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PARTNERSHIP OPERATION
INSTRUCTION: FINAL ANSWERS FOR NOS. 1 TO 14 SHOULD BE ON THE DATE AND PARTICULAR
COLUMN ON YOUR WORKSHEET. USE THE OTHER MONEY COLUMNS TO SHOW YOUR
COMPUTATONS.

A. Brian and Rachel agree to form a partnership on July 1, 2014. Brian, who has been trading as a sole
proprietor, will invest certain business assets at agreed valuations, transfer his business liabilities and
contribute sufficient cash to bring his contribution equal to the agreed equity ratio. Details of Brians
assets and liabilities are given below.
Book value
Accounts Receivable (net of 20% provision) P132,000
Inventory
Equipment (book value of 80%)
Accounts Payable
9% Notes Payable (issued March 31)

240,000
322,000
100,000
150,000

Agreed value
25% of receivables doubtful
of collection
138,000
Increase accumulated to30%
100,000
150,000

Rachel agreed to bring in inventory with a value of P146,500 and P93,500 in cash for a 40%
interest in the partnership. All liabilities will be assumed by the partnership including accruals, if any.
The partners have agreed on the following:
12% interest profit based on capital; salaries every quarter of P15,000 and P20,000, respectively, are to be paid
to Brian and Rachel; 10% is to be charged on partners drawings made beyond the agreed salaries, residual profit
of 1:1.
Profit after one year ending June 30, 2015 was P120,500 after closing the revenue and expense
accounts. Tax rate is 30%. Cash withdrawals made by Bruce and Rachel totalled P90,000 and P80,000,
respectively.
Required:
1. Determine adjusted contribution of Brian
2. Brians cash investment, if any.
3. One of the accounts to be transferred to the partnership is the accounts receivable.
Give the account and amount to be debited and credited for this.
4. Profit share of each partner.
5. Entry to comply with the agreement on fluctuating capital.
6. Determine each partners equity.
B. The JR Asia Consultancy Firm which is owned and managed by two CPAS, Joffre and Ric started
operation on March 31, 2015. Initial investments of the partners are: Joffre P800,000 and Ric P400,000.
Profit agreement as shown in the articles of co-partnership follows:
Distribute profit by giving partners a 9% interest on contributions, a 10% bonus treated as a
distribution of profit to Joffre, remaining profit divided equally as both are CPAs.
7. If profit at the end of Dec 31 is reported as P200,000, how much will be Joffres profit share ?
8. If Ric earns a total profit share of P69,750 at the end of 2015, how much will Joffre earn?
9. Ric was not satisfied with the agreement. He wants the bonus to be 10% after interest and bonus. If
Ric earns P69,750, how much will the bonus be?
C. Beth, Luz and Ana established an internet shop and agreed to divide profit and loss in the ratio of 2:1:1
respectively, after giving a monthly salary of P10,000 to each partner and bonus of 20% to Beth. What is
the profit share of Beth based on the following independent situations?
10. Net taxable income earned is P480,000 and 20% bonus is based on net income before salaries but
after bonus and the tax rate is 30%.

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11. Net income after salaries but before tax and bonus is P480,000. 20% bonus is based on net income after tax,
salaries and bonus.
12. Net income is P480,000 including salaries and bonus. 20% Bonus is based on net income before salaries but
after bonus.
13. Net income is P480,000 before salaries bonus and tax. Bonus is based on net income after salaries,
bonus and tax. Salaries and bonus are treated as deductible expenses . Tax rate is 30%.

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D. Marcie and Lance are partners in an appliance business with Lance contributing P3,000,000 and Marcie
P2,000,000. Profit and loss agreement was based on contributions after a salary allowance of P50,000 for each
partner. The profit sharing was revised in 2014 which required a 12% interest on contributions, a salary
allowance of P50,000 only to Marcie as managing partner, residual profit to be divided equally. Profit for the
year 2013 was P350,000 and P360,000 for 2014. It was only in 2015 that an error was discovered in that an
insurance expense was not recognized in 2013. This was paid on June 1, 2013 for an annual insurance of
P12,000 and recorded under the asset method. The prepaid expense is still open as at 2015.
14. What is the correcting entry in 2015?
15. If the drawing accounts show a credit balance of P75,000 for Marcie and P45,000 for Lance at the start of
2015, how much will be the balances of the drawing accounts after the correcting entry?

TEST II. True or False- Answers beside the number. If false, correct the statement by crossing the wrong
word(s) or amounts(s) and place your correction above it.

_____1 Partners regular cash withdrawal is credited to a separate withdrawal account.

_____2. In closing the accounts at the end of a period, the partners' capital accounts are credited for
their share of the partnership loss or debited for their share of the partnership net income
_____3. The statement of changes in partners' equity shows the beginning balance only in the capital
accounts if the accountant uses the fixed capital method.
_____4. The statement of changes in partners equity should present regular salary drawings as a
reduction from equity whether salary allowances withdrawn are of the same amount or not as
agreed in their profit sharing agreement.
_____5. If partners devote their time and services to their partnership, their salaries should be presented
as expenses.
_____6. An industrial partner may receive salary allowance but not interest profit.
_____7. A limited partner may receive interest profit and salary allowance.
_____8. Reggie is a partner in Time To Sleep. An analysis of her capital account indicates that during
the year, her residual share was a loss of P16,000 after a salary allowance of P20,000 which she
withdrew during the year. Her total loss share for the year was P36,000.
_____9. Refer to. No. 8. If Reggies capital account at the end of the year reached P150,000 after she
made an additional mid year contribution of P10,000, her capital balance at the start of the year
must have been P144,000 including beginning drawing balance.
_____10. The accountant briefly explained this entry as cash investment of Helen with bonus given by
the other partners:
Cash
900,000
Ben Chan, Capital
50,000
Rose Jocson, Capital
50,000
Helen Reyes, Capital
800,000
11. Duran and Vera formed a partnership with capital contributions of P150,000 and P200,000,
respectively. Their partnership agreement called for Duran to receive a P50,000 annual salary
allowance and a 20% bonus on net income after salaries and interest. They also agreed to allow each
partner a share of income equal to 10% of their initial capital investments. The remaining income or
loss is to be divided equally. If the net income for the current year is P120,000 before a 30% tax, no
bonus should be given to Duran.

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SOLUTION PARTNERSHIP OPERATION
A. 1.and 2 Brians Contribution:
Accts Receivable (132,000/.8 x .75)
Inventories
Equipment 322,000/.8 x .7
Accounts Payable

123,750
138,000
281,750
(100,000
)
(150,000
)
( 3,375
)
290,125

9% Notes Payable
Interest Payable (150,000 x .09 x 3/12)
Adjusted contribution
Total Agreed (146,500 + 93,500) /40%
Agreed Equity for Brian
Additional cash investment

600,000
.6

360,000
69,875

3. Investment entry required for accts receivable:

Accts Receivable
Allowance for Doubtful Accounts

165,000
41,250

4. Profit share:
Profit |Distribution Table
12% interest on contributions
Salaries
10% charge on excess drawings
Remainder 1:1
Total (120,500 x .7)

Brian
43,200
60,000
(3,000)
(62,325)
37,875

Rachel
28,800
80,000
(62,325)
46,475

Total
72,000
140,000
( 3,000)
(124,650)
84,350

5. Entry to close drawing using fluctuating capital method:

Brian, Capital

52,12
5
33,52
5

Rachel, Capital
Brian, Drawing
Rachel Drawing

52,125
33,525

Brian, Drawing
9/30 to
6/30
Balance

90,000
52,125

6/30

Rachel, Drawing
37,875

9/30 to
6/30
Balance

80,000
33,525

6/30

6. Partners Equity as at June 30: Brian (360,000 52,125) P307,875

Rachel (240,000 33,525) P206,475
B. 7.
Profit |Distribution Table
Joffre
Ric
Total
6.75 % interest on contributions
54,000
27,000
81,000
10% bonus on P200,000
20,000
20,000
Remainder equally
49,500
49,500
99,000
123,500
76,500
200,000

46.475

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8.
Profit |Distribution Table
6.75 % interest on contributions
10% bonus
Remainder equally

Joffre
Ric
Total
54,000
27,000
81,000
18,500
18,500 *
42,750
42,750
85,500
115,250
69,750
185,000#
# (81,000 + 85,500) / .9= 185,000 x 10% = 18,500*

9. Joffre 54,000 + 42,750 + 10% of 85,500* = P 105,300

* bonus is based on residual profit (net income after interest and bonus)
C. 10. NI after tax 480,000 x .7= P336,000
Profit |Distribution Table
Beth
Salaries
120,000
Bonus (336,000/1.2) x .2
56,000
Remainder
(40,000)
Total (480,000 x .7)
136,000

Total
360,000
56,000
(80,000)
336,000

11.
Profit |Distribution Table
Beth
Total
Salaries
120,000
360,000
Bonus
38,000
38,000*
Remainder
95,000
190,000
Total
253,000
588,000#
#(480,000+360,000) x .7= 588,000
*588,000 360,000= NI Aft salaries 228,000/1.2 x .2
12.
Profit |Distribution Table
Beth
Salaries
120,000
Bonus
80,000
Remainder
20,000
Total
220,000
#(480,000 /1.2= 400,000 x .2
13.

Total
360,000
80,000
40,000
480,000

a) Tax= 30% (480,000-360,000-B)

= 144,000-108,000-.3B

c)Tax= 36,000 - .3(14,736.84)

= 31,579

b) Bonus= 20%(480,000 360,000- B (36,000-.3B)

= 96,000- 72,000 -.2B 7,200+ .06B
1.14 = 16,800
= 14,736.84
Distribution Table
Salaries
Bonus
Remainder
Total

Beth
120,000.0
0
14,736.8
4
36,842.0
8
171,578.9
2

Total
360,000.00
14,736.84
73,684.16
448,421.00

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Question: What was the net income for distribution? 480,000 31,579= 448,421
D. 14.
2013 If prepaid for 7 months was not recorded, then profit is overstated:
12,000 x 7/12= 7,000 x 60%= P4,200 for Marcie and P2,800 for Lance
2014 again prepaid was not recorded for the balance of P5,000 overstating reported profit. Decrease share
of Marcie and Land 5,000/2= P2,500 each
Total adjustment to decrease the drawing accounts should be P6,700 for Marcie and P5,300 for Lance.
Adjusted drawing balances: Marcie 75,000 6,700= P68,300
Lance 45,000 5,300 = P39,700
15. Correcting entry:
Marcie, Drawing
6,700
Lance, Drawing
5,300
Prepaid Insurance
12,000

Under the asset method, advance payments are recorded by debiting a prepaid expanse account.
At the end of the period, an adjusting entry should be prepared for the expired portion.
TEST II. True

nos. 3, 4, 6,7, 11

False
1 Partners regular cash withdrawal is credited debited to a separate withdrawal account
2. In closing the accounts at the end of a period, the partners' capital drawing accounts are credited
debited for their share of the partnership loss or debited credited for their share of the partnership net
income
5. If partners devote their time and services to their partnership, their salaries should be
presented as expenses distribution of profit.
8. Reggies total profit share is P36,000 4,000 (20,000 salary 16,000 share in loss).
9 Reggies beginning capital must have been P 144,000 P156,000.
10. Cash investment of Helen with bonus given by to the other partners.