Problem 1: Jose and Mario begin a partnership on January 1, 2022.

Jose invests P 400,000 as well as

inventory costing P 150,000 but with a current appraisal of only P 120,000. Mario contributes a building
with a P 400,000 book value and a P 480,000 fair market value. The partnership also accepts
responsibility for a P 100,000 notes payable owed in connection with this building.

The partners agree to begin operation with equal capital balances. The articles of Partnership also
provide that at the end of each year profit and losses are allocated as follows:

1. For managing the business, Jose is credited with a bonus

of 10 percent of partnership income after subtracting the
bonus. No bonus is accrued if the partnership records a loss.
2. Both partners are entitled to interest equal to 10 percent of
the average capital balances for the year without regard for
the income or drawing of that year.
3. Any remaining profit or loss is divided 60 percent to Jose
and 40 percent to Mario.
4. Each partner is allowed to withdraw P 8,000 per month in
cash from the business.

On October 1, 2022, Jose invests an additional P 120,000 cash in the business. For 2022 the
partnership report income of P 330,000. All allowed drawings were taken by partners.

Part A: Assuming that the bonus method is used exclusively by this partnership, compute the answer
for questions:
1. The amount of capital credited to Jose upon formation must be: (P 450,000)

Jose 520,000 (70,000) 450,000

Inventory: 120,000 (at NRV)
Cash: 400,000
Mario 380,000 70,000 450,000
Building: 480,000 (at FV)
Less: 100,000 (Notes Payable)
Total 900,000 900,000
Each Partner (÷ 2) = 450,000

Jose Mario
Beginning Balance 450,000 450,000
Jose: 450,000 x 12/12
Mario: 450,000 x 12/12
Additional Investment 30,000
Jose: 120,000 x 3/12
Mario: None
Average Capital 480,000 450,000
Total Asset after Formation 1,000,000
Total Liabilities after Formation 100,000
Total Partners' Capital 900,000

Jose (60%) Mario (40%) Total

Interest on Average Capital 48,000 45,000 93,000
Jose: 10% x 480,000
Mario: 10% x 450,000
Bonus (for Jose only) 30,000 30,000
(see computation below)
Remainder (ratio = 60:40) 124,200 82,800 207,000
Jose: 60% x 207,000
Mario: 40% x 207,000
Total 202,200 127,800 330,000
B = 10% x (NI - B)
: the monthly withdrawals of P 8,000 is not included in the computation of
B = 0.1 x (330,000 - B)
average capital because it is not a permanent withdrawal directly debited to
B = 33,000 - 0.1B
the capital account (return of capital/investment). The monthly withdrawal
B + 0.1B = 33,000
will be recorded in the drawings account.
1.1B = 33,000
1.1 1.1
: if the allowable monthly withdrawal is less than the actual withdrawal, the
B = 30,000 excess of the actual over the allowable will be charged to their respective
capital accounts.

Actual Withdrawal 100,000

Allowable Withdrawal 96,000
Excess (charged to Capital) 4,000

Alternative Computation: (Average Capital)

Jose Mario
Beginning Balance 337,500 450,000
Jose: 450,000 x 9/12
Mario: 450,000 x 12/12
Additional Investment 142,500
Jose: (450,000 + 120,000) x 3/12
Mario: None
Average Capital 480,000 450,000

Ending Capital Computation:

Jose Mario Total
Beginning Capital 450,000 450,000 900,000
Additional Investments 120,000 120,000
Share in Profit 202,200 127,800 330,000
Ending Capital before Withdrawals 772,200 577,800 1,350,000
Withdrawals (96,000) (96,000) (192,000)
Ending Capital after Withdrawals 676,200 481,800 1,158,000
2. The share of Mario on the partnership net income must be: (P 127,800)

Part B: Assuming that asset revaluation method is used exclusivelyby this partnership, determine the
answer for question 3 through 4:
3. The capital credited to Mario upon formation must be: (P 520,000)
- for asset revaluation, if there is no basis given, the partner with
the highest capital contribution will be the basis.
- but if the question goes "How much is the additional cash
investment or withdrawal...", that partner will be the basis for asset
revaluation.

