3,860,000
d. (1) 552,000; (2) 3,860,000

The partnership of MIKEE and ROSA is in the process of liquidation. On January 1, 2017, the ledger
shows account balances as follows:

Cash 8,000 Accounts payable 12,000

Accounts receivable 20,000 MIKEE capital 32,000

Lumber inventory 32,000 ROSA capital 16,000

On January 10, 2017, the lumber inventory is sold for P20,000, and during January, accounts receivable
of P15,800 are collected. No further collections on the receivables are expected and the partners have
incurred P3,200 of liquidation expenses. Profits are shared 60% to Mikee and 40% to Rosa.

2. How much cash will partner Mikee and Rosa receive upon liquidation?
a. P27,850; P9,920
b. P37,600; P18,400
c. P20,960; P8,640
d. P20,500; P20,500

(3)

(4)
BY INSTALLMENT

On December 31, 2017, the balance sheet of CDO Partnership is as follows:

Assets Liabilities

Cash 15,360 Account payable 51,200

SlryPlyble, Celia 10,240

Noncash assets 271,360 Dave, loan 20,480

Loan to Oleg 10,240 Celia, capital 38,912

Dave, capital 73,728

Oleg, Capital 102,400

Total 296,960 total 296,960

Profit and losses were shared as follows; Celia, 30%, Dave 30% and Oleg, 40%. It was decided to
liquidate the business. The following is a summary of the realization and liquidation activities.

Book Value

Of asset Expenses Liabilities Cash Paid

Period realized Cash Collected Paid Paid to partners

1st 133,120 81,920 4,100 40,000 41,980

2nd 76,800 51,200 4,800 11,200 40,000

rd
3 61,440 35,840 3,600 - 38,640

Total 271,360 168,960 12,500 51,200 120,620

Required:

1. Prepare a statement of liquidation for each period

2. Prepare a () to show how cash is to be distributed to partners

MULTIPLE CHOICE

The balance sheet for CHESTER, JOANA and JOHN Partnership who have profits and losses in the ratio of
50%, 25% and 25% respectively, shows the following balances just before liquidation

Cash P 24,000 Commented [t1]:

Other assets 119,000

Liabilities 40,000
Chester, Capital 44,000
 Joana, Capital 31,000
John, Capital 28,000
On the first month of liquidation, certain assets are sold for P ()4,000. Liquidation expenses of P2,000 are
paid, and additional liquidation expenses are anticipated. Liabilities are paid amounting to P10,800 and
sufficient cash is returned to insure the payment to creditors before making payments to partners. On the
first payment to partners, Chester receives P12,500.
1. Determine the amount of cash withheld for anticipated liquidation expenses.
a. 35,200 c. 33,200
b. 29,200 d. ()

The following balance sheet for the partnership of A, B, and C was taken from the books of December
31, 2017.
Assets Liabilities and Capital
Cash P 40,000 Liabilities P 100,000
Other Asset 360,000 A, Capital (40%) 74,000
B, Capital (40%) 130,000
C, Capital (20%) 96,000
Total Assets P 400,000 Total Liab & Cap P 400,000
2. If the firm is dissolved and liquidates by installment , the first sale of the other assets having
book value of P180,000 realized P80,000 and all cash available are distributed, the amount to be
received by A, B, and C, respectively would be
A B C
a. P0 P18,000 P40,000
b. P0 P80,000 P20,000
c. P20,000 P0 P0
d. P0 P0 P20,000

3. If the firm is dissolved and liquidates and A receives a total of P3,000 in full settlement of his
interest, then C, would have received a total of
a. P56,000
b. P31,000
c. P60,500
d. P59,000
The accounts of the partnerships of PBA at December 31, 2017 are as follows:
Cash P 120,000 Liabilities P 100,000
Non-cash assets 1,166,000 Loan from B 32,000
Loan to P 24,000 P, Capital 330,000
B, Capital 586,000
 A, Capital 274,000
Total P1,322,000 Total P1,322,000
They divide profits and losses 3:5:2 to P, B, and A, respectively. They have decided to liquidate the
partnership at this date.
4. Determine the amount of payable to Partner A if cash is paid just before the start of liquidation
on December 31, 2017.
a. P28,286
b. P35,300
c. P35,357
d. P35,120
5. How much cash will the partners receive if all available cash except for a P10,000 contingency
fund is distributed immediately after the sale.
a. All partners will receive P60,000
b. Partners F and G will both receive P90,000
c. Partner F will receive P96,667 and partner G will receive P93,333
d. Partner F will receive P190,000
Claudia, Petra, Mona and Hilda are partners who share profits and losses at 40%, 30%, 20% and 10%,
respectively. Since two of them have given intention to withdraw, they have decided to liquidate the
partnership instead. At this point the capital balances of the partners are as follows:
Claudia P 51,000
Petra 21,600
Mona 34,400
Hilda 17,000
6. Which of the following statement is true?
a. The first available P2,400 will go to Claudia
b. Hilda will be the last to receive cash
c. The first available P400 will go to Mona
d. Petra will collect a portion of any available cash before Hilda receives anything