CHAPTER 13

SUPPLEMENTARY MATERIAL

 Distribution of Profits or Losses Based on Partners’ Agreement

Illustration. The following series of illustrations are based on the figures obtained
from the Aguilar Porras Partnership which had a profit of P300,000 for the year ended
Dec. 31, 2019, the first year of operations. The partnership contract provided that each
partner may withdraw P5,000 on the last day of each month; both partners did so during
the year. The drawings are recorded by debits to the partners’ drawing accounts and shall
not be considered in the division of profit or loss. It is the intention of the partners tat
each partner’s share in the profit or loss be either credited or debited to the drawing
account.

 By Allowing Interest on Capital and the Balance in an Agreed Ratio

Illustrative Example 8: Assume that the Aguilar and Porras Partnership had a loss
of P10,000 for the year ended Dec. 31,2019.

 Aguilar Porras Total

 15% Interest on Average Capital:
 Aguilar: 475,000 x 15% ₱ 71,250.00

Porras: 775,000 x 15% ₱ 116,250.00 ₱ 187,500.00

Balance to be Divided Equally

[(10,000) - 187,500 =

(197,500)]

 Aguilar: (197,500) x 50% -98,750
 Porras: (197,500) x 50% -98,750 -197,500
 Share of Partners in Profits -₱ 27,500.00 ₱ 17,500.00 -₱ 10,000.00



Dr. Cr.
 If the partnership agreement provided for
Aguilar, Drawing 27,500
 interest on capital accounts, this provision must
Income Summary 10,000
 be honored regardless of whether operations
Porras, Drawing 17,500
 yielded profits or not.
To record the division of losses

  By Allowing Bonus to Managing Partner Based on Profit and the Balance in an Agreed
Ratio
Illustrative Example 11: Assume
instead that the Aguilar and Porras It is understood in the wording of the agreement
Partnership agreement provided that the 25% bonus will be based on the difference
for a bonus of 25% of profit after after deducting bonus from a certain amount. This
bonus to Partner Aguilar and the certain amount is the profit after considering all the
balance to be divided equally operating expenses but before this bonus

Here, the P300,000 profit still includes the

Profit before bonus. The difference between this profit
Profit after Bonus (300,000/125%) and bonus shall be the basis for the 25%
Bonus bonus rate. Hence, profit after bonus
represents 100% while the profit of
P300,000 before bonus represents 125%

Aguilar Porras Total

Bonus ₱ 60,000.00 ₱ 60,000.00
Balance to be Divided Equally
(300,000 - 60,000 =
240,000)
Aguilar: 240,000 x50% 120,000
Porras: 240,000 x 50% 120,000 240,000
Share of Partners in Profits ₱ 180,000.00 ₱ 120,000.00 ₱ 300,000.00

Dr. Cr.
Income Summary 300,000
Aguilar, Drawing 180,000
Porras, Drawing 120,000
To record the division of profits
  By Allowing Salaries, Interest on Partners’ Capital, Bonus to the Managing Partner and the
Balance in an Agreed Ratio

Illustrative Example 13: Assume instead that the bonus to Aguilar is 25% of profit after
salaries, interest and after bonus. The computation of the bonus follows:

₱400,000.0
Profit before Salaries, Interest and Bonus 0
Less: Salaries ₱ 160,000.00
Interest 187,500 347,500
Profit after Salaries and Interest but before Bonus ₱ 52,500.00 125%
Profit after Salaries and Interest but after Bonus* 42,000 100%
Bonus ₱ 10,500.00 25%
*P52,500 divided by 125% = P42,000

Aguilar Porras Total

Salary Allowances ₱ 100,000.00 ₱ 60,000.00 ₱ 160,000.00
Interest on Average Capital Balances 71,250 116,250 187,500
Bonus 10,500 10,500
Balance to be Divided in a Ratio of 40:60
[400,000 - 160,000 - 187,500 - 10,500 =
42,000]
Aguilar: 42,000 x 40% 16,800
Porras: 42,000 x 60% 25,200 42,000
Share of Partners in Profits ₱ 198,550.00 ₱ 201,450.00 ₱ 400,000.00

Dr. Cr.
Income Summary 400,000
Aguilar, Drawing 198,550
Porras, Drawing 201,450
To record the division of profits