Module Part I Preface To UNIT I PDF

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Module Overview
This module covers the topics as contained in the course syllabus for Accounting for Special Transactions.
Discussion, examples and illustrations for every lesson or topic were direct-to-the-point to facilitate easy learning and
mastery of the course.
Module Part 1 (Midterm coverage) has 5 topics:

1. Partnership Formation and Operations
1.1 Definition, nature and characteristics of a partnership
1.2 Partnership formation
1.3 Partnership Operation
2. Partnership Dissolution
3. Partnership Liquidation
4. Corporate Liquidation and reorganization
5. Joint arrangements
Learning Outcomes:
After completing this module, the student shall be able to do the following in accordance with generally
accepted accounting principles:
1. Define partnership, identify the characteristics, advantages and disadvantages of a partnership, types of
partnership and kinds of partners and record the formation of the partnership.
2. Identify, describe and account for the different methods of dividing partnership profits and losses based
on the agreement and .prepare the necessary journal entries and Statement of Partners” Equity
3. Identify the different causes of dissolution and account for the different causes of partnership dissolution.
4. Distinguish dissolution from liquidation and account for partnership liquidation under lump sum and
installment liquidation,
5. Describe the accounting for corporation liquidation and prepare Statement of Affairs.
6. Identify the types of joint arrangements and account for joint operations and joint venture.
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Module Map
(Module Part 1- Midterm Coverage)
Accounting for Special

Transactions
Partnership Formation and Operation
Partnership Dissolution
Partnership Liquidation
Corporate Liquidation and Reorganization
Joint Arrangements
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UNIT I – PARTNERSHIP Formation and Operation

Lesson 1 – Definition, nature and characteristics
Partnership
 Article1767 of the Partnership Law, defines partnership, “ by contract of partnership, 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”.
 An association of two or persons to carry on, as co- owners, a business for profit (Uniform Partnership Act,
Section 6)
 Partnership in the Philippines are governed by and covered under Articles 1767 to 1867 of the Civil Code of
the Philippines.
 A partnership is formed based on “trust and confidence “ of the individual to each other.
 Only natural persons can form a partnership. A corporation is prohibited from joining a partnership
Characteristics of a Partnership
1. Juridical Personality
Article1768 of the Partnership Law states that the partnership has a juridical personality separate and
distinct from that of each of the partners. Therefore, a partnership can acquire property in its own name and
may enter into contracts.
2. Mutual agency
Each partner is a principal as well as an agent of the partnership on matters relative to the affairs of the
partnership. Any partner can bind the other partners to a contract if he is acting within his express or
implied authority.
3. Ease of formation
A partnership is perfected by a mere agreement or consent of the parties. The creation of a partnership
may be informal as a handshake or as formal with the adoption of the “ Articles of co-partnership”
agreement.
4. Unlimited Liability
Article 1768 of the Partnership Law states that the partnership has a juridical personality separate and
distinct from that of each of the partners. Legally, however, a partnership is not considered a separate
entity from the partners when it involves debts to third party creditors. All partners (except limited partner),
including industrial partner, are personally liable pro-rata with their separate properties for all obligations
contracted by the partnership after all the partnership assets have been exhausted.
5. Limited life
Any change in the partners’ agreement terminates the partnership contract or dissolve the partnership. It
may be by reason of death, withdrawal, retirement or insolvency of any partner, admission of a new
partner, when the specific purpose or objective for which the partnership was formed is achieved and
other causes as enumerated under Article 1830 of the New Civil Code.
6. Co-ownership of contributed assets

All assets contributed into the partnership are owned by the partnership and all partners have equal rights
to contributed assets. The partner investing a particular asset no longer retains any personal right to it.
7. Division of Profits or losses

Each partner has the right to share in the profits or losses of the partnership. Any statement in the
partnership contract excluding a partner from profit sharing is null and void. Profit or loss sharing is
governed by the partnership contract, if no agreement is specified, profit or loss sharing shall be in
accordance with partners’ capital contribution.
8. Limited right to dispose of interest in partnership

A partner may dispose of his interest or investment in the partnership only with the consent from the other
partners for the partnership contract is one of trust and confidence.
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9. Income Taxes
Partnership, except general professional partnerships, are subject to tax at the rate of 30% of the taxable
income like a corporation.
10. Partners’ equity accounts – each partner has a capital account and a withdrawal account that serves
similar functions as the related accounts for sole proprietorship.
Partnership distinguished from Corporation:
Partnership Corporation
1. Formation Easier to form. A partnership is created by
a mere agreement of the partners. Created by operation of law
2. Number of
Persons Two or more persons At least persons, not exceeding 15.
3. Commencement of From the execution of the Article of From the issuance of certificate of
juridical personality Partnership incorporation by the SEC.
Every partner is an agent of the
4. Management partnership if the partners did not appoint Vested on the Board of Directors.
a managing partner
Partners (except limited partners have
5. Extent of liability unlimited liability. Stockholders have limited liability
Legal life is 50 years subject to
6. Life Can be easily dissolved renewal
Has the capacity to generate greater
7. Financing Limited ability to raise funds capital by issuing shares of capital
stock
Advantages and Disadvantages of a Partnership
Advantages Disadvantage
1. Easy formation 1. limited life
2. Better management resulting from combined abilities of 2. unlimited liability
partners
3. tax exemption for professional partnership 3. mutual agency may hold the partners
4. less government supervision 4. less effective in raising capital than
corporation
Kinds of Partnerships
a. As to nature of business
1. Trading partnership – those engaged in buying and selling of goods.

2. Non-trading business – those engaged in other forms of business activities not included in (1).
b. As to Purpose
1. Commercial partnership – one established for business purposes.

2. General professional partnership – one formed for the exercise of a profession.
c. As to Object:
1. Universal partnership
a. of all present property – all contributions become part of partnership fund.
b. of profits – all property acquired through the work or industry of the partners during the existence
of the partnership become part of the common fund.
2. Particular Partnership – one which the parties combine to pursue a single individual transaction or
enterprise and divide among themselves the benefits therefrom. It may be formed for an exercise of
profession.
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d. As to liability
1. General partnership – comprised of all general partners or a combination of general and industrial
partners. They are personally liable for the partnership debts after the exhaustion of its assets.
2. Limited partnership - comprised both limited and general partners. Only the limited partners are
liable only to the extent of their personal contributions. In a limited partnership, the law states
that there shall be at least one general partner. ” LLP” is usually affixed in the partnership name.
e. As to duration
1. Partnership with a fixed term or for a particular undertaking – formed with a specified period of
existence.
2. Partnership at will - one in which no term is specified or fixed period of existence and formed for a
particular undertaking and may be terminated any time by the will of any of the partners or by
mutual agreement of the partners.
f. As to legal existence
1. De jure partnership – established and organized in accordance with all the legal requirements for
its existence.
2. De facto partnership – established and organized without complying with the legal requirements for
its existence.
Kinds of Partners
a. As to liability
1. General Partner – one who is liable to the extent of his separate property after all the assets of the
partnership are exhausted.
2. Limited partner – one who is liable only to the extent of his capital contribution.
b. As to contribution
1. Capitalist partner – one who contributes money or property to the common fund of the partnership
2. Industrial Partner – one who contributes his skills, knowledge, industry or personal service to the
partnership
3. Capitalist-industrial – contributes money, property or industry to the partnership.
c. As to participation
1. Managing Partner – one whom the partners has appointed as manage of the partnership.
2. Liquidating Partner – one who is designated to wind up or settle the affairs of the partnership after
dissolution.
3. Silent Partner –known as a partner but does not take active part in running the affairs of the partnership.
d. As to third persons
1. Dormant Partner – not known as a partner and does not take active part in the partnership business.
2. Secret Partner – not known to be a partner but takes active part in running the partnership business.
3. Nominal Partner – one who takes no active part, makes no investment, but permits his name to be used
by the firm.
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The Partnership Contract
Articles of Co-Partnership – is a written contract made by the partners. It is needed to appear in a public
instrument and to be registered in the Office of SEC if the partners contributed a real property or real rights of it
the total capital amounted to P3,000 or more. It specifies all the rights, duties and obligations of the partners among
themselves and/or in relation to the partnership.
The partners in the formation, operation and dissolution of the partnership must observe this contact which
commonly contains the following:
1. Name of the partnership;

2. Principal place and purpose of the business
3. Effectivity and duration of the contract of partnership;
4. Names and addresses of the partners
5. Kinds of partners whether general or limited partners;
6. Contributions of the partners. For non-cash investments the agreed values and description of each.
7. Rights, powers and duties of each partner as well as any limitations upon the authority of partners.
8. Conditions for additional investments and withdrawals
9. Salary and profit and loss agreement
10. Dissolution procedures
11. Methods of resolving disputes between partners.
Failure to register the Article of Co-Partnership with SEC:
1. the partnership cannot acquire legal personality to maintain an action against third persons but the
partners may file a suit jointly against third persons,
2. will not affect the liability of the partnership and its partners to third persons.
Rights of a Partner:
1. To share in partnership profits and partnership properties;

2. To participate in the management of the partnership operations;
3. To receive his equity rights after the creditors’ right have been paid.
Requisites of a Partnership
The New Civil Code of the Philippines provides the essential elements in the formation of the partnership,
involves:
1. A voluntary and valid agreement among the parties
2. A lawful purpose for which the partnership is organized
3. Contribution of money, property or industry
4. An association for profit to be divided among the partners
5. Mutual agency among the partners
6. A practice of transparency on the records and transactions of the partnenrship
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Unit I – Partnership Formation and Operation
SELF-ASSESSMENT QUESTIONS
1. Define partnership
2. Enumerate and explain the major characteristics of partnership.
3. Explain the advantages and disadvantages of a partnership
4. Enumerate and explain the different classifications of partnership as to:
a. Nature of business
b. Purpose
c. Object
d. Liability
e. Duration
f. Legal existence
5. Explain the term mutual agency.

