DISSCUSSION QUESTIONS

1. What are the procedures followed in closing the books of the partnership at the end of an
accounting period?
ANSWER: First, all revenue and nominal accounts with credit balances are debited and
the income summary is credited. Second, the income summary is debited and all
expenses and nominal accounts with debit balances are credited. Third, the balance of the
income summary account, which represents the profit or loss of the partnership, is
transferred either to the drawing accounts or directly to the capital accounts of the
partners. Finally, the balance of the drawing account of each partner is transferred to his/
her capital account.
2. What are the factors to be considered in adopting a particular plan for sharing profits
among partners?
ANSWER: The factors to be considered upon making an equitable distribution of
partnership profits are the services rendered by the partners to the partnership, the amount
of capital contributed by the partners to the business, and lastly, the entrepreneurial
ability or the managerial skills of the partners.
3. What are the general rules for dividing profits among partners? For dividing losses?
ANSWER: The rules on dividing profits and losses of the partnership are based on the
provision of the New Civil Code. Whereas, as to capitalist partners:

a. Division of profits
1. By agreement
2. In the absence of an agreement, the division of profits is by capital
contributions
b. Division of losses
1. By agreement
2. If only the division of profits is agreed upon, the division of losses will
be the same as the agreement on the division of profits
3. In the absence of an agreement, the division of losses is in accordance
with capital contributions
4. Does an industrial partner share in both profits and losses?
ANSWER: The rules on dividing profits and losses of the partnership are based on the
provision of the New Civil Code. Whereas, as to industrial partners:
a. Division of profits
1. By agreement
 2. In the absence of an agreement, the industrial partner shall receive a
just and equitable share of the profits and the capitalist partners shall
receive profits in accordance with their capital contributions
b. Division of losses
1. By the agreement
2. In the absence of an agreement, the capitalist- industrial partner in his
character as an industrial partner shall have no share in the losses, but
in his character as a capitalist partner will share in proportion to the
capital contribution
5. Why are salary allowances to partners debited to Income Summary instead of Salary
Expense? Is there an instance when such salary allowances are debited to Salary Expense
account? If yes, what is that instance?
ANSWER: Salaries paid to partners is not an expense of a partnership rather it is just a
form of distribution. Therefore partners' salaries are not deducted from revenues in
arriving at partnership net income. Partners' salaries are recorded by debiting the
partnership income summary account and crediting the respective partner's capital
account.
6. Pacis, Quezon and Roces share profits and losses based on their capital balances of
P250,000, P500,000, and P750,000, respectively. Show hoe the profit of P100,000 be
distributed in terms of (a) percentage; (b) fraction; (c) decimal; and (d) ratio.
ANSWER: Arbitrary ratio (Percentage, Decimal, Fraction, Ratio) - it is easy to add but
does not offer recognition on the discrepancy in capital contributions nor does it consider
the period and commitment that a partner can devote in running the firm’s business
operations.
(a) Percentage – The percentage of the partners based on their capital balance is 16.67%,
33.33% and 50% respectively. To get the division of profit:
Pacis = 100,000 x 16.67% = 16,670 php
Quezon = 100,000 x 33.33% = 33,330 php
Roces = 100,000 x 50% = 50,000 php
(b) Decimal – The profit of the partnership of the partnership is divided using decimal
Pacis = 100,000 x .1667 = 16,670 php
Quezon = 100,000 x .3333 = 33,330 php
Roces = 100,000 x .50 = 50,000 php
(c) Fraction – The profit of the partnership is divided using fraction
Pacis = 100,000 x 250,000/1,500,000 or 5/30= 16,666.67
Quezon = 100,000 x 500,000/1,500,000 or 1/3 = 33,333.33
Roces = 100,000 x 750,000/1,500,000 or 1/2 = 50,000
(d) Ratio = The profit of the partnership is divided using the ratio of 1:2:3
 Pacis = 100,000 x 1/6 = 16,666.67
Quezon = 100,000 x 2/6 = 33,333.33
Roces = 100,000 x 3/6 = 50,000
7. Explain the following terms; (a) original capital; (b) beginning capital; (c) ending capital;
and (4) average capital. How do you determine the amount of each type of capital?
ANSWER:
(a) Original Capital – This is the original investment of the partners. This can be
obtained by multiplying the profit and the original capital and dividing it to the total of
the original capital of the partners.
(b) Beginning Capital – The original capital investments are also the beginning capital
in new partnerships on its first year of operations. However beginning capital are
considered as the beginning capital of that particular year. The computation for this is
profit multiplied by the beginning capital of the year and divided to the total of the capital
of all partners.
(c) Ending Capital – The ending capital is the capital of the partners at the end of the
accounting period. The profit is divided in the ratio of capital balances at the end of the
year before drawings and the distribution of profit.
(d) Average capital ratio is a method of dividing profits based on the amount of capital
invested and the time during which such capital is actually used in the business. The
division of profit is based on the three preceding capital concepts- original capital,
beginning capital and ending capital.
The following steps are to be followed in determining the average capital of each partner
using the peso month method; thus, arriving at the average capital ratio:
1. Multiply beginning capital by the number of months that it remained unchanged.
2. Determine each new capital balance in chronological order and multiply by the number
of months it remained unchanged.
3. Add the products which represents peso month and divide the total by twelve (12) to
obtain the average monthly capital.
8. When the profit and losses agreement provides for the allowance of interest on partners’
equity and salaries to partners, why are the partners entitled to these allowances even if the
partnership operations result in a loss?
ANSWER: The interest on partners’ equity is treated as the controlling factor of the
partnership in the success of the partnership. That’s why they choose to balance this
through allocation after due consideration of the contribution of the partners. The salaries
of the partners may provide for variations in compensating the personal services
contributed by partners. Even if the partners devote equal service time, one partner’s
superior experience and knowledge may command a greater share of the profit.
9. Why is it necessary to specify whether the withdrawal made by the partner is a
withdrawal against profit or a permanent withdrawal of a capital or a loan being extended
to him/her by the partnership?
ANSWER: It is necessary to specify whether the withdrawal made by the partner is a
withdrawal against profit or a permanent withdrawal of a capital or a loan because it will
determine his capital balance in the partnership. During the accounting period, partners
may withdraw capital every periodic basis to meet personal living expenses. It depends
on the partner’s intentions whether the withdrawal is to be shown and to be a part of his
permanent capital account. This treatment will have an effect on the partner’s ending
capital balance.
10. What is a statement of changes in partners’ equity? What information does it show?
ANSWER: A statement of changes in equity shows the total comprehensive income for
the period showing separately the total amounts attributable to owners of the parent and
minority interests. For each component of equity, the effects of retrospective restatement
recognized in accordance with IAS No. 8, Accounting Policies, Changes in Accounting
Estimates and Errors. The amounts of transactions with owners in their owners in their
capacity as owners, showing separately contributions by and distributions to owners; and
for each component of equity, a reconciliation between the carrying amount at the
beginning and the end of the period, separately disclosing each change.
 EXERCISES
Exercise 3-1 (Division of Profits using Ratios)
Borres, Buendia, and Bustos have capital balances of P250,000 and P100,000, respectively. Time
divided by the partners in the partnership follows:
Borres - three- fourths time
Buendia - one-fourth time
Bustos - one-half time
Instructions: Determine the participation of the partners in the profit of P600,000 if profit is
divided:
1. in the ratio of capital investments
2. In the ratio of time devoted in the business
1. Borres (250,000-/500,000-) x 600,000- = 300,000-
Buendia (150,000-/500,000-) x 600,000- =180,000-
Bustos (100,000-/500,000-) x 600,000- =120,000-

2. Borres (3/4÷3/2) x 600,000- = 300,000-

Buendia (1/4÷3/2) x 600,000- =100,000-
Bustos (1/2÷3/2) x 600,000- =200,000-
Exercises 3-2 (Division of Profit; Interest on Average Capital)
Banal and Benson are partners. Their capital accounts during the fiscal year 2014were as
follows:
Banal Benson
9/1 120,000 1/1 800,000 3/1 180,000 1/1 1,200,000
4/1 160,000 3/1 140,000
11/1 60,000 10/1 100,000
Profit opf the partnership is P250,000 for the year. The partnership agreement provides for the
division of profits as follows:
1. Each partner is to be credited 10% interest on his average capital
2. Any remaining profit or loss is to be divided equally.
Instruction: Prepare the entry to record the closing of profit to the partners’ capital accounts.
The average Capital of Banal
Date Capital No. Of months Peso Months Average Capital
Balance unchanged
Jan 1- Mar 31 800,000- 3 ₱ 2,400,000-
 Apr 1- Aug 960,000- 5 4,800,000-
31
Sept 1- Oct 31 840,000- 2 1,680,000-
Nov 1- Dec 900,000- 2 1,800,000-
31
12 ₱ 10,680,000- ₱ 890,000-

The average Capital of Benson

Date Capital No. Of months Peso Months Average Capital
Balance unchanged
Jan 1- Feb 29 1,200,000- 2 ₱ 2,400,000-
Mar 1- Jun 30 1,020,000- 4 4,080,000-
Jul 1- Sept 30 1,160,000- 3 3,480,000-
Oct 1- Dec 31 1,260,000- 3 3,780,000-
12 ₱ 13,7400,000- ₱ 1,145,000-

Banal Benson Total

Interest (10%)
890,000-x 10% ₱ 89,000-
1,145,000-x 10% ₱ 114,500- ₱ 203,500-
Remainder (equal) 23,250- 23,250- 46,500-
Total ₱ 112,250- ₱ 137,750- ₱ 250,000-

Income Summary 250,000-

Banal, Capital 112,250-
Berson, Capital 37,750-

Exercise 3-3 (Division of profit; Interest on Average Capital and Salaries to Partners)
The partnership of Benito and Bunye has the following provisions in the partnership agreement:
1. A partner earns 10% interest on the excess of his average capital over the other partner.
 2. Benito and Bunye are allowed annual salaries of P300,000 and P200,000 respectively.
3. Any remaining profit or loss is to be divided in the ratio of 70:30.
The average capital of Benito is P1,000,000 and that Bunye is P600,000.
Instructions: Prepare a profit distribution schedule assuming the profit of the partnership is (a)
P700,000; and (b) P400,000
Profit Distribution Schedule (A)
Benito Bunye Total
Interest of 10% on excess average ₱ 40,000- ₱ 40,000-
capital
Salaries to partners 300,000- 200,000- 500,000-
Remainder (dividend in the ratio of 112,000- 48,000- 160,000
70:30)
Total ₱ 452,000- ₱248,000- ₱ 700,000-

Profit Distribution Schedule (B)

Benito Bunye Total
Interest of 10% on excess average ₱ 40,000- ₱ 40,000-
capital
Salaries to partners 300,000- 200,000- 500,000-
Remainder (dividend in the ratio of (98,000-) (42,000-) (140,000-)
70:30)
Total ₱ 242,000- ₱158,000- ₱ 400,000-

Exercise 3-4 (Division of Profit under Various Assumptions)

Blanco and Banda formed a partnership by investing P120,000 and P180,000, respectively. At
the end of its first year of operations, the partnership has realized a profit of P120,000.
Instructions: Prepare a profit distribution of profit under each of the following independent
assumptions:
1. The partnership agreement does not mention profit sharing.
2. Profit is divided in the ratio of the original investments.
3. Interest at 8% is to be allowed on the original capital investments and the balance to be
dividedequally.
4. Salaries of P54,000 and P45,000 respectively and the balance to be divided equally.
5. Interest at 10% is to be allowed on the original capital investments, salaries of P50,000
and P75,000 to partners, respectively and the balance to be divided in the ratio 2:3. In case of
insufficient net income, however, this has to be distributed in the salary ratio. While if
there is a net loss, then it has to be distributed equally.
1. Blanco (120,000-/300,000-) x 120,000- = 48,000-
Banda (180,000-/300,000-) x 120,000- = 72,000-

2. Blanco (120,000-/300,000-) x 120,000- = 48,000-

Banda (180,000-/300,000-) x 120,000- = 72,000-

3. Blanco Banda Total

Interest of 8% on original capital investment ₱ 9,600- ₱ 14,400- ₱ 24,000-
Balance (divided equally) 48,000- 48,000- 96,000-
Total ₱ 57,600- ₱ 62,400- ₱ 120,000-

4. Blanco Banda Total

Salaries to partners ₱ 54,000- ₱ 45,000- ₱ 99,000-
Balance (divided equally) 10,500- 10,500- 21,000-
Total ₱ 64,500- ₱ 55,500- ₱ 120,000-

5. Blanco (50,000-/125,000-)x 120,000- = 48,000-

Banda (75,000/125,000-)x 120,000- = 72,000-

Exercise 3-5 (Division of Profit; Interest on Capital and Salaries to Partners)

Bueno and Beran have capital balances at the beginning of the year of P600,000 and P675,000,
respectively. They share profit as follows:
1. Interest of 8% on beginning capital balances
2. Salary allowances of P225,000 to Bueno and P115,000 to Beran
3. Balance in the ratio of 3:2
The partnership realized a profit of P375,000 during the current year before interest and salary
allowances to partners
Instructions:
1. Show how the profit of P375,000 should be divided between Bueno and Berna.
2. Assuming that Bueno and Beran simply agree to share a profit in 3:2 ratio with a
minimum of P175,000 guaranteed to Beran, show how the profit of P375,000 should be
divided.
1. Bueno Beran Total
Interest of 8% on beginning capital balances ₱ 48,000- ₱ 54,000- ₱ 102,000-
Salaries to partners 225,000- 115,000- 340,000-
Balance (divided in the ratio of 3:2) (40,200-) (26,800-) (67,000)
Total ₱ 232,800- ₱ 142,200- ₱ 375,000-

2. Beran 375,000-x (2/5) = 150,000-

However, a minimum of ₱ 175,000- is guaranteed to Beran
Bueno 375,000- -175,000- = 200,000-

Exercise 3-6 (Divisions of Profit; Interest on Capital, Salary Allowance, and Bonus to
Managing Partner)
Belen and Blanco formed a partnership on January 2, 2014 and agreed to share profit 90% and
10% respectively, Belen invested cash of P200,000. Basco invested to assets but has a
specialized expertise and manages the firm full time. There were no withdrawals during the year.
The partnership contract provides for the following:
1. Capital accounts are to be credited annually with interest at 10% of beginning capital
2. Basco is to be paid a salary of P8,000 a month.
3. Basco is to reveive a bonus of 25% of profit calculated before deduction of salary and
interest on capital accounts.
4. Bonus, interest, and basco’s salary are to be considered as expenses.
The fiscal year 2014 income statement for the partnership includes the following:
Revenue P701,000
Expenses (including salary, interest and bonus) P379,000
Profit P322,000
Instructions: Determine the amount of bonus to be collected to Basco.
Net Income after salaries, interest and bonus 322,000
Interest 20,000
Salary 96,000 116,000
Net Income before salaries, interest and bonus 438,000
Bonus rate 25% .
Bonus of Basco P109,500

The Bonus to be collected by Basco is P109,500.

Exercise 3-7 (Calculation of Bonus)
Banzon is the managing partner of Power Partnership. He is given an incentive of 5% bonus on
profit The profit of the paretnership is P650,000 and income tax rate is 30%.
Instructions: Determine the amount of bonus under each of the following assumptions:
1. Bonus is computed based on the profit before deduction for bonus and income tax.
B = 5% x 928,571 = P46,428
2. Bonus is computed based on profit after deduction for bonus but before deduction for
income tax.
B = 5% (928,571 – B)
B = 46,428 -.05B
B + .05B = 46,428
1.05B/1.05 = 46,428/1.05
B = P44,217
3. Bonus is computed based on profit before deduction for bonus but after deduction for
income tax.
B = .05 (928,571 – T)
T = .30 x 928,571
= 278,571
B = .05 x (928,571 – 278,571)
B = .05 x 650,000
B = P32,500
4. Bonus is computed based on profit after deduction for both bonus and income tax.
B = .05 (928,571 – B-T)
T = .30 x 928,571
= 278,571
B = .05 x (928,571– B – 278,571)
B = .05 (650,000 – B)
B = 32,500 - .05 B
B + .05B = 32,500
B = 32,500/ 1.05
B = P30,952
Exercise 3-8 (Capital Balances Ratio Adjusted to Profit and Loss Ratio)
Balbin, Bagtas, and Banta are partners sharing 40%, 35%, and 25%. Partners’ Ooriginal capital
were in this ratio but on June 30, 2014, capital balances are as follows: Balbin – P240,000,
Bagtas – P 200,000, and Banta – P200,000. Partners want to bring capital balances into profit
and loss ratio.
Instructions:
1. Assuming that the capital balances are to be brought into profit and loss ratio by the payments
outside the firms among partners, the total firm capital to remain the same, what cash transfers
are required between or among partners and what entry would be made on the firm books?
2. Assuming that the capital balances are to be brought into profit and loss ratio by the lowest
possible cash investment in the firm by the partners, what additional investments are required
and what entry would be made by the firm books?
3. Assuming that the capital balances are to be brought into profit and loss ratio by the lowest
possible cash investment or cash withdrawal from the firms by the partners, what additional cash
investments or cash withdrawals are required and what entry would be made by the firm books?
1. Banta, Capital 40,000
Balbin, Capital 16,000
Bagtas, Capital 24,000
To allocate capital based on profit and loss ratio

2. Cash 160,000
Balbin, Capital 80,000
Bagtas, Capital 80,000
To record lowest possible cash invested for capital balance adjustment

3. Banta, Drawings 50,000

Bagtas, Capital 10,000
Cash 40,000
To record cash withdrawal and bring capital balance into profit and loss ratio
Exercise 3-9 (Computation of Partnership Profit)
Barte, a partner in the BBB Partnership, has a 25% participation in profit. Barte’s capital account
had a net decrease of P240,000 during the year of 2014. During 2014, Barte withdrew P520,000
(charged against his capital account) and invested in the partnership a property with a fair value
of P100,000.
Instructions: Determine the profit of the BBB Partnership for the year 2014.
Drawings charged against capital P520,000
Less Additional investment (100,000)
Decrease in capital P420,000
Less Net Decrease in capital (240,000)
Share in income P180,000
Profit share .25%
Net income of the partnership P720,000
 PROBLEMS
Problem 3-1 (Division of Profit under Various Assumptions)
The capital accounts of Bondoc and Barba at the end of the fiscal year 2014 are as follows:
Bondoc, Capital
January 1 Balance P210,000
May 1 Investment 90,000
October1 Withdrawal P60,000
Barba, Capital
January 1 Balance P150,000
April 1 Withdrawal P30,000
The partnership profit for the year ended December 31, 2014 is P300,000.
Instructions: Give the journal entries to record the transfer of profit to the capital accounts under
each of the following assumptions: (Show the procedure used in calculating the respective
amounts as an explanation for each entry.)
1. Profit is divided 60% to Bondoc and 40% to Barba.
2. Profit is divided in the ratio of capital balances at the beginning of the period.
3. Profit is divided in the ratio of average capital.
4. Interest at 8% is allowed on average capital and the balance of the profit is divided
equally.
5. Salaries of P60,000 and P48,000 are allowed to Bondoc and Barba, respectively, and the
balance of profit is divided in the ratio of capital balance at the end of the period.
6. Bondoc is allowed a bonus of 33 1/3% of profit after bonus, and the balance of the profit
is divided in the ratio of the average capital.
Date Account Title and Explanations PR Debit Credit
1 Income Summary 300,000
Bondoc, Capital 180,000
Barba, Capital 120,000
Remaining income is divided in 60:40

2 Income Summary 300,000

Bondoc, Capital 175,000
Barba, Capital 125,000
Remaining income is divided according to beginning balances
3 Income Summary 300,000
Bondoc, Capital 200,000
Barba, Capital 100,000
Remaining income is divided according to average capital

4 Income Summary 324,000

Bondoc, Capital 162,000
Barba, Capital 162,000
Interest on average capital

5 Income Summary 300,000

Bondoc, Capital 192,307.69
Barba, Capital 85,741.29
Remaining income is divided according to ending balances

6 Income Summary 300,000

Bondoc, Capital 216,319.45
Barba, Capital 83,680.55
Remaining income is divided according to bonus and average capital
Problem 3-2 (Division of Profit under Various Assumptions)
Bernal and Burgos formed a partnership on January 1, 2014. The changes in their respective
capital balancesduring the year ended December 31, 2014 are presented on the next page During
the year, the partnership earned a profit of P350,000.

Bernal, Capital Burgos, Capital

10/31 60,000 1/1 360,000 6/30 80,000 1/1
440,000
5/31 100,000 10/31 140,000
Instructions: Prepare the entry to record the allocation of the partnership profit to individual
capital accounts under each of the following assumptions.
1. Each partner, receives 8% interest on beginning-of-the-year capital balance and the remainder
is divided between Bernal and But, in the ratio of 3:1, respectively.
2. Bernal and Burgos are given annual salaries of P70,000 and P130,000, respectively. 12%
interest on the end-of-year capital balances, and the remainder is divided equally.
3. Bernal and Burgos are given salaries of P45,000 and P85,000, respectively, 12% interst on
average capital balances, and the remainder divided in the ratio of 3:1.
4. Bernal and Burgos are given salaries of P50,000 and P100,000, respectively. 10% interest on
average capital balances, and the remainder divided 40% to Bernal and 60,to Burgos.
5. Each partner receives 8% interest on beginning of-the-year capital balances and a salary of
P50,000, Bernal receives a bonus of 10% of profit after deducting interest and salaries, and the
remainder is divided in the ratio of 2:3.
Date Account Titles and Explanations PR Debit Credit
1 Income Summary 350,000
Bernal, Capital 243,300
Burgos, Capital 106,700
Remaining income is divided in the ratio of 3:1

2 Income Summary 350,000

Bernal, Capital 139,000
Burgos, Capital 211,000
Remaining income is divided equally
3 Income Summary 350,000
Bernal, Capital 179,100
Burgos, Capital 170,900
Remaining income is divided in the ratio of 3:1

4 Income Summary 350,000

Bernal, Capital 134,000
Burgos, Capital 216,000
Remaining income is divided in 40:60

5 Income Summary 350,000

Bernal, Capital 180,552
Burgos, Capital 169,448
Remaining income is divided in 2:3

Problem 3-3 (Division of Profit and Loss; Interest on Average Capital, Salaries to Partners,
and Bonus to the Managing Partner)
The partners of BBB Partnership are Bilbao, Bertol and Borja. During the current year, their
average capital balances are as follows;
Bilbao P560,000
Bertol P400,000
Borja P240,000
The partnership agreement provides that partners shall receive:
1. Annual allowance of 6% of their average capital balances.
2. Salary allowance as follows: Bilbao-none; Bertol - P96,000; Boija - P80.000.
3. Berta who manages the business, is to receive a bonus of 25% of profit in excess ofP144,000
after partners' interest and salary allowances.
4. Residual profit will be divided in the ratio of 5:3:2.
Instructions: Prepare separate schedules showing how profit and loss will be divided among the
three partners under each of the following independent cases. The amount given in each case is
the profit or loss for the year that is available for distribution to partners.
1. P50,000 loss 2. P120,000 profit 3. P500,000

1. P50,000 loss
Bilbao Bertol Borja Total
6% interest on average capital balances 33,600 24,000 14,400 72,000
Salaries 0 96,000 80,000 176,000
25% bonus on excess profit (P144,000) 33,600 -72,000 -65,600 -104,000
Residual profit (divided by 5:3:2) -52,000 -15,600 -3,120 -70,720
Total 15,200 32,400 25,680 73,280

2. P120,000 profit
Bilbao Bertol Borja Total
6% interest on average capital balances 33,600 24,000 14,400 72,000
Salaries 0 96,000 80,000 176,000
25% bonus on excess profit (P144,000) 86,400 0 25,600 112,000
Residual profit (divided by 5:3:2) 56,000 16,800 3,360 76,160
Total 176,000 136,800 123,360 436,160

3. P500,000 profit
Bilbao Bertol Borja Total
6% interest on average capital balances 33,600 24,000 14,400 72,000
Salaries 0 96,000 80,000 176,000
25% bonus on excess profit (P144,000) 466,400 380,000 405,600 1,252,000
Residual profit (divided by 5:3:2) 626,000 187,800 37,560 851,360
Total 1,126,000 687,800 537,560 2,351,360
Problem 3-4 (Division of Profit and Loss; Interest on Capital and Salaries and Bonus to
Partners)
Basa, Benito, Beltran and Bagnes own a publishing company which they operate as a
partnership. The partnership agreement includes the following:
• Basa receives a salary of P400,000 and a bonus of 3% of income after all bonuses;
• Benito receives a salary of P200,000 and a bonus of 2%of income after all bonuses;
• All partners are to receive a 10% interest on their average capital balances. The average
capital balances are as follows: Basa – P100,000; Benito – P900,000; Beltran – P400,000
; Bagnes – P940,000
• Any remaining profits are to be divided equally among the partners.
Instructions:
1. Determine how a profit of P2,100,000 would be allocated among the partners.
Basa Benito Beltran Bagnes Total
Salaries P400,000 P200,000 P 600,000
Bonus 60,000 40,000 100,000
Interest (ACB x .1) 100,000 90,000 P 40,000 P 94,000 324,000
Balance (1,076,000/4) 269,000 269,000 269,000 269,000 1,076,000
Total share in profit P829,000 P599,000 P309,000 P363,000 P2,100,000

*B = 5% (P2,100,000/1.05) = P100,000 x 3/5 = P60,000

x 2/5 = 40,000

2. Determine how a loss of P800,000 would be allocated among the partners.

Basa Benito Beltran Bagnes Total
Salaries P 400,000 P 200,000 P 600,000
Interest 100,000 90,000 P 40,000 P 94,000 324,000
Balance (431,000) (431,000) (431,000) (431,000) (1,724,000)
Total P 69,000 P(141,000) P (391,000) (P337,000) (P800,000)

3. Determine how a profit P800,000 would be allocated among the partners assuming the
following priority system: Income should be allocated by first giving priority to interest
on invested capital, then bonuses, then salary, and then according to the profit and loss
percentages.

Basa Benito Beltran Bagnes Total

Interest P 100,000 P 90,000 P 40,000 P 94,000 P 324,000
Bonus 22,857 15,238 38,095
Salaries 291,937 145,968 437,905
Total P 414,794 P 251,206 P 40,000 P 94,000 P 800,000

B = 5% (P800,000/1.05) = P38,095 x 3/5 = P22,857

P38,095 x 2/5 = P15,238
S = P437,905 x 4/6 = P291,937; P437,905 x 2/6 = P145,968
Problem 3-5 (Division of Profit and Loss; Interest on Capital and Salaries and Bonus to a
Partner)
The condensed income statement of Balte and Bala as of December 31, 2014 follows:
Sales P4,800,000
Cost of sales 2,100,000
Gross profit P2,700,000
Operating expenses 1,000,000
Profit before taxes P1,700,000
Income tax (P1,700,000x30%) 510,000
Profit P1,190,000
The profit and loss agreement specifies that:
1. Interest of 8% is allowed on capital balances. Capital balances is P500,000 and
P300,000, respectively, while withdrawals debited to drawing accounts during the
year are P60,000 and P100,000, respectively.
2. Salary allowance to Balte and Bala are P120,000 and P80,000 respectively.
3. A bonus is given to Balte equal to 20% of profit without regard to interest and
salary.
4. Remaining profits and losses are to be divided in the ratio of capital balances.
Instructions:
1. Prepare a schedule showing the distribution of profit to partners.
Balte Bala Total
8% interest on capital (Capital x .08) P40,000 P 24,000 P 64,000
Salaries 120,000 80,000 200,000
20% bonus on net income (Profit x .2) 238,000 238,000
*Balance – capital ratio 430,000 258,000 688,000
Total P828,000 P 362,000 P1,190,000
*Balance (688,000 x 5/8; 688,000 x 3/8)
2. Prepare the journal entries required to distribute profit and to close the books of
partnership.
Sales 4,800,000
Cost of Goods Sold 2,100,000
Operating Expenses 1,000,000
Income Taxes 510,000
Income Summary 1,190,000

Income Summary 1,190,000

Balte, Capital 828,000
Bala, Capital 362,000
 Balte, Capital 60,000
Bala, Capital 100,000
Balte, Drawing 60,000
Bala, Drawing 100,000

3. Prepare a statement of changes in partners’ equity.

Balte and Bala Partnership
Statement of Changes in Partners’ Equity
For the Year Ended December 31, 2014

Balte Bala Total

Capital balances, January 1, 2014 P 500,000 P300,000 P 800,000
Add Distribution of net income for 2014:
Interests P 40,000 P 24,000 P 64,000
Salaries 120,000 80,000 200,000
Bonus 238,000 238,000
Balance - capital ratio 430,000 258,000 688,000
Total share in net income P 828,000 P 362,000 P1,190,000

Total P1,328,000 P 662,000 P1,990,000

Less Drawings 60,000 100,000 160,000
Capital balances, December 31, 2014 P1,268,000 P 562,000 P1,830,000

Problem 3-6 (Computation of Profit; Division of Profit; Ending Capital Balance)

Brenda and Brosas entered into a partnership on May 1, 2014, investing P625,000 and P375,000,
respectively. It was agreed that Brenda, the managing partner, is to receive a salary of P150,000
per year and 10% of profit after adjustment for the salary, any remaining profit is to be divided in
the ratio of original capital. On December 31, 2014, account balances are as follows:
Debit Credit
Accounts Payable 300,000
Accounts Receivable 335,000
Brenda, Capital 625,000
Brenda, Drawing
Brosas, Capital 375,000
Brosas, Drawing 150,000
Cash 710,000
Furniture and Fixtures 225,000
Operating Expenses 300,000
Purchases 980,000
Sales 1,525,000
Sales Returns and Allowance 25,000
Additional information as of December:
 1. Inventories; merchandise, P305,000; supplies, P12,000
2. Prepaid taxes and insurance, P5,000
3. Accrued expenses, P17,500
4. Depreciation on furniture and fixtures, 20% per year.
Instructions:
1. Determine the profit or loss of the partnership. Income tax rate is 30%.
Net sales (P1,525,000 – P25,000) P1,500,000
Cost of goods sold:
Purchases P980,000
Less Merchandise inventory, end 305,000 675,000
Gross profit P 825,000
Operating expenses (300,000 – 12,500 – 5,000 + 17,500 + 330,000
30,000)
Income before income tax P 495,000
Income tax 148,500
Net income P 346,500

2. Prepare a schedule showing the distribution of partnership profit los loss.

Brenda Brosas Total
Salaries (P150,000 x 8/12) P100,000 P100,000
Additional 10% of NI after salaries 24,650 24,650
Balance – original capital 138,656 P83,194 221,850
Total P263,306 P83,194 P346,500
*NI after salaries = (346,500 – 100,000) = 296500 x .1
*Balance = 221,850 x 625/1000; 221,850 x 375/1000

3. Determine the ending capital balances of the partners.

Brenda Brosas Total
Beginning capital P625,000 P375,000 P1,000,000
Add Share in net income 263,306 83,194 346,500
Total P888,306 P458,194 P1,346,500
Less Drawings 100,000 150,000 250,000
Ending capital P788,306 P308,194 P1,096,500
Problem 3-7 (Work Sheet; Financial Statements; Adjusting and Closing Entries)
The account balances in the books of Be on Top Partnership at the end of its first year of
operations on December 31, 2014 are as follows:
Accounts Payable 756,000
Accounts Receivable 186,000
Bathan, Capital 600,000
Bathan, Drawing 144,000
Buenas, Capital 489,000
Buenas, Drawing 54,000
Cash 582,750
General Expenses – Others 756,000
Interest Expense 26,000
Interest Income 21,000
Notes Payable 360,000
Notes Receivable 120,000
Purchases 4,920,000
Purchases Discount 138,000
Purchases Returns and Allowance 99,000
Sales 5,100,000
Sales Salaries 480,000
Store Furniture 222,000
Store Supplies 36,000
Taxes 36,000
As the person in-charge of the preparation of financial statements, you gathered the following
data that require adjustments as of December 31, 2014 and the information relating to division of
partnership profit or loss:
1. Inventories: merchandise, P1,406,000; supplies, P16,500.
2. Depreciation of store furniture, 10% a year. Additions to store furniture were made on
March 1 costing P54,000.
3. Accrued advertising, P9,500.
4. Prepaid taxes, P10,000
5. Accrued taxes, P10,500
6. Accrued interest on notes payable, P3,750
7. Accrued interest on notes receivable, P6,000
8. Uncollectible accounts receivable, P9,300
9. Income taxes, 30%
10. Bathan and Buenas agree to divide earnings as follows:
a. Interest at 10% on beginning capital balances
b. Salaries to the managing partner Bathan of P100,000
c. Remaining profit or loss to be divided equally
Instructions:
1. Prepare a ten-column worksheet.
 BE ON TOP PARTNERSHIP
WORKSHEET
FOR THE MONTH DECEMBER 2014
Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Account Titles
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 582,750.00 582,750.00 582,750.00
Notes Receivable 120,000.00 120,000.00 120,000.00
Accounts Receivable 186,000.00 186,000.00 186,000.00
Allowance for Doubtful Accounts 8 9,300.00 9,300.00 9,300.00
Merchandise Inventory - 1,406,000.00 1,406,000.00
of financial position.

Store Supplies 36,000.00 1 19,500 16,500.00 16,500.00

Store Furniture and Equipment 222,000.00 222,000.00 222,000.00
Accumulated Depreciation 2 21,300.00 21,300.00 21,300.00
Notes Payable 360,000.00 360,000.00 360,000.00
Accounts Payable 756,000.00 756,000.00 756,000.00
Bathan, Capital 600,000.00 600,000.00 600,000.00
Bathan, Drawing 144,000.00 144,000.00 144,000.00
Buenas, Capital 489,000.00 489,000.00 489,000.00
Buenas, Drawing 54,000.00 54,000.00 54,000.00
Sales 5,100,000.00 5,100,000.00 5,100,000.00
Interest Income 21,000.00 7 6,000 27,000.00 27,000
Purchases 4,920,000.00 4,920,000.00 4,920,000.00
Purchase Ret. and Allowances 99,000.00 99,000.00 99,000.00
Purchase Discount 138,000.00 138,000.00 138,000.00
Store Salaries 480,000.00 480,000.00 480,000.00
Taxes Expense 36,000.00 5 10,500.00 4 10,000.00 36,500.00 36,500.00
Interest Expense 26,250.00 6 3,750 30,000.00 30,000.00
General Expenses - Others 756,000.00 756,000.00 756,000.00
Total 7,563,000 7,563,000
Store Supplies Expense 1 19,500 19,500 19,500
Depreciation Expense 2 21,300 21,300 21,300
Advertising Expense 3 9,500.00 9,500.00 9,500.00
Advertising Payable 3 9,500.00 9,500.00 9,500.00
Prepaid Tax 4 10,000.00 10,000.00 10,000.00
Tax Payable 5 10,500.00 10,500.00 10,500.00
Interest Payable 6 3,750 3,750 3,750
Interest Receivable 7 6,000 6,000 6,000
3. Prepare the adjusting and closing entries as of December 31, 2014.

Bad Debts Expense 8 9,300 9,300 9,300

Income Tax 9 146,370 146,370 146,370
Income Tax Payable 9 146,370 146,370 146,370

236,220 236,220 7,769,720 7,769,720 6,428,470 6,770,000 2,747,250 2,405,720

NET INCOME 341,530 341,530
6,770,000 6,770,000 2,747,250 2,747,250
2. Prepare an income statement, a statement of changes in partners' equity, and a statement
 BE ON TOP PARTNERSHIP
STATEMENT OF COST OF GOODS SOLD
FOR THE YEAR DECEMBER 2014

Merchandise Inventory, Beginning ₱ -

Add: Net Cost of Purchases:
Purchases ₱ 4,920,000.00
Add: Freight - In
Total Cost of Goods Delivered ₱ 4,920,000.00
Less: Purchase Returns and Allowances ₱ 99,000.00
Purchase Discounts 138,000.00 237,000.00 4,683,000.00
Cost of Goods Available for Sale ₱ 4,683,000.00
Less: Merchandise Inventory, ending 1,406,000.00
Cost of Goods Sold ₱ 3,277,000.00

BE ON TOP PARTNERSHIP
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 2014

Sales ₱ 5,100,000.00
Add: Interest Income 27,000.00 ₱ 5,127,000.00
Less: Sales Returns and Allowances ₱ -
Sales Discounts -
Net Sales ₱ 5,127,000.00
Less: Cost of Goods Sold 3,277,000.00
Gross Profit ₱ 1,850,000.00
Less: Operating Expenses
Store Salaries 480,000.00
Taxes Expense 36,500.00
Interest Expense 30,000.00
General Expenses - Others 756,000.00
Store Supplies Expenses 19,500.00
Depreciation Expense 21,300.00
Advertising Expense 9,500.00
Bad Debts Expense 9,300.00 1,362,100.00
Income Before Tax ₱ 487,900.00
Less Income Tax 146,370.00
NET INCOME ₱ 341,530.00

BE ON TOP PARTNERSHIP
STATEMENT IN CHANGES OF PARTNERS EQUITY
FOR THE YEAR DECEMBER 2014
BATHAN BUENAS TOTAL
Equity, January 1 ₱ 600,000.00 ₱ 489,000.00 ₱ 1,089,000.00
Add: Profit for 2014
Salaries 100,000.00 100,000.00
Interest on beginning equity (10%) 60,000.00 48,900.00 108,900.00
Balance
₱ 132,630/2 66,315.00
₱ 132,630/2 66,315.00 132,630.00
Total Share in Profit ₱ 226,315.00 ₱ 115,215.00 ₱ 341,530.00
Total ₱ 826,315.00 ₱ 604,215.00 ₱ 1,430,530.00
Less: Partner's Withdrawals 144,000.00 54,000.00 198,000.00
Ending, Equity, December 31 ₱ 682,315.00 ₱ 550,215.00 ₱ 1,232,530.00
 BE ON TOP PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
AS OF DECEMBER 31, 2014

A S S E T S
CURRENT ASSETS:
Cash ₱ 582,750.00
Notes Receivable 120,000.00
Accounts Receivable ₱ 186,000.00
Less: Allowance for Bad Debts 9,300.00 176,700.00
Interest Receivable 6,000.00
Merchandise Inventory 1,406,000.00
Prepaid Tax 10,000.00
Supplies 16,500.00
Total Current Assets ₱ 2,317,950.00

PROPERTY, PLANT, AND EQUIPMENT

Store Furniture and Equipment ₱ 222,000.00
Less: Accumulated Depreciation 21,300.00 ₱ 200,700.00
Total Property, Plant, and Equipment ₱ 200,700.00
TOTAL ASSETS ₱ 2,518,650.00

LIABILITIES & OWNER'S EQUITY

CURRENT LIABILITIES:
Notes Payable ₱ 360,000.00
Accounts Payable 756,000.00
Advertising Payable 9,500.00
Interest Payable 3,750.00
Tax Payable 10,500.00
NON CURRENT LIABILITIES:
Income Tax Payable ₱ 146,370.00
Total Liabilities ₱ 1,286,120.00
OWNER'S EQUITY
Bathan, Capital ₱ 682,315.00
Buenas, Capital 550,215.00 ₱ 1,232,530.00
TOTAL LIABILITIES AND OWNER'S EQUITY ₱ 2,518,650.00
CLOSING ENTRIES

a. Merchandise Inventory 1,406,000

Interest Revenue 27,000
Purchase Returns and Allowances 99,000
Purchase Discounts 138,000
Sales 5,100,000
Income Summary 6,770,000

b. Income Summary 6,428,470

General Expenses – Others 756,000
Interest Expense 30,000
Purchases 4,920,000
Sales Salaries 480,000
Taxes 36,500
Store Supplies Expense 19,500
Depreciation Expense 21,300
Advertising Expense 9,500
Doubtful Accounts Expense 9,300
Income Taxes 146,370

c. Income Summary 341,530

Bathan, Capital 226,3150
Buenas, Capital 115,215

d. Bathan, Capital 144,000

Buenas, Capital 54,000
Bathan, Drawing 144,000
Buenas, Drawing 54,000
Problem 3-8 (Statement of Changes in Partners' Equity)
Bacani, Badeo, and Barte formed a partnership on January 1, 2012, investing P1,000,000,
P500,000, and P400,000, respectively. The partners agree to the following distribution of profits:
1. Annual salaries are to be allowed to partners as follows:
Bacani- P96,000
Badeo- P120,000
Barte- P120,000
2. Interest is to be allowed on partners' capital as of the beginning of each year at the rate of
6%.
3. Bacani, the managing partner, is to be allowed a bonus of 20% of profit after treating as
expenses the partners' salaries, interest and bonus.
4. Profits and losses after partners' salaries, interest and bonus are to be divided equally.

The partnership fiscal year is the calendar year. Activities of the partnership for 2012, 2013 and
2014 are summarized below:
2012 2013 2014
Profit or loss before interest, salaries
And bonus (P42,000) P300,192 P470,000
Cash withdrawals:
Bacani P72,000 P139,600 P163,200
Badeo 86,800 163,200 195,200
Barte 96,000 177,200 169,600

Instructions: Prepare a statement of changes in partners' equity covering the three-year period
ending December 31, 2014.
STATEMENT IN CHANGES OF PARTNERS EQUITY
FOR THE YEAR DECEMBER 2012
Bacani Badeo Barte Total
Equity, January ₱ 1,000,000 ₱ 500,000 ₱ 400,000 ₱ 1,900,000
1
Add: Profit for
2012
Salaries 96,000 120,000 120,000 336,000
Interest on
beginning equity 60,000 30,000 24,000 114,000
(6%)
Balance 8,400
((42000)x20%)
Remainder (166,800) (166,800) (166,800) (493,000)
500,400/3
Total Share ₱ (2400) ₱ (16,800) ₱ (22800) ₱ (42,000)
in Profit
Total ₱ 997,600 ₱ 483,300 ₱ 377,200 ₱ 1,858,00
Less:
Partner's 72,000 86,800 96,000 254,800
Withdrawals
Ending, Equity, ₱ 925,600 ₱ 396,400 ₱ 281,200 ₱ 1,603,200
December 31

STATEMENT IN CHANGES OF PARTNERS EQUITY

FOR THE YEAR DECEMBER 2013
Bacani Badeo Barte Total
Equity, January ₱ 925,600 ₱ 396,400 ₱ 281,200 ₱ 1,603,200
1
Add: Profit for
2013
Salaries 96,000 120,000 120,000 336,000
Interest on
beginning equity 55,536 23,784 16,872 96,192
(6%)
Balance (60,038.4)
(300,192x20%)
Remainder (23,987.2) (23,987.2) (23,987.2) (132.000)
71,961.6/3
Total Share ₱ 67,510.4 ₱ 119,796.8 ₱ 112,884.8 ₱ 300,192
in Profit
Total ₱ 993,110.4 ₱ 516,196.8 ₱ 394,084.8 ₱ 1,903,392
 Less:
Partner's 139,600 163,200 177,200 480,000
Withdrawals
Ending, Equity, ₱ 853,510.4 ₱ 352,996.8 ₱ 216,884.8 ₱ 1,423,392
December 31

STATEMENT IN CHANGES OF PARTNERS EQUITY

FOR THE YEAR DECEMBER 2014
Bacani Badeo Barte Total
Equity, January ₱ 853,510.4 ₱ 352,996.8 ₱ 216,884.8 ₱ 1,423,392
1
Add: Profit for
2014
Salaries 96,000 120,000 120,000 336,000
Interest on
beginning equity 51,210.62 21,179.81 13,013.09 85,403.52
(6%)
Balance (94,000)
Remainder (47,532.16) (47,532.16) (47,532.16) (493,000)

Total Share ₱ 100,742.78 ₱ 188711.97 ₱ 180,545.25 ₱ 470,000

in Profit
Total ₱ 954,253.18 ₱ 541,708.77 ₱ 397,430.05 ₱ 1,893,392
Less:
Partner's 163,200 195,200 169,600 528,000
Withdrawals
Ending, Equity, ₱ 791,053.18 ₱ 346,508.77 ₱ 227,830.05 ₱ 1,365,392
December 31
Problem 3-9 (Correction of Partnership Profit)
Balmes, Bambam, and Buela are partners sharing profits on a 5:3:2 ratio. On January 1, 2014,
Baguio was admitted into the partnership with a 20% share in the profits. The old partners continue
to participate in profits proportionate to their original ratios.
For the year 2014, the partnership books showed profit of P400,000. It was disclosed, however,
that the following errors were made.
2013 2014
Accrued expenses not recorded at year-end P24,000
Inventory overstatement P62,000
Purchases not recorded, for which goods have been
received and included in the inventory 40,000
Income received in advance not adjusted 30,000
Unused supplies not taken up at year-end 18,000

Instructions:
1. Determine the new profit and loss ratio of the old partners.
2. Prepare a schedule showing the division of the corrected partnership profit to the
partners.

Recorded Profit ₱ 400,000

Correction
Unrecorded Accrued expense ₱ 24,000
Unrecorded Unearned Income 30,000
Overstatement of Ending Inventory (62,000)
Unrecorded Purchases (40,000)
Unrecorded Unused Supplies (18,000)
₱ (66,000)
X 70%
Total Correction after Income Tax ₱ (46,200)
Corrected Profit ₱ 353,800

Corrected Profit (divided among partners)

Balmes ₱ 353,800 x (50%x80%) = ₱ 141,520
Bambam ₱ 353,800 x (30%x80%) = 84,912
Buela ₱ 353,800 x (20%x80%) = 56,608
Baguio ₱ 353,800 x 20% = 70,760
₱ 353,800
 MULTIPLE CHOICE

MC 3-1 Banayo and his very close friend Buendia formed a partnership on January 1, 2014
with Banayo contributing P160,000 cash and Buendia contributing equipment with
a book value of P64,000 and a fair value of P48,000, and inventory items with a
book value of P24,000 and a fair value of P32,000. During 2014, Buendia made
additional investment of P16,000 on April 1, and P16,000 on June 1. On September
1, he withdrew P40,000. Banayo had no additional investment nor withdrawals
during the year. The average capital balance of Buendia at the end of the fiscal year
2014 is
a. P72,000 c. P88,000
b. P80,000 d. P96,000

PERIOD CAPITAL MONTHS CHANGE PESOS AMOUNT

Jan 1 – Mar 31 88,000 3 264,000

Apr 1 – May 30 104,000 2 208,000
Jun 1 – Aug 30 120,000 3 360,000
Sept 1 – Dec 31 80,000 4 320,000

AVERAGE 12 ÷ 1,152,000 = 96,000

MC 3-2 Bañas and Belda are partners who share profits equally and losses in a 2:1 ratio. If
they have beginning capital balances of P120,000 and P118,000, made no
additional investments nor withdrawals, and suffered an unprofitable year with loss
of P48,000, their capital balances will be:
Bañas Belda
a. P40,000 P80,000
b. 88,000 102,000
c. 120,000 118,000
d. 152,000 134,000
NET LOSS = 48,000
BAÑAS = 48,000 × (2/3) = 32,000 120,000 – 32,000 = 88,000
BELDA = 48,000 × (1/3) = 16,000 118,000 – 16,000 = 102,000

MC 3-3 Bernardo and Belo formed a partnership in the year 2014. The partnership
agreement provides for annual salary allowances of P110,000 for Bernardo and
P90,000 for Belo. The partners share profits equally and losses in a 60:40 ratio. The
partnership had a profit of P180,000 for the year 2014 before any allowance to
 partners. What amount should be credited to each partner's capital account as a
result of the distribution of the partnership profit?
Bernardo Belo
a. P98,000 P82,000
b. 100,000 80,000
c. 96,000 84,000
d. 90,000 90,000
NET INCOME = 180,000 – 200,000 = 20,000
BAÑAS = 20,000 × (60/100) = 12,000
BELDA = 20,000× (40/100) = 8,000
BERNARDO BELO TOTAL
SALARIES 110,000 90,000 200,000
LESS 12,000 8,000 20,000
TOTAL 98,000 82,000

MC 3-4 Bunag, Belen, and Bustos 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. Bustos is to receive a bonus of 10% of 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 Bunag and Bustos,
respectively.

Assuming a profit of P220,000 for the year, the total profit share of Bustos is
a. P38,800 c. P54,800
b. P50,800 d. P74,800

BUNAG BELEN BUSTOS TOTAL

BONUS 20,000 20,000
INTEREST 2,000 2,000
SALARIES 20,000 24,000 44,000
PROFIT 61,600 61,600 30,800 154,000
TOTAL 81,600 63,600 74,800 220,000

NET INCOME OF BUSTOS AFTER BONUS, SALARIES

B = X (NI – B)
B = 10% (220,000 – B)
B = 22,000 –.1B
1B + .1B = 22,000
1.1B = 22,000 = 20,000
MC 3-5 Banta, Berba, and Borja formed a partnership on January 1, 2014. They had the
following initial investments: Banta- P200,000; Berba- P300,000; Borja- P450,000.
The partnership agreement states that 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 Banta, P96,000 for Berba and P72,000 for
Borja.
b. Average partners' capital balances during the year shall be allowed 10%
interest.
Additional information:
a. On June 30, 2014, Banta invested an additional P120,000.
b. Borja withdrew P140,000 from the partnership on September 30, 2014.
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. P95,000 c. P107,500
b. P97,500 d. P115,250

PERIOD CAPITAL MONTHS CHANGE PESOS AMOUNT

Jan 1 – June 30 200,000 6 1,200,000

Jul 1 – Dec 31 320,000 6 1,920,000

AVERAGE CAPITAL OF BANTA 12 ÷ 3,120,000 = 260,000

PERIOD CAPITAL MONTHS CHANGE PESOS AMOUNT

Jan 1 – Dec 31 300,000 12 36,000,000

AVERAGE CAPITAL OF BERBA 12 ÷ 36,000,000 =300,000

PERIOD CAPITAL MONTHS CHANGE PESOS AMOUNT

Jan 1 – Sep 30 450,000 9 4,050,000

Oct 1 – Dec 31 310,000 3 930,000

AVERAGE CAPITAL OF BORJA 12 ÷ 4,980,000 = 415,000

INTEREST = (260,000 × 10%) + (300,000 × 10%) + (415,000 × 10%) = 97,500

MC 3-6 Using the information in MC 3-5, partnership profit at December 31, 2014 before
salaries, interest and partners' share on the remainder is
a. P395,500 c. P415,500
b. P399,500 d. P423,250
 BANTA BERBA BORJA TOTAL
INTEREST 26,000 30,000 41,500 97,500
SALARIES 120,000 96,000 72,000 288,000
PROFIT 10,000 10,000 10,000 30,000
TOTAL 156,000 136,000 123,500 415,500

MC 3-7 Using the information in MC 3-5, the total partnership capital on December 31,
2014 is
a. P950,000 c. P1,345,500
b. P970,000 d. P1,365,500

CAPITAL = P200,000 + P300,000 + P450,000

= P950,000 + P120,000
= P1,070,000 – P140,000
= P930,000 + P415,500
= P1,345,500

MC 3-8 On January 1, 2014, Besa, Basco, Buan, and Baduel formed the B4 TRADING, a
partnership with capital contributions as follows: Besa- P150,000; Basco- P75,000;
and Baduel- P60,000. The partnership agreement stipulates that each partner shall
receive a 5% interest on capital contributed and that Besa and Basco shall receive
salaries (chargeable as expenses of the business) of P15,000 and P9,000,
respectively. The agreement further provides that Buan shall receive a minimum of
P7,500 per annum and Baduel a minimum of P18,000, which is inclusive of
amounts representing interest and their respective share in 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 2014, before any
charge for interest and partners' salaries, in order that Besa may receive an
aggregate of P37,500 including interest, salary, and share of profits?
a. P92,000 c. P50,000
b. P97,000 d. P90,000

Interest = 150,000 × 5% = 7,500

Besa Profit Share = 37,500 – 7,500 = 30,000
Salaries = 30,000 – 15,000 = 15,000

15,000 + 15,000 + (15,000 × 2/3) + (15,000 × 2/3) = 50,000

MC 3-9 Using the information in MC 3-8, the total profit share of Buan is
a. P7,500 c. P19,400
b. P13,750 d. P37,500
The agreement further provides that Buan shall receive a minimum of P7,500 per annum which
is inclusive of amounts representing interest and their respective share in partnership profits
MC 3-10 Using the information in MC 3-8, the total profit share of Baduel is
a. P13,000 c. P18,000
b. P13,500 d. P19,400

The agreement further provides that Baduel shall receive a minimum of P18,000, which is
inclusive of amounts representing interest and their respective share in partnership profits.

MC 3-11 The partnership agreement between Banaria and Bertol stipulates that Banaria is to
receive a 20% bonus on profits before bonus with the residual profit and loss to be
appropriated in the ratio of 2:3, respectively. Which partner has greater advantage
when the partnership has a profit and when it incurs a loss?
Profit Loss Profit Loss
a. Bertol Banaria c. Banaria Banaria
b. Banaria Bertol d. Bertol Bertol

MC 3-12 Bulan, Bustos, and Bucao formed a partnership on January 1, 2014 and contributed
P150,000, P200,000, and P250,000, respectively. The Articles of Co- Partnership
provide that the operating income be shared among the partners as follows: As
salary: Bulan- P24,000; Bustos- P18,000; Bucao- P12,000; interest of 12% on the
average capital during 2014 of the three partners; the remainder will be divided in
the ratio of 2:4:4, respectively.
Additional information:
a. Operating income for the year ended December 31, 2014 is P180,000.
b. Bulan contributed additional capital of P30,000 on July 1, and made drawing
of P10,000 on October 1.
c. Bustos contributed capital of P20,000 on August 1 and made withdrawal of
P10,000 on October 1.
d. Bucao made withdrawal of P30,000 on November 1.
The division of the P180,000 operating income is
Bulan Bustos Bucao
a. P53,760 P65,520 P59,720
b. P35,200 P70,400 P70,400
c. P53,980 P63,660 P62,360
d. P53,180 P62,060 P60,760

PERIOD CAPITAL MONTHS CHANGE PESOS AMOUNT

Jan 1 – June 30 150,000 6 900,000

Jul 1 – Sept 31 180,000 3 540,000
Oct 1 – Dec 31 170,000 3 510,000

AVERAGE CAPITAL OF BULAN 12 ÷ 1,950,000 = 162,500

PERIOD CAPITAL MONTHS CHANGE PESOS AMOUNT

Jan 1 – July 30 200,000 7 1,400,000

Aug 1 – Sept 31 220,000 2 440,000
Oct 1 – Dec 31 210,000 3 630,000

AVERAGE CAPITAL OF BUSTOS 12 ÷ 2,470,000 =205,833.33

PERIOD CAPITAL MONTHS CHANGE PESOS AMOUNT

Jan 1 – Oct 30 250,000 10 2,500,000

Nov 1 – Dec 31 220,000 2 440,000

AVERAGE CAPITAL OF BUCAO 12 ÷ 2,940,000 = 245,000

INTEREST = (162,500 × 12%) + (205,833.33 × 12%) + (245,000 × 12%) = 73,599.99

BULAN BUSTOS BUCAO TOTAL

INTEREST 19,500 24,700 29,400 73,600
SALARIES 24,000 18,000 12,000 54,000
PROFIT 10,480 20,960 20,960 52,400
TOTAL 53,980 63,660 62,360 180,000

MC 3-13 Using the information in MC 3-12, the partners' capital balances on December 31,
2014 are
Bulan Bustos Bucao
a. P223,980 P273,660 P282,360
b. P179,760 P229,520 P239,520
c. P189,860 P239,360 P269,360
d. P223,180 P272,060 P280,760

BULAN = P170,000 + P53,980

= P223,980
BUSTOS = P210,000 + P63,660
= P273,660
BUCAO = P220,000 + P62,360
= P282,360
MC 3-14 Briones, Belen, and Burgos are partners with average capital balances during 2014
of P945,000, P477,300, and P324,700, respectively. The partners receive 10%
interest on their average capital balances, salaries of P244,650 to Briones and
P165,250 to Burgos, any residual profit or loss is divided equally.
In 2014, the partnership had a net loss of P251,248 before the interest and salaries
to partners.
What is the change in the capital balances of Briones and Burgos?
Briones Burgos
a. P81,688 decrease P62,474 decrease
b. P56,716 increase P64,916 increase
c. P58,952 increase P35,072 increase
d. P60,534 increase P80,896 decrease

BRIONES BELEN BURGOS TOTAL

INTEREST 94,500 47,730 32,470 174,700
SALARIES 244,650 165,250 409,900
LOSS (278,616) (278,616) (278,616) (835,848)
TOTAL 60,534 (230,886) (80,896) (251,248)
Test Material No. 10 Rating __________

TRUE or FALSE

Instructions: Encircle the letter T if the statement is correct and the letter F if the statement is
incorrect.

T F 1. An adequate accounting system and an accurate measurement of income are not

needed by a partnership because the profit is divided among two or more partners.

T F 2. If the partners did not agree as to how profits are to be divided, then such should
be divided among the partners equally.

T F 3. The income statement of a partnership differs from that of a single

proprietorship in only one respect: a final section is added to show the division of
the profit between or among partners.

T F 4. Any salaries authorized for partners are regarded as a preliminary step in the
division of profits, not as an expense of the business

T F 5. The statement of changes in partners’ equity takes the place of the capital
statement in a sole proprietorship.

T F 6. All partnerships, just like corporations, are subject to income tax.

T F 7. Bonus is allowed to partner only if there is a partnership profit, since bonus is

based on profit.

T F 8. Unless otherwise agreed, allowance for salaries and interest are allowed to
partners whether there is a profit or a loss; whether the profit is sufficient or
insufficient.

T F 9. All partners, whether capitalist or industrial, are to share on whatever partnership

profits or losses.

T F 10. The drawing account of a partner may have a debit or a credit balance.

T F 11. The profit of the partnership is transferred to the drawing accounts of the
partners if the intention is to keep the capital account intact for investments and
permanent withdrawals of capital.

T F 12. A credit balance in the Income Summary account represents profit after closing
into it all the operating (nominal) accounts.

T F 13. If the partnership agreement specifies a method for sharing profits, but not
losses, then losses are shared in the same proportion as profits.
T F 14. Allowance for salaries and interest in a partnership agreement are methods of
allocating profits and losses to the partners.

T F 15. The percentage interest in a partnership is always the same as the profit-sharing
ratio.
T F 16. Profits and losses, in general, shall be divided in accordance with the agreement
among the partners.

T F 17. Partners may intend for salary and interest allowances to be deducted in
determining the base for computing bonus. In such a case, no bonus is allowed if
there is insufficient profit after distribution of salaries and interests.

T F 18. Salaries, interests and bonuses allowed to partners as distribution of partnership

profits are treated as partnership expenses.

T F 19. The partnership books may show an incorrect profit because of errors and
omissions that should first be corrected before the profit distribution to the partners.

T F 20. In the absence of an agreement, the capitalist-industrial partner in his character

as industrial partner shall have no share in the losses, but in his character as a
capitalist partner will share in proportion to his capital contribution.
 Test Material No. 11 Rating __________

MATCHING TYPE

Choices:

A. Arbitrary ratio J. Interest on investment

B. Average capital K. Multiple bases of profit allocation
C. Beginning capital L. Original capital
D. Bonus M. Partners’ salaries
E. Capital account N. Partnership profits
F. Capital ratio O. Profit and loss ratio
G. Distribution of profit P. Statement of changes in partners’ equity
H. Drawing account Q. Worksheet
I. Income Summary

Instructions: Write the letter that corresponds to your choice.

L 1. Capital contributions of the partners at the commencement of the partnership.

F 2. A method of dividing profits which uses as basis the amount of capital invested and
the time during which such capital are actually used by the business.

K 3. A partnership agreement that provides for a combination of several allocation

procedures to be used in the distribution of profit.

J 4. To compensate for the difference in their capital contributions, partners are allowed
this item.

M 5. The compensation given to partners for the ability and time devoted to the business.

D 6. An incentive given to the managing partner which is usually a percentage of net

income.
H 7. The account debited for partners’ permanent withdrawals of capital.

A 8. A ratio expressed in fraction or percentage which has no relation to the amount of

capital investment of the partners.
O 9. The basis or ratio in which the profits or losses are shared by the partners.

N 10. The entire return from the business to the partners for their time, skill, and capital.
P 11. A basic financial statement which gives effect to the changes in capital balances of the
partners during a specific period.

G 12. A permanent part of a partnership income statement not found in that of a sole
proprietorship.

I 13. A temporary account used to summarize the various revenue and expenses, the balance
of which may represent profit or loss.

Q 14. This is prepared in order to classify accounting data in a convenient and orderly manner
and facilitate the preparation of financial statements.

C 15. Balances in the capital accounts of partners at the start of each accounting period.

Test Material No. 12 Rating ____________

MULTIPLE CHOICE – Theory and Problems

Instructions: Encircle the letter of the best answer in good from in a separate work
sheet. Present supporting computations.
1. If the partners have not drawn up any agreement, then they must share profits and losses
a. Equally
b. By any means that will save taxes
c. By any appropriate ratio
d. According to capital distributions

2. Among the various options available for determining the partners’ share of profit are the
following except:
a. Capital contributions and service to the partnership
b. Loans to the partnership
c. Capital contributions
d. Stated fraction or ratio

3. Partners Barona and Basilio share income in a 2:1 ratio, respectively. Each partner receives
an annual salary allowance of P72,000. If the salaries are recorded in the accounts of the
 partnership as an expense rather than treated as an allocation of profit, the total amount
allocated to each partner for salaries and profit would be
a. Less for both Barona and Basilio
b. Unchanged for both Barona and Basilio
c. More for Barona and less for Basilio
d. More for Basilio and less for Barona

4. Partners Bagobo and Bicomo share profit and loss equally after each has been credited with
annual salary allowances of P90,000 and P72,000, respectively. Under this arrangement,
Bagobo will benefit by P18,000 more than Bicomo in which of the following
circumstances?
a. Only if the partnership has profit of 162,000 or more for the year
b. Only if the partnership does not incur a loss for the year
c. In all profit or loss situation
d. Only if the partnership has profit of at least P18,000 for the year

5. The BB Tours Partnership earned P500,000 this year. The partners have equal capital
balances, and share profits and losses 1:3. The partners will show share in partnership profit
of
a. P250,000 each
b. P250,000 and P750,000, respectively
c. P125,000 and P375,000, respectively
d. P500,000 each

Solution:
Share in Partnership Profit = P500,000
= 1:3 = x:3x
X = P500,000 / 4 = P125,000
= 1:3 = (P125,000) : 3(P125,000)
= P125,000 : P375,000
6. Beltran and Barba are partners who share profits equally and losses in a 2:1 ratio. Beltran
and Barba have beginning capital balances of P400,000 and P500,000 respectively, and
made no withdrawals during a period of two years. After a profitable operations on the first
year with a profit of P400,000 and an unprofitable operations on the second year with a
loss of P240,000, the capital balances of Beltran and Barba will be
Beltran Barba Beltran Barba
a. P480,000 P580,000 c. P440,000 P620,000
b. P390,000 P570,000 d. P670,000 P770,000

Solution:

Original Capital P400,000 P500,000

Add: Year 1 Profit P200,000 P200,000
Less: Year 2 (Loss) (P160,000) (P80,000)
Ending Capital P440,000 P620,000

7. Bamba and Balbina share profits and losses in the ratio of 1:2. Bamba receives a monthly
salary of P150,000. If Bamba’s capital balance is P2,500,000 at the beginning of the year
and P2,000,000 at the end of the year, and annual partnership profit after salaries is
P1,200,000, then Bamba withdrew
a. P500,000 c. P2,700,000
b. P1,300,000 d. P3,200,000

Solution:
Bamba
Beginning Balance P2,500,000
Add: Salaries per year P150,000 x 12 months = P1,800,000
Profit P400,000
Ending Balance P4,700,000
Less: Ending Capital P2,000,000
Withdrawals P2,700,000
8. The BBB Company is a partnership of three musicians who play at weddings and office
parties. The partnership’s profits and losses are allocated in proportion to the partner’s
capital contributions. If the partners Bamboo, Banda, and Banjo have capital contributions
of P300,000, P300,000, and P500,000, respectively, what is each partner’s share in profit
of P1,100,000?
Bamboo Banda Banjo
a. P300,000 P300,000 P600,000
b. P300,000 P300,000 P500,000
c. P300,000 P300,000 P1,100,000
d. P366,667 P366,667 P366,667

Solution:
Share in Profit = 3x:3x:5x
X = P1,100,000 / 11 = P100,000
= 3(P100,000) : 3(P100,000) : 5(P100,000)
= P300,000 : P300,000 : P500,000

9. Banzon and Borja are partners in B and B Enterprises. Partnership profits and losses are
allocated as follows: salaries of P160,000 and P200,000 to Banzon and Borja, respectively;
10% interest on their beginning capital balances, any remaining profit is divided equally.
At the beginning of the year, their capital balances are P360,000 and P600,000. How will
the partnership profit of P600,000 be allocated to the two partners?
Banzon Borja Banzon Borja
a. P192,000 P408,000 c. P300,000 P300,000
b. P268,000 P332,000 d. P280,000 P320,000

Solution:
Banzon Borja
Beginning Balance P360,000 P600,000
Salaries and Interest
 Add: Salaries P160,000 P200,000
Interest (Beg. Balance P36,000 P60,000
x 10%)
Total Salaries and Interest P196,000 P260,000
Add: (Profit – Total Salaries P72,000 P72,000
and Interest) x 50%
Total Change in Capital P268,000 P332,000

10. Bautista, a partner in the Christian Partnership has a 20% participation in the partnership
profit and loss. Bautista’s capital account had a net decrease of P240,000 during the
calendar year 2014. During 2014, Bautista withdrew P520,000 (charged against his capital
account) and contributed property valued at P100,000 to the partnership. What was the
profit of the partnership?
a. P600,000
b. P900,000
c. P1,400,000
d. P2,200,000

Solution:
Profit of the partnership
Bautista Profit = Withdrawals – Additional Capital – net decrease
= P520,000 – P100,000 – P240,000
= P180,000
Total Profit = Baustista Profit / 20%
= P180,000 / 20
= P900,000

11. The partnership agreement of Bustos and Balen provides that interest at 12% per year is to
be credited to each partner on the basis of average capital balances. A summary of Balen’s
capital account for the year ended December 31, 2014 is as follows:
Balance, January 1 P840,000
 Additional Investment, July 1 240,000
Withdrawal, August 1 90,000
Balance, December 31 990,000
What amount of interest should be credited to Balen’s capital account for 2014?
a. P91,500
b. P92,500
c. P99,000
d. P110,700

Solution:
Interest = Balen, Capital x 10%
= P990,000 x 10%
= P99,000

12. Basilio and Bituin formed a partnership in the year 2014. The partnership agreement
provides for annual salary allowances of P220,000 for Basilio and P180,000 for Bituin.
The partners share profits equally and loses in a 60:40 ratio. The partnership had a profit
of P360,000 for the year 2014 before any allowance to the partners. What amount should
be credited to each partner’s capital account as a result of the distribution of the partnership
profit?
Basilio Bituin Basilio Bituin
a. P180,000 P180,000 c. P196,000 P164,000
b. P192,000 P168,000 d. P200,000 P160,000

Solution:
Capital Distribution = P400,000 – P360,000 = P40,000 / 2 = P20,000
= P220,000 – P20,000 = P200,000
= P180,000 – P20,000 = P160,000
13. Bucao, Basco, and Blanco share profits and losses in the ratio 2:3:5, respectively. Their
partnership realized a profit of P900,000 during the year. Bucao, with a beginning capital
balance of P1,000,000 withdrew P200,000 during the year. Bucao’s ending capital balance
is
a. P980,000 c. P1,160,000
b. P1,000,000 d. P1,380,000

Solution:
Bucao
Beginning Capital P1,000,000
Add: Profit (20%) P180,000
Less: Withdrawals P200,000
Ending Capital P980,000

14. The B2 partnership was formed on January 3, 2014. Under the partnership agreement, each
partner has an equal initial capital balance accounted for under the bonus method
Partnership profit or loss is allocated 60% to Brecia and 40% to Buan. To form the
partnership, Brecia originally contributed assets costing P300,000 with a fair value of
P600,000 on January 3, 2014, while Buan contributed P200,000 in cash. Withdrawals by
the partners during the fiscal 2014 totaled P30,000 by Brecia and P90,000 by Buan. The
partnership profit for fiscal year 2014 was P450,000. Buan’s initial capital balance in the
partnership is
a. P200,000 c. P400,000
b. P250,000 d. P600,000

15. Using the information in No. 14, what is the ending capital of Brecia at December 31,
2014?
a. P550,000 c. P840,000
b. P640,000 d. P870,000

Solution:
 Brecia
Beginning Capital P600,000
Add: Profit (60%) P270,000
Less: Withdrawals P30,000
Ending Capital P840,000

Test Material No. 13 Rating__________

PROBLEMS

Problem A

The partnership of Beltran, Bernal, and Basco was formed on January 1, 2014. The original cash
investments were as follows:

Beltran P384,000
Bernal 576,000
Basco 864,000

According to the partnership contract, profit or loss will be divided among the partners as follows:

1. Salaries of P57,600 for Beltran, P48,000 for Bernal and P38,400 for Basco.
2. Interest of 8% on average capital balances during the year.
3. Remaining profit will be divided equally
The profit of the partnership for the year ended December 31, 2014 was P450,000. Beltran invested
an additional P96,000 in the partnership on July I, 2014. Basco withdrew P144,000 from the
partnership on October 1, 2014; and Beltran, Bernal, and Basco made regular drawings of P48,000
each against their share of profit during the calendar year 2014

Instructions:

1. Prepare a schedule showing the division of profit among the three partners.
2. Prepare a statement of changes in partners’ equity for the year 2014

Problem B

Several years ago, Bilbao and Bragas formed Double B Partnership. The partnership agreement
states that each partner is to receive a salary of P20,000 per month and 5% interest on beginning
capital balances; any remainder would be divided between Bilbao and Bragas in the ratio of 2:3,
respectively. The unadjusted trial balance of the partnership as of December 31, 2014 is presented
below.

DEBITS CREDITS
Cash 1,000,000 Accounts payable 700,000
Accounts receivable 600,000 Notes payable 400,000
Merchandise Inventory, Jan.1 800,000 Bilbao, capital 1,500,000
Furniture and Fixtures (net) 300,000 Bragas, capital 1,240,000
Building (net) 600,000 Sales 1,800,000
Bilbao, drawing 200,000
Bragas, drawing 240,000
Purchases 1,200,000
Operating expenses 300,000

Additional information:

1. The merchandise inventory on December 31, was P1,050,000.

2. Depreciation on furniture and fixtures and building is 10% and 5% of net values,
respectively
3. On July 1, 2014, the partnership recorded a P200,000 additional capital contribution by
Bilbao. Bragas made no additional capital contributions during the year.
4. Income tax rate is 30%.
Instructions:

1. Prepare the partnership statement of income for the year ended December 31, 2014.

Double B Company
Comprehensive Statement of Income
For the Year Ended December 31, 2014

Schedule
Net Sales P 1, 800, 000
Less: Cost of Sales 1 950, 000
Gross Profit 850, 000

Less: Operating Expenses 300, 000

Profit before Tax 550, 000
Income Tax Expense (30%) (165, 000)
Profit for the Period P 385, 000

Division of Profit
Bilbao Bragas Total
Salaries P 240, 000 P 240, 000 480, 000
Interest on beginning capital 44, 000 66, 000 110, 000
Balance
P 205, 000 x 2/5 (82, 000)
P 205, 000 x 3/5 (123, 000) (205, 000)
P 202, 000 P 183, 000 P 385, 000

2. Prepare a schedule showing the allocation of partnership profit or loss and prepare the
entry to record the partners' share in the profit (to be recorded directly in the partners'
capital accounts).

Merchandise Inventory, January 1 P 800, 000

Purchases 1, 200, 000
2, 000, 000
Merchandise Inventory, December 3 ( 1, 050, 000)
Cost of Sales 950, 000
 3. Prepare the entry to close the partners' drawing accounts as of December 31, 2014.

Closing Entries
31 Sales 1, 800, 000 -
Income Summary 1, 800, 000 -
To close the Sales account

31 Income Summary 300, 000 -

Operating expenses 300, 000 -
To close Expense Account

31 Income Summary 1, 500, 000 -

Bilbao, capital 600, 000 -
Bragas, capital 900, 000 -
To close Income Summary to Capital

31 Bilbao, capital 200, 000 -

Bragas, capital 240, 000 -
Bilbao, drawing 200, 000 -
Bragas, drawing 240, 000 -
To close Drawing to Capital

4. Prepare a statement of changes in partners' equity for the year ended December 31, 2014

Double B Company
Statement of Changes in Partners' Equity
For the Year Ended December 31, 2014

Bilbao Bragas Total

Beginning Capital 880, 000 1, 320, 000 2, 200, 000
Additonal investments, July 1, 2014 200, 000 200, 000
Withdrawal , October 1, 2014 (200, 000) (240, 000) (440, 000)
Share Profits 202, 000 183, 000 385, 000

Capital balances, Ending 1, 500, 000 1, 240, 000 2, 740, 000

Capital balances, December 1, 2014 P 2, 582, 000 P 2, 503, 000 5, 085, 000