PROBLEM SET 1 - PARTNERSHIP OPERATION

Prepared by Jephte O. Muñez, CPA, REA, REB, MBA, MSF, DPA Candidate

PROBLEM A Distribution of Profits or Losses Based on Partners’ Agreement

Mandatory Problem to be solved by every group

Lucas, Thomas, and Stephen are partners in an architectural firm. Their capital accounts were as
follows:

Partner Date Debit Credit

Lucas January 1, 2021 300,000.00
Lucas May 1, 2021 60,000.00
Lucas September 1, 2021 80,000.00

Thomas January 1, 2021 400,000.00

Thomas March 1, 2021 90,000.00
Thomas July 1, 2021 50,000.00
Thomas September 1 40,000.00

Stephen January 1 500,000.00

Stephen April 1 70,000.00
Stephen June 1 30,000.00
Stephen August 1 120,000.00

Required:

For each of the following independent profit and loss agreement, prepare the income distribution
schedule:

1. Salaries are provided as follows: Lucas – Php 150,000, Thomas – Php 200,000, and Stephen –
Php 180,000. Special Compensation is given to Lucas amounting to 5 percent of the Net
Income before distribution of salaries. Interest is 10 percent of the partners’ ending capital
balances. Lucas, Thomas, and Stephen will divide the remainder in a 3:3:4 ratio. Net income
as of December 31, 2021 was Php 989,600.

2. Interest is 10 percent of average capital balances. Salaries are provided as follows: Lucas –
Php 240,000, Thomas – Php 210,000, and Stephen – Php 250,000. Thomas receives a special
compensation which is 10 percent of net income after salaries and interest. Any remainder is
divided equally. Net income as of December 31, 2021 was Php 1,180,800.

3. Interest is 10 percent of beginning capital balances. Salaries are provided as follows: Lucas –
Php 210,000, Thomas – Php 180,000, and Stephen – Php 150,000. Stephen receives a special
compensation which is 15 percent of net income after salaries and interest. Any remainder is
divided in the following ratio: 8:7:5 ratio. Net income as of December 31, 2021 was
Php 929,400.

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PROBLEM 1 Rules for the Distribution of Profits or Losses

Louie and Dennis established a general professional partnership by investing Php 2,000,000 and
Php 3,500,000 respectively.

Hereunder are assumptions independent from each other

a. Net loss is Php 830,000 and the partners have no written partnership agreement.

b. Net income is Php 830,000 and the partnership agreement states that the partners share profits
and losses on the basis of their capital contributions.

c. Net loss is Php 935,000 and the partnership agreement states that the partners share profits on
the basis of their capital contributions.

d. Net Income of Php 1,025,000. The first Php 300,000 is shared on the basis of their capital
contributions. The next Php 225,000 will be based on partner’s service to the firm, Louie
service contribution is 30 percent of the time the business is on operation, while Dennis’ service
contribution is 70 percent of the time the business is on operation.

Required:

1. Determine the partners’ share in the net income or net loss for each of the situations above-
stated.

2. Using the information in situation d, prepare the journal entries to close the a) income summary
and b) partners’ drawing accounts with the assumption that during the year, Louie and Dennis
withdrew cash amounting to Php 310,000 and Php 250,000 respectively. Determine the amount
of increase or decrease in each of the partner’s capital balance, and the over-all effect in the
partnership capital or equity.

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PROBLEM 2 Rules for the Distribution of Profits or Losses

Cortez, Santos, and Garcia formed a commercial partnership on May 13, 2021. Cortez invested
Php 1,150,000; Santos, Php 1,180,000 and Garcia, Php 2,700,000. Cortez will be the managing
partner. Santos will work in the store half of his time while Garrido will be a silent partner.

a. Net loss is Php 429,000 and the partners have no written partnership agreement.

b. Net loss is Php 600,000. The articles of partnership states that partners Cortez, Santos, and
Garcia agreed that profits would be shared in the ratio of 40:25:35, respectively. The agreement
did not mention the manner of sharing of losses.

c. Net income is Php 920,000. The first Php 400,000 is shared on the basis of salary allowance
of Php 280,000 to Cortez and Php 120,000 to Santos. The remainder is allocated on the basis of
their capital contributions.

d. Net income is Php 1,800,000. The first Php 750,000 is shared on the basis of their capital
contributions; and the next Php 360,000 is based on service, wherein Cortez to receive
Php 280,000 and Santos to receive Php 80,000. Any remainder is shared equally.

Required:

Determine the partners’ share in the net income or net loss for each of the situations described above.
Correspondingly, provide the journal entries to record the distribution of income or loss.

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PROBLEM 3 Distribution of Profits or Losses on Partners’ Capital Contributions

Hereunder are the activities in the capital accounts of partners Boo and Moo for the year ended
December 31, 2021, follows:

Boo, Capital Moo, Capital

Balances, January 1 Php 4,000,000 Php 8,000,000
Investment, July 1 Php 2,000,000
Withdrawal, October 1 Php 4,000,000

Net Income for the year ended December 31, 2021 amounted to Php 4,800,000.

Required:

Prepare the income (loss) distribution schedule under each of the following independent assumptions:

1. The partnership contract is silent as to sharing of net income or net loss.

2. Net income or net loss is divided on the basis of average capital account balances (before
distribution of share in current year’s net income or net loss)

3. Net income or net loss is divided on the basis of beginning capital account balance.

4. Net income or net loss is divided on the basis of ending capital account balances (before
distribution of share in current year’s net income or net loss).

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PROBLEM 4 Distribution of Profits or Losses Based on Partners’ Agreement

The partnership contract of Elton, Brandon, and Garruda provided for the distribution of net income or
net loss in the following manner:

a. Scenario 1 The Net Income of EBG Partnership for 2021 was Php 900,000 and the average
capital account balances for the year as follows: Elton, Php 1,000,000; Brandon-Php 2,000,000
and Garruda – Php 3,000,000.

1. Interest of 15 percent on the average capital account balances of each partner

2. Residual profits or losses are divided equally.

b. Scenario 2 The Net Income of EBG Partnership for 2021 was Php 750,000 and the ending
capital account balances for the year are as follows: Elton, Php 500,000; Brandon-P1,000,000
and Garruda – Php 1,500,000.

1. The salaries is provided amounting to Php 120,000 for each of the partner
2. Interest of 12 percent on the ending capital balances of each partner
3. Residual profits or losses are divided equally.

Required:

Prepare the income (loss) distribution schedule and the journal entries to record the distribution of
income under each of the scenarios.

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PROBLEM 5 Distribution of Profits or Losses Based on Partners’ Agreement

The partnership contract for Arguelles and Mercado provided for the distribution of net income or net
loss in the following manner:

1. Annual salaries of Php 400,000 to Arguelles and Php 600,000 to Mercado.

2. Interest of 12 percent per annum from the beginning capital account balances.
3. Remaining profits or losses in the ratio of 60 percent to Arguelles and 40 percent to Mercado.

For the year ended December 31, 2021, Arguelles and Mercado Partnership had a net income of
Php 2,000,000. The capital account balances on January 1, 2021 are as follows: Arguelles –
Php 4,000,000 and Mercado – Php 5,000,000. Arguelles invested an additional Php 1,000,000 in the
partnership on September 30, 2021.

Required:

1. Prepare the income distribution schedule and the corresponding journal entry to record the
distribution of profit to the partners.

2. Based on the given in the problem, a variation in the computation of the interest which will be
14 percent per annum from the ending capital account balances of the partners. The annual
salaries to be given to the partners remain the same and the remaining profits or losses ratio will
be distributed based on their average capital balances.

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PROBLEM 6 Distribution of Profits or Losses Based on Partners’ Agreement

Zarina, Lim, and Palma was formed on January 1, 2021. The original cash investment were as follows:
Zarina - Php 960,000, Lim – Php 1,440,000, and Palma – Php 2,160,000.

