Partnership Accounting

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PARTNERSHIP FORMATION
DEFINITION
- A partnership is an association of two or more persons who contribute money,
property or industry to a common fund with the intention of dividing the profits
among themselves.
- The term "persons" refers to natural or juridical which may either be an
individual, a corporation and even other partnerships.
Types of Partnerships
1. General Partnerships
− are those in which each partner is personally liable to the partnership's
creditors if partnership assets are not sufficient to pay such creditors.
2. Limited Partnerships
− only one partner needs to be a general partner.
− The remaining partners can be limited, which means that their obligations
to creditors are limited to their capital contributions. Thus, their personal
properties are not put into risk and they play no role in the partnership
management, which is full responsibility of the general partner
Features of General Partnerships
1. Ease of Formation.
− The partners merely put their agreement into writing concerning who
contributes assets or services, their role and functions, and how profits
and losses are allocated.
− This written document is called the partnership agreement. In some cases,
partnership may also be created by oral agreement between two or more
persons or maybe implied by their agreement.
2. Limited Life.
− The possibility that the operations of a partnership could not continue
after the withdrawal or death of a partner was considered a major
pitfall of this form of business organization
3. Assignment of Partner's Interest
− Assignment of partner's interest does not automatically dissolve a
partnership.
− Since a partner's relationship to the other partners is a personal one, an
assignment of a partner's interest does not automatically admit the
assignee into the partnership.
− The assignee has no right to participate in managing the affairs of the
partnership, their right are only limited in the allocation of profit and loss
and the right to receive assignor's interest in the event of dissolution.
4. Unlimited Liability.
− The term "general partnership" as previously discussed refers to a firm in
which all the partners are responsible for liabilities and have all the
authority to act on his behalf.
− Partnership creditors having difficulty in collecting from the
partnership may request payment from any partner who has
personal assets in excess of personal liabilities.
5. Unlimited Liability.
− The term "general partnership" as previously discussed refers to a firm in
which all the partners are responsible for liabilities and have all the
authority to act on his behalf.
− Partnership creditors having difficulty in collecting from the
partnership may request payment from any partner who has
personal assets in excess of personal liabilities.
6. Mutual Agency
− Every partner is an agent and has the authority to act for the partnership
and to enter into contracts on its behalf.
− However, acts beyond the normal scope of business operations such as
obtaining loan by a partner.
− Generally do not bind the partnership unless specific authority has been
given to the partner juridical personality separate and distinct from that of
each partner
7. Separate Legal Personality

− Partnership law provides that partnership has a
8. Sharing Profits and Losses

− Profit and losses are shared among the partners in any manner to which
they agree.
Underlying Equity Theories (Proprietary and Entity Theories)
1. Proprietary theory
− looks at the entity through the eyes of the owner. It views the assets of a
business as belonging to the proprietor.
− The liabilities of a business are debts of the proprietor.
− The profits generated there from are viewed as an increase in the

proprietor's capital.
− Characteristics of this theory can be demonstrated by the following:

a. Salaries to partners are considered as distribution of income
rather as a determinant of net income (treated as expenses in
computing net income).
b. Unlimited liability of general partners extends beyond the
entity to the individual partners.
− Original partnership is dissolved upon the admission or

withdrawal of a partner.
− In practice, proprietorships are treated as separate entities, even though

in theory, they are not. It should be noted, that this type of theory
primarily affected most partnerships.
2. Entity theory
− views the business as a separate and distinct entity possessing its own
existence apart from the individual partners
− Profits earned by the partnership are usually viewed as profit to the

"entity" with each partner entitled to a distributive share of the profit.
− The legal life of firms in this fashion transcends the death or admission of
a partner
Written Partnership Agreements (Articles of Partnership)
- While it is perfectly acceptable to have an oral partnership agreement, it is

preferable to commit such agreement in writing Lapses in memory and future
misunderstandings are usually avoided when agreements are written.
- A written agreement is called the articles of partnership and usually provides
for the following:
1. Name of the partnerships,
2. The name, addresses of the partners, classes of partners, stating
whether the partners are general or limited
3. The effective date of the contract
4. The purpose/s and principal office of the business

5. The capital of the partnerships, stating the contribution of
individual partners, their description and agreed values
6. The rights and duties of each partner
7. The manner of dividing net income or loss among the partners

including salary allowance and interest on capital;
8. The conditions under which the partners withdraw money or other
assets for partnership use.
9. The manner of keeping the book of accounts:
10. The causes of dissolution: and
11. The provision for arbitration in settling disputes Accounting and
Financial Reporting Requirements for Partnership
Most partnerships are small or medium-sized entities, although there are some large
partnership entities. Partnership does not issue stock and thus the information needs of a
partnership are typically different those of corporations that have stockholders. A
partnership has much more flexibility to select specific accounting measurement and
recognition methods and specific financial reporting formats,
ACCOUNTING FOR PARTNERSHIP ACTIVITIES
To maintain partnership accounting records, it might be possible to have one

ledger account for each partner, and the usual practice is to maintain three types of
accounts. These partnership accounts consist of:
1. Capital accounts,
2. Drawings or personal accounts, and
3. Accounts for loans to and from partners
Capital Accounts
- The initial investments by each partner is recorded by debiting the assets

contributed crediting any liabilities assumed by the firm, and crediting the
partner's capital account of the fair value of the net assets (assets minus
liabilities) contributed.
- Partner's equity is increased by additional investments at fair value at the time of
and any share of net income.
- Partner's equity is decreased by withdrawal of cash or other assets and share of
net losses. Withdrawals of large and irregular accounts are ordinarily charged
directly to the withdrawing partner's capital account. The entry for such a
withdrawal is:
A, Capital xx
Cash xx
Following are the items that affect capital account:
CAPITAL ACCOUNTS
At the end of each accounting period, the net income or loss in the partnership's Income
Summary ledger account is transferred to the partners' capital accounts in accordance
with the partnership contract.
On occasion, a partner's capital account may have a debit balance called a deficiency or
sometimes called a deficit, which occurs when the capital accounts debit balance is
greater than the credit balance. A deficiency is usually additional capital contributions.
Drawings Accounts
- provide a record of each partner's drawings during an accounting period. These

drawings may be compared with drawings allowed in the partnership agreement
in order to establish an accounting control over excessive drawings
- Following are the items that affect drawing account:
a. Personal withdrawals in anticipation of profits [temporary
withdrawal]
b. Periodic withdrawal
TWO CLASSES OF WITHDRAWAL
1. Capital withdrawal or permanent withdrawal

− They directly affect the capital account balance because they arise
mostly from withdrawals of investment be it original or additional.
2. Personal withdrawal or temporary withdrawal or drawing accounts.

− These are initially recorded in a drawing account More often these are
drawings from share of profits which will eventually be closed to capital
accounts
Loan Accounts
- Rarely, a partner may receive cash from the partnership with the intention of
repaying this amount. Such a transaction may be debited to the Loans Receivable
from Partners ledger account rather than to the partner's drawing account.
- Unless all partners agree otherwise, these loans should bear interest, and the
interest income is recognized on the partnership's income statement.
- On the other hand, a partner may make a cash payment to the partnership that is
considered a loan rather than an increase in the partner's capital account balance.
This transaction is recorded by a credit to Loans Payable to Partners and normally
is accompanied by the issuance of a promissory note.
- Note that interest is not required to be paid on capital investments unless the
partnership agreement states that capital interest is to be paid. The partnership
records interest on loans as an operating expense.
- Loan receivable from partners are displayed as assets in the partnership balance
sheet and loans payable to partners are displayed as liabilities. The classification
of these ems as current or non-current usually depends on the maturity date
Since these accounts are related-party transaction for which separate footnote
disclosure is required, and it must be reported as a separate balance sheet item
- If sizeable unsecured loan has been made by a partnership to a partner and
settlement appears doubtful, it is proper to offset the receivable against the
partner's capital account balance if this is not done partnership total assets and
total partners' equity may be deceptive
PARTNERSHIP OPERATION
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 Pxx
Less: Operating Expense
xx Net Income (Loss)
Pxx
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

1 The profits or losses shall be distributed in conformity with the agreement.
2 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.
3 In the absence of stipulation, the share of each partner in profits or losses shall
be in proportion to what he may have contributed.
Additional:
● 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
The profits will be divided according to the partner’s agreement.
If there is no agreement:
● 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
The losses will be divided according to the partner’s agreement
If there is no agreement as to the distribution of losses but there is an agreement as to
profits, the losses shall be distributed according to the profit-sharing ratio.
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 beliable 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:
Equally or in other agreed ratio
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
2. By allowing interest on partner’s capital and the balance in agreed
ratio
3. By allowing salaries to partners and the balance in agreed ratio
4. By allowing bonus to the managing partner based on profit and the
balance in an agreed ratio.
5. 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
Income Summary xx
Based on the 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- the 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 are 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 a 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 the partner’s capital is considered as a 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 an
expense and a factor in the measurement of profit or loss ofthe 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. A bonus is not being considered in the computation
of profit, rather it is a mere technique to distribute profits.
Illustrations
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.
CAPITAL ACCOUNTS
− Permanent or capital withdrawal − Initial/Original Investment
− Drawings in excess of a specified amount − Additional investment
− Withdrawal of large and irregular − Share in net income (this may be
accounts credited to drawing accounts)
− Share in net losses (this may be debited
to drawing accounts)
− Closing of a net debit balance in the
partner's drawing account
PARTNERSHIP FORMATION
The partnership is a separate accounting entity (not to be confused with a separate legal
entity), and therefore its assets and liabilities should remain separate and distinct from the
individual partner’s personal assets and liabilities.
All assets contributed to the partnership are recorded by the partnership at their fair market
values. All liabilities assumed by the partnership are recorded at their present values.
Upon formation, the amount credited to each partner’s capital account is the difference
between the fair market value of the assets (including goodwill, if any) contributed and the
present value of the liabilities assumed from the partner. The capital accounts represent the
residual equity of the partnership. The capital account of each partner reflects all of the activity
of an individual partner; contributions, withdrawals, and the distributive share of net income
(loss). In some cases, a drawing account is used as a clearing account for each partner’s
transactions with only the net effect of each period’s activity shown in the capital account.
Example: 1
A and B form a partnership. A contributes cash of P50,000, while B contributed land

with a fair market value of P50,000 and the partnership assumes a liability on the land of
P25,000.
The entry to record the formation of the partnership is
Cash P50,000
Land 50,000
Liabilities P25,000
A, capital 50,000
B, capital 25,000
Example: 2
On June 1 20x9, S and T pooled their assets to form a partnership, with the firm to take over
their business assets and assume the liabilities. Partners capitals are to be based on the assets
transferred after the following adjustments:
a) T’s inventory is to be increased by P3,000.

b) An allowance for bad debts of P1,000 and P1,500 are be set up on the books of S
and T, respectively.
c) Accounts payable of P4,000 is to be recognized in S’s books.
d) An amount of cash must be contributed by any one of the partners in order to
establish equal amount of interest.
The following balances appear on S and T’s individual books on June 1, before adjustments:
Assets Liabilities
S P 75,000 P 5,000
T 113,000 34,500
How much capital must be credited to S?

Answer:
S T Total
Assets of S P75,000 P113,000 P188,000
Less: Liabilities of S ( 5,000) ( 34,500) ( 39,500)
Unadjusted capital of S P70,000 P 78,500 P148,500
Adjustment:
a. Inventory increase 3,000 3,000
b. Allowance for bad debts ( 1,000) ( 1,500) ( 2,500)
c. Accounts payable recognized ( 4,000) ( 4,000)
Capital before cash contribution P65,000 P 80,000 P145,000
Cash contribution by S 15,000 _ 15,000
Equal interest P80,000 P 80,000 P160,000
Example: 3
The balance sheet as of July 31, 20x4, for the business owned by Sexy, shows the following
assets and liabilities:
Cash P 50,000 Furniture & Fixtures

P164,000 Accounts receivable 134,000
Accounts payable 28,800
Merchandise inventory 220,000
It is estimated that 5% of the receivables will prove uncollectible. The cash balance includes a
1,000 shares marketable equity securities recorded at its cost, P4,000. The stock last sold on the
market at P17.50 per share. Merchandise inventory includes obsolete items costing P18,000
that will probably realized only P4,000. Depreciation has never been recorded; however, the
furniture and fixtures are two years old, have an estimated total life of 10 years, and would cost
P240,000 if purchased new. Prepaid items amount to P5,000. Pogi is to be admitted as a partner
upon investing P200,000 cash and P100,000 merchandise. How much capital is to be credited
to Sexy upon formation of partnership?
Answer:
Assets contributed by Sexy:
Cash P 50,000
Accounts receivable 134,000
Furniture and fixtures 164,000 P568,000
Less: Accounts payable ( 28,800)
Unadjusted capital contributed P539,200
Adjustments:
Allowance for bad debts (5% x 134,000) ( 6,700)
Marketable securities (17,500 – 4,000) 13,500
Merchandise inventory (18,000 – 4,000) ( 14,000)
Furniture and fixtures (240,000 x 80% - 164,000) 28,000
Prepaid items 5,000
Adjusted capital of Sexy P565,000
1. On May 1, 2008, Jose and Pedro formed a partnership and agreed to share profits and
losses in the ratio of 3:7, respectively. Jose contributed a computer that cost him
P50,000.Pedro contributed P200,000 cash. The computer was sold for P55,000 on May
1, 2008 immediately after the formation of the partnership. What amount should be
recorded in Jose's capital account on formation of the partnership?
2. Red, White, and Blue form a partnership on May 1, 2008. They agree that Red will
contribute office equipment with a total fair value of P40,000; White will contribute
delivery equipment with a fair value of P80,000; and Blue will contribute cash. If Blue
want a one-third interest in the capital and profits, how much should he contribute?
3. Scooby admits Scrappy as a partner in the business. Balance sheet accounts of Scooby
on September 30, just before the admission of Scrappy show:
Cash P 2,600
Accounts receivable 12,000
Accounts payable P
6,200
Scooby, capital 26,400
It is agreed that for purposes of establishing Scooby’s interest, the following adjustments
shall be made:
a. An allowance for doubtful accounts of 2% is to be established.

b. Merchandise inventory is to be valued at P20,200.
c. Prepaid expenses of P350 and accrued expenses of P400 are to be recognized.
Scrappy is to invest sufficient cash to obtain a 1/3 interest in the partnership. How much is
Scrappy’s investment to the partnership?
4. Minipao and Siopao formed a partnership with each contributing the following assets at
the indicating market value:
Minipao Siopao
Cash P20,000 40,000
Machinery and equipment 30,000
Land 200,000
Building 60,000
Office furniture 30,000
The partners agree to share profits in the ratio of one-fourth to Minipao and
three-fourths to Siopao. Assume that Siopao’s land and building are subject to a
mortgage loan of P120,000 that the partnership will assume, the partner’s capital
accounts should have the following initial balances:
Summary of legal provision of profit and loss distribution
a. The profits will be divided according to the

Profits
partner’s agreement.
b. If there is no agreement:
− 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.
a. The losses will be divided according to the

Losses
partner’s agreement
b. If there is no agreement as to the
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:
6. Equally or in other agreed ratio
7. 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
8. By allowing interest on partner’s capital and the balance in agreed
ratio
9. By allowing salaries to partners and the balance in agreed ratio
10. By allowing bonus to the managing partner based on profit and the
balance in an agreed ratio.
11. 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
• Loss
Income Summary xx
Based on the 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- the 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 are 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 a 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 the partner’s capital is considered as a 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 an
expense and a factor in the measurement of profit or loss ofthe 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 ofoperations of the partnership
are favorable.
● This allowance is given in order to encourage the partner to maximize the profit
potentials of the partnership. A bonus is not beingconsidered in the computation
of profit, rather it is a mere technique to distribute profits.
Illustrations
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 50,000 30,000 80,000
1. Salaries
2. Allocation of remaining profit
(20K × 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 50,000 30,000 80,000
1. Salaries
2. Allocation of remaining profit
(-10K × 60%); (-10K × 40%) (6,000) (4,000) (10,000)
As allocated 44,000 26,000 70,000
ADDITIONAL NOTES: PARTNERSHIP OPERATIONS

Profit and Loss Agreement
SCENARIO PROFIT LOSS RESULT

1. Both profit and loss ? ? Follow the
agreement are given agreement
2. There is a profit agreement ? ? Follow
but no loss agreement profit
agreement
3. No profit agreement but ? ? For profit, use
there is a loss agreement original capital
ratio
4. Both profit and loss ? ? For both, use
agreement 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
PARTNERSHIP DISSOLUTION / CHANGES IN OWNERSHIP
INTEREST
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.
The 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.
● 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.
● 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.
● 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 records 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)
Gualbe
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
(2)
Gualbe
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 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)
Rebecca Miranda, Capital 30,000
Stephanie Calamba, Capital 10,000
rto Magdaraog Jr., Capital 37,500

rto Magdaraog Jr., Capital 100,000
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 balance 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:
− By selling his equity interest to one or more of the
remaining partners
− By selling his equity interest to an outsider
− 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.
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: Jessica Selisana, Capital 640,000
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
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
and 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:
Cash 120,000 Accounts Payable 172,000

Accts. Receivable 100,000 Accumulated Depreciation 8,000
Inventory 140,000 Madelaine Rialubin, Capital 140,000
Equipment 80,000 Juanita Rabena, Capital 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:

Accts. Receivable 100,000 Accumulated Depreciation 8,000
Inventory 140,000 Madelaine Rialubin, Capital 140,000
Equipment 80,000 Juanita Rabena, Capital 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
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.
Rules in Settling Accounts After Dissolution

● Civil Code of the Philippines, Art. 1839
● Assets of the Partnership
The asset of the partnership consists 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
tosettle 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, the 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.
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 or 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

Partner’s capital xx
Loss on realization xx
3. Payment of Liabilities
Liabilities xx
Cash xx
4. Exercise of write of offset
Partner’s Loan xx
Partner’s Capital 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
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.
Illustration
Seungcheol, Woozi and Hoshi are partners in a public relations firm and share
profits and losses in the ratio of 2:2:1respectively. They decided to liquidate
their business on Dec. 31, 2020. the following is the condensed statement of
financial position prepared prior to liquidation:
Non-cash assets 3,400,000

Total Assets 3,600,000
Liabilities and Capital
Woozi, Loan 1,120,000
Hoshi, Loan 50,000
Seungcheol, Capital 80,000
Woozi, Capital 600,000
Hoshi, Capital 800,000
Total Liabilities and Capital 3,600,000
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

Woozi, Loan 50,000
Hoshi, Loan 80,000
Cash 1,580,000
Case 2: Loss on Realization resulting to a capital deficiency with

right of offset
resulting loss on realization of P1,550,000 which was distributed in the
ratio 4:4:2.
on realization
Cash 1,850,000
Cash 1,120,000
c. Exercise of the right of offset
Woozi, Loan 20,000
d. Distribution of cash to partners

Woozi, Loan 30,000
Hoshi, Loan 80,000
Cash 930,000
Case 3: Loss on Realization resulting to a capital deficiency to a

personally solvent partner
Assume that the non-cash assets are sold at P1,700,000 with a resulting
loss on realization of P1,700,000 which was distributed in the ratio4:4:2.
on realization
Cash 1,700,000
Cash 1,120,000
c. Exercise of the right of offset

Woozi, Loan 50,000
d. Additional investment by deficient partner

Cash 30,000
Evelyn Tria, Capital 30,000
e. Distribution of cash to partners
Hoshi, Loan 80,000
Seungcheol, Loan 270,000
Cash 810,000
Case 4: Loss on Realization resulting to a capital deficiency

to a personally insolvent partner
ratio 4:4:2. Woozi is insolvent.

on realization
Cash 1,700,000
Cash 1,120,000
c. Exercise of right of offset
Woozi, Loan 50,000
d. Deficiency absorbed by solvent partners

e. Distribution of cash to partners

Hoshi, Loan 80,000
Seungcheol, Loan 250,000
Cash 780,000
Case 5: Partnership insolvent but partners personally solvent
Assume that the non-cash assets are sold at P900,000 with a
ratio 4:4:2. Woozi is insolvent.
The entries are as follows
on realization
Cash 900,000
Seungcheol, Capital 1,000,000
Woozi, Capital 1,000,000
Cash 1,100,000
c. Exercise of right of offset

Woozi, Loan 50,000
d. Additional investment by partners

Cash 400,000
Seuncheol, Capital 50,000
Woozie, Capital 350,000
e. Full payment of liabilities
Liabilities 20,000
Cash 20,000
f. Distribution of cash to partners
Hoshi, Loan 80,000
Hoshi, Loan 300,000
Cash 380,000
Chapter 1: Partnership Formation
On January 1, 2015, Ernie and Bert both sole proprietors decided to form a partnership to expand both of
their businesses. According to their agreement, they will split profits and losses 75:25 and their initial
capital will also reflect that ratio.
The following are Ernie and Bert’s Statement of Financial Position:
Ernie Proprietor
Statement of Financial
Position
December 31, 2014
ASSETS LIABILITIES AND EQUITY
Cash 50,000 Accounts payable 65,000

Accounts Receivable 100,000 Accrued expenses 55,000
Inventories 75,000 Notes payable 80,000
Equipment 250,000 Ernie, capital 90,000
Accumulated depreciation− Equipment (185,000)
TOTAL ASSETS 290,000 TOTAL LIABILITIES&EQUITY 290,000
Bert Proprietor
Statement of Financial
Position
December 31, 2014
ASSETS LIABILITIES AND EQUITY
Accounts receivable 110,000 Accrued expenses 90,000
Inventories 85,000 Notes Payable 100,000
Equipment 300,000 Bert, Capital 160,000
Accumulated Depreciation− Equipment (100,000)
TOTAL ASSETS 425,000 TOTAL LIABILITIES&EQUITY 425,000
The values reflected in the Statement of Financial Position are already at fair values except fo the following
accounts:
Ernie’s Accounts Receivable is now 20,000 less than what is stated in his Statement of Financial Position.
Both inventories of Ernie and Bert are now 90,000 and 70,000 respectively. Equipment for Bert has an
assessed value of 275,000, appraised value of 250,000 and book value of 200,000. Additional accrued
expenses are to be established in the amount of 10,000 for Bert only while additional accounts payable in
the amount of 5,000 for Ernie. It is also agreed that all liabilities will be assumed by the partnership, except
for the notes payable of Bert which will be personally paid by him.
1. How much is the adjusted capital balance of Bert upon formation?

A. 91,250 C. 285,000
B. 185,000 D. 310,000
Answer: ( C )
2. How much is the capital credit to Ernie upon

formation? A. 80,000 C. 292,000
B. 273,750 D. 255,500
Answer: ( B )
3. How much should Ernie invest as additional cash to be in conformity with their initial
capital agreement?
A. 193,750 C. 175,500
B. 212,000 D. 205,000
Answer: ( A )
Bonnie and Clyde enters into a partnership agreement in which Bonnie is to have 55% interest in the
partnership and 35% in the profits and losses, while Clyde will have 45% interest in the partnership and
65% in the profits and losses. Bonnie contributed the following:
Cost Fair value

Building 235,000 255,000
Equipment 168,000 156,000
Land 500,000 525,000
The building and the equipment has a mortgage of 50,000 and 35,000 respectively. Clyde is to
contribute 150,000 cash and equipment. The partners agreed that only the building mortgage will be
assumed by the partnership.
1. How much is the fair market value of the equipment which Clyde contributed?
A. 615,818 C. 546,273
B. 989,143 D. 574,909
Answer: ( D )
2. How much is the total asset of the partnership upon formation?

A. 1,892,143 market.
B. 1,701,818 b. Inventory at the lower of weighted−
Answer: ( C ) average cost or market.
c. Equipment at each proprietor’s carrying
Theories (letter of answer is underlined) amount.
d. Equipment at fair value.
1 The partnership agreement is an express contract
among the partners (the owners of the business). Such
an agreement generally does not include
a. A limitation on a partner’s liability to
creditors.
b. The rights and duties of the partners.
c. The allocation of income between the
partners.
d. The rights and duties of the partners in the
event of partnership dissolution.
2. A partnership records a partner’s investment of
assets in the business at
a. The market value of the assets invested.
b. A special value set by the partners.
c. The partner’s book value of the assets
invested.
d. Any of the above, depending upon the
partnership agreement.
?3. 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 recognition.
b. Contributing partner’s original cost.
c. Assessed valuation for property tax
purposes.
d. Contributing partner’s tax basis.
?4. 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.
c. Assessed valuation for property tax
purposes.
d. Contributing partner’s tax basis.
5. Four individuals who were previously sole
proprietors form a partnership. Each partner
contributes inventory and equipment for use by the
partnership. What basis should the partnership use to
record the contributed assets?
a. Inventory at the lower of FIFO cost or
C. 1,660,909 a. P5, 000.00
D. 1,632,273 b. P10, 000.00
c. P3, 000.00
d. P30, 000.00
1. A contract where two or more persons Answer: (c)
bind themselves to contribute money,
property, or industry to a common fund
with the intention of dividing the profits
among themselves.
a. Voluntary Association
b. Corporation
c. Partnership
d. Sole Proprietorship
Answer: (c)
2. A partnership formed for the exercise of a
profession which is duly registered is an
example of:
a. Universal partnership of profits
b. Universal partnership of all present property
c. Particular partnership
d. Partnership by estoppel
Answer: (c)
3. One of the following is not a
characteristic of contract of
partnership.
a. Real, in that the partners must deliver their
contributions in order for the partnership
contract to be perfected
b. Principal, because it can stand by itself
c. Preparatory, because it is a means by which
other contracts will be entered into
d. Onerous, because the parties contribute
money, property, or industry to the
common fund
Answer: (a
4. One of the following is not a requisite of a
contract of partnership. Which is it?
a. There must be a valid contract
b. There must be a mutual contribution of
money, property, or industry to a
common fund
c. It is established for the common benefit of
the partners which is to obtain profits and
divide the same among themselves
d. The articles are kept secret among members
Answer: (d)
5. The minimum capital in money or property
except when immovable property or real
rights thereto are contributed, that will
require the contract of partnership to be in a
public instrument and be registered with the
Securities and Exchange Commission
(SEC).
6. Roberts and Smith drafted a partnership agreement that lists the following assets contributed at the
partnership’s formation:
Contributed by
Roberts Smith
Cash P 20,000 P 30,000
Inventory 15,000
Building 40,000
Furniture & Equipment 15,000
The building is subject to a mortgage of P 10,000, which the partnership has assumed. The
partnership agreement also specifies that profits and losses are to be distributed evenly. What
amounts should be recorded as capital for Roberts and Smith at the formation of the
partnership?
Roberts Smith
a. 35,000 85,000
b. 35,000 75,000
c. 55,000 55,000
d. 60,000 60,000
Suggested Answer: (b) 35,000 & 75,000
Roberts: 20,000 + 15,000 = P35, 000 Smith: 30,000 + 15,000 + 40,000 – 10,000 =
P75,000. The partner’s capital credit is based upon the net assets contributed by the particular
partner, thus the liabilities assumed reduced the fair market value of the building invested.
7. The Grey and Redd Partnership was formed on January 2, 2010. 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, 2010, and Redd contributed
P20,000 cash. Drawings by the partners during 2010 totaled P3, 000 by Grey an P9,000 by
Redd. The partnership net income in 2010 was P25,000
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
Suggested Answer: (d) 60,000
Contributed Capital Agreed Capital Increase (Decrease)

Grey 60,000 60,000
Redd 20,000 60,000 40,000
Total 80,000 120,000 40,000
The partnership agreement provides for equal initial capital. Thus under the goodwill
method , the capital credit for Redd should be the same as the contribution of Grey,
thereby increasing
the total agreed capital to P120,000, which is P40,000 more than the total contributed
capital (goodwill).
8. Using the information in No. 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
Suggested Answer: (b) 20,000 bonus to Redd
Contributed Capital Agreed Capital Increase (Decrease)

Grey 60,000 40,000 (20,000)
Redd 20,000 40,000 20,000
Total 80,000 80,000
The partnership agreement provides for equal initial capital. Thus under the bonus
method, the capital credit for Redd should be the same as the contribution for Grey,
resulting to P20,000
bonus from Grey to Redd.
9. On May 1, 2010, 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 & Fixture 50,345 34,789
Other Assets 2,000 3,600
Total P 1, 020, 916 P 1, 317, 002
Accounts Payable P 178,940 P 243,650

Notes Payable 200,000 345,000
John, Capital 641, 976
Paul, Capital\ 728,352
Total P 1, 020, 916 P1, 317, 002
John and Paul agreed to form a partnership contributing their respective assets and equities
subject to the following adjustments:
a. Accounts receivable of P20, 000 in John’s books and P35, 000 in Paul’s are uncollectible.
b. Inventories of P5, 500 n P6, 700 are worthless in John’s and Pail’s respective books.
c. Other assets of P2, 000 and P3, 600 in John’s and Paul’s respective books are to be written off.
The capital accounts of John and Paul, respectively, after the adjustments will be:
a. 614, 476 683, 052 c. 640, 876 712, 345
b. 615, 942 717, 894 d. 613,576 683, 350
Suggested Answer: (a) 614, 476 683, 052
John: 641, 976 – 20, 000 – 5, 500 – 2, 000 = P 614, 476
Smith: 728, 352 – 35, 000 – 6, 700 – 3, 600 = P 683, 052
10. Based on No. 4, how much assets does the partnership have?
a. 2, 317, 918
b. 2, 237, 918
c. 2, 265, 118
d. 2, 365, 218
Suggested Answer: (c) 2, 265, 118

John: 1, 020, 916 – 20, 000 – 5, 500 – 2, 000 = P 993, 416
Smith:1, 317, 002 – 35, 000 – 6, 700 – 3, 600 = P 1, 271, 702
Total: 2, 337, 918 – 55, 000 – 12, 200 – 5, 600 = P 2, 265, 118
Problems the amount of P2,250

1. LF, EZ, and GT are partners with capital B. The total agreed capital of the old partners
balances of P67,200, P108,000 and P38,000 is P18,000 greater than their contributed capital
respectively, sharing profits and losses in the ratio C. The capital balance of EZ amount to P119,250
of 2:5:1. SG is admitted as a new partner bringing D.Cash will be debited in the amount of P40,800.
with him expertise and is to invest cash for a 15%
interest in the partnership considering the transfer 2. On June 1, 2013, AZ invited MG to join him
of capital from him of P18,000 upon his admission. in his business. MG agreed provided that AZ will
Upon admission of SG, which of the following adjust the accumulated depreciation of his
statements is false? equipment account to a certain amount, and will
recognize additional accrued expenses of P40,000.
A. The capital account of GT will be credited in After that, MG is to invest additional pieces of
equipment make her interest equal to 45%. If the balances of AZ before and after adjustment were
capital 556,00 and 484,000 respectively, what is the effect
in the carrying value of the equipment as a result of
the admission of MG?
A. 364,000 B. (32,000)
C. 396,000 D. (324,000)
3. TM and SJ, having capital balances of

P980,000 and P525,000 respectively, decided to
admit GD into the partnership. If TM and SJ share
profit in proportion of 3;1 respectively, and SJ's
capital balance after GD's investment is P589,750,
how much was invested by GD?
A. P848,750 B. P1,174,250
C. P588,000 D. P847,000
4. RD formed a partnership on February 10,

2009. R contributed cash of P150,000, while D
contributed inventory with a fair value of P120,000.
Due to R's expertise in selling, D agreed that R
should have 60% of the total capital of the
partnership. R and D agreed to recognize goodwill.
what is the total capital of the RD partnership after
the goodwill is recognized?
A.P450,000 B.P330,000
C.P300,000 D.P270,000
5. Transferable interest of a partner includes all
5. In AD partnership, Allen's capital is of the following except:
P140,000 and Daniel's capital is P40,000 and they A.the partner's share in profits and losses
share a net income ratio of 3:1 respectively. They B. the right to receive distributions
decided to admit David in the partnership. What C. the right to receive any liquidating
amount will David invest to give him 1/5 interest in distribution
the partnership if no bonus/goodwill is recorded? D. the authority to transact any of the
A.P60,000 B.P36,000 partnership’s
D.P45,000 C.P50,000 business operation
Answers
Theories Problem
1. ZEE acquired the assets (net of liabilities) of 1. D
partner BEE in exchange for cash. The acquisition 2. A
price exceeds the fair value of the net assets 3. D
acquired. How should ZEE determines the amount 4. C
to be reported for the plant and equipment, and for 5. D
long-term debt of the acquired debt of partner
BEE?
A. Plant and equipment: Fair value ; Long-term
debt: BEE's carrying amount
B. Plant and equipment: Fair value ; Long-term
debt: Fair value
C. Plant and equipment: BEE's carrying
amount; Long-term debt: Fair Value
D. Plant and equipment: BEE's carrying
amount; Long-term debt: BEE's carrying amount
2. Goodwill represents the excess cost of an

acquisition over the:
A. Sum of the fair values assigned to an
intangible assets less liabilities assumed
B. Sum of the fair values assigned to tangible
and intangible assets acquired less liabilities
assumed
C. Sum of the fair values assigned to
intangibles acquired less liabilities assumed
D. Book value of an acquired company
3. When a partnership is formed, noncash

assets contributed by partners should be recorded:
I. At their respective book values for income
tax purposes
II. At their respective fair values
for financial accounting purposes
A. I only B. II only
C. Both I and II D. Neither I
nor II
4. A limited liability company (LLC):

I.Is governed by the laws of the states in which it is
formed
II.provides liability protection to its investors
III. does not offer pass-through taxation
benefits of partnership
A. Both I and III B. III
C. Both I and II D. I, II, III
1. A partnership is a(n): capital accounts, Bauzon's intangible assets
I. accounting entity. should be debited for:
II. taxable entity. a. 0 c. 8,000
b. 16,000 d. 46,000
a. I only c. Neither I nor II
b. II only d. Both I and II
7. Roy, Sam and Tim decided to engage in
a real estate venture as a partnership. Roy
invested P140,000 cash and Sam provided an
2. Which of the following is NOT a office and furnishings valued at P220,000.
feature of a general partnership? (There is a 60,000 note payable remaining on
a. mutual agency the furnishings to be assumed by the
b. limited life partnership). Although Tim has no tangible
c. limited liability assets to invest, both Roy and Sam believe
d. none of these that
3. A partner's tax basis in a
partnership is comprised of which of the
following items?
I. The partner's tax basis of
assets contributed to the partnership.
II. The amount of the
partner's liabilities assumed by the other
partners.
III. The partner's share of
other partners' liabilities assumed by the
partnership.
a. I plus II minus III c. I minus II plus III

b. I plus II plus III d. I minus II minus III
4. Which of the following accounts could be

found in the general ledger of a partnership?
a. Option A c. Option C
b. Option B d. Option D
5. Which of the following accounts could be

found in the PQ partnership's general ledger?
I. Due from P
II. P, Drawing
III. Loan Payable to Q
a. I, II c. II, III
b. I, III d. I, II, and III
6. Anton and Bauzon formed a partnership

and agreed to divide initial capital equally,
even though Anton contributed P100,000 and
Bauzon contributed P84,000 in identifiable
assets. Under the bonus method, to adjust
Tim's expert salesmanship provides an
adequate investment. The partners agree to What is each partner's tax basis in
receive an equal capital interest in the the Jones and Smith partnership?
partnership. Using the bonus method, what is
the capital balance of Tim?
a. 0 c. 100,000
b. 50,000 d. 140,000
a. Option A c. Option C
b. Option B d. Option D
8. Lara and Mitra formed a partnership on
July 1, 2011 and invested the following
assets: P130,00 cash by Lara, and P200,000
cash and P50000 computer equipment by
Mitra. The computer equipment has a note
payable amounting to P10,000, which was
assumed by the partnership. The partnership
agreement provides that Lara and Mitra will
have an equal capital credit. Using the
goodwill method, the amount of goodwill to
be recorded upon formation of partnership is:
a. 100,000 c. 120,000
b. 110,000 d. 140,000
9. Ana and Elsa form a new partnership.

Ana invests P300,000 in cash for her 60%
interest in the capital and profits of the
business. Elsa contributes land that has an
original cost of P40,000 and a fair market
value of P70,000, and a building that has a
tax basis of P50,000 and a fair market value
of P90,000. The building is subject to a
P40,000 mortgage that the partnership will
assume. What amount of cash should Elsa
contribute?
a. 40,000 c. 110,000
b. 80,000 d. 150,000
10. Jones and Smith formed a partnership
with each partner contributing the following
items:
Assume that for tax purposes Jones

and Smith agree to share equally in the
liabilities assumed by the Jones and Smith
partnership.
ANSWERS & SOLUTIONS (Chapter 1)
1. a
2. c
3. c
4. d
5. d
6.a
Zero, because under the bonus method, a transfer of capital is only required.
7. c
Roy Sam Tim
Cash P140,000 – –
Office Equipment – P220,000 –
Note payable _( 60,000)
Net asset invested P140,000 P160,000 P –
Agreed capitals, equally (P300,000/3) = P100,000
8. b
Lara Mitra
Cash P130,000 P200,000
Computer equipment – 50,000
Note payable _( 10,000)
Net asset invested P130,000 P240,000
Goodwill (P240,000 - P130,000) = P110,000
9. b
Total Capital (P300,000/60%) P500,000
Elsa's interest 40%
Elsa's capital P200,000

Less: Non−cash asset contributed at market value
Land P 70,000
Building 90,000
Mortgage Payable ( 40,000) _120,000
Cash contribution P 80,000
10. a
Jones: (80000+300000) - 120000 + (180000/2) =
350000
Smith: (40000+200000) - 60000 + (180000/2) =

270000
1.1 THEORIES. 5. A unique feature of partnerships (compared with
1. A partnership is publicly owned corporations) is that:
a(n): a. Limited liability with respect to damages
I. accounting arising from professional services
entity. b. Greater allowable tax deductions for
II. taxable entity. retirement plans
A. I only B. II only c. Ease of formation
C. Neither I nor II D. Both I and II d. Book value
1.2 PROBLEMS.
2. Anton and Garcia formed a partnership, each
contributing assets to the business. Anton 1. On May 1, 2015, Cat and Meow formed a
contributed inventory with a current market partnership and agreed to share profits and losses in
value in excess of its carrying amount. Garcia the ratio of 3:7, respectively. Cat contributed a parcel
contributed real estate with a carrying amount in of land that cost her P10,000. Meow contributed
excess of its current market value. At what P40,000 cash. The land has a fair value of P15,000.
amount should the partnership record each of Cat insisted that the value of land should be P18,000.
the following assets? The partners agreed to value the land at P18,000.
Inventory Real Estate What amount should be recorded in Cat’s capital
account on formation of the new partnership?
a. Carrying Amount Market Value
a. P18,000 b. P17,400
b. Market Value Carrying Amount
b. c. P15,000 d. P10,000
c. Carrying Amount Carrying Amount
d. Market Value Market Value
2. On July 1, Manny and Floyd formed a partnership,
agreeing to share profits and losses in the ratio of
3. On June 30, 2015, a partnership was formed by
4:6, respectively. Manny contributed a parcel of land
Mendoza and Lopez. Mendoza contributed cash.
that cost him P25,000. Floyd contributed P50,000
Lopez, previously sole proprietor, contributed
cash. The land was sold for P50,000 on July 1, four
noncash assets including a realty subject to
hours after formation of the partnership. How much
mortgage which was assumed by the
should be recorded in Manny’s capital account on
partnership. Lopez’s capital account at June 30,
the partnership formation?
2015 should be recorded at:
a. The fair value of the property on June
a. P10,000 b. P20,000
30, 2015 less the mortgage payable
c. P25,000 d. P50,000
b. Lopez’s carrying amount of the property
on June 30, 2015
Use the following question for 3 & 4
c. Lopez’s carrying amount of the
property on June 30, 2015 less the
On March 1, 2014, cat and Fish formed a partnership
mortgage payable
with each contributing the following assets:
d. The fair value of the property on June
Cat Fish
30, 2015
Cash P30,000 P70,000
Machinery P25,000 P75,000
4. Two individuals who were previously sole
Building − P225,000
proprietors formed a partnership. Property
Furnitures
other than cash which is part of the initial
and Fixtures P10,000 −
investment in the partnership would be
recorded for financial accounting purposes at
the : 3. On March 1, 2015, the capital account of Fish would
show a balance of:
a. Proprietors’ book values or the fair
value of the property at the date of the
a. P280,000 b. P305,000
investment whichever is higher.
c. 314,000 d. 370,000
b. Proprietors’ book values or the fair
value of the property at the date of the
investment whichever is lower.
c. Proprietors’ book values of the property
at the date of the investment
d. Fair value of the property at the date
of investment
4. Assuming that the partners agreed to bring their cash. The land has a quoted price of P3,600,000 on
respective capital in proportion to their respective October 1, 2015. What amount should be recorded
profit and loss ratio, and using Fish capital as the in Albano’s capital account upon formation of the
base, how much cash is to be invested by Cat? partnership?
a. P19,000 b. P30,000 a. P3,600,000 b.

c. P40,000 d. P55,000 P3,000,000 c. P3,480,000
d.
5. On October 1, 2015, Albano and Armando formed a P2,000,000
partnership and agreed to share profits and losses
in the ratio 3:7 respectively. Albano contributed a
parcel of land that cost him P2,000,000. Armando 1. Jones and Smith formed a partnership with each
contributed P3,000,000 in partner contributing the following items:
Jones Smith
Cash P 80,000 P 40,000
Building − cost to Jones 300,000
− fair value 400,000
Inventory − cost to Smith 200,000
− fair value 280,000
Mortgage Payable 120,000
Accounts Payable 60,000
Assume that for tax purposes Jones and Smith agree to share equally in the liabilities
assumed by the Jones and Smith partnership. What is the balance in each partner’s capital
account for financial accounting purposes?
A. Jones: P 360,000, Smith: P 260,000 C. Jones: P 260,000, Smith: P 180,000

B. Jones: P 350,000, Smith: P 270,000 D. Jones: P 500,000, Smith: P 300,000
2. The business assets of LL and MM appear below:

LL MM
Cash P 11,000 P 22,354
Land 603,000 −
Building − 428,267
Furniture and Fixture 50,345 34,789
Total P 1,020,916 P 1,317,002
Accounts Payable P 178,940 P 243,650

LL, capital 641,976 -
MM, capital − 728,352
Total P 1,020,916 P 1,317,002
LL and MM agreed to form a partnership by contributing their respective assets and

equities subject to the following adjustments:
a. Accounts Receivable of P20,000 in LL’s books and P35,000 in MM’s are uncollectible.
b. Inventories of P5,500 and P6,700 are worthless in LL’s and MM’s respective books.
c. Other assets of P2,000 and P3,600 in LL’s and MM’s respective books are to be written off.
The capital account of the partners after the adjustments will be:
a. LL: P615,942, MM: P717,894 c. LL: P640,876, MM: P712,345
b. LL: P614,476, MM: 683,052 d. LL: P640,876, MM: 683,050
3. The same information in number 2, how much total assets does the partnership have
after formation?
a. P2,265,118 c. P2,237,918
b. P2,337,918 d. P2,365,218
4. On March 1, 2015, PP and QQ decide to combine their businesses and form a partnership.
Their balance sheets on March1, before adjustments, showed the following:
PP QQ
Cash P 9,000 P 3,750
Furniture and Fixtures (net) 30,000 9,000
Office Equipment (net) 11,500 2,750
Prepaid Expenses 6,375 3,000
Total P 105,375 P51,500
Accounts Payable P45,750 P18,000

Capital 59,625 33,500
Total P105,375 P51,500
They agreed to have the following items recorded in their books:

1. Provide 2% allowance for doubtful accounts.
2. PP’s furniture and fixtures should be P31,000, while QQ’s office equipment is
underdepreciated by P250.
3. Rent expense incurred previously by PP was not yet recorded amounting to P1,000,
while salary expense incurred by QQ was not also recorded amounting to P800.
4. The fair market value of inventory amount
to: For PP P29,500
For QQ P21,000
Compute the net (debit) credit adjustment for PP and

QQ: PP QQ
a. P 2,870 P 2,820
b. (2,870) (2,820)
c. 870 180
d. (870) 180
5. The same information in number 4, compute the total liabilities after formation:
a. P 65,550 c. 63,750
b. 61,950 d. 63,950
1. Which of the following is not a characteristic of most partnership?
a. Limited liability c. Mutual agency
b. Limited life d. Ease of formation
Suggested answer (a) limited liability The liability of the partners in a partnership is unlimited.
2. Which of the following is not a characteristic of the proprietary theory that influences
accounting for partnerships?
a. Partner’s salaries are viewed as a distribution of income rather than a component of net
income.
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 of the partnership.
Suggested answer (c) A partnership is characterized by limited liability
3. An advantage of the partnership as a 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
Suggested answer (c) A partnership is created by mere agreements of the partners
4. 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 original cost
c. Assessed valuation for property tax purposes
d. Contributing partner’s tax basis
Suggested answer (a) Fair value at the date of contribution
5. Partnership capital and drawings accounts are similar to the corporate
a. Paid in capital, retained earnings, and c. Paid in capital and retained earnings accounts
dividends accounts d. Preferred and common stock accounts
b. Retained earnings account
Suggested answer (a)Partnership capital accounts are similar to corporate paid in capital and
retained earnings; while partnership drawing accounts are similar to corporate dividends accounts
For questions 6−10:
On May 1, 2015, the business assets of Jessyreen and Leilani appear below:
Jessyreen Leilani
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 and fixtures 50, 345 34,789
Other assets _ _2, 000 3,600_
Total P 1,020,916 P 1,317,002
Accounts payable P 178,940 P 243,650

