INTEGRATED REVIEW CLASS IN ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR)

Partnership Accounting

PARTNERSHIP FORMATION

Nature of Partnership
• A contract between two or more persons who bind themselves to contribute money, property, or industry
to a common fund with the intention of dividing profits among themselves.

• A partnership is created by mere agreement (oral or written) among the partners. The written contract of
a partnership is called the articles of co-partnership.

Accounting for Partnership Formation

• In a partnership, a partner must have his or her own capital and drawings account. Hence, if there are two
partners, there must be two capital and drawings account existing in the books of the partnership.

Capital account Drawings account

Normal balance Credit Debit
Increases ü Initial investment ü Regular/temporary drawings
ü Additional investments
ü Share in profits

Decreases ü Permanent withdrawals

ü Drawings in excess of specific
amount
ü Share in losses

• Loan accounts are used to record/account for transactions between the partnership and the partners.
These are reported as separate items in the partnership’s statement of financial position.
Ø Loan from partner – Presented under liabilities.
Ø Loan to partner – Presented under assets.

• The following table summarizes the appropriate valuation of the partners’ investments in the partnership:

Form of investment Valuation

Cash Face amount

In case of a foreign currency cash investments, it must be valued

using the current exchange rate.

Non-cash Level of priority

(i.e., properties) 1. Agreed value
2. Fair value (in the absence of agreed value)
3. Carrying value

Note: If there will be a conflict between the agreed value and the fair
value, the agreed value will prevail. Always remember that
partnership is created by the mere agreement of the partners. Hence,
the agreement of the partners will always prevail!

Services/Industry N/A. No value can be assigned to services. This is accounted

through a memorandum entry only.

• For pre-existing liabilities (i.e., former proprietor’s liabilities, mortgage attached to a property invested in
the partnership, etc.), there is a need for the partners to agree on a provision whether liabilities are to be
assumed by the partnership.
Ø As a rule, the partnership will assume the said liabilities unless otherwise agreed upon by the partners.

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 Establishment of the Initial Capital Balances of the Partners
• If a partner’s capital interest is different from his/her capital contributions, the partners may apply one of
the following methods:
ü Net investment method

Under this method, the capital interest and capital contribution of a partner are the same. Hence,
there will be no further adjustments on the initial capital interests of the partners.

ü Bonus (or transfer of capital) method

Under this method, one of the partners will transfer a portion of his/her capital to the other partner.

ü Invest or withdraw method

Under this method, one of the partners’ capital contributions will become the basis for the total
partnership capital and the other partner will invest additional assets (or withdraw assets) to (or from)
the partnership to conform to their agreement.

DISCUSSION PROBLEMS

Problem 1:
Aries decides to admit Virgo as a partner in a business partnership. Before Virgo's admission, Aries' accounting
records reflect the following balances:
Debit Credit
Cash P26,000
Accounts receivable 120,000
Merchandise inventory 180,000
Building 350,000
Accumulated depreciation – Building 140,000
Accounts payable 62,000
Real mortgage payable 70,000
Aries, capital 404,000

It was agreed that, for purposes of establishing Aries’ investment in the partnership, the following adjustments shall
be made:
• Allowance for doubtful accounts equal to 10% of accounts receivable shall be set up.
• Merchandise inventory shall be valued at P202,000.
• The building is currently appraised at P196,000.
• Prepaid expenses of P3,500 and accrued expenses of P4,000 shall be recognized.
• The partnership will assume all liabilities except for one-fourth of the real mortgage payable.

1. How much is the adjusted capital of Aries prior to the admission of Virgo?
A. 399,500 C. 417,000
B. 408,500 D. 441,000

2. How much cash should Virgo invest to secure a one-third interest in the partnership?
A. 199,750 C. 208,500
B. 204,250 D. 220,500

3. Assume that Virgo contributes equipment with a carrying value of P100,000, a fair value of P180,000, and an
agreed value of P160,000 to the partnership. If Virgo is acquiring a two-fifth interest in the partnership, how
much cash must be contributed in addition to the equipment?
A. 98,000 C. 118,000
B. 114,000 D. 134,000

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Problem 2:
On January 1, 2025, D, E, and F established a partnership by contributing the following assets and liabilities,
recorded at their respective book values as reflected in their individual records:

D E F
Cash P320,000 P240,000 P240,000
Accounts receivable 56,360 61,600 110,240
Inventory 216,000 190,800 107,200
Property, plant, and equipment (PPE) 720,000 576,000 608,000
Accounts payable 64,000 80,000 96,000
Long-term liabilities 160,000 192,000 208,000

The partners agreed on the following:

• D’s PPE is over-depreciated by P88,000 while E’s and F’s PPE are under-depreciated by P20,160 and P87,800,
respectively.
• The long-term liabilities of D, E, and F are understated by P24,000, P8,000, and P33,440, respectively.
• All other accounts, except those specified above, are already recorded at fair values and require no further
adjustments.

