Module. Partnership Accounting

MODULE
IN
PARTNERSHIP ACCOUNTING
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MODULE
1
Week 1-2
INTRODUCTION
This module demonstrates an understanding about the accounting for the equity
of partnership formation, operations, dissolutions, and liquidations. At the end of this
module, the learners will be able to account for the accounting for partnership that must
comply with the relevant provisions of the Civil Code of the Philippines. Learners are also
expected to describe accounting procedures for partnership profits and losses and state
the causes of partnership dissolution and account for the liquidation of a partnership.
INTENDED LEARNING OUTCOMES
1. Differentiate between the accounting for partnerships, sole proprietorships, and

corporations.
2. Account for the initial investments of the partners to the partnership
3. State the items that affect the division of a partnership’s profits or losses among
the partners.
4. Compute for the share of a partner in the partnership’s profit or loss
5. State the causes of partnership dissolution and account for the effects of
partnership dissolution on the partnership equity
6. State the order of priority in the settlement of claims in cases of liquidation and
account for the liquidation of a partnership.
LEARNING CONTENT
DEFINITIONS OF PARTNERSHIP
Partnership has been defined variously, as follows:
1. “By the 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. Two or more persons may also form a partnership for the
exercise of a profession.
2. “An association of two or more persons to carry on as co-owners of a business for
profit.
3. “A joint undertaking to share in the profit and loss.
4. “A joint undertaking to share in the profit and loss.
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5. “A legal relation based upon the express or implied agreement of two or more
competent persons whereby they unite their property, labor or skill in carrying on
some lawful business as principles for their joint profit.
The law provides that the minimum number of owners composing a partnership must be
at least two persons. However, it does not specify the maximum number of persons
composing a partnership because of the words “…two or more persons.”
Characteristics of Partnership
1. Ease of formation
2. Separate legal personality
3. Mutual agency
4. Co-ownership of property
5. Co-ownership of Profits
6. Limited Life
7. Transfer of Ownership
8. Unlimited Liability
Advantages and Disadvantages of a Partnership
A Partnership, as a form of business organization, offers several advantages and
disadvantages as delineated below:
Advantages and Disadvantages of a Partnership
Advantages Disadvantages
Easy Formation Unlimited Liability

Mere agreement or mutual understanding General partners are liable in the partnership’s unpaid debts
by the partners may organize a partnership. to the extent of their personal assets.
Joint Resources Mutual Agency

A partnership provides an opportunity to All partners may be held liable for the actions of one partner.
pool the abilities, experiences, and resources
of two or more persons.
Tax Exemption Consensual

Except for a business co-partnership, a An acceptance of a new partner or a transfer of one partner’s
general professional partnership is interest to another must be agreed to by all the partners.
exempted from income taxes.
Less Government Supervision Limited Life

Generally, partnerships receive less A mere change in the parties of partnership agreement
government regulation than corporations dissolves the partnership.
do.
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The following are the major considerations in the accounting for the equity of a
partnership:
a. Formation – accounting for initial investments to the partnership
b. Operations – division of profits or losses
c. Dissolution – admission of a new partner and withdrawal, retirement or death of a
partner
d. Liquidation – winding up of affairs
• Owner’s equity accounts. Partnership has two or more owners, separate capital
and drawing accounts are established for each partner.
• A partner’s capital account is credited for his initial and additional net investments
(assets contributed less liabilities assumed by the partnership), and a credit
balance of the drawing account at the end of the period. It is debited for his
permanent withdrawals and debit balance of the drawing account at the end of the
period.
• To meet personal living expenses, partners customarily withdraw money on a
periodic basis throughout the year. A partner’s drawing account is debited to
reflect assets temporarily withdrawn by him from the partnership. At the end of
each accounting period, the balances in the drawing accounts are closed to the
related capital accounts
Partner’s capital account

Permanent Withdrawal Original Investment
Debit balance of the drawing account at Additional Investment
the end of the period Debit balance of the drawing account at
the end of the period
Partner’s drawing account

Temporary Withdrawal Share in Profit
Share in Loss
Permanent withdrawals are made with the intention of permanently decreasing the
partner’s capital while temporary withdrawals are regular advances made by the partners
in anticipation of their share in profit.
The use of drawing accounts for temporary withdrawals provides a record of each
partner’s drawings during an accounting period. Hence, drawings in excess of the allowed
amounts as stated in the partnership agreement may be controlled.
If the partners wish to maintain their capital accounts for investments and permanent
withdrawals, then profit or loss should be entered in the drawing account. On the other
hand, if the purpose of the partners is to make profit or loss part of their capital, then the
capital account should be used.
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Loans Receivable from or Payable to Partners
• If a partner withdraws a substantial amount of money with the intention of
repaying it, the debit should be to loans receivable-partner account instead of to
partner’s drawing account. This account should be classified separately from
other receivables of the partnership.
• A partner may lend amounts to the partnership in excess of his intended
permanent investment, these advances should be credited to loans-payable
account and not to partner’s capital account classified among the liabilities but
separate from liabilities from outsiders.
In general, the accounting principles and procedures used in recording partnership

transactions with outside parties are the same as those of sole proprietorships and
corporations. The difference, however, lies in the owners’ equity accounts. In sole
proprietorship, there is one capital account and one withdrawal account because there is
only one owner of the business. On the other hand, the capital accounts and drawing
accounts of a partnership business are more than one depending on the number of
partners in the association. The corporation’s equity section, however, does not contain
the capital and drawings accounts of individual stockholders. Instead, it contains the
capital stock and retained earnings accounts. Accordingly, the partnership assets,
liabilities, revenues and expenses are all recorded in accordance with the GAAP in the
same manner as in the single proprietorships or corporations, except for the accounting
elements under the equity section of the statement of financial position.
LESSON 1: PARTNERSHIP FORMATION
It refers to the perfection of the partnership contract by the partners. When a partnership
is formed, partners commonly observe the following to effect fair and honest business:
1. Execution of partners’ agreement.

2. Valuation of partners’ investments.
3. Adjustments of accounts.
If there is an existing sole proprietor’s business that would be converted as a partnership,

all accounts that are being revalued according to the partnership agreement would
increase or decrease the contributing partner's capital. The adjustments of the accounts
are very important because they reflect the fair and equitable value of the prospective
partner’s contributions to the partnership.
The following rules shall then be observed when capital contribution issues arise:
1. Amount of contribution. The amount of contribution shall be based on the partners’

agreement. In the absence of any agreement, it shall be contributed equally.
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AMOUNT OF P ART NER’ S CONTRIBUT ION
Contribute and record

Yes as per agreement.
Do partners agree upon

their respective
To be contributed
No equally.
2. Valuation of partners' contribution. If cash contribution is made, the face value of

cash is the amount to be recognized.
If noncash contribution is to be made, it shall be recorded at agreed value; otherwise,

it will be recorded at the fair value of the property to effect fair and equitable valuation.
V ALU AT IO N O F P ART NE RS ’ CO NT RIBUT IO N
Is it cash
contribution?
No Yes
To be recorded at ACTUAL
Is it AMOUNT of cash contributed
Property?
No Yes To be recorded at AGREED VALUE, otherwise

at FAIR VALUE
Recorded in MEMORANDUM ENTRY form

Industry
Notes:
1. If there is no agreed value, the investment of capital in a partnership should be measured at the fair value
of all tangible and intangible assets contributed at the time of their transfer to the partnership. An
individual partner’s liabilities that have been assumed by the partnership should also be recorded at fair
market value.
2. The fair value or fair market value represents the estimated amount in which the seller and buyer would
be willing to exchange value in an open market. In other words, fair market value suggests the approximate
cash equivalent of an asset.
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Valuation of contributions of partners
• Accordingly, all assets contributed to (and related liabilities assumed by)
partnership are initially measured at fair value.
• When measuring the contributions of partners, the following additional guidance
from the PFRSs shall be observed:
• Cash and Cash equivalents – Face amount
• Inventory – lower of cost and net realizable value
Adjustment of accounts prior to formation