The Net Income of the partnership for year ended December 31, 2021 was Php 920,800. Zarina
invested an additional Php 250,000 in the partnership on July 1, 2021. Palma made a permanent
withdrawal amounting to Php 360,000 from the partnership on October 1, 2021.

Scenario 1 According to the partnership contract, the partners were to be remunerated as follows:

a. Salaries of Php 144,000 to Zarina, Php 120,000 to Lim, and Php 136,000 to
Palma
b. Interest at 8 percent per annum from the average capital account balances of the
partners during the year.
c. Remainder divided 40 percent to Zarina, 30 percent to Lim, and 30 percent to
Palma.

Scenario 2 According to the partnership contract, the partners were to be remunerated as follows:

a. Salaries of Php 120,000 to Zarina, Php 140,000 to Lim, and Php 130,000 to
Palma
b. Interest at 10 percent per annum from the average capital account balances of the
partners during the year.
c. Remainder divided based on the ratio of their original capital investment.

Required:

Prepare the income distribution schedule and the corresponding journal entry to record the distribution
of profit to the partners for the two scenarios.

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Problem 7 Distribution of Profit or Losses based on Partners’ Agreement

The following statement of financial position for the partnership of Sheila, Lily, and Cathy were taken
from the partnership books on September 30, 2021 when it started its operations:

Assets Liabilities and Partners’ Equity

Cash Php 180,000 Accounts Payable Php 200,000
Other Assets 720,000 Sheila, Capital 198,000
Lily, Capital 260,000
Cathy, Capital 242,000

Total Assets Php 900,000 Total Liabilities and Partners’ Php900,000

Equity

Scenario 1 The partners’ agreed to share profits and losses as follows:

1. Annual salary allowance to Sheila and Lily amounting to Php 60,000 each
2. Interest of 6 percent per quarter based on beginning capital balances.
3. Bonus given to Cathy for special project completed amounting to Php 50,000
4. Remaining profit will be divided on a 40:40:20 ratio to Sheila, Lily and Cathy
respectively.

Net Income was Php 422,000 for the three months period ending December 31, 2021

Scenario 2 The partners’ agreed to share profits and losses as follows:

1. Annual salary allowance to Sheila and Lily amounting to Php 50,000 each
2. Interest of 5 percent per annum based on ending capital balances before net income
distribution.
3. Bonus given to Cathy for special project completed amounting to Php 50,000
4. Remaining profit will be divided on a 35:35:30 ratio to Sheila, Lily and Cathy
respectively.

Net Income was Php 575,000 for the three months period ending December 31, 2021

Required:

Prepare the income distribution schedule and the corresponding journal entries to record the
distribution of the profit.

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Problem 8 Distribution of Profits or Losses Based on Partners’ Agreement

Toys for the Big Boys is a partnership that sells sporting goods. The partnership agreement provides
for 10 percent interest on invested capital; salaries of Php 240,000 to Aldrin and Php 280,000 to
Denver; and Special Compensation or Bonus for Aldrin. The 2021 capital accounts of the partners
were as follows:

Aldrin, Capital Denver, Capital

_______________________ _______________________
8/1 150,000 1/1 500,000 7/1 100,000 1/1 700,000
9/1 225,000

Required:

For each of the following independent situations, prepare the income distribution schedule as well as
the corresponding journal entries:

1. Interest will be based on average capital balances. The bonus is 5 percent of the net income.
The 2021 net income was Php 742,600. Any remainder is divided between Alvin and Denver in
a ratio of 3:2, respectively.

2. Interest is based on ending capital balances after deducting the salaries, which the partners
normally withdraw during the year. The bonus is 8 percent of the net income. The net income
was Php 1,087,000. Any remainder is divided equally.

3. Interest is based on the beginning capital balances. The bonus is 12.5 percent of the net income.
Net income was Php 869,500. Any remainder is divided between Aldrin and Denver in a 4:2
ratio respectively.

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