CHAPTER 1

CHAPTER 1
Partnership

1. What is a Partnership? Partnership partnership

claims
collected and Periodic
It is a contract whereby two or more persons retained by salaries
bind themselves to contribute money, property the partner
or industry to a common fund with the Withdrawal Advance to
by a partner the
intention of dividing profits among themselves. with the partnership
Loans to and assumption of with the
from its investment assumption of
2. How are the contributions of the partners in partners its ultimate
repayment by
the partnership valued? the
partnership

Investment Valuation 4. In what order of priority should profits/losses

Cash Face Value be divided among the partners?
Noncash Agreed Value or Fair Value in
the absence of Agreed Value
PWASOBE
 If the assets contributed by the partner are
subject to mortgage or any other liabilities, Partners’ Agreement
the partner’s capital should be credited for Weighted Average Capital
an amount net of the liabilities assumed. Simple Average Capital
Original Contribution
Beginning Capital
3. What are the transactions affecting Partners’ Ending Capital
ledger accounts?

5. How may the partners agree to divide

PARTNERS’
CREDITED profits/losses?
LEDGER DEBITED FOR
FOR
ACCOUNTS
Permanent Original
withdrawal investment a. Equally
b. Arbitrary Ratio
Ending debit Additional
c. In the ratio of partners’ capital account
Capital balance of the investment
Account drawing balances:
account W-eighted
Share in Share in S-imple
losses profits O-riginal
Drawing Temporary Partnership B-eginning
Account withdrawal debts paid by
the partner E-ending
Partner’s d. Allowing interest on partners’ capital
personal debt Claims of the
paid by partner account balances and dividing the
partnership collected by remaining net income or loss in a specified
the
ratio
 CHAPTER 1

e. Allowing salaries and dividing the remaining

net income or loss in a specified ratio
f. Bonus to managing partner on net income
g. Combination of enumerations above

6. Rule on division of profits/losses if partners’ 8. Enumerate the priorities of cash distribution in

agreement for either is not established. partnership liquidation.

 Should the partners agree to divide the 1. Outside creditors

profits only, losses, if any are to be 2. Partners’ loan accounts
divided in the same manner as that of 3. Partners’ capital accounts
dividing profits.
 Should the partners agree to divide 9. What are the ways of liquidating a
losses only, profits, if any shall be partnership?
divided by the partners according to
capital balances. 1. Lump-sum liquidation
2. Liquidation by installment
7. What are the two ways of admitting a new a. Schedule of Payments
partner in the partnership? b. Cash Priority Program

1. By purchasing all or part of the interest of

one or more of the existing partners
2. Investment of assets in the partnership by
the incoming partner.

Investment
No revaluation of assets,
Cost=Agreed
goodwill or bonus
Capital
a. Revalue net assets up to
fair value and allocate to
old partners
Investment
b. Record unrecognized
Cost>Agreed
goodwill and allocate to
Capital
old partners.
c. Allocate bonus to old
partners
a. Revalue net assets down
to fair value and allocate
to old partners.
Investment
b. Recognize goodwill
Cost<Agreed
brought in by new
Capital
partner
c. Assign bonus to new
partner.
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 CHAPTER 1

REVIEW PROBLEMS

Cortez admits David as a partner in the BSAC5 business. a. 35,374

The capital account of Cortez on December 31, 2013 b. 36,974
just before the admission of David, shows a balance of c. 35,974
P33,000. d. 35,800

It is agreed that for purposes of establishing Cortez’s 2. David’s cash investment on December
interest, the following adjustments shall be made: 31, 2014.
a. 17,687
a. An allowance for doubtful accounts of P426 is b. 18,487
to be established. No allowance has been made c. 17,987
by Cortez. d. 17,900
b. The merchandise inventory is to be valued
3. What is the share of Cortez in the
P3,000 more than the recorded amount. partnership profit?
c. Prepaid salary expense of P600 and accrued a. 30,000
rent expense of P800 are to be recognized. b. 28,942.52
c. 31,057.48
David is to invest sufficient cash to obtain 1/3 interest in d. 28,057.48
the partnership.
4. Cortez’s capital balance on December
Cortez and David made the following investments and 31, 2014.
capital withdrawals during the year 2014: a. 73,038.48
b. 72,038.48
c. 71,431.48
CC DD
d. 71,864.48
Invests Draws Invests Draws
June 1 P10,000 P10,000
5. David’s capital balance on December
Aug 1 P20,000 P2,000 31, 2014.
Dec 1 5,000 a. 35,429.52
The partnership’s profit and loss agreement provides b. 34,929.52
for: c. 34,629.52
d. 34,842.52
1. Salary, of which P30, 000 was paid to each
partner for 2014. ANSWERS AND SOLUTIONS:
2. Cortez is to receive a bonus of 10% on net
income after salaries and bonus.
3. Interest of 8% on average annual capital 1. A
balances affected by both investments and Cortez, Capital P33,000
drawings. Allowance for doubtful accounts (426)
4. Any remaining profits are to be divided equally Adjustment on Inventory 3,000
among the partners. Prepaid Expenses 600
Net income for 2014 is P60,000. Accrued Expenses (800)
Adjusted Cortez, Capital P35,374
1. Cortez adjusted capital on December
31, 2013. 2. A
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 CHAPTER 1

Adjusted Cortez, Capital P35,734 profit among the partners. Salaries traceable to the
Cortez, interest ÷ 2/3 other partners are estimated to be P100,000.
Total 53,061
David, interest x 1/3
David, investment P17,687 6. What amount of income would be
necessary so that Carla would consider
the choices to be equal?
a. 350,000
3. C b. 290,000
Weighted Average Capital c. 292,000
Balances d. 300,000
CC DD
P35,374 x 12/12 = P35,374 P17,687 x 12/12 =P17,687
10,000 x 7/12 10,000 x 7/12=(5,833.33) ANSWERS AND SOLUTIONS
=(5,833.33)
20,000 x 5/12 = 8,333. 2,000 x 5/12 = (833.33) 6. B
5,000 x 1/12 = (416.67) P11,020.34 40,000 = 25,000 + .10(NI-125,000-B)
37, 457.33 40,000 = 25,000 + .10NI – 12,500 - .10B
40,000 = 25,000 + .10NI – 12,500 - .10(15,000)
40,000 = 25,000 + .10NI – 12,500 – 1500
40,000 -25,000 + 12,500 + 1500 = .10NI
Profit 29,000 = .10NI
Sharing .10 .10
Cortez David NI= 290,000
Salaries P30,000 P30,000
Bonus - -
Interest 2,996.59 881.63
Remaining (1,939.11) (1,939,11)
Total P31,057.48 P28,942.52 Angel, Bolts and Cliff are partners sharing profits in the
ration 3:3:2. On July 31, their capital balances are as
follows:
4. C
Cortez David Angel P700,000
Beginning Capital P35,374 P17,687 Bolts 500,000
Balances Cliff 400,000
Investments 20,000 -
Drawings (15,000) (12,000) The partners agree to admit Dan on the following
Share in profit 31,057.48 28, 942.52 agreement.
Ending Capital P71,431.48 P34,629.52 a. Dan is to pay Angel P500,000 for ½
Balances interest of Angel’s interest
b. Dan is also to invest P400,000 in the
partnership.
5. C (See solution #4) c. The total capital of the partnership is to
be P2,400,000 of which Dan’s interest is
to be 25%.

Carla is trying to decide whether to accept a salary of 7. What are the capital balances of Angel,
P40,000 or a salary of P25,000 plus bonus of 10% of net Bolts, Cliff and Dan respectively after
income after salary and bonus as a means of allocating the admission of Dan?
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 CHAPTER 1

8. How should the P30,000 cash be

distributed to Beth, Cring, Dawn and
Gee respectively?
a. 206,250 206,250 137,500 137,500
500,000 400,000 600,000 a. 0 10,000 20,000 0
b. 350,000
b. 10,000 0 20,000 0
c. 556,250 706,250 537,500 600,000
c. 0 0 0 0
d. 500,000 400,000 350,000 200,000
d. 10,000 20,000 0 0
ANSWERS AND SOLUTIONS

ANSWERS AND SOLUTIONS

7. C
Angel Bolts Cliff Dan
Before 700,000 500,000 400,000 -
8. A
investment
Total Beth Cring Dawn Gee
By purchase (350,000) - - 350,000
Capital 140,000 60,000 40,000 30,000 10,000
By investment -_______ -______ -______ 400,000
Balances
350,000 500,000 400,000 750,000
Computer (15,000) (15,000)
(750,000-
taken by Beth
600,000) 56,250 56,250 37,500 (150,000)
Gain on 3000 1500 900 300 300
406,250 556,250 437,500 600,000
computer
TAC-TCC 150,000 150,000 100,000 -
Total interest 128,000 46,500 49,900 30,300 10,300
Capital
balances 556,250 706,250 537,500 600,000 Possible loss (98,000) (49,000) (29,400) (9,800)
(9,800)
Balances 30,000 (2,500) 11,500 20,500 500
Additional 2500 (1,500) (500) (500)
loss
Payment to 30,000 0 10,000 20,000 0
partners
Partners Beth, Cring, Dawn and Gee who share profits
5:3:1:1 respectively, decide to liquidate their
partnership. Capital balances before liquidation are:

Beth P60,000 On December 31, 2013, the accounting records of the

Cring 40,000 BSAC5 Partnership included the following ledger
Dawn 30,000 account balances:
Gee 10,000
(Dr)Cr
The partners agree to the following: Sy, drawing (24,000)
Uy, drawing (9,000)
a. Partnership’s computer equipment with Ty, loan 30,000
a book balue of P12,000 is to be taken Sy, capital 123,000
over by partner Beth at a price of Ty, capital 100,500
P15,000. Uy, capital 108,000
b. Partnership’s liabilities are to be paid
off and the balance of cash on
hand,P30,000 is to be divided in a
manner that will avoid the need for any Total assets of the partnership amounted to P478,500,
possible recovery of cash from a including P52,500 cash. The partnership was liquidated
partner. on December 31, 2013 and Uy received P83,250 cash
pursuant to the liquidation. Sy, Ty and Uy shared
income and losses in a 5:3:2 ratio respectively.

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 CHAPTER 1

9. How much is the loss on realization of

assets?
a. 178,750
b. 78,750
c. 23,750
d. 123,750

10. How much cash is received by Sy?

a. 35,625
b. 59,625
c. 37,125
d. 13,125

ANSWERS AND SOLUTIONS

9. B
Uy, Capital P108,000
Uy, Drawing (9,000)
Total interest 99,000
Cash received (83,250)
Loss share(20%) P15,750

Loss on realization(15,750/20%) P78,750

10. B
Sy, Capital P123,000
Sy, drawing (24,000)
Total interest 99,000
Loss share P39,375
Cash received by Sy P59,625