Module 1: PARTNERSHIP

Pros Con
*Minimal Legal Cost. * Unlimited Liability & Limited capital.
*Easily to established. * Limited managerial ability.
Sole *You have complete control as owner.
* Personally liable to all debts and
Proprietorship action of the company.
*Minimal Reporting requirements. *Doesn’t exist as separate legal entity.
*Simplified tax reporting. * Does not last long.
*Bring greater financial Capability than sole
*Easily to dissolve/ uncertain existence.
proprietorship.
*Combines special skills. *Unlimited Liability.
*Easier & less expensive to organize than
Partnership corporation.
*Less Capital than corporation.
*Ease formation-less formality. *Conflict among partners.
*Tax is like a corporation (other than a
*Flexibility in decision making.
general professional partnership).
*Double Taxation of the corporation
*Limited Liability.
income.
*A publicly-held corporation in particular
*Separation of ownership and
Corporation can raise substantial amounts by selling management.
shares or issuing bonds.
*Transfer of ownership is easy. * Excessive tax-fillings.
*There is no limit to the life of corporation.
1. Differentiate accounting for partnerships to sole proprietorships, and corporations.

2. Peer Quiz (video)

3. Account

FORMATION:
1. Twinkle, Sheep and Bus formed a partnership. Twinkle contributed cash of P80,000. Sheep contributed
equipment with historical cost of P700,000, carrying amount of P180,000, and fair value of P90,000. Bus
contributed building with historical cost 0f P1,000,000, carrying amount of P480,000, and fair value of
P690,000. The partnership will assume the unpaid mortgage of P580,000 on the building. Which partner has the
largest capital account balance on partnership formation? (Problem 4, p.19)
a. Twinkle c. Bus
b. Sheep d. None, all are equal

Solution:
Step I. List all the partner’s name and identify their total contribution at fair value.
Twinkle Sheep Bus
a. Cash 80,000
b. Equipment 90,000
c. Building 690,000
d. Unpaid mortgage (580,000)
Total: 80,000 90,000 110,000
Step II: Identify the partner who has the largest capital account balance.
Bus- with a contribution of P110, 000.

2. Hammer and Nail formed a partnership. Hammer contributed equipment with original cost of P370, 000 and
a fair value of P300,000 while Nail contributed cash of P180,000. Hammer and Nail agreed to have a 60:40
interest in the partnership and that their initial capital credits should reflect this fact. A partner’s capital account
should be increased accordingly by way of additional cash investment. Which of the partners should make an
additional investment and by how much? (Problem 4, p.19)
a. Hammer, P20,000 c. Hammer, P70,000
b. Nail, P20, 000 d. Nail, P70, 000

Solution:
Step I. List all the partner’s name and identify their total investment at fair value.
Hammer Nail
a. Equipment 300,000
b. Cash 180,000
Step II: Look for the Profit and Loss Ratio of the partnership.
60:40 , Hammer: Nail
Step III: Solve using Hammer’s capital. Let us determine of Hammer’s capital contribution has any deficiency
(excess).
Hammer, capital P300, 000
Divide by: Hammer’s profit sharing ratio / 60%
Total 500, 000
Multiply by: interest of Nail x 40% Compare the required and
Minimum capital required of Nail 200, 000 actual contribution.
Less: Nail’s Actual contribution 180,000
Deficiency in Nail’s contribution 20,000

 Conclusion: Nail shall contribute additional cash of P20,000 to make his contribution proportionate to his profit sharing ratio.

3. Mike and Mario agreed to form a partnership. Mike contributed equipment with carrying amount of P100,000
and fair value of P70,000, while Mario contributed cash of P200,000. The partners agreed to have profit sharing
ratio of 2:1, respectively. The initial credits to the partner’ capital account shall reflect this fact. Under the
bonus method, how much is the balance of the capital account of Mario immediately after the partnership
formation? (Problem 4, p.19)
a. 90,000 c. 135,000
b. 200,000 d. 70,000
Solution:
Step I: Make a table for Mario’s actual contribution and his contribution using the bonus method. Identify their
total contribution at fair value.
 Partners Actual Contribution Bonus Method
Mario 200,000

Step II: Identify his (Mario) total contribution using bonus method based on his profit-sharing ratio. (2:1)
Partners Actual Contribution Bonus Method
Mario 200,000 270x 1/3 90,000

 Conclusion: The balance of the capital account of Mario immediately after the partnership formation is P90,000

4. Abel and Carr formed a partnership and agreed to divide initial capital equally, even though Abel contributed
P100,000 and Carr contributed P84,000 in identifiable assets. Under the bonus approach to adjust the capital
accounts, Carr’s unidentifiable asset should be debited (Problem 4, p.19-20)
a. 46, 000 c. 8,000
b. 16,000 d. 0

Note: No goodwill (‘unidentifiable asset’) is recognized under the bonus approach.

5. A and B agreed to form a partnership. The partnership agreement stipulates the following:
o Initial capital of P300,000
o A 25:75 interest in the equity of the partnership.

A contributed P100, 000 cash, while B contributed P200,000 cash. Which partner should provide additional
investment (or withdraw part of his investment) in order to bring the partners’ capital credits equal to their
respective interest in the equity if the partnership? (Problem 4, p.19-20)
a. A shall provide additional capital of P25,000
b. B shall withdraw capital of P25,000
c. B shall make an additional investment of P25,000
d. No additional contribution or withdrawal shall be made.
Solution:
Step I: Identify the required capital balance of A and B, 25:75.
Agreed initial capital 300,000
A’s required capital balance (300K x 25%) 75,000
B’s required capital balance (300K x 75%) 255,000
Step II: Compare the actual contribution and required capital balance of A and B.
A B Total
Actual contribution 100,000 200,000 300,000
Required capital balances 75,000 225,000 300,000
Additional (withdrawal) (25,000) 25,000 ---
 OPERATION:
Things to remember in solving Partnership Operation
1. Get the Profit.
2. Identify the Profit and Loss Ratio, if none, based on their capital balances contribution.
3. Look for salaries, bonuses, and Interest.
Note: If net loss, no bonus.
1. A and B formed a partnership. The partnership agreement stipulated the following:
 Annual salary allowances of P80, 000 for A and P40, 000 for B.
 The partners share profit equally and losses on a 60:40 ratio.
During the period, the partnership earned profit of P100, 000. How much was the share of A? (Problem 4, p.49)
a. 72, 000 c. 52, 000
b. 68, 000 d. 32, 000
Solution:
Partnership earned profit of P100, 000
Solve for the Net Profit/Loss
Profit Earned P100, 000
Total Salaries (80K + 40K) ( 120, 000)
Net Loss (20,000)

A B Total
Amount being allocated 100,000
1. Salaries 80,000 40,000 120,000
2. Allocation of remaining loss
(A) -20k x 60%=
(B) -20k x 40% = (12,000) (8,000) (20,000)
As allocated 68, 000 32, 000 100, 000

2. A, B and C are partners, sharing in partnership profits in the ratio of 2:3:4. A, the managing partner, is
entitled to an annual salary of P80, 000 and a 10% bonus on profit after deducting the salary but before
deducting the bonus. The partnership earned profit of P560, 000. How much is the share of A? (Problem 4,
p.49)
a. 214,400 c. 224,000
b. 196,000 d.189,667
Partnership earned profit of P560, 000
Solve for the bonus
Bonus scheme is “bonus before bonus”.
B = Net Profit x Br
= (560K profit– 80K salaries) x 10%
= 480K x 10%
 B = 48, 000

Solve for the Net Profit/Loss

Profit Earned P560, 000
Salaries (80, 000)
Bonus (48, 000)
Net Profit 432, 000

A
1. Salaries 80,000
2. Bonus 48, 000
3. Allocation of remaining profit
(432K x 2/9) 96, 000
As allocated 224, 000

3. The partnership agreement of A, B and C stipulates the following:

 A, the managing partner, shall receive a bonus of 10% of profit.
 Each partner shall receive a 6% interest on average capital investments.
 Any remaining profit or loss shall be shared equally.
The average capital investments of the partners during the year were P80, 000 for A, P50, 000 for B, and P30,
000 for C. The partnership earned profit of P100, 000 during the period. How much was A’s share? (Problem 4,
p.49-50)
a. 23, 800 c.29, 800
b. 28, 600 d. 41, 600
Solve the bonus for A
Bonus scheme is “bonus before bonus”.
B = Net Profit x Br
= 100, 000 x 10%
B = 10, 000

Solve for the Net Profit/Loss

Profit Earned P100, 000
Bonus 10, 000
Interest (80K x 6%) 9, 600
Net Profit 80, 400

A B C Total
Amount being allocated 100,000
1. Bonus 10, 000 -- -- 10, 000
2. Interest on capital
(A) 80K x 6% =
(B) 50K x 6% =
 (C) 30K x 6% = 4, 800 3, 000 1, 800 9, 600
3. Allocation of remaining profit
(80.4K / 3) 26, 800 26, 800 26, 800 80, 400
As allocated 41, 600 29, 800 28, 600 100, 000

4. A and B’s partnership agreement stipulates the following:

 Annual salary allowance of P100, 000 for A.
 Bonus to A of 10% of profit after partner’s salaries and bonus.
 The partners share in profit and losses on a 60:40 ratio
The partnership incurred loss of P40, 000 before deduction for salaries. How much is the change in A’s capital
account? (Problem 4, p.50)
a. 56, 000 decrease c. 16, 000 increase
b. 15, 000 decrease d. 9, 000 increase
Solution:
A B Totals
Amount being allocated 40, 000
1. Salaries 100, 000 -- 100, 000
4. Allocation of remaining loss
(A) -40K – 100K x 60% =
(B) -40K – 100K x 40% = -84, 000 -56, 00 -140, 000
As allocated 16, 000 (56, 000) -40, 000

5.In its first year of operations. A and B’s Partnership business earned profit of P2, 500, 00. It was agreed that A
is to have an annual salary allowance of P100, 000 and a 20% bonus based on profit after deducting the salary
and the bonus. However, there has been no stipulation on how the remaining profit is to be shared between A
and B. A contributed P300, 000, while B contributed P500, 000. How much is the share of B?
a. 1,250, 000 c. 1, 350, 000
b. 1, 060, 000 d. 1, 080, 000

Solution:
Profit - P2, 500, 00
Step 1: Solve for the Profit and Loss Ratio based on their capital balances contribution.
A, Capital 300, 000 / 800, 000 = 37.5%
B, Capital 500, 000 / 800, 000 = 62.5%
Total 800, 000

Step II: Solve the bonus for A

Bonus scheme is “bonus after bonus”.
B = P – P/1+Br
= (2, 500, 000 – 100, 000) - (2, 500, 000 – 100, 000) / 1 + 20%
= 2, 400, 000 – 2, 400, 000 / 1.2
= 2, 400, 000 – 2, 000, 000
 B = 400, 000

Step III: Solve for the Net Profit/Loss

Profit Earned 2, 500, 000
Salaries (100, 000)
Bonus (400, 000)
Net Profit 2, 000, 000

A B Totals
Amount being allocated 2, 500, 000
1. Salaries 100, 000 -- 100, 000
2. Bonus 400, 000 -- 400, 000
3. Allocation of remaining Profit
(A) 2M x 37.5% =
(B) 2M x 62.5% = 750, 000 1, 250, 000 2, 000, 000
As allocated 1, 250, 000 1, 250, 000 2,500,000

6. A and B Partnership earns profit of P240, 000 in 20x1. The movements in the capital accounts of the partners are shown
below:
A, Capital B, Capital
Dr. Cr. Dr. Cr.
Jan.1 120,000 80,000
May 1 20,000 10,000
July 1 20,000
Aug. 1 10,000
Oct. 1 10,000 5,000

How much is the share of A if profits are to be divided based on average capital? (Problem 4, p. 51)
a. 108,333 c. 103,457
b. 121,500 d. 136,543

Solution: CRPs (Capital, Ratio, Profit Share)

Step I: Get Weighted Average Capital for both Partners and the Total Capital
A’s Capital
Months outstanding / total months
Date Balances of the year Weighted Average
Jan.1 120, 000 12/12 120,000
May 1 (20, 000) 8/12 (13, 333)
Aug. 1 10, 000 5/12 4, 166
Oct. 1 (10, 000) 3/12 (2, 500)
Total 108, 333
B’s Capital
 Months outstanding / total months
Date Balances of the year Weighted Average
Jan.1 80, 000 12/12 80,000
May 1 (10, 000) 8/12 (6, 666)
Jul. 1 20, 000 6/12 10, 000
Oct. 1 (5, 000) 3/12 (1, 250)
Total 82, 084

A’s Capital 108, 333

B’s Capital 82, 084
Total Capital 190, 417

Step II: Get P & L ratio based on their Capital Contribution (for A only)
A - 108, 333 / 190, 417 = 56.89%

Step III: Compute for Profits share of A.

Profit 240, 000
A’s P&L share ratio x 56.89%
Total 136, 536

Another way:
Profit 240, 000
A’s P&L share ratio x 108, 333 / 190, 417
Total 136, 542

7. Partner A first contributed P50, 000 of capital into an existing partnership on March 1, 20x1. On June 1,
20x1, Partner A contributed another P20, 000. On September 1, 20x1, Partner A withdrew P15, 000 from the
partnership. Withdrawal in excess of P10, 000 is charged to the partner’s capital account. The annual interest
rate applicable to capital contributions is 12%. How much is the interest on the weighted average capital
balance of Partner A in 20x1?
a. 6, 200 c. 7, 567
b. 6, 667 d. 8, 993

Solution:Get Weighted Average Capital for Partner A.

Balance, Mar. 1 50,000 10/12 41, 666.67
Add. Invest. Jun 1 20,000 7/12 11, 666.67
Withdrawal, Sept. 1 (15K - 10K) (5,000 ) 4/12 (1, 666.67)
Weighted average capital 51, 667
Multiply by: 12%
Interest on capital 6,200
DISSOLUTION:

1. The capital accounts and profit and loss sharing ratios of A, B and C are follows:
Capital P/L
A 139, 200 1/2
B 208, 800 1/3
C 96,000 1/6

On this date, D is admitted to the partnership when he purchased, for P132, 000, a proportionate interest from A
and B in the net assets and profits of the partnership. As a result of the transaction, D acquired one-fifth interest
in the net assets and profits of the firm. What is the combined gain realized by A and B upon the sale of portion
of their interest in the partnership to D?
a. 0 c. 62, 400
b. 43, 200 d. 82, 000
Solution:
 Determine the investment of the new partner.
 Determine the portion of interest acquired of the new partner.
 Get the difference of the investment and the capital credit.

D's payment 132,000

D's capital credit [(139,200 + 208,800 + 96,000) x 1/5] 88,800
Combined personal gain of A and B 43,200

2. The capital balances of partners Ming and Piw are P80, 000 and P40, 000, respectiveliy. They share in
profits and losses in the ratio of 3:2. They have a desperate need for cash and they agree to admit Andre as a
new partner with a 1/3 interest in both capital and profits upon the latter’s capital infusion of P30, 000. No
goodwill is to be recognized. After Andre’s admission, the respective capital balances of Ming, Piw and
Andre are:

a. 50,000, 50,000 & 50,000 c. 68,000, 32,000 & 50,000

b. 66,667, 33,333 & 50,000 d. 80,000, 40,000, & 30,000

Solution:
 Make a table for the 3 partners representing the Capital and the additional investment of the new partner.
 Determine the investment of the new partner.
 Determine the portion of interest acquired of the new partner.
  Get the difference of the investment and the capital credit.

Andre's investment 30,000

Andre's capital credit [(120K + 30K) x 1/3] (50,000)
Bonus to Andre 20,000

Ming Piw Andre Totals

Capital, beg 80, 000 40, 000 120, 000
A’s Investment 30, 000 30, 000
Bonus to Andre (12, 000) (8, 000) 20, 000 -
Capital, End 68, 000 32, 000 50, 000 150, 000

LIQUIDATION:

1. On January 1, 2003, the partners of Cobb, Davis and Eddy, who share profits and losses in the ratio of
5:3:2, respectively, decided to liquidate their partnership. On this date the partnership condensed balance
sheet was as follows:

Cash 50, 000 Liabilities 60, 000

Other assets 250, 000 Cobb, cap 80, 000
Davis, cap 90, 000
Eddy, cap 70, 000
Total assets 300, 000 Total Liab&Equity 300, 000

On January 15, 2003, the first cash sale of other assets with a carrying amount of P150,000 realized P120,000.
Safe installment payments to the partners were made the same date. How much cash should be distributed to
each partner?

Cobb Davis Eddy Cobb Davis Eddy

a. 15, 000 51, 000 44, 000 c. 55, 000 33, 000 22, 000
b. 40, 000 45, 000 35, 000 d. 60, 000 36, 000 24, 000

Solution:
 Get the loss or gain from the sale of other assets
 Allocate to each partner
Pro c e e d fro m sa le o f o t h e r a sse t s 120,000
le ss: C a rryin g a m o u n t o f a ll o t h e r a sse t (250,000)
To t a l lo ss (130,000)

Co b b Da vis Ed d y to ta ls
C a p it a l b a la n c e s 80,000 90,000 70,000 240,000
Allo c a t io n o f lo ss ( 65,000) (39,000) (26,000) (130,000)
a m o un ts re c e ive d 15,000 51,000 44,000 110,000
 2. Partners A, B and C decided to liquidate their partnership. A summary of the partnership’s statement of
financial position is shown below:
Assets Liabilities Equity
Cash Noncash A (20%) B (30%) C(50%)
20,000 480,000 30,000 100,000 170,000 200,000

One-third of the noncash assets were sold for P70, 00. The partnership paid P8, 000 liquidation expenses.
Partner C is Insolvent. How much cash did A receive from the settlement of the partners’ interests?

a. 12, 4000 c. 13, 600

b. 16, 800 d. 12, 800

Solution:

Proceed from sale of other assets 70,000

Liquidation expense (8,000)

Carrying amount of all assets   (480,000)

total loss on sale (418,000)

A
B (30%) C(50%)
(20%) Totals
Capital Balances 100,000 170,000 200,000 470,000

Allocation of loss (83,600) (125,400) (209,000) -418,000

total 16,400 44,600 -9,000 52,000

allo. of insolvent part. (3,600) (5,400) 9,000 0

amts rec. by partners 12,800 39,200 - 52,000

4. Nourish your Soul

Poem for My Friend

Dearest friend of mine,

Who my secret I could always consign
In days of troubled and stormy times
You never fail to put the joy back in my eyes

For you are what we call my happy pill

And my moments with you are never still
The crazy things we say, do and feel
Are emotions brimming with pleasing thrill

And so in this short little lyric

I hope my gratefulness that you can detect
Will put a warmth in your heart made of gold
And your life will always be blessed by the Lord ♥

5. QUIZ
Diagnostic Learning Logs:
Partnership is not too hard but sometimes I can’t get it and get confused, especially the
partnership liquidation. Cash Priority program, settled capital account by each partners this are
some of the topics that I got confused sometimes when I solve problems. What I did is I solve
again and again the illustration from the book related to the topic that I’m confused with.