PARTIAL TOPICS

1. PARTNERSHIP FORMATION

a. CHARACTERISTICS OF A PARTNERSHIP

B. ACCOUNTING FOR PARTNERSHIP

C. FORMATION

ADVACC1
D. VALUATION OF CONTRIBUTIONS OF PARTNERS

1. PARTNERSHIP OPERATION

2. PARTNERSHIP DISSOLUTION

3. PARTNERSHIP LIQUIDATION

Accounting for Special

Transactions
(Advanced Accounting 1)
True or False Questions
1. A partnership is an incorporated association of two or more persons to pursue a business for profit as co-owners.
Ans. False - partnership is an unincorporated form of business.

2. Partners can agree to limit the power of negotiating contracts for the partnership to any one or more of the partners.
Such an agreement is binding on all outsiders, whether or not they know it exists.
Ans. False, because of mutual agency, rights of all partners to represent the company’s normal business operations.

3. If Partner A contributes cash of P20,000 to the partnership of A and B, and Partner B contributes a building valued at
P30,000 to the partnership, the investments become joint property of both partners.
Ans. True, because of co-ownership of  property

4. A general partnership may consist of limited partners and general partners.

Ans. False , because general partnership all partners are individually liable – unlimited liability

5. Limited partners are liable for any debt that cannot be paid through the resources of the partnership.
Ans. False, limited partners whose liability is limited up to the extent of their contributions (limited partnership)

6. General partners are included in limited partnerships.

Ans. True, In limited partnership at least one should be a general partner

7. Partner A contributed cash of P100,000 and land with carrying amount of P500,000 and a fair value of P700,000 to a
partnership. The credit to Partner A’s capital account in the partnership books is P600,000.
Ans. False, because cash is P100,000 and land with fair value of P700,000, so total credit to partner A, is P800,000

8. Partner C contributed inventory costing P50,000 and with a net realizable value of P40,000 to a partnership. The related
accounts of payable P10,000 will be assumed by the partnership. The net credit to Partner C’s capital account in the
partnership books is P30,000.
Ans. True, Inventory net realizable value is P40,000 less accounts payable of P10,000 equals P30,000
 Identification Questions
1. Defined as the contract entered into between two or more persons who binds themselves to contribute
money, property
or industry to a common fund, with the intention of dividing the profits among themselves .
Ans. Partnership
2. A partnership has a juridical personality separate and distinct from that of each of the partners.
Ans. Separate and legal personality
3. Each partner can act as agent of the partnership in matters which are within the nature of its business.
Ans. Mutual agency
4. A kind of partner whose liability for the debts of partnership is limited to the amount of his capital
contribution in the firm.
Ans. Limited partner
5. One who’s liability for the partnership debts is unlimited and therefore may extent up to his personal assets.
Ans. General partner
6. One whose contributions to the partnership consist of money and property.
Ans. Capitalist partner
7. A partner whose contributions to the partnerships in the form of services, skills and talent and expertise.
Ans. Industrial partner

8. One who is not known to be a partner and does not participate in running the affairs of
the business.
Ans. Dormant partner
9. One who participates actively in managing the business but he is not known as a partner.
Ans. Secret partner
10. One who is known publicly as a partner but does not participate in running the affairs of
the firm.
Ans. Silent partner
11. A partner whose contribution to the partnership consists of money, property and
services.
Ans. Capitalist-industrial partner
12. It is a temporary account and is periodically closed to a partner’s capital account.
Ans. Drawing account
Problem:1. Mr. Billy and Ms. Angie agreed to form a partnership. The assets contributions of the partners are as follows:

Angie Billy

Cash 20,000 30,000

Inventory 15,000

Building 40,000

Furn. And Fixt 15,000

The building is subject to a mortgage of P10,000 w/c the partnership has assumed. The partnership agreement

also specified that the profits and losses are to be distributed evenly.

Required: Compute for the adjusted capital balances of the partners.