1. Upon formation of the partnership, how much is the initial capital balance of each partner?

Case 1: Assuming the partners agreed to have a capital ratio of 4:3:3 for D, E. and F, respectively.
1. What are the capital balances of the partners upon formation?
2. How much is the bonus to (from) D?
3. How much is the bonus to (from) E?
4. How much is the bonus to (from) F?

Case 2: Assume that the partners agreed to have an interest ratio of 4:2:4 to D, E, F, respectively; E and F will invest
or withdraw certain amounts to conform with the agreement.
1. What are the capital balances of the partners upon formation?
2. How much is the additional investment (or withdrawal) of E?
3. How much is the additional investment (or withdrawal) of F?

PARTNERSHIP OPERATIONS

Division of Profits and Losses

• Profits and losses shall be divided among the partners in accordance with their agreement.

• If only the profit-sharing arrangement has been specified, losses will be allocated in the same proportion
as profits.

• If only the loss-sharing arrangement has been specified, profits will be allocated based on the partners'
original capital contributions.

• If the partners have no agreement as to distribution of profits and losses, the allocation shall be in
proportion to what they have contributed (original capital contribution).
§ Rationale: Profit and loss ratio should be established at the time of the formation. Since the original
capital is the only available capital balance at the time of formation, the original capital contribution
shall be used.

Capital interest vs. Profit and loss interest

Capital interest Profit and loss interest
Nature Represents claims against the net assets of the Determines how the partner’s capital interest
partnership. will increase or decrease as a result of profit and
loss allocation.

Ratio Capital interest ratio Profit and loss ratio

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 Methods of Dividing Profits and Losses
• The partners may distribute profits and losses:
§ Equally
§ In arbitrary ratio
§ Based on capital ratio
o Original capital – the capital contributions of the partners at the inception of the partnership (its
time of formation).

o Beginning capital – the capital balances of the partners at the beginning of the period.

o Ending capital – the capital balances of the partners at the end of the period before closing of net
income. Ending capital is computed as:
Beginning capital xx
Additional investments xx
Permanent withdrawals (xx)
Ending capital balance xx

NOTE: The ending capital above is only for the purpose of establishing the ending capital ratio.

o Average capital – Takes into account how long the capital balance was at a specific amount
during the period.
ü Only considers the beginning capital, additional investments, and permanent withdrawals
(direct charge to capital).

ü Temporary/regular withdrawals (or withdrawals in anticipation of partnership share in profits)

are not considered since these are charged to the partner’s drawing account.

§ With interest on invested capital – These are incentives given to partners to give recognition to the
differences in capital contributions.

§ With salary allowances to partners – These are compensations given to partners in proportion to the
time devoted to the business.

§ With bonus to partners – An incentive normally given to the managing partner in recognition of his/her
managerial skills.
o A bonus is usually a percentage of profit.
o Bonus may be computed using one of (but not limited to) the following as basis:
ü Bonus is based on profit before interests, salaries, and bonus.
ü Bonus is based on profit after interests but before salaries and bonus.
ü Bonus is based on profit after interests and salaries but before bonus.
ü Bonus is based on profit after interests, salaries, and bonus.

• It is important to note that interests on capital balances, salary allowances to partners, and bonus to
partners are not expenses of the firm but as a manner of distribution of profits and losses.

• As a rule, interest on capital balances and partner salaries are provided in full, even in cases of insufficient
net income or when the partnership incurs a loss.

DISCUSSION PROBLEM
On January 1, 2024, Morgan and Freeman formed a partnership by initially contributing cash of P280,000 and
P176,000, respectively.

The terms of the profit and loss distribution are as follows:

• Interest at a rate of 5% is allowed on the average capital balances during the initial year of operations. In
the subsequent year, both partners will be entitled to interest equivalent to 5% of their capital balances as
of the first day of the year.
• Each partner will receive a monthly salary of P8,000.
• Bonus to Morgan of 10% of net income after interest, salaries, and bonus; and

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 • Balance is to be divided as follows:
o In the ratio of 60:40 if under-allocated.
o In the ratio of 50:50 if over-allocated.

