BCSVillaluz
ADVANCED FINANCIAL ACCOUNTING AND REPORTING
Partnership Accounting
PARTNERSHIP FORMATION
Problem 1:
Sergio admits Andres to a partnership interest in his business. Accounts in the ledger of Sergio on December 31, 2021,
before Andres’ admission, show the following:
Cash
Accounts receivable
Inventory
Accounts payable
Sergio, Capital
Debit
P100,000
75,000
80,000
255,000
Credit
P76,500
178,500
255,000
It is agreed that for the purpose of establishing the interest of Sergio, the following adjustments shall be made:
(1) An allowance for doubtful accounts must be established at 10% of accounts receivable.
(2) The inventory is understated by P32,000.
(3) Prepaid expenses of P40,000 and accrued expenses of P25,000 are to be recognized.
REQUIRED:
1. How much is the adjusted capital of Sergio prior to Andres’ admission?
2. How much cash shall Andres invest to acquire a one-third interest in the partnership?
3. Assuming Andres is to invest an equipment with carrying value and fair value of P30,000 and P37,500, respectively.
How much cash shall Andres invest in addition to the equipment to secure a 20% interest in the partnership?
Assume Andres is to invest a building with carrying value, fair value and an agreed value of P90,000, P100,000 and P120,000,
respectively. The building is subject to real mortgage at PCI Bank amounting to P50,000. How much shall be credited to Andres’
capital if:
1. The partnership will assume the mortgage in full?
2. The partnership will only assume half of the mortgage?
3. The partnership will not assume the mortgage?
Problem 2:
On March 1, 2021, HELSINKI and NAIROBI decide to combine their businesses and form a partnership. After forming
the partners agreed to share profits and losses in the ratio of 75:25, respectively. Their adjusted trial balances on March
1, 2021 showed the following:
Cash
Accounts receivable
Inventories
Furniture and fixtures
Office equipment
Prepaid expenses
Cost of goods sold
Operating expenses
Total
Allowance for bad debts
Accumulated Depreciation – Furniture and fixtures
Accumulated Depreciation – Office equipment
Accounts payable
Capital
Sales
0
HELSINKI
9,000
18,500
30,000
30,000
11,500
6,375
70,000
20,000
195,375
NAIROBI
3,750
13,500
19,500
9,000
2,750
3,000
48,000
37,000
136,500
500
9,000
1,500
21,000
61,375
100,000
900
1,200
500
18,000
35,900
80,000
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____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR)
Auditing (AUD)
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BCSVillaluz
Miscellaneous income
2,000
195,375
136,500
They agreed to have the following items adjusted in their books:
(a) 5% of the accounts receivable of HELSINKI and NAIROBI are estimated to be uncollectible.
(b) The inventory of HELSINKI should be valued at P32,000 while 10% of NAIROBI’s inventory is to be considered
obsolete and worthless, therefore, must be written off.
(c) HELSINKI’s furniture and fixtures should be carried at P24,500, while NAIROBI’s office equipment is underdepreciated by P1,000.
(d) Rent expense incurred previously by HELSINKI was not yet recorded amounting to P1,000, while salary expense
incurred by NAIROBI was not also recorded amounting to P800.
What are the capital balances of HELSINKI and NAIROBI, respectively, after adjustments?
Case 1: After adjustments, HELSINKI will either invest or withdraw cash to make his capital proportionate to his profit
or loss ratio.
1. What are the capital balances of the partners immediately after formation?
2. How much is the cash to be invested (withdrawn) by HELSINKI to make his capital balance proportionate to his
profit or loss ratio?
Case 2: After adjustments, the partners will adjust their capital balances by the use of transfer of capital (or bonus method)
to make their capital balances proportionate to their profit and loss ratio.
1. What are the capital balances of the partners immediately after the formation?
2. How much capital was transferred to (from) NAIROBI?
PARTNERSHIP OPERATIONS
Problem 1:
On January 1, 2020, ARTURO, MONICA, and DENVER put up a partnership with original capital contribution ratio of
1:3:4 for a total agreed capitalization of P2,000,000. The profit or loss ratio agreement provides that profits shall be
distributed in the ratio of 4:2:4 during the first six months of operations and in the ratio of 3:2:5 thereafter while losses
shall be distributed in the ratio of 2:2:6. Net income is earned evenly throughout the year.
For the year ended December 31, 2020, the partnership reported net income of P1,200,000 with ARTURO and MONICA
withdrawing P50,000 and P100,000, respectively.
For the year ending December 31, 2021, the partnership suffered a net loss of P250,000 with MONICA investing an
additional P80,000 and DENVER withdrawing P120,000.
1. Compute for the 2020 profit share of each partner.
2. Compute for each partner’s capital balance on December 31, 2021.
Problem 2:
RAQUEL, ANGEL, and SUAREZ put up a partnership on April 1, 2020. The partners invested the following amounts on
that date:
RAQUEL
ANGEL
SUAREZ
P94,000
114,000
70,000
During the year, RAQUEL withdrew P10,000 cash while SUAREZ invested a property with a fair value of P22,000.
The partners agreed to distribute the profits as follows:
• Annual salary of P30,000 to ANGEL and P25,000 to SUAREZ.
• Allow a 5% interest to each partner on their capital at the beginning of the period.
• Allow a 20% bonus to RAQUEL based on net income after salaries, interests, and bonus.
• Any remaining undistributed profit or loss will be distributed in the following manner:
➢ In the ratio 2:3:5, if under-allocated
➢ Equally, if over-allocated
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____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR)
Auditing (AUD)
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BCSVillaluz
Case 1: The partnership realized profit of P100,000 during the year 2020.
