Partnership Accounting

Partnership Accounting
Stages in the Life of the Partnership

Formation -------> Operation ------> Dissolution ------> Liquidation

Formation
Accounting Procedures:
1. Valuation of assets and liabilities contributed
Assets: Liabilities if assumed by the partnership:
a. Agreed values a. Agreed values
b. Fair values b. Present values/fair values

Liabilities assumed by the partnership will operate to decrease the contributed asset of the
partner in computing the contributed capital.

2. Re-alignment of capital balances

a. Goodwill method
b. Bonus method
c. Non-revaluation and bonus method

Capital contribution vs. Final Capital credit

Capital contributions (also called initial capital credit) represent the net assets invested by a partner
whereas final capital credit represents the agreed capital for a partner. Generally, capital
contribution equals capital credit. However, this may be changed by agreement of the partners.
When changed by agreement, the difference between capital contribution and agreed capital is
accounted either as:
1. Bonus – transfer of capital among the partner. Total contributed capital = total agreed
capital.
2. Goodwill – the difference is attributed to an unidentifiable intangible asset (outlawed by PFRS 3
for external financial reports). Total contributed capital < total agreed capital.
3. Cash settlement

1.) On December 1, 2015, Kevin and Love formed a partnership, agreeing to share for profits and
losses in the ratio of 2:3, respectively. Kevin invested a parcel of land that cost him P25,000.
Love invested P30,000 cash. The land was sold for P50,000 on the same date, three hours after
the formation of the partnership. How much should be the capital balance of Kevin right after
formation?
A. 25,000
B. 30,000
C. 60,000
D. 50,000

2.) On April 1, 2015, A. James and C. Irving formed a partnership with each contributing the
following assets:
A. James C. Irving
Cash 120,000 80,000
Machinery and Equipment 100,000 300,000
Building 900,000
Furniture and Fixtures 40,000

The building is subject to a mortgage loan of P320,000, which is to assumed by the partnership. On
April 1, 2015, the balance of Irving’s capital account should be

A. 960,000
B. 1,020,000
C. 1,056,000
D. 1,280,000
 3.) M. Davis and N. Towns are forming a partnership by combining their businesses. Their books
show the following:
M. Davis N. Towns
Cash 72,000 30,000
Accounts Receivable 150,000 108,000
Merchandise Inventory 240,000 156,000
Furniture and Fixtures 330,000 102,000
Prepaid Expenses 63,000 21,000
Accounts Payable 366,000 144,000
M. Davis, Capital 489,000
N. Towns, Capital 273,000

It has been agreed to provide for uncollectible accounts equal to 5% of the receivables of each
party and that the Furniture and Fixtures of Towns are overdepreciated by P9,000. If each partner’s
share in equity is to be equal to the net assets invested the capital accounts of Davis and Towns
would be

A. P489,000 and P273,000, respectively

B. P481,500 and P276,600, respectively
C. P481,500 and P258,600, respectively
D. P855,000 and P417,000, respectively

4.) A business owned by Francesca Wiggins was short of cash and Wiggins decided to form a
partnership with Isabel Levine, who was able to contribute cash twice the interest of Wiggins in
the new partnership. The assets contributed by Wiggins appeared as follows in the Statement of
Financial Position of her business: Cash, P9,000; Accounts Receivable, P189,000 with
allowanced for uncollectible accounts of P6,000; Merchandise Inventory, P420,000; and Store
Equipment, P150,000 with accumulated depreciation of P15,000.

Wiggins and Levine agreed that the allowanced for uncollectible accounts were inadequate and
should be P10,000. They also agreed that the fair value for the inventory is P460,000 and for
the store equipment is P140,000. The cash contributed by Levine into the partnership was

A. 424,000
B. 620,000
C. 808,000
D. 1,576,000

5.) F. Noah and G. Rose are combining their separate businesses to form a partnership. Cash and
noncash assets are to be contributed for a total capital of P600,000. The noncash assets to be
contributed and the liabilities to be assumed are as follows:

Noah Rose
BV FMV BV FMV
Accounts 40,000 40,000
Receivable
Merchandise 60,000 100,000 40,000 50,000
Inventory
Equipment 120,000 90,000 80,000 100,000
Accounts Payable 30,000 30,000 20,000 20,000

The partners’ capital accounts are to be equal after all the contribution of assets and the
assumptions of liabilities. The amount of cash to be contributed by Noah is

A. 300,000
B. 210,000
C. 200,000
 D. 100,000

6.) Using the information in number 4, the total assets of the partnership is
A. 650,000
B. 360,000
C. 340,000
D. 630,000

7.) On April 30, 2015, PARKER, GINOBILI and DUNCAN formed a partnership by combining their
separate business proprietorships. PARKER contributed cash of P75,000. GINOBILI contributed
property with a carrying value of P60,000, a P60,000 original cost, and P120,000 fair value. The
partnership accepted responsibility for the P52,500 mortgage attached to the property.
DUNCAN contributed equipment with a P45,000 carrying amount, a P112,500 original cost, and
P82,500 fair value. The partnership specifies that profits and losses are to be shared equally but
is silent regarding capital contributions. Which partner has the largest April 30, 2015 capital
balance?
A. PARKER
B. GINOBILI
C. DUNCAN
D. All capital account balances are equal

8.) R. Curry and S. Thompson entered into a partnership on February 1, 2007 by investing the
following assets:

R. Curry S. Thompson
Cash 40,000
Merchandise Inventory 90,000
Land 130,000
Equipment 30,000
Furniture and Fixtures 200,000

The agreement between Curry and Thompson provides that profits and losses are to be divided
60% and 40% to Curry and Thompson, respectively, and that the partnership is to assume the
P100,000 mortgage on the land. If Thompson is to receive capital credit equal to his profit and
loss ratio, how much cash must he invest?
A. 10,000
B. 150,000
C. 160,000
D. 400,000

9.) Using the information in number 7, and assuming that Thompson invests P100,000 cash and
each partner is to be credited for the full amount of the net assets invested, the total capital of
the partnership is
A. 240,000
B. 250,000
C. 490,000
D. 590,000

10.) Using the information in number 7, and assuming that the capital of the partners is
proportionate to their profit and loss ratio, the capital of the Curry and Thompson upon formation
are:
A. 245,000 and 245,000, respectively
B. 234,000 and 156,000, respectively
C. 156,000 and 234,000, respectively
D. 294,000 and 196,000, respectively
Operation
Primary accounting issues include:
a. Profit or loss allocation b. Periodic capital adjustment c. Error correction

Profit Distribution Rule:

1. Profit sharing agreement
2. Capital ratio
a. Original capital balance
b. Capital during the year the profit is earned
a) Weighted average capital balance
b) Opening capital balance

Loss Distribution Rule:

1. Loss sharing agreement
2. How profit is divided

ARBITRARY ALLOCATION
The partners may provide for the following methods of profit or loss distribution:
1. Salary – compensation for services; provided for regardless of the existence of profit because the
provision of services by a partner is independent from the earnings of profit
2. Interest – compensation for use of partner’s capital; provided for regardless of the existence of profit
because the use of the partner’s capital is independent from the earnings of profit
3. Bonus – compensation for good performance; provided only when the partnership has profit
Bonus bases:
a. before bonus: bonus = bonus base x bonus rate
b. after bonus: bonus = bonus base x [bonus rate/(100% + bonus rate)]

1.) GASOL and RANDOLPH are partners who share profits and losses in the ratio of 60%:40%
respectively. GASOL’s salary is P60,000 and P30,000 for RANDOLPH. The partners are also
paid interest on their average capital balances. In 2015, GASOL received P30,000 of interest
and RANDOLPH, P12,000. The profit and loss allocation is determined after deductions for the
salary and interest payments. If RANDOLPH’s share in the residual income was P60,000 in
2015, what was the total partnership income?
A. 192,000
B. 345,000
C. 282,000
D. 387,000

2.) The partnership has the following accounting amounts:

