Illustration 1.1: Salaries (w/ remaining profit) – different P/L ratios
A and B formed a partnership. The partnership agreement stipulates the following:


Annual salary allowances of P50,000 for A and P30,000 for B. Salary allowances
are to be withdrawn by the partners throughout the period and are to be debited
to their respective drawings accounts.
The partners share profits equally and losses on a 60:40 ratio.
During the period the partnership earned profit of P100,000 before salary allowances.
Requirements:
a. Compute for the respective shares of the partners in the profit.
b. Provide journal entries
Solution:
Requirement (a):
A
B
Amount being allocated
Total
100,000
Allocation:
1. Salaries
50,000
30,000
80,000
10,000
10,000
20,000
60,000
40,000
100,000
2. Allocation of remaining profit
(100K profit – 80K salaries) = 20K
(20k x 50%); (20K x 50%)
As allocated
Notes:
® Salaries are provided first and the remaining amount is allocated based on the
profit sharing ratio.
® The sum of the amounts allocated to the partners is equal to the amount being
allocated (i.e., 60K + 40K = 100K)
Requirement (b):
Monthly
A, Drawings
50,000
Entries
B, Drawings
30,000
Cash
80,000
To record the withdrawal of salary allowances
Year-end
Income summary
Entry
100,000
A, Capital
60,000
B, Capital
40,000
To record the distribution of profit
Entry
A, Capital
50,000
B, Capital
30,000
A, Drawings
50,000
B, Drawings
30,000
To close the drawings accounts
Illustration 1.2: Salaries (no remaining profit) – different P/L ratios
A and B formed a partnership. The partnership agreement stipulates the following:
o Annual salary allowances of P80,000 for A and P40,000 for B.
o The partners share profits equally and losses on a 60:40 ratio.
During the period there partnership earned profit of P100,000.
Requirement: Compute for the respective shares of the partners in the profit.
Solution:
A
B
Amount being allocated
Total
100,000
Allocation:
1. Salaries
80,000
40,000
120,000
-12,000
-8,000
-20,000
68,000
32,000
100,000
2. Allocation of remaining profit
(100K profit – 120K salaries) = -20K
(-20k x 60%); (-20K x 40%)
As allocated
Notes:
® After the salaries are provided, the remaining amount is negative (i.e., loss); thus,
it is allocated based on the stipulated loss ratio of 60:40.
® The sum of the amounts allocated to the partners is equal to the amount being
allocated (i.e., 68K + 32K = 100K)
Illustration 1.3: No P/L ratio
A and B formed a partnership on January 1, 20x1. Their contributions were credited to
their respective capital accounts as follows:
Capital
accounts
A, Capital
150,000
B, Capital
250,000
400,000
During the year, the partnership earned profit of P1,000,000. There was no stipulation in
the agreement on how profits are to be shared by the partners.
Requirement: Compute for the respective shares of the partners in the profit.
Solution:
A
B
Amount being allocated
Total
1,000,000
Allocation: (based on contributions)
1M x (150K/400K)
375,000
1M x (250K/400K)
As allocated
375,000
375,000
625,000
625,000
625,000
1,000,000
Illustration 2.1: Bonus (with profit)
A and B formed a partnership. The partnership agreement stipulates the following:



Annual salary allowances of P48,000 for A and P30,000 for B.
Bonus to A of 10% of the profit after partner’s salaries and the bonus.
The partners share profits and losses on a 60:40 ratio.
During the period the partnership earned profit of P100,000 before deductions for
salaries and bonus.
Requirement:
Compute for the respective share of the partners in the profit.
Solution:
A
B
Amount being allocated
Total
100,000
Allocation:
1. Salaries
48,000
30,000
78,000
2. Bonus after bonusa
2,000
2,000
3. Allocation of remaining profit
(100K-78K-2K) = 20K
(20Kx60%); (20Kx40%)
As allocated
12,000
8,000
20,000
62,000
38,000
100,000
a
The bonus is computed as follows:
Profit before salaries and bonus
100,000
Salaries
(78,000)
Profit after salaries but before deduction of
bonus
22,000
The bonus scheme is “bonus after bonus.” The formula is as follows:
P
B=
P
1 + Br
-
Where: B = bonus
P = profit before bonus and tax
Br = bonus rate or bonus percentage
22,000
B=
22,000
-
1 + 10%
B=
22,000
-
20,000
B=
2,000
Illustration 2.2: Bonus (with loss)
A and B formed a partnership. The partnership agreement stipulates the following:



Annual salary allowances of P25,000 for A and P4,000 for B.
Bonus to A of 10% of the profit after partner’s salaries and bonus.
The partners share profits and losses on a 60:40 ratio.
During the period the partnership incurred loss of P10,000 before deduction for salaries.
Requirements:
a. Compute for the respective shares of the partners in the profit.
b. By what amount did A’s capital account change?
Solutions:
Requirement(a):
A
B
Amount being allocated
Total
(10,000)
Allocation:
1. Salaries
2. Bonus after bonusb
25,000
4,000
29,000
-
-
-
(23,400)
(15,600)
(39,000)
1,600
(11,600)
(10,000)
3. Allocation of remaining loss
(-10K-29K) = -39K
(-39Kx60%); (-39Kx40%)
As allocated
b
No bonus is allocated because the partnership incurred a loss. However, salaries are
provided whether the partnership earns profit or incurs loss because salaries are
compensation for services rendered.
Illustration 2.3: Bonus – with Limit
A and B formed a partnership. The partnership agreement stipulates the following:



First, A shall receive 10% profit up to P100,000 and 20% over P100,000.
Second, B shall receive 5% of the remaining profit over P150,000.
Any remainder shall be shared equally.
During the year, the partnership earned profit of P280,000.
Requirement: Compute for the respective shares of the partners in the profit.
Solution:
A
B
Amount being allocated
Total
280,000
Allocation:
1. Bonus to A
First 100K: (100Kx10%)
Over 100K: [(280K-100K)x20%]
10,000
10,000
36,000
36,000
2. Bonus to B on remaining profit
(280K-10K-36K-150K)x5%
3. Allocation of remaining profit
(280K-10K-36K-4.2K) / 2
As allocated
4,200
4,200
114,900
114,900
229,800
160,900
119,100
280,000
Illustration 2.4: Bonus – choice of profit-sharing scheme
Mr. A, a partner in ABC Co., is deciding on whether to accept a salary of P8,000 or a
salary of P5,000 plus a bonus of 10% of profit. The bonus shall be computed on profit
after salaries and bonus. Salaries of the other partners amount to P20,000.
Requirement: What amount of profit would be necessary so that Mr. A would be
indifferent between the choices?
Solution:
An algebraic equation is developed from the two choices above.
Let X = profit after salaries and bonus
10%X = bonus after bonus
Choice #1
8,000 salary
Choice #2
=
5,000 salary + 10%X
X is computed from the equation above as follows:
8,000 = 5,000 + 10%X
10%X = 8,000 – 5,000
X = 3,000 / 10%
X = 30,000
Profit after salaries and bonus (X)
Multiply by: Bonus rate
30,000
10%
Bonus
3,000
Profit after salaries and bonus
30,000
Add back: Salaries (5K to Mr. A + 20K to other
partners)
25,000
Add back: Bonus
3,000
Profit before salaries and bonus
58,000
If the profit of the partnership is P58,000, it does not matter whether Mr. A chooses to
receive a salary of P8,000 (‘choice #1’) or a salary of P5,000 plus a 10% bonus (choice
#2); he will receive the same amount.
Checking:
Choice #1
Choice #2
8,000 salary
=
5,000 salary + bonus
The bonus is computed as follows:
Profit before salaries and bonus
58,000
Salaries (5K + 20K)
(25,000)
Profit after salaries but before bonus
33,000
P
B=
P
1 + Br
-
33,000
B=
33,000
-
1 + 10%
B=
33,000
-
30,000
B=
3,000
Choice #1
8,000 salary
Choice #2
=
5,000 salary + 3,000 bonus
Illustration 2.5: Bonus – comparison of profit-sharing scheme
A and B formed a partnership. The partnership agreement stipulates the following:


Bonus to A of 10% of the profit before bonus.
The partners share profits equally and losses in the ratio of 2:3, respectively.
Requirement: Which partner has a greater advantage when the partnership has a profit
or when it has a loss?
Solution:
Let: B = bonus
P = profit after deducting bonus
L = loss without deducting any bonus
1. When there is profit, the profit shall be shared as follows:
A’s share
Bonus + (50%P)
B’s share
>
50%P
2. When there is loss, the loss shall be shared as follows:
A’s share
B’s share
2/5 L
<
3/5 L
From the analyses above, we can conclude that A has a greater advantage
whether the partnership earns profit or incurs loss.
Illustration 3.1: Interest on capital
A and B formed a partnership. The partnership agreement stipulates the following:



Annual salary allowance of P50,000 for A.
Interest of 10% on the weighted average capital balance of B.
The partners share profits and losses on a 60:40 ratio.
During the period, the partnership earned profit of P100,000.
The movements in B’s capital account are as follows:
B, Capital
Jul 31 withdrawal
End
30,000
6,000
Beg
20,000
April 1 additional investment
40,000
Sept 30 additional investment
10,000
Dec 31 additional investment
10,000
Requirement:
Compute for the respective shares of the partners in profit.
Solution:
The weighted average balance of B’s capital account is computed as follows:
Balances
Months
outstanding
/ Total
months in a
year
Weighted
Average
Beg. Balance
60,000
12/12
60,000
April 1 additional investment
20,000
9/12
15,000
(30,000)
5/12
(12,500)
Sept 30 additional investment
40,000
3/12
10,000
Dec 31 additional investment
10,000
0/12
-
July 31 withdrawal
Weighted average capital balance
72,500
A
B
Amount being allocated
Total
100,000
Allocation:
1. Salaries
50,000
-
50,000
2. Interest on weighted ave. capital
Balance (72.5K x 10%)
-
7,250
7,250
26,250
17,100
42,750
76,650
24,350
100,000
3. Allocation of the remaining profit
(100K-50K-7.250K) = 42.750K
(42,750 x 60%); (42,750 x 40%)
As allocated
Illustration 3.2: Interest on capital and bonus
A and B formed a partnership. The partnership agreement stipulates the following:




Monthly salary of P5,000 for A.
20% bonus to A, before deductions for salary, interest, and bonus.
10% interest on the weighted average capital of B.
Salary, bonus and interest are considered partnership expenses.
The results of operations show the following:
Revenues
Expenses (including salary, interest, and bonus)
Profit
150,000
(120,000)
30,000
The weighted average capital balance of B’s capital account is P100,000.
Requirement: How much is the bonus of A?
Solution:
Profit (given)
30,000
Add back: Annual salary (5,000 x 12 mos.)
60,000
Add back: Interest on capital (100K x 10%)
10,000
Profit before annual salary and interest but after
bonus
100,000
Profit before salary and interest but after bonus
100,000
Divide by: (100% less 20% bonus rate)
80%
Profit before salary, interest and bonus
125,000
Multiply by: Bonus rate
25%
Bonus (bonus before bonus scheme)
25,000
Illustration 3.3: Interest on capital – Partial year
A and B formed a partnership on March 1, 20x1. The partnership agreement stipulates
the following:



Annual salary allowance of P50,000 for A.
Interest of 10% on the weighted average capital balance of B.
The partners share profits and losses on a 60:40 ratio.
During the period, the partnership earned profit of P100,000.
The movements in B’s capital account are as follows:
B, Capital
Jul 31 withdrawal
End
30,000
80,000
Mar 1 initial investment
40,000
Sept 30 additional investment
10,000
Dec 31 additional investment
100,000
Requirement: Compute for the interest on B’s weighted average capital.
Solution:
Months
outstanding
/ Total
months in a
year
Weighted
Average
80,000
10*/12
66,667
(30,000)
5/12
(12,500)
Sept 30 additional investment
40,000
3/12
10,000
Dec 31 additional investment
10,000
0/12
-
Balances
March 1 Beg. Balance
July 31 withdrawal
Weighted average capital balance
64,167
Multiply by: Interest rate
10%
Interest on weighted average
capital
6,417
*Months outstanding (March 1 to December 31)
Notice that the solution above is similar to the solution we had in ‘Illustration 3.1’ for a
full year.
Alternative Solution #1:
Months
outstanding /
Total
months in a
year
Weighted
Average
80,000
10/10*
80,000
(30,000)
5/10
(15,000)
Sept 30 additional investment
40,000
3/10
12,000
Dec 31 additional investment
10,000
0/10
-
Balances
March 1Beg. Balance
July 31 withdrawal
Total
77,000
Multiply by: Interest rate
10%
Total
7,700
Multiply by:
10/12
Interest on weighted average
capital
6,417
Alternative solution #2:
No. of
months the
running
balance is
outstandin
g until the
next
transaction
Amount of
transaction
s
Running
balance
a
B=
previous
bal. + a
c
d=bxc
80,000
80,000
5*
400,000
July 31 withdrawal
(30,000)
50,000
2**
100,000
Sept 30 additional
investment
40,000
90,000
3
270,000
Dec 31 additional
investment
10,000
100,000
0
-
March 1Beg. Balance
Total
Divide by: No. of months in
the period
Total
Multiply by: Interest rate
Totals
770,000
10
77,000
10%
Multiply by: Months
outstanding
10/12
Interest on weighted
average capital
6,417
*
(from March 1 to July 31 is 5 months)
**
(from July 31 to Sept. 30 is 2 months)
Illustration 3.4: Interest on capital – With limit
A and B formed a partnership. The partnership agreement stipulates the following:


A and B shall maintain average investments of P100,000 and P150,000,
respectively. Interest on the excess or deficiency in a capital contribution is to be
computed at 10% per annum.
After interest allowances, the partners share profits and losses on a 60:40 ratio.
During the first six months of operations, the partnership incurred loss amounting to
P60,000. The average capital balances of the partners during this period were
P120,000 and P110,000, respectively.
Requirement: Compute for the respective shares of the partners in the loss.
Solution:
The interest on the excess or deficiency on capital contribution is computed as follows:
A
B
Capital balance to be maintained
100,000
150,000
Actual average balance
120,000
110,000
Excess (deficiency)
20,000
(40,000)
Multiply by: Interest rate
10%
10%
Multiply by: Months outstanding
6/12
6/12
1,000
(2,000)
Interest to (from)
A
B
Amount being allocated
Total
(60,000)
Allocation:
1. Interest to (from)
1,000
(2,000)
(1,000)
(35,400)
(23,600)
(59,000)
(34,400)
(25,600)
(60,000)
2. Allocation of remaining loss
[-60K-(-1K)] = -59K
(-59K x 60%); (-59K x 40%)
As allocated
Illustration 4.1: Partner’s capital account
A and B formed a partnership and began operations on March 1, 20x1. A invested
P100,000 cash while B invested equipment with a book value of P300,000 and a fair
value of P180,000. On August 31, 20x1, A invested additional cash of P20,000. The
partnership agreement stipulates the following:




Monthly salary allowances of P2,000 and P10,000 to A and B, respectively,
recognized as expenses.
20% bonus on profit before salaries and interest but after bonus to B.
12% annual interest on the beginning capital of A.
Balance equally.
The monthly salaries are withdrawn by the partners at each month-end. The
partnership earned profit of P210,000 during the period before deductions of bonus and
interest.
Requirement: Compute the ending balances of the capital accounts of the partners.
Solution:
The amount of profit given in the problem is already net of the monthly salaries which
were recognized as expenses. Thus, the gross amount of profit subject to allocation
needs to be recomputed first.
Profit (after deduction of monthly salaries)
210,000
Add back: Monthly salaries (2K x 10 mos.) + 10K x 10
mos)
120,000
Profit before salaries (Amount to be allocated)
330,000
The interest on capital and bonus are not yet deducted from the profit figure given in the
problem. Unlike for monthly salaries which are withdrawn periodically (i.e., monthly
basis), interests and bonuses are normally computed only at year-end.
Thus, we cannot validly assume that these items were already recognized during the
period.
The profit before salaries, interest and bonus is allocated as follows:
A
B
Amount being allocated (see computation
above)
Total
330,000
Allocation:
1. Salaries
20,000
100,000
120,000
55,000
55,000
10,000
-
10,000
72,500
72,500
145,000
102,500
227,500
330,000
2. Bonusa
3. Interest (100K x 12% x 10/12)
4. Allocation of remaining profit
(330K – 120L – 55K – 10K) /2
As allocated
a
The bonus after bonus is computed as follows:
P
B=
P
-
1 + Br
330,000
B=
330,000
-
1 + 20%
B=
330,000
-
275,000
B=
55,000
The ending balances of the partner’s respective capital accounts are computed as
follows:
A
B
Capital, beg.
100,000
180,000
Additional investment
20,000
-
Share in profit
102,500
227,500
Drawings (monthly salaries)
(20,000)
(100,000)
Capital, end.
202,500
307,500
Illustration 4.2: Reconstruction of information
Partner A has a 25% participation in the profits of a partnership. During the year, A’s
capital account has a net increase of P10,000. Partner A made contributions of P40,000
and capital withdrawals of P60,000 during the year.
Requirement: How much profit did the partnership earn during the year?
Solution:
A, Capital
Withdrawals
End
60,000
10,000
Beg.
40,000
Additional investment
30,000
Share in profit (squeeze)
A’s share in profit
30,000
Divide by: A’s P/L ratio
25%
Partnership’s profit
120,000
Illustration 4.3: Reconstruction of information – Required profit
The partnership agreement of partners A, B and C stipulates the following:



A shall receive a salary of P20,000.
Interest of 10% shall be computed on the partner’s capital contributions of
P20,000, P50,000 and P100,000.
Balance is divided among the partners on a 2:3:5 ratio. However, the minimum
amounts that B and C shall receive if the partnership earns profit are P10,000
and P20,000, respectively, inclusive of interest and share in remaining profit.
Requirement: How much is the level of profit necessary so that A shall receive a total of
P25,000, inclusive of salaries, interest and share in remaining profit, and all of the other
partners shall receive their minimum allocable amounts?
Solution:
First step: Allocate the fixed amounts of salaries and interests to the partners.
A
B
C
20%
30%
50%
Salaries
20,000
Interests*
2,000
Total
20,000
5,000
10,000
17,000
*(20x10%) – 2K; (50x10%) = 5K; (100x10%) = 10K
Second step: Reconstruct the profit-sharing column of partner A to his needed share of
P25,000
A
20%
Salaries
20,000
Interests
2,000
Allocation of balance
3,000 (squeeze)
As allocated
25,000
The total amount of remaining profit for allocation to the partners is computed as
follows:
Allocation to A (from above)
3,000
Divide by: A’s P/L ratio
20%
Total amount for allocation
15,000
Third step: Allocated the computed remaining profit for allocation to partners.
A
B
C
20%
30%
50%
Total
Salaries
20,000
20,000
Interests
2,000
5,000
10,000
17,000
Allocation of balance
3,000
4,500
7,500
15,000
As allocated
25,000
9,500
17,500
52,000
Fourth step: Adjust the shares of B and C to their minimum required shares in profit of
P10,000 and P20,000, respectively.
Salaries
A
B
C
20%
30%
50%
20,000
Total
20,000
Interests
2,000
5,000
10,000
17,000
Allocation of balance
3,000
4,500
7,500
15,000
500
2,500
3,000
10,000
20,000
55,000
Additional profit (squeeze)
As allocated
25,000
Answer: From the table above, the partnership needs to earn profit of P55,000 so that
A shall receive a total share of P25,000 while partners B and C shall also receive their
minimum shares of P10,000 and P20,000, respectively.
Illustration 5: P/L ratio in fractions
The ABC Co., on which A, B and C are partners, reported profit of P90,000 during the
year.
Case #1:
If partners A, B and C have a profit sharing agreement of 1/6, 2/6 and 3/6, respectively,
how much are their respective shares in the profit?
Solution:
Partners
Allocation of profit
A
(90,000 x 1/6)
15,000
B
(90,000 x 2/6)
30,000
C
(90,000 x 3/6)
45,000
Total
90,000
Case #2:
If partners A, B and C have a profit-sharing agreement of 2:3:4, respectively, how much
are their respective shares in the profit?
Solution:
Partners
Allocation of profit
A
(90,000 x 2/9*)
20,000
B
(90,000 x 3/9)
30,000
C
(90,000 x 4/9)
40,000
Total
*(9 = 2+3+4)
90,000