Partnership

Accounting
CA51027
Course
Outline 1. Partnership Formation
2. Subsequent Operations
3. Partnership Dissolution
4. Partnership Liquidation
Partnership
Formation
Definition
•Partnership is a contract of two or more
persons who binds themselves to
contribute money, property or industry
to a common fund with the intention of
dividing the profits among themselves (Art.
1767 of the New Civil Code of the Philippines)

Key aspects of a partnership.

• Contract of two or more persons

• Contributing money, property or industry to
a common fund
• Dividing the profits among themselves
Initial Valuation of the Partnership
1. Cash – Face Value
BONUS METHOD (when the problem is
2. Land, Depreciable Asset, & NCA
silent)
a. Agreed Value 1. There will be a transfer of capital between
b. Fair Value the partners.
c. Appraised Value 2. No goodwill recognition.
3. Total asset and capital will remain
d. Book Value unchanged.
3. Liabilities – considered assumed if the INVESTMENT/WITHDRAWAL
problem is silent 1. Agreed Capital is more than Unadjusted
4. Inventory – a. Agreed Value b. fair value Capital = Investment
2. Agreed Capital is less than Unadjusted
c. LCNRV Capital = Withdrawal
5. Capital
5.1. Bonus Method
5.2. Investment/Withdrawal Method
Problem 1
X, Y and Z decided to form XYZ Partnership. It was agreed that X will contribute an equipment with
assessed value of P100,000 with historical cost of P600,000 and accumulated depreciation of
P500,000. A day after the partnership formation, the equipment was sold for P 300,000.

Y will contribute a land and building with carrying amount of P1,800,000 and fair value of P1,500,000.
The land and building are subject to a mortgage payable amounting to P300,000 to be assumed by the
partnership. The partners agreed that Y will have 60% capital interest in the partnership. The partners
also agreed that Z will contribute sufficient cash to the partnership.

1. Compute the total agreed capitalization of the XYZ Partnership

2. Compute the amount of cash to be contributed by Z in the XYZ Partnership

Solution
Solution for Question No. 1
Solution for Question No. 2
Fair Market Value of Land and Building contributed 1,500,000
by Y Total Agreed Capitalization of 2,000,000
Less: Mortgage Payable to be assumed by XYZ ( 300,000) ABC Partnership
Less: Total Capital Credit of X 1,500,000
Partnership
1,200,000 and Y (P300,000 + P1,200,000)
Capital Credit of Y in ABC Partnership
Cash to be contributed by Z in 500,000
Divided by Y’s Capital Interest Ratio /60% XYZ Partnership

Total Agreed Capitalization of XYZ Partnership 2,000,000

Capital Credit of X in ABC Partnership 300,000

(Proceeds from sale of equipment)
Problem 2
Celine, Darla, and Emelita formed the CDE Partnership on December 31, 2020, with the following assets, measured at book values in
their respective records, contributed by each partner:
Celine Darla Emelita
Cash 259,200 86,400 103,680
Inventory 58,464 75,200
Property, Plant and 1,296,000 240,000
Equipment
totals 1,613,664 326,400 178,880

A portion of Celine's cash contribution amounting to P 172,800, came from personal borrowings. Also, the PPE of Celine and Darla are
mortgaged with the bank for P777,600 and P57,600, respectively. The partnership is to assume responsibility for these PPE
mortgages. The fair value of the inventories contributed by Emelita is P73,440 while the PPE contributed by Darla at this date is
P272,190. The partners agreed to share profits and losses on a 5:2:3 ratio, to Celine, Darla, and Emelita, respectively

1. Compute the capital balance for each partner at the opening of business on December 31, 2020

2. Compute the capital balance for each partner at December 31, 2020, assuming their capital balances is made in accordance with their P&L ratio
Solution
Solution for Question No. 1 Solution for Question No. 2

