EXERCISES

1. On January 1, 2019, David and Enrile decided to form partnership. At the end of the
year, the partnership made a net income of 120,000. The capital accounts of the
partnership show the following transactions:

David, Capital
Debit Credit
January 1 - 40,000
April 1 5,000 -
August 1 - 10,000
October 1 - 5,000
December 1 - 4,000

Enrile, Capital
Debit Credit
January 1 - 25,000
June 1 - 10,000
September 1 3,000 -
October 1 1,000 -
December 1 - 5,000

Assuming an interest of 20% is given on the average capital balance and the balance of
the profits is divided equally, compute for each partner’s share in the net income.

2. The partnership of Gary, Jerome and Paul was formed on January 1, 2019 with original
investments of 80,000, 120,000 and 180,000, respectively. According to the partnership
agreement, profits and losses shall be divided among the partners as follows:

 Salaries of 12,000 for Gary, 10,000 for Jerome, and8,000 for Paul.
 Interest of 8% on the average capital balance during the year.
 The remainder, if any, shall be divided by the partners equally.

Additional information is as follows:

 Net income of the partnership for the year ended December 31, 2019 was
70,000.
 Gary invested an additional 20,000 in the partnership on July 1, 2019.
 Paul withdrew 30,000 from the partnership on October1, 2019.
 Gary, Jerome and Paul made regular drawings against their share of net income
during 2019 of 10,000 each.

Compute for each partner’s capital balance as of December 31, 2019.

3. TM Partnership begins is first operations with the following capital balance: Tan, Capital
200,000 and May, Capital 100,000. According to the partnership agreement, all profits
and losses will be distributed as follows:
 Tan will be allowed a monthly salary of 20,000 and May 10,000.
 The partners will be allowed with interest equal to 10% of the capital balance as
of the first day of the year.
 Tan will be allowed a bonus of 10% of the net profit after bonus.
 The remainder will be divided based on the beginning capital for the first year
and equally for the second year.
 Each partner can withdraw up to 10,000 a year.

Assume that the net loss for the first year of operations is 15,000 with net income of
55,000 for the second year. Assume further that each partner withdraws the maximum
amount from each business period. What is the respective capital balance of each
partner at the end of the second year?

4. 4. NN and OO created a partnership to own and operate a health- food store. The
partnership agreement provided that NN receive a salary of 100,000 and OO a salary of
50,000 to recognize their relative time spent in operating the store. Remaining profits
and losses were divided 60:40. Income for 2018, the first year of operations, of 130,000
was allocated as 88,000 to NN and 42,000 to OO.

On January 1, 2019, the partnership agreement was changed to reflect the fact that OO
could no longer devote any time to the store’s operation. The new agreement allows NN
a salary of 180,000 and the remaining profit or loss be allocated equally. During 2019, an
error was discovered such that the 2018 net income reported was understated by
40,000. The partnership income for 2019 including the 40,000 error was 250,000.

Allocate the 250,000 to the partners.

5. A and B organized a partnership and began operations on March 1, 2019. On that date,
A invested 75,000 and B invested land and building with current fair value of 40,000 and
50,000 respectively. B also invested an additional 30,000 to the partnership on
November 1, 2019 due to some cash flow issues.

The partnership contract provides that an annual salary of 9,000 and 12,000 be provided
to A and B, respectively. Interest on average capital balances of 10% shall also be
provided. Any remainder profit or loss shall be allocated based on a 60:40 ratio.

The annual salary was to be withdrawn by each partner in 12 monthly installments.

During the fiscal year ending February 29, 2020, the partnership had sales amounting to
250,000, cost of goods sold of 140,000 and total operating expenses of 50,000
(excluding the partners’ salaries and interest on average capital balances. Each partner
made monthly cash drawings in accordance with the partnership contract.
 Requirements:
a. Compute for the share of A and B in the net income.
b. Compute for the capital balance of each partner on March1, 2020.
c. Assuming that the annual salary of the partners are to be recognized as
operating expenses and the total operating expenses of 50,000 already includes
the partners’ salaries but excluding interest on their respective average capital
balances, compute for the share of A in the net income.
d. Using the same information in letter c, compute for the capital balance of each
partner on March 1, 2020.

References:

Dayag, Antonio J. (2021), Advanced Financial Accounting: A Comprehensive – Conceptual &

Procedural Approach. Quezon City, Philippines: Good Dreams Publishing

Millan, Zeus Vernon B. (2018), Accounting for Special Transactions (Advanced Accounting 1).
Baguio City, Philippines: Bandolin Enterprises