Solution: Angie Billy

Cash 20,000 30,000

Inventory 15,000
Building 40,000
Furn. and fixt. 15,000
Mortgage payable (10,000)
Adjusted cap. balance 35,000 75,000
Billy capital unadjusted 85,000
Mortgage payable (10,000)
Adjusted Billy capital balance 75,000

Journal entries:
Journal entry for Angie
1. Cash 20,000
Furn. and fixt 15,000
Angie, capital 35,000
To record the investment of Angie
Journal entry for Billy
1. Billy, capital 10,000
Mortgage payable 10,000
To adjust the liability of Billy

2. Cash 30,000
Inventory 15,000
Building 40,000
Mortgage payable 10,000
Billy ,capital 75,000
To record the investment of Billy
Problem 2.

On January 1, 20x1, Mr. Angot and Ms. Banglo agreed to form a partnership and share profits and losses in the ratio
of 3:7, respectively. Mr. Angot contributed a parcel of land that cost him P10,000 ,Ms. Banglo contributed P40,000
cash. The land was sold for P18,000 on. January 1 ,20x1, immediately after formation of the partnership.

Requirement: Compute the adjusted capital balances of the partners on January 1, 20x1.

Ans. Mr. Angot, capital is equal to P18,000, the sale of the land by the partnership agreement date
provides information on the land’s fair value on that date.

Ms. Banglo, capital is P40,000 cash distribution

 Topic – 2 Partnership Operations

Division of profits and losses

The partners share in the partnership profits and losses in accordance with their partnership agreement.
The Philippine Civil Code provides the following additional rules in the profit or loss sharing of partners:

If only the share of each partner in the profits has been agreed upon, the share of each in the losses shall
be the
same proportion.

In the absence of stipulation, the share of each partner in the profits and losses shall be in proportion to
what he may
have contributed, but the industrial partner shall not be liable for the losses. As for the profits, the
industrial
partner shall receive such share as may be just and equitable under the circumstances.

If besides his service he has contributed capital, he shall also receive a share in the profits
in proportion of his capital.
In addition to profit and loss sharing , the partnership agreement may also stipulate any of the following:
a. Salaries – normally, an industrial receives salary in addition to his share in the partnership’s
profits as compensation for his services to the partnership.

b. Bonuses – the managing partner may be entitled to a bonus for excellent management
performance. Unlike for salaries, a partner is entitled to a bonus only if the
partnership earns profit. The partners is not entitled to any bonus if the
partnership incurs loss.

c. Interest on capital contributions - the partnership agreement may stipulate that capitalist
partners are entitled to an annual interest on their capital contributions.

The items above are normally provided first to the respective partners and any remaining amount of the
profit or loss is shared amount the partners based on their stipulated profit and loss ratio.
The ratio in which partnership profits and losses are divided is known as the profit and loss ratio.
The many possible methods of dividing net income or loss among partners may be summarized as follows:

1. Equally.
2. In an unequal or arbitrary ratio.
3. In the ratio of partners’ capital account balances on a particular date, or in the ratio of average capital
account balances during the year.
4. Allowing interest on partners’ capital account balances and dividing the remaining net income or loss
in a specific ratio.
5. Allowing salaries to partners and dividing the remaining net income or loss in a specified ratio.
6. Bonus to managing partner based on net income.
Distribution of net income or net loss using drawing account and capital account in journalizing.

Profit distribution
Using capital account only
Income Summary xx
A, capital xx
B, capital xx
To record the distribution of profit
Using drawing account and capital account
1st entry - Income Summary xx
A, drawing xx
B, drawing xx
To record distribution of profit
2nd entry - A, drawing xx
B, drawing xx
A, capital xx
B, capital xx
To close drawing accounts
Loss distribution
Using capital account only
A, capital xx
B, capital xx
Income summary xx
To record the distribution of loss
Using drawing account and account
1st entry - A, drawing xx
B, drawing xx
Income summary xx
To record the distribution of loss
2nd entry - A, capital xx
B, capital xx
A, drawing xx
B, drawing xx
To close drawing accounts
Illustration 1 - Alba and Ben decided to form a partnership. The partnership agreement stipulates the following:
a. Annual salary allowance of P50,000 for Alba and P30,000 for Ben. Salary allowances are to be withdrawn
by the partners throughout the period and are to be debited to their respective drawing accounts.
b. The partners share profits equally and losses on a 60:40 ratio.
During the period the partnership earned a profit of P100,000 before salary allowances.
Required : Compute the respective shares of the partners in the profit and journal entries

Solution: Schedule of profit distribution Alba Ben Total

Amount to be allocated 100,000
Amount to be allocated
1. Salaries 50,000 30,000 80,000
2. Allocation of remaining profits
(100,000 – 80,000=20,000) (20,000 x 50%) (20,000 x 50%) 10,000 10,000 20,000
Totals 60,000 40,000 100,000
Journal entries:
1. Alba, drawing 50,000
Ben, drawing 30,000
Cash 80,000
To record the withdrawal of salary allowances
2. Income summary 100,000
Alba, capital 60,000
Ben, capital 40,000
To record the distribution of profit

3. Alba, capital 50,000

Ben, capital 30,000
Alba, drawing 50,000
Ben, drawing 30,000
To close the drawing accounts
Illustration 2 – Bravo and Charlie form a partnership. The partnership agreement stipulated the following:
a. Annual salary allowances of P80,000 for Bravo and P40,000 for Charlie.
b. The partners share profits equally and losses on a 60:40 ratio.
During the period there partnership earned profit of P100,000.
Required: Compute for the respective shares of the partners in the profit.
Solution :
Schedule profit distribution
Bravo Charlie Total
Amount to be allocated 100,000
Allocation:
1. Salaries 80,000 40,000 120,000
2. Allocation of remaining loss
(profit 100,000 – 120,000 salaries=
- 20,000 loss)
- 20,000 x 60% (12,000) (12,000)
- 20,000 x 40% (8,000) (8,000)
Totals 68,000 32,000 100,000
   Illustration 3 .1– Andy and Bobby decided to form a partnership. The partnership agreement stipulates the following:
a. annual salary allowances of P48,000 for Andy and P30,000 for Bobby.
b. Bonus to Andy of 10% of the profit after partner’s salaries and bonus.
c. The partners share profits and losses on a 60:40 ratio.
During the period the partnership earned a profit of P100,000 before deductions for salaries and bonus.
Required: Compute for the respective shares of the partners in the profit.
Solution: Andy Bobby Total
Amount being allocated 100,000
Allocation : a.. Salaries 48,000 30,000 78,000
b. Bonus * 2,000 * 2,000
c. Allocation of remaining profit
(100K-80K=20K) 60:40 12,000 8,000 20,000
Totals 62,000 38,000 100,000
*Bonus computation: Profit before salaries and bonus - 100,000
Salaries (78,000)
Profit after salaries but before deduction of bonus 22,000

* B B=Bonus or Let X = Bonus

= 22,000-20,000 P=Profit X=10%(100,000-78,000-X)

= 2,000 Br = Bonus Rate X=2.000
Illustration 3.2 – Susan and Tita decided to form a partnership. The partnership contract provides for the following:
a. Salaries to Susan and Tita, P30,000 each.
b. Interest on capital accounts balances , Susan P7,000 and Tita P3,200.
c. Bonus to Susan, 20% of net income after allowances for salaries and interest but before bonus
d. Remaining profit or loss
During the period the partnership earned a profit of P190,200 before salaries, interest and bonus to partners.
Required: Computation of the bonus and schedule of profit distribution.

Solution: Bonus computation

Net income before salaries, interest and bonus 190,200
Less: salaries 60,000
Interest 10,200 70,200
Net income before bonus 120,000
Bonus percentage _20%_
Bonus 24,000
Schedule of profit distribution
Susan Tita Total
Amount to be allocated 190,200
Allocation:
Salary allowances 30,000 30,000 60,000
Interest allowances 7,000 3,200 10,200
Bonus to Susan 24,000 24,000 94,200
Remainder equally (190,200-94,200) 48,000 48,000 96,000
Totals 109,200 81,200 190,200
Illustration 4 - Andres and Bueno decided to form a partnership. The partnership agreement stipulates the following:
a. Annual salary allowance of P50,000 to Andres.
b. Interest of 10% on the weighted average balance of Bueno
c. The partners share profits and losses on a 60:40 ratio.
During the period , the partnership earned a profit of P100,000.
The movement in Bueno’s capital account are as follows:
Capital balance,, beginning 60,000
Additional investment, April 1 20,000
Withdrawal, July 31 (30,000)
Additional investment, September 30 40,000
Additional investment, December 31 10,000
Capital balance, ending 100,000
Requirement: Compute for their respective shares of the partnership profit.
Solution : The weighted average balance of Bueno’s capital account is computed as follows:
Mons. outstanding /total mons.
Balance in a year Weighted average
Beg. balance 60,000 12/12 60,000
April 1, additional investment 20,000 9/12 15,000
July 31, withdrawal (30,000) 5/12 (12,500)
September 30, additional investment 40,000 3/12 10,000
December 31, additional investment 10,000 0 /12 __ 0__
Weighted average capital; balance 72,500
Schedule of profit contribution
Andres Bueno Total
Amount to be allocated 100,000
Allocation :
a. Salaries 50,000 50,000
b. Interest on weighted ave.
(72,500x10%) 7,250 7,250 57,250
c. Allocation of remaining of
remaining profit (100,000-57250)
42,750x60% 25,650 25,650
42,750x40% 17,100 17,100
As allocated 75,650 24,350 100.,000
 Illustration 5- On January 1, 2016, Santos and Torres formed a partnership with an investment of P40,000 by
Santos and P60,000 by Torres. Changes in the capital accounts during 2016 are summarized below:

Changes in partners’ capital accounts Santos Torres

Capital balance , Jan.1, 2016 40,000 60,000
Additional investment, March 1 20,000 50,000
Additional investment, August 1 20,000 40,000
Withdrawal, October 1 (20,000) -
Withdrawal, November 1 __ -___ (50,000)
Capital balances, December 31,2016 60,000 100,000

The partnership agreement stipulates that allows interest on partners’ average capital account balance at 12%, with
any remaining income or loss to be divided equally. The net loss for the year is P1,000.

Required: Compute for the respective shares of the partners in the loss and journal entry.
Solution: Computation of weighted average capital account balances are as follows:

Mons. Outstanding /
Santos Balances Total months in a yr. Weighted
average
January 1 40,000 12/12 40,000
March 1, additional investment 20,000 10/12 16,667
August 1, additional investment 20,000 5/12 8,333
October 1, withdrawal (20,000) 3/12 (5,000)
Weighted average capital balance 60,000

Torres Balances Total mons. in a yr. Weighted

average
Capital balance, January 1 60,000 12/12 60,000
Additional investment, March 1 50,000 10/12 41,667
Additional investment, August 1 40,000 5/12 16,666 *
Withdrawal, November 1 ( 50,000 ) 2/12 ( 8,333)
Weighted average capital balance 110,000

* Adjusted to balance
 Schedule of profit distributions Santos Torres Total
Amount to be allocated (1,000)
Allocation: 1. Interest on average capital account balances
(60,000 x 12%) 7,200 7,200
(110,000 x 12%) 13,200 13,200 20,400
2. Remainder (20,400 + 1,000) equally (10,700) (10,700) (21,400)
(21,400)
Totals (3,500) 2,500 (1,000)

Journal entry
Santos, capital 3,500
Torres, capital 2,500
Income summary 1,000
To record division of net loss
Summary
1. The partners share in the profits and losses of a partnership in accordance with their partnership agreement.
2. If only the share of each partner in the profit has been agreed upon, the share of each in the losses shall be
in the same proportion.
3. In the absence of stipulation, the share of each partner in the profits and losses shall be in proportion to what
he may have contributed, but the industrial partner shall not be liable for the losses.
4. Before allocation of profit, the following items are allocated first, if they are stipulated in the partnership
agreement:
a. Salaries
b. Bonuses to partners – allocated only if there is profit
c. Interest on capital
After allocating these items, any remaining profit or loss is allocated based on the stipulated profit and loss
ratio.
The net income base for bonus may be:
a. Net income before bonus (bonus is not treated as an expense of operation)
b. Net income after bonus (bonus is treated as an expense of operation). An algebraic computation
is required.