6. Enumerate the basic information contained in the Articles of Co-Partnership
7. Distinguish the kinds of partners according to :
a. Contribution
b. Liability
c. Participation
d. Third persons
8. Compare a sole proprietorship from partnership form of business as to:

a. Formation
b. Liability
c. Capitalization
d. Life
e. Taxation
9. Describe the nature of partnership

10. What are the essential elements and pre-requisites in forming partnership
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Lesson 1 – Nature, Definition and characteristics of Partnership
Name: __________________________ Score__________

Section _________________________ Date:____________
Assignment 1: Instruction: Answer as directed.
1. Explain the difference between the accounting entity concept and the unlimited liability characteristic of a
partnership.
2. One of the advantages of a partnership is tax exemption for professional partnership. Explain.
3. Explain the significance of the “Articles of Co-Partnership.
4. Can a nominal partner be at the same time a secret partner? Explain
5. Distinguish partnership from corporation.

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Unit I - Partnership
Lesson 1 – Nature, Definition and characteristics of Partnership
Name: ________________________ Score__________

Section _______________________ Date:____________
Assignment 2: Modified True or False:
Instruction: Write “T” on the space provided before the statement if its correct and if the statement is
false underline the word or group of words that makes the statement false.
___1. Basically a partnership is perfected by a mere consent of the parties.

___2. In the event of liquidation, all partners are legally and personally liable when it involves debts to third parties
that cannot be paid by the partnership.
___3. A partnership has the power of succession.
___4. Industrial partners are legally like a general partner for all partnership debts to the extent of their personal
assets.
___5. The SEC should first authorize a partnership to engage in business before it can operate.
___6. A stipulation of partnership contract excluding a partner from profit sharing is null and void.
___7. Every partner is assumed as agent of the partnership.
___8. The partner investing a particular kind of asset may receive back the same property if the partnership is
terminated.
___9. The maximum number of owners composing a partnership must be three natural persons.
___10. General partnership is not subject to tax.
___11. When the capitalization of the partnership is below P 3,000 an oral agreement is sufficient in forming a
partnership.
___12. Partnership is the best form of business organization for firms that are engaged in rendering profession
services.
___13. Partnership can be formed to engage in trading, manufacturing and rendering services.
___14. Partnership is founded on the basis of trust.
___15. A limited partner is one whose investment in the partnership is limited to a certain amount.
___16. Industrial partners share in the in the business profits but not in losses.
___17. An oral partnership contract is not binding among partners.
___18. The wrongful acts of any partner bind the firm and/or the partners.
___19. All partners in the limited partnership are not liable for partnership debts after exhaustion of its assets.
___20. A partnership is automatically dissolved if there is a change in the persons of partners.
___21. A partner may not be known as one of the partners but take active part in running the business.
___22. Upon the termination of the legal life of the partnership, it may continue its normal activities under a new
business name.
___23. Every partnership should have at least one general partner.
___24. An industrial partner is a limited partner.
___25. A partnership is not considered separate entity from the partners when it involves debts to third party
in the event of liquidation.
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UNIT I – PARTNERSHIP FORMATION AND OPERATION

Lesson 2 - Partnership Formation
Partnership Accounting –
a) The generally accepted accounting principles used in accounting for single proprietorship are also the
same principles to be used in accounting for a partnership business.
b) Plurality of Capital and Drawing accounts – each partner has capital and a drawing account.
Partner’s Capital Account

Debit Credit
permanent withdrawals of capital original investment
debit balance of drawing account at the end of additional investment
period
share in net loss (this may be debited to credit balance of the drawing account at the
drawing account ) end of the period
share in net income (this may be credited to
drawing account
Partner’s Drawing Account

Debit Credit
advance withdrawals of share in net income Partner’s salaries
Personal liability paid or assumed by the Partnership liability assumed or paid by the
partnership partner
Partnership receivable collected but not remitted by Personal receivables of partner collected and
the partner retained by the partnership.
c) Partner’s loan – partner’s may lend money to the partnership other than their capital contributions: Such
loans are credited to:
1. Loan Payable account; or
2. Notes Payable account if the loan is evidenced by a note duly signed in the name of the
partnership.
d) Partner’s Borrowings – a partnership may lend money to the partners. Such amount are debited to:
1. Loans receivable account; or
2. Notes receivable account if the advance is supported by a note signed by the partner.
e) Partner’s Salaries
The partners may agree to allow salaries to them. The salary allowances to the partners are purely
a method of profit distribution. Salaries to partners are not true business expenses
f) Pro-forma entries:
Transactions Journal Entries
1) Investment with liability Dr. Asset xx
assumed by partnership Cr. Accounts payable xx
Cr. Partner’s, capital xx
2. Temporary withdrawal Dr. Partner’s, drawing xx

Cr. Asset xx
3. Permanent withdrawal Dr. Partner’s, capital xx

Cr. Asset xx
4. Loan to partner by partnership Dr. Loans receivable - partner xx

Cr. Cash xx
5. Loan to partnership by partner Dr. Cash xx

Cr. Loan payable- partner xx
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Partnership Formation
 Methods:
1. Net Investment
2. Bonus Method
3. Goodwill method ( no longer applicable due to PFRS 3)
 If non-cash assets are invested the following should be the basis for valuation according to level
of priority:
1. Fair market value of the property at the time of investment. The agreed value should be
equivalent to the fair market value.
1. Book value or carrying value – in case no available fair market value.
 WAYS OF FORMING A PARTNERSHIP
1. Formation of a partnership for the first time.

2. Conversion of a single proprietorship to a partnership.
a. A sole proprietor allows another individual, who has no business of his own to join his business.
b. Two single proprietors agree to join their businesses to form a partnership.
1. FORMATION OF A PARTNERSHIP FOR THE FIRST TIME

 Partnership books
 record the investment of the partners.
 non-cash assets should be recorded at fair market value.
Illustration 1: (Net Investment Method)

On October 1, 2020, Franz, Genny and Anne agreed to form FGA Enterprises with the following investments.
Genny Anne
Cash P 40,000 P 50,000
Land - Cost 100,000
- FMV 130,000
Equipment – carrying value 65,000
- FMV 50,000
Furniture 55,000
An outstanding liability of P 5,000 on the furniture still exists and will be assumed by the partnership.
Franz is an industrial partner.
REQUIRED: Prepare the journal entries to record the investment of the partners and prepare the
Statement of Financial Position immediately after the formation of the partnership.
Solution: Partnership Books

GENERAL JOURNAL
Date Particulars PR Debit Credit
2020.
Oct. 1 Cash 40,000
Land 130,000
Genny, Capital 170,000
To record investment
Cash 50,000
Equipment 50,000
Furniture 55,000
Accounts Payable 5,000
Anne, Capital 150,000
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Franz, Capital
Franz is an industrial partner
The Partnership Statement of Financial Position on October 1, 2020:
FGA Enterprises
Statement of Financial Position
October 1, 2020
Cash P 90,000 Accounts Payable P 5,000

Equipment 50,000 Genny, Capital 170,000
Furniture 55,000 Anne, Capital 150,000
Land 130,000 Franz, capital (industrial partner) .
Total Assets P 325,000 Total liabilities & Partners’ Equity P 325,000
Illustration 2 ( Bonus Method: The Total Agreed Capital (TAC) is equal to Total Contributed Capital (TCC))
The partnership of Sean and Timmy was formed on July 1, 2020. On this date, Sean invested P 600,000 cash and
furniture valued at P 360,000. Timmy invested P 440,000 cash , fixtures valued at P 320,000 and building valued at
P 1,200,000, subject to a notes payable of P 600,000 which was assumed by the partnership. The partnership
provides that Sean and Timmy share profits and losses 40:60, respectively. The agreement further provides that
the partners’ capital must be in conformity with their profit and loss ratio upon formation.

GENERAL JOURNAL
2020.
July 1 Cash 600,000
Land 360,000
Sean, Capital 960,000
Cash 440,000
Furniture and Fixtures 320,000
Building 1,200,000
Notes Payable 600,000
Timmy, Capital 1,360,000

Timmy, Capital 32,000
Bonus to Timmy .
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To compute for Bonus given to Sean from Timmy:
Contributed capital (CC) Agreed Capital (AC) Difference

Sean, 960,000 (40%) 928,000 * (32,000)
Timmy 1,360,000 (60%) 1,392,000 32,000
Total 2,320,000 2,320,000
* Sean, Capital is decreased by P 32,000 which represents transfer of capital (Bonus) from Sean to
Timmy to make their capital balance in conformity with their profit and loss ratio.
ST Company
July 1, 2020
Cash P 1,040,000 Notes Payable P 600,000

Furniture and Fixtures 320,000 Sean, Capital 928,000
Land 360,000 Timmy, Capital 1,392,000
Building 1,200,000 .
Total Assets P 2,920,000 Total liabilities & Partners’ Equity P 2,920,000
* If Goodwill method is used: ( Note: no longer applicable due to PFRS 3: TAC is greater than TCC)
a) compute for total agreed capitalization which should be greater than total contributed capital
1. based on Sean contributed capital:
Total Agreed Capitalization (TAC)= 960,000 / 40% = P 2,400,000
2. based on Timmy’s contributed capital:

Total Agreed Capital (TAC) = 1,360,000/ 60% = P 2,266,667 (lesser than the Total
Contributed Capital (TCC) of P 2,320,000)
b there is a goodwill of P 80,000 ( difference between TAC and TCC)

Contributed capital Agreed Capital Difference
Sean, 960,000 (40%) 960,000 ---
Timmy 1,360,000 (60%) 1,440,000 80,000
Total 2,320,000 2,400,000 80,000

GENERAL JOURNAL
2020.
July 1 Cash 600,000
Land 360,000
Cash 440,000
Building 1,200,000
Notes Payable 600,000
Timmy, Capital 1,360,000
Goodwill 80,000
Timmy, Capital 80,000
Goodwill to Timmy .
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ST Company
July 1, 2020
Cash P 1,040,000 Notes Payable P 600,000

Furniture and Fixtures 320,000 Sean, Capital 960,000
Land 360,000 Timmy, Capital 1,440,000
Building 1,200,000 .
Goodwill 80,000
Total Assets P 3,000,000 Total liabilities & Partners’ Equity P 3,000,000
3. CONVERSION OF A SINGLE PROPRIETORSHIP INTO A PARTNERSHIP.
A. A sole proprietor allows another individual, who has no business of his own to join his business.
New set of books will be used for the partnership
Steps:
 In the books of the single proprietorship:
a. adjust the books according to the agreement of the partners.
Adjustment may be for:
 undervaluation/overvaluation of assets
 unrecorded assets and/or liabilities
 unrecorded income and/or expenses (credit and/or debit sole prorprietor’s capital
account)
b. close the book
 In the books of the Partnership:

Open the partnership books by recording the investments of the partners.
Note: Depreciable assets are recorded in the books of the partnership at net of accumulated
depreciation.
Illustration 3: A sole proprietor allows another individual, who has no business of his own to join his business.
On August 1, 2020, Karlo and Peter, who has his own retail business decided to form partnership wherein
they will participate in the ratio of 60% and 40%, respectively. The partnership is to be known as KAP Trading.
The statement of financial position of Peter on this date is presented below:
Peter Trading
August 1, 2020
Assets
Cash P 40,000
Accounts receivable P 160,000
Less: Estimated uncollectible accounts 16,000 144,000
Merchandise Inventory 100,000
Furniture and Fixtures P 150,000
Less: Accumulated depreciation 40,000 110,000
Total assets P 394,000
Liabilities and Capital
Accounts Payable P 44,000

Peter, Capital 350,000
Total liabilities and capital P 394,000
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Conditions agreed upon before the formation of the partnership:

a) The accounts receivable of Peter is estimated to be realizable at 80%.
b) The furniture and fixtures of Pepe is under depreciated by P 5000.
c) The merchandise inventory is to be valued at P 110,000.
d) All the payables are to be assumed by the partnership.
e) The capital of the partnership is based on the adjusted capital balance of Peter, and Karlo is to
contribute cash in order to make the partner’s capital balances proportionate to the profit and loss ratio.
f) A new set of books will be used by the partnership.
REQUIRED:
1. Prepare the necessary journal entries in the books of Peter.
2. Prepare the journal entries in the books of the partnership.
3. Prepare the statement of financial position of the partnership
Solution:
Req. 1: adjust and close the books of Peter (Sole Proprietor)
GENERAL JOURNAL
2020.
Aug. 1 Peter, capital 16,000
Estimated uncollectible accounts 16,000
To adjust estimated uncollectible accounts
to 20% of accounts receivable
Peter, Capital 5,000

Accumulated depreciation – furniture & fixtures 5,000
To adjust accumulated depreciation
Merchandise inventory 10,000

Peter, capital 10,000
To adjust inventory account

Accumulated depreciation 45,000
Cash 40,000
Accounts receivable 160,000
To close the books
 The adjusted capital balance of Peter is:
Peter, Capital
Debit Credit
8/1/20 16,000 balance 350,000
5,000 8/1/20 10,000
21,000 360,000
adjusted bal. 339,000
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Req. 2 – Journal Entries in the Partnership Books
Partnership Books
GENERAL JOURNAL
2020.
Aug. 1 Cash 40,000
Accounts receivable 160,000
Investment of Peter
Cash 508,500
Karlo, Capital 508,500
Investment of Karlo.
 To compute for the cash investment of Karlo in the partnership:

 Total agreed capital of the partnership: (Peter, capital P 339,000/40%)= P 847,500
 Cash investment by Karlo = (TAC x p/l ratio of Karlo) P 847,500 x 60% = P 508,500
KAP TRADING
August 1, 2020
Cash P 548,500 Accounts Payable P 44,000

Accounts Receivable 160,000
Less: Est. Uncol. Accts 32,000 128,000 Peter, capital 339,000
Merchandise inventory 110,000 Karlo, capital 508,500
Total Assets P 891,500 liabilities & Partners’ Equity P 891,500
B. Two or more single proprietors agree to join their businesses to form a partnership.
New set of books will be used for the partnership

Steps:
 In the books of the single proprietorships:
b. adjust the books according to the agreement of the partners.
Adjustment may be for:
 undervaluation/overvaluation of assets
 unrecorded assets and/or liabilities
 unrecorded income and/or expenses (credit and/or debit sole prorprietor’s capital
account)
c. close the book
 In the books of the Partnership:

Open the partnership books by recording the investments of the partners.
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Lesson 2 – Partnership Formation
1. Why is it necessary to adjust the books of single proprietor(s) prior to the formation of the partnership?
2. Discuss the accounting treatment of the following items:

a. partner’s capital account
b. partner’s drawing account
c. loans receivable from partners
d. loans payable to partners
3. Differentiate permanent withdrawals from temporary withdrawals.
4. What are the three basic elements to be considered to effect a fair and honest partnership business
formation?
5. What is the basis for recording the non-cash assets contributed to the partnership?
6. How should the contribution of industrial partner be recorded in the partnership books?
7. What are the procedures in forming a partnership under the following?

a. 2 or more individuals form a partnership for the first time
b. a sole proprietor and an individual form a partnership
c. 2 or more sole proprietors form a partnership
8. Explain briefly the rules on initial investments when partner’s capital credit is exceeds or less than his
capital contribution.
9. Explain briefly the difference between a partner’s interest in profit and loss and a partner’s interest in
the partnership.
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Name: ________________________ Score__________

Section _______________________ Date:____________
Assignment 1 – THEORY.
1. The net contributions of the partners to the partnership is measured at

a) cost c) discretionary amount determined by partner
b) fair value d) any of these
2. Transactions between and among the partners are:

a) recorded in the partnership books c) either a or b
b) not recorded in the partnership books d) neither a or b
3. Which of the following accounts has a normal credit balance?

a) Loans to partners c) Partner’s drawing
b) partner’s capital d) Due from partner
4. What is the entry for the acceptance of an industrial partner’s skills as his contribution?
a) General journal through a debit-credit entry
b) General ledger through a debit-credit entry
c) General ledger through a memorandum entry
d) none of the above
5. The partner’s capital account increases in the following cases except when a partner’s transaction in the
partnership involves:
a) initial investment c) additional investment

b) share in net income d) personal drawings
For items 6 -7:

Dee and Tee agreed to form a partnership. Dee contributed cash of P 50,000 while Tee contributed cash of
P150,000. They agreed to have an equal interest on the initial capital and in partnership profits and losses.
6. Which of the following statements is false?
a) Tee’s contribution will be debited for P150,000.

b) The partnership capital after recording the investments od Dee and Tee is P 200,000.
c) Dee’s contribution will be debited for P 50,000.
d) none of these
7. Which of the following statements is correct?
a. the contractual agreement is void because Dee’s contribution is less than the agreed interest of Dee.
b. Tee’s contribution will be debited for P 100,000.
c. Dee will make an additional investment of P 100,000 to make his capital balance equal to Tee’s capital.
d. Dee and Tee will have capital balances of P 100,000 each after the partnership formation.
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8. A and B agreed to form a partnership. A contributed P 300,000 cash while B contributed his expertise.
partnership agreement stipulates that A and B shall have equal interest in both initial capital and profits and
losses.
Which of the following is correct?

a) Immediately after the formation of the partnership, the balance of A capital account in the partnership
books is P 300,000.
b) Immediately after the formation of the partnership, the balance of B capital account in the partnership
books is zero.
c) A’s contribution will be debited for P 300,000, but the net credit to A’s capital account will be P 150,000.
d) None of these
9. Statement 1. A bonus exists when the capital account of a partner is credited for an amount greater than of
lesser than the fair value of his contribution.
Statement 2: A bonus given to a partner is treated as an adjustment to the capital account of the other
partners.
a) True: True b) False: False c) True: False d) False: True
10. Fay and May agreed to form a partnership. The agreement stipulates that Fay shall contribute a non-cash
assets with a fair value of P 150,000 and while May shall contribute cash of P 150,000. However, since Fay
will be bringing her special skills to the partnership, the partners agreed that Fay shall be entitled to a 60%
interest in partnership profits and losses.
Which of the following is incorrect?

a) Fay’s contribution shall be debited for P 150,000.
b) The total capital of the partnership immediately after the formation of the partnership is P 300,000.
c) Fay’s capital account balance immediately after the formation of the partnership is P 180,000.
d) None of these.
20

Name: ________________________ Score__________

Section _______________________ Date:____________
Assignment 2 – Brief exercises. Instruction: Answer as directed.
1. On August 1, 2020, Eddie and Fred agreed to form a partnership to sell and install office security
systems. The partners decide that Eddie will invest cash, P 500,000; equipment with a cost of P 300,000
but with a current fair value of P250,000.
Fred will contribute a service vehicle with a fair value of P 400,000. The book value of the service vehicle is
P 650,000. In addition, Fred is to invest sufficient cash to equal Eddie’s investment.
Journalize the investments of Eddie and Fred.

2. Pepe and Pilar formed a partnership on July 1, 2020. Pepe contributed equipment with a book value of
P300,000 and a fair market value of P 400,000 with P 100,000 mortgage to be assumed by the partnership.
Pilar invests cash of P 100,000 and equipment recorded as P 150,000 with accumulated depreciation of
P60,000 and with and agreed valuation of P 80,000.
Journalize the investments of Pepe and Pilar.

3. Using the same data in 2 above, except that the mortgage will not be assumed by the partnership. Record
the investment of Pepe.
21
4. Mark and Nick agreed to form a partnership on July 1, 2020, for the purpose of manufacturing and selling
custom stainless kitchen wares. Both are master crafters and have their own tools and equipment, which
they will invest in the business.
Mark and Nick determined that their tools and equipment have fair values of P 180,000 and P 240,000,
respectively. They further resolved to invest sufficient cash such that each partner will have beginning
capital balance of P500,000.
How much cash will be presented in the partnership’s statement of financial position? _____________
5. MM, NN, and LL formed a partnership on July 1, 2020 with the following assets, measured at their fair
market values, contributed by each partner:
MM NN LL
Cash P 20,000 P 22,000 P 40,000
Delivery trucks 250,000 228,000 ---
Computers 48,000 51,000 ---
Office furniture 9,500 22,500
Totals P 318,000 P 310,500 P 62,500
Although LL has contributed the most cash to the partnership, he did not have the full amount of P40, 000
available and was forced to borrow P20, 000. The delivery truck contributed by MM has a Mortgage of
P 100,000 and the partnership is to assume responsibility for the loan. The profit and loss sharing agreement is
40%, 40%, and 20%, respectively, for MM, NN, and LL.
Journalize the investments of MM, NN and LL.

6. Using the same data in number 5: except that the agreement further provides that the partners’ capital must
be in conformity with their profit and loss ratio upon formation, the capital balances of MM, NN and LL in
the partnership statement of financial position:
MM ________________ NN _______________ LL ________________
7. Refer to no. 6: the journal entry to record the transfer of capital (bonus) :
End
22

Name: ________________________ Score__________

Section _______________________ Date:____________
Assignment 3 – Use 2-columns journal
1. On October 1, 2020, JC Construction and GB builders decided to form a partnership to be known as JCGB
Construction Company. Their Statement of financial Position on this date were:
JC Construction GB Builders
Cash P 250,000 P 260,000
Accounts Receivable 400,000 390,000
Allowance for bad debts (15,000) (13,000)
Inventory 600,000 700,000
Equipment , net 800,000 1,000,000
Total 2,035,000 2,337,000
Accounts Payable 335,000 550,000

Amanda Capital 1,700,000
Diana, Capital _________ 1,787,000
Total 2,035,000 2,337,000
They agreed the following adjustments shall be made:

1. Equipment of JC Construction is under depreciated by P 10,000 and that GB Builders is over
depreciated by P 15,000.
2. Allowance for bad debts shall be equal to 10% of Accounts Receivable.
3. The value of Inventories of JC is to be increased by P 8,000 and for GB Builders, P 5,000 are
worthless.
4. The assets and liabilities at their adjusted values shall be assumed by the partnership.
REQUIRED:
1. Prepare the necessary journal entries in the books of JC Construction and GB Builders.
2. Prepare the journal entries in the books of JCGB Construction Company
3. Prepare the statement of financial position of the partnership
2. Using the same data in problem 1: except that the partnership provides that JC and GB share profits and
losses 40:60, respectively. The agreement further provides that the partners’ capital must be in conformity
with their profit and loss ratio upon formation.
Q1. Assuming the use of transfer of capital method, how much is the agreed capital of JC to bring the
capital balances proportionate to their profit and loss ratio? _______________________________
Q2. The total assets of the Partnership after the formation is ___________________________________
Q3. Prepare journal entries to record the formation of the partnership.

23
3. AB and CD decided to form a partnership on August 1, 2020. Their balance sheets on this date are:
AB CD
Cash P 15,000 P 37,500
Merchandise Inventory 200,000 202,500
Equipment 200,000 350,000
Accumulated depreciation ( 50,000) ( 60,000)
Total P 705,000 P 735,000
Accounts Payable P 105,000 P 265,000
Capital 600,000 470,000
Total P 705,000 P 735,000
They agreed to have the following adjustments :

1. Equipment of AB is underdepreciated by P 20,000 and that of CD is overdepreciated by P 10,000.
2. Allowance for doubtful accounts is to be set up amounting to P 68,000 for AB and P 45,000 for CD.
3. Inventories of P 5,000 and P 15,000 are worthless in AB’s and CD’s books, respectively.
4. The partnership agreement provides for a profit and loss ratio and capital interest of 70% to AB and 30% to
CD.
1. How much cash must AB invests to bring the capital balances proportionate to their profit and loss ratio?
______________________
2. Prepare journal entries in the books of the sole proprietors and partnership books.
24

Name: ________________________ Score__________

Section _______________________ Date:____________
Assignment 4 – Answers must be supported with computations. Use yellow pad for supporting computations.
On January 1, 2020, Anne, and Betty decided to form a partnership. The firm is to take over the assets and
assume liabilities and capital are to be based on net assets transferred after the following adjustments:
a. Anne and Betty’s inventory is to be valued at P 31,000 and P 22,000, respectively.
b. Accounts receivable of P 2,000 in Anne’s books and P 1,000 in Betty’s books are uncollectible.
c. Accrued salaries of P 4,000 to Anne and P 5,000 to Betty are still to be recognized in the books.
d. Unused office supplies of Anne amounted to P 5,000 while that of Betty amounted to P 1,500.
e. Unrecorded patent of P 7,000 and prepaid rent of P 4,500 are to be recognized in the books of Anne and
Betty, respectively.
f. Anne is to invest or withdraw cash necessary to have a 40% interest in the firm.
Balance sheets for Anne and Betty on January 1, 2020, before adjustments are given below:
Anne Betty
Cash P 31,000 P 50,000
Accounts receivable 26,000 20,000
Inventory 32,000 24,000
Office supplies --- 5,000
Equipment 20,000 24,000
Accumulated depreciation – equipment (9,000) (3,000)
Total assets P 100,000 P 120,000
Accounts payable P 28,000 P 20,000

Capitals 72,000 100,000
Total assets P 100,000 P 120,000
1. The net adjustments – capital in the books of Anne and Betty:

a) Anne, P 7,000 net debit, and Betty, P 2,000 net credit
b) Anne, P 5,000 net debit, and Betty, P 7,000 net credit
c) Anne, P 7,000 net credit, and Betty, P 2,000 net debit
d) Anne, P 5,000 net credit, and Betty, P 7,000 net debit
2. The adjusted capital of Anne and Betty in their respective books:

a) Anne, P 65,000; Betty, P 102,000 c) Anne, P 77,000; Betty, P 98,000
b) Anne, P 63,000; Betty, P 107,000 d) Anne, P 77,000; Betty, P 93,000
3. The additional investment (withdrawal) made by Anne:

a) P ( 6,666.50) b) P (15,000) c) P 3,000 d) P 8,377.50
4. The total assets of the partnership after formation:

a) P 212,000 b) P 220,333.50 c) P 230,000 d) P 235,333.50
5. The total Liabilities of the partnership after formation:

a) P 48,000 b) P 51,000 c) P 54,000 d) P 57,000
6. The total capital of the partnership after formation:

a) P 155,000 b) P 163,333.50 c) P 178,333.50 d) P 180,000
7. The capital balances of Anne and Betty in the partnership balance sheet:
a) Anne, P 81,250; Betty, P 72,000 c) Anne, P 100,000; Betty, P 75,000
b) Anne, P 81,250; Betty, P 75,000 d) Anne, P 62,000; Betty, P 93,000
25
8. On January 1, 2020 PS and RT agreed to form a partnership. The following are their assets and
liabilities:
Accounts PS RT
Cash P 136,000 P 76,000
Inventories 304,000 364,000
Machinery 480,000 440,000
Accounts Payable 216,000 144,000
Notes Payable 140,000 60,000
PS decided to pay-off his notes payable from his personal assets. It was also agreed that RT inventories
were overstated by P 24,000 and PS machinery was overdepreciatedi by P 20,000. RT is to invest/withdraw
cash in order to receive a capital credit that is 20% more than PS’ total net investment in the partnership.
How much cash will be presented in the partnership’s statement of financial position?
a) P 274,400 b) P 410,400 c) P 450,400 d) P 486,400
9. On December 1, 2019, DJ and BF agreed to invest equal amounts and share profits equally to form a
partnership. DJ invested P 3,120,000 cash and a piece of equipment. BF invested some assets which are
shown below: Book value
Accounts Receivable P 400,000
Inventory 1,120,000
Machineries, net 2,240,000
Intangibles, net 920,000
The assets invested by BF are not properly valued . P 32,000 of the accounts receivable are proven
uncollectible. Inventories are to be written down to P 1,040,000. Included in the machineries is an obsolete
apparatus acquired for P 384,000 with an accumulated depreciation balance of P 336,000. Part of the
intangibles is a patent with a carrying value of P 56,000 which was sued upon by a competitor . BF
unsuccessfully defended the case and the final decision of the court was released on November 29, 2019.
What is the fair value of the equipment invested by DJ?

a) P 968,000 b) P 1,344,000 c) P 1,400,000 d) P 1,560,000
10. On September 3, 2020, MM admits VV for an interest in his business. On this date MM’s capital account shows
a balance of P 452,000. The following were agreed upon before the formation of the partnership:
1. Prepaid expenses of P 25,750 and accrued expenses of P 17,500 are to be recognized.
2. 8% of the outstanding accounts receivable of MM amounting to P375,000 is to be recognized as
uncollectible.
3. VV invested P 260,000 worth of merchandise and is to be credited with a one-third interest in the
partnership.
4. MM is to invest or withdraw cash to earn his interest.
Which of the following is not true regarding the partnership formation?

a) The total agreed capital upon formation is P 780,000
b) The total contributed capital of the partnership is P 690,250.
c) MM invest additional cash of P89,750 to earn his interest in the partnership.
d) A net debit adjustment of P 21,750 affected the capital balance of MM upon formation.
11. A and B have just formed a partnership. A contributed cash of P 882,000 and office equipment that cost
P 378,000. the equipment had been used in his sole proprietorship and had been 70% depreciated, the
current market value of the equipment is P 252,000. A also contributed a note payable of P 84,000 to be
assumed by the partnership. A is to have 60% interest in the partnership. B contributed only P 630,000
merchandise inventory at fair market value. The partner’s .capital must be in conformity with their profit and
loss ratio upon formation. Which of the following is true?
a) The agreed capital of A upon formation is P 1,008,000.
b) The capital of B will decrease by P 42,000 as a result of the transfer of capital.
c) The total agreed capital of the partnership is P 1,750,000.
d) There is an investment or withdrawal of asset under the bonus method.
26
12. On June 1, 2020, AJ the sole proprietor of AJ Company, expands the company and establish a partnership
with DJ and PJ. The partners plan to share profits and losses as follows: AJ, 40%, DJ, 35% and PJ 25%.AJ
asked DJ to join the partnership because his image and reputation are expected to be valuable during the
formation. DJ is also contributing P 420,000 cash and a building that was acquired for P 4,040,000, with
carrying amount of P 3,480,000 and a fair market value of P 1,960,000. The building is subject to a P
792,000 mortgage that the partnership did not assume. PJ is contributing P 848,000 cash and marketable
securities costing P 1,344,000 to PJ but are currently worth P 1,900,000 AJ’s investment in the partnership is
the AJ Company. The Statement of Financial Position for the AJ Company follows:
Cash P 1,560,000 Accounts Payable P 1,748,000

Accounts Receivable 1,824,000 Notes Payable 2,368,000
Merchandise Inventory 1,576,000 AJ, Capital 3,316,000
Equipment, net 2,472,000 __________
P 7,432,000 P 7,432,000
The partners agree that 35% of the inventory is considered worthless, the equipment is worth ¾ of its carrying
amount, and 85% of the accounts receivable is collectible. AJ plans to pay off the accounts payable with his
personal assets. The other partners have agreed that partnership will assume the notes payable. The partners
agreed that their capital balances upon formation will be in conformity with their profit and loss ratio.
Which of the following statements is false?

a) Assuming the partners will either invest or withdraw cash, using AJ as the base, DJ will invest cash of
P 788,200and PJ will withdraw cash of P 485,000. .
b) Assuming the partners will either invest or withdraw cash , using DJ as the base, AJ and PJ will both
withdraw cash with a total amount of P 1,948,800.
c) Assuming the partners will either invest or withdraw cash, using PJ as the base, AJ and DJ will both
invest cash with a total amount of P 2,243,200.
d) If the transfer of capital method is used, the capital accounts of AJ and PJ will be debited in the amount
of P 560,800 and P 121,280, respectively.
13. On June 1, 2020, AD invited MP to join him in his business. Mp agreed provided that AD will adjust the
accumulated depreciation of his Equipment account to a certain amount and will recognize additional
accrued expenses of P 40,000. After that, MP is to invest additional pieces of equipment to make her interest
equal to 45%. If the capital balances od AD before and after adjustments were P 556,000 and P 484,000,
respectively, what is the effect in the carrying value of the equipment as a result of the admission of MP?
a) P 364,000 b) P 32,000 c) P 396,000 d) (P 324,000)
14. Net assets of DD, EE and CC before formation are P 135,000, P 165,000 and P 251,000, respectively. The
partners agreed that certain assets and liabilities had to be adjusted. DD’s note payable of P 15,000 bearing an
interest of 12% should be included in the partnership books and other assets undervalued by P 24,000. The
interest is personally paid by DD. EE’s prepaid expenses should be P 5,000 less than what is stated in the
financial statements. CC’s liabilities were understated by P 14,500.
How much is the capital of DD after the formation?

a) P 174,000 b) P 144,000 c) P 142,200 d) P 127,800
15. On June 1, 2020, MM and AA are combining their separate businesses to form a partnership. Cash and non-
cash assets are to be contributed. The noncash to be contributed and the liabilities to be assumed are :
MM AA
Book value Fair Value Book Value Fair value
Accounts Receivable P 25,000 P 26,250 P 20,000 P 19,000
Inventory 40,000 45,000 20,000 20,750
Property, Plant and Equipment 100,000 90,700 86,250 82,250
Accounts Payable 15,000 15,000 11,250 11,250
MM and AA are to invest equal amounts of cash such that the contribution of MM would be 10% more than the
investment of AA. What is the amount of cash presented on the partnership’s Statement of Financial Position on
June 1, 2020?
a) P 251,250 b) P 276,250 c) P 502,500 d) P 552,500
27

Lesson 3 – Partnership Operation
Partnership Operations
 Accounting for Partnership transactions

 The accounting process of partnership operation is basically the similar to other businesses engaged to
generate profits - sole proprietorship and corporations - from journalization up to closing the nominal
accounts and determining the net income.
 The difference is that the net income or loss as determined is distributed to the partners in accordance
with the profit and loss agreement.
 The Financial Statement are prepared similar to that of a sole proprietorship. The Statement of
Changes in Partner’ Equity shows the details of changes in the partners’ capital and drawing accounts,
including the distribution of partnership profits or losses.
 Profit or loss Distribution

 Partnership net income – represents the amount available for distribution to the partners before the
distribution of partners salaries, interest on capital and bonuses.
 Profit and loss ratio – the ratio in which partnership profits and losses are divided.
 The partnership profit or loss may be distributed using the following rules:
 according to agreement of the partners.
 If an agreement does not exist, according to capital contributions (original capital, if cannot be
determined then based on beginning capital of the year). Industrial partners should be given a
share in the profit what is just and equitable under the circumstances.
 If only an agreement as to profits exists, losses are distributed according to the profit
distribution agreement. However, industrial partners do not share in the losses of the
partnership.
 PROFIT OR LOSS MAY BE DISTRIBUTED ACCORDING TO THE FOLLOWING:

1. Equally
2. Arbitrary ratio
3. Capital Contribution
a. Ending capital balance
b. Beginning capital balance
c. Average capital balance
1. Simple average method
2. Weighted average or peso months method
4. By allowing salaries, interest on capital and/or bonus to the partners and the remainder to be divided
using an arbitrary ratio.
 The following points regarding the distribution of partnership profits and losses are important:
1. Payment of salaries should be treated as part of profit distribution.
2. Interest on capitals is treated as part of the distribution of profit.
3. If there is a bonus agreement, determine the basis of the bonus which may be on net income before
deducting bonus or net income after deducting bonus.
4. Bonus is not applicable if the base is negative.
4. Salaries and interest on capital are allowed regardless of whether there is profit or loss.
5. If there is an industrial partner:
a. If there is a profit
 he gets the first according to the profit sharing agreement, before the capitalist partners divide
the balance in accordance with the profit or loss agreement.
 If there is no specified profit sharing for an industrial partner, he will receive “just and equitable”
or equal to
the share of the a capitalist partner having the smallest share.
b. If there is a loss , he will share in according to their loss sharing agreement, if any. If there is no
agreement with regards to industrial partner sharing in the loss, he is exempted from sharing in
the partnership loss
28
6. If there is a capitalist-industrial partner:

a. If there is a profit
 he gets the first according to the profit sharing agreement, and another share as a capitalist
partner in accordance with the profit or loss agreement.
. b. If there is a loss ,
 If there is no agreement with regards to industrial partner sharing in the loss, as a capitalist,
loss sharing is in accordance with the profit or loss agreement.
7. Average capital means weighted average or peso months method unless another interpretation of
average capital is specified in the agreement. The weighted average capital method is the best
alternative compared to other capital balances because it provides the most equitable basis for
allocating partnership income by considering additional investments and permanent withdrawals.
STATEMENT OF CHANGES IN PARTNERS’ EQUITY

 shows the changes/composition of partners’ capital accounts. It presents in summarized form the following
information.
a) Beginning balances
b) Additional investments during the period
c) Capital withdrawal
d) Share in net income or net loss
e) Personal drawing
Illustrative Problem: (Distribution of Profit or Loss)
The capital accounts of Castro and Diaz show the following facts for the fiscal year ended December 31, 2019.
Castro Diaz
Jan. 1 Balance P 260,000 Jan. 1 Balance P 165,000
Mar. 30 Investment 30,000 May 18 Investment 50000
May 10 Investment 70,000 Aug. 24 Withdrawal 20000
July 25 Withdrawal 40,000 Dec. 31 Balance 195,000
Dec. 31 Balance 320,000
The Income Summary account shows a credit balance of P 240,000 on December 31, 2019.
REQUIRED:
A. Prepare a schedule of profit distribution and journal entries to close the Income Summary account under the
following independent agreements on the division of profits and losses:
1. Equally
2. 2:1 ratio
3. Capital Balances
a) Beginning capital balances
b) Ending capital balances
c) Average capital balances
1. simple average
2. peso months method (weighted average) Investments and withdrawals are to be
considered as made at the beginning of the month if made before the middle of the month,
and are to be considered as made at the beginning of the following month if made after the
middle of the month.
4. Interest of 24% on average capitals, salaries to Castro and Diaz of P 72,000 and P 48,000, respectively
and any balance equally. (Investments and withdrawals are to be considered as in 3.c.2.
5. Allowance to Castro of a bonus of 20% of the net profit before bonus, interest of 10% to be allowed on
beginning capitals and any balance in the ratio of 3:2 to Castro and Diaz, respectively.
6. Allowance to Castro of a bonus of 20% of net profit after bonus, interest of 10% to be allowed on
ending capital balances, Annual Salaries to Castro and Diaz of P 80,000 and P 75,000, respectively
and balance divided in equally.
29
7. Salaries of P 8,000 and P 6,000 a month to Castro and Diaz, respectively, 10% interest on ending capital
balances, 25% bonus to Castro on net profit after deducting salaries, interest and bonus, any balance
divided equally.
8. Salaries of P 11,000 and P 10,000 a month to Castro and Diaz, respectively, 10% interest on ending
capital balances, 25% bonus to Castro on net profit after deducting salaries, interest and bonus, any
balance divided equally.
9. Salaries of P 12,000 and P 10,000 a month to Castro and Diaz, respectively, provided annual earnings
are sufficient to cover salary allowance; if earnings are insufficient, the profit shall be distributed in
the salary ratio; if operations result in a loss, it shall be distributed equally.
B. Assuming the Income Summary account shows a debit balance of P 75,000, prepare journal entries and
schedule of profit and loss distribution under req. A – 2 and 7.
C. Prepare a Statement of Changes in Partners’ Equity for req. A. 7.
Solution:
A.1 – Equally
2019
Dec. 31 Income Summay 240,000
Castro, capital 120,000
Diaz, Capital 120,000
Profit distributed equally
Schedule of profit distribution - equally:

 Equally : P 240,000 / 2 = P 120,000
2. Arbitrary ratio : 2:1 ratio

2019
Profit distributed 2:1 ratio
Schedule of profit distribution based on 2:1 ratio:

Castro = 2/3 x P 240,000 = P 160,000
Diaz = 1/3 x P 240,000 = P 80,000
3. Capital balances:
a) Beginning Capital Balances:

2019
Profit distributed based on beginning
capital balances.
Schedule of profit distribution based on beginning Capital balances:

Castro = 260,000 = 260/425 x 240,000 = 146,824
Diaz = 165,000 = 165/425 x 240,000= 93,176
425,000 240,000
30
b) Ending Capital balances

2019
Profit distributed based on ending capital
balances
Schedule of profit distribution based on ending capital balances:

Castro = 320,000 = 320/515 x 240,000 = 149,126
Diaz = 195,000 = 195/515 x 240,000 = 90,874
515,000 240,000
c. Average Capital
1. Simple Average:
2019
Profit distributed based on simple
average capital balances
Schedule of Profit distribution based on Simple average capital balances:

Castro Diaz Total
Balance, January 1 260,000 165,000
December 31 320,000 195,000
Total 580,000 360,000
Simple average capital (Total/2) 290,000 180,000 470,000

Computation:
Castro= 290,000/470,000 x 240,000 148,085 140,085
Diaz = 180,000/470,000 x 240,000 91,915 91,915
Profit distributed 148,085 91,915 240,000
2. Weighted Average or Peso Months Method

2019
Profit distributed based on simple
average capital balances
Schedule of Profit distribution:

Castro = 312,500 = 312,500/500,000 x 240,000 = 150,000
Diaz = 187,500 = 187,500/500,000 x 240,000 = 90,000
500,000 240,000
31
To compute for weighted average capital balances:
Castro, Capital: Diaz, Capital :

Date Capital Fraction of Average Date Capital Fraction of Average
Balance Year Capital Balance Year Capital
Unchanged Unchanged
1/1 260,000 3/12 65,000 1/1 165,000 5/12 68,750
4/1 290,000 1/12 24,167 6/1 215,000 3/12 53,750
5/1 360,000 3/12 90,000 9/1 195,000 4/12 65,000
8/1 320,000 5/12 133,333 Average capital 187,500
Average capital 312,500
4. Interest of 24% on average capitals, salaries to Castro and Diaz of P 72,000 and P 48,000, respectively
and any balance equally. (Investments and withdrawals are to be considered as in 3.c.2.

2019
Profit distribution.

Castro Diaz Total
24% interest on average capital 75,000 45,000 120,000
Salaries 72,000 48,000 120,000
Net income distribution 147,000 93,000 240,000
5. Allowance to Castro of a bonus of 20% of the net profit before bonus, interest of 10% to be allowed on
beginning capitals and any balance in the ratio of 3:2 to Castro and Diaz, respectively.

2019
Schedule of profit distribution

Castro Diaz Total
20% bonus to Castro 48,000 48,000
10% interest on beginning capital 26,000 16,500 42,500
Balance 3:2 89,700 59,800 149,500
163,700 76,300 240,000
 To compute bonus = 240,000 x 20% = 48,000
6. Allowance to Castro of a bonus of 20% of net profit after bonus, interest of 10% to be allowed on ending
capital balances, Annual Salaries to Castro and Diaz of P 80,000 and P 75,000, respectively and balance
divided in equally.
2019
32

Castro Diaz Total
20% bonus of net profit after bonus 40,000 40,000
10% interest on ending cap 32,000 19,500 51,500
Salaries 80,000 75,000 155,000
Balance – equally ( 3,250) ( 3,250) ( 6,500)
148,750 91,250 240,000
To compute bonus: Bonus is 20% of Net income after Bonus:

Net income before bonus 120% 240,000
Less: Bonus 20% 40,000
Net income after bonus 100% 200,000
Net income after bonus = 240,000 x 120% = P 200,000

Bonus = 200,000 x 20% = 40,000
divided equally.

2019
Castro Diaz Total

Salaries 96,000 72,000 168,000
10% interest ending 32,000 19,500 51,500
25% bonus 4,100 4,100
Balance – equally 8,200 8,200 16,400
140,300 99,700 240,000
To compute bonus: Bonus is 25% of Net income after Salaries, interest and Bonus:
Net income before bonus 240,000

Less: Salaries 168,000
Interest 51,500 219,500
Net income after salaries and interest but before bonus 20,500 125%
Less: Bonus 4,100 25%
Net income after bonus 16,400 100%
Net income after salaries and interest but before bonus = 20,500 x 125% = P 16,400
Bonus = 16,400 x 25% = 4,100
 Base is always equal to 100%

33
balances, 25% bonus to Castro on net profit after deducting salaries, interest and bonus, any balance divided
equally.

2019

Castro Diaz Total
Salaries 132,000 120,000 252,000
10% on ending cap. 32,000 19,500 51,500
Balance equally ( 31,750) ( 31,750) ( 63,500)
132,250 107,750 240,000
To compute bonus: Bonus is 20% of Net income after Salaries, interest and Bonus:
Net income before bonus 240,000
Less: Salaries 252,000
Interest 51,500 303,500
Net income after salaries and interest but before bonus (63,500)
 Bonus is not applicable because the base is negative.
9. Salaries of P 12,000 and P 10,000 a month to Castro and Diaz, respectively, provided annual earnings are
sufficient to cover salary allowance; if earnings are insufficient, the profit shall be distributed in the salary
ratio; if operations result in a loss, it shall be distributed equally.

2019
Casto, capital 130,909
Schedule of Profit distribution based on salary ratio:

Castro Diaz Total
Castro: 144,000/264,000 x 240,000 131,908 130,909
Diaz: 120,000/264,000 x 240,000 109,924 109,091
240,000
Net income is not sufficient to cover salary allowances:

Castro salary = 12,000 x 12 (12 months) 144,000
Diaz, salary = 10,000 x 10 (12 months) 120,000
Total Salaries 264,000
 Net income is not sufficient to cover salary allowances, profit is to be distributed based on
salary ratio.
34
B. Assuming the Income Summary account shows a debit balance of P 75,000, prepare journal entries and
schedule of profit and loss distribution under req. A - 2 and 7.
A.2. Arbitrary ratio : 2:1 ratio

2019
Dec. 31 Castro, capital 50,000
Income Summay 75,000
Loss distribution
Schedule of loss distribution based on 2:1 ratio:

Castro = 2/3 x 75,000 = 50,000
Diaz = 1/3 x 75,000 = 25,000
A.7 Salaries of P 8,000 and P 6,000 a month to Castro and Diaz, respectively, 10% interest on ending capital
divided equally.
2019
Dec. 31 Castro, capital 19,250
Income Summay 240,000
Profit distributed 2:1 ratio

Castro Diaz Total
Salaries 96,000 72,000 168,000
10% interest ending 32,000 19,500 51,500
Balance (147,250) (147,250) (294,500)
( 19,250) ( 55,750) (75,000)
C. Prepare a Statement of Changes in Partners’ Equity for req. A. 7.
Castro and Diaz

Statement of Partners’ Equity
For the Year December 31, 2019
Castro Diaz Total

Capital balances, January 1, 2019 260,000 165,000 425,000
Add: additional investment 100,000 50,000 150,000
Total 360,000 215,000 575,000
Less: withdrawal 40,000 20,000 60,000
Capital balance before net income distribution 320,000 195,000 515,000
Net income distributed as follows:
Salaries 96,000 72,000 168,000
10% interest ending 32,000 19,500 51,500
25% bonus 4,100 4,100
Balance – equally 8,200 8,200 16,400
Net share 140,300 99,700 240,000
Capital balances after net income distribution 460,300 294,700 755,000
Less: drawing (amounts assumed) 20,000 20,000 40,000
Capital balances, December 31, 2019 440,300 274,700 715,000
35
General Professional Partnership
 Formed for the exercise of profession and usually renders services based on the partners’ acquired
profession. Examples are CPAs, medical doctors, dentists, engineers and lawyers.
 Partnership net income is exempted from income tax.
 The partners’ distributive shares on the profit of the partnership shall be taxed in their separate and
individual capacities as individual taxpayers.
To illustrate:
Manny and Timmy formed a partnership named MT Partnership with a net income before tax of P 200,000. It
was agreed that the partners should share profits and loss equally.
a) If the partnership is a general partnership
1) To record the tax liability of the partnership ( taxed like a corporation = 30% of taxable income)
2019
Dec. 31 Income tax expense 60,000
Income tax payable 60,000
Income tax payable.
2) to record the disitribution of profit

2019
Dec. 31 Income Summary 140,000
Manny, capital 70,000
Timmy, capital 70,000
Profit distribution
b) If the partnership is a general professional partnership
1) Exempted from income tax liability
2) to record profit distribution:

2019
Dec. 31 Income Summary 200,000
Manny, capital 100,000
Timmy, capital 100,000
Profit distribution
Partnership Working Papers and Financial Statements
 The principle of preparing the worksheet and financial statements of a partnership is the same as that of the
sole proprietorship except that in the partnership there are more than one accounts representing partner’s
capital and partner’s drawing.
36

1. Briefly explain the difference between partnership business accounting and sole proprietorship
business accounting.
2. Enumerate the different methods of profit and loss distribution.
3. Briefly explain the rules on profit distribution when there is:

a. insufficient net income
b. partnership incurred net loss
4. The capital contributions and managerial abilities or skills of the partners differ. How do these
differences are recognize in the profit or loss distribution or agreement?
5. Briefly explain the difference between the two ways of closing the Income Summary account.
37

Name: ________________________ Score__________

Section _______________________ Date:____________
Assignment 1 – Theory:
1. This average method should be used in the absence of an agreement of profit or loss:
a) simple average c) weighted average
b) basic capital average d) not given
2. This allowance for profit distribution is granted only if there is profit?

a) Salary b) interest c) Bonus a) all of the above
3. Interest on the money borrowed by the partner from the partnership shall be treated as:
a) profit sharing device c) operating expense
b) finance cost d) revenue
4. Which of the following is not considered legitimate expense of a partnership?

a) supplies used by partners’ offices
b) depreciation on assets contributed to the partnership by partners.
c) interest paid to partners based on the amount of invested capital
d) interest paid on the money from the partners.
5. As a general rule, in computing the partner’s average capital, the temporary withdrawals are:
a) regarded in the computation of the average capital
b) not considered in the computation of average capital
c) considered in the computation of average capital if the drawing is made in anticipation for accruing
profit.
d) all of the above
6. Which of the following statements about partnership financial statement is true?

a) Details of the distribution of net income are shown in the owners’ equity statement.
b) The distribution of the net income is shown in the statement of financial position.
c) Only the total of all partner capital balances is shown on the statement of financial position.
d) the owners’ equity statement is called partner’ capital statement.
7. This method of profit sharing relative to capital balances is discourages additional investments during the
accounting period.
a) original capital balances c) beginning capital balance of the fiscal year
b) average capital balance of the year d) ending capital balance of the fiscal year
8. Statement 1: A professional partnership would be entitled to tax exemption only if it engage purely in the practice
of profession.
Statement 2: An industrial partner is not exempted from sharing in the loss of the partnership if he is also a
capitalist partner.
a) only statement 1 is correct c) Both statements are correct
b) only statement 2 is correct d) Both statements are incorrect
9. Statement 1: The partnership profit and loss ratio is always the same as the partner’s capital contribution ratio.
Statement 2: In the absence of the loss agreement, losses shall not be divided among the partners.
10. Statement 1: No bonus is allocated to any partner when the partnership incurred loss during the period.
Statement 2: As a rule, partner’s salary and interest on capital are treated as ordinary operating expense.
38

Name: ________________________ Score__________

Section _______________________ Date:____________
Assignment 2 – Answer as directed. Use Yellow pad for additional computations
Problem 1:The capital accounts of BEE and CEE partners on December 31, 2019 are shown below:
BEE, capital CEE, capital

Date Debit Credit Date Debit Credit
1/1/ 48,000 1/1 72,000
4/1 9,000 2/1 6,000
6/1 30,000 5/1 18,000
9/1 12,000 10/1 15,000
Net income for the year is P 124,000.
Determine the share of each partner if:

1. the profit is divided to Bee and Cee on the basis of 1:2 ratio
2. the profit is divided on the basis of beginning capital ratio:
3. the P/l ratio is based on ending capital ratio:
4. the P/l ratio is based on simple average capital:
5. the P/l ratio is based on weighted average capital:
6. Assume Bee gets 25% bonus on income before bonus and the balance equally.
7. If the bonus in item (6) is based on income after bonus:

39
Problem 2:
The partnership of Dino and Dante are engaged in trading. Dino’s original capital was P 40,000 and
Dante was P 600,000. They agree to share profits and losses as follows:
Dino Dante
Annual salaries P 68,000 P 80,000
As interest on original capital 10% 10%
Bonus on net income after salaries, interest but
before deducting bonus 25%
Remaining profits and losses 30% 70%
Prepare the schedule of profit distribution and journal entry to close Income Summary account for the year ended
December 31, 2020, assuming:
1. The Income Summary account shows a credit balance of P 280,000.
2. The Income Summary account shows a credit balance of P 125,000.
3. The Income Summary account shows a debit balance of P 120,000.

40
Problem 3: The following balance sheet for MTJ Partnership is dated September 30, 2020:
Cash P 40,000 Liabilities P 100,000
Other Assets 360,000 M, Capital 74,000
T, Capital 130,000
________ J, Capital __96,000
P 400,000 P 400,000
The partners agreed to distribute the profits as follows:

1. Allow annual salaries to M and T of P 48,000 each.
2. Allow interest of 6% on beginning capital of all partners.
3. Allow bonus to T of 10% of net income after salaries, interest and bonus
4. Remaining: 40% to M, 40% to T and 20% to J.
If the net income of the partnership was P 61,500 during the three-month period ending December 31, 2020,
determine the share of each partner on the net income.
Problem 4: SS and GG are partners in SG Partnership begins its first year of operations on June 1, 2019 with the
following capital balances:
SS, Capital P 1,440,000
GG, Capital 720,000
According to the partnership agreement, all profits and losses will be distributed as follows:
 SS will be allowed an annual salary of P 960,000 will GG will be allowed a monthly salary of P 112,000.
 The partners will be allowed with an interest equal to 15% of the capital balance as of the first day of the
year.
 GG will be allowed a bonus of 12% of the net income after bonus.
 The remainder will be divided equally.
 Each partner is allowed to withdraw up to P 72,000 on the first year and up to P 96,000 the following year
and for the next three years.
Assume that the results of operations in 2019 from the date of formation is P 560,000 net income and P 280,000
net loss the following year. Assume further that each partner withdraws the maximum amount from the business
each period.
Q1. The share of SS in 2019 net income: ______________________________
Q2. The capital balance of SS at the end of 2019 ________________________
Q3. The share of GG in 2020 net loss _________________________________

41
Q4. Which of the following statements is wrong?

a) The capital balance of SS at the end of 2019 is P 1,242,925
b) The share of GG in the net loss in 2019 is a credit to capital account of P 14,575.
c) There is a net increase of P 97,500 in the capital account of SSS from the beginning to end of 2020.
d) The capital balance of GG at the end of year is P 1,038,500.
Problem 5. Ace, Beni Dani and are partners whose capital accounts with the ABC Partnership as of January 1, 2020
and the subsequent changes therein are as follows:
Jan. 1, 2020 Additional Investment Withdrawals
Ace P 300,000 P 210,000 P 90,000

Beni 200,000 120,000 160,000
Dani 150,000 100,000 50,000
Net income for 2020 amounts to P 323,000 and per agreement, this is to be distributed as follows: Salary allowance
of P10,000 per month to Ace and P 7,000 per month to Beni, 10% interest on beginning capital balances, 20%
bonus to Ace on net income before interest but after salaries and bonus, remainder to be divided in the ratio of
2:2:1 between Ace. Beni and Dan, respectively. The temporary withdrawals of Ace, Beni and Dani were P 75,000,
P 50,000 and P 35,000, respectively.
REQ: Prepare the statement of Partners’ Capital.
____________________________
_____________________________
_____________________________
42

Name: ________________________ Score__________

Section _______________________ Date:____________
Assignment 3– Multiple Choice Problems. Answers must be supported with computation. Use yellow pad for
supporting computations.
1. C, D and E share in the partnership’s profit and losses in the ratio of 3:4:5. During the year, the partnership’s
distributive income is P 1,500,000. What is the amount of E’s share from the partnership’s income?
a) P 750,000 b) P 625,000 c) P 500,000 d) P 125,000
2. A and B share in the partnership’s profit in the ratio of 2:1, respectively. A received P 245,000 as his share. How
much di B receive as his share?
a) P 367,000 b) P 245,000 c) P 122,500 d) P 122,000
3 After closing the nominal accounts on December 31, 2015, the Income Summary account shows a debit balance
of P200,000. If partners D, E and F have income ratios of 50%, 30% and 20%, respectively, how much is the
share of F from the net income (loss) of the partnership?
a) 60,000 b) P 40,000 c) P (40,000) d) (P 100,000)
X, Y and Z, a partnership formed on January 1, 2014 had the following initial investment:
X P 100,000
Y 150,000
Z 225,000
The partnership agreement states that the profits and losses are to be shared equally by the partners after
Consideration is made for the following:
 Salaries allowed to partners: P 60,000 for X, P 48,000 for Y and P 36,000 for Z.
 Average partners’ capital balances during the year shall be allowed 10%.
Additional information:
 On June 30, 2014, X invested an additional P 60,000.
 ZZ withdrew P 70,000 from the partnership on September 30, 2014
 Share on the remaining partnership profit was P 5,000 for each partner.
4. Interest on average capital balances of the partners totaled:

a) P 53,750 b) P 48,750 c) P 60,625 d) P 57,625
5. Partnership net profit at December 31, 2014 before salaries, interests and partners’ share on the remainder was:
a) P 207,750 b) P 199,750 c) P 211,625 d) P 222,750
6. Total assets before partnership formation are P 800,000 and MM’s assets are P 450,000. Total liabilities before
partnership formation are P 400,000 and NN’s liabilities are P 175,000. They decided to become partners on
January 1, 2020. They agreed on the following adjustments: NN’s assets are understated by P 15,000 and there
is a note payable that he wants to settle outside of the partnership agreement which is still included in his books
amounting to P 13,000. On the other hand, MM has and accounts receivable with an overvalued allowance for
bad debts for P 12,000.During the year NN withdrew P 17,000 on March 21 and made investment of P 35,000
on August 8, while MM made an investment of P 55,000 on April 8 and made another investment of P 12,500
on November 14. For the year, the partnership had a credit balance in the income summary account of P 450,000.
The tax rate during the year is 32%. They also agreed that the net income or loss should be distributed as
follows: 8% interest on the beginning capital and the remainder will be shared in the ratio 2:3 for MM and NN
respectively. The net income is earned or net loss is incurred evenly during the year.
How much is the ending capital of MM on December 31, 20120:

a) P 504,760 b) P 489,380 c) P 486,120 d) P 463,460
43
7. On January 2, 2020, BB and EE formed a partnership. BB contributed capital of P 175,000 and EE, P 25,000.
They agreed to share profits and losses 80% and 20%, respectively. EE is the general manager and works in
the partnership full time and is given a salary of P 5,000 a month; an interest of 5% of the beginning capital (of
both partners) and a bonus of 15% of net income before the salary, interest and bonus. The profit and loss
statement of the partnership for the year ended December 31, 2020 is as follows:
Net Sales P 875,000
Cost of good sold 700,000
Gross Profit P 175,000
Expenses ( including salary, interest and bonus) 143,000
Net income P 32,000
The amount of bonus to EE amounted to:

a) P 13,304 b) P 16,456 c) P 18,000 d) P 20,700
8. Helen and Fenny are partners operating grocery store. Their partnership agreement requires that profits and
losses be divided as follows:
Helen Fenny
Salaries P 20,000 None
Commission on gross sales None 2%
Interest on average capital balances 8% 8%
Bonus 20% of net income before None
commission and interest but
after salaries and bonus
Remainder 60% 40%
Gross Sales for 2020 were P 1,250,000. Income before deducting amounts for salary, commission, interest and
bonus were P200,000. Average capital balances of Helen and Fenny are P 400,000 and P420,000 respectively.
What are the profit share of Helen and Fenny respectively?
a) P 117,640 and P 82,360 c) P 110,640 and P 89,360
b) P 35,460 and P 23,760 d) P 117,460 and P 82,540
9. Dan, Jerry and Fred form a partnership and agree to maintain average investments of P 2,500,000, P1,250,000
and P 1,250,000, respectively. The partners agree to divide profits and losses as follows:
 Interest of 6% on the excess or deficiency in the capital investments
 Remainder to shared in the ratio of 5:3:2 to Dan, Jerry and Fred, respectively.
Average investments made during the first six months were as follows: Dan, P 3,000,000; Jerry, P1,375,000;
Fred, P 1,000,000. A loss from operations of P 62,500 was incurred for the first six months. How is this loss
distributed among the partners?
Dan Jerry Fred Dan Jerry Fred
a) P 21,875 P 18,375 P 22,250 c) P 31,250 P 18,750 P 12,500
b) 12,500 10,000 48,500 d) 18,375 21,875 22,250
10. On December 31, 2020, the total partnership capital for GDK partnership is P 422,000. Selected information
related to the pre-closing capital balance is as follows:
Gee Dee Kay Total
Balance, January 1 P 140,000 P 100,000 P 160,000 P 400,000
Investment, 2020 20,000 20,000 40,000
Withdrawals, 2020 (30,000) (30,000) (60,000)
Drawings, 2020 (10,000) (10,000) (10,000) (30,000)
P 100,000 P 110,000 P 140,000 P 350,000
How much is the partnership net income during the year?

a) P 72,000 b) P 102,000 c) P 42,000 d) P 22,000
End

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1

Module Part 1 (Midterm coverage) has 5 topics:

Accounting for Special

Partnership Formation and Operation

Corporate Liquidation and Reorganization

UNIT I – PARTNERSHIP Formation and Operation

6. Co-ownership of contributed assets

7. Division of Profits or losses

8. Limited right to dispose of interest in partnership

Partnership distinguished from Corporation:

Advantages and Disadvantages of a Partnership

1. Trading partnership – those engaged in buying and selling of goods.

1. Commercial partnership – one established for business purposes.

The Partnership Contract

1. Name of the partnership;

Failure to register the Article of Co-Partnership with SEC:

1. To share in partnership profits and partnership properties;

Unit I – Partnership Formation and Operation

5. Explain the term mutual agency.

8. Compare a sole proprietorship from partnership form of business as to:

9. Describe the nature of partnership

Unit I – Partnership Formation and Operation

Name: __________________________ Score__________

Assignment 1: Instruction: Answer as directed.

3. Explain the significance of the “Articles of Co-Partnership.

4. Can a nominal partner be at the same time a secret partner? Explain

5. Distinguish partnership from corporation.

Name: ________________________ Score__________

Assignment 2: Modified True or False:

___1. Basically a partnership is perfected by a mere consent of the parties.

UNIT I – PARTNERSHIP FORMATION AND OPERATION

Partner’s Capital Account

Partner’s Drawing Account

2. Temporary withdrawal Dr. Partner’s, drawing xx

3. Permanent withdrawal Dr. Partner’s, capital xx

4. Loan to partner by partnership Dr. Loans receivable - partner xx

5. Loan to partnership by partner Dr. Cash xx

 WAYS OF FORMING A PARTNERSHIP

1. Formation of a partnership for the first time.

1. FORMATION OF A PARTNERSHIP FOR THE FIRST TIME

Illustration 1: (Net Investment Method)

Solution: Partnership Books

The Partnership Statement of Financial Position on October 1, 2020:

Cash P 90,000 Accounts Payable P 5,000

Solution: Partnership Books

Sean, Capital 32,000

To compute for Bonus given to Sean from Timmy:

Contributed capital (CC) Agreed Capital (AC) Difference

Cash P 1,040,000 Notes Payable P 600,000

2. based on Timmy’s contributed capital:

b there is a goodwill of P 80,000 ( difference between TAC and TCC)

Solution: Partnership Books

Cash P 1,040,000 Notes Payable P 600,000

3. CONVERSION OF A SINGLE PROPRIETORSHIP INTO A PARTNERSHIP.

 In the books of the Partnership:

Accounts Payable P 44,000

Conditions agreed upon before the formation of the partnership:

Req. 1: adjust and close the books of Peter (Sole Proprietor)

Peter, Capital 5,000

Merchandise inventory 10,000

Accounts Payable 44,000

 The adjusted capital balance of Peter is:

Name: ________________ Score

Name: ______________ Score

Name: ______________ Score

Name: ______________ Score

MM ________ NN _ LL __________

Name: ______________ Score

Name: ______________ Score