 PARTNERSHIP FORMATION:

 May be done by:

1. Individuals without existing businesses
2. One sole proprietor and an individual without existing business
3. Both are sole proprietors
*Note: A partnership may be formed by 2 or more persons. 2
persons will be used for the examples to simplify the illustrations.
: An individual may contribute money, property or industry.
Money contributed is measured at Face Value (as ease) and for
property, amount as agreed by partners or if there is no
agreement, at fair market value of the non cash asset.
*Fair market value: the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date
Example: On December 1, 2015, EE and FF formed a
partnership, agreeing to share for profits and losses in the ratio of
2:3, respectively. EE invested a parcel of land that cost him
P25,000. FF invested P30,000 cash. The land was sold for P50,000
on the same date, three hours after formation of the partnership.
How much should be the capital balance of EE right after
formation? Answer: P50,000 because that was the amount received
when the land was sold. That amount refers to the fair market
value and since no agreement for the amount of the land was
settled, the fair market value will be used.
 PARTNERSHIP OPERATIONS:
- Accounting problem for here is the distribution of profit/loss
 The partners may agree to distribute profit/loss
1. Equally
2. In an agreed ratio
3. According to original capital contribution
4. According to capital balances at the beginning of the year
5. According to capital balances at the end of the year
6. According to average capital balances (may be simple average or peso
day/peso month method)

*Note: Salaries, interest on capital contributions and bonus are sometimes given
to partners. Those three are not expenses. In case it was already deducted to
the net income, just work back (add it to the net income to arrive at the correct
net income to be distributed to the partners). Salaries and interests are part of
 the computation of the distribution even though the operations incurred a loss.
Bonus is only given when the partnership earned net income.

: capital contribution ratio and profit/loss ratio are not the same except
when the partners agreed that the profit/loss ratio is according to their original
capital contributions.

: industrial partners have share on the net income but does not share in
the loss.

 PARTNERSHIP ADMISSION:
- A cause of a partnership dissolution (Dissolution- changes in the relationship
of partners)
- The new partner may contribute additional capital to the partnership or buy a
partner’s or partners’ interest in the partnership.
- Total agreed capital is not always the same with the total contributed capital.

 SAMPLE PROBLEMS:
 Partnership Formation:
1. On March 1, 2015, II and JJ formed a partnership with each contributing
the following assets:
II JJ
Cash P300,000 P700,000
Machinery and Equipment 250,000 750,000
Building None 2,250,000
Furniture and Fixtures 100,000 None

The building is subject to mortgage loan of P800,000, which is to be

assumed by the partnership. Partnership agreement provides that II and
JJ share in profits and losses in the ratio of 30:70. What are their
respective capital balances?
2. The same information in Number 2, except that the mortgage loan is not
assumed by the partnership. What is the balance of JJ’s capital?
3. CC admits DD as a partner in business. Accounts in the ledger for CC on
November 30, 2015 just before the admission of DD, show the following
balances:
Cash P6,800
Accounts receivable 14,200
Merchandise inventory 20,000
 Accounts payable 8,000
CC, capital 33,000

It is agreed that for the purposes of establishing CC’s interest, the

following adjustments shall be made:

a. An allowance for doubtful accounts of 3% of accounts receivable is to

be established.
b. The merchandise inventory is to be valued at P23,000
c. Prepaid salary expenses of P600 and accrued rent expense of P800 are
to be recognized

DD is to invest sufficient cash to obtain a 1/3 interest in the partnership.

Compute for: CC’s adjusted capital before the admission of DD and the
amount of cash investment by DD.

4. As of July 1, 2015, FF and GG decided to form a partnership. Their

balance sheets on this date are:
FF GG
Cash P15,000 P37,500
Accounts receivable 540,000 225,000
Merchandise inventory None 202,500
Machinery and equipment 150,000 270,000
Total P705,000 P735,000

Accounts payable P135,000 P240,000

FF, capital 570,000
GG, capital 495,000
Total P 705,000 P735,000

The partners agreed that the machinery and equipment of FF is

underdepreciated by P15,000 and that of GG by P45,000. Allowance for doubtful
accounts is to be set up amounting to P120,000 for FF and P45,000 for GG. The
partnership agreement provides for a profit and loss ratio and capital interest of 60% to
FF and 40% to GG. How much cash must FF invest to bring the partners’ capital
balances proportionate to their profit and loss ratio?

 PARTNERSHIP OPERATIONS:
For nos. 1 to 4:
 Assume that the partnership of Siy and Tiu has a net income of P190,200 before
salaries, interest and bonus to partners. The partnership contract provides the
following:
a. Salaries to Siy and Tiu, P30,000 each.
b. Interest on capital account balances: Siy- P7,000; Tiu- P3,200.
c. Bonus to Siy, 20% of net income.
d. Remaining profit or loss after salaries, interest and bonus, equally.
1. What is the share of each partner in the net income if bonus is computed based
on net income before allowances for salaries, interest and bonus?
2. What is the share of each partner in the net income if bonus is computed based
on net income before allowances for salaries, interest and but after bonus?
3. What is the share of each partner in the net income if bonus is computed based
on net income after allowances for salaries, interest and but before bonus?
4. What is the share of each partner in the net income if bonus is computed based
on net income after allowances for salaries, interest and bonus?
5. Fred, Greg and Henry are partners with average capital balances during 2013 of
P120,000, and P60,000, and P40,000, respectively. Partners receive 10 percent
interest on their average capital balances. A bonus of P30,000 will be also
credited to Henry. After deducting salaries of P30,000 to Fred and P20,000 to
Henry, the remaining profit or loss is divided equally. In 2011, the partnership
sustained a P33,000 loss before interest and salaries to partners. What are the
partners’ shares in the net loss?
6. The partnership agreement of Rey and Serg provides that interest at 10 percent
is to be credited to each partner on the basis of their average capital balances. A
summary of Serg Capital account for the year ended December 31, 2013 is as
follows:
Balance, January 1 P140,000
Additional investment, July 1 40,000
Withdrawal, August 1 15,000
What amount of interest should be credited to Serg capital account for 2013
using the simple average method.
7. Using the same information in no. 6, use the peso-day/peso-month in computing
the average capital balance of Serg.
 PARTNERSHIP ADMISSION:
1. The ALD partnership shows the following profit/loss ratios and capital
balances:
Aquino 60% P252,000
Locsin 30% 126,000
Dizon 10% 42,000
 The partners decide to sell Hizon 20 percent of their respective capital and
profit and loss interests for a total payment of P90,000. Hizon will pay the
money directly to the partners. Compute for the capital balances of the 4
partners and their profit/loss ratio.
2. Ben and Ric are partners who share profits and losses in the ratio of 6:4
respectively. On May 1, 2013, their respective capital accounts were as
follows:
Ben P60,000
Ric 50,000
On that date, Lito was admitted as a partner with a one third interest in
capital and profits for an investment of P40,000. The new partnership
began with a total capital of P150,000. Compute for the capital balances
of the partners.
*Hello AC201! Sorry kung hindi natuloy yung tutorials, wala kasing available na room.
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for questions. Goodluck on you exams! Godbless! – Ate Myra