Calamba Review Center - Laguna (LCRC)

2F MMCO Building, 8000 Lakeview Ph3 Angela Street, Halang, Calamba City Laguna, Philippines
Tel No. (02) 330-8617, (049) 523-6031; (02) 330-6057
CPA REVIEW (May 2020 Batch)
AFAR Marc Oliver Castañeda, CPA MBA

PARTNERSHIP FORMATION
There are no authoritative pronouncements concerning the accounting for partnership. The principles described have
evolved through accounting practice.

Partnership Formation
The partnership is a separate accounting entity (not to be confused with a separate legal entity), and therefore its
assets and liabilities should remain separate and distinct from the individual partner’s personal assets and liabilities.
All assets contributed to the partnership are recorded by the partnership at their fair market values. All liabilities
assumed by the partnership are recorded at their present values.
Upon formation, the amount credited to each partner’s capital account must be equal to the amount of cash contributed
or equal to the fair market value of the noncash contributed or equal to the difference between the fair market value of
the assets (including goodwill, if any) contributed and the present value of the liabilities assumed from the partner. The
capital accounts represent the residual equity of the partnership. The capital account of each partner reflects all of the
activity of an individual partner; contributions, withdrawals, and the distributive share of net income (loss). In some cases, a
drawing account is used as a clearing account for each partner’ transactions with only the net effect of each period’s activity
shown in the capital account.

Example: Partnership Formation

A and B form a partnership. A contributes cash of P50,000, while B contributed land with a fair market value of

P50,000 and the partnership assumes a liability on the land of P25,000.

The entry to record the formation of the partnership is

Cash P50,000
Land 50,000
Liabilities P25,000
A, capital 50,000
B, capital 25,000
Sometimes, a partner will contribute intangible benefit to the partnership like good management skills, good business
reputation, business connections, or anything that will bring in higher income to the business. The partners may agree to
quantify this in the form of either goodwill or bonus.
Example: C and D agreed to form a partnership, with C contributing P100,000 cash and D contributing P150,000 cash. The
partners agreed that C will also contribute an intangible benefit to the business for C to have an initial equal interest in the
partnership.

If the bonus method is to be used, the entry in the partnership books must be:
(1) To record the initial contribution of partners:
Cash P250,000
C, Capital P100,000
D. Capital 150,000

(2) To record the bonus recognized:

D, Capital P25,000
C, Capital P25,000

If the goodwill method is to be used, the entry in the partnership books must be:
(1) To record the initial contribution of partners:
Cash P250,000
C, Capital P100,000
D. Capital 150,000
(2) To record the goodwill recognized:
Goodwill P50,000
C, Capital P50,000

The use of either method must be explicitly stated in the problem, otherwise the use of bonus method is preferable over
goodwill method.

Sometimes, two or more single proprietorships may wish to combine their businesses and agree to form a partnership. In this
case, the assets and liabilities of the sole proprietors are normally restated or revalued to their fair values in order to adjust their
capital accounts prior to recording their contributions in the partnership books. The restated or revalued capitals are now the
partners’ initial contribution.

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Example: Mr. T and Mr. D decided to form a partnership on January 3, 2020, to be called the TD Merchandising. The following
are their respective balance sheets immediately before the formation:

T Store
Balance Sheet
December 31, 2019

Assets Liabilities and Capital

Cash P130,000 Accounts Payable P125,000
Accts. Receivable 100,000 T, Capital 355,000
Merchandise Inventory 200,000
Furniture 50,000_ _______
Total P480,000 Total P480,000

D Store
Balance Sheet
December 31, 2019
Assets Liabilities and Capital
Cash P 15,000 Accounts Payable P 15,000
A/R P40,000 Notes Payable 20,000
Less: ADA 4,000 36,000 Duterte, Capital 79,500
Merchandise Inventory 50,000
Furniture P15,000
Less: A/D 1,500 13,500 ________
Total P114,500 P114,500

The two partners agree to the following adjustments:

1. That P20,000 of Mr. T’s accounts receivable be written off.
2. That Mr. T’s furniture has a market value of P40,000.
3. That accrued expenses of P25,000 be recognized on Mr. T’s books.
4. Mr. D’s estimated uncollectible accounts should be 5% of the outstanding accounts receivable.
5. The fair value of Mr. D’s furniture is P12,000.
6. Total partners’ equity should be P400,000 with Mr. T’s interest
representing 75%.
The most likely question will be how much capital must be recorded in the partnership books. Then your answer must be
P300,000 for Mr. T and P100,000 for Mr. D. The partnership balance sheet immediately after its formation will be presented as
follows:

TD Merchandising
Balance Sheet
January 3, 2020

Assets Liabilities and Capital

Cash P145,000 Accounts Payable P140,000
Accts. Rec. 120,000 Notes Payable 20,000
Less: ADA 2,000 118,000 Accrued Expenses 25,000
Merchandise Inventory 250,000 T, Capital 300,000
Furniture 52,000 D, Capital 100,000
Goodwill 20,000 _
Total P585,000 P585,000

QUIZZER
1. Aiden, Amelia and Madison formed a partnership on April 30, with the following assets, measured at their fair market
values, contributed by each partner:
Aiden Amelia Madison
Cash P 100,000 P 120,000 P 300,000
Automobile 85,000
Delivery trucks 280,000
Computer and printer 51,000
Office furniture 35,000 25,000
Land and building 1,500,000
P 1,685,000 P 486,000 P 325,000

Although Madison has contributed the most cash to the partnership, he did not have the full amount of P 300,000 available
and was forced to borrow P 200,000. The land and building contributed by Aiden has a mortgage of P 900,000 and the
partnership is to assume responsibility of the loan. If the profit and loss sharing agreement is 40 percent, 40 percent, and
20 percent, respectively, for Aiden, Amelia and Madison, what is the total capital investment of all the partners at the
opening of business on April 30?
a. P 2,496,000 b. P 1,596,000 c. P 1,396,000 d. P 1,664,000

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 2. C, P and A are new CPA’s and are to form an accounting partnership. C is to contribute cash of P75,000 and his computer
originally bought at P80,000 but has a second hand value of P50,000. P is to contribute cash of P100,000, and tables and
chairs worth P20,000 but acquired by P for only P18,000. A, whose family is selling computers, is to contribute cash of
P40,000 and a brand new computer plus printer with regular price at P80,000 but which cost their family’s computer
dealership P70,000. Partners agree to share profits 3:2:3. The capital balances of C, P and A, respectively, upon formation
are:
a. P155,000; P118,000 and P110,000 c. P143,625; P95,750 and P143,625
b. P125,000; P120,000 and P120,000 d. P136,875; P91,250 and P136,875

3. A, B, and C are forming a new partnership each contributing cash of P200,000 and their respective office equipment and
supplies valued at P100,000, P200,000, and P300,000, respectively. A’s noncash contribution is his own developed audit
software valued at cost which he could sell for trice the amount. Partners agree to admit his software at market value and
they will share profits equally. The capital balances of A, B, and C, respectively, are:
a. P300,000; P400,000; and P500,000 c. P500,000; P400,000; and P500,000
b. P400,000; P400,000; and P400,000 d. P466,666; P466,666; and P466,667

4. Elijah developed an interesting idea for marketing sailboats in Death Valley. He interested Caleb in joining him in a
partnership. Following is the information you have collected relative to their original contributions.
Caleb contributed P30,000 cash, a tract of land, and delivery equipment. Elijah contributed P60,000 cash. After giving
special consideration to the tax bases of the assets contributed, the relative usefulness of the assets to the partnership
versus the problems of finding buyers for the assets and contributing cash, and other such factors, the partners agreed that
Elijah’s contribution was equal to 40 percent of the partnership’s tangible assets, measured in terms of the fair value of the
assets to the partnership. However, since the marketing idea originated with Elijah, it was agreed that he should receive
credit for 50 percent of the recorded capital. Recent sales of land similar to that contributed by Caleb suggest a market
value of P40,000. Likewise, recent sales of delivery equipment similar to that contributed by Caleb suggest P40,000 as the
market value of the equipment. These sales, of course, were not entirely representative of the particular assets contributed
by Caleb and therefore may be a better indicator of their relative values than their absolute values. In reflecting on their
venture, the partners agree that it is a rather risky affair in respect to anticipated profits. Hopefully, however, they will be
able to build good customer relations over the long run and establish a permanent business with an attractive long-term
rate of return.

Under the most appropriate method, given the circumstances, the entry to record the formation of partnership must be:
a. Cash 90,000 c. Cash 90,000
Delivery equipment40,000 Delivery equipment 40,000
Land 40,000 Land 40,000
Elijah, capital 60,000 Goodwill 50,000
Caleb, capital 110,000 Elijah, capital 110,000
Caleb, capital 110,000
b. Cash 90,000
Delivery equipment 40,000 d. Cash 90,000
Land 40,000 Delivery equipment 40,000
Elijah, capital 85,000 Land 40,000
Caleb, capital 85,000 Elijah, capital 102,000
Caleb, capital 68,000

5. C Cola and R. Crown formed a partnership and agree to divide initial partnership capital equally, even though C. Cola
contributed P50,000 in identifiable assets and R. Crown contributed P42,000. Such an agreement implies that R. Crown is
contributing an unidentifiable assets such as individual talent, established clientele, or banking connections to the
partnership.
The unidentifiable asset is not recorded on the partnership books, the journal entry necessary to establish equal capital
interest is:
a. Cash P92,000 c. C. Cola, capital P4,000
C. Cola, capital P50,000 R. Crown, capital P4,000
R. Crown, capital 42,000
b. Cash P92,000 d. R. Crown, capital P4,000
C. Cola, capital P46,000 C. Cola, capital P4,000
R. Crown, capital 46,000

6. The balance sheet as of July 31, 2016, for the business owned by Sunshine, shows the following assets and liabilities:
Cash 50,000 Furniture and Fixtures P164,000
Accounts receivable 134,000 Accounts payable 28,800
Merchandise inventory 220,000

It is estimated that 5% of the receivables will prove uncollectible. The cash balance includes a 1,000 shares marketable
equity securities recorded at its cost, P4,000. The stock last sold on the market at P17.50 per share. Merchandise inventory
includes obsolete items costing P18,000 that will probably realized only P4,000. Depreciation has never been recorded;
however, the furniture and fixtures are two years old, have an estimated total life of 10 years, and would cost P240,000 if
purchased new. Prepaid items amount to P5,000. Paulo is to be admitted as a partner upon investing P200,000 cash and
P100,000 merchandise. How much capital is to be credited to Sunshine upon formation of partnership?
a. P539,200 b. P613,000 c. P565,000 d. P606,200

7. Darwin and Sanders are joining their separate businesses to form a partnership. Property and cash are to be contributed for a
total capital of P400,000. The property to be contributed and liabilities to be assumed are:
Page 3 of 25
 Darwin Sanders
Book value Fair value Book value Fair value
Accounts receivable 30,000 P 30,000
Inventories 30,000 45,000 P80,000 P 90,000
Equipment 50,000 40,000 90,000 95,000
Accounts payable 15,000 15,000 10,000 10,000
The partners’ capital accounts are to be equal after all contributions and assumptions of liabilities. Profit and loss ratio is
45% Darwin and 55% Sanders.
The amount of cash Darwin and Sanders must contribute:
a. P200,000; P200,000, respectively c. P5,000; P70,000, respectively
b. P80,000; P45,000, respectively d. P100,000; P25,000, respectively

8. Paul admits Timothy as a partner in business. Accounts in the ledger for Paul on November 30, 2017, just before the
admission of Timothy, show the following balances:
Cash P 26,000 Accounts payable P 62,000
Accounts receivable 120,000 Paul, capital 264,000
Merchandise inventory 180,000
It is agreed that for purposes of establishing Paul’s interest the following adjustments should be made:
1. An allowance for doubtful accounts of 2% of accounts receivable is to be established.
2. The merchandise inventory is to be valued at P202,000.
3. Prepaid expenses of P6,500 and accrued liabilities of P4,000 are to be established.