Notes payable 200,000 345,000
John, capital 641,976
Paul, capital 728, 352
Total P 1,020,916 P1,317,002
Jessyreen and Leilani agreed to form a partnership contributing their respective assets and
equities subject to the following adjustments:
a. Accounts receivable of P20,000 in Jessyreen’s books and P35,000 in Leilani’s are uncollectible
b. Investors of P5,500 and P6,700 are worthless in Jessyreen’s and Leilani’s respective books
c. Other assets of P2,00 and P3,600 in Jessyreen’s and Leilani’s respective books are to be
written off
6. The capital accounts of the partner’s after adjustments will be:
a. Jessyreen’s 614,476
Leilani’s 683, 052
b. Jessyreen’s 615, 942
Suggested answer (a)
Jessyreen
Leilani Unadjusted capital balances
p641,976 P728,352 Adjustments:
Uncollectible accounts (20,000) (35,000)
Worthless inventories (5,500) (6,700)

Other assets written off (2,000) (3,600)
Adjusted capital balances P614,476 P683,052
7. How much assets does the partnership have?
a. 2,337,918 c. 2,265,118
b. 2,237,918 d. 2,365,218
Suggested answer (c)
Jessyreen Leilani Total
Unadjusted asset bals. 1020916 1317002 2337918
Adjustments:
Uncollectible accounts (20000) (35000) (55000)
Worthless inventories (5500) (6700) (12200)
Other assets written off (2000) (3600) (5600)
Adjusted assets bals. 993416 1271702 2265118
8. Shamira offered to join for a 20% interest in the firm. How much cash should he contribute?
a. 330,870 c. 344,237
b. 337,487 d. 324,382
Suggested answer (d)
New capital of the partnership [(614476+683052)/80%]

P1621910 Multiply by
20%
Cash to be contributed by Shamira P324382
9. After Shamira’s admission, the profit and loss sharing ratio was agreed to be 40:40:20, based on
capital credits. How much should the cash settlement be between Jessyreen and Leilani.
a. 33,602 c. 32,272
b. 32,930 d. 34,288
Suggested answer (d)

Jessyreen Leilani
Capital balances at P614476 683052
40:40:20 ratio
New capital ratio:
@ 40% each (1621910) 648764 648764
Cash settlement bet.
Jessyreen and Leilani P34288 (P34288)
10. During the first year of their operations, the partnership earned P325,000. Profits were
distributed in the agreed manner. Drawings were made in these amounts: Jessyreen, p50,000;
Leilani, 65,000; Shamira, P28,00.
How much are the capital balances after the first year?
A. Jessyreen, capital 750,627 c. Jessyreen, capital 757,915

Leilani, capital 735,177 Leilani, capital 742,315
Shamira, capital 372,223 Shamira, capital 375, 837
b. Jessyreen, capital
728,764 Leilani, capital
713,764
Shamira, capital 361,382
Suggested answer (b)
Jessyreen Leilani Shamira
Capital balances at P648764 P648764 P324382
40:40:20 ratio
Drawings (50000) (28000)
(65000)
Share in profit (40:40:20) 130000 130000 65000
Capital balances P728764 P713764 P361382
Use following information for question 1 to 5
On July 1, 2015, A and B decided to form a partnership. The firm is to take over the business
assets and assume liabilities, and the capitals are to be based on net assets transferred after the
ff. adjustments:
● A and B’s inventory is to be valued at 31,000 and 22,000 respectively.

● Accounts receivable of 2,000 in A’s book and 1,000 in B’s books are uncollectible.
● Accrued salaries of 4,000 for A and 5,000 for B are still to be recognized in the books.
● Unused office supplies of A and B amounted to 5,000 and 1,500.
● Prepaid rent of 7,000 and 4,500 are to be recognized in the books A and B, respectively.
● A is to invest or withdraw cash necessary to have a 40% interest in the firm.
Balance sheet for A and B before adjustments

A B
Cash ₱ 31,000 ₱ 50,000
Accounts receivable 26,000 20,000
Inventory 32,000 24,000
Office supplies 5,000
Equipment 20,000 24,000
Accum. Depreciation− Equipment (9,000) (3,000)
Total Assets ₱ 100,000 120,000
Accounts Payable ₱ 28,000 20,000

Capitals 72,000 100,000
Total Liabilities and Capital ₱ 100,000 ₱ 120,000
1. The additional investment (withdrawal)

made by A: a. ₱(15,000) c.
₱3,000
b. ₱(6,667) d. ₱8,333
2. The total assets of the partnership after formation:

a. ₱235,333 c. ₱220,333
b. ₱230,000 d. ₱212,000
3. The total liabilities of the partnership

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

a. ₱180,000 c. ₱163,333
b. ₱178,000 d. ₱155,000
5. The total capital balances of A and B in the combined

balanced sheet: a. A, ₱81,250; B, ₱72,000 c. A,
₱100,000; B, ₱75,000
b. A, ₱81,250; B, ₱75,000 d. A, ₱62,000; B, ₱93,000
6. On June 1, 2015, T, U and V formed a partnership by combining their separate business
proprietorships. T contributed cash of ₱100,000. U contributed property with a ₱80,000
carrying amount, a ₱95,000 original cost, and ₱120,000 fair value. The partnership accepted
the responsibility for the ₱55,500 mortgage attached to the property. V contributed
equipment with a ₱65,000 carrying amount, a ₱90,000 original cost, and ₱78,000 fair value.
The partnership agreement specifies that P & L are to be shared equally but is silent
regarding capital contributions. Which partner has the largest capital balance at the
beginning of the partnership?
a. T c. V
b. U d. All capital account balances are equal
7. For financial accounting purposes, assets of an individual partner contributed to a partnership

are recorded by the partnership at:
a. Historical cost c. Fair market value
b. Book value d. Lower of cost or market
8. A unique feature of partnership:

a. They do not have to follow GAAP c. Books have to be maintained on the tax
basis
b. They are not governed by laws d. They do not file income tax return
9. Which of the following is not an advantage of a partnership over a corporation?

a. Ease of formation c. The elimination of taxes at the entity level
b. Unlimited liability d. All of the above
10. A partner’s withdrawal of assets from a limited liability partnership that is considered a
permanent reduction in that partner’s equity is debited to the partner’s:
a. Drawing account c. Capital account
b. Retained earnings account d. Loan receivable account
1. A partner who is entitled to a share of the profits from a partnership is known as:
a) A salaried partner.
b) A managing partner.
c) An equity partner.
d) A limited liability partner.
Answer:An equity partner.
A partner on a fixed salary is known as a salaried partner.
2. The maximum number of persons who are legally allowed to operate in a partnership is:
a) 2
b) 20
c) There is no legal limit
d) 100
d. Jessyreen, capital 743,121

Leilani, capital 727,825
Shamira, capital 368,501
Answer:There is no legal limit
3. Sparkle Ltd is a private limited company limited by shares. It has one director. How
many shareholders does the law require it to maintain?
a) One provided it is a different person from the director.
b) Five.
c) Two.
d) One which can be the same person as the director.
Answer:One which can be the same person as the director.
The law allows private limited companies to exist with one shareholder who is the same
person as the director.
4. Which one of the following statements about limited liability partnerships (LLPs) is incorrect?
a) An LLP has a legal personality separate from that of its members.
b) The liability of each partner in an LLP is limited.
c) Members of an LLP are taxed as partners.
d) A limited company can convert to an LLP.
Answer:A limited company can convert to an LLP.
A general partnership can convert to an LLP but a limited company cannot.
5. An organisation running a business has the following attributes: the assets belong to
the organisation, it can create a floating charge over its assets, change in membership does
not alter its existence, and members cannot transfer their interests to others. What type of
organisation is it?
a) A private limited company
b) A limited liability partnership
c) A general partnerships
d) A private limited company
Answer:A limited liability partnership.
In the question the attributes of the organisation are the same for LLPs as companies except
members of a company (private and public) can transfer their interests to others.
6. Roberts and Smith drafted a partnership agreement that lists the following assets
contributed at the partnership’s formation:
Contributed
by
Roberts Smith
Cash $20,000 $30,000
Inventory −− 15,000
Building −− 40,000
Furniture & equipment 15,000 −−
The building is subject to a mortgage of $10,000, which the partnership has assumed. The
partnership agreement also specifies that profits and losses are to be distributed evenly. What
amounts should be recorded as capital for Roberts and Smith at the formation of the
partnership? Roberts Smith
a. $35,000 $85,000 c. $55,000 $55,000
b. $35,000 $75,000 d. $60,000 $60,000
Answer: (b) The requirement is to determine the amounts to be recorded as capital for
Roberts and Smith at the formation of the partnership. Unless otherwise agreed upon by the
partners, individual capital accounts should be credited for the fair market value (on the date
of contribution) of the net assets contributed by that partner. It is necessary to assume that
the amounts listed are fair market values. The amount of net assets that Roberts contributed
is
$35,000 ($20,000 + $15,000). The fair market value of the net assets Smith contributed is
$75,000 ($30,000 + $15,000 + $40,000 – $10,000). The partners’ profit and loss sharing ratio
does not affect the initial recording of the capital accounts.
7. On April 30, year 1, Algee, Belger, and Ceda formed a partnership by combining their
separate business proprietorships. Algee contributed cash of $50,000. Belger contributed
property with a $36,000 carrying amount, a $40,000 original cost,and $80,000 fair value. The
partnership accepted responsibility for the $35,000 mortgage attached to the property. Ceda
contributed equipment with a $30,000 carrying amount, a $75,000 original cost, and
$55,000 fair value. The partnership agreement specifies that profits and losses are to be
shared equally but is silent regarding capital contributions. Which partner has the largest
April 30, year 1 capital account balance?
a. Algee. d. All capital
b. Belger. account balances
c. Ceda. are equal.
Answer: (c) The requirement is to determine which partner has the largest capital account
balance. Use the solutions approach to solve the problem.
Algee Belger Ceda
Partner contribution 50,000 80,000 55,000
Less: Liabilities assumed
by the partnership 0 (35,000) 0
Ending capital balance $50,000 $45,000 $55,000
Each partner values his contribution to the partnership at its fair market value. The fair
market value becomes the partner’s balance in his capital account and is basis to the
partnership under generally accepted accounting principles. Any liabilities assumed by the
partnership, reduces the partners’ capital balance by the amount assumed.
8. Abel and Carr formed a partnership and agreed to divide initial capital equally, even
though Abel contributed $100,000 and Carr contributed $84,000 in identifiable assets.
Under the bonus approach to adjust the capital accounts, Carr’s unidentifiable asset should
be debited for
a. $46,000 c. $ 8,000
b. $16,000 d. $0
Answer: (d) Under the bonus method, unidentifiable assets (i.e., goodwill) are not
recognized. The total resulting capital is the FV of the tangible investments of the partners.
Thus, there would be no unidentifiable assets recognized by the creation of this new
partnership.
9. Ellis and Nossiter are partners sharing profits in a 30:70 ratio. The following data
summarizes 2004 activity:
Partnership net income, 2004 $68,000