• In cases when the prospective partners have existing businesses, their respective
books will have to be adjusted to reflect the fair market values of their assets or to
correct misstatements in the accounts.
• The adjustments of the assets and liabilities prior to formation will be similar to
the adjustments we do but, when the adjustment involves a debit or credit to a
nominal account, the capital account would instead be debited or credited. This is
so because the business has ceased to be a going concern.
Owner’s/Partner’s Equity Account

Decrease in asset Increase in asset
Increase in Liability Decrease in Liability
Increase in Contra-asset Decrease in Contra-asset
Opening entries of a partnership upon formation

• A partnership may be formed in any of the following ways:
1. Individuals with no existing business form a partnership.
2. Conversion of a sole proprietorship to a partnership.
a. A sole proprietor and an individual without existing business form a partnership
b. Two or more sole proprietors form a partnership.
3. Admission or retirement of a partner
Individuals with no existing business form a partnership

• The opening entry to recognize the contributions of each partner into the
partnership is simply to debit the assets contributed, and to credit the liabilities
assumed and the capital account of each partner.
Illustration
• On July 1, 2020, Arnold Quinto and Lovilet Ruiz agreed to form a partnership. The
partnership agreement specified that Quinto is to invest cash of P700,000 and Ruiz
is to contribute land with a fair market value of P1,300,000 with P300,000
mortgage to be assumed by the partnership. The entries are as follows:
Cash 700,000
Land 1,300,000
Mortgage Payable 300,000
Arnold Quinto, Capital 700,000
Lovilet Ruiz, Capital 1,000,000
• After formation, the statement of financial position of the partnership is:
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Quinto and Ruiz
Statement of Financial Position
July 1, 2020
Assets
Cash P 700,000
Land 1,300,000
Total Assets 2,000,000
========
Liabilities and Owner’s Equity
Mortgage Payable P300,000
Arnold Quinto, Capital 700,000
Lovilet Ruiz, Capital 1,000,000
Total Liabilities and Owner’s Equity 2,000,000
=========
A sole proprietor and another individual form a partnership

• A sole proprietor may consider forming a partnership with an individual who has
no existing business. Under this type of formation, the assets and the liabilities of
the proprietorship will be transferred to the newly formed partnership at values
agreed upon by all the partners or at their current fair prices.
• The following procedures may be used in recording the formation of the
partnership:
• Books of the sole proprietor:
1. Adjust the assets and liabilities in accordance with agreement. Adjustments are to
be made to his capital account.
2. Close the books.
• Books of the partnership
1. Record investment of the sole proprietor
2. Record investment of the individual without existing business.
Two or more sole proprietor form a partnership

• The following procedures may be used in recording the formation of the
partnership:
• Books of the sole proprietor:
1. Adjust the assets and liabilities in accordance with agreement. Adjustments are to
be made to his capital account.
2. Close the books.
• Books of the partnership
1. Record investment of the sole proprietor
Bonus on initial investments
An accounting problem exists when a partner’s capital account is credited for an amount
greater than the fair value of his contributions. If a partner’s capital balance is credited for
an amount greater than or less than the air value of his net contribution, there is a bonus.
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Under bonus method, any increase (or decrease) in the capital credit of a partner is
deducted from (or added to) the capital credits of the other partners. The total partnership
capital remains equal to the fair value of the partner’s net contributions to the partnership.
Illustration:
A and B agreed to form a partnership. A contributed P40,000 cash while B contributed
equipment with air value of P100,000. However, due to the expertise that A will be
bringing to the partnership, the partners agreed that they should initially have an equal
interest in the partnership capital
Requirement:
Provide the journal entry to record the initial investments of the partners.
Solution:
Actual Contributions Bonus method
A 40,000 (140,000X50%) 70,000
B 100,000 (140,000X50%) 70,000
Total 140,000 140,000
==========================================
Cash 40,000
Equipment 100,000
A Capital 70,000
B Capital 70,000
Variations to bonus method

A partnership agreement may stipulate a certain ratio to be maintained by the partners
representing their specific interest in the equity of the partnership. This stipulation may
give rise to adjustments to the initial contributions of the partners. Any increase or
decrease to the capital credit of a partner is not deducted from his co-partners’ capital
accounts. Instead, the capital adjustment is accounted for as either:
a, cash settlement among the partners; or
b. Additional investment or withdrawal of investment of a partner
Illustration 1: Cash settlement between partners
A, B and C formed a partnership. Their contributions are as follows:

A B C
Cash 40,000 10,000 100,000
Equipment 80,000
Totals 40,000 90,000 100,000
=============================
Additional information:
• The equipment has an unpaid mortgage of P20,000 which the partnership assumes
to repay.
• The partners agreed to equalize their interests. Cash settlements among partners
are to be made outside the partnership.
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Requirements:
a. Which partner(s) shall receive cash payment from the other partner(s)
b. Provide the entry to record the contributions of the partners.
Solution:
Requirement a
A B C Partnership
Cash 40,000 10,000 100,000 150,000
Equipment 80,000 80,000
Mortgage (20,000) (20,000)
payable
Net 40,000 70,000 100,000 210,000
contribution
Equal interests 70,000 70,000 70,000 210,000
(210k/3)
Cash receipt (30,000) - 30,000 -
(payment)
Answer: C shall receive P30,000 from A

Requirement b
Cash 150,000
Equipment 80,000
Mortgage payable 20,000
A Capital 70,000
B Capital 70,000
C Capital 70,000
Illustration 2: Additional investment (withdrawal o investment)

A and B agreed to form a partnership. The partnership agreement stipulates the following:
• initial investment of P140,000
• A 60:40 interest in the equity of the partnership
A contributed P100,000 cash while B contributed P40,000 cash.
Requirement: Which partner shall provide additional investment (or withdraw part of his
investment) in order to bring the partners’ capital credits equal to their respective
interests in the equity of the partnership?
Solution:
A’s required capital balance (140KX60%) 84,000

B’s required capital balance (140KX40%) 56,000
A B Totals
Actual contributions 100,000 40,000 140,000
Required contributions 84,000 56,000 140,000
Additional (Withdrawal) (16,000) 16,000 -
====================================
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Answer: A shall withdraw P16,000 from his initial contribution while B shall make an
additional investment of P16,000.
LESSON 2: PARTNERSHIP OPERATIONS

The accounting for partnership operation is concerned with the following activities:
1. Accounting treatment of profit and loss
2. Proper distribution of profit and loss
3. Preparation of financial statements such as:
a. Income statement (Statement of Recognized Income and Expenses)
b. Statement of Financial Position (formerly Balance Sheet)
c. Partners’ capital statement (Statement of Changes in Partners’ Equity)
Accounting Treatment of Partnership’s Profit and Loss

The determination of proper income or loss is made through the preparation of income
statement with the following basic formula:
Revenues Pxxx
Less: Operating expenses xxx
Net income (loss) Pxxx
In the journal entry, there is net income if the income summary account has a credit
balance. There is net loss if the income summary account has a debit balance.The profit or
loss is subsequently distributed to the partners by closing the income summary account
to the respective partners’ capital accounts.
Rules for developing distribution of profits or losses

• The profits or losses shall be distributed in conformity with the agreement. If only
the share of each partner in the profits has been agreed upon, the share of each in
the losses shall be in the same proportion.
• In the absence of stipulation, the share of each partner in profits or losses shall be
in proportion to what he may have contributed.
• A stipulation which excludes one or more partners from any share in the profits
or losses is void.
• The designation of losses and profits cannot be entrusted to one of the partners
(Art 1798). A stipulation which excludes one or more partners from any share in
the profits or losses is void (Art. 1799)
Summary of legal provision of profit and loss distribution
Profits
a. The profits will be divided according to partner’s agreement.
b. If there is no agreement:
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- As to capitalist partners, the profits shall be divided according to their capital
contributions (according to the ratio of original capital investments or in its
absence, the ratio of capital balances at the beginning of the year
- As to industrial partners (if any), such share as may be just and equitable under the
circumstances, provided, that the industrial partner shall receive such share before
the capitalist partners shall divide the profits.
Losses
a. The losses will be divided according to partner’s agreement
b. If there is no agreement as to distribution of losses but there is an agreement as to
profits, the losses shall be distributed according to the profit sharing ratio.
c. In the absence of agreement:
- As to capitalist partners, the losses shall be divided according to their capital
contributions (according to the ratio of original capital investments or in its
absence, the ratio of capital balances at the beginning of the year).
- As to purely industrial partners (if there’s any), shall not be liable for any losses.
• The industrial partner is not liable for losses because he cannot withdraw the work
or labor already done by him.
Distribution of profits or loss based on partner’s agreement

• In general, profits or losses shall be divided in accordance with the agreement of
the partners. The ratio in which profit or losses from partnership operations are
distributed is recognized as the profit and loss ratio.
• The partners may agree on any of the following scheme in distributing profits or
losses.
1. Equally or in other agreed ratio
2. Based on partner’s capital contributions
a. ratio of original capital investments
b. ratio of capital balances at the beginning of the year.
c. ratio of capital balances at the end of the year
d. ratio of average capital balances
3. By allowing interest on partner’s capital and the balance in agreed ratio
4. By allowing salaries to partners and the balance in agreed ratio
5. By allowing bonus to the managing partner based on profit and the balance in an
agreed ratio.
6. By allowing salaries, interest on partner’s capital, bonus to the managing partner
and the balance in agreed ratio.
Entry on distribution of profit and loss

• Profit
Income Summary xx
Partner’s Drawing xx
• Loss
Partner’s Drawing xx
Income Summary xx
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Based on partner’s capital contribution
• Division of partnership profits in proportion to the capital invested by each partner
is most likely to be found in partnerships in which substantial investments is the
principal ingredient for success.
• Division of profits or losses on the basis of the three capital concepts- original
capital investments, capital balances at the beginning of the year, or capital
balances at the end of the year- may prove inequitable if there is material changes
in the capital accounts during the year.
By allowing interest on capital and the balance in an agreed ratio

• Partnerships may choose to allocate portion of the total profits in the capital ratio
and balance equally or in other agreed ratio after due consideration of the partner’s
other contributions.
• To allow interest on partner’s capital account balances is almost similar to dividing
part of profits in the ratio of partner’s capital balances. If the partners agree to
allow interest on capital as a first step in the division of profit, they should specify
in the interest rate to be used. It should state whether interest is to be computed
on capital balances on specific dates or on average capital balances during the year.
• Interest on partner’s capital is considered as mere technique to share partnership
profit and losses and not as expenses of the partnership.
• On the other hand, the interest on loans from partners is recognized as expense
and a factor in the measurement of profit or loss of the partnership.
• If the partnership agreement provided for interest on capital accounts, this
provision must be honored regardless of whether operations yielded profits or not.
By allowing salaries to partners and the balance in an agreed ratio

• The sharing agreement may provide for variations in compensating the personal
services contributed by partners. Even among partners who devote equal service
time, one partner’s superior experience and knowledge may command a greater
share of the profit. To acknowledge the harder working or more valuable partner,
the profit-sharing plan may provide for salary allowances.
• In the absence of an agreement to govern this situation, salary allowances will be
provided even when operations yielded losses.
• Partners are the partnership’s owners, they are not employees of the business.
When the partners calculate the profit of the partnership, salaries to the partners
are not deducted as expenses in the statement of recognized income and expense.
By allowing bonus to the managing partner based on profit and the balance in an
agreed ratio
• A partnership contract may provide for a special compensation in the form of
bonus to the managing partner when the results of operations of the partnership
are favorable.
• This allowance is given in order to encourage the partner to maximize the profit
potentials of the partnership. Bonus is not being considered in the computation of
profit, rather it is a mere technique to distribute profits.
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Illustration 1: Salaries
A and B’s partnership agreement provides for annual salary allowances of P50,000 for A
and P30,000 for B. The salary allowances are to be withdrawn throughout the period and
are to be debited to the partner’s respective drawing accounts.
Case 1 : The partnership share profits equally and losses on a 60:40 ratio. The partnership
earned profit of P100,000 before salary allowances.
Requirements:
a. Compute for the respective shares of the partners in the profit.
b. Provide the journal entries.
Requirement a
A B Total
Amount being allocated
100,000
Allocation:
1. Salaries 50,000 30,000 80,000
2. Allocation of remaining profit
(20KX 50%); (20K X 50%) 10,000 10,000 20,000
As allocated 60,000 40,000 100,000
Requirement b:
A Drawings 50,000
B Drawings 30,000
Cash 80,000
To record the withdrawal of salary allowances
Income Summary 100,000

A Drawings 60,000
B Drawings 40,000
To record the distribution of profit
Case 2: The partners share profits equally and losses on a 60:40 ratio. The
partnership earned profit o P70,000 before salary allowances.
Requirement: Compute for the respective shares of the partners in the profit.
Solution
A B Total
Amount being allocated
70,000
Allocation:
1. Salaries 50,000 30,000 80,000
2. Allocation of remaining profit
(-10KX 60%); (-10K X 40%) (6,000) (4,000) (10,000)
As allocated 44,000 26,000 70,000
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ADDITIONAL NOTES: PARTNERSHIP OPERATIONS
Profit and Loss Agreement
Scenario Profit Loss Result

1. Both profit and loss agreement are Follow the
given. agreement
2. There is a profit agreement but no loss Follow profit
agreement agreement
3. No profit agreement but there is a loss For profit, use
agreement original capital
ratio
For loss, follow the
agreement
4. Both profit and loss agreement For both, use
original capital
ratio.
Statement of Changes in Partner’s Capital
Beginning Capital P xxx

Add: Additional Investment xxx
Less: Irregular or Permanent Withdrawal (xxx)
Balance Before Net Income P xxx
Add: Share In Net Income xxx
Less: Regular Drawings (xxx)
CAPITAL, END P xxx
LESSON 3: PARTNERSHIP DISSOLUTION
The dissolution of a partnership is the change in the relation of the partners caused
by any partner ceasing to be associated in the carrying on as distinguished from the
winding up of the business of the partnership. On dissolution, the partnership is not
terminated, but continues until the winding up of partnership affairs is completed.
Dissolution of the partnership does not necessarily imply that business operations will
come to an end. Most changes in ownership of a partnership are accomplished without
interruptions of its normal operation. A partnership dissolution should be distinguished
from liquidation. A partnership is said to be liquidated when the business is terminated;
a partnership may be dissolved without being terminated but liquidation is always
preceded by dissolution.
• Winding up is the process of settling the business or partnership affairs after

dissolution.
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• Termination is the point in time when all partnership affairs are wound up or
completed, and is the end of the partnership life.
Causes of dissolution
1. Admission of a partner
2. Withdrawal or retirement of a partner
3. Death of a partner
4. Incorporation of a partner
Admission of a partner
• A new partner can only be admitted into a partnership with the consent of all the
continuing partners based on the principle of delectus personae: No one becomes
a member of a partnership without the consent of all the members. This is because
a partnership is based on mutual trust and confidence of the partners.
• By admission of a new partner, the old partnership has been dissolved and it is
important that a new agreement be formulated to govern the continuing business
operations.
A person may become a partner in an existing partnership be either of the following:

1. Purchase of an interest from one or more of the existing partners.
2. Investment of assets in the partnership by new partner.
• The 2 situations are similar in the sense that the old partnership is legally
dissolved; the capital and profit and loss ratio will be based on new partnership
agreement.
• Dissimilar in the sense that the partnership receives no new resources when a
third party purchases an interest directly from existing partners, but it does
receive new resources when third party becomes a partner by investing in the
partnership.
Liability of Incoming Partner for Existing Obligation

• A person admitted as a partner into an existing partnership is liable for all the
obligations of the partnership incurred before his admission as though he had been
a partner when such obligations were incurred. Such liability is limited to his
capital contribution unless otherwise agreed.
Purchase of an Interest from Existing Partners

• With the consent of all continuing partners, a person may be admitted into an
existing partnership by purchasing an interest directly from one or more of the
existing partners. Payment is made personally to the partner from whom the
interest is obtained resulting to mere transfers among capital accounts.
• This type of admission will only result to a debit to the capital account of the selling
partner for the interest sold and a credit to the capital account of the buying
partner for the interest purchases.
• The amount debited and credited is not affected by the actual price for the equity
interest.
• Total assets, total liabilities and total partner’s equity of the partnership are not
affected upon admission.
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• Purchase may be
a. Payment to old partners is equal to interest purchased.
b. Payment to old partners is less than the interest purchased.
c. Payment to old partners is more than the interest purchased.
Case 1. Payment to old partners is equal to interest purchased

Partners Elizabeth and Reynaldo San Mateo received an offer from Janet Matuguinas to
purchase directly ¼ of each of their interest in the partnership for P150,000. The partners
agreed to admit Janet Matuguinas into the firm.
Elizabeth Salvador, Capital 100,000

Reynaldo San Mateo, Capital 50,000
Janet Matuguinas, Capital 150,000
Case 2. Payment to old partners is less than the interest purchased

Assume that Janet Matuguinas directly purchased 1/3 partner’s interest in the business.
Matuguinas paid P160,000 for 1/3 of each partner’s capital.

Case 3. Payment to old partners is more than the interest purchased

Partners Elizabeth Salvador and Reynaldo San Mateo received an offer from Janet
Matuguinas to purchased directly 30% of each of their interest in the partnership or
P200,000. The partners agreed to admit Janet Matuguinas as a member of the firm.

Investment of Assets in a Partnership

• A person may be admitted into a partnership by investing cash or other assets in
the business.
• The assets are invested into the partnership and not given to the individual
partners.
• The investment will increase the total assets and total partner’s equity.
Definition of terms
• Total contributed capital. It is the sum of the capital balances of the old partners
and the actual investment of the new partner.
• Total agreed capital. It is the total capital of the partnership after considering the
capital credits given to each of the partners. Under bonus method, total agreed
capital is equal to the total contributed capital though the capital credit to each
other may be equal to, greater than or less than his capital contributions.
• Bonus. It is the amount of capital or equity transferred by one partner to another
partner.
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• Capital credit. It is the equity of a partner in the new partnership and is obtained
by multiplying the total agreed capital by the applicable percentage interest of the
partner.
Bonus to old partners

• A partnership may be exceptionally attractive because of superior earnings record
such that the old partners may demand a premium from a new partner. This
premium increases the old partner’s capital interest. This premium is effected
either by allocating a portion of the investment of the new partner to the old
partners. The capital accounts of the old partners are credited for the premium
according to their profit or loss ratio.
Illustration
Rebecca Miranda and Stephanie Calamba are partners with capital balances of P400,000
and P200,000, respectively. They share profits in the ratio of 3:1. The partners agreed to
admit Gualberto Magdaraog Jr., as a member of the firm. The foregoing information will
be the basis of the following cases.
Case 1. Total agreed capital is stated

• Assume that Gualberto Magdaraog Jr. invested P250,000 for ¼ interest in the
business. The partners decided not to revalue the assets of the partnership and that
the total agreed capital is P850,000.
(1)
Cash 250,000
Gualberto Magdaraog Jr, Capital 250,000
(2)
Gualberto Magdaraog Jr., Capital 37,500
Rebecca Miranda, Capital 28,125
Stephanie Calamba, Capital 9,375
Case 2. Total agreed capital is not explicitly stated

• Assume that Gualberto Magdaraog Jr. invested P400,000 in the business. Out of the
total cash invested P100,000 is considered as a bonus to Partners Rebecca Miranda
and Stephanie Calamba.
(1)
Cash 400,000
Gualberto Magdaraog Jr, Capital 400,000
(2)
Bonus to new partner

• A new partner may be admitted into the partnership because of his vast financial
resources, extensive business network, distinctive reputation, unique
management and/or technical skills. The old partners may be willing to give a
premium for all of these exceptional qualifications by allowing a capital credit
20
greater than the prospective partner’s investment just to ensure his association
with the partnership. This bonus will be treated as a bonus from the equities of the
old partners and credited to the new partner.
Case 1. Total agreed capital is stated

Assume that Gualberto Magdaraog Jr., invested P240,000 for a 1/3 interest in the
business. The total agreed capital is P840,000.
(1)
Cash 240,000
(2)
Gualberto Magdaraog JR., Capital 40,000
Case 2. Total agreed capital is not explicitly stated

Assume that Gualberto Magdaraog Jr., invested P300,000 for a 50% interest in the
business. Rebecca Miranda and Stephanie Calamba transferred part of their capital baance
to that of Gualberto Magdaraog Jr. as a bonus.
(1)
Cash 300,000
(2)
Gualberto Magdaraog JR., Capital 150,000
Withdrawal or retirement of a partner

• A partner may withdraw or retire from a partnership for various reasons. Disputes
with other partners, old age, and pursuit for better opportunities among the
possible explanations. The withdrawal of a partner dissolves the old partnership.
This type of dissolution may be accomplished by either of the following ways:
a. By selling his equity interest to one or more of the remaining partners
b. By selling his equity interest to an outsider
c. By selling his equity interest to the partnership
Sale of interest to a partner or an outsider

• When a partner’s interest is sold to another partner or an outsider, the
withdrawing partner is paid from the personal assets of the buyer.
• Accounting for this sale is similar to admission by purchase of interest. The total
assets of the partnership are not affected by the consideration involved.
• The required entry will only be a debit to the seller’s capital account for his capital
balance and a credit to the buyer’s capital account for the same amount.
21
Sale of interest to the partnership
• When a withdrawing partner sells his interest to the partnership, the partner is
paid from the assets of the partnership. He may receive an amount equal to, greater
than or less than the balance of his capital account. The effect of withdrawal is to
reduce the assets and owner’s equity of the partnership.
• The accounting issues to be encountered here will be similar to admission by
investment of assets but in a reverse manner.
• Instead of a new partner joining the partnership by investing assets into the
partnership, an old partner is now leaving the partnership with the business
distributing assets to the withdrawing partner.
Illustration:
Suppose that Remedios Palaganas is retiring in midyear from the partnership of
Selisana, Dela Cruz and Palaganas because of family relocation. Physical distance will
prevent her from coping with the daily rigors of their fashion and beauty consulting
business. After the books have been adjusted for the semi-annual profits but before
revaluation, their capital balances are as follows:
Jessica Selisana, Capital P540,000

Daisy Dela Cruz, Capital 430,000
Remedios Palaganas, Capital 210,000
An independent appraiser revalued their cosmetics inventory to P380,000 and their

land to P1,010,000. the profit and loss ratio of the partners is 1:2:1
The entries to record the revaluation of assets follow:
Jessica Selisana, Capital 15,000

Cosmetics Inventory 60,000
Land 460,000
After revaluation, the capital balances of the partners are shown below:

Cases: Withdrawal of a partner

Case 1: Withdrawal at book value
Assume that Remedios Palaganas, agreed to accept payment equal to her interest.
Cash 310,000
22
Case 2: Withdrawal at more than book value
Assume that Remedios Palaganas demanded a P400,000 settlement for her interest
because she firmly believed that she has contributed so much to the success of the
business.
Cash 400,000
Case 3: Withdrawal at less than book value

Assume that Remedios Palaganas is very eager to retire and is willing to accept
settlement at P280,000.