Celine Darla Emelita Totals Capital Balances based on

interest ratio
Asset P1,613,66 P358,590 P177,120 P2,149,374 Celine (P1,314,174 * 657,087
4 50%)
Liabilities 777,600 57,600 835,200 Darla (P1,314,174 * 262,835
20%)
Net 836,064 300,990 177,120 1,314,174
Emelit (P1,314,174 * 394,252
asset/ a 30%)
capital Totals P1,314,174
Problem. 3 Eli Luisa
Cash P 24,000 P 60,000
Effective August 1, 2021, Eli and Luisa agreed to
form a partnership from their two respective· Accounts Receivable 144,000 84,000
proprietorships. Merchandise Inventory 396,000 504,000
Prepaid Rent 48,000
The Statement of Financial Position presented Store Equipment 480,000 360,000
below reflect the financial position of both Accumulated Depreciation (180,000) (216,000)
proprietorships as of July 31, 2021:
-Store Equipment
As of August 1, 2021, the fair value of Eli's Building 1,500,000
assets were: Merchandise Inventory, P324,000; Accumulated Depreciation (300,000)
Store Equipment, P180,000; Building: Building
P3,000,000; and Land, P1,200,000. Land 720,000
Totals P 2,784,000 P 840,000
For Luisa, the fair value of the assets on the
same date were: Merchandise Inventory,
Accounts Payable P 90,000 P 36,000
P540,000; Store Equipment, P78,000; Mortgage Payable 108,000
Prepaid Rent, P 0. All other items on the two Eli, Capital 2,586,000
balance sheets were stated at their fair values. Luisa, Capital 804,000
Totals P 2,784,000 P 840,000
1. How much capital must be credited to Eli
upon formation of partnership?
Solution
Solution for Question No. 1 Eli Luisa
Original Capital Balances 2,586,000 804,000

Adjustments: Merchandise Inventory (72,000) 36,000

Store Equipment (120,000) (66,000)

Building 1,800,000
Land 480,000
Prepaid Rent (48,000)
Totals 4,674,000 726,000
Partnership
Operations
 Partnership Operations
During the course of the year, the partnership can compensate the partners for the efforts
provided to the business, the interest on their capital contribution or bonus to each
partner, as part of their profit or loss regime.
1. Salaries
 This could be based on a fraction of a year
 Given, regardless of the result of operation
2. Interest
 This could be in fractional year
 Given, regardless whether there is profit or loss(Use the salary/interest ratio if the problem states
that the amount to be distributed to the partners is up to the extent of profit only or the profit is
distributed based on the priority.)
 Can be based on weighted capital contribution of the partners during the year
3. Bonus
 This is given if there is a profit only
 Bonus is not always given if there is profit
4. Remainder
 This is divided between the profit or loss ratio given to the partnership or based on the
Initial capital contribution if the problem is silent.
Partnership Operations
*NOTES: Advances made by the partnership to a partner are included in their total interest but shall not affect
the capital balance of a partner.

PROFIT RATIO LOSS RATIO

1. Profit Ratio, Loss Ratio ✔ ✔ (✔ ; provided)
2. Profit Ratio, Profit Ratio ✔ x ( x ; not provided)

3. Original Capital Ratio, Loss ratio x ✔

4. Original Capital Ratio, Original Capital Ratio x x
Problem 1
On January 1, 2021, Flor and Grace formed a partnership by contributing, cash, of P324,000 and P216,000, respectively. On February 1,
2021, Partner Flor contributed an additional P108,000 cash to the partnership and on August 1, 2021 Partner Flor made a permanent
withdrawal of P54,000. On May 1 2021, Partner Grace contributed Machinery with a fair market value of P72,000 and a net book value of
P60,000 when contributed. On November 1, 2021, Partner Grace contributed an additional P36,000 cash to the partnership. Both partners
withdrew one fourth of their salary allowances in 2021.

The partnership reported a net income of P205,920 in 2021 and the profit and loss agreement are the following:

a. Interest on capital of 6% is allowed based on its average balances

b. Salaries of P2,160 per month to each partner

c. Bonus to Flor of 10% of net income after interest, salaries, and bonus; and

d. Balance to be divided in the ratio of 6:4 to Flor and Grace Respectively

1. Determine how the net income is divided between the partners

2. Determine the capital balances of the partners on December 31, 2021

Solution
Solution for Question No. 1
Solution
Solution for Question No. 2
Problem 2
Regine and Michelle formed a partnership on January 2, 2021. Michelle invested P120,000 in cash.
Regine invested land valued at P30,000, which he had purchased for P20,000 in 2015. In addition,
Regine possessed superior managerial skills and agreed to manage the firm. The partners agreed to
the following profit and loss allocation formula:
a. Interest —8% on original capital investments.
b. Salary — P5,000 a month to Regine.
c. Bonus — Regine is to be allocated a bonus of 20% of net income after subtracting the bonus,
interest, and salary.
d. Remaining profit is to be divided equally.