Jose 520,000 520,000

Inventory: 120,000 (at NRV)
Cash: 400,000
Mario 380,000 140,000 520,000
Building: 480,000 (at FV)
Less: 100,000 (Notes Payable)
Total 900,000 140,000 1,040,000

Jose (60%) Mario (40%) Total

Interest on Average Capital 55,000 52,000 107,000
Jose: 10% x 550,000
Mario: 10% x 520,000
Bonus (for Jose only) 30,000 30,000
(see computation below)
Remainder (ratio = 60:40) 115,800 77,200 193,000
Jose: 60% x 207,000
Mario: 40% x 207,000
Total 200,800 129,200 330,000

B = 10% x (NI - B)
B = 0.1 x (330,000 - B)
Jose Mario
B = 33,000 - 0.1B Beginning Balance 520,000 520,000
B + 0.1B = 33,000 Jose: 520,000 x 12/12
1.1B = 33,000 Mario: 520,000 x 12/12
1.1 1.1 Additional Investment 30,000
B = 30,000 Jose: 120,000 x 3/12
Mario: None
Average Capital 550,000 520,000

Ending Capital Computation:

Jose Mario Total
Beginning Capital 520,000 520,000 1,040,000
Additional Investments 120,000 120,000
Share in Profit 200,800 129,200 330,000
Ending Capital before Withdrawals 840,800 649,200 1,490,000
 Withdrawals (96,000) (96,000) (192,000)
Ending Capital after Withdrawals 744,800 553,200 1,298,000

4. The share of Jose on the partnership net income must be: (P 200,800)

Beginning Inventory (contributed) XX

Add: Purchases (usually given) XX
Less: Ending Inventory (usually given) (XX)
Cost of Goods Sold XX

Problem 2: Jose and Jesse formed a partnership on January 1, 2023, to operate a beauty parlor. To
begin the partnership, Jose transferred cash totaling P 116,000 and office equipment with a book value
of P 90,000 and a fair value of P 84,000. Jesse transferred cash of P 56,000, land valued at P 36,000
and a building valued at P 300,000. Jesse bought these at a lump sum price of P 250,000. In addition,
the partnership assumed the mortgage of P 232,000 on the building.

5. The amount of capital to be credited to Jose and Jesse on January 1, 2023 are:

Jose 200,000
Cash: 116,000
Office Equipment: 84,000
Jesse 160,000
Cash: 56,000
Land: 36,000 (at FV)
Building: 300,000 (at FV)
Less: 232,000 (Mortgage)
Total 360,000
(use the fair value of PPE items not the
lump sum price)

The partnership reported a loss of P 16,000 on December 31, after its first year of operation. In the
partnership agreement, the owners had specified the distribution of income and losses by allowing
interest of 10 percent on beginning capital, salaries of P 20,000 to Jose and P 48,000 to Jesse, the
remaining profit amount to be divided in the ratio of 3:2.

6. The share of Jesse on the 2023 net loss is: (P 16,000)

Jose (60%) Mario (40%) Total

Interest on Beginning Capital 20,000 16,000 36,000
Jose: 10% x 200,000
Jesse: 10% x 160,000
Salary (annual) 20,000 48,000 68,000
Jose: 20,000
Jesse: 48,000
Remainder (ratio = 3:2) (72,000) (48,000) (120,000)
 Jose: 60% x (120,000)
Jesse: 40% x (120,000)
Total (32,000) 16,000 (16,000)

Problem 3: C, D, and E Doctors agree to form a patnership and to share profits in the ratio 5:3:2. They
also agreed that E is to be allowed a salary of P 14,000, and that D is to be guaranteed P 10,500 as his
share of the profits. During the first year of operations, income from fees are P 90,000, while expenses
total P 48,000. What amount of net income should be credited to each partners' capital account?

Important Details:
: the partners agreed for Doctor E to be allowed a salary of P
14,000.
: the partners agreed for Doctor D to be guaranteed P 10,500
as his share of the profits.

C (50%) D (30%) E (20%) Total

Salary (for E) 14,000 14,000
E: 14,000
Remainder (5:3:2) 12,500 5,000 17,500
C: 50% x 17,500
E: 20% x 17,500
Total 12,500 10,500 19,000 42,000

Problem 4: L, M, and P are partners with capitals of P 40,000, P 25,000, and P 15,000 respectively. The
partnership agreement provides that each partner shall be allowed 5% interest on their capital, that L
shall be allowed an annual salary of P 8,500, and that M shall be entitled to a minimum of P 14,000 per
annum including amounts allowed as interest on capital and as share on profit. Profit after interest and
salary allowances is to be divided between L, M, and P would be 5:3:2 respectively. What amount must
be earned by the partnership during 2022 before charges for interest or salary if L is to receive an
aggregate of P 20,000 to include interest, salary, and share of profit?

Important Details:
: agreement provides that each partner shall be allowed 5%
interest on their original capital.
: partners agreed for L to be allowed an annual salary of P
8,500
: M shall be entitled to a minimum of P 14,000 share per
annum (including amounts allowed as interest on capital and
as share on profit)
: remaining profit after interest and salaries is to be divided
between the partners in the ratio of 5:3:2.
: L is to receive an aggregate amount of P 20,000 to include
interest, salary, and share of profit.
 L (50%) M (30%) P (20%) Total
Interest (5%) 2,000 1,250 750 4,000
L: 5% (40,000)
M: 5% (25,000)
P: 5% (15,000)
Salary (for L) 8,500 8,500
L: 8,500
Remaining (5:3:2) 9,500 5,700 3,800 19,000
(9,500 ÷ 50%)
L: 50% (19,000)
M: 30% (19,000)
P: 20% (19,000)
Total 20,000 6,950 4,550 31,500
Additional Profit 7,050 7,050
Total 20,000 14,000 4,550 38,550

Problem 5: Kulas and Juan form a partnership on May 1, 2022. Kulas contributes cash of P 500,000;
Juan conveys title to the following properties to the partnership:

Book Value Market Value

Land 150,000 280,000
Building & Equipment 350,000 360,000

According to the Articles of Partnership written by the partners, profits and losses are allocated based
on the following formula:

: Kulas receives a compensation of P 10,000 per month

: All remaining profits and losses are split 60:40 to Juan and
Kulas, respectively
: Annual drawings of P 50,000 can be made by each partner
beginning 2022

Net income of P 110,000 is earned by the business during 2022.

Kulas 500,000
Cash: 500,000 9. The capital credited to Juan at the
Juan 640,000 time of formation must be:
Land: 280,000
Building & Equipment: 360,000 (at FV)
Total 1,140,000

Kulas (40%) Juan (60%) Total

Salary (Kulas) 80,000 80,000
Kulas: 10,000 x 8 months
Remainder (ratio = 40:60) 12,000 18,000 30,000
 Kulas: 40% x (30,000)
Juan: 60% x (30,000)
Total 92,000 18,000 110,000

Problems for Assignment: (Formation and Operation)

Problem A: On January 1, 2020, A, B and C formed ABC Partnership with total agreed capitalization of P
1,000,000. The capital interest ratio of the ABC Partnership is 5:1:4 while the profit or loss ratio is 3:2:5,
respectively for A, B and C.

During 2020, A and B made additional investments of P 200,000 and P 500,000, respectively. At the end
of 2020, B and C made drawings of P 300,000 and P 100,000, respectively. On December 31, 2020, the
capital balance of B is reported at P 200,000.

Partner A (50%) 500,000

Partner B (10%) 100,000
Partner C (40%) 400,000
Total 1,000,000

A (30%) B (20%) C (50%)

Beginning Capital 500,000 100,000 400,000
Additional Investment 200,000 500,000
Withdrawals (300,000) (100,000)
Share in Profit/Loss (150,000) (100,000) (250,000)
Loss (B) = 200K + 300K - 500K - 100K = (100K)
Loss (Total) = (100K) ÷ 20% = (500K)

Total 550,000 200,000 50,000

1. What is the net income or net loss of ABC Partnership for Answer = (P 500,000) loss
the year ended December 31, 2020?

2. What is the capital balance of C on December 31, 2020? Answer = P 50,000

Problem B: Partners A, B, and C already established a business and they want to distribute the profits
or losses that were generated at the end of the year. The capital accounts during the year were as
follows:
Partner A Partner B Partner C
January 1 135,000 180,000 75,000
March 1 - Withdrawal (36,000)
April 1 - Investment 30,000
May 1 - Investment 72,000
June 1 - Investment 27,000
August 1 - Withdrawal (9,000)
October 1 - Withdrawal (54,000)
December 1 - Investment 18,000
The following were agreed on how to distribute the profits and losses:

: Annual salaries were P 600,000 to A, P 540,000 to B, and P

750,000 to C.
: Interest was 15% of the ending capital balance in excess of
P 140,000.
: C receives a bonus of 20% of net income after deducting the
bonus and the salaries.
: Remainder will be distributed equally.
: At the end of the year, there was a credit balance in the
income summary account in the amount of P 1,740,000.

A (1/3) B (1/3) C (1/3) Total

Interest (15%) 1,950 7,350 0 9,300
A: 15% (13K)
B: 15% (49K)
C: 15% (0)
Annual Salary 600,000 540,000 750,000 1,890,000
A: 600,000
B: 540,000
C: 750,000
Bonus (C only) 0 0
C: 0
Remaining (equal) (53,100) (53,100) (53,100) (159,300)
(159.3K ÷ 3)
Total 548,850 494,250 696,900 1,740,000

Partner A Partner B Partner C

January 1 135,000 180,000 75,000
March 1 - Withdrawal (36,000)
April 1 - Investment 30,000
May 1 - Investment 72,000
June 1 - Investment 27,000
August 1 - Withdrawal (9,000)
October 1 - Withdrawal (54,000)
December 1 - Investment 18,000
Ending Capital Balance 153,000 189,000 96,000
In Excess of P 140,000 13,000 49,000 0
B = 20% (NI - S - B)
B = 0.2 (1,740,000 - 1,890,000 - B)
B = -30,000 - 0.2B
B + 0.2B = -30,000
1.2B = -30,000
B=0
 A B C
Beginning Capital 135,000 180,000 75,000
Additional Investment 72,000 45,000 30,000
Withdrawals (54,000) (36,000) (9,000)
Share in Profit/Loss 548,850 494,250 696,900
Total 701,850 683,250 792,900

3. What is the share in the net income of Partner B? Answer = P 494,250

4. What is the capital at the end of the year of Partner C? Answer = P 792,900

Problem C: Partners D and E already established a business and they want to distribute the profits and
losses that were generated at the end of the year. The capital accounts during the year were as
follows:

Partner D Partner E
January 1 50,000 70,000
April 1 - Investment 30,000
April 1 - Withdrawal (20,000)
June 30 - Investment 50,000
June 30 - Withdrawal (temp.) (25,000)
September 1 - Investment 60,000
September 1 - Withdrawal (45,000)
October 1 - Investment 70,000
October 1 - Withdrawal (temp.) (40,000)

Note: The temporary withdrawals are included in the computation of average capital because they are deemed credited in the
capital account. They are treated as excess of the actual withdrawal and allowable withdrawal.

The following were agreed on how to distribute the profits and losses:

: Interest on average capital balances at 8%.

: Annual salaries of P 25,000 for D and P 35,000 for E.
: Bonus to E at 25% of net income after deducting the interest
and salaries, but before deducting the bonus.
: Remainder were shared equally.
: The income summary had a debit balance of P 45,000.