Cash 280,000
Death of a partner
• The death of a partner dissolves a partnership.
• When the death of a partner does not result to liquidation, the accounting
procedures to be followed are similar in the withdrawal of a partner.
• The deceased partner may be considered to have retired from the partnership and
his heirs or estate can expect to receive the amount of his interest from the
business.
• If payment to the estate of the deceased cannot be made immediately, the balance
in the capital account of the deceased partner should be transferred to a liability
account, payable to the estate
Incorporation of a partnership
• A partnership may decide to incorporate after evaluating the various advantages
of having a corporate form of business organization.
• After necessary adjusting and closing entries, the assets and liabilities of the
partnership are transferred to the corporation in exchange for shares of stock.
• The shares received by the partnership are distributed to the partners based on
their equity interests.
• In the books of the corporation, the receipt of transferred assets ad liabilities will
be recorded along with the issuance of share capital to the incorporators, the
“former” partners.
Illustration
Partners Madelyn Rialubin and Juanita Rabena, who share equally in profits and losses,
have the following items in their partnership’s statement of financial position at Dec. 31,
2020:
23
Cash 120,000 Accounts Payable 172,000
Accts. Rec. 100,000 Accum. Dep. 8,000
Inventory 140,000 Madelyn Rialubin, Cap. 140,000
Equipment 80,000 Juanita Rabena, Cap. 120,000
Total 440,000 Total 440,000
====== =======
They agreed to incorporate their partnership, with the new corporation absorbing the net
assets after the following adjustments: providing for allowances for doubtful accounts of
P10,000; restatement of the inventory to its current fair value of P160,000 ; and additional
recognition of depreciation on the equipment of P3,000.
Partners Madelyn Rialubin and Juanita Rabena, who share equally in profits and losses,
have the following items in their partnership’s statement of financial position at Dec. 31,
2020:
Cash 120,000 Accounts Payable 172,000

Accts. Rec. 100,000 Accum. Dep. 8,000
Inventory 140,000 Madelyn Rialubin, Cap. 140,000
Equipment 80,000 Juanita Rabena, Cap. 120,000
Total 440,000 Total 440,000
====== =======
They agreed to incorporate their partnership, with the new corporation absorbing the net
assets after the following adjustments: providing for allowances for doubtful accounts of
P10,000; restatement of the inventory to its current fair value of P160,000 ; and additional
recognition of depreciation on the equipment of P3,000.
The corporation’s share capital will have a par value of P100 and the partners will be
issued the shares equivalent to their adjusted capital balances. The journal entries to
incorporate the partnership will be:
Cash 120,000
Accounts Receivable 100,000
Inventory 160,000
Equipment 69,000
Allowance for Doubtful Accounts 10,000
Accounts Payable 172,000
Ordinary shares 267,000
LESSON 4: PARTNERSHIP LIQUIDATION
The liquidation of a partnership is the winding up of its business activities

characterized by sale of all non-cash assets, settlement of liabilities and distribution of the
remaining cash to the partners. The conversion of non-cash assets into cash is referred to
as realization. This may either result to gain or loss on realization and shall be divided in
the profit or loss ratio of the partners. A substantial loss on realization may yield for a
partner a capital deficiency, which is the excess of a partner’s share in losses over the
partner’s capital credit balance. Partner’s interest is the sum of his capital and loan
accounts in the partnership.
24
Rules in Settling Accounts After Dissolution
• Civil Code of the Philippines, Art. 1839
• Assets of the Partnership
The asset of the partnership consist of the following:
1. Partnership property
2. Additional contributions of the partners needed for the payment of all liabilities.
Order of Preference
The assets of a general partnership shall be applied in the following order:
1. First, those owing to outside creditors,
2. Second, those owing to inside creditors in the form of loans or advances for
business expenses by the partners,
3. Third, those owing to the partners with respect to their capital contributions,
4. Lastly, those owing to the partners with respect to their share of the profits.
• Right of offset- legal right of a partner to apply part or all of his loan account
balance against his capital deficiency resulting from losses in the realization of the
partnership assets.
• Insufficient Partnership Assets
in cases when the partnership assets are insufficient to settle all outside liabilities,
the partners should make additional contributions in the partnership. Any partner
who contributed in excess of his share in this liability has a right to collect the
supposed additional contributions from the other partners.
Preference of Partnership Creditors and Partner’s Separate Creditors

• The creditors of the partnership shall have priority in payments over those of the
partner’s separate creditors as regards the partnership properties. On the other
hand, the creditors of the partners are preferred with respect to the separate or
personal properties of the partners.
Distribution of separate properties of an Insolvent Partner

• If a partner is insolvent, his personal properties shall be distributed as follows:
1. first, those owing to separate creditors,
2. Second, those owing to partnership creditors
3. Lastly, those owing to the partners by way of additional contributions when the
assets of the partnership were insufficient to settle all obligations.
Methods of Partnership Liquidation

1. Lump sum method. Under this method, all non-cash assets are realized and the
related gains or losses distributed and all liabilities are paid before a single final
cash distribution is made to the partners.
2. Installment Method. Under this method, realization of non-cash assets is
accomplished over an extended period of time. When cash is available, creditors
may be partially or fully paid. Any excess may be distributed to the partners in
accordance with a program of safe payments or a cash priority program. This
process persists until all non-cash assets are sold.
25
Entries related to Liquidation
1. Sale of non-cash assets
a. At book value
Cash xx
Non-cash assets xx
b. Above book value
cash xx
Non-cash assets xx
Gain on realization xx
c. Below book value
Cash xx
Loss on realization xx
Non-cash assets xx
2. Distribution of gain or loss on realization based on P/L ratio
a. Distribution of gain on realization
Gain on realization xx
Partner’s capital xx
b. Distribution of loss on realization
Loss on realization xx
3. Payment of liabilities
Liabilities xx
Cash xx
4. Exercise of right of offset
Partner’s loan xx
5. Additional investment by deficient partner
Cash xx
6. Deficiency absorbed by solvent partner
Solvent Partner’s Capital xx
Deficient Partner’s Capital xx
7. Distribution of cash to partners
Cash xx
Lump - Sum liquidation

• Under this method, all non-cash assets are realized and all liabilities are settled
before a single final cash distribution is made to partners. The procedures below
may be followed in lump-sum liquidation:
1. Realization of non-cash assets ad distribution of gain or loss on realization among
the partners based on their profit or loss ratio.
2. Payment of liabilities.
3. Elimination of partner’s capital deficiencies using one of the following methods, in
the order of priority:
a. If the deficient partner has a loan balance, then exercise the right of offset
26
b. If the deficient partner is solvent, then he should invest cash to eliminate
his deficiency
c. If the deficient partner is insolvent, then the other partners should absorb
his deficiency.
4. Payments to partners, in the order of priority:
a. Loan accounts
b. Capital accounts
Installment liquidation
• Under this method, realization of non-cash assets is accomplished over an
extended period of time. It is a process of selling some assets, paying the creditors,
paying the remaining cash to the partners, realizing additional assets and making
additional payments to the partners. The liquidation will continue until all non-
cash assets have been realized and all available cash distributed to partnership
creditors and partners.
• Installment payments to partners are appropriate if necessary safeguards are used
to ensure that all partnership creditors are paid in full and that no partner is paid
more than the amount to which he would be entitled after all losses on realization
of assets are known.
• The procedures below may be followed in installment liquidation:
a. Realization of non-cash assets and distribution of gain or loss on realization among
the partners based on their profit or loss ratio.
b. Payment of liquidation expenses and adjustment for unrecorded liabilities; both of
these items will be distributed among the partners in their profit or loss ratio
c. Payment of liabilities to outsiders
d. Distribution of available cash based on a schedule of safe payments which assumes
possible losses due to inability of the partnership to dispose of part or all the
remaining non-cash assets and failure of the partners with capital deficiencies to
make additional contributions. Payments can also be made based on a cash priority
program.
27
Illustration
Joel Feliciano, Evelyn Tria and Nick Marasigan are partners in a public relations firm
and share profits and losses in the ratio of 2:2:1 respectively. They decided to liquidate
their business on Dec. 31, 2020. the following is the condensed statement of financial
position prepared prior to liquidation:
Feliciano, Tria and Marasigan

Statement of Financial Position
Dec. 31, 2020
Assets
Cash P 200,000
Non-cash assets 3,400,000
Total Assets P3,600,000
=============
Liabilities and Capital
Evelyn Tria, Loan P1,120,000
Nick Marasigan, Loan 50,000
Joel Feliciano, Capital 80,000
Evelyn Tria, Capital 600,000
Nick Marasigan, Capital 800,000
Total Liabilities and Capital P3,600,000
=========
Case 1: Loss on Realization fully absorbed by partner’s capital balances
Assume that the non-cash assets are sold at P2,500,000 with a resulting loss on
realization of P900,000 which was distributed in the ratio 4:4:2.
The entries are as follows:
a. Sale of non-cash assets and distribution of loss on realization
Cash 2,500,000
b. Payment of liabilities
Liabilities 1,120,000
Cash 1,120,000
c.Distribution of cash to partners

Evelyn Tria, Loan 50,000
Cash 1,580,000
28
Case 2: Loss on Realization resulting to a capital deficiency with right of offset
realization of P1,550,000 which was distributed in the ratio 4:4:2.
Cash 1,850,000
Cash 1,120,000
. Exercise of right of offset
d. Distribution of cash to partners
Cash 930,000
Case 3: Loss on Realization resulting to a capital deficiency to a personally solvent

partner
realization of P1,700,000 which was distributed in the ratio 4:4:2.
Cash 1,700,000
Cash 1,120,000
Exercise of right of offset

d. Additional investment by deficient partner
Cash 30,000
29
e. Distribution of cash to partners
Cash 810,000
Case 4: Loss on Realization resulting to a capital deficiency to a personally

insolvent partner
realization of P1,700,000 which was distributed in the ratio 4:4:2. Evelyn Tria is
insolvent.
Cash 1,700,000
Cash 1,120,000
c.Exercise of right of offset
d. Deficiency absorbed by solvent partners
Cash 780,000
Case 5: Partnership insolvent but partners personally solvent

Assume that the non-cash assets are sold at P900,000 with a resulting loss on
realization of P2,500,000 which was distributed in the ratio 4:4:2. Evelyn Tria is
insolvent.
The entries are as follows
Cash 900,000
Joel Feliciano, Capital 1,000,000
Evelyn Tria, Capital 1,000,000
30
Cash 1,100,000
Exercise of right of offset
c. Additional investment by partners
Cash 400,000
c. Full payment of liabilities
Liabilities 20,000
Cash 20,000
Cash 380,000
Case 6: Partnership Insolvent and partners personally insolvent

Loida Cardenas, Aristotle Go and Renante Balocating are partners who are sharing
profits or losses in the ratio of 4:3:2, respectively. They decided to liquidate theier
business on Nov. 1, 2015 because of constant credit problems. The partnership and
partners Go and Balocating are currently unable to meet their financial obligations. The
partnership’s condensed balance sheet and the personal status of the partners are as
follows:
Schedule of safe payments

A partner’s restricted interest represents the portion of a partner’s interest which
should remain available to absorb possible future losses. Restricted interests are provided
for assumed non-sale of remaining non-cash assets and for assumed insolvency of
deficient partner. When all of these restricted interests are satisfied, the resulting
balances will be referred to as free interests which are simply the amounts to be paid to
the partners. This payment should first be applied to loan then to capital in accordance
with the rules on the order of preference in liquidation.
Cash priority program
This is a repetitious procedure can be avoided with the introduction of an alternative
device called the cash priority program. This program which is prepared at the start of the
liquidation process will help the partners project when they can expect to be included in
the cash distribution. If the program is prepared, any amount of cash received from the
realization of partnership assets may be paid immediately to partnership creditors and
later, the partners as specified in the program. Loss absorption balances represent the
maximum loss that the partners can absorb without reducing their equity below zero. The
partner with the biggest capital exposure or loss absorption balance should be prioritized
in a cash distribution. A partner with a relatively low loss absorption balance can be wiped
out by a material realization loss
31
MODULE SUMMARY
PARTNERSHIP FORMATION
• The major considerations in the accounting for the equity of partnerships are: (a)
Formation; (b) operations; (c) Dissolutions; and (d) liquidation.
• The contributions of the partners to the partnership are initially measured at fair
value.
• A partner’s capital balance is normally credited for the fair value of his net
contribution to the partnership. If a partner’s capital balance is credited for an
amount greater than or less than the fair value of his net contribution, there is
bonus.
• Under the bonus method, any increase (or decrease) in the capital credit of a
partner is deducted from (or added to) the capital credits of the other partners.
The total partnership capital remains equal to the fair value of the partner’s net
contributions to the partnership.
PARTNERSHIP OPERATIONS
• The partners share in the partnership profits and losses based on their agreement
• If only the share in profits has been agreed upon, the share in losses shall be in the
same proportion.
• If no profit sharing has been agreed upon, the partners shall share in proportion to
their capital contributions. However, an industrial partner shall not be liable for
losses.
• Profit or loss is allocated as follows:
(1) Salaries, Bonus (allocated only if there is profit), and Interest on Capital, if these
are stipulated; and
(2) Any remaining amount is allocated based on the P/L ratio.
PARTNERSHIP DISSOLUTION
• Dissolution is the change in the relation of the partners caused by any partner
being disassociated from the business. Examples of events that result to
partnership dissolution: (a) Admission of a partner, (b) Withdrawal, retirement or
death of a partner, and (c) Incorporation of a partnership.
❖ Admission of a partner
Purchase of interest Investment in the partnership
The transaction is recorded as a The transaction is recorded in the
transfer within equity: regular manner:
Selling partner’s capital (Dr) Asset invested (Dr)
Incoming Partner’s Capital (Cr) Incoming patner’s capital (Cr)
32
❖ Withdrawal, retirement or death of a partner
Purchase by remaining partners Settlement by the partnership
The transaction is recorded as a The transaction is recorded in the
transfer within equity: regular manner:
Outgoing partner’s capital (Dr) Outgoing partner’s capital (Dr)
Purchasing Partner’s Capital (Cr) Payment made (Cr)
❖ Incorporation of a partnership
❖ When a partnership is incorporated, the corporation acquires the net assets
of the partnership and in return issues shares of stocks to the owners. If the
fair value of the net assets exceeds the aggregate par value of the shares
issued, the excess is credited to share premium.
PARTNERSHIP LIQUIDATION
❖ Liquidation is the termination of business operations or the winding up of

affairs.
❖ The order of priority in the settlement of claims during liquidation is: (1)
Outside creditors; (2) Inside creditors; and (3) Owners' capital balances.
❖ Pro-forma computation for distributions to partners
A (x%) B (x%) Totals

_________________________________________________________________________________________________
Capital balances xx xx xx
Payable (receivable) – partner’s right of offset xx xx xx
Total xx xx xx
Allocation of loss (a) – based on P/L ratio (xx) (xx) (xx)
Amounts received by the partners xx xx xx
(a) The loss is computed as follows:

❖ Net proceeds (net of actual and estimated expenses and cash retentions) less
Carrying amount of all non-cash assets, whether sold or not; or
❖ The balancing figure in the basic accounting equation: A = £ + C
• In case of partnership insolvency, the rule of marshalling of assets is applied. Under

this rule, only the excess of a partner's personal assets over his personal liabilities
can be used to settle partnership debt. Any capital deficiency of an insolvent
partner is absorbed by the solvent partners.
• Under the cash priority program, when all of the priorities are paid, the remaining
cash is distributed to the partners based on the P/L ratio.
33
REFERENCES:
BOOKS:
Millan, Zeus Vernon B. (2020).Accounting for Special Transactions and

Business Combinations , Bandolin Enterprise ,Baguio City.
Ballad,Win Lu,(2019). Partnership and Corporation Accounting ,Domdame Publication

Sampaloc, Manila, Philippines
Dayag, Antonio J. (2019).Advanced Financial Accounting and Reporting

Part I and II , GIC Enterprise, Claro M. Recto Manila, Philippines.
De Jesus, Paul Anthony (2019). Advanced Financial Accounting and

Reporting , GIC Enterprise, Claro M. Recto Manila, Philippines.
Guerrero, Pedro (2019). Advanced Financial Accounting and Reporting ,

GIC Enterprise, Claro M. Recto Manila, Philippines.
Philippine Financial Reporting Standards (PFRSs), Philippines: Financial Reporting

Standards Council (FRSC
WEBSITE REFERENCES:
http://www.iasplus.com/
http://www.picpa.com.ph/
34
MODULE ACTIVTY/ASSESSMENT
ACTIVITY 1:
1. A and B formed a partnership. The following are their contributions:

A B
Cash 200,000 -
Accounts receivable 100,000 -
Inventory 160,000 -
Land 100,000
Building 240,000
Total 460,000 340,000
Note payable 120,000
A, capital 340,000
B, capital 340,000
Total 460,000 340,000
Additional information:
• Included in accounts receivable is an account amounting to ₱40,000 which is
deemed uncollectible.
• The inventory has an estimated selling price of ₱200,000 and estimated costs to
sell of ₱20,000.
• An unpaid mortgage of ₱20,000 on the land is assumed by the partnership.
• The building is under-depreciated by ₱50,000.
• The building also has an unpaid mortgage amounting to ₱30,000, but the mortgage
is not assumed by the partnership. B agreed to settle the mortgage using his
personal funds.
• The note payable is stated at face amount. A proper valuation requires the
recognition of a ₱30,000 discount on note payable.
• A and B shall share in profits and losses 60% and 40%, respectively.
Requirements:
a. Compute for the adjusted balances in the partners’ capital accounts.
b. Assume that a partner’s capital shall be increased accordingly by contributing
additional cash to bring the partners’ capital balances proportionate to their profit
or loss ratio. Which partner should provide additional cash and how much is the
additional cash contribution?
35
ACTIVITY 2:
Use the following information for the next three cases:

The partnership agreement of A, B and C stipulates the following:
• Partners A and C shall receive annual salaries of ₱12,000 and ₱8,000,
respectively.
• A bonus of 10% of profit after salaries but before deduction of bonus shall be
given to Partner A, the managing partner.
• Each partner shall receive 10% interest on average capital investments.
• Any remaining profit or loss shall be shared as follows: 40% to A and 30% each
to B and C.
The average capital investments of partners during the year are as follows:
A ₱100,000
B 60,000
C 120,000
Case #1: The partnership earns profit of ₱100,000.
Requirement: Compute for the respective shares of the partners on the partnership
profit.
Case #2: The partnership earns profit of ₱10,000.
Requirement: Compute for the respective shares of the partners on the partnership
profit.
Case #3: The partnership incurs loss of ₱20,000.
Requirement: Compute for the respective shares of the partners on the partnership loss.
36
ACTIVITY 3:
Use the following information for the next three cases:

Carrots joins the partnership of Apple and Banana. Before the admission of Carrots, the
partnership statement of financial position shows the following information:
Cash 30,000
Accounts receivable 140,000
Inventory 200,000
Equipment 500,000
Total assets 870,000
Accounts payable 80,000

Apple, Capital (60%) 515,000
Banana, Capital (40%) 275,000
Total liabilities and equity 870,000
The following adjustments are determined:

a. The recoverable amount of the accounts receivable is ₱120,000.
b. The inventory has a net realizable value of ₱160,000.
c. The equipment has a fair value of ₱450,000.
d. Unrecorded liabilities amount to ₱20,000.
Case #1: Carrots acquires half of Banana’s interest for ₱800,000.

Requirements:
a. Provide the entry to record the admission of Carrots.
b. Determine the balances of the partners’ capital accounts after the admission of
Carrots.
c. Determine the profit or loss sharing ratio of the partners after the admission of
Carrots.
Case #2: Carrots invests ₱165,000 cash to the partnership in exchange for a 20%
interest. Carrots’ capital account is credited for the fair value of the 20% interest he
acquired.
Requirements:
a. Provide the journal entry to record the admission of Carrots.
b. Compute for the capital balances of the partners following the admission of Carrots.
c. Determine the profit or loss sharing ratio of the partners after the admission of
Carrots.
Case #3: If Carrots is to invest sufficient cash to obtain 2/5 interest in the partnership,
how much should Carrots contribute to the new partnership?
37
ACTIVITY 4:
Use the following information for the next two cases:
A and B decided to liquidate their partnership. The partnership’s records show the
following information:
Cash -
Non-cash assets 80,000
Total assets 80,000
Liabilities 15,000
Loan payable to Partner A 10,000
Loan payable to Partner B 17,000
A, capital (80%) 20,000
B, capital (20%) 18,000
Total liabilities and equity 80,000
Case #1: Lump-sum liquidation

All the non-cash assets are sold for ₱50,000.
Requirement: Determine the amount distributable to A and B in liquidation.
Case #2: Installment liquidation

The non-cash assets are sold in installments. Settlement of partners’ claims shall be
made in installments as cash becomes available. In the first sale, three-fourths (3/4) of
the non-cash assets are sold for ₱45,000.
Requirement: Determine the amount distributable to A and B after the first installment
sale.
38
II. MULTIPLE CHOICE QUESTIONS: THEORY
1. Which of the following is not a characteristic of most partnership?

a. Limited liability
b. Limited life
c. Mutual agency
d. Ease of formation
2. Which of the following is not a characteristic of the proprietary theory that

influences accounting for partnerships?
a. Partners’salariesareviewed asa distributionofincome ratherthanacomponent
ofnetincome.
b. A partnership is not viewed as separate entity, distinct, taxable entity.
c. A partnership is characterized by limited liability.
d. Changes in the ownership structure of a partnership result in the dissolution .
3. Which of the following statements is correct with respect to a limited partnership?

a. A limited partner may be an unsecured creditor of the limited partnership.
b. A general partner may not also be limited partner at the same time.
c. A general partner may be a secured creditor of the limited partnership.
d. A limited partnership can be formed with limited liability for all partners.
4. An advantage of the partnership as form of business organization would be

a. Partners do not pay income taxes on their share in partnership income.
b. A partnership is bound by the act of the partners.
c. A partnership is created by mere agreements of the partners.
d. A partnership may be terminated by the death or withdrawal of a partner.
5. When property other than cash is invested in a partnership, at what amount

should the noncash property be credited to the contributing partner’s capital
account?
a. Fair value at the date of contribution.
b. Contributing partner’s originalcost.
c. Assessed valuation for property tax purposes.
d. Contributing partner’s taxbasis.
6. Partnership capital and drawings accounts are similar to the corporate
a. Paid in capital, retained earnings, and dividends accounts.
b. Retained earnings account.
c. Paid in capital and retained earnings accounts.
d. Preferred and common stock accounts.
39
7. If the partnership agreement does not specify how income is to be allocated,
profits and loss should be allocated
a. Equally.
b. In proportion to the weighted average of capital invested during the period.
c. Equitably so that partners are compensated for the time and effort expended
on behalf of the partnership.
d. In accordance with their capital contribution.
8. Which of the following is not a component of the formula used to distribute

income?
a. Salary allocation to those partners working.
b. After all other allocation, the remainder divided according to the profit and loss
sharing ratio.
c. Interest on the average capital investments.
d. Interest on notes to partners.
9. Which of the following is not considered a legitimate expense of a partnership?

a. Interest paid to partners based on the amount of invested capital.
b. Depreciation on assets contributed to the partnership by partners.
c. Salaries for management hired to run the business.
d. Supplies used in the partners’ offices.
10. The fact that salaries paid to partners are not a component of partnership income
is indicative of
a. A departure from generally accepted accounting principles.
b. Being characteristic of the entity theory.
c. Being characteristic of the proprietary theory.
d. Why partnerships are characterized by unlimited liability
11. Which of the following results in dissolution of a partnership?

a. The contribution of additional assets to the partnership by an existing partner.
b. The receipt of a draw by an existing partner.
c. The winding up of the partnership and the distribution of remaining assets to
the partners.
d. The withdrawal of a partner from a partnership.
40
12. Whenanewpartnerisadmittedtoapartnership,anoriginalpartner’scapitalaccount
maybe adjusted
for
a. A proportionate share of the incoming partner’s investment.
b. His or her share of previously unrecorded intangible assets traceable to the
original partners.
c. His or her share of previously unrecorded intangible assets traceable to the
incoming partner.
d. None of the above.
13. Which of the following best characterizes the bonus method of recording a new
partner’sinvestment in a partnership?
a. Net assets of the previous partnership are not revalued.
b. The new partner’s initial capital balance is equal to hisor her investment.
c. Assuming that recorded assets are properly valued, the book value of the new
partnership is equal to the book value of the previous partnership and the
investment of the new partner.
d. The bonus always results in an increase to the previous partners’ capital
balances.
14. If goodwill is traceable to the previous partners, it is

a. Allocated among the previous partners according to their interest in capital.
b. Allocated among the previous partners only if there are no other assets to be
revalued.
c. Allocated among the previous partners according to their original profit or
loss sharing percentages.
d. Not possible for goodwill to also be traceable to the incoming partner.
15. The goodwill and the bonus methods are two means of adjusting for differences
between the net book value and the fair market value of partnership when new
partners are admitted. Which of the following statements about these methods is
correct?
a. The bonus method does not revalue assets to market values.
b. The bonus method revalues assets to market values.
c. Both methods result in the same balances in the partner capital accounts.
d. Both methods result in the same total value of partner capital account, but the
individual capital account vary.
41
MULTIPLE CHOICE: PROBLEM SOLVING:
PROBLEM 1: On May 1, 2021, the business assets of John and Paul appear below:
John Paul
Cash P 11,000 P 22,354
Accounts receivable 234,536 567,890
Inventories 120,035 260,102
Land 603,000
Building 428,267
Furniture & fixtures 50,345 34,789
Other assets 2,000 3,600
Total P1,020,916 P1,317,002
Accounts payable P178,940 P243,650
Notes payable 200,000 345,000
John, capital 641,976
Paul, capital 728,352
Total P1,020,916 P1,317,002
John and Paul agreed to form a partnership contributing their respective assets and
equities subject to the following adjustments:
1. Accounts receivable of P20,000 in John’s books and P350,000 in Paul’s are
uncollectible.
2. Inventories of P5,500 and P6,700 are worthless in John’s and Paul’s respective
books.
3. Other assets of P2,000 and P3,600 in John’s and Paul’s respectivebooks are to be
writtenoff.
1. The capital accounts of the partners after the

adjustment will be:
a. John’s 614,476
Paul’s 683,052
b. John’s 615,942
Paul’s 717,894
c. John’s 640,876
Paul’s 712,345
d. John’s 613,576
Paul’s 683,350
2. How much assets does the

partnership have? a. 2,337,918
b. 2,237,918
42
c. 2,265,118
d. 2,365,218
3. Peter offered to join for a 20% interest in the firm. How much cash should
be contributed?
a. 330,879
b. 337,487
c. 344,237
d. 324,382
4. After Peter’sadmission, theprofitandlosssharingratiowasagreed to be 40:40:20,

based on capital credits. How much should the cash settlement be between John and
Paul?
a. 33,602
b. 32,930
c. 32,272
d. 34,288
PROBLEM 2: As of December 31, the books of AME Partnership showed capital

balances of A – P40,000; M – P25,000; and E – P5,000. The partners’ profit and loss
ratio were 3:2:1, respectively. The partners decided to dissolve and liquidate. They
sold all the non-cash assets for P37,000 cash. After settlement of all liabilities
amounting to P12,000, they still have P28,000 cash left for distribution.
1. The loss on the realization of the non-cash assets was

a. 40,000
b. 42,000
c. 44,000
d. 45,000
2. Assuming that any partner’s capital debit balance is uncollectible, the share of A
in the P28,000 cash for distribution would be
a. 19,000
b. 18,000
c. 17,800
d. 40,000
PROBLEM 3: The Grey and Redd Partnership was formed on January 2, 2021. Under
the partnership agreement, each partner has an equal initial capital balance.
Partnership net income or loss is allocated 60% to Grey and 40% to Redd. To form the
partnership, Grey originally contributed assets costing P30,000 with a fair value of
P60,000 on January 2, 2021, and Redd contributed P20,000 cash. Drawings by the
parties during 2021 totaled P3,000 by Grey and P9,000 by Redd. The partnership net
income in 2021 was P25,000.
43
1. Under the goodwill method, what is Redd’s initial capital balance in the
partnership? A. 20,000
b. 25,000
c. 40,000
d. 60,000
2. Under the bonus method, what is the amount of bonus?

a. 20,000 bonus to Grey
b. 20,000 bonus to Redd
c. 40,000 bonus to Grey
d. 40,000 bonus to Redd
PROBLEM. 4 : The partnership agreement of Reid and Simm provides that Interest at
10% per year is to be credited to each partner on the basis of weighted-average capital
balances. A summary of Simm’s capital account for the year-ended December 31, 2021, is
as follows:
Balance, January 1 P140,000

Additional investment, July 1 40,000
Withdrawal, August 1 (15,000)
Balance, December 31 165,000
What amount of interest should be credited to Simm’s capital

accountfor2021? A. 15,250
b. 15,375
c. 16,500
d. 17,250
PROBLEM 5: The following condensed balance sheet is presented for the partnership
of Alfa and Beda, who share profits and losses in the ratio of 60:40, respectively:
Cash 45,000
Other assets 625,000
Beda, loan 30,000
700,000
Accounts payable, 120,000

Alfa, capital 348,000
Beda, capital 232,000
700,000
44
1. The assets and liabilities are fairly valued on the balance sheet. Alfa and Beda
decide to admit Capp as a new partner with a 20% interest. No goodwill or
bonus is to be recorded. What amount should Capp contribute in cash or other
assets?
a. 110,000
b. 116,000
c. 140,000
d. 145,000
2. Instead of admitting a new partner, Alfa and Beda decide to liquidate the
partnership. If the other assets are sold for P500,000, what amount of the
available cash should be distributed to Alfa?
a. 255,000 c. 327,000
b. 273,000 d. 348,000
-END OF MODULE-
45

Module. Partnership Accounting

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MODULE

INTENDED LEARNING OUTCOMES

1. Differentiate between the accounting for partnerships, sole proprietorships, and

Advantages and Disadvantages of a Partnership

Easy Formation Unlimited Liability

Joint Resources Mutual Agency

Tax Exemption Consensual

Less Government Supervision Limited Life

Partner’s capital account

Partner’s drawing account

In general, the accounting principles and procedures used in recording partnership

LESSON 1: PARTNERSHIP FORMATION

1. Execution of partners’ agreement.

If there is an existing sole proprietor’s business that would be converted as a partnership,

1. Amount of contribution. The amount of contribution shall be based on the partners’

Contribute and record

Do partners agree upon

2. Valuation of partners' contribution. If cash contribution is made, the face value of

If noncash contribution is to be made, it shall be recorded at agreed value; otherwise,

V ALU AT IO N O F P ART NE RS ’ CO NT RIBUT IO N

No Yes To be recorded at AGREED VALUE, otherwise

Recorded in MEMORANDUM ENTRY form

Adjustment of accounts prior to formation

Owner’s/Partner’s Equity Account

Opening entries of a partnership upon formation

Individuals with no existing business form a partnership

A sole proprietor and another individual form a partnership

Two or more sole proprietor form a partnership

Bonus on initial investments

Variations to bonus method

Illustration 1: Cash settlement between partners

A, B and C formed a partnership. Their contributions are as follows:

Answer: C shall receive P30,000 from A

Illustration 2: Additional investment (withdrawal o investment)

A’s required capital balance (140KX60%) 84,000

LESSON 2: PARTNERSHIP OPERATIONS

Accounting Treatment of Partnership’s Profit and Loss

Rules for developing distribution of profits or losses

Summary of legal provision of profit and loss distribution

Distribution of profits or loss based on partner’s agreement

Entry on distribution of profit and loss

By allowing interest on capital and the balance in an agreed ratio

By allowing salaries to partners and the balance in an agreed ratio

Income Summary 100,000

Profit and Loss Agreement

Scenario Profit Loss Result

Statement of Changes in Partner’s Capital

Beginning Capital P xxx

LESSON 3: PARTNERSHIP DISSOLUTION

• Winding up is the process of settling the business or partnership affairs after

A person may become a partner in an existing partnership be either of the following:

Liability of Incoming Partner for Existing Obligation

Purchase of an Interest from Existing Partners

Case 1. Payment to old partners is equal to interest purchased

Elizabeth Salvador, Capital 100,000

Case 2. Payment to old partners is less than the interest purchased

Elizabeth Salvador, Capital 133,333

Case 3. Payment to old partners is more than the interest purchased

Elizabeth Salvador, Capital 133,333

Investment of Assets in a Partnership

Bonus to old partners

Case 1. Total agreed capital is stated

Case 2. Total agreed capital is not explicitly stated