1. How much is the bonus given to RAQUEL?
2. How much is the share of each partner in the 2020 net income?
3. What are the capital balances of the partners on December 31, 2020?
4. Assume the net income of the partnership during the year 2021 is P150,000. How much is the share of each
partner in the 2021 net income if there were no additional investments nor withdrawals made?
Case 2: the partnership realized profit of P45,000 during the year 2020.
1. How much is the bonus given to RAQUEL?
2. How much is the share of each partner in the 2020 net income?
Problem 3:
TOKYO and RIO are partners engaged in a partnership which began operations several years ago. Transactions affecting
the partners’ capital accounts in 2020 are as follows:
Beg. Bal
4/1
5/31
7/31
8/1
9/30
10/1
11/30
12/31
TOKYO, Capital
DR.
CR.
150,000
40,000
RIO, Capital
DR.
CR.
175,000
25,000
25,000
50,000
40,000
15,000
10,000
10,000
35,000
Shown below are the partners’ drawing accounts during 2020:
2/1
7/31
TOKYO, Drawing
15,000
27,000
4/30
10/1
RIO, Drawing
21,000
12,000
REQUIRED: What are the average capital balances of TOKYO and RIO, respectively?
Problem 4:
ANDRES and PALERMO formed a partnership on March 1, 2020 and agreed to share profit 80% and 20%, respectively.
ANDRES invested cash of P150,000. PALERMO invested no assets but has a specialized expertise and manages the firm
full time. There were no other investments nor withdrawals during the year. The partnership contract provides for the
following:
▪ Capital accounts are to be credited annually with interest at 10% of original capital contribution.
▪ PALERMO is to be paid a monthly salary of P 3,000.
▪ PALERMO is to receive a bonus of 20% of profit before deducting interest on capital, salary, and the bonus.
The 2020 condensed income statement for the partnership includes the following:
Revenues
Expenses (including interest, salary and bonus)
Net income
P
550,000
(375,000)
175,000
1. How much is the bonus given to PALERMO in 2020?
2. How much net income was realized by the partnership for the year 2020?
3. How much is PALERMO’ profit share for 2020?
PARTNERSHIP DISSOLUTION
Problem 1: (Admission by Purchase of Interest)
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____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR)
Auditing (AUD)
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BCSVillaluz
X and Y are partners sharing profits and losses on a 40:60 ratio and have the following capital balances: P100,000 and
P200,000, respectively. Z directly purchased a 30% interest in the partnership by paying X P40,000 and Y P60,000.
CASE 1: Net assets are fairly valued prior to Z’s admission. What are the capital balances of the partners immediately
after’s Z’s admission?
CASE 2: Assets are undervalued by P20,000 prior to Z’s admission.
1. How much is the gain or loss that will be recognized in the partnership books upon purchase of interest by Z?
2. What are the capital balances of the partners immediately after’s Z’s admission?
CASE 3: Assets are overvalued by P30,000 prior to Z’s admission.
1. How much is the gain or loss that will be recognized in the partnership books upon purchase of interest by Z?
2. What are the capital balances of the partners immediately after Z’s admission?
Problem 2: (Admission by Investment)
HAYABUSA and HANABI are partners with capital balances of P78,400 and P117,600, respectively. They share profits
and losses in the ratio of 2:3. HAYABUSA and HANABI decided to admit KAGURA as a new partner with 20% interest.
CASE 1: The assets and liabilities are fairly valued on the balance sheet provided.
1. What amount should KAGURA invest into the partnership assuming no bonus is to be recognized?
2. Assuming KAGURA invested a total of P34,000 into the partnership, how much is the bonus upon
admission of KAGURA?
3. In connection with item no. 2, what are the capital balances of the partners immediately after the
admission of KAGURA?
4. Assuming KAGURA invested a total of P74,000 into the partnership, how much is the bonus upon
admission of KAGURA?
5. In connection with item no. 4, what are the capital balances of the partners immediately after the
admission of KAGURA?
CASE 2: KAGURA invested P88,000 cash in the partnership. After the admission of KAGURA, the total partnership capital will be
P460,000.
1. How much is the asset revaluation?
2. What is the amount of bonus upon admission of KAGURA?
3. What are the capital balances of the partners immediately after the admission of KAGURA?
CASE 3: KAGURA invested a total of P75,000 into the partnership. After the admission of KAGURA, the total partnership capital
will be P250,000.
1. What is the amount of the asset revaluation?
2. What is the amount of bonus upon admission of KAGURA?
3. What are the capital balances of the partners immediately after the admission of KAGURA?
Problem 3: (Retirement of a partner – The incoming/remaining partners paid the retiring partner)
A, B, and C are partners with capital balances of P80,000, P200,000 and P120,000, respectively. Profits and losses are
shared in a 3:2:1 ratio. B decided to retire and the partnership revalued its assets. The value of inventory was decreased
by P20,000 and the value of land was increased by P50,000.
Required: Prepare the journal entry to record B’s withdrawal under each of the following independent assumptions:
1. As agreed by all the partners, B sold his interest to D, an outsider, for P250,000.
2. As agreed by all the partners, B sold 60% his interest to A and 40% to C for a total of P250,000.
Problem 4: (Retirement of a partner – Partnership paid the retiring partner)
You are given the following information together with the profit and loss ratio of the partners as of March 31, 2021:
Assets
Liabilities to outsiders
Due to P
Loan from A
C, Capital (30%)
P, Capital (50%)
A, Capital (20%)
P1,200,000
308,000
19,000
33,000
432,000
241,000
167,000
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0
____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR)