PAMANTASAN NG LUNGSOD NG VALENZUELA
College of Accountancy and Business Administration
Advanced Financial Accounting and Reporting (AFAR)
PARTNERSHIP OPERATION
CHANGES IN CAPITAL
Capital beginning xxx
Additional investment xxx
Drawings (permanent/temporary) (xxx)
Share in NI/(NL) xxx(xxx)
Capital ending xxx
DRAWINGS
1. Permanent capital drawings - Directly affects capital balance
2. Regular/Temporary drawings - For anticipation for share in share in net income - Yearly withdrawal
Note:
If net loss is generated, regular/temporary withdrawal is considered as permanent withdrawal.
If silent, it is permanent.
RULES FOR THE DISTRIBUTION OF PROFITS AND LOSSES
A. Capitalist Partner
1. Distribution of Profits
a. Agreement
b. Capital contribution
2. Distribution of Losses
a. Agreement
b. Profit sharing ratio
c. Capital contribution
B. Industrial Partner
1. Distribution of Profits
a. Agreement
b. Just and equitable
2. Distribution of Losses
a. Agreement
Take note:
RULE 1: The profits and losses shall be distributed in conformity with the agreement.
RULE 2: If ONLY the share of each partner in the profits has been agreed upon, the share of each in
the losses shall be in the same proportion
RULE3: In the absence of stipulation, the share of each partner in the profits and losses shall be in
proportion to what they have contributed (original capital contribution) but the industrial partner shall
not be liable for the losses. As for the profits, the industrial partner shall receive such share as may be
just and equitable under the circumstances.
RULE 4: If beside his services, he also contributed capital, he shall also receive a share in the profits in
proportion to his capital.
METHODS OF DIVIDING PROFITS AND LOSSES
Partners may agree on the distribution of profits and losses in any manner they choose as long as the provisions of the
law are not violated. The agreement on this matter should be specific and complete to avoid misunderstanding and
dispute.
1. Equally
2. In an arbitrary or agreed ratio
3. In the ratio of partners’ capital
a. Original capital
b. Beginning of the year capital
c. End of the year capital
d. Average capital
Simple average during the year
Weighted average during the year
4. Salaries, interest, and bonus are to be allowed, the balance to be divided based on some arbitrary basis as agreed
upon.
a. Salaries
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Normally, an industrial partner shall receive salary, in addition to his share in the partnership’s
profits, as compensation for his services to the partnership.
Could be fractional year
Should be given regardless of result of the operation
b. Interest
The partnership agreement may stipulate that each partner may be entitled to a per annum
interest computed on his capital contributions.
Should be given regardless of the result of the operation.
If the problem is silent, interest is based on average capital
If the problem says the amount to be distributed among the partners is limited to the profit only
or base on the following order of priority, use salary ratio and interest ratio.
b. Bonus
The partnership agreement may stipulate a bonus to be given to a managing partner to
encourage excellent management performance.
Only provided if there is a profit
The following computation of the bonus may be based on:
- Net income before allowance for interest, salary and bonus
- Net income before interest but after allowance for bonus and salary
- Net income before salary but after allowance for interest and bonus
- Net income before bonus but after allowance for interest and salary
- Net income after salary but before allowance for interest and bonus
- Net income after interest but before allowance for salary and bonus
- Net income after bonus but before allowance for salary and interest
- Net income after allowance for interest, salary and bonus
ILLUSTRATIVE PROBLEMS
Problem 1: On Jan 1, 2021, Sy and Dy formed a partnership with an investment of 40,000 by Sy and P 60,000 by Dy,
On Dec 31, 2021, after closing all income and expense accounts, the Income Summary account shows a credit balance of
P60,000, representing the profit for the year 2021. Changes in the capital accounts during 2021 are summarized as
follows:
Sy Dy
Capital Balances, Jan 1, 2021 40,000 60,000
Additional investments, Mar 1 20,000 50,000
Additional investments, Aug 1 20,000 40,000
Withdrawal, Oct 1 (20,000) -
Withdrawal, Nov 1 - (50,000)
1. Assuming that the partners agree that the share in net income is to be distributed equally, what is the share in net
income and capital balances of Sy and Dy, respectively, for the year ended December 31, 2021?
Share in Net Income Capital Balances
Sy Dy Sy Dy
2. Assuming that the partners agree that the share in net income is to be distributed in an arbitrary (unequal) ratio
of 60:40, what is the share in net income and capital balances of Sy and Dy, respectively, for the year ended
December 31, 2021?
Share in Net Income Capital Balances
Sy Dy Sy Dy
3. Assuming that the partners agree that the share in net income is to be distributed based on original capital, what
is the share in net income and capital balances of Sy and Dy, respectively, for the year ended December 31,
2021?
Share in Net Income Capital Balances
Sy Dy Sy Dy
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4. Assuming that the partners agree that the share in net income is to be distributed based on beginning capital,
what is the share in net income and capital balances of Sy and Dy, respectively, for the year ended December
31, 2021?
Share in Net Income Capital Balances
Sy Dy Sy Dy
5. Assuming that the partners agree that the share in net income is to be distributed based on ending capital, what
is the share in net income and capital balances of Sy and Dy, respectively, for the year ended December 31,
2021?
Share in Net Income Capital Balances
Sy Dy Sy Dy
6. Assuming that the partners agree that the share in net income is to be distributed based on average capital
(simple average), what is the share in net income and capital balances of Sy and Dy, respectively, for the year
ended December 31, 2021?
Share in Net Income Capital Balances
Sy Dy Sy Dy
7. Assuming that the partners agree that the share in net income is to be distributed based on average capital
(weighted average), what is the share in net income and capital balances of Sy and Dy, respectively, for the year
ended December 31, 2021?
Share in Net Income Capital Balances
Sy Dy Sy Dy
Problem 2: Left and Right are partners. Their capital accounts during 2019 were as follows:
Left, Capital Right, Capital
8/23 P3,000 1/1 P15,000 3/5 P4,500 1/1 P25,000
4/3 4,000 7/6 3,500
10/31 3,000 10/7 2,500
Partnership net income is P25,000 for the year. The partnership agreement provides for the division of net income
as follows:
Each partner is credited 10 percent interest on his or her average capital (rounded to the nearest month).
Because of prior work experience, Left is entitled to an annual salary of P6,000 and Right is credited
with P4,000
Any remainder income or loss is to be allocated based on beginning capital
1. How much of the partnership net income for 2019 should be assigned to Left and Right?
a. Left, P11,833; Right, P13,167
b. Left, P13,194; Right, P11,806
c. Left, P9,375; Right, P15,625
d. Left, P12,500; Right, P12,500
Problem 3: Hunt, Rob, Turman and Kelly own a publishing company that they operate as a partnership. The
partnership agreement includes the following:
Hunt receives a salary of P10,000 and a bonus of 3% of income after all bonuses.
Rob receives a salary of P5,000 and a bonus of 2% of income after all bonuses.
All partners are to receive 10% interest on their average capital balances.
The average capital balances are Hunt, P25,000; Rob, P22,500; Turman, P10,000 and Kelly, P23,500. Any remaining
profits and losses are to be allocated equally among the partners.
1. Determine how a profit of P52,500 would be allocated among the partners.
a. Hunt, P20,725; Rob, P14,975; Turman, P7,725; Kelly, P9,075
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b. Hunt, P14,000; Rob, P8,250; Turman, P1,000; Kelly, P2,350
c. Hunt, P19,850; Rob, P14,600; Turman, P8,350; Kelly, P9,700
d. Cannot be determined.
Problem 4: PP and QQ are partners operating a chain of retail stores. The partnership agreement provides for the
following:
PP QQ
Salaries P5,000 P2,500
Interest on average capital balances 10% 10%
Bonus 20% of net income before interest
but after bonus & salaries
Remainder 30% 70%
The income summary account for year 2019 shows a credit balance of P25,500 before any deductions. Average
capital balances for PP and QQ are P25,000 and P37,500, respectively.
1. The share of PP and QQ in the P25,500 net income would be:
a. PP, P12,031.25; QQ, P13,468.75
b. PP, P11,750; QQ, P13,750
c. PP, P13,270.75; QQ, P12,229.25
d. PP, P13,125; QQ, P12,375
Problem 5: XX and YY formed a partnership on January 2, 2019 and agreed to share profits and loss in the ratio of 90%
and 10%, respectively. XX contributed capital of P6,250. YY contributed no capital but has a specialized expertise and
manages the firm full time. There were no withdrawals during the year. The partnership agreement provides for the
following:
Capital accounts are to be credited annually with interest at 5% of the beginning capital
YY is to be paid a salary of P250 a month
YY is to receive a bonus of 20% of net income calculated before deducting his salary and interest on both
capital accounts.
Bonus, interest, and YY’s salary are to be considered as partnership expenses
The partnership’s income statement for 2019 follows:
Revenues 24,112.50
Less: Expenses (including salary, interest, and bonus) 12,425.00
Net income 11,687.50
1. What is YY’s 2019 bonus?
a. P2,922.00
b. P3,750.00
c. P3,000.00
d. P3,934.50
2. How much is the total share of Y on the 2019 partnership net income?
a. P7,084.50
b. P7,918.75
c. P7,162.50
d. P8,097.00
Problem 6: The Trading Company, a partnership, was formed on January 1, 2019, with four partners, DD, EE, FF, and
GG. Capital contributions were as follows: DD, P25,000; EE, P12,500; FF, P12,500; GG, P10,000. The partnership
agreement provides that partners shall receive 5% interest in the amounts of their capital contributions. In addition, DD
is to receive a salary of P2,500 and EE a salary of P1,500. The agreement further provides that FF shall receive a
minimum of P1,250 per annum from the partnership and GG a minimum of P3,000 per annum, both including amounts
allowed as interest on capital and their respective shares of profits. The balance of the profit is to be shared in the
following proportions: DD, 30%; EE, 30%; FF, 20% and GG, 20%.
1. Calculate the amount that must be earned by the partnership during 2019, before any charges for interest on
capital or partners’ salaries, in order that DD may receive an aggregate of P6,250 including interest, salary
and share of profits.
a. P 8,333.33
b. P15,333,33
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c. P15,000.00
d. P16,166.67
Problem 7: The AA, BB, and CC Partnership was formed on January 2, 2019. The original cash investments were as
follows:
AA 48,000
BB 72,000
CC 108,000
According to the general partnership contract, the partners were to be remunerated as follows:
a. Salaries of P7,200 for AA, P6,000 for BB, and P6,800 for CC.
b. Interest at 12% on the average capital account balances during the year.
c. Remainder divided 40% to AA, 30% to BB, and 30% for CC.
Income before partners’ salaries for the year ended December 31, 2019, was P46,040. AA invested an additional
P12,000, in the partnership on July 1; CC withdrew P18,000 from the partnership on October 1, and, as authorized by the
partnership contract, AA, BB, and CC each withdrew P375 monthly against their shares of net income for the year.