A. Sales = P70,000
B. Cost of Sales = P40,000
C. Operating Expenses = P10,000
D. Salary allocations to partners = P13,000
E. Interest paid to banks = P2,000
F. Partners’ withdrawals = P8,000

The partnership net income (loss) is:

A. 20,000
B. 18,000
C. 5,000
D. (3,000)

3.) Mr. Derozan and his very close friend, Mr. Lowry formed a partnership on January 1, 2007 with
Derozan contributing P160,000 cash and Lowry contributing equipment with a book value of
P64,000 and a fair value of P48,000, and inventory with a book value of P24,000 and a fair
value of P32,000. During 2007, Lowry made additional investment of P16,000 on April 1, and
P16,000 on June 1. On September, he withdrew P40,000. Derozan had no additional
 investment nor withdrawals during the year. The average capital balance at the end of the fiscal
year 2007 for Lowry is:

A. 96,000
B. 88,000
C. 80,000
D. 72,000

4.) On January 1, 2007, Howard and Horford decided to form a partnership. At the end of the year,
the partnership made a profit of P240,000. The capital accounts of the partnership show the
following transactions:
Howard, Capital Horford, Capital
Debit Credit Debit Credit
January 1 80,000 50,000
April 1 10,000
June 1 20,000
August 1 20,000
September 1 6,000
October 1 10,000 2,000
December 1 8,000 10,000

Assuming that the profit of the partnership is divided on the basis of average capital ratio,
Howard’s share of the profit is:
A. 100,000
B. 140,000
C. 144,000
D. 147,692

5.) Using the information in number 2, and assuming an interest of 20% per annum on average
capital is given, and the balance of the profits is divided equally, the sharing of the profit shall be
(compute for Horford’s share)
A. 117,600
B. 115,200
C. 237,600
D. 235,200

6.) Abarrientos, Lastimosa, and Hawkins are partners in an accounting firm. Their capital account
balances at year-end were P180,000, P220,000, and P100,000, respectively. They share profits
and losses on a 4:4:2 ratio, after considering the following terms:
a. Benson is to receive a bonus of 10% profit after bonus
b. Interest of 10% shall be paid on that portion of a partner’s capital in excess of P200,000
c. Salaries of P20,000 and P24,000 shall be paid to partners Abarrientos and Hawkins,
respectively

Assuming a profit of P220,000 for the year, the total profit share of Hawkins was
A. 50,800
B. 54,800
C. 38,800
D. 74,800

7.) Gayoso, Locsin, and Aquino formed a partnership on January 1, 2007. They had the following
initial investments: Gayoso – P200,000; Locsin – P300,000; Aquino – P450,000. The
partnership agreement states that the profits and losses are to be shared equally by the
partners after consideration is made for the following:
a. Salary allowance of P120,000 for Gayoso, P96,000 for Locsin and P72,000 for Aquino
b. Average partners’ capital balances during the year shall be allowed 10% interest.
 Additional Information:
a. On June 30, 2007, Gayoso invested an additional P120,000
b. Locsin withdrew P140,000 from the partnership on September 30, 2007.
c. Share on the remaining partnership profit was P10,000 for each partner.

How much is the total interest on average capital balances of the partners?
A. 97,500
B. 107,500
C. 115,250
D. 95,000

8.) Using the information in number 5, partnership profit at December 31, 2007 before salaries,
interest and partners’ share in the remainder is
A. 399,500
B. 415,500
C. 423,250
D. 395,500

9.) Using the information in number 5, the total partnership capital on December 31, 2007 is
A. 950,000
B. 970,000
C. 1,365,500
D. 1,345,500

10.) Taulava is trying to decide wheter to accept a salary of P40,000 or a salary of P25,000
plus a bonus of 10% of net income after salary and bonus as a means of allocating profit among
the partners. Salaries traceable to the other partners are estimated to be P100,000. What
amount of income would be necessary so that Taulava would consider the choices to be equal?
A. 165,000
B. 290,000
C. 265,000
D. 305,000