Timothy is to invest sufficient funds in order to receive a 1/3 interest in the partnership. How much must Timothy
contribute?
a. P132,000 b. P143,050 c. P95,360 d. P88,000

9. Effective August 1, 2017, Alex and Bob agreed to form a partnership from their two respective proprietorships. The balance
sheets presented below reflect the financial position of both proprietorships as of July 31, 2017:
ALEX BOB
Cash P 12,000 P 30,000
Accounts Receivable 72,000 42,000
Merchandise Inventory 198,000 252,000
Prepaid Rent 24,000
Store Equipment 240,000 180,000
Accumulated Depreciation (90,000) (108,000)
Building 750,000
Accumulated Depreciation (150,000)
Land 360,000 _
Totals P1,392,000 P420,000

Accounts Payable P 45,000 P 18,000

Mortgage Payable 360,000
Alex, Capital 987,000
Bob, Capital _ 402,000
Totals P1,392,000 P420,000

As of August 1, 2017, the fair value of Alex’s assets were: merchandise inventory, P162,000; store equipment, P90,000;
building, P1,500,000; and land, P600,000. For Bob, the fair value of the assets on the same date were: merchandise
inventory, P270,000; store equipment, P39,000; prepaid rent, P 0. All other items on the two balance sheets were stated at
their fair values. How much capital must be credited to Alex upon formation of partnership?
a. P2,031,000 b. P1,791,000 c. P363,000 d. P2,394,000

10. Roy admits Al as a partner in the business. Balance sheet accounts of Roy on September 30, just before admission of Al
show:
Cash P 15,600
Accounts receivable 72,000
Merchandise inventory 108,000
Accounts payable P 37,200
Roy, capital 158,400
It is agreed that for purposes of establishing Roy’s interest, the following adjustments shall be made:
a. An allowance for doubtful accounts of 2% is to be established.
b. Merchandise inventory is to be valued at P121,200
c. Prepaid expenses of P2,100 and accrued expenses of P2,400 are to be recognized.
Al is to invest sufficient cash to obtain a 1/3 interest in the partnership. How much is Al’s investment to the partnership?
a. P84,930 b. P105,600 c. P85,830 d. P47,520

11. On Sept. 1, 2017, the business assets and liabilities of Garfield and Betty are as follows:
Garfield Betty
Book Value Fair Value Book Value Fair Value
Page 4 of 25
 Cash P56,000 P56,000 P124,000 P124,000 Garfield and Betty agreed to form a
Accounts Receivable 400,000 360,000 1,200,000 1,120,000 partnership and to share profits
Inventories 240,000 228,000 400,000 386,000 based on their capital contribution.
Land 1,200,000 1,300,000 The capital amount to be recorded
Building 1,000,000 1,040,000 for Garfield and Betty, respectively
Furniture and Fixtures 100,000 90,000 70,000 66,000 are:
Other Assets 4,000 6,000 a. P1,536,000 and P1,274,000
Accounts Payable 360,000 360,000 500,000 500,000 b. P1,274,000 and P1,536,000
Notes Payable 400,000 400,000 700,000 700,000 c. P1,240,000 and P1,600,000
d. P1,282,000 and P1,536,000

12. Francis, Chris, and Ivan are to form a partnership. Francis is to contribute cash of P350,000; Chris, P35,000; and Ivan,
P350,000. Francis and Ivan are not to actively participate in the business, but will refer customers, while Chris will manage
the firm. Chris has to give up his present job, which gives him an annual income of P420,000. The partners decided that
profits & losses should be shared equally. Upon formation, partners’ capital balances would respectively be:
a. P245,000; P245,000; and P245,000
b. P350,000; P35,000; and P350,000
c. P350,000; P455,000; and P350,000
d. P385,000; P385,000; and P385,000

Questions 13 and 14 are based on the following:

X and Y are partners sharing profits 60:40. A balance sheet prepared for the partnership on April 1, 2017 shows the
following:
Cash P 48,000 Accounts payable P 89,000
Accounts receivable 92,000 X, capital 133,000
Inventory 165,000 Y, capital 108,000
Equipment 70,000
Accumulated depreciation ( 45,000) -
P 330,000 P330,000

On this date, the partners agree to admit Z as a partner. The terms of the agreement is that assets and liabilities are to be
restated as follows:
a. An allowance for possible uncollectibles of P 4,500 is to be established.
b. Inventories are to be restated at their present replacement values of P 170,000.
c. Equipment are to be restated at a value of P 35,000.
d. Accrued expenses of P 4,000 are to be recognized.

X, Y, and Z will divide profits in the ratio of 5:3:2. Capital balances for the new partners are to be in this ratio with X and Y
making cash settlement outside of the partnership for the required capital adjustment between themselves and Z investing
cash in the partnership for his interest.

13. How much cash Z should contribute?

a. P 61,875 b. P 49,496 c. P 60,250 d. P 50,625
14. What capital adjustments should be made between X and Y?
a. X must pay Y, P17,785. c. X must invest cash of P17,785.
b. Y must pay X, P17,785. d. Y must invest cash of P17,785.

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PARTNERSHIP OPERATIONS
Allocation of Partnership Income (Loss)
The partners should have a written agreement, called articles of co-partnership, specifying the manner in which partnership
income (loss) is to be distributed. Note that in the absence of a predetermined agreement, the profit and loss (P&L) is divided
according to original capital contributed by partners.
A number of issues arise which complicate the allocation of partnership income (loss).
1. Partners may receive interest on their capital balances. If so, it must be determined what constitute the capital balance
(e.g., the year-end amount of some type of weighted-average).
2. Some of the partners may receive a salary.
3. Some of the partners may receive a bonus on distributable net income. If so, you need to determine if the bonus should
be computed before or after salary, interest and bonus allocations.
4. A formula needs to be determined for allocating the remaining income. The formula agreed upon is usually termed the
residual, remainder, or profit (loss) sharing ratio.

Finally, the partners should decide upon how income is to be allocated if net income is insufficient to cover partner’s
salaries, bonuses, and interest allocations. These allocations are usually made even if the effect is to create a negative
remainder. This is important to note that partners may choose to allocate losses (or a negative remainder) in a different manner
than income.
Example: Partnership P & L Distribution
A, capital P300,000; B, capital P100,000; and C, capital P50,000
Partners receive 5% interest on beginning capital balances
Partner B receives a P60,000 salary
Partner C receives a 10% bonus after interest and salaries
The P&L ratios are A – 50%; B – 30%; C – 20%
Assuming partnership net income of P182,500, the distribution schedule would be prepared:
A B C Total
5% interest on beginning capital P15,000 P 5,000 P 2,500 P 22,500
Salary to partner B 60,000 60,000
Bonus to partner C after interest 10,000* 10,000
& salaries
Remaining distribution 50:30:20: 45,000 27,000 18,000 90,000
Total share P60,000 P92,000 P30,500 P182,500
*(P182,500 – P22,500 – P60,000) x .10 = P10,000
Note that if the interest, salary, and bonus allocation had exceeded net income, the excess would have been deducted on
the distribution schedule in the P&L ratio.
Note also, that if the bonus is based on net income after interest, salary and bonus then, bonus would have been computed
as follows: P182,500 – P22,500 – P60,000 divided by 110% x 10%.

Sometimes, problems in the CPA board exam will require the examinee to determine first the net income before allocation is
made. In this case, the method of determining net income must first be determined in order to compute the distributed net
income. If the problem is silent as to the method used, then the generally accepted method must be the accrual basis of
accounting net income.

QUIZZER
1. Jayden and Aria formed the J & A partnership several years ago. Capital
account balances on January 1, 2017 were: Jayden, P993,500; and Aria,
P536,500.

The partnership agreement provides Jayden with an annual salary of P20,000

plus a bonus of 5% of partnership net income for managing the business. Aria
is provided an annual salary of P30,000 with no bonus. The remainder is shared
evenly. Partnership net income for 2017 was P60,000. Aria and Jayden each
invested an additional P10,000 during the year to finance a special purchase.
Year-end drawing account balances were P30,000 for Jayden and P20,000 for
Aria. Aria’s capital balances as of December 31, 2017 should be:
a. P560,000 b. P1,000,000 c. P998,750 d. P561,250

2. D, S, and T have capital balances of P30,000, P20,000, and P40,000,

respectively. Their P/L ratio is 10% interest on capital balances; S is entitled to
a salary of P12,000; T is guaranteed a minimum share of P24,000 and
remainder is divided 30:30:40.
The minimum profit to give an aggregate of P20,000 to S is:
a. P60,000 b. P53,000 c. P56,000 d. P49,000

3. G and H formed a partnership on January 2, 2017, and agreed to share income

90%, 10%, respectively. G contributed a capital of P25,000. H contributed no
capital but has a specialized expertise and manages the firm full-time. There
were no withdrawals during the year. The partnership agreement provides for
the following:
a. Capital accounts are to be credited annually with interest at 5% of
beginning capital.
b. H is to be paid a salary of P1,000 a month.
Page 6 of 25
 c. H is to receive a bonus of 20% of income calculated before deducting
his bonus, his salary, and interest on both capital accounts.
d. Bonus, interest, and H’s salary are to be considered partnership
expenses.

The partnership’s 2017 income statement follows:

Revenues P 96,450
Expenses (including salary, interest and bonus) 49,700
Net income P 46,750
How much is the total share of H on the 2017 partnership net income?
a. P31,675 b. P28,650 c. P32,388 d. P28,338

4. Roel and Jekell, partners, divide profits and losses on the basis of average
capitals. Capital accounts for the year ended December 31, 2017, are shown
below. The net profit for 2017 is P270,000. (Changes in capitals during the first
half of a month are regarded as effective as of the beginning of the month;
changes during the second half of a month are regarded as effective as of the
beginning of the following month.)
Roel, Capital Jekell, Capital
Debit Credit Debit Credit
January 1 P600,000 P660,000
March 9 P 100,000
April 14 300,000
July 1 200,000
September 4 P80,000
September 22 200,000
October 26 150,000

The share of Roel on the 2017 profit is:

a. P114,500 b. P154,500 c. P115,500 d. P125,260

5. Dianne and David created a partnership to own and operate a health food
store. The partnership agreement provided that Dianne receive a salary of
P20,000 and David a salary of P10,000 to recognize their relative time spent in
operating the store. Remaining profits and losses were divided 60:40 to Dianne
and David, respectively. Income for 2016, the first year of operations, of
P26,000 was allocated P17,600 to Dianne and P8,400 to David.
On January 1, 2017 the partnership agreement was changed to reflect the fact
that David could no longer devote any time to the store’s operations. The new
agreement allows Dianne a salary of P36,000 and the remaining profits and
losses are divided equally. In 2017 an error was discovered such that the 2016
reported income was understated by P8,000. The partnership income of
P50,000 for 2017 included this P8,000 related to 2016.

By what amount should Dianne’s capital change in 2017?

a. P 39,000 b. P46,200 c. P43,800 d. P43,000

6. L, M, and N are partners with capital balances on January 1, 2017 of

P1,200,000, P480,000, and P240,000, respectively. They agreed to share profits
and losses as follows:
a. Salary allowances of L, P192,000; M, P240,000, and N, P240,000.
b. 6% interest allowed on beginning of the year’s capital balances.
c. The managing partner, L to be entitled to a 20% bonus after allowing
as expenses partners’ salaries , interest and bonus; and
d. Profits after partners’ salaries, interest, and bonus to be divided
equally.

For the year 2017, the partnership reported profit before interest, salaries and
bonus of P1,176,000. For the year, the partners’ drawings were L, P408,000, M,
P80,000 and N, P424,000. Each partner’s share in the profits after salaries,
interest and bonus was
a. P 108,000 b. P 129,600 c. P 392,000 d. P 103,680

7. X, Y and Z formed a partnership on November 10, 2016, known as XYZ

Trading. X and Y each contributed P60,000 cash. Z contribution consisted of
100 shares of A Company stock which had cost him P40,000. On November 10,
2016, the stock had a market value of P60,000. The net profit from operations,
after adjustment is P236,700 as of December 31, 2017, and after considering
the following information:
a. Personal consumption of partners and families is P4,000 for each partner per
month.
b. Each of the partners devote full time to the business an withdrew P3,000
Page 7 of 25
 per
week in 2017.
Ignoring result of operation for the prior year, the capital account of each
partner as of December 31, 2017 is:
a. X, P90,900; Y, P90,900; Z, P90,900
b. X, P138,900; Y, P138,900; Z, P138,900
c. X, P186,900; Y, P186,900; Z, P186,900
d. X, P330,900; Y, P330,900; Z, P330,900

8. Eddy and Freddy operate The Gourmet Restaurant as a partnership. Their

partnership agreement has the following provisions for sharing profits and
losses:
A. Income is distributed only as far as it is available.
B. Available income is to be distributed in the following
sequence:
1. Eddy, who is the chef, gets a salary of P50,000 a year; Freddy, who
is still learning, gets a salary of P20,000.
2. Interest is imputed on the average capital balances at 15 percent.
3. Any remaining profits and losses are to be shared equally.

The average capital balances during the year were P40,000 for Eddy and
P100,000 for Freddy. If the partnership income for the year is P35,000, it
should be distributed to the partners as follows:
a. Eddy P16,000; Freddy P19,000
b. Eddy P17,500; Freddy P17,500
c. Eddy P25,000; Freddy P10,000
d. Eddy P28,000; Freddy P7,000

9. Rubi, Gwen, and Celine have been partners throughout 2017. Their average
balances and their balances at the end of the year before closing the nominal
accounts are as follows:
Partner Average Balances Balances, 12/31/17
Rubi P97,500 P70,000
Gwen 7,300 11,800
Celine 4,250 1,700 (debit balance)
The income for 2017 is P103,500 before charging partners’ salary allowances
and before payment of interest on average balances at the agreed rate of 4%
per annum. Annual salary allocations are P12,500 to Rubi, P8,750 to Gwen, and
P6,250 to Celine. The balance of the profits is to be allocated at the rate of
60% to Rubi, 10% to Gwen, and 30% to Celine.

It is intended to distribute cash to the partners so that, after credits and

allocations have been made as indicated in the preceding paragraph, the
balances in the partners’ accounts will be proportionate to their residual profit-
sharing ratios. None of the partners is to invest additional cash, but they wish
to distribute the lowest possible amount of cash.

How much are capital balances of Rubi, Gwen and Celine, respectively.
a. P52,422; P8,737 and P26,211
b. P129,383; P28,006 and P26,211
c. P110,160; P18,360 and P55,080
d. P168,036; P28,006 and P84,018

10. Sin and Vidal were partners. Shortly before the close of 2017 their bookkeeper
left suddenly, and they disagreed about the manner of distributing 2017’s net
loss from operations, which amounted to P3,380 before consideration of
interest (the partners agree that the rate is 5%), salaries or drawings. They ask
you to arbitrate the matter. You believed that the best evidence of their
understanding is the manner in which the distribution of earnings was made in
earlier years. The partners agree that the division of the 2016 net income of
P48,990 was made in accordance with their understanding of their profit-
sharing agreement. The partners’ capital accounts for the years 2016 and 2017
are shown below:

Sin, capital
-------------------------------------------------------------------------------------------------
Dec. 31, 2016 Salary P 12,000 Jan. 1, 2016 Balance P120,000
31, 2016 Drawings 3,930 July 1, 2016 Investment 4,800
Balance 130,000 Dec. 31, 2016 Net income 21,130
P 145,930 P145,930
Jan. 1, 2017 Balance 130,000
Sept. 1, 2017 Investment 3,600
Vidal, capital

Page 8 of 25
 -------------------------------------------------------------------------------------------------
May 1, 2016 Excess withdrawal P 6,000 Jan. 1, 2016 Balance P 180,000
Dec. 31, 2016 Salary 16,000 Nov. 1, 2016 Investment 6,000
31, 2016 Drawings 2,660 Dec. 31, 2016 Net income 27,860
Balance 189,200 .
P213,860 P213,860
Jan. 1, 2017 Balance P189,200
How should the loss for 2017 be divided between Sin and Vidal?
a. Sin, (P1,458); Vidal, (P1,922) c. Sin, (P5,140); Vidal, P1,760
b. Sin, (P1,649); Vidal, (P1,731) d. Sin, (P1,352); Vidal, (P2,028)

11. X, Y and Z have been partners throughout the year 2017. Their average
balances for the year and their balances at the end of the year before closing
the nominal accounts are as follows:
Balances
Average Balances Dec. 31, 2017
X (Cr.) P900,000 (Cr.) P600,000
Y (Cr.) 30,000 (Dr.) 10,000
Z (Cr.) 70,000 (Cr.) 100,000
The profit for 2017 is P750,000 before charging partners’ drawing allowances
and before interest on average balances at the agreed rate of 4% per annum. X
is entitled to a drawing account credit of P100,000, Y of P70,000, and Z of
P50,000 per annum. The balance of the profit is to be distributed at the rate of
60% to X, 30% to Y, and 10% to Z.
The partners agreed that, after credits and distribution as indicated in the
preceding paragraph, it is intended to adjust the capital accounts of partners by
investing the highest amount of cash, so that, the balances in the partners’
accounts will be proportionate to their profit-sharing ratios. None of the
partners will withdrew cash from the partnership.

What amount of investment must be made by each partners.

a. X, none; Y, P578,000 and Z, none
b. X, P180,800, Y, P397,200; Z, none
c. X, none; Y, P296,800 and Z, none
d. X, none; Y, P296,800 and Z, (P30,133)

Items 12 and 13 are based on the following:

Partners E, F and G have capital balances in a partnership of P70,000, P30,000,
and P900,000, respectively. The losses for the year are P120,000.

12. What will be the capital balance of F if the three partners share profits and
losses at 2:2:6 ratio?
a. P6,000 credit balance. c. P24,000 debit balance.
b. P10,000 debit balance. d. P40,000 debit balance.

13. What will F’s capital be if E gets a P140,000 salary, F gets a P50,000 salary, and
G gets a 10% interest on her beginning capital balance, with the remaining
being divided at a 1:1:2 ratio?
a. Zero c. P10,000 debit balance.
b. P20,000 debit balance. d. P70,000 debit balance.

14. O and M formed the KERN Partnership several years ago. Capital account
balances on December 31, 2017, after closing were as follows:
O P500,000
M 280,000
The partnership agreement provides O with an annual salary of P10,000 plus a
bonus of 5% of partnership net income for managing the business. M is
provided an annual salary of P15,000 with no bonus. The remainder is shared
evenly. Partnership net income for 2017 was P30,000. O and M each invested
additional P5,000 during the year to finance a special purchase. Year- end
drawing account balances were P15,000 for O, and P10,000 for M. The capital
balances of O and M on January 1, 2017 were:
a. P503,250 and P291,750. c. P505,000 and P290,000.
b. P496,750 and P268,250. d. P480,000 and P310,000.

15. A, B and C are partners sharing profit on a 7:2:1 ratio, respectively. On

January 1, 2017, Lexus was admitted into the partnership with a 15% share in
profits. The old partners continue to participate in the profits in their original
ratios. For the year 2017, the partnership showed profits of P15,000.
However, it was discovered that the following items were omitted from the
firm’s books:
Page 9 of 25
 Unrecorded at Year- end 2016 2017
Accrued expense P1,050
Accrued income 875
Prepaid expense P1,400
Unearned income 1,225
The share of B in the 2017 profits should be:
a. P2,197.50 b. P2,490.50 c. P2,637.00 d. P3,149.75

16. Partners R and S share profits 3:1 after annual salary allowances of P40,000
and P60,000, 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
P90,000 were reported for the year 2017. In 2015, it is ascertained that in
calculating net income for the year ended December 31, 2017, depreciation
was overstate by P36,000 and ending inventory was overstated by P8,000.

The adjustment to the capital of R and S amounted to

a. P29,500 and P14,500 c. P17,500 and P10,500
b. P36,000 and P54,000 d. P53,500 and P64,500
CHANGES IN PARTNERSHIP
Partnership Dissolution (Changes in Ownership)
Partnership dissolution occurs whenever there is a change in ownership (e.g., the addition of a new partner, or the
retirement, withdrawal or death of an existing partner). We will also include in this handout the incorporation of a
partnership, that is, change from a partnership form of organization to a corporation. Partnership dissolution should not be
confused with partnership liquidation which is the winding up of partnership affairs and termination of the business. Under
dissolution the partnership business continues, but under different ownership.
When partnership dissolution occurs, a new accounting entity exists. The partnership should first adjust its records so
that all accounts are properly stated at the date of dissolution. After the income (loss) has been properly allocated to the
existing partners’ capital accounts, all assets and liabilities should be adjusted to their fair market value and their present
values, respectively. The latter step is performed because the dissolution results in a new accounting entity.
After all adjustments have been made, the accounting for dissolution depends on the type of transaction that caused
the dissolution.
These transactions can be broken down into two types:
* Transactions between the partnership and a partner (e.g., a new partner contributes assets, or a retiring partner
withdraws assets).
* Transactions between partners (e.g., a new partner purchases an interest from one or more existing partners, or a
retiring partner sells his/her interest to one or more existing partners).

a. Transactions Between a Partner and the Partnership

(1) Admission of a New Partner
When a new partner is admitted to the partnership essentially three cases can result. The new partner
can invest assets into the partnership and receive a capital balance.
(a) Equal to his/her purchase price.
(b) Greater than his/her purchase price.
(c) Less than his/her purchase price.

If the new partner’s capital balance is equal to the assets invested, then the entry debits the asset(s) contributed and
credits the new partner’s capital account for the fair value of the asset(s) contributed.

If the new partner’s capital balance is not equal to the assets invested (as in situation (b) and (c) above), then either the
bonus or goodwill method must be used to account for the difference.

Bonus method - The old partnership capital plus the new partner’s asset contribution is equal to the new partnership
capital. The new partner’s capital is allocated his purchase share (e.g., 40%) and the old partner’s capital accounts are
adjusted as if they had been paid (or as if they paid) a bonus. The adjustment to the old partners’ capital accounts is made
in accordance with their profit (loss) sharing ratio.

The bonus method implies that the old partners either received a bonus from the new partner, or they paid a bonus to
the new partner. As a result the old partners’ capital accounts are either debited to reflect a bonus paid, or credited to
reflect a bonus received. The new partner’s capital account is never equal to the amount of assets contributed in a case
where the bonus method is used.

Goodwill method - The old partnership capital plus the new partner’s asset contribution is not equal to the new
partnership capital. This is because goodwill is recorded on the partnership books for the difference between the total
identifiable assets of the partnership (not including goodwill) and the deemed value of the partnership entity (which includes
goodwill). An adjustment is made to the capital accounts of the existing partners to reflect the goodwill (whether acquired
or given) in their profit (loss) sharing ratio. Under the goodwill method, valuation of the partnership is the objective.
How the value of the partnership is determined depends on whether the book value acquired is greater or less than the
asset(s) invested. If the book value acquired is less than the asset(s) invested, the value is determined based upon the new
partner’s contribution, and goodwill is allocated to the old partners’ accounts. If the book value acquired is greater than the
asset(s) contributed, the value is based upon the existing capital accounts, and goodwill is attributed to the new partner.
Page 10 of 25
Example: A & B Partnership admit C by investing to the business P50,000 for a 1/5 interest. The capital balances of A and
B before the admission are P100,000 and P80,000, respectively. The goodwill can be determined as follows:

Total contributed capital to the business

(100,000 + 80,000 + 50,000) P230,000
Capital interest of C the new partner x 1/5
Book value of the interest acquired P 46,000
The assets contributed is greater than the book value acquired, therefore the total implied capital must be based on the
new partner’s contribution which is P50,000. The total implied capital in this case must be P250,000, (50,000 ÷ 1/5). The
goodwill must be P20,000 to old partners. (250,000 – 230,000).
Assuming that the interest of C will be ¼, then the book value acquired must be P57,500, (230,000 x ¼), greater than
the assets contributed by C, then the total implied capital must be based on the old partners’ contributions which is
P180,000. The implied total capital must be P240,000, (180,000 ÷ ¾). The goodwill in this case must be P10,000, (240,000
– 230,000) and the goodwill will now be given to the new partner. So, it is just like bonus method. In the above example
wherein the interest of C is 1/5, the bonus goes to the old partners, but inasmuch as no bonus recognized but rather
goodwill then the goodwill goes to the old partners. In the situation wherein C’s interest is ¼ the bonus goes to the new
partner but under the goodwill method, then goodwill and not bonus to new partner.

You can also determine the goodwill by simply dividing the contributed capital of old partners to their capital interest
and also the contributed capital of the new partner to his/her capital interest. The amount that was computed which is
greater than the total contributed capital would be the implied or deemed total capital. The goodwill must be the difference
between the total implied or deemed capital over the total contributed capital. If the total implied capital was based on the
old partners’ contribution then goodwill must be given to the new partner, but if the total implied capital is based on the
new partner’s contribution then the goodwill must be given to the old partner.

Using the same example above, C’s interest is 1/5, then total implied capital of business can be determined as follows:

Capital contributed by old partners or new partner divide by their interest whichever is higher then that should be the
total implied capital.
Capital balances of A & B P180,000 Capital contributed by C P 50,000
Interest of A & B ÷ 4/5 Interest of C ÷ 1/5
Implied total capital P225,000 Implied total capital P250,000

The amount greater than the total contributed capital must be the total implied capital which is P250,000. Therefore, if the
basis of the agreed capital is the contribution of the new partner, then the goodwill of P20,000 must be credited to the old
partners. Try it to C’s ¼ interest and you will arrive at the same conclusion that this time the goodwill goes to the new
partner.
The decision as to whether the bonus or goodwill method should be used rests with partners involved. In other words,
the bonus and goodwill methods are alternative solutions to the same problem. For CPA Board exam, if the method is
not clearly indicated in the problem then the generally acceptable and preferable method must be the bonus method.
Example: Admission of a New Partner - Bonus Method
Total old capital for ABC Partnership is P600,000.
Partner A B C
Capital Balances P100,000 P200,000 P300,000
P&L Ratio 40% 40% 20%
Case I
D is admitted to the partnership and is given a 20% interest in the capital in return for a cash contribution of P300,000.
The entry to record the admission of D should be
Cash P300,000
D, capital P180,000
A, capital 48,000
B, capital 48,000
C, capital 24,000
The total partnership capital to be shown on the books is P900,000 (P600,000 + P300,000) of which D is entitled to a
20% interest, or a capital balance of P180,000. The remaining P120,000 is treated as a bonus to the old partners and is
allocated to their capital accounts in accordance with their P&L ratio.
Case 2
D is admitted to the partnership and is given a 20% interest in the capital in return for a cash contribution of P100,000.
The entry to record the admission of D in this case should be
Cash P100,000
A, capital 16,000
B, capital 16,000
C, capital 8,000
D, capital P140,000
The total partnership capital to be shown on the books is P700,000 (P600,000 + P100,000) of which D is admitted to a
20% interest, or a capital balance of P140,000. The difference of P40,000 (P100,000 - P140,000) is allocated to the old
partners’ capital accounts as if they had paid a bonus to the new partner.
Example: Admission of a New Partner - Goodwill Method
Use the same original data as given above

Case I

Page 11 of 25
 D is admitted to the partnership and is given a 20% interest in the capital in return for a cash contribution of P200,000.
The partners elect to record goodwill. The book value acquired (P600,000 + P200,000) x 20% = P160,000 is less than the
asset contributed.
The value of the partnership is determined based upon the contribution of the new partner. In this case it is assumed
that the partnership value is P1,000,000 (P200,000/20%). The resulting goodwill is P200,000 (P100,000 - P800,000). The
P800,000 represents the total current capital exclusive of goodwill, P600,000 of which is attributable to the old partners and
P200,000 of which is attributable to the new partner. The entry to record the admission of D should be:
Goodwill P200,000 Cash P200,000
A, capital P80,000 D, capital P200,000
B, capital 80,000
C, capital 40,000
Goodwill was allocated to the old partners in their P&L ratio. Also note that the capital balance of D represents 20% of
the total capital of the partnership.

Case 2
D is admitted to the partnership and is given a 20% interest in the capital in return for a cash contribution of P100,000.
The partners elect to record goodwill. The book value acquired (P600,000 + P100,000) x 20% = P140,000 is greater than
the asset contributed.
The partnership value is based upon the capital accounts of the existing partners. Because D is entitled to a 20%
interest, the P600,000 capital of the old partners must represent 80% of the capital. This means that the total value of the
partnership is P750,000 (P600,000/80%). D’s total contribution consists of the P100,000 in cash and P50,000 of goodwill.
The goodwill is determined as the difference between the cash contribution and the 20% of the partnership capital.
Cash P100,000
Goodwill 50,000
D, capital P150,000
Note that in this last case no adjustment is made to the capital accounts of partners A, B, and C
To summarize the above explanations, under the goodwill method, goodwill can be determined by simply dividing the
capital contributions of either the new partner or the old partners, to get an amount higher than the total contributed
capital. The higher amount is now called the total implied capital after goodwill or otherwise known as total agreed capital.
The total agreed capital is then compared to the total contributed capital to get the total amount of implied goodwill that
should be recognized in the books. If the new partner’s contribution was used to get the total agreed capital, then goodwill
should be credited to the old partners’ capital in accordance with their P&L ratio. But if the old partners’ capital was used to
get the agreed capital then goodwill should be credited to the new partner’s capital.

The table below summarizes the bonus and goodwill situations discussed above:
When to Apply Bonus Method
New Partnership Capital = Old Partners Capital + New Partner’s Asset Investment
Which Partner(s) Receive Bonus
New Partner
New Partner’s Capital Credit > New Partner’s Asset Investment
Old Partners
New Partner’s Capital Credit < New Partner’s Asset Investment
(The difference represents the bonus allocated to old partners in
their P&L ratio.)
When to Apply Goodwill Method
New Partnership Capital > Old Partners Capital + New Partner’s Asset
Investment
Which Partner’s Goodwill is Recognized
New Partner’s Goodwill
New Partner’s Capital Credit > New Partner’s Asset Investment
(The difference represents goodwill)
Old Partners’ Goodwill
New Partner’s Capital Credit = New Partner’s Asset Investment
(Goodwill is allocated to old partners in their P&L ratio)

Total Capital Agreed After Admission

Sometimes partners agreed as to the total capital of the partnership after the admission of a new partner that might either
result in:
(1) goodwill to old partners only or new partner only or both, or
(2) bonus to old partners only or new partner only but it can never be both, or
(3) goodwill and bonus to either old partners or new partner.

Situations wherein goodwill to old partners only or new partners only and bonus to old partners only or new partner
only were already discussed above except that the total agreed capital was not specified in the example. It was assumed
using the bonus method or goodwill method. Cases explained below pertain to situations wherein goodwill and at the same
time bonus were either credited to old partners’ capital based on their P&L ratio or to new partner’s capital.
Case 1
Using the previous example for ABC Partnership, wherein D invested P300,000, but this time all partners agreed that
the total capital after D’s admission should be P1,000,000 and D’s interest in the partnership net assets is 20%.
The partnership should therefore recognized goodwill of P100,000 (P1,000,000 agreed capital minus P900,000
contributed capital; P600,000 attributable to old partners and P300,000 attributable to new partner). D should be credited
for P200,000 (P1,000,000 x 20%) only, inspite of his contribution of P300,000. Therefore, the old partners in this case
Page 12 of 25
should receive the goodwill of P100,000 and the bonus from the new partner of P100,000 distributed based on their P&L
ratio. The entry to record the admission of D should be:

Goodwill P100,000 Cash P300,000

A, capital P40,000 D, capital P200,000
B, capital 40,000 A, capital 40,000
C, capital 20,000 B, capital 40,000
C, capital 20,000
Case 2
Using the previous example in case 1 above, except, this time D invested P250,000, and all partners agreed that the
total capital after D’s admission should be P900,000 and D’s interest in the partnership’s net assets is 40%.
The partnership should recognized goodwill of P50,000 (P900,000 agreed capital minus P850,000 contributed capital).
D should be credited for P360,000 (40% x P900,000).
If the capital credit to D is P360,000 but his capital contribution is just P250,000, then the goodwill of P50,000 should
be credited to him as well as a bonus of P60,000 from the old partners (to make the total capital of D P360,000) deducted
from them based on their P&L ratio. The entry to record the admission of D should be:
Goodwill P50,000 A, capital P24,000
D, capital P50,000 B, capital 24,000
Cash P250,000 C, capital 12,000
D, capital P250,000 D, capital P60,000

Case 3
Using again the above example in case 1 and this time D invested P200,000 but he should be credited for P250,000 a
25% interest in the partnership net assets. The partners also agreed that the total capital should be P1,000,000 after D’s
admission.
The goodwill therefore in this case is P200,000 (P1,000,000 agreed capital minus P800,000 contributed capital), and D
should be credited for P250,000 (25% x P1,000,000). Inasmuch as the amount of identifiable assets contributed by D is just
P200,000, but he should be credited for P250,000, then it is implied that D is bringing in goodwill of P50,000. Therefore, the
goodwill should be distributed as follows: P50,000 to D and the balance of P150,000, is the implied goodwill of the business
prior to D’s admission and should be credited to old partners based on their P&L ratio. The entry to record D’s admission
should be
Goodwill P200,000 Cash P200,000
A, capital P60,000 D, capital P200,000
B, capital 60,000
C, capital 30,000
D, capital 50,000

Partner’s Interest Different From P&L Sharing Ratio

Normally, the partner’s interest in the partnership’s net assets is equal to his or her P&L ratio. If in case, the interest in
net assets differs from the share in the profit or loss of the partnership, then the use of either bonus method or the goodwill
method might be advantageous to the new partner in recording his or her admission.
Example: Interest Greater Than P&L Ratio
Case 1
Using the same information of ABC Partnership above except that D was admitted into the partnership for a 25%
interest and D’s P&L ratio is only 20%, after investing P300,000.
Using the bonus method D should be credited for P225,000 (P900,000 x 25%) and based on this you can now say that
D, the new partner is giving bonus to old partners of P75,000 (P300,000 - P225,000), distributed to A, B & C based on their
P&L ratio.
Using the goodwill method, D’s capital contribution will be the basis of computing the agreed capital of P1,200,000
(P300,000/25%). The goodwill of P300,000 (P1,200,000 - P900,000) will be credited to old partners based on their P&L
ratio. Under the goodwill method, the goodwill determined is normally recorded in the books. The goodwill once recorded in
the books should be written off for a period of not exceeding 40 years (GAAP rule) and thus the effect is reduction in the
capital of all partners. Since D’s P&L ratio is just 20%, D’s share on the goodwill amortization would be P60,000 (20% x
P300,000), and D’s capital will reduce to P240,000. Therefore, it will be advantageous for D to use the goodwill method
because the capital is still P240,000, rather than the bonus method wherein the capital is only P225,000, and the advantage
will be P15,000, or to simplify the computation, just get the difference between the interest and P&L share, then multiply by
the amount of goodwill. (25% - 20%) = 5% of P300,000 goodwill. To summarize the above explanations the following
computations were made.
Bonus method:
Capital credit to D (25% x P900,000 agreed capital) P225,000
Goodwill method:
Capital credit to D initially (25% x P1,200,000)
equal to his capital contribution P300,000
Less: Share on the goodwill amortization
(20% x P300,000) 60,000 240,000
Advantage of goodwill method over bonus method P 15,000
OR simply the difference between the interest and P&L multiply by the goodwill recognized under the goodwill method.
(5% x P300,000) = P15,000.
Example: Interest Less Than P&L Ratio

Case 2
Page 13 of 25
 Using the same information, but this time the interest is 20% and D’s P&L ratio is 25%.
Bonus method:
Capital credit to D (20% x P900,000) P180,000
Goodwill method:
Capital credit to D (20% x P1,500,000) P300,000
Less: Share on the goodwill amortization
(25% x P600,000) 150,000 150,000
Advantage of Bonus method over Goodwill method P 30,000

OR simply the difference between the interest and P&L multiply by the goodwill recognized under the goodwill method (5%
x P600,000) = P30,000.
The table below summarizes the situations discussed above.
Bonus method advantageous and the amount of advantage.
Partner’s interest in the net assets
< Partner’s P&L ratio, difference x Goodwill.
Goodwill method advantageous and the amount of advantage
Partner’s interest in the net assets
> Partner’s P&L ratio, difference x Goodwill.
Neither bonus nor goodwill advantageous (general rule)
Partner’s interest in the net assets = Partner’s P&L ratio,
difference x Goodwill.

(2) Partner Death or Withdrawal or Retirement

The death or withdrawal or retirement of a partner is treated in much the same manner as the admission of a new
partner. However, there is no new capital account to be recorded; we are dealing only with the capital accounts of the
original partners. Either the bonus or goodwill method may be used. The key thing to remember in regard to a partner’s
withdrawal from the partnership is that the withdrawing partner’s capital account must be adjusted to the amount that the
withdrawing partner is expected to receive.
Example: Partner Withdrawal

Assume the same partnership data as given for the ABC partnership earlier.

Case 1
Assume that A withdraws from the partnership after reaching an agreement with partners B & C that would pay him
P160,000. The remaining partners elect not to record goodwill. The entry to record the withdrawal of A should be:
B, capital P 40,000 A, capital P160,000
C, capital 20,000 Cash P160,000
A, capital P60,000

The P60,000 bonus is determined as the difference between the current balance of A’s capital account and the amount
of his buyout agreement. This “bonus” is then allocated between the remaining partners’ capital accounts in proportion to
their P&L ratios.

Case 2
Assume again that A withdraws from the partnership pursuant to the same agreement except that this time the partners
elect to record goodwill.
The first step is to determine the amount of goodwill to be recorded. In this case we know that A’s capital account must
have a balance of P160,000, the agreed buyout payment A is to receive. In order to accomplish this the total partnership
assets must be increased by some amount of which P60,000 represents 40%, A’s P&L ratio. Therefore, the amount of
goodwill to be recorded is P150,000 (P60,000/40%).

The entry therefore, to record A’s withdrawal should be:

Goodwill P150,000 A, capital P160,000
A, capital P60,000 Cash P160,000
B, capital 60,000
C, capital 30,000

Note that in this case all of the partners’ capital accounts are adjusted to record the goodwill in accordance with their P
& L ratios.

Case 3
Sometimes partners wish to record only the goodwill paid to A and not the total goodwill, which is known as the
“alternative goodwill method”. In this case, using the information in case 2 above, the entry to record A’s withdrawal should
be:
Goodwill P60,000 A, capital P160,000
A, capital P60,000 Cash P160,000

b. Transactions between Partners

The sale of a partnership interest is a transaction only between the partners. Thus, the treatment accorded the
transaction is determined by the partners involved.
There are two means of dealing with such a transaction. The first is to simply transfer a portion of the existing partners’
capital to a new capital account for the buying partner.

Page 14 of 25
 Example: Sale of a Partnership Interest - No Goodwill Recorded
Assume the following for the AB partnership:
Partner A B
Capital P500,000 P500,000
P&L ratio 60% 40%
Case 1
Assume that C wishes to enter the partnership by buying 50% of the partnership interest from both A and B for a total
of P800,000. It is important to note that the P800,000 is being paid to the individual partners and not to the partnership.
Thus, we are only concerned with the proper adjustment between the capital accounts, not the recording of the cash. This
approach ignores the price that C paid for the partnership interest. The entry to record C’s capital should be:
A, capital P250,000
B, capital 250,000
C, capital P500,000
The other method available for recording a transaction between partners is the recording of implied goodwill.
Example: Sale of Partnership Interest - Recording Goodwill
Assume the same facts presented above for the sale of the partnership interest except that in this case the partners
elect to record goodwill.

Case 2
Assuming that C paid P800,000 for a 50% interest in the partnership, the implied value of the partnership assets is
P1,600,000 (P800,000/50%). Because total capital prior to the purchase is only P1,000,000, the amount of goodwill that
must be recorded is P600,000. The goodwill is allocated to the partners’ capital accounts in proportion to their P&L ratios.
Note that this entry is made before an adjustment is made to reflect C’s admission to the partnership.
Goodwill P600,000
A, capital P360,000
B, capital 240,000
Now we can record the sale of the partnership interest to C. The capital balance of A is now P860,000 (P500,000 +
P360,000) while the capital balance of B is P740,000 (P500,000 + P240,000). Recall that C is to receive 50% of each
balance.
A, capital P430,000
B, capital 370,000
C, capital P800,000
Notice that in this situation the capital balance of C after the purchase is equal to the amount of the purchase price.
Again no entry is made to record the receipt of cash because the cash goes directly to the individual partners, A and B.

c. Incorporation of a Partnership

PROCEDURE:
1. Adjust the assets and liabilities of the partnership to their fair market values and allocate the difference to the
partners’ capital accounts according to their profit and loss ratio.
2. Compute for and record the goodwill by comparing the total par value of the stocks to be issued to the partners
with the total adjusted partners’ capital accounts. If the total par value of the stocks issued is greater than the
adjusted partners’ capital accounts, the difference represents goodwill. If the par value of the stocks issued is less
than the adjusted partners’ capital accounts, the difference is considered as additional paid in capital.
3. Close the partnership books because a new book will be used for the new entity.
4. Record in the new set of books by debiting the assets at their fair market values, crediting the liabilities at their
current values, and crediting capital stock for the total par value of the stocks issued to the partners.

ILLUSTRATION:
Assume that Noel, Alex and Harold are partners dividing profits and losses in the ratio of 3:2:1, respectively. They
decided to incorporate the partnership and call it NAH Corporation. The partnership books were closed and a balance sheet was
prepared in July 1, 2020:

Cash P 350,000 Accounts Payable P 100,000

Accounts Receivable 500,000 Notes Payable 250,000
Inventories 750,000 Noel, Capital 750,000
Furniture & Fixtures 800,000 Alex, Capital 500,000
Accum. Depreciation (300,000) Harold, Capital 500,000
Total P2,100,000 Total P2,100,000

The NAH Corporation is authorized to issue 10,000 shares of common stock with a par value of P500 per share. Two more
friends were invited as incorporators who paid cash for a total of 3,000 shares at P500 par. The partners were issued 4,000
shares for their net assets, subject to the following revaluation:
a. 5% provision for doubtful accounts.
b. 10% write down on inventories.
c. Furniture and fixtures has a fair market value of P360,000.

Corporation’s books:
Cash P350,000
Accounts Receivable 500,000
Inventories 675,000
Page 15 of 25
 Furniture and Fixtures 360,000
Goodwill 490,000
Allowance for Bad Debts P 25,000
Accounts Payable 100,000
Notes Payable 250,000
Capital Stock 2,000,000
Cash 1,500,000
Capital Stock 1,500,000

QUIZZER
1. The Samuel Partnership shows the following profit and loss ratios and capital balances: Andrew (60%), P252,000; Mila
(30%), P126,000 and Philip (10%), P42,000. The partners decide to sell to Violet 20 percent of their respective capital and
profit and loss interests for a total payment of P90,000. Violet will pay the money directly to the other partners. What are
the capital balances of the partners after Violet’s admission to the partnership?
Andrew Mila Philip Violet
a. P198,000 P 99,000 P33,000 P90,000
b. P201,600 P100,800 P33,600 P84,000
c. P216,000 P108,000 P36,000 P90,000
d. P255,699 P127,800 P42,600 P84,000
2. Ruth and Jethro are partners who share income and loss in the ratio 2:3 respectively. The partners agree to admit Samuel
as a partner upon investing P150,000 cash for a one-fifth interest. Assets of the partnership are fairly valued except for a
parcel of land that is overvalued by P150,000. Net assets of the partnership are to be revalued, and Samuel is to be
admitted. The capital accounts of Ruth and Jethro are P450,000 and P300,000, respectively.
Determine the capital to be credited to Samuel.
a. P150,000
b. P180,000
c. P210,000
d. P120,000
.
Questions 3 and 4 are based on the following:
Riley and Smith are partners with present capital balances of P500,000 and P400,000, respectively. The partners share
profit and losses according to the following percentages: 60% for Riley and 40% for Smith. Tyler is to join the original
partnership upon contribution of P250,000 to the partnership in exchange for a 20% interest in capital and 15% interest in
profits and losses. Tyler’s contribution consists of P170,000 of cash and equipment having a fair value of P80,000. The
assets of the original partnership have a book value equal to their fair value except that the land has a book value of
P15,000 and fair value of P55,000.
3. Calculate the capital balance of Tyler in the new partnership, assuming use of the bonus method.
a. P238,000 b. P250,000 c. P230,000 d. P178,500
4. Calculate the capital balance of Tyler in the new partnership, assuming use of the goodwill method.
a. P 238,000 b. P250,000 c. P230,000 c. P178,500

5. Bucker and Pressey are partners in a dry-cleaning business in which profits and losses are shared equally. Bucker and
Pressey have capital balances of P40,000 and P60,000, respectively.
For each of the three (3) situations presented, determine the capital to be credited to the new partner.
Situations
(1) (2) (3)
Admission of new partner
Entering partner Nelson Nelson Nelson
Purchase price P60,000 P30,000 P40,000
Interest in capital acquired 30% 20% 30%
Paid to Partnership Partnership Pressey
Method used Bonus Goodwill N/A

a. Situation 1, P48,000; Situation 2, P30,000; Situation 3, P30,000.

b. Situation 1, P48,000; Situation 2, P26,000; Situation 3, P30,000
c. Situation 1, P48,000; Situation 2, P30,000; Situation 3, P40,000
d. Situation 1, P48,000; Situation 2, P30,000; Situation 3, P42,000

Questions 6 through 8 are based on the following:

A, B and C have capital balances of P112,000, P130,000 and P58,000, respectively, and share profits in the ratio 3:2:1. D
invest cash in the partnership for a one-fourth interest.
6. Assume D receives a one-fourth interest in the assets of the partnership, which includes credit for P25,000 of goodwill that
is recognized upon admission. How much cash D invest?
a. P100,000 b. P75,000 c. P125,000 d. P50,000

7. Assume D receives a one-fourth interest in the assets of the partnership and D is credited with P20,000 of the bonus from
the old partners that is recognized upon D’s admission. How much cash D invest?
a. P73,333 b. P100,000 c. P93,333 d. P80,000

8. Assume D receives a one-fourth interest in the assets of the partnership and B is credited with P15,000 of the bonus from
D, how much cash D invest?
a. P115,000 b. P105,000 c. P160,000 d. P120,000

Page 16 of 25
 9. Dick and Nick are partners who have capital balances of P900,000 and P720,000, respectively, and share profits and losses
in the ratio of 3:2, respectively. Rick is admitted as a partner upon investing P750,000 for a 20% interest in the firm, profits
are to be shared 3:3:2, to Dick, Nick, and Rick, respectively. Given the choice between goodwill and bonus method, Rick
will:
a. Prefer goodwill method due to Rick’s gain of P276,000.
b. Prefer bonus method due to Rick’s gain of P69,000.
c. Prefer goodwill method due to Rick’s gain of P157,500.
d. Be indifferent for the goodwill and bonus method are the same