At the end of 2021 the partnership reported net income before interest, salaries, and bonus of
P168,000.

1. Calculate the amount of bonus to be allocated to Regine

Solution
Solution for Question No. 1

B = Bonus to Regine
B = 0.20(Net Income - interest - salary - bonus)
B = 0.20(P168,000 - [0.08(P150,000)] - P60,000 – B)
B = 0.20(P96,000 - B)
B = P19,200 - 0.20B
1.20B = P19,200
B = P16,000
Problem 3
The partnership agreement of Silvia, Frederich, and Kenny provides for annual distribution of profit
and loss in the following sequence:
– Frederich, the managing partner, receives a bonus of 10% of net income.
– Each partner receives 5% interest on average capital investment.
– Residual profit or loss is to be divided 4:2:4.

Average capital investments for 2021 were:

Silvia P270,000
Fred. P180,000
Kenny P120,000
Prepare a schedule to allocate net income, assuming operations for the year resulted in:
1. Net income of P75,000.
2. Net income of P15,000.
3. Net loss of P30,000.
Solution 1. Silvia Frederich Kenny Total
Bonus P --- P 7,500 P --- P 7,500
Interest 13,500 9,000 6,000 28,500
13,500 16,500 6,000 36,000
Residual 15,600 7,800 15,600 39,000
Total P29,100 P24,300 P21,600 P75,000
Solution for
Question
2.
Bonus P --- P1,500 P --- P 1,500
Interest 13,500 9,000 6,000 28,500
13,500 10,500 6,000 30,000
Residual (6,000) (3,000) (6,000) (15,000)
Total P7,500 P7,500 -0- P15,000

3.
Bonus P --- --- --- ---
Interest 13,500 9,000 6,000 28,500
13,500 9,000 6,000 28,500
Residual (23,400) (11,700) (23,400) (58,500)
Total P(9,900) P(2,700) P(17,400) P(30,000)
Problem 4
Fina, Amor, Emil are partner with capital balances on January 1, 2021 of P600,000,
P240,000, and P120,000, respectively. They agreed to share profit and losses as
follows:
a. Salary allowances of Fina P 96,000, Amor 120,000, and Emil 120,000.
b. 6% Interest on the yearly beginning capital balances are allowed
c. The Managing partner, Fina, is entitled to a 20% bonus after allowing as expenses
partners’ salaries, interest, and bonus and
d. Profits after partners’ salaries, interest, and bonus is to be divided equally.

For the year 2021, the partnership reported profit before interest, salaries and bonus
of P588,000. For the year, the partners’ drawing were Fina, P204,000, Amor,
P40,000 and Emil, P212,000.

Each partner's share in the profits after salaries, interest and bonus was?
Solution
Solution for
Question
Partnership
Dissolution
 Partnership Dissolution
Part of the business life of a partnership is the changes in the capital interest of each
partner. Changes are caused by the following:
1. Admission of a new partner
2. Retirement of an old partner
3. Purchasing of current capital interest of each partner during the year
1. Admission by Purchase without Revaluation
-It is a personal transactions between the old partner(s) and the incoming partner
-Total asset and capital will remain unchanged
-Purchase price is ignored

2. Admission by Purchase w/Revaluation

Two Steps to be followed:
Determine the asset revaluation
Distribute the changes to the old partners
Partnership Dissolution
Partnership
Liquidation
 Partnership Liquidation
Last part of the business life of a partnership is the closure and winding up process.
Liquidating the business has two types of methodology:
1. Lump-Sum Liquidation
2. Installment Liquidation
1. Cash Priority Program
2. Schedule of Safe Payments
Partnership Liquidation
Partnership Liquidation