11.) On January 1, 2007, Balagtas, Baltimor, Baltazar and Balara formed the BAL Trading, a
partnership with capital contributions as follows: Balagtas – P150,000; Baltimor – P75,000;
Baltazar – P75,000; and Balara – P60,000. The partnership agreement stipulates that each
partner shall receive a 5% interest on capital contributed and that Balagtas and Baltimor shall
receive salaries (chargeable as expenses of the business) of P15,000 and P9,000, respectively.
The agreement further provides that Baltazar shall receive a minimum of P7,500 per annum and
Balara a minimum of P18,000, which is inclusive of amounts representing interest and their
respective share in the partnership profits. The balance of the profits shall be distributed among
the partners in the ratio of 3:3:2:2. What amount must be earned by the partnership in fiscal
year 2007, before any charge for interest and partners’ salaries, in order that Balagtas may
receive an aggregate of P37,500 including interest, salary and share of profits.

A. 92,000
B. 97,000
C. 50,000
D. 90,000

Dissolution

Partnership dissolution may be caused by change in agreements of the partners or change in relations
of the partners. This may include:
 1. Admission of a new partner 4. Assignment of interest by a partner
2. Retirement of a partner 5. Partnership merger
3. Death of a partner 6. Incorporation of the partnership

ACCOUNTING PROCEDURES FOR DISSOLUTION

1. Asset revaluation to agreed or fair values
2. Capital re-alignment

1.) A. Bogut and F. Ezeli are partners with capital balances of P30,000 and P40,000 and sharing
profits and losses 40% and 60%, respectively. If Z. Pachulia is admitted as partner paying
P20,000 in exchange for 50% of Bogut’s equity, the entry in the partnership books should be as
follows:

A. A. Bogut, Capital 15,000

Z. Pachulia, Capital 15,000
B. Cash 20,000
Z. Pachulia, Capital 20,000
C. Cash 15,000
Goodwill 5,000
Z. Pachulia, Capital 20,000
D. Cash 20,000
A. Bogut, Capital 5,000
Z. Pachulia, Capital 15,000

2.) W. Fajardo, X. Aguilar, and Y. Pingris are partners sharing profits and losses in the ratio of
4:3:3, respectively. The condensed Statement of Financial Position of WXY Partnership as of
December 1, 2007 is as follows:

Assets Liabilites and Equities

Cash 50,000 Liabilities 40,000
Other Assets 130,000 W. Fajardo, Capital 60,000
X. Aguilar, Capital 40,000
Y. Pingris, Capital 40,000
Total Assets 180,000 Total Liabilities and 180,000
Equities

All the partners agree to admit Z. Menk as 1/5 partner in the partnership without any goodwill
nor bonus. Menk shall contribute assets amounting to

A. 28,000
B. 10,000
C. 35,000
D. 60,000

3.) Alaska Partnership had a net income of P8,000 for the month ended September 30, 2007. S.
Thoss purchased an interest in the Alaska Partnership of R. Chambers and C. Santos by paying
Chambers P32,000 for half of his capital and half of his 50% profit sharing interest. At this time,
the capital balance of Chambers was P24,000 and the capital balance of Santos was P56,000.
Thoss should receive a credit to his capital account of
A. 12,000
B. 16,000
C. 20,000
D. 26,667

4.) Longley, a partner in an accounting firm decided to withdraw from the partnership. Longley’s
share of the partnership profits and losses was 30%. Upon withdrawing from the partnership, he
 was paid P74,000 in final settlement of his interest. The total of the partners’ capital accounts
before the recognition of partnership goodwill prior to Longley’s withdrawal was P210,000. After
his withdrawal, the remaining partners’ capital accounts, excluding their share of goodwill,
totalled P160,000. The total goodwill of the firm recognized was
A. 80,000
B. 96,000
C. 120,000
D. 160,000

5.) Harden and Jones formed a partnership and agreed to divide initial capital equally, even though
Harden contributed P25,000 and Jones contributed P21,000 in identifiable assets. Under the
bonus approach to adjust the capital accounts, Jones’s unidentifiable assets should be debited
for:
A. 11,500
B. 4,000
C. 2,000
D. 0

6.) In the AD partnership, Allen’s Capital is P140,000 and Dwight’s is P40,000 and they share
income in a 3:1 ratio, respectively. They decide to admit Davis into the partnership.