Ellis capital, 1/1/2004 90,000
Ellis additional investment in 2004 10,000
Ellis drawings in 2004 12,000
Nossiter capital, 1/1/2004 80,000
Nossiter drawings in 2004 20,000
What amount of net income is allocated to Nossiter’s capital account for 2004?
a. $26,600 c. $34,000
b. $27,600 d. $47,600
Answer: (d) (68,000×.7)
10. Ellis and Nossiter are partners sharing profits in a 30:70 ratio. The following data
summarizes 2004 activity:
Partnership net income, 2004 $68,000

Ellis capital, 1/1/2004 90,000
Ellis additional investment in 2004 10,000
Ellis drawings in 2004 12,000
Nossiter capital, 1/1/2004 80,000
Nossiter drawings in 2004 20,000
What is the value of Ellis’s capital account at c. $111,400

12/31/2004? a. $20,400 d. $120,400
b. $108,400
Answer: (b) (90,000+10,000−12,000+(68,000×.3))
Chapter 1 Partnership Formation
1. On July 1,1997, Monuz and Pardo form a partnership, agreeing to share profits and losses in
the ratio of 4:6,respectively. Monuz contributed a parcel of land that cost him P25,000. Pardo
contributed P50,000 cash. The land was sold for P50,000 on July 1,1997 four hours after formation of
the partnership. How much should be recorded in Munoz capital account on formation of the
partnership?
a) P10,000 c) P25,000
b) P20,000 d) P50,000
2.Moonbits partnership had a net income of P8,000.00 for the month ended September 30,1997.
Sunshine purchased an interest in the Moonbits partnership of Liz and Dick by paying Liz P 32,000.00
for half of her capital and half of her 50 percent profit sharing interest on October 1,1997. At this
time Liz capital balance was P24,000.00 and Dick capital balance was P56,000.00. Liz should receive a
debit to her capital account of:
a) P 12,000.00 c) P 16,000.00
b) P 20,000.00 d) P 26,667.00
3.On March 1,1997, Santos and Pablo formed a partnership with each contributing the following assets:
Santos Pablo
Cash P 30,000 P 70,000
Machinery and Equipment 25,000 75,000
Building −0− 225,000
Furniture & Fixtures 10,000 −0−
The building is subject to a mortgage loan of P80,000, which is to be assumed by the partnership.
The partnership agreement provides that Santos and Pablo share profits and losses 30% and 70%,
respectively. On March 1,1997 the balance in Pablo’s capital account should be:
a) P 290,000.00 c) P 314,000.00
b) P 305,000.00 d) P 370,000.00
4. The business assets of John and Paul appear below:
John Paul
Cash P 11,000 P 22,354
Land 603,000
Building 428,267
Furniture & Fixtures 50,435 34,789
Total P 1,020,916 P 1,317,002
Accounts Payable 178,940 243,650

John, Capital 641,976
Paul, Capital 728,352
Total P 1,020,916 P 1,317,002
John and Paul agreed to form a partnership contributing their respective assets and equities
a. Accounts receivable of P 20,000 in John’s books and P 35,000 in Paul’s are uncollectible.
b. Inventories of P 5,500 and P 6,700 are worthless in John’s and Paul’s respective books.
c. Other assets of P 2,000 and P 3,600 in John’s and Paul’s respective books are to be written off.
The capital account of the partners after the adjustment will be:
a) John’s P 614,476 c) John’s P 649,876

Paul’s P 683,052 Paul’s P 712,345
b) John’s P 615,942 d) John’s P 613,576
Paul’s P 717,894 Paul’s P 683,350
5. The following is the condensed balance sheet of the partnership Jo, Li and Bi who share profits
and losses in the ratio of 4:3:3.
Cash P 180,000 Accounts Payable P 420,000

Other Assets 1,660,000 Bi, Loan 60,000
Jo, receivable 40,000 Jo, Capital 620,000
Li, Capital 400,000
Bi, Capital 380,000
Total P1,880,000 Total P1,880,000
Assume that the assets and liabilities are fairly valued on the balance sheet and the partnership
decides to admit Mac as a new partner, with a 20% interest. No goodwill or bonus is to be recorded.
How much Mac contributes to cash or other assets?
a) P 350,000
b) P 280,000
c) P 355,000
d) P 284,000
Solution and Explanation
1. D. The requirement is Munoz’ capital account balance upon formulation of the partnership.
As in the case with all entities, investment in the capital of a partnership should be measured at the
fair market value of the assets contributed. In this case, the FMV of the land would be measured at
the fair market value by its sales price on the date of sale (P50,000) which is also the date of the
partnership formation. Recording the land of Munoz’ cost would result in the partners sharing the
gain from the sale in accordance with their profit and loss ratio. This is not equitable since the gain
accrued while the land was held by Monuz.
2. A. Under the admission by purchase only the transfer of the capital purchase by the selling
partner (Liz) to the buying partner (Sunshine) is recorded. Therefore 50% of the capital of Liz
(P24,000) or P 12,000 is to be debited to her capital account.
3. A. P 290,000.00
Assets contributed by Pablo P 370,000

Less: Mortgage assumed by partnership (80,000)
Capital balance of Pablo P 290,000
Note that the profit and loss sharing ratio is irrelevant to the solution of this
problem. 4. A. John’sP 614,476
Paul’s P 683,052
John Paul
Capital balance before adjustments P641,976 P 728,352
Adjustments:
Uncollectible accounts (20,000) (35,000)
Inventories Written Off (5,500) 6,700
Other Assets written off (2,000) (3,600)
Capital balances after adjustments P 614,476 P 683,052
5. A. P 350,000
Total agreed capital of the new partnership ( 1,400,000 ÷ 80% ) P 1,750,000
Total contributed capital of the old partners ( 1,400,000)
Mac’s contribution P 350,000
1. Partnership capital and drawing accounts are similar to the

corporate
A. Paid-in capital, retained earnings, and dividend
accounts
B. Retained earnings account.
C. Paid-in capital and retained earnings accounts.
D. Preferred and common stock accounts
2. For individuals who were previously sole proprietors form a partnership. Each partner contributes
inventory and equipment for use by the partnership. What basis should the partnership use to
record the contributed assets?
A. Inventory at the lower of FIFO cost or market.
B. Inventory at the lower of weighted-average cost or market.
C. Equipment at each proprietor’s carrying amount.
D. Equipment at fair value.
3. Meca and Came formed a partnership on January 1,2015 with each

contributing the following assets: Meca Came
Cash P30,000 P70,000
Machinery 25,000 75,000
Inventory 10,000 -
Building 225,000
The building is subject to a mortgage loan of P90,000 which is to be assumed by the
partnership. On January 1,2015, the capital account of Came would show a balance of:
A. P280,000 B. P305,000 C. P314,000 D. P370,000
4. Alma and Becca have just formed a partnership. Alma contributed cash of P176,400 and office
equipment that cost P75,600. The equipment had been used in his sole proprietorship and had
been 70% depreciated, the current value of the equipment is P50,400. Alma also contributed a
note payable of P16,800 to be assumed by the partnership. Alma is to have a 30% interest in the
partnership. Becca contributed P256,000 land at fair market value. Becca should make
additional investment of
a. P234,000 b. P490,000 c. P256,000 d. P210,000
5. The business assets of LL and MM appears below:
LL MM
Cash P11,000 P22,354
Land 603,000 ----------
Building -------- 428,267
--
Furniture and Fixtures 50,345 34,789
P1,020,916 P1,317,002
Accounts Payable P178,940 P 243,650
LL,Capital 641,976 -------------
MM, Capital 728,352
P1,020,916 P1,317,002
LL and MM agreed to form a partnership contributing their respective assets and equities
a. Accounts receivable of P20,000 in LL’s books and P35,000 in MM’s are uncollectible.
b. Inventories of P5,500 and P6,700 are worthless in LL’s and MM’s respective books.
c. Other assets of P2,000 and P3,600 in LL’s and MM’s respective books are to be written off.
The capital account of the partners after the adjustments will be:
a. LL, P615,942; MM, P717,894 c. LL, P640,876; MM, P683,050
b. LL, P640,876; MM, P712,345 d. LL, P614,476; MM, P683,052
6. Langley invests his delivery van in a computer repair partnership with McCurdy. What amount
should
the van be credited to Langley’s partnership capital?
A. The tax basis.
B. The fair value at the date of contribution.
C. Langley’s original cost.
D. The assessed valuation for property tax purposes.
7. On April 30, 1993, Algee, Belger, and Ceda formed a partnership by combining their separate
business proprietorships. Algee contributed cash of $50,000, Belger contributed property with a
$36,000 carrying amount, a $40,000 original cost, and $80,000 fair value. The partnership
accepted responsibility for the $35,000 mortgage attached to the property. Ceda contributed
equipment with a
$30,000 carrying amount, a $75,000 original cost, and $55,000 fair value. The partnership
agreement specifies that profits and losses are to be shared equally but is silent regarding capital
contributions. Which partner has the largest April 30, 1993, capital account balance?
A. Algee. c. Ceda.
B. Belger. d. All capital account balance are equal.
8. Jamby and Minam just formed a partnership. Jamby contributed cash of P2,205,000 and office
equipment that cost P945,000. The equipment had been used in her sole proprietorship and had
been 70% depreciated, the appraised value of the equipment is P630,000. Jamby also
contributed a note payable of P210,000 to be assumed by the partnership. Jamby is to have
60% interest in the partnership. Miriam contributed only P1,575,000 merchandise inventory at
fair market value. Assume the use of bonus method, the partners’ capital must be in conformity
with their profit and loss ratio upon formation.
In the formation of a partnership, which of the following is true?
A. The agreed capital of Jamby upon formation is P2,625,000

B. The total agreed capital of the partnership is P4,375,000
C. The capital of Miriam will increase by P105,000 as a result of the transfer of capital
D. There is either an investment or withdrawal of asset under the bonus method
9. Alley and Barvey established a partnership on December 1, 20x4. They agreed that Alley will
contribute cash of P20,000; Land of P15,000 and Building of P50,000. Alley’s accounts payable of
P10,000 is to be assumed by the partnership. Barvey will contribute cash of P30,000 and
furniture and fixtures of P25,000.
Assume that each partner initially should have an equal interest in partnership capital
with no contribution of intangible asset (bonus method). How much are the capital
balances of each partner?
a. P85,000 for Alley and P55,000 for Barvey
b. P65,000 for Alley and P65,000 for Barvey.
c. P75,000 for Alley and P55,000 for Barvey
d. P75,000 for Alley and P75,000 for Barvey.
10. The partnership agreement is an express contract among the partners (the owners of the
business).
Such an agreement generally does not include
a. A limitation on a partner’s liability to creditors.
b. The rights and duties of the partners.
c. The allocation of income between the partners.
d. The rights and duties of the partners in the event of partnership dissolution.
1. The partnership form of business is:

a. An economic entity.
b. A separate legal entity, just as a corporation is a legal entity.
c. A taxable entity.
d. A fiscal entity.
2. A distinct and major advantage of the professional corporation form of organization in
comparison with the partnership form of organization is:
a. Limited liability with respect to damages arising from professional services.
b. Greater allowable tax deductions for retirement plans.
c. Ease of formation
d. Book value
e. Historical cost
3. Which of the following is not a characteristic of a partnership?
a. The partnership itself pays no income taxes.
b. It is easy to form a partnership.
c. Any partner can be held personally liable for all debts of the business.
d. A partnership requires written Articles of Partnership.
e. Each partner has the power to obligate the partnership for liabilities.
4. The advantages of the partnership form of business organization, compared to corporations,
include
a. Single taxation d. Limited Liability
b. Ease of raising capital e. Difficulty of formatio
c. Mutual Agency
5. Which of the following is NOT a characteristic of the proprietary theory that influences
accounting for partnerships?
a. Partners’ salaries are viewed as a distribution of income rather than a component

of net income.
b. A partnership is not viewed as a separate, distinct, taxable entity.
c. A partnership is characterized by limited liability.
d. Changes in the ownership structure of a partnership result in the dissolution
of the partnership.
PROBLEMZ
6. Albert, Claude, and Jamie form a partnership by contributing P25,000, P70,000, and
P80,000, respectively. In addition, the partners agree that Albert should receive
P20,000 of goodwill because of his special skills relevant to this business. What amount
of capital will exist for Claude when the partnership is formed?
a. P60,000
b. P65,000
c. P70,000
d. Some other amount
7. Bill and Ken enter into a partnership agreement in which Bill is to have a 60% interest
in capital and profits and Ken is to have a 40% interest in capital and profits. Bill
contributes the following:
Cost Fair value
Land P10,000 P20,000
Building P100,000 P60,000
Equipment P20,000 P15,000
a. There is a P30,000 mortgage on the building that the partnership agrees to

assume. Ken contributes P50,000 cash to the partnership. Bill and Ken agree
that Ken’s capital account should equal Ken’s P50,000 cash contribution and
that goodwill (revaluation of asset) should be recorded. Goodwill (revaluation
of asset) should be recorded in the amount of: P10,000
b. P15,000
c. P16,667
d. P20,000
8. Paul, Jeremy, and Juan are forming a partnership. Juan contributes a building having an
historical cost, accumulated depreciation, and market value of P290,000, P100,000, and
P400,000, respectively. The building is initially recorded on the partnership’s books at
Juan’s book value (P190,000). Two years later the building is sold for a P270,000 gain.
What portion of the profit or loss should be allocated to Juan?
a. P20,000 c. P210,000
b. P90,000 d. P230,000
9. Jones and Smith formed a partnership with each partner contributing the following items:
Jones Smith
Cash P80,000 P40,000
Building−Cost to 300,000
Jones
−Fair Value 400,000
Inventory− Cost 200,000
Smith
−Fair Value 280,000
Mortgage Payable 120,000
Account Payable 60,000
Assume that for tax purposes Jones and Smith agree to share equally in the liabilities
assumed by the Jones and Smith partnership. What is the balance in each partner’s
capital account for financial accounting purposes?
a. Jones− P350,000 and Smith− P270,000
b. Jones− P260,000 and Smith− P180,000
c. Jones− P360,000 and Smith− P260,000
d. Jones− P500,000 and Smith− P300,000
10. On July 1, ML and PP formed a partnership, agreeing to share profits and losses in the
ratio of 4:6, respectively. ML contributed a parcel of land that cost her P25,000. PP
contributed P50,000 cash. The land was sold for P50,000 on July 1, four hours after
formation of the partnership. How much should be recorded in ML’s capital account on
the partnership formation?
a. P10,000
b. P20,000
c. P25,000
d. P50,000
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1.1 A partnership is formed by two individuals who were previously sole proprietors.
Property other than cash which is part of the initial investment in the partnership would be
recorded for financial accounting purposes at the:
a. Proprietors’ book values or the fair value of the property at the date of the investment,
whichever is higher
b. Proprietors’ book values or the fair value of the property at the date of the investment,
whichever is lower.
Chapter 1
1. B.
2. A.
3. D.
4. A.
5. C.
6. C.
7. A.
8. B.
9. C.
10. D.
c. Proprietors’ book values of the property at the date of the investment.
d. Fair value of the property at the date of the investment.
1.2. When property other than cash is invested in a partnership, at what amount should
the non-cash property be credited to the contributing partner’s capital account?
a. Contributing partner’s tax basis.
c. Assessed valuation for property tax purposes.
d. Fair value at the date of contribution.
1.3. An advantage of the partnership as a 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.
1.4. When property other than cash i 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 original cost
c. Assessed valuation for property tax purposes
d. Contributing partner’s tax basis
1.5. Partnership capital and drawings are similar to the corporate

a. Paid in capital, retained earnings and dividends accounts
b. Retained earnings account

Partnership Accounting

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Features of General Partnerships

7. Separate Legal Personality

8. Sharing Profits and Losses

Underlying Equity Theories (Proprietary and Entity Theories)

− The liabilities of a business are debts of the proprietor.

− The profits generated there from are viewed as an increase in the

− Characteristics of this theory can be demonstrated by the following:

− Original partnership is dissolved upon the admission or

− In practice, proprietorships are treated as separate entities, even though

− Profits earned by the partnership are usually viewed as profit to the

Written Partnership Agreements (Articles of Partnership)

- While it is perfectly acceptable to have an oral partnership agreement, it is

4. The purpose/s and principal office of the business

7. The manner of dividing net income or loss among the partners

ACCOUNTING FOR PARTNERSHIP ACTIVITIES

To maintain partnership accounting records, it might be possible to have one

- The initial investments by each partner is recorded by debiting the assets

Following are the items that affect capital account:

- provide a record of each partner's drawings during an accounting period. These

TWO CLASSES OF WITHDRAWAL

1. Capital withdrawal or permanent withdrawal

2. Personal withdrawal or temporary withdrawal or drawing accