Page 1 of 8 | AFAR 01
Partnership
MARK ALYSON B. NGINA, CPA, CMA
PARTNERSHIP
MARK ALYSON B. NGINA, CPA CMA
Definition of a Partnership
A partnership is “a contract whereby two or more persons bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among themselves.”
Two or more persons may also form a partnership for the exercise of a profession. Article 1767, Civil Code of the Philippines
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Partnership Operation
Primary accounting issues include:
1. Profit or loss allocation
2. Periodic adjustment of capital after operation
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Partnership Formation
Primary formation issues include:
1. Valuation of contribution
2. Re-alignment of contribution with partnership agreement
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Stages in the Life of the Partnership:
1. Formation – the first-time creation of the partnership
2. Operation – this is the reason why a partnership is formed, to operate and earn “profit”
3. Dissolution – changes in the partnership agreement or relations among the partners
4. Liquidation – realization of the assets of the partnership and settlement of partnership liabilities.
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Partnership Dissolution
Dissolution is the change in the relation of the partners caused by any partner being disassociated from the business or by
change in agreements of the partners. This may include:
1. Admission of a new partner
4. Assignment of interest by a partner
2. Retirement of a partner
5. Incorporation of the partnership
3. Death of a partner
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PARTNERSHIP LIQUIDATION
Liquidation is the winding up of the partnership business. This involves:
1. Converting non-cash assets into cash (i.e. realization)
2. Settlement of liabilities (i.e. liquidation)
3. Distribution of any remaining amount to the partners
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Basic Concepts on Partnership Liquidation
1. Unlimited liability
2. Right of offset
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Methods of Partnership Liquidation
When the partnership is to be liquidated by the sale of assets, the following methods may be used:
1. Lump-Sum Liquidation / Total Liquidation / Single Distribution
2. Installment Liquidation / Installment Distribution
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Page 2 of 8 | AFAR 01
MARK ALYSON B. NGINA, CPA, CMA
PARTNERSHIP ACCOUNTING
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PARTNERSHIP FORMATION
EXERCISE 1
On June 1, 2020, Makati and Taguig decided to pool their assets and form a partnership, to be known as Petmalu Na
Partnership. Their statement of financial position on June 1, 2020 before the formation was as follows:
Makati
Taguig
Cash
₱ 198,000
₱ 316,800
Accounts receivable
1,296,000
1,440,000
Allowance for doubtful accounts
(32,400)
(36,000)
Notes receivable
360,000
Merchandise inventory
115,200
108,000
Prepaid rent
36,000
Transportation equipment
720,000
Accumulated depreciation
(72,000)
Computer equipment
576,000
Accumulated depreciation
(43,200)
Total assets
₱ 2,584,800
₱ 2,397,600
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Accounts payable – trade
₱
36,000
₱
43,200
Notes payable
360,000
Capital
2,548,800
1,994,400
Total liabilities and capital
₱ 2,584,800
₱ 2,397,600
The new partnership is to take over the business assets and assumes business liabilities of the partners. Capitals of the
partners are to be based on net assets invested after the following adjustments:
1) 4% of the accounts receivable of Makati is estimated to be uncollectible while the accounts receivable of Taguig is
estimated to be 98% realizable.
2) Interest at 15% on notes receivable of Makati dated April 1, 2020 should be accrued.
3) The merchandise inventory of Makati should be valued at ₱110,000 and ₱8,000 of the inventory of Taguig is
considered worthless.
4) 4/5 of the prepaid rent has expired.
5) The transportation equipment of Makati is appraised at ₱660,000.
6) The replacement cost of the computer equipment of Taguig is determined to be at ₱600,000.
7) Interest at 10% on notes payable of Taguig dated May 1, 2020 should be accrued.
8) Taguig had office supplies on hand which have been charged to expense amounting to ₱8,000. These are still to
be used by the partnership.
9) Accrued expense of ₱6,000 is to be recognized in the books of Makati.
The partnership agreement provides that Makati and Taguig share profits and losses of 60% and 40%, respectively.
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Required:
1. Prepare journal entries in the net partnership books to record the net assets invested by Makati and Taguig.
2. Assuming the partners further agreed to bring their capital balances proportionate to their profit and loss ratio:
A. The new capital of the partnership is based on adjusted capital of Makati so that Taguig may either withdraw or
invest additional cash.
B. The new capital of the partnership is based on adjusted capital of Taguig so that Makati may either withdraw or
invest additional cash.
C. The use of the bonus method.
D. The use of the goodwill method.
3. Assuming the partners further agreed the following adjustments:
E. Only Makati possess the technical expertise required by the business so Taguig agreed to provide 10% of his
contributed capital as bonus to Makati.
F. Owing to the business expertise of Makati and Taguig, they concurred that they will be credited with 20% goodwill
based on their contributed capital.
4. Compute the balance of the following after formation
A
B
C
D
E
F
a. Total Asset
b. Total Liabilities
c. Total Capital
d. Cash
EXERCISE 2
Mandaluyong and Quezon City establish a partnership to operate a used-furniture business under the name of MQC
Furniture. Mandaluyong contributes furniture that cost ₱240,000 and has a fair value of ₱360,000. Quezon City contributes
₱120,000 cash and delivery equipment that cost ₱160,000 and has a fair value of ₱120,000. The partners agree to share
profits and losses 60% to Mandaluyong and 40% to Quezon City.
Required: Calculate the peso amount of inequity that will result if the initial noncash contributions of the partners are
recorded at cost rather than fair market value.
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Page 3 of 8 | AFAR 01
MARK ALYSON B. NGINA, CPA, CMA
PARTNERSHIP ACCOUNTING
PARTNERSHIP OPERATION
EXERCISE 1
Caloocan and Valenzuela formed a partnership on January 1, 2019 by contributing ₱800,000 and ₱1,200,000, respectively.
As of January 1, 2020, their partnership capital was ₱900,000 and ₱1,100,000, respectively.
Situations:
A. No profit-sharing agreement
B. No loss-sharing agreement
C. Profit is divided equally
D. Loss divided 30:70, respectively
Required: Compute the share of Caloocan and Valenzuela assuming:
₱400,000 loss
Caloocan
Valenzuela
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₱400,000 profit
Caloocan
Valenzuela
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*Situational Cases
1. A and B
2. B and C
3. A and D
4. C and D
5. C and D with guaranteed ₱250,000
minimum profit sharing to Valenzuela
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EXERCISE 2
Meycauayan and Marilao are partners in a gold trading business. Their capital accounts in the Bulacan Partnership for the
year were as follows:
Meycauayan
Marilao
January 1, balances
₱450,000
₱600,000
March 1, withdrawal
120,000
May 1, investment
240,000
June 1, investment
90,000
June 30, drawings
80,000
100,000
October 1, withdrawal
180,000
December 1, investment
60,000
December 31, investment
50,000
10,000
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The partnership agreement provides for the following distribution of profit and losses:
• Interest of 8% on weighted average capital balances.
• Meycauayan receives a salary of ₱150,000 and a bonus of 3% of income after all bonuses
• Marilao receives a salary of ₱100,000 and a bonus of 2% of income after all bonuses
• Profit is divided in a 6:4 ratio by Meycauayan and Marilao, respectively. Loss is divided equally by Meycauayan and
Marilao.
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The income summary has a credit balance amounting to ₱315,000.
Required: Prepare a schedule of profit and loss distribution
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EXERCISE 3
Bocaue, Balagtas and Guiguinto are partners in a glutathione trading business. Interest to be credited to each partner is
10%. Their capital accounts in the Bulacan Partnership for the year were as follows:
Bocaue
Balagtas
Guiguinto
April 1, investment
₱145,000
₱260,000
₱250,000
May 1, withdrawal
120,000
June 1, investment
100,000
August 1, investment
120,000
October 1, investment
90,000
December 1, withdrawal
30,000
Required: Compute for the following:
Bocaue
1. Weighted average capital
2. Interest
Balagtas
Guiguinto
EXERCISE 4
Pulilan and Apalit shares profit and loss equally after providing for annual salaries of ₱150,000 and ₱180,000, respectively,
and a 10% bonus on net income after salaries and bonus to Pulilan. The profit and loss statement of the partnership for
whole year is shown below:
Sales
Less: Cost of sales
Gross profit
₱ 6,000,000
3,000,000
₱ 3,000,000
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Page 4 of 8 | AFAR 01
MARK ALYSON B. NGINA, CPA, CMA
PARTNERSHIP ACCOUNTING
Less: Expenses
Net profit
₱
2,450,000
550,000
Required: Compute for the bonus in each of the following independent scenario:
1. The expense is exclusive of bonus and salaries
2. The expense is inclusive of the salaries
3. The expense includes bonus and salaries
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The profit and loss statement of the partnership for the year ended December 31 is as follows:
Net Sales
₱ 875,000
Less: Cost of Goods Sold
700,000
Gross Profit
₱ 175,000
Less: Expenses
143,000
Net Income
₱ 32,000
Required: Compute for the following:
1. The amount of bonus to San Fernando
2. The share in net income of San Simon
3. The share in net income of San Fernando
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EXERCISE 5
On January 2, San Simon and San Fernando formed a partnership to be located in Pampanga. San Simon contributed
capital of ₱175,000 and San Fernando, ₱25,000. They agreed to share profits and losses 80% and 20%, respectively. San
Fernando is the general manager and works in the partnership full time and is given a salary of ₱5,000 a month; an interest
of 5% of the beginning capital (of both partner) and a bonus of 15% of net income before the salary, interest and the bonus.
Salaries, interest and bonus is regarded as an expense of the partnership.
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EXERCISE 6
The Mexico Co., a partnership was formed on January 1, with four partners, C, P, A, and S. Capital contributions were as
follows: C - ₱1,000,000; P - ₱500,000; A - ₱500,000; and S - ₱400,000. The partnership agreement provides that each
partner shall receive 5% interest on the amount of his capital contribution. In addition, C is to receive a salary of ₱100,000
and P a salary of ₱60,000. The agreement further provides that A shall receive a minimum of ₱50,000 per annum from the
partnership and S a minimum of ₱120,000 per annum, both including amounts allowed as interest on capital and their
respective shares of profits. The balance of the profits to be shared in the following proportions: C - 30%; P - 30%; A - 20%;
and S - 20%.
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Required:
1. Calculate the share of each partner if the partnership earned ₱440,000 before salaries and interest.
2. Calculate the amount that must be earned by the partnership, before any charge for interest on capital or partners’
salaries, in order that C may receive an aggregate of ₱250,000, including interest, salary and share of profits.
3. Calculate the share of each partner if the partnership earned ₱646,667 before salaries and interest.
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EXERCISE 7
Mr. Angeles and Ms. Mabalacat are partners in a construction business located in Pampango. The profit and loss are
distributed in the following order of priority:
1) Salaries of ₱35,000 and ₱40,000 for Angeles and Mabalacat, respectively.
2) A bonus to Angeles equal to 10% of net income after the bonus.
3) Interest on weighted average capital at the rate of 8%. Annual drawings in excess of ₱20,000 are considered reduction
of capital for purposes of this calculation.
4) Any balance to be divided 40:60 for Angeles and Mabalacat, respectively.
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Capital and drawing activity of the partners for the year are as follows:
Angeles
Capital
Drawing
Beginning balance
₱120,000
₱
0
April 1
20,000
June 1
15,000
September 1
30,000
November 1
.
15,000
Ending balance
₱170,000
₱ 30,000
Mabalacat
Capital
Drawing
₱ 60,000
₱
0
20,000
40,000
₱100,000
.
₱20,000
Net income for the year is ₱132,000 before any allocations.
Required: Compute for the following:
1. Weighted average capital
2. Share in the net income
3. Ending capital (after closing)
Angeles
Mabalacat
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Page 5 of 8 | AFAR 01
MARK ALYSON B. NGINA, CPA, CMA
PARTNERSHIP ACCOUNTING
EXERCISE 8
Concepcion is trying to decide what compensation package is more beneficial:
Option 1: Bonus of 25% of net income after salaries and bonus or;
Option 2: Salary of ₱107,250 plus a bonus of 10% of net income after salaries and bonus
Salaries and bonus are regarded as a means of allocating profit among the partners. Salaries traceable to the other partners
are estimated to be ₱495,000.
Required: Compute for the following:
1. The indifference point (NI B4 S & B)
2. The amount of bonus under Option 1
3. The amount of bonus under Option 2
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PARTNERSHIP DISSOLUTION
EXERCISE 1
Tarlac and Victoria sells inventory through their partnership. They expand their business and decide to admit Gerona to the
partnership. Before the admission of Gerona, the statement of financial position of Tarlac and Victoria are as follows:
Cash
₱ 40,000
Accounts payable
₱70,000
Accounts receivable
60,000
Loan from Victoria
50,000
Inventory
140,000
Tarlac, capital (60%)
300,000
Plant assets-net
360,000
Victoria, capital (40%)
240,000
Loan to Tarlac
60,000
.
Total assets
₱660,000
Total liab. & equity
₱660,000
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Required: Record the admission of Gerona for each of the following situations:
1) Gerona invests ₱139,500 for half of Victoria’s capital. The money goes to Victoria.
2) Gerona directly purchases a one-fourth interest from Tarlac and Victoria by paying Tarlac, ₱96,000 and Victoria,
₱108,000. The equipment account is undervalued before Gerona’ admission.
3) Gerona invests the amount needed to give him one-third interest in the capital of the partnership. No goodwill or bonus
is recorded.
4) Gerona invests ₱156,000 for a one-fourth interest. Tarlac and Victoria agree that some of the inventory is obsolete
before Gerona’ admission.
5) Gerona invests ₱168,000 for a one-fourth interest. Unidentifiable asset is to be recorded.
6) Gerona invests ₱180,000 for a one-fifth interest. Profits and loss are to be shared by Tarlac, Victoria and Gerona
45:30:25. Goodwill is not recorded.
7) Gerona invests ₱300,000 for a 1/3 interest. Profits and loss are to be shared by Tarlac, Victoria and Gerona equally.
Capital of the partnership after Gerona’s admission is to be ₱900,000.
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EXERCISE 2
Pura and Ramos are partners who have capital balances of ₱300,000 and ₱240,000 and shares profits in the ratio of 6:4.
Anao is admitted as a partner upon investing ₱250,000 for a 20% interest in the firm. Profits and loss are to be shared 3:3:2.
Given the choice between goodwill and bonus method, Anao will
1. Prefer goodwill or bonus method, and
2. By what amount?
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EXERCISE 3
The partnership of Cuyapo, Rosales and Villasis has been in business for 25 years. On December 31, Villasis decided to
retire from the partnership. The statement of financial position before the retirement of Villasis is presented below:
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Cash
Accounts receivable
Inventory
Plant assets-net
Loan to Cuyapo
Loan to Villasis
Total assets
₱ 40,000
60,000
140,000
400,000
30,000
40,000
₱710,000
Accounts payable
Notes payable
Loan from Rosales
Cuyapo, capital (20%)
Rosales, capital (30%)
Villasis, capital (50%)
Total liab. & equity
₱ 70,000
80,000
50,000
150,000
200,000
160,000
₱710,000
Required: Record the withdrawal of Villasis under each of the following independent cases:
1) Villasis was paid ₱100,000 cash upon retirement.
2) Villasis was paid ₱180,000 cash upon retirement. Capital of the partnership after Villasis’ retirement was to be ₱290,000.
3) Villasis was paid ₱150,000 cash upon his retirement. The portion of goodwill attributable to Villasis was recorded by the
partnership.
4) Assume the same facts as in (3) above except that partnership goodwill attributable to all the partners were recorded.
5) Due to the limited cash of the partnership, Villasis was paid merchandise with a fair value of ₱100,000 and a note
payable for ₱50,000. The carrying amount of the merchandise was ₱60,000. Capital of the partnership after Villasis’
retirement was ₱360,000.
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Page 6 of 8 | AFAR 01
MARK ALYSON B. NGINA, CPA, CMA
PARTNERSHIP ACCOUNTING
EXERCISE 4
The statement of financial position of R and S, a partnership appears as follows:
R AND S PARTNERSHIP
Statement of Financial Position
October 31, 2020
₱ 241,000
68,200
172,800
₱669,300
₱182,200
₱260,350
226,750
487,100
₱669,300
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Partner’s capital:
R, capital
S, capital
Total Liabilities and capital
204,160
241,100
10,140
₱496,500
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LIABILITIES AND CAPITAL
Current Liabilities:
Accounts payable
₱161,400
Accrued expenses
20,000
₱ 41,100
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Plant Assets:
Furniture and Fixtures
Accumulated Depreciation
Total assets
₱212,160
8,000
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ASSETS
Current Assets:
Cash
Accounts Receivable
Allowance for bad debts
Inventories
Prepaid expenses
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Additional information:
• R and S share profits and losses equally.
• The partners incorporate as Urdaneta Corporation with an authorized capital of 5,000 shares at ₱100 par stock, of
which 4,400 are issued to the partners in exchange for their interest in the net assets of R and S, and the remainder
are issued at ₱120 per share for cash. The partners agree that the following adjustment should be recorded:
Allowance for bad debts decreased by
₱ 4,000
Inventories increased by
12,000
Accumulated depreciation decreased by
6,200
• Goodwill is to be recognized in an amount which will cause the net assets of the partnership to equal the cash issuance
price of the shares to be issued.
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Required:
a. How much is the share premium contributed by R and S to the new corporation?
b. How much goodwill is to be recognized in the corporation’s books?
c. How many shares R will receive?
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EXERCISE 5
On January 1, 2020, the partnership of D, E and F started with an initial contribution from the partners of ₱100,000, ₱200,000
and ₱300,000, respectively. The partners stipulated that in case of death of any partner, the parties will compute profits up
to the nearest month and to provide for 20% annual interest for the deceased partner interest prior to its settlement.
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On July 1, 2020, D was heart-attacked and instantly died. The newly hired accountant of the partnership prepared the
following entries during the year:
7/1/2020
D, capital
100,000
Payable to D’s estate
100,000
To set-up D’s capital as a liability
12/31/2020 Interest expense
10,000
Payable to D’s estate
10,000
To recognize interest on D’s estate
12/31/2020 Sales
700,000
Inventory, end
50,000
Purchases
300,000
Operating expenses
160,000
Interest expense
10,000
Profit and loss summary
280,000
To close nominal accounts
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Page 7 of 8 | AFAR 01
MARK ALYSON B. NGINA, CPA, CMA
PARTNERSHIP ACCOUNTING
12/31/2020 Profit and loss summary
280,000
E, capital (40%)
160,000
F, capital (30%)
120,000
To close profit and loss to E and F’s remaining P&L sharing ratio.
Profits were evenly earned throughout the year.
Required: What are correct capital balances of E and F as of December 31, 2020, respectively.
₱
50,000
Total assets
₱
.
50,000
Urdaneta, capital (30%)
Binalonan, capital (20%)
Pozorrubio, capital (50%)
Total equity
₱
₱
4,000
(60,000)
106,000
50,000
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PARTNERSHIP LIQUIDATION
EXERCISE 1
The partnership of Urdaneta, Binalonan, and Pozorrubio was dissolved. By August 1, 2020, all assets had been converted
into cash and all partnership liabilities were paid. The partnership statement of financial position on August 1, 2020 (with
partner residual profit and loss sharing percentages) was as follows:
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The value of partners' personal assets and liabilities on August 1, 2020 were as follows:
Urdaneta
Binalonan
Pozorrubio
Personal assets
₱
74,000
₱
120,000
₱
56,000
Personal liabilities
72,000
80,000
60,000
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Required:
Prepare the final statement of liquidation
EXERCISE 2
On December 31, the accounting records of Sison, Rosario and Pugo Partnership included the following information:
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Sison, drawings (debit balance)
Pugo, drawings (debit balance)
Rosario, loan
Sison, capital
Rosario, capital
Pugo, capital
₱( 24,000)
( 9,000)
30,000
123,000
100,500
108,000
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Total assets amounted to ₱478,500, including ₱52,500 cash and liabilities totaled ₱150,000. The partnership was liquidated
on December 31 and Pugo received ₱83,250 cash pursuant to the liquidation. Sison, Rosario and Pugo share net income
and losses in a 5:3:2, respectively.
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Required: Compute for the following:
3. The loss on realization
4. The cash balance after payment of liabilities
3. The amount realized from sale of non-cash assets
4. Cash distributed to each partner
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EXERCISE 3
D, E and F are partners sharing profits in the ratio of 40:35:25, respectively. On December 31, they agree to liquidate. The
statement of financial position prepared on this date follows:
₱ 20,000
460,000
R
Cash
Other Assets
Liabilities
E, Loan
F, Loan
D, capital (40%)
E, capital (35%)
F, capital (25%)
Total liab./equity
.
₱480,000
Total assets
The results of liquidation are summarized below:
Realization
s
January
February
March
April
Book Value
₱120,000
70,000
150,000
120,000
Cash
Realized
₱105,000
60,000
100,000
40,000
Expenses of
Realization
₱5,000
7,500
6,000
4,000
₱ 60,000
50,000
25,000
144,500
125,500
75,000
₱480,000
Cash W/held at
end of month for
estd. Future exps.
₱20,000
12,500
5,000
---
Liability paid
₱40,000
20,000
-----
All cash available, except the amount withheld for future expenses and any unpaid liabilities, is distributed at the end of
each month.
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Page 8 of 8 | AFAR 01
MARK ALYSON B. NGINA, CPA, CMA
PARTNERSHIP ACCOUNTING
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EXERCISE 4
The following is the condensed statement of financial position of Darnasuncion Company.
Cash
₱ 180,000
Accounts payable
₱ 220,000
Other assets
?
Due to A
20,000
Due from C
30,000
Due to B
30,000
A, Capital (4)
200,000
B, Capital (4)
250,000
C, Capital (2)
300,000
C is an insolvent and limited partner.
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Required:
1. Compute for the partner’s equity/partner’s interest
2. Prepare a
a. Partnership liquidation schedule
b. Safe payments schedule
c. Cash priority program
3. Determine the share of each partner every month of distribution.
D
E
F
Total
January
February
March
April
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Based from the information given, determine the following
a. The partner with first priority is
b. If the partner with least priority received ₱150,000 as total settlement of his interest and liquidation expenses of
₱15,000 was incurred, how much is the selling price of the non-cash asset?
c. If the partner with first priority received ₱150,000 as total settlement of his interest, how much did the partner with
second priority received?
d. If the partnership was able to sell non-cash assets with a book value of ₱365,000, how much is the gain or loss
realized from the sale if the partner with least priority received ₱20,000?
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“Make it a habit to view your failure as stepping stones to success.”
“Success is achieved not by doing only what is comfortable and convenient.
Success is built by doing what must be done to reach it.”
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Effectiveness. Efficiency. Convenience
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