Allen and Dwight agree that some of the inventory is obsolete. The inventory account is
decreased before Davis is admitted. Davis invests P40,000 for a one-fifth interest. What is the
amount of inventory writedown?

A. 4,000
B. 10,000
C. 15,000
D. 20,000

7.) The partnership of A. Kukoc, B. Harper, and C. Kukoc has reached an impasse as Kukoc is no
longer willing to contribute the amount of time and effort to the partnership that he has
previously given. The partners share profits and losses in the ratio of 3:3:4, respectively. The
partners have the following capital balances just prior to Kukoc’s withdrawal from the
partnership.

Kukoc 45,000
Harper 35,000
Kukoc 20,000

If Harper purchases Kukoc’s interest from Kukoc for 32,000 and no goodwill is recorded, the
balance of Harper capital account immediately after the withdrawal of Kukoc is
A. 67,000
B. 61,000
C. 60,250
D. 55,000

8.) Using the information in number 5, and assuming that the partners agree that the partnership
will purchase Kukoc’s interest for 32,0000 and no goodwill is to be recorded, the balance of
Kukoc’s capital account immediate after the withdrawal of Kukoc is
A. 41,400
B. 39,600
C. 39,000
D. 38,250
 9.) Using the information in number 5, and assuming that the partners agree that the partnership
will purchase Kukoc’s interest for P32,000, and will record goodwill to the extent paid to Kukoc,
the balance of Harper’s capital account immediately after the withdrawal of Kukoc is
A. 35,000
B. 38,000
C. 39,200
D. 41,000

10.) Using the information in number 5, and assuming that the partners agree that the
partnership will purchase Kukoc’s interest for P32,000 and will revalue the partnership based on
the price Kukoc is willing to accept for his interest in the partnership, the balance of Harper’s
capital account immediately after the withdrawal of Kukoc is
A. 39,000
B. 44,000
C. 63,000
D. 72,000

Liquidation
Liquidation refers to the winding up of the affairs of the partnership. This involves realization of all non-
cash assets of the partnership into cash and settling all claims to the partnership.
Claims to the partnership are generally classified as follows in the order of priority in settlement:
A. External claims – claims of external third party creditors
B. Internal claims – claims of the partners
a. Partners loan
b. Partners capital
Basic Concepts on Partnership Liquidation
1. Unlimited Liability – partners have unlimited liability hence external creditors can run after their
separate personal property in case the partnership asset is insufficient to satisfy their claims. The
personal creditors; however, of a partner is preferred over partnership creditors with respect to the
personal assets of a partner. When a partner is personally insolvent and has capital deficiency, the
other solvent partners absorbs his capital deficiency.
2. Right of offset – the right of a partner to set-off his loan to the partnership against his capital
deficiency
General Approaches to Liquidation:
External claims must first be satisfied before any distributions are made to any partners. After external
claims are paid, remaining cash is distributed to the partners based on either:
1. Installment Liquidation – cash distributions to partners are made once cash becomes available
from the realization of non-cash assets
2. Lump Sum Liquidation – all non-cash assets are realized into cash and one-time cash
distributions to the part
The installment liquidation is common in practice. Cash installment may be based on a:
a. Schedule of safe payment – this is regarded as the presumptive loss approach. Every time a
realization is made, the balance of the unrealized non-cash asset is presumed a total loss which
is then distributed to the partners. Any positive balance in the partners’ capital balances
represents the safe payments.
b. Cash priority program – the loss absorption capacity of each partner is determined and ranked
from highest to lowest. The incremental differences in the partner’s loss absorption capacity
multiplied by the partners’ respective profit sharing ratio indicate the priority payments.
Loss absorption capacity = Net interest/Profit sharing ratio

1.) JJ and KK partnership’s balance sheet at December 31, 2015, reported the following:
a. Total assets – P100,000
b. Total Liabilities – P20,000
c. JJ, Capital – 40,000
d. KK, Capital – 40,000
 On January 2, 2015, JJ and KK dissolved their partnership and transferred all assets and
liabilities to a newly-formed corporation. At the date of incorporation, the fair value of the net
assets was P12,000 more than the book value, of which P7,000 was assigned to tangible
assets and P5,000 was assigned to goodwill. JJ and KK were each issued 5,000 shares of the
corporation’s P1 par value ordinary shares. Immediately following incorporation, APIC in excess
over par or share premium should be credited for:
A. 68,000
B. 70,000
C. 77,000
D. 82,000

2.) The following condensed Statement of Financial Position is presented for the partnership of A.
Pekovic, B. Rubio and C. Garnett, who share profits and losses in the ratio of 6:2:2,
respectively.

Assets Liabilities and Equities

Cash 40,000 Liabilities 70,000
Other Assets 140,000 A.Pekovic, Capital 50,000
B.Rubio, Capital 50,000
C.Garnett, Capital 10,000
Total Assets 180,000 Total Liabilities and 180,000
Equity

The partners agreed to liquidate the partnership after selling the other assets. If the other assets
are sold for P80,000, how much should Pekovic receive upon liquidation, assuming all the
partners are solvent?

A. 12,500
B. 13,000
C. 14,000
D. 50,000

3.) The following Statement of Financial Position was prepared for the Elton, Festus, and Gary
Partnership on March 31, 2007:

Assets Liabilities and Equities

Cash 25,000 Liabilities 52,000
Other Assets 180,000 Elton, Capital (40%) 40,000
Festus, Capital (40%) 65,000
Gary, Capital (20%) 48,000
Total Assets 205,00 Total Liabilities and 205,000
0 Equity

The partnership is being liquidated by the sale of assets in instalments. The first sale of noncash
assets having a book value of P90,000 realizes P50,000. The amount of cash each partner
should receive in the first instalment is

Elton Festus Gary

A. 0 5,000 18,000
B. 12,000 13,000 22,000
C. 27,000 5,000 18,000
D. None of these

4.) Using the information in number 2, and if P3,000 cash is withheld for possible liquidation
expenses, how much cash should Gary receive?
A. 21,000
B. 17,000
 C. 3,000
D. None of the above

5.) Andray, Blatche, and Chot are partners. On January 3, 2007, their capital balances and profit
and loss ratio are as follows:

Capital Profit and Loss Ratio

Andray 25,000 60%
Blatche 50,000 25%
Chot 60,000 15%

Chot withdrew P10,000 during the year. Net loss on December 31, 2007 totaled P20,000. Hence, the
partners decided to liquidate the partnership. It is uncertain how much of the assets will ultimately yield
but favourable realization is expected. It is, therefore agreed to distribute cash as it becomes available.
There are unpaid liabilities of P5,000 and cash on hand of P700. The amount of noncash assets before
liquidation is

A. 110,000
B. 104,300
C. 109,300
D. 105,000

6.) Using the information in number 4, the amount to be realized by the partnership on the sale of
its assets so that Andray will receive a total of P19,000 in the final settlement of his interest is:
A. 103,300
B. 9,300
C. 119,300
D. 6,000

7.) Using the information in number 4 and if Chot received a total of P33,000, the amount that
Blatche would have received at this point is:
A. None
B. 2,000
C. 5,000
D. 21,667

8.) The PAL partnership is being dissolved. All liabilities have been paid and the remaining assets
are being realized gradually. The equity of the partners is as follows:

Partners’ Accounts Loans to (from) Profit and Loss Ratio

partnership
Patrimonio 24,000 6,000 3
Allan 36,000 0 3
Loyzaga 60,000 (10,000) 4

The second cash payment to any partner/partners under the program of priorities shall be made thus
A. To L P2,000
B. To A P6,000
C. To L P8,000
D. To A P6,000 and to L P8,000