Partner D Months Used Total

January 1 50,000 12 50,000
April 1 - Investment 30,000 9 22,500
June 30 - Withdrawal (temp.) (25,000) 6 (12,500)
September 1 - Withdrawal (45,000) 4 (15,000)
October 1 - Investment 70,000 3 17,500
Average Capital (D) 62,500
 Partner E Months Used Total
January 1 70,000 12 70,000
April 1 - Withdrawal (20,000) 9 (15,000)
June 30 - Investment 50,000 6 25,000
September 1 - Investment 60,000 4 20,000
October 1 - Withdrawal (temp.) (40,000) 3 (10,000)
Average Capital (E) 90,000

D (50%) E (50%) Total

Interest on Average Capital 5,000 7,200 12,200
D: 62,500 x 8%
E: 90,000 x 8%
Annual Salaries 25,000 35,000 60,000
D: 25,000
E: 35,000
Bonus (to E only) 0 0
Remainder (ratio = 50:50) (58,600) (58,600) (117,200)
D: 50% x (117,200)
E: 50% x (117,200)
Total (28,600) (16,400) (45,000)

D E
Beginning Capital 50,000 70,000
Additional Investment 100,000 110,000
Withdrawals (70,000) (60,000)
Share in Profit/Loss (28,600) (16,400)
Total 51,400 103,600

5. What is the share in the net income of Partner D? Answer = (P 28,600) loss

6. What is the capital at the end of the year of Partner E? Answer = P 103,600

Problem D: A and B formed a partnership on January 1, 2020 by contributing capital of P 525,000 and P
75,000 respectively and agreed to share profits and losses 70:30 respectively also.

The following were the profit or loss agreement distribution:

: Monthly salaries for Partner B in the amount of P 10,000.

: Interest of 5% of the partners’ beginning capital.
: Bonus to Partner B, 20% of net income before deducting
salaries, interest and bonus.
: Remainder will be divided using their profit or loss ratio.
: At December 31, 2020, the partnership generated a net
income of P 96,000 after deducting salaries, interest, and
bonus
 A (70%) B (30%) Total
Interest on Beginning Capital 26,250 3,750 30,000
A: 525,000 x 5%
B: 75,000 x 5%
Annual Salaries (B) 120,000 120,000
B: 10,000 x 12
Bonus (to E only) 61,500 61,500
(see computation below)
Remainder (ratio = 70:30) 67,200 28,800 96,000
A: 70% x 96,000
B: 30% x 96,000
Total 93,450 214,050 307,500
B = 20% (NIASIB + I + S + B)
B = 0.2 (96,000 + 30,000 + 120,000 + B)
B = 0.2 (246,000 + B)
B = 49,200 + 0.2B
B - 0.2B = 49,200
0.8B = 49,200
0.8 0.8
B = 61,500

7. What is the share in the net income of Partner A? Answer = P 93,450

8. What is the share in the net income of Partner B? Answer = P 214,050

Problem E: Partners Samson and Delilah have profit and loss agreement with the following provisions:
salaries of P 90,000 and P 135,000 for Samson and Delilah, respectively: a bonus to Samson of 10% of
net income after salaries; and interest of 10% on average capital balances of P 60,000 and P 105,000
for Samson and Delilah, respectively. One-third of any remaining profits will be allocated to Samson
and the balance to Delilah.

9. If the partnership had net income of P 66,000, how much should be allocated to
Answer = P 37,500
Partner Samson, assuming that the provisions of the profit and loss agreement
are ranked by order of priority starting with 1) salaries, 2) interest, 3) bonus and up
to the extent of the ranking only?

Samson (1/3) Delilah (2/3) Total

Annual Salaries 90,000 135,000 225,000
S: 90,000
D: 135,000
Interest on Average Capital 6,000 10,500 16,500
S: 10% x 60,000
D: 10% x 105,000
Bonus (to E only) 0 0
Remainder (ratio = 70:30) (58,500) (117,000) (175,500)
 S: 70% x 96,000
D: 30% x 96,000
Total 37,500 28,500 66,000