Morgan made an additional investment of P25,600 on April 1 and permanently withdrew P3,200 on September 30.
On the other hand, Freeman made a permanent withdrawal of P40,000 on July 1, invested an additional P74,400 on
August 31 and made a further investment of P6,400 on December 31. In addition, each partner withdrew P2,000
monthly as an advance against their share of the profits.

The partnership reported a net income of P324,860 in 2024 and P206,251 in 2025.

1. What is the average capital balance of Morgan for 2024?

2. What is the average capital balance of Freeman for 2024?
3. How much is the profit share of Morgan for 2024?
4. How much is the profit share of Freeman for 2024?
5. How much is the capital balance Morgan as of December 31, 2024?
6. How much is the capital balance Freeman as of December 31, 2024?
7. How much is the profit share of Morgan for 2025?
8. How much is the profit share of Freeman for 2025?
9. How much is the capital balance Morgan as of December 31, 2025?
10. How much is the capital balance Freeman as of December 31, 2025?

PARTNERSHIP DISSOLUTION

Dissolution
• A partnership is dissolved when there is a change in ownership interest.
• Scenarios leading to the dissolution of a partnership:
ü Admission of a new partner
ü Retirement, withdrawal, or death of a partner
ü Incorporation of a partnership

Admission of a New Partner

• When a partner is admitted in an existing partnership, the existing partnership is dissolved, and a new
partnership is created. However, it is important to note that a new partner may be admitted in an existing
partnership only with the consent of all the partners.

Manner of Admitting a New Partner

A new partner may be admitted by:
ü Purchase of interest, or
ü Investment

Admission by Purchase of Interest

• The new partner purchases a certain portion of the selling partner(s) or the partnership to have an
ownership interest.

• A purchase of interest is a personal transaction between the new partner and the selling partner(s).

• The amount credited to the new partner’s capital account is the interest purchased and not the cash paid.
The interest purchased is computed as follows:

Selling partner’s adjusted capital x New partner’s ownership interest (%)

• No cash and gain or loss will be recognized in the books of the partnership since this is a personal
transaction between the selling partner and the new partner. The difference between the cash paid for the
equity and the interest purchased is called the personal gain or loss.
o If cash paid < interest purchased, a personal loss to the selling partner (or personal gain to the
incoming partner) arises.

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 o If cash paid > interest purchased, a personal gain to the selling partner (or personal loss to the
incoming partner) arises.

o If cash paid for the equity = interest purchased, no personal gain or loss arises.

Asset adjustments prior to Admission of a New Partner

• Generally, net assets are fairly valued prior to the admission of a new partner. If the problem is silent or
stated that net assets are fairly valued, the difference between the cash paid and interest purchased is
treated as personal gain or loss of the selling partner(s).

• If the net assets are not fairly valued, there is a need to adjust the amount of the net assets of the
partnership before admitting a new partner so that there will be a fair transaction between the selling
partner(s) and the new partner(s). If the fair value of the net assets is:
o Higher than the recorded amount per books, the difference is upward (positive) asset revaluation.
o Lower than the recorded amount per books, the difference is downward (negative) asset revaluation.
o Equal to the recorded amount per books, there is no asset revaluation.

Note: It is to be emphasized that only the original partners are entitled to the asset revaluation. The new partner(s)
shall have no share in the asset revaluation. The asset revaluation will be shared by the original partners based on
their old profit and loss ratio.

Admission by Investment of Assets

• The new partner invests assets to the partnership in order to acquire ownership interest.

Terminologies
1. Old partners’ capital (OPC) – this refers to the capital balances of the old or original partners prior to the
admission of a new partner.

2. New partner’s investments (NPI) –This refers to the actual amount of assets invested by a new partner to
the partnership.

3. Total contributed capital (TCC) – This refers to the sum of old partners’ capital and new partner’s
investments.

4. Asset revaluation – refers to the adjustments in asset valuation upon admission of a new partner.
o Arises when the TAC is not equal to the TCC.
o Relates only to the old partners of an existing partnership.

5. Total agreed capital (TAC) – the amount of new capital set by the partners for the partnership after the
admission of the new partner.
o It may be equal to, more than, or less than the TCC.
Ø If TAC = TCC, there is no asset revaluation
Ø If TAC < TCC è In this case, net assets is overstated, therefore there is a downward (negative)
asset revaluation.
Ø If TAC > TCC è In this case, net assets is understated, therefore there is an upward (positive) asset
revaluation.

Note: If the partners expressly agreed on the new partnership capital, that agreement must be followed
accordingly. However, if there is no agreement as to the new capital of the partnership after the admission of the
new partner, then it is assumed that the TAC is equal to their TCC.

6. New partner’s initial capital (NPIC) – This refers to the new partner’s initial capital balance. Computed as
the new partner’s ownership interest on the TAC.

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

o When bonus is given to the new partner(s) or in the case of NPIC > NPI, the capital is transferred from
the old partners to the new partner(s). This will decrease the capital of the old partners.

o When bonus is given to the old partners or in the case of NPIC < NPI, the capital is transferred from the
new partner(s) to the old partners. This will increase the capital of the old partners.
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 o There is no bonus if NPIC = NPI

Note: It must be emphasized that the total partnership capital will remain the same after the transfer of capital
(or bonus) between or among the partners. But the capital credit of each partner will change.

Retirement, Withdrawal, or Death of a Partner

• A partnership is dissolved when a partner withdraws or retires, as this results in a change in the ownership
structure.

• At the time of retirement or withdrawal, the total interest of the outgoing partner is computed. When a
partner ceases to be associated with the partnership by way of retirement or withdrawal, The interest may
then be:
ü Sold to a new partner or outsider.
ü Sold to the remaining partner(s).
ü Sold to the partnership.

Computation of the total interest of an outgoing partner:

Adjusted capital balance XX

Add: Payable to partner XX
Less: Receivable from partner (XX)
Total interest in the partnership XX

Scenario: Treatment:
Sold to a new partner/outsider or the In this type of transaction, the sale of interest resembles the
remaining partners. admission of a new partner through the purchase of an existing
partner's interest. This is a personal transaction between the
outgoing partner and the incoming or remaining partner(s).

Settlement price XX
Less: Outgoing partner’s total interest in the partnership (XX)
Personal gain (loss) to the outgoing partner XX(XX)

If:
Settlement price > Total interest = Personal gain to the outgoing
partner (or personal loss to the buying partner)
Settlement price < Total interest = Personal loss to the outgoing
partner (or personal gain to the buying partner)

Sold to the partnership This type of sale of interest is not a personal transaction. Instead, it
involves the partnership directly purchasing the interest of the
retiring or withdrawing partner(s).

Settlement price XX
Less: Outgoing partner’s total interest in the partnership (XX)
Bonus to (from) the outgoing partner XX(XX)

If:
Settlement price > Total interest in the partnership = Bonus to the
outgoing partner
Settlement price < Total interest in the partnership = Bonus from the
outgoing partner

Incorporation of a Partnership
• Under this scenario, a partnership is converted into a corporation. In turn, the corporation acquires all the
assets and assumes the liabilities of the partnership in exchange for shares.

• The partners then become shareholders.

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 • Procedures:
1. Revalue assets and liabilities of the partnership prior to incorporation.
2. Distribute share certificates to the partners.

Note: Any excess of the fair value of the net assets of the partnership over the aggregate par value of shares issued
is credited to share premium.

DISCUSSION PROBLEMS
Problem 1:
Uno and Dos’ capital balances are P1,200,000 and P960,000, respectively. Profit or loss ratio is 7:3, respectively.
Tres directly purchased one-third interest in the partnership by paying Uno P390,000 and Dos P450,000. An asset
was revalued upwards by P360,000 prior to the admission of Tres.

1. What is the capital balance of Uno after Tres’ admission into the partnership?
A. 600,000 C. 840,000
B. 712,000 D. 968,000

2. What is the capital balance of Dos after Tres’ admission into the partnership?
A. 600,000 C. 840,000
B. 712,000 D. 968,000

3. What is the capital balance of Tres after his admission into the partnership?
A. 600,000 C. 840,000
B. 712,000 D. 968,000

Problem 2:
Aaron and Butch’s capital balances are P960,000 and P1,040,000, respectively. Profit or loss ratio is 4:6. Caine
invested P1,000,000 for a 30% interest in the partnership. The partners agreed to have a total capital of P5,000,000
after Caine’s admission.

1. What is the capital balance of Aaron after Caine’s admission?

A. 960,000 C. 1,040,000
B. 1,000,000 D. 1,560,000

2. What is the capital balance of Butch after Caine’s admission?

A. 960,000 C. 1,040,000
B. 1,000,000 D. 1,940,000

3. What is the capital balance of Caine after his admission?

A. 900,000 C. 1,040,000
B. 1,000,000 D. 1,500,000

Problem 3:
X, Y, and Z, partners in XYZ Partnership, had the following capital balances and profit and loss sharing ratio:

X (50%) P480,000
Y (30%) 288,000
Z (20%) 192,000

1. If X decided to retire and sold his interest to Y for P540,000, how much is the capital balance of Y after X’s
retirement?
A. 288,000 C. 828,000
B. 768,000 D. None of the foregoing.

2. If X decided to withdraw and receives P540,000 from the partnership, how much is the capital balance of Z
after X’s withdrawal?
A. 168,000 C. 216,000
B. 175,200 D. 252,000

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Problem 4:
X, Y, and Z are partners who share profits and losses in the following ratio 4:2:4, respectively. The partnership's
statement of financial position as of December 31, 2024, is summarized below:

ASSETS LIABILITIES AND EQUITY

Cash P230,000 Accounts payable P20,000
Inventories 120,000 Z, loan 10,000
Equipment 150,000 X, capital 220,000
Trademark 45,000 Y, capital 190,000
Y, loan 5,000 Z, capital 110,000
Total assets 550,000 Total 550,000

On January 1, 2025, Z decided to retire from the partnership and by mutual agreement, the following have been
arrived at:
• Inventories amounting to P20,000 is considered obsolete and must be written or.
• Equipment should be adjusted to their current value of P200,000.
• Trademark is to be written or immediately prior to the retirement.

Z will receive P90,000 from the partnership as full payment for his total interest, which also includes his loan to the
partnership.

1. How much is the bonus to (from) Z?

A. 14,000 C. 24,000
B. (14,000) D. (24,000)

2. How much is the capital balance of X after Z’s retirement?

A. 179,000 C. 198,000
B. 195,000 D. 230,000

3. How much is the capital balance of Y after Z’s retirement?

A. 179,000 C. 198,000
B. 195,000 D. 230,000

Problem 5:
X and Y are partners who share profits and losses in an 80:20 ratio, respectively. On September 30, 2025, they agreed
to incorporate their partnership by forming XY Corporation. The assets and liabilities of the partnership were
transferred to the corporation in exchange for shares of stock. Below is the post-closing trial balance of the
partnership:

Cash P14,400
Accounts receivable (net) 33,000
Inventory 30,600
Equipment (net) 40,800
Accounts payable 42,000
X, capital 57,590
Y, capital 19,210

The partners agreed to make the following adjustments to the assets before transferring them to the corporation:

Accounts receivable (net) P31,200

Inventory 42,000
Equipment 53,400

XY Corporation is authorized to issue P10 par value ordinary shares. X and Y agreed to receive 7,500 shares and 2,000
shares, respectively, in exchange for their equity in the partnership. How much is the share premium to be recognized
upon incorporation?
A. Zero C. 95,000
B. 4,000 D. 99,000

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 PARTNERSHIP LIQUIDATION

LIQUIDATION DEFINED
• Liquidation refers to the process by which a partnership is brought to an end and the assets of the
partnership are paid out to creditors and partners.

• It is the process of converting partnership non-cash assets into cash (known as realization) and cash is
used as payment of claims (known as liquidation).

• It is the phase of a partnership’s operations which begins after dissolution and ends with the winding up
of partnership affairs.

• When the partnership is liquidated, the following events take place:

1. The assets of the partnership are sold.
2. The liabilities are paid or settled.
3. The interests of the partners are paid or settled.

• The liabilities of the partnership shall rank in order of payment, as follows:

1. Those owing to creditors other than partners,
2. Those owing to partners other than for capital and profits,
3. Those owing to partners in respect of capital,
4. Those owing to partners in respect of profits*.

*For accounting purposes, item (4) should already be closed to the partners’ capital accounts prior to the
liquidation process.

• Where a partner has become insolvent or his estate is insolvent, the claims against his separate property
shall rank in the following order:
1. Those owing to separate creditors.
2. Those owing to partnership creditors.
3. Those owing to partners by way of contribution.

RULES ON PAYMENT OF CLAIMS

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

TYPES OF LIQUIDATION
There are two types of liquidation:
1. Lump-sum liquidation
2. Installment liquidation

LUMP-SUM LIQUIDATION
Refers to the type of liquidation where all non-cash assets are converted into cash in one transaction or in several
transactions but within a short period of time.

REALIZATION GAIN OR LOSS

• There is gain on realization if the proceeds > carrying value of the non-cash assets sold.
• There is loss on realization if the proceeds < carrying value of the non-cash assets sold.

LIQUIDATION EXPENSES
• Liquidation expenses is treated as an expense arising from liquidation and must be allocated to partners
in accordance with the partnership agreement.
• Liquidation expenses is not included in the computation of gain or loss on realization. It is included in the
computation of gain or loss on liquidation.

CAPITAL DEFICIENCY
• The term used to describe a debit capital balance.
• Also called deficit.
• The excess of a partner’s share on losses over his capital.
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 SOLVENT vs. INSOLVENT PARTNER
• A partner is said to be solvent if his personal assets exceed his personal liabilities. (Personal Assets >
Personal Liabilities)
• A partner is said to be insolvent if his personal liabilities exceed his personal assets. (Personal Assets <
Personal Liabilities)

• To eliminate capital deficiency:

Ø If the deficient partner is solvent, additional investment is a must.
Ø If the deficient partner is insolvent, the remaining partners will absorb the capital deficiency.

INSTALLMENT LIQUIDATION
• Refers to the type of liquidation where assets are realized on a piecemeal basis.
• Under this type of liquidation, cash is distributed to partners as it becomes available even before all non-
cash assets are converted into cash.

Schedules to determine cash distribution to partners

Under installment liquidation, there are two schedules which may be used to determine cash distribution to
partners:
1. Schedule of safe payments
2. Cash priority program

Schedule of Safe Payments

• This schedule is prepared every time a non-cash asset is sold, and once cash becomes available.
• Partnership creditors are entitled to full payment before anything is paid to partners.

Assumptions
To distribute assets of the partnership to the partners fairly and equitably, the following assumptions are used:
1. All unsold non-cash assets are unrealizable.
2. A capital deficient partner is personally insolvent.

All unsold noncash assets are unrealizable.

• This assumption suggests that the remaining non-cash assets of the partnership are no longer salable,
resulting in their carrying value being treated as a loss. This loss, referred to as a theoretical or
hypothetical loss, is allocated among the partners according to their profit-and-loss sharing ratio.

Maximum possible loss

• The maximum possible loss refers to the worst-case scenario, representing the largest potential loss that
could occur in the future.

• It comprises of:
1. Carrying value of the unsold non-cash assets
2. Cash withheld for anticipated liquidation expenses and unrecorded liabilities.

Note: Under this schedule, cash is distributed to partners who have free interest. Free interest refers to a positive
amount of a partner’s interest after absorbing his or her share of maximum possible loss and absorbing of any
other partner’s capital deficiency.

Cash priority program

• Prepared prior to the start of the liquidation process.
• Under this method, an advance cash distribution schedule outlines how available cash is allocated
among the partners.

Procedures in preparing cash priority program:

1. Determine each partner’s total interest.
2. Determine each partner’s loss absorption capacity.
3. Partners are ranked based on their vulnerability to losses.
4. The highest loss absorption balance is reduced to the next highest and so on until all of the partners have
equal loss absorption balances.

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 5. Once all the partners have equal loss absorption balance, cash distributions are made based on their
profit and loss ratios.

DISCUSSION PROBLEMS

Problem 1: (Lump Sum Liquidation)

The statement of financial position of XYZ Partnership prior to liquidation is as follows:

ASSETS LIABILITIES AND CAPITAL

Cash P80,000 Liabilities to outsiders P105,000
Other assets 210,000 X, Loan 30,000
Z, Loan 10,000 X, Capital 45,000
Y, Capital 75,000
Z, Capital 45,000
Total assets 300,000 Total 300,000

The partners share profits and losses in the ratio of 5:3:2, respectively.

You have been provided the following information concerning the personal net assets of the partners, excluding their
partnership interests:

X Y Z
Personal assets P20,000 P40,000 30,000
Personal liabilities 30,000 25,000 28,200

Situation no. 1: Other assets are sold for P48,000, liquidation expense of P8,000 and all liabilities are paid.

How much cash should Y receive?

A. Zero C. 16,800
B. 14,000 D. 18,000

Situation 2: Y received a total of P60,000 and liquidation expenses of P10,000 were paid.

1. How much is the amount of gain (loss) on realization of other assets?

A. 10,000 C. 150,000
B. (40,000) D. 190,000

2. How much is the total proceeds on sale of other assets?

A. 10,000 C. 150,000
B. 90,000 D. 170,000

3. How much cash should Z receive?

A. 25,000 C. 70,000
B. 50,000 D. 100,000

Problem 2: (Installment Liquidation)

X, Y, and Z are partners who share profits and losses in the ratio of 4:3:3, respectively. On January 1, 2024, they
decided to liquidate the partnership, and the statement of financial position was prepared as follows:

ASSETS LIABILITIES AND CAPITAL

Cash P35,000 Outside liabilities P80,000
Non-cash assets 130,000 X, loan 10,000
Y, loan 5,000 Z, loan 15,000
X, capital 20,000
Y, capital 20,000
Z, capital 25,000
Total 170,000 170,000

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In January, noncash assets with book value of P70,000 was sold for P60,000 to a buyer; liquidation expense of P6,000
was paid and only 40% of the outstanding liabilities were paid in January. The partnership withholds cash of P4,000
for next month’s liquidation expenses.

In February, noncash asset with book value of P30,000 was sold for P24,000 to a buyer. Liquidation expense of
P4,500 was paid and only P20,000 recorded liabilities were paid during the month. The partnership withholds cash
of P1,500 for next month’s liquidation expenses and P3,500 in anticipation for unrecorded liabilities.

In March, the remaining noncash assets were sold to a buyer for P25,000. Liquidation expense of P8,000 was paid.
The remaining recorded liabilities plus P4,000 unrecorded liabilities were paid during the month to end the
liquidation process.

1. Determine the total amount of cash available for distribution to partners in January, February, and March.
2. Determine the amount cash paid to each partner in each month by preparing schedules of safe payments.
3. Prepare a cash priority program to show how cash is to be distributed to each partner.

THEORIES

1. The non-cash contributions of the partners to form a partnership are recorded at their:
A. Agreed value
B. Fair market value
C. Carrying amount as of the date of formation
D. Original cost

2. Two proprietors formed a partnership. Property other than cash which is part of the initial investment in the
partnership would be recorded for financial accounting purposes at the:
A. Carrying value at the date of investment.
B. Fair value of the property at the date of investment.
C. Carrying value or the fair value of the property at the date of the investment, whichever is higher.
D. Carrying value or the fair value of the property at the date of the investment, whichever is lower.

3. In the formation of a partnership, the net assets contributed by a partner is higher than the amount credited
to his capital. Which of the following explanation is allowed by our GAAP here in the Philippines?
A. That partner’s contribution is subject to asset revaluation.
B. That partner gave bonus to the other partner(s).
C. That partner received bonus from the other partner(s).
D. That partner has a bad reputation to the other partners so they assigned him a lower capital than his
contribution.

4. How shall the profits and losses of a partnership be distributed among the partners?
A. Profits and losses should be distributed according to their profits and losses sharing agreement.
B. Profits and losses should be distributed proportionately in accordance to their capital contribution.
C. Profits and losses should be distributed equally.
D. Profits and losses should be distributed in a way that minimizes the personal taxes of the partners.

5. In the absence of agreement as to the sharing of profits, profits shall be distributed to the capitalist partners:
A. Equally.
B. In accordance with their loss sharing agreement.
C. Proportionately to their capital contribution.
D. Cannot be determined.

6. In the absence of agreement as to the sharing of losses, losses shall be distributed to the capitalist partners:
A. Equally.
B. In accordance with their profit sharing agreement.
C. Proportionately to their capital contribution.
D. Cannot be determined.

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 7. If the partners have not come into an agreement as to how to divide profits and losses among them, then
they must share profits and losses:
A. Equally.
B. By any appropriate allocations.
C. By any means that will minimize taxes.
D. According to their original capital contributions.

8. Which of the following uses the most equitable distribution of partnership profits based on capital
contributions?
A. Equally.
B. Beginning capital balances.
C. Ending capital balances.
D. Average capital balances.

9. In computing a partner’s average capital, the partner’s permanent withdrawals are:

A. Included in the computation of the average capital.
B. Not considered in the computation of the average capital.
C. Included in the computation of average capital if there is an expectation high profits.
D. None of the foregoing.

10. In computing a partner’s average capital, the partner’s temporary withdrawals are:
A. Included in the computation of the average capital.
B. Not considered in the computation of the average capital.
C. Included in the computation of average capital if there is an expectation high profits.
D. None of the foregoing.

11. If the agreed capital exceeds the total contributed capital with the new partner’s investment is the same as
his capital credit, then the admission of the new partner involved a(n)
A. Upward asset revaluation
B. Downward asset revaluation
C. Bonus to the old partners
D. Bonus to the new partner

12. If the agreed capital is equal to the total contributed capital with the new partner’s investment is less than
his capital credit, then the admission of the new partner involved a(n)
A. Asset revaluation
B. Bonus to the old partners
C. Bonus to the new partner
D. No bonus nor asset revaluation

13. F retired from a partnership operated by F, G, and H. F received an amount which is lower than his total
interest in the partnership. Assuming the use of the bonus method, the excess…
A. Was recorded as an asset revaluation.
B. Increases the capital balances of G and H.
C. Decreases the capital balances of G and H.
D. Had no erect on the capital balances of G and H.

14. What is the order of partnership liquidation process?

A. Sell assets à Settle liabilities à Distribute assets to partners
B. Sell assets à Distribute assets to partners à Settle liabilities
C. Distribute assets to partners à Sell assets à Settle liabilities
D. Settle liabilities à Sell assets à Distribute assets to partners

15. In a partnership liquidation, a gain or loss from sale of non-cash assets is:
A. Allocated to the partners based on their capital balances.
B. Allocated to the partners based on their profit or loss ratio.
C. Allocated to the partners based on their net worth.
D. Allocated to the partners based on the ratio of their ages.

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 16. A partner’s interest in the partnership includes all of the following, except:
A. Capital balance.
B. Loan to the partnership.
C. Advances to the partnership.
D. All of the foregoing are components of a partner’s interest in the partnership.

17. If a capital deficient partner is personally solvent:

A. The partner must invest additional assets in the partnership.
B. The partner’s deficiency shall be allocated to the other partners.
C. The other partners will give the capital deficient partner enough cash to absorb the capital deficiency.
D. Either A or B

18. If a capital deficient partner is personally insolvent:

A. The partner must invest additional assets in the partnership.
B. The partner’s deficiency shall be allocated to the other partners.
C. The other partners will give the capital deficient partner enough cash to absorb the capital deficiency.
D. Either A or B

19. In partnership liquidation by installment, safe payments are:

A. The amounts of distributions that can be made to the partners, after all non-cash assets have been
adjusted to fair market value.
B. The amounts of distributions that can be made to the partners, after all creditors have been paid in full.
C. The amounts of distributions that can be made to the partners with assurance that such amounts will
not have to be returned to the partnership.
D. The amounts of distributions that can be made to the creditors and partners with assurance that such
amounts will not have to be returned to the partnership.

20. In the schedule of safe payments, cash withheld for anticipated liquidation expenses and unrecognized
liabilities is treated as:
A. A component of maximum possible loss.
B. An additional expenses.
C. A loss on realization.
D. None of the choices.

21. Which of the following is incorrect regarding the schedule of safe payments method of installment
liquidation?
A. All unsold non-cash assets are assumed to be unrealizable.
B. All partners are assumed insolvent and therefore cannot make additional investment to eliminate their
deficiencies.
C. Maximum possible loss is equal to the sum of the carrying value of the remaining non-cash assets and
the total cash withheld.
D. Additional possible loss may also accrue to the partners when a debit balance in any partner’s capital
account results from the allocations of maximum possible loss.
E. All of the following are correct regarding the schedule of safe payments method of installment
liquidation.

22. A cash priority program is prepared:

A. To determine the order and amount of cash each partner will receive as it becomes available for
distribution.
B. Each time cash is distributed to partners in a piecemeal liquidation.
C. Each time a non-cash asset is sold in a piecemeal liquidation.
D. To comply with the legal requirements set by law in the Republic Act No. 9298.

23. A partner’s loss absorption capacity is computed as:

A. Dividing the partner’s capital balance by his profit and loss ratio.
B. Dividing the partner’s total interest by his profit and loss ratio.
C. Dividing the total partnership capital by the combined profit and loss ratio of the partners.
D. Multiplying the distributable assets by the partner’s profit and loss ratio.

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 24. In the cash priority program, which partner gets the first cash distribution?
A. The partner with the largest loss absorption balance.
B. The partner with the smallest loss absorption balance.
C. The partner with the largest interest in the partnership.
D. The partner with the largest profit or loss sharing ratio.

25. In a piece-meal liquidation, the final cash distribution to the partners should be made in accordance with:
A. The ratio of original capital contributions by the partners.
B. The partners’ profit and loss ratio.
C. The ratio of partner’s personal net worth.
D. The partners’ average capital balance ratio.

---END---

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