BASHERON, Noorodden
Inside the partnership, the entry is:
A, Capital
25,000
B, Capital
25,000
PARTNERSHIP



FORMATION
In terms of legal and taxability aspect, it is
more advantageous for businessmen in the
Philippines
Relatively easier to form
Unlimited liability, limited life
Outside the partnership, B pays A 25,000.
3. Capital Investment
 TCC ≠ TAC
 Total contributed capital will increase
Valuation of Contribution
Cash
Non-Cash Assets



Face Value
i. Agreed Value
ii. Fair Value/Appraised
iii. Carrying Value
Only consider the assets invested and liabilities
assumed by the partnership.
Accounts Receivable – can have an allowance for
doubtful account but deduct those deemed
uncollectible
PPE- don’t include accumulated depreciation;
consider under/over depreciation if any.
Methods of Accounting for Capital Investment
1. Bonus Method (assumed if silent)
 Agreed Capital = Contributed Capital
 No recording of goodwill; there is only
transfer of capital
 TAC=TCC
N
TCC
TAC (based on agreed
A
B
TCC
100,000
50,000
150,000
TAC (based on
agreed ratio of 50-50)
100,000
50,000
150,000
75,000
75,000
150,000
AGREED ratio
60/100
40/100
NOTE: If there are 3 or more partners, choose the
partner that will yield the highest total contributed
capital. (If problem is silent.)
4. Capital Withdrawal
 TCC ≠ TAC
 Total Agreed Capital should decrease
75,000
75,000
150,000
TCC
Contribution
100,000
50,000
150,000
First step is to find out who and how much will
have to be invested
 It is incorrect to use B as a basis because
TCC will decrease
o TCC= 50,000/40% = 125,000.
 If we use A as a basis
o TCC = 100,000/60% = 166,667.
o Hence, B’s investment should be 66,667
(166,667 x 40%). He should invest an
additional 16,667. Since A is already the
basis, he doesn’t need to invest
additional capital.
ratio of 50-50)
2. Direct Settlement
 Agreed Capital = Contributed Capital
 Similar to bonus method but there’s
cash settlement between partners that
are not recorded in the books
 TAC=TCC
A
B
TCC
A
B
Total
A
B
Total
Contribution
100,000
50,000
150,000
AGREED ratio
60/100
40/100

o
o
Using B as a basis, agreed capital will
decrease
TCC=125,000 (50,000/40%).
Hence, A will have to withdraw 25,000
(150,000-125,000)
NOTE: Choose the partner with lowest contributed
capital as a basis.
BASHERON, Noorodden
OPERATIONS
ISSUE: How to allocate partnership profits/losses?
Scenario
P
L
Result
Both P&L
  Follow Agreement
agreement are
given
There’s profit
Follow profit
agreement but
agreement for
 
no loss
BOTH profit and
agreement
loss
For profit, use
There’s loss
original capital
agreement but
contribution ratio
 
no profit
For loss, follow
agreement
loss ratio
There’s no profit
Follow original
  capital contribution
or loss
ratio for both
agreement
Methods of allocating capital balance (in order)
1. Weighted Average Capital
2. Simple Average Capital
3. Beginning Capital
4. Ending Capital
5. Original Capital (Use if there’s an agreement
but unsure as to which method to use)
Accounting for Salaries, Interest, and Bonus
1. Before salary, interest, bonus (assumed if
silent)
2. Before salary and interest, but after bonus
3. After salary and interest, but before bonus
4. After salary, interest, and bonus
Salaries and interest
o They are regardless whether there’s profit or
loss, EXCEPT when the problem states that
there’s an “order of priority” or “only up to
extend of earning”
o This could for a fractional year only. Annual or
monthly amount is usually given for salaries.
o Interest is based on capital balance (weighted,
simple, beg, end, orig)
o These are NOT treated as expense.
Bonus
o it should only be given if there is profit and the
basis (positive value) depends on partners
agreement
Example:
Salary – 50,000
Interest – 30,000
Net Income – 200,000
Bonus rate – 20%
Scenarios:
1. Before salary, interest, and bonus:
B = 200,000 x 20% = 40,000
B=NI X BR
2. Before salary and interest, and after bonus
B = 200,000 / (1.2) x 20% = 33,333
𝐍𝐈 𝐗 𝐁𝐑
𝐁=
𝟏 + 𝐁𝐑
3. After salary and interest, but before bonus
B = (200,000-50,000-30,000) x 20% = 24,000
B=(NI – S – I) X BR
4. After salary, interest, and bonus
B = (200000-50,000-30,000)/1.2 x 20% = 20,000
(𝐍𝐈 − 𝐒 − 𝐈) 𝐗 𝐁𝐑
𝐁=
𝟏 + 𝐁𝐑
*After allocating these items, any remaining profit
is allocated based on the stipulated profit or loss
ratio
Statement of Changes in Partner’s Capital
Beginning Balance
Additional Investment
Less: Permanent Withdrawals
Balance
Net Income Share
Less: Temporary Withdrawals
Ending Capital



P XX
XX
(XX)
P XX
XX
(XX)
P XX
Permanent: irregular drawings in excess of
capital (direct debit to capital)
Temporary: regular drawings in anticipation
of future salaries
If withdrawal is silent as to permanent or
regular, it will be considered as
PERMANENT withdrawal.
BASHERON, Noorodden
DISSOLUTION
Methods:
1. Admission
a. Purchase of Interest
i. With revaluation
ii. No revaluation (if silent)
b. Direct Investment
2. Retirement
a. Bought by partner
i. With revaluation
ii. No revaluation
b. Bought by partnership (assumed)
Purchase of Interest Without Revaluation
 Purchase price is to be ignored.
 Transaction between new partner and the
partner who is selling shares is considered as
PERSONAL TRANSACTION.
 The total agreed capital would still be equal to
the total contributed capital TCC = TAC
Example:
C invests 100,000 for 30% share.
A’s capital is 100,000
B’s capital is 200,000
30,000
60,000
90,000
Payment outside the partnership:
Transferred
Gain
Capital(∆ in Cap)
A
30,000
6,000
B
60,000
4,000
Total
90,000
10,000*
*Allocated using P&L ratio of partners
Payment
Allocation
36,000
64,000
100,000
Purchase of Interest with Revaluation
 Purchase price is used to determine the
amount of revaluation
 The revaluation increases the amount of
capital of the old partner and so is distributed
among P& L ratio TCC ≠ TAC
purchase price
% of interest
TAC = 100,000 / 30% = 333,333
TCC = 300,000
Revaluation = 333,333 – 300,000 = 33,333
This amount of revaluation pertains to one of the
partnership’s assets (e.g. Land), and is allocated
according to P&L ratio.
Land
33,000
A, Capital (60%)
B, Capital (40%)
A, Capital
B, Capital
C, Capital
20,000
13,000
36,000
64,000
100,000
*(100K+20K)X30%=36K
*(200K+13K)X30%=64K
Journal entry to record purchase of interest:
A, Capital
B, Capital
C, Capital
Example:
C invests 100,000 for 30% share.
Basis of new capital is the NEW PARTNER’S
PAYMENT. Hence, if this is the case,
= Total Agreed Capital
Less: Total Contributed Capital
Revaluation
Direct Investment
 Bonus method is to be applied if the problem is
silent. Revaluation method should also be
applied if the problem says so.
 Do purchase of purchase of interest first before
direct investment
 Simply compare new investment against new
agreed capital after revaluation. The difference
between the two is considered bonus.
investment > agreed cap
TCC>TAC
investment < agreed cap
TCC < TAC
Bonus to old partner
Cash
Capital, old partner
Capital, old partner
Capital, new partner
Bonus to new partner
Cash
Capital, old partner
Capital, old partner
Capital, new partner
bonus to existing
partners
bonus to new
partner
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
BASHERON, Noorodden
Example:
C invests 100,000 for 30% share. Total
contributed capital of old partners is 300,000.
Investment
Agreed new capital
Bonus to new partner
Entry:
Cash
A, Capital
B, Capital
C, Capital
100,000
120,000 (400k*30%)
20,000
100,000
12,000
8,000
120,000
Retirement of Partner Bought by Partner
with Revaluation
Example:
A, Capital – 100,000
B, Capital – 200,000
C Capital – 120,000
150,000
(120,000)
30,000
0.25
120,000
Journal entries:
Land
A, Capital
B, Capital
C, Capital
120,000
60,000
30,000
30,000
C, Capital
B, Capital
150,000
150,000
Retirement of Partner Bought by Partner
without Revaluation
Example:
A, Capital – 100,000
B, Capital – 200,000
C, Capital – 120,000
If B buys C, journal entry is:
C, Capital
B, Capital
BONUS
Total interest > payment
Total interest < payment
B buys C’s capital for 150,000.
P&L ratio: A-50%, B-25%, C-25%
Given
Capital
Revaluation
/ P&L Ratio
Revaluation
Retirement of Partner Bought by Partnership
Formula:
Total interest (after revaluation)*
P XX
Less: Payment to Partner
(XX)
Bonus
P XX
Capital Balance
P xxx
+/- Share in Net Income/Loss
xxx
+/- Revaluation
xxx
+Payable/Due to Partner
xxx
-Receivable/Due from Partner
(xxx)
Total Interest
PXXX
120,000
120,000
bonus to remaining
partners
bonus to retiring
partner
Example
120,000 is C’s Capital
150,000 is given by the partnership
P&L ratio: C-50%, A-30%, B-20%
Journal entry is:
C, Capital
A, Capital
B, Capital
Cash
120,000
18,000
12,000
150,000
BASHERON, Noorodden
LIQUIDATION
Safe Payment Schedule
Process:
1. Lump-sum/total
2. Installment/piecemeal realization
1. Compute total interest net of gain/loss on
condonation, liquidation expense, and
contribution to parties
2. Compute maximum possible loss
3. If there is capital deficiency  loss absorption
4. Distribute to partners
General steps:
1. Sell noncurrent assets
2. Pay creditors (in priority)
3. Distribute excess to partners
Marshalling of Assets/Hierarchy of Claims
Personal Assets
Partnership Assets
1 Personal Creditors
Partnership creditors
2 Partnership creditors Personal creditors
3 Other parties
Other parties
NOTE:
 If silent, assume INSOLVENT.
 If partner has capital deficiency,
1. If solvent (A>L), contribute
2. If insolvent (A<L), loss absorption by
other partners (except those who are
deficient and insolvent)
Installment Liquidation
Formula:
Proceeds
BV sold
G/L on revaluation
P xx
(xx)
P xx
EQUITY SIDE
Total Interest
Contribution
+/- Gain or Loss on Realization
Condonation of Debt
Liquidation Expenses
Maximum Possible Loss:
BV of asset unsold
Cash Withheld for future expenses
Total Distribution to Partners
ASSET-LIAB SIDE
Cash on Hand
Proceeds from Sale
Contribution (must be stated)
Liquidation Expenses
Payment of Liabilities(paid/unpaid)
Cash Withheld for future expenses
Total Distribution to Partners
XX
XX
XX
XX
(XX)
(XX)
(XX)
XX
XX
XX
XX
(XX)
(XX)
(XX)
XX
NOTE:
Max Possible Loss =BV of asset unsold +Cash
withheld for future expenses
 Total interest after distribution = Max. Possible Loss
 Total interest of partner after distribution =
Max Possible Loss share + Loss Absorption



Under the statement of liquidation, partners are
assumed to be solvent.
Under the schedule of safe payment, partners are
assumed to be insolvent
Cash Priority Program (CPP)
1. Determine the total interest
2. Compute loss absorption balance or Maximum
Loss (ML)
3. Equalize maximum loss from the highest to the
second highest until equal to determine priority
of payment
4. Distribution to partners (difference in ML x P&L
ratio)
Total Interest
Divided by
P&L ratio
Max Loss
Priority I
Priority II
Priority III
Cash
Distribution
Partner A
P xxx
Partner B
P xxx
Partner C
P xxx
TOTAL
P xxx
xxx
xxx
xxx
xxx
P xxx
P xxx
P xxx
P xxx
P xxx
P xxx
xxx
xxx
P xxx
xxx
xxx
P xxx
xxx
xxx
P xxx
P xxx
P xxx
P xxx
When to use CPP?
 If there is no deficiency in the partners’ capital
 When the problem gives payment to any of the
partners
o ex. If partner A receives P xxx, how
much will partner B receive?
 If there is no additional investment