1. The share of partner AA in the net income
a. P18,416.00
b. P13,080.00
c. P17,616.00
d. P 5,880.00
2. The capital balance of partner CC on December 31, 2019:
a. P108,770.00
b. P100,112.00
c. P104,270.00
d. P 99,312.00
3. If the salaries to partners’ are to be recognized as operating expenses by the partnership, the share of partner
BB in the net income?
a. P18,416.00
b. P8,190.00
c. P14,190.00
d. P7,812.00
4. Using the same information in No. 3, the capital balance of partner CC on December 31, 2019?
a. P108,770.00
b. P100,112.00
c. P104,270.00
d. P 99,312.00
Problem 8: DD and EE was organized and began operations of March 1, 2019. On that date, DD invested P75,000 and
EE invested land and building with current fair value of P40,000 and P50,000, respectively. EE also invested P30,000 in
the partnership on November 1, 2019 because of its shortage of cash. The partnership contract includes the following
remuneration plan:
DD EE
Annual Salary P9,000 P12,000
Annual interest on average capital account balances 10% 10%
Remainder 60% 40%
The annual salary was to be withdrawn by each partner in 12 monthly installments. During the fiscal year ended,
February 28, 2020, DD and EE had net sales of P250,000, cost of goods sold of P140,000 and total operating expenses of
P50,000 (excluding partners’ salaries and interest on average capital account balances). Each partner made monthly cash
drawings in accordance with partnership contract.
1. The share of partner DD in the net income:
a. P29,400.00
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b. P36,000.00
c. P33,000.00
d. P23,400.00
2. The capital balance of each partner on March 1, 2020 should be:
a. DD, P95,400; EE, P138,600
b. DD, P108,000; EE, P147,000
c. DD, P66,000; EE, P82,000
d. DD, P99,000; EE, P135,000
3. Assuming that the annual salary are to recognized as operating expenses and the total operating expenses of
P50,000 includes the partners’ salaries expenses but excluding interest on partners’ average capital account
balances. The share of partner DD in the net income in 2020?
a. P29,400.00
b. P36,000.00
c. P33,000.00
d. P23,400.00
4. Using the same information in No. 3, the capital balance of each partner on March 1, 2020:
a. DD, P95,400; EE, P138,600
b. DD, P108,000; EE, P147,000
c. DD, P66,000; EE, P82,000
d. DD, P99,000; EE, P135,000
Problem 9: FF and GG are partners in merchandising business. During 2019, the withdrew their salary allowances of
P40,000 and P60,000, respectively. Profits and losses are shared in the ratio of 3:2. The income summary account has a
credit balance of P120,000 before any income allocation. Their capital accounts reflect the following:
FF GG
Beginning balance………………………………………. P50,000 P30,000
Additional investments………………………………….. P30,000 P40,000
Withdrawals other than for salary allowances……... (P10,000) (P15,000)
Ending Capital……………………………………………. P70,000 P55,000
1. The share of partner FF in the net income:
a. P72,000.00
b. P40,000.00
c. P52,000.00
d. P12,000.00
2. The capital balance of each partner on December 31, 2018 after closing the income summary and withdrawals
accounts.
a. FF, P82,000; GG, P63,000
b. FF, P70,000; GG, P55,000
c. b FF, P122,000; GG, P123,000
d. FF, P82,000; GG, P123,000
Problem 10: NN and OO created a partnership to own and operate a health-food store. The partnership agreement
provided that NN receive a salary of P100,000 and OO a salary of P50,000 to recognize their relative time spent in
operating the store. Remaining profits and losses were divided 60:40 to NN and OO, respectively. Income for 20x4, the
first year of operations, P130,000 was allocated P88,000 to NN and P42,000 to OO. On January 1, 20x5, the partnership
agreement was changed to reflect the fact that OO could no longer devote any time to the store’s operations. The new
agreement allows NN a salary of P180,000, and the remaining profits and losses are allocated equally. In 20x5, an error
was discovered such that the 20x4 reported income was understated by P40,000. The partnership income of P250,000 for
20x5 including the P40,000 related to 20x4.
1. The P250,000 should be allocated between NN and OO as follows:
a. NN, P219,000; OO, P 31,000
b. NN, P -0- ; OO, P -0-
c. NN, P171,000; OO, P171,000
d. NN, P125,000; OO, P125,000
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