10. A and B have capital balances of P65,000 and P35,000 and share profits 3:2. C is admitted as a partner and is given a 25%
interest in the firm upon investing P40,000 cash. Profits are to be shared 5:3:2 by A, B and C. D subsequently enters the
partnership by investing P25,000 for a 20% interest in assets and a 20% share of the firm’s profits. Former partners share
the balance of profits in their original ratio. A has difficulty getting along with D and withdraws from the partnership. The
partnership pays P73,000 cash for A’s interest. How much are the capital balances of B, C and D, respectively after A’s
withdrawal under the bonus method?
a. P31,000; P31,000; P30,000
b. P34,600; P33,400; P33,000
c. P40,600; P38,400; P38,000
d. P43,000; P40,000; P40,000

11. In relation to the above, how much are the capital balances of B, C and D after A’s withdrawal under the goodwill method?
a. P31,000; P31,000; P30,000
b. P34,600; P33,400; P33,000
c. P40,600; P38,400; P38,000
d. P43,000; P40,000; P40,000

12. R, S, and T are partners sharing profits in the ratio of 3:2;1, respectively. Capital accounts are P500,000, P300,000 and
P200,000 on December 31, 2014, when T decides to withdraw. It is agreed to pay P300,000 for T’s interest. Profits after the
withdrawal of T are to be shared equally. What entry is required to record the withdrawal of T under the bonus method?
a. T, Capital 200,000 c. T, Capital 200,000
Cash 200,000 Goodwill 100,000
Cash 300,000
b. T, Capital 200,000 d. T, Capital 200,000
R, Capital 50,000 R, Capital 60,000
S, Capital 50,000 S, Capital 40,000
Cash 300,000 Cash 300,000

13. What entry is required to record the withdrawal of T under the goodwill method?
a. T, Capital 200,000 c. T, Capital 200,000
Goodwill 100,000 Goodwill 600,000
Cash 300,000 Cash 300,000
R, Capital 300,000
S, Capital 200,000
b. T, Capital 200,000 d. T, Capital 200,000
Goodwill 600,000 R, Capital 60,000
R, Capital 250,000 S, Capital 40,000
S, Capital 250,000 Cash 300,000
Cash 300,000

14. The trial balance of Nimpha, Esther, and Rebecca, on December 31, 2016, is as follows:
Cash P 54,990
Other assets 25,000
Receivable from Nimpha 2,500
Merchandise inventory, January 1, 2016 10,500
Purchases 33,500
Expenses 13,510
6% Note payable to Nimpha, dated June 1, 2016 P 6,000
Sales 66,000
Rental payable 1,100
Nimpha, capital 23,220
Esther, capital 26,780
Rebecca, capital 16,900
P140,000 P140,000

Merchandise inventory on December 31, 2016, amounts to P9,100; accrued interest on the note payable to Nimpha is to be
recognized as of December 31. Nominal accounts are closed and P31,500 is paid for Nimpha’s net interest in the firm
(capital, receivable, and payable balances). A few days later, Esther accepts a personal check for P32,000 from Rebecca to
quit the business and allow Rebecca to continue operations as a sole proprietor. The partners share profit and losses equally.
Compute the ending capital balance of Rebecca immediately after Esther’s withdrawal?
a. P25,380 b. P25,590 c. P56,490 d. P24,795

Items 15 and 16 are based on the following:

Page 17 of 25
 The following balances as of the end of 2017 for the partnership of X, Y, and Z, together with their respective profit and loss
percentages, were as follows:
Assets P360,000 X, loan P 18,000
X, capital (20%) 84,000
Y, capital (20%) 78,000
Z, capital (60%) 180,000
P360,000 P360,000
X decided to retire from the partnership. Parties agreed to adjust the assets to their fair market value of P432,000 as of
December 31, 2017. X will be paid P122,400 for X’s partnership interest inclusive of X loan which is to be repaid in full. No
goodwill is to be recorded. After X’s retirement.
15. What will be the balance of Y’s capital account?
a. P78,000 b. P72,900 c. P92,400 d. P90,900
16. Assuming that the P122,400 payment to X exclude his loan, what will be the balance of Y’s capital account, after X’s
retirement?
a. P78,000 b. P92,400 c. P90,900 d. P86,400

17. X, Y and Z are partners dividing profits and losses in the ratio of 5:3:2 and whose capital balances as of January 1, 2017
were P600,000, P400,000 and P300,000, respectively. Z is retiring from the partnership as of July 1, 2017. The partnership
agreement provides that the books of accounts need not be closed upon the retirement of a partner. Net income is to be
considered as having been realized proportionately during the period. The partnership estimated net income for 2017,
P480,000. Prior to her retirement, Z paid personal expenses of P15,000 from the partnership funds. The partnership, on the
other hand, collected P50,000 from personal receivable of Z and deposited the same for the account of the partnership.
How much is the total amount due to Z as of the date of retirement?
a. P348,000 b. P359,000 c. P383,000 d. P431,000

18. Partners D, E, F, and G, share profits 40%, 30%, 15%, and 15%, respectively. Their partnership agreement provides that in
the event of the death of a partner, the firm shall continue until the end of the fiscal period. Profits shall be considered to
have been earned proportionately during this period, and the deceased partners’ capital shall be adjusted by the proper
share of the profit or loss until the date of death. From that date until the date of settlement with the estate there shall be
added interest at 6% computed on the adjusted capital.

The remaining partners shall continue to share profits in the old ratio. Payment to the estate shall be made within one year
from the date of the partner’s death. Partner G died on November 16. On December 31, the end of the six-month period,
account balances on the partnership books before the income summary account is closed are as follows:
Cash P 15,000 Notes payable P 30,000
Accounts receivable 140,000 Accounts payable 141,000
Inventories 190,000 D, capital 84,000
Machinery and equipment, net 90,000 E, capital 75,000
Store furniture and fixtures, net 33,000 F, capital 48,000
G, capital 45,000
Income summary
(7/1-12/31) 45,000
P468,000 P468,000

The income summary account is closed on December 31. On this date, F decides to retire. D and E agree to pay the balance
in F’s capital account after distributions of profit, less 20%, and issue a partnership 60-day, 6% note to F in settlement.
What amount is due to G’s estate on December 31?
a. P45,000 b. P51,750 c. P50,062.50 d. P50,437.97
19. In relation to the above data, what amount of note payable must be issued to F?
a. P54,750 b. P55,047.79 c. P44,038.23 d. P43,985.23

Questions 20 through 21 are based on the following:

The partners in the Kenneth, Rhaian, and Marlon partnership have capital balances as follows:
Kenneth, capital P35,000;
Rhaian, capital P35,000;
Marlon, capital P40,000
Profits and losses are shared 30%, 30%, and 40%, respectively. On this date, Marlon withdraws and the partners agree to
pay him P45,000 out of partnership cash. (Tangible assets are already stated at values approximating their fair market
values.)
20. Using bonus method, how much must be the ending capital of Kenneth immediately after Marlon’s withdrawal?
a. P35,000 b. P32,500 c. P33.500 d. P38,750
21. Using the partial goodwill method, how much must be the ending capital of Kenneth immediately after Marlon’s withdrawal?
a. P35,000 b. P32,500 c. P33,500 d. P38,750
22. Using the full goodwill method, how much must be the ending capital of Kenneth immediately after Marlon’s withdrawal?
a. P35,000 b. P32,500 c. P33,500 d. P38,750

23. Kris, Cristy and Dina are partners with capital balances on December 31, 2017 of P300,000, P300,000, and P200,000,
respectively. Profits are shared equally. Dina wishes to withdraw and it is agreed that she is to take certain furniture and
fixtures at their second-hand value of P12,000 and note for the balance of her interest. The furniture and fixtures are
carried on the books as fully depreciated. Brand new, furniture and fixtures may cost P20,000. Dina’s acquisition of the
second-hand furniture will result to:
a. Increase in the capital of P4,000 each for Kris, Cristy and Dina.
b. Increase in the capital of P6,000 each for Kris and Cristy.
Page 18 of 25
 c. Increase in the capital of P10,000 each for Kris and Cristy.
d. Increase in the capital of P8,000 for Dina.

24. Sharon, Manilyn, and Maricel, partners who share profits equally are to incorporate their business. The capital accounts
show Sharon, P200,000; Manilyn, P300,000, and Maricel, P500,000. Net assets of P1 million are to be revalued based on
current market value of P1.3 million. The capital stock of the company is to have a par value of P1. Upon incorporation,
partners are to receive shares of stock as follows:
a. Sharon, 260,000; Manilyn, 390,000; and Maricel, 650,000.
b. Sharon, 200,000; Manilyn, 300,000; and Maricel, 500,000.
c. Sharon, 300,000; Manilyn, 400,000; and Maricel, 600,000.
d. Sharon, 433,333; Manilyn, 433,333; and Maricel, 433,334

25. F, G and H are partners who agree to form a corporation. Their capital balances are F, P100,000; G, P100,000 and H,
P200,000 and they share profits equally. All their assets and liabilities are to become the corporation’s. Net assets of
P400,000 will be revalued at P550,000. The substantial revaluation is only from the land which H contributed to the
partnership ten years ago at P100,000. At P1 par value per share, partners are to receive shares of stock as follows:
a. F, 150,000; G, 150,000; and H, 250,000
b. F, 183,333; G, 183,333; and H, 183,333
c. F, 100,000; G, 100,000; and H, 300,000
d. F, 100,000; G, 100,000; and H, 350,000

PARTNERSHIP LIQUIDATION
A liquidation is the winding up of the partnership business. That is, it sells all of its noncash assets called realization, pays its
liabilities, and makes a final liquidating distribution to the remaining partners.
There are four basic steps to a partnership’s liquidation.
1. Any operating income or loss up to the date of the liquidation should be computed and allocated to the partner’s
capital accounts on the basis of their P&L ratio.
2. All noncash assets are sold and converted to cash. The gain (loss) realized on the sale of such assets is allocated to
the partners’ capital account on the basis of their P&L ratio.
3. Any creditors’ claims, including liquidation expenses or anticipated future claims, are satisfied through the payment
or reserve of cash.
4. The remaining unreserved cash is distributed to the remaining partners in accordance with the balance in their
capital accounts. Note that this is not necessarily the P&L ratio.
Two factors that may complicate the liquidation process are the existence of loans or advances between the partnership
and one or more of the partners, or the creation of a deficit in a partner’s capital account because of the allocation of a loss.
When loans exist between the partnership and a partner, the capital account and the loan(s) are combined to give a net
amount. This is often referred to as the right of offset. When a deficit exists, the amount of the deficit is allocated to the
remaining solvent partners’ capital accounts on the basis of their relative P&L ratio. Note here that if the partner with capital
deficit is personally solvent, he has a liability to the remaining partners for the amount of the deficit.
There are two topics that appear with regularity on the CPA examination in regard to the liquidation of a partnership.
They are the statement of partnership liquidation and the determination a “safe payment” in an installment liquidation.

a. Statement of Partnership Liquidation

The statement of partnership liquidation shows in detail all of the transactions associated with the liquidation of the
partnership. It should be noted here that the liquidation of a partnership can take one of two forms: simple (lump-sum) or
installment. A simple liquidation (illustrated below) is one in which all of the assets are sold in bulk and all of the creditors’
claims are satisfied before a single liquidating distribution is made to the partners. Because the assets are sold in bulk there
is a tendency to realize greater losses than if the assets are sold over a period time. As a result, many partnership liquidate
on an installment basis. In an installment liquidation the assets are sold over a period of time and the cash is distributed to
the partners as it becomes available.
Example: Statement of Partnership Liquidation - Simple Liquidation
Assume the following:
The capital balances are as given below.
The P&L ratio is 5:3:2 for A, B, and C, respectively.
Statement of Partnership Liquidation
Cash Other Assets Liabilities A B C
Balances P 50,000 P750,000 P450,000 P120,000 P170,000 P60,000
Sale of assets 400,000 ( 600,000) (100,000) ( 60,000) (40,000)
450,000 150,000 20,000 110,000 20,000
Payment of
liabilities (450,000) (450,000)
0 0
Sale of assets 100,000 ( 150,000) ( 25,000) ( 15,000) (10,000)
0 ( 5,000) 95,000 10,000
Distribution
of A’s deficit 5,000 ( 3,000) ( 2,000)
0 92,000 8,000
Final
distribution
of cash (100,000) ( 92,000) ( 8,000)

Page 19 of 25
 Notice that after the noncash assets have been sold and the creditors satisfied, a P5,000 deficit remains in A’s capital
account. The deficit is allocated to the remaining solvent partners on the basis of their relative P&L ratios, in this case, 3:2.
A is liable to the partnership for the P5,000. If A is personally solvent and repays the P5,000, then P3,000 will go to B and
P2,000 will go to C.
If in the above example there had been liquidation expense or loans between the partnership and partners these would
have to be recognized in the statement prior to any distribution to partners.

b. Installment Method of Cash Distribution

There are two keys to preparing a statement of partnership liquidation under the installment method: the determination
of the available cash balance at any given point in time and the determination of which partner(s) is(are) to receive the
payment of that cash. The reason that the cash is not distributed in accordance with the P&L ratio is twofold: first the final
cash distribution is based upon the balance in each partner’s capital account, not the P&L ratio, and second, there will be
situations, as illustrated in the previous example, where one or more partners will have deficit balances in their capital
accounts. If this is the case, they should never receive a cash distribution, even if the deficit does not arise until late in the
liquidation process.
The determination of the available cash balance is generally very straightforward. The beginning cash balance (cash on
hand at the start of the liquidation process) is adjusted for the cash receipts from receivables, sale of noncash assets,
payment to creditors, and liquidation expenses incurred. A situation may occur where a certain amount of cash is to be
reserved for payment of future liabilities that may arise. If this is the case, this cash should be treated as noncash asset
which makes it unavailable for current distribution to the partners.
The determination of which partner(s) is(are) to receive the available cash is somewhat more difficult. There are a
number of ways to make this computation, all of which are equally correct in the eyes of the examiners. This determination
can be made at the beginning of the liquidation process or at the time of each payment. In making this determination there
are two key assumptions that must be made: (1) the individual partners are assumed to be personally insolvent, and (2) the
remaining noncash assets are deemed to be worthless (thus creating a maximum possible amount of loss).
One method of determining the amount of the “safe payment” is the use of an Installment Cash Distribution Schedule.
This schedule is prepared by determining the amount of loss required to eliminate each partner’s capital account. As noted
above, all of the remaining noncash assets are to be considered worthless at the time a safe payment is determined. Thus if
we determine the amount of loss required to eliminate each partner’s capital balance, we can determine the order in which
the partners should receive the cash payments.
When preparing this schedule it is important to make sure that the proper capital balance is used. The capital balance
used must be inclusive of any loans or advances between the partnership and partners. Thus, the capital balance at the
beginning of the liquidation process is increased by any amount owed to the partner by the partnership, and decreased by
any amount owed to the partnership by the partner.

Example: Schedule of Possible Losses and Installment Cash Distribution

Assume the same data as used for the previous example.
A, capital B, capital C, capital Total
Capital balances P120,000 P170,000 P60,000 P350,000
Loss to eliminate A (120,000) ( 72,000) (48,000) 240,000
0 98,000 12,000
Additional loss
to eliminate C ( 18,000) (12,000) 30,000
80,000 0
Additional loss
to eliminate B ( 80,000) 80,000
0 P350,000

The total capital balance of P350,000 indicates that if the noncash assets are sold for P350,000 less than their book
value, then none of the partners will receive a cash distribution. The purpose of this schedule is to determine how much of a
loss each partner’s capital account can withstand based on that partner’s P&L ratio. In this example A’s capital would be
eliminated if the partnership incurred a P240,000 (P120,000/50%) loss, B’s would be eliminated by a P566,667
(P170,000/30%) loss, and C’s by a P300,000 (P60,000/20%) loss. A is assumed to be eliminated first because it would take
the smallest amount of loss to eliminate his account Once A is eliminated as a partner, the P&L ratios change to reflect the
relative P&L ratio of the remaining partners, in this case B and C. Based on the remaining capital balances and the relative
P&L ratio, it would take a P163,333 (P98,000/60%) loss to eliminate B and a P30,000 (P12,000/40%) loss to eliminate C.
Now that C is eliminated, B will share all of the profits and losses as a sole partner (i.e., 100%). It will now take an P80,000
loss to eliminate B’s capital. The resulting installment cash distribution schedule would appear as follows (this schedule
assumes that all creditors have already received full payment; thus, the cash amount represents available cash):

Installment Cash Distribution Schedule

Partner A B C
First P 80,000 100%
Next 30,000 60% 40% Next 240,000
50% 30% 20%
Any other 50% 30% 20%
While the example shown in the previous page was not an installment liquidation, the Installment Cash Distribution
Schedule shown above could still be used to determine how the available cash of P100,000 is to be distributed. This is
illustrated below.
Partner A B C
First P 80,000 P 80,000
Page 20 of 25
 Next 20,000 12,000 P8,000
P 100,000 P92,000 P8,000
The above amounts can also be determined by simply computing the loss absorption capacity of each partner. The loss
absorption capacity pertain to the amount of loss a partner’s capital can absorbed. As already explained above, A’s capital
can only absorb P240,000 loss (P120,000/50%), whereas, B’s capital can absorb P566,667 loss (P170,000/30%) and C’s
capital can absorb up to P300,000 loss (P60,000/20%). In this case, B’s capital has the highest loss absorption capacity in
which the amount of cash to be paid to B before other partners can share should be P80,000 (P566,667 - P300,000) x 30%,
known as priority 1 or allocation 1. After giving P80,000 to B his capital balance will have a loss absorption capacity equal
that of C P300,000, (P170,000 - P80,000 = P90,000/30%). The next available cash to be distributed known as priority 2 or
allocation 2 can be determined by simply getting the difference between the loss absorption capacity of B or C and that of
A multiply by B and C’s P&L ratio. In this case, B’s share under priority 2 is P18,000 (P300,000 - P240,000) x 30% and C’s
share is P12,000 (P300,000 - P240,000) x 20%. After giving P18,000 to B and P12,000 to C, their capital balances will be
P72,000 for B (P90,000 - P18,000) and P48,000 for C (P60,000 - P12,000). The partners capital balances after priority 2 will
have the same amount of loss absorption capacity in which case any additional cash distributed can be made based on the
partners’ P&L ratio, in this case, 50%;30%;20%.

ADDITIONAL ILLUSTRATIONS:

1. Partners A, B, and C decided to liquidate their partnership. A balance sheet was prepared on this date as follows:
ABC Partnership
Balance Sheet
As of March 1, 20X1
Cash P 20,000 Accounts Payable P 25,000
Other Assets 180,000 Loan Payable, B 5,000
A, Capital 50,000
B, Capital 45,000
_______ C, Capital 75,000
P200,000 P200,000

Profits and losses are divided in the ratio of 2:3:1, respectively. The non- cash assets were sold for P68,000. All the partners
are solvent, except for B.

ABC Partnership
Statement of Partnership Liquidation
March 1, 20X1
CAPITAL BALANCES
Other Loan
Cash Assets Liabilities Due to B A (2/6) B (3/6) C (1/6)
Balances before
liquidation P20,000 P180,000 P 25,000 P5,000 P50,000 P45,000 P75,000
Sale of assets at a
loss 68,000 (180,000) (37,333) (56,000) (18,667)
Balances after
sale 88,000 -- 25,000 5,000 12,667 (11,000) 56,333
Payment of
liabilities (25,000) (25,000)
Balances after
payment 63,000 -- -- 5,000 12,667 (11,000) 56,333
Right of offset (5,000) 5,000
Balances after
right of offset 63,000 -- -- -- 12,667 (6,000) 56,333
Deficiency balance
of B absorbed
by A & C (4,000) 6,000 (2,000)
Balances P63,000 -- -- -- P8,667 -- P54,333
Payments to
partners (63,000) (8,667) (54,333)

Since B’s share in the loss on realization is greater than his capital balance, a capital deficiency results. The loan payable to B
is not sufficient to absorb the deficiency, and since he is insolvent, the other partners absorb the deficiency balance as a loss.
This will decrease the payment to be received by partners A and C.
2. On December 31, 20X1, the balance sheet of XX, YY, and ZZ is as follows:
XYZ Partnership
Balance Sheet
December 31, 20X1
Cash P 15,000 Liabilities P 50,000
Non- cash Assets 265,000 Loan Payable, YY 20,000
Loan Payable, ZZ 10,000
XX, Capital 48,000
YY, Capital 72,000
________ ZZ, Capital 80,000
P280,000 P280,000
Profits and losses were shared as follows: XX, 30%; YY, 30%; and ZZ, 40%. It was decided to liquidate the business. The
following is a summary of the realization and liquidation:
Book Value
Of Asset Cash Expenses Liabilities
Page 21 of 25
 __Month_ _Realized_ Collected _Paid__ Paid__
January P 50,000 P 20,000 P 1,000 P 24,000
February 80,000 60,000 3,000 ---
March 75,000 50,000 4,000 26,000
April 60,000 30,000 2,000 ---

Required: Prepare a Statement of Partnership Liquidation. When necessary, this statement should be supplemented by
supporting schedules. In the general ledger, the loan accounts are not to be closed into the capital account.
CASH PRIORITY PROGRAM
BALANCES PAYMENTS
XYZ PARTNERSHIP
XX YY ZZ XX YY ZZ TOTAL Statement of Partnership Liquidation
January 1 to April 30, 20X1
Total Interests 48,000 92,000 90,000
Divide by: P/L ratio 30% 30% 40%

Loss Absorption Bal. 160,000 306,667 225,000

1 Priority – YY
st
(81,667) -- P24,500 -- P24,500

Balances P160,000 P225,000 P225,000

2nd Priority – YY, ZZ (65,000) (65,000) -- 19,500 26,000 45,500

Balances P160,000 P160,000 P160,000 30% 30% 40%

CASH NON-CASH LIAB. L/P- YY L/P- ZZ XX,CAP. YY,CAP. ZZ,CAP.

Balances P 15,000 P 265,000 P50,000 P20,000 P10,000 P48,000 P72,000 P80,000
JANUARY
Sale at a loss 19,000 (50,000) ______ _______ _______ ( 9,300) ( 9,300) (12,400)
Balances P34,000 P 215,000 P50,000 P 20,000 P10,000 P38,700 P62,700 P 67,600
Payment of
liabilities ( 24,000) ________ (24,000) _______ _______ _______ ______ _______
Balances P10,000 P 215,000 P26,000 P 20,000 P10,000 P38,700 P62,700 P 67,600
FEBRUARY
Sale at a loss 57,000 ( 80,000) _______ _______ _______ ( 6,900) ( 6,900) ( 9,200)
Balances P67,000 P 135,000 P26,000 P 20,000 P10,000 P31,800 P55,800 P 58,400
Distribution to
partners (41,000) _______ _______ (20,000) ( 9,429) _______ (11,571) _______
Balances P26,000 P 135,000 P26,000 --- P 571 P31,800 P44,229 P 58,400
MARCH
Sale at a loss 46,000 ( 75,000) _______ _______ _______ ( 8,700) ( 8,700) (11,600)
Balances P72,000 P 60,000 P26,000 --- P 571 P23,100 P35,529 P 46,800
Payment of
Liabilities (26,000) ________ (P26,000) --- _______ _______ _______ _______
Balances P 46,000 P 60,000 --- --- P 571 P23,100 P35,529 P46,800
Distribution to
Partners (46,000) ________ ________ _______ ( 571) ( 5,100) (17,529) (22,800)
Balances --- P60,000 --- --- --- P18,000 P8,000 P24,000
APRIL
Sale at a loss 28,000 ( 60,000) ________ _______ _______ ( 9,600) ( 9,600) (12,800)
Balances P 28,000 --- --- --- P 8,400 P 8,400 P11,200
Payments to
Partners ( 28,000) --- --- --- --- ( 8,400) ( 8,400) (11,200)

SCHEDULE OF CASH DISTRIBUTION

Total XX, Cap. YY, Loan YY, Cap. ZZ, Loan ZZ, Cap.
FEBRUARY
Payment to partners P41,000
1st priority (full) ( 24,500) P 20,000 P 4,500
2nd priority (partial) ( 16,500) 7,071 P 9,429
Cash distribution in February P 20,000 P 11,571 P 9,429
MARCH
Payment to partners P46,000
2nd priority (balance) (29,000) P 12,429 P 571 P 16,000
3rd priority (17,000) P 5,100 5,100 6,800
Cash distribution in March P 5,100 P 17,529 P 571 P 22,800

The supporting computation in the preceding example is the Cash Priority Program, which can be prepared before the start of
the liquidation process. It is then, supported by the Schedule of Cash Distribution for a clearer presentation of how the
distribution to the partners were arrived at. Another supporting computation that may be used is the Schedule of Safe
Payments. This schedule is done on a monthly basis with the same purpose in mind. And that is to determine the proper
distribution of cash among the partners. Using the same example, we are now going to prepare a Schedule of Safe Payments:

SCHEDULE OF SAFE PAYMENTS

FEBRUARY XX YY ZZ__
Total Interests* P31,800 P75,800 P68,400
Less: Possible Loss** ( 40,500) ( 40,500) ( 54,000)
Balances P( 8,700) P35,300 P14,400
Absorption of Deficit 8,700 ( 3,729) ( 4,971)
Payments P31,571 P 9,429
MARCH
Total Interests P23,100 P35,529 P47,371
Less: Possible Loss ( 18,000) ( 18,000) ( 24,000)
Page 22 of 25
 Payments P 5,100 P17,529 P23,371

* TOTAL INTERESTS = CAPITAL + PAYABLE TO PARTNER -- RECEIVABLE FROM PARTNER.

** POSSIBLE LOSS = NON-CASH ASSET BALANCE+CASH WITHHELD
FOR FUTURE EXPENSES.

Short cut technique of determining the amount of cash available to a partner or all partners will be discussed inside the
classroom. These are the common questions asked in the CPA board exam. Examinees are no longer required to prepare in
good form a statement of liquidation or a safe payment schedule. The questions normally focuses on distribution of
available cash to partners as to how much will be their share and determination of the total liquidation loss. Hence, an
examinee should give his/her answer within the time limit required.

QUIZZER
1. After paying all their liabilities, Mark, Lark, and Park had the following balances:
Partner Capital Loans P & L ratio
Mark P102,960 P90,000 12/25
Lark 89,040 30,000 8/25
Park 68,100 39,900 5/25
Cash available for distribution amounts to P37,800, remaining assets of P382,200 will be realized piecemeal in the next
month. How much of the P37,800 cash should Park receive?
a. P30,600 b. P7,200 c. P7,560 d. Zero

2. The condensed balance sheet and profit and loss ratios of the partnership of Bean, Dean, and Jean are as follows:

Cash P 1,125,000 Liabilities P 2,625,000

Rec. from Bean 375,000 Payable to Jean 500,000
Other assets 10,250,000 Bean, capital (40%) 3,750,000
Dean, capital (30%) 2,500,000
Jean, capital (30%) 2,375,000
Partners agree to liquidate and all non- cash assets were sold for P7,500,000.
How much of the available cash will go to Bean?
a. P3,750,000 b. P2,275,000 c. P2,650,000 d. P2,125,000

Items 3 to 5 are based on the following:

The balance sheet for Coney, Honey, and Money partnership shows the following information as of December 31, 2016:
Cash P 40,000 Liabilities P100,000
Other assets 560,000 Coney, loan 50,000
Coney, capital 250,000
Honey, capital 140,000
Money, capital 60,000
P600,000 P600,000
Profit and loss ratio is 3:2:1 for Coney, Honey, and Money, respectively. Other assets were realized as follows:
Date Cash Received Book Value
January 2017 P120,000 P180,000
February 2017 70,000 154,000
March 2017 250,000 226,000
Cash is distributed as assets are realized.
3. The total loss to Coney is:
a. P60,000 b. P40,000 c. P20,000 d. None
4. The total cash received by Honey is:
a. P40,000 b. Zero c. P100,000 d. P30,000
5. Cash received by Money in January 2017 is:
a. P4,000 b. P20,000 c. P10,000 d. Zero

6. Dolly, Folly, and Golly have capital balances of P800,000; P1,000,000; and P360,000, respectively and profit sharing ratios
of 4:2:1, respectively.

If Dolly received P160,000 upon liquidation of the partnership, the total amount received by all the partners was:
a. P2,160,000 b. P1,120,000 c. P1,040,000 d. P480,000

7. Assume the same facts in No. 6, except that Dolly received P520,000 as a result of the liquidation. Golly received as part of
the liquidation:
a. P520,000 b. P290,000 c. P360,000 d. P280,000

8. On January 1, 2017, the partners of Max, Sax, and Tax, who share profits and losses in the ratio of 5:3:2, respectively,
decided to liquidate their partnership. On this date, the partnership’s condensed balance sheet was as follows:

Cash P150,000 Liabilities P180,000

Other assets 750,000 Max, capital 240,000
Sax, capital 270,000
Tax, capital 210,000 P900,000
P900,000
Page 23 of 25
 On January 15, 2017, the first cash sale of other assets with a carrying amount of P450,000 realized P360,000. Safe
installments to the partners were made the same day. How much cash should be distributed to Max, Sax, and Tax,
respectively?
a. P45,000; P153,000; and P132,000. c. P165,000; P99,000; and P66,000.
b. P120,000; P135,000; and P105,000. d. P180,000; P108,000; and P72,000

Items 9 and 10 are based on the following:

The following condensed balance sheet is presented for the partnership of Nick, Pick, and Rick, who share profits and losses
in the ratio of 4:3:3, respectively:
Cash P 45,000 Accounts payable P105,000
Other assets 415,000 Rick, loan 15,000
Nick, loan 10,000 Nick, capital 155,000
Pick, capital 100,000
Rick, capital 95,000
P470,000 P470,000
9. Assume that the assets and liabilities are fairly valued on the balance sheet and that the partnership decides to admit Tick
as a partner, with a 20% interest. No goodwill or bonus is to be recorded. How much should Tick contribute in cash or
other assets?
a. P70,000 b. P71,000 c. P87,500 d. P88,750

10. Assume that instead of admitting a new partner, the partners decide to liquidate the partnership. If the other assets are
sold for P350,000, how much cash should be distributed to Nick?
a. P115,000 b. P119,000 c. P129,000 d. P155,000

Items 11 and 12 are based on the following:

Benny, Jenny, and Kenny are partners in a trading business. They participate in the profits and losses equally. As of
December 31, 2017, the partners’ capital and drawing accounts are as follows:
Benny Jenny Kenny Total
Capital P200,000 P160,000 P600,000 P960,000
Drawing 120,000 80,000 40,000 240,000
The partners decided to liquidate the partnership. The operating profit for the year 2017 amounted to P144,000, which was
all exhausted including partnership assets. As of December 31, 2017, unpaid liabilities still amounted to P168,000. Benny is
personally insolvent, but both Jenny and Kenny have substantial private resources.
11. The total loss on realization was:
a. P720,000 b. P888,000 c. P960,000 d. P1,032,000
12. The amount received by Kenny in final cash distribution was:
a. P156,000 b. P168,000 c. P216,000 d. P324,000

Items 13 and 14 are based on the following:

The following balance sheet is for the Ad Gen Da partnership. The partners, Ad, Gen and Da, share profits and losses in the
ratio of 5:3:2, respectively.
Cash P30,000 Liabilities P70,000
Other assets 270,000 Ad, capital 140,000
Gen, capital 80,000
Da, capital 10,000
13. The assets and liabilities are fairly valued on the above balance sheet and the partnership wishes to admit Melvin as a
partner with a one-fifth interest without recording goodwill or bonus. How much should Melvin contribute in cash or other
assets?
a. P36,800 b. P46,000 c. P57,500 d. P60,000
14. Assume that the original partners have agreed to liquidate the partnership by selling the other assets. How much each of
the partners receives if the other assets are sold for P200,000?
a. Ad, P102,500; Gen, P57,500; Da, P0
b. Ad, P103,000; Gen, P57,000; Da, P0
c. Ad, P105,000; Gen, P80,000; Da, P10,000
d. Ad, P105,000; Gen, P59,000; Da, P0

15. Alston, Boyer, and Cane are partners with a profit and loss ratio of 5:4:1. The partnership was liquidated, and prior to the
liquidation process, the partnership balance sheet shows the following:
Cash 80,000 Alson, capital 320,000
Other assets 720,000 Boyer, capital 320,000
______ Cane, capital 160,000
800,000 800,000
After the partnership was liquidated and the cash was distributed, Boyer received P128,000 in cash in full settlement of his
interest. The amount of realization loss on the sale of the other assets is:
a. P480,000 b. P320,000 c. P672,000 d. P330,000

16. Partners Jones, Kerr, and Lyons have decided to liquidate their partnership. The partnership’s balance sheet reveals the
following:
Cash 50,000 Liabilities 60,000
Other assets 500,000 Jones, capital 180,000
Kerr, capital 240,000
_______ Lyons, capital 70,000
Page 24 of 25
 550,000 550,000
The partners share profits and losses in a 4:4:2 ratio and all partners are personally solvent. Lyons received P98,000 in cash
in full settlement for her share of the partnership.
The selling price for the other assets is:
a. P690,000 b. P640,000 c. P360,000 d. P410,000

17. Victor, Waldo, and Xeres are partners sharing profits equally. The partnership and also certain partners are insolvent and
the partnership is liquidated. Upon distribution of the partnership loss from liquidation, a statement is drawn up
summarizing the status of each partner as follows:
Personal Status Firm Status
(Exclusive of Firm Interest) Interest Amount Owed Partner Assets
Liabilities in Firm to Firm
Victor P300,000 P100,000 P50,000
Waldo 50,000 100,000 P 50,000
Xeres 150,000 100,000 150,000
Against whom can firm creditors proceed for the recovery of their unpaid claims?
a. Against Victor for P150,000.
b. Against Victor for P100,000
c. Against Xeres, for P50,000
d. Against Xeres, for P50,000, Victor, P100,000

18. X, Y, and Z have capital balances of P30,000, P15,000, and P5,000, respectively, in the XYZ partnership. The general
partnership agreement is silent as to the manner in which partnership losses are to be allocated but does provide that
partnership profits are to be allocated as follows: 40% to X, 25% to Y, and 35% to Z. The partners have decided to dissolve
and liquidate the partnership. After paying all creditors, the amount available for distribution will be P20,000. X, Y, and Z are
individually solvent. Under the circumstances, Z will:
a. Receive P7,000.
b. Receive P12,000.
c. Personally have to contribute an additional P5,500.
d. Personally have to contribute an additional P5,000.

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

Cash P10,000 Accounts payable P15,000

Accounts receivable 25,000 Folly capital 40,000
Lumber inventory 40,000 Frill capital 20,000

On January 10, 2017 the lumber inventory is sold for P25,000, and during
January, accounts receivable of P21,000 are collected. No further collections on the receivables are expected. Profits are
shared 60% to Folly and 40% to Frill. Of the total equity of Folly, what amount, appear to be recoverable?
a. P40,000 b. P28,600 c. P24,600 d. P37,600

20. Terry, Vivian, and Walter have decided to liquidate their partnership. Account balances on January 1, 2017 are as follows:
Cash P120,000 Accounts payable P 40,000
Other assets 120,000 Terry capital (30%) 85,000
P240,000 Vivian capital (30%) 25,000
Walter capital (40%) 90,000
P240,000

The partners agree to keep a P10,000 contingency fund and to distribute available cash immediately. How much cash will
be distributed to Terry?
a. P21,000 b. P33,000 c. P46,000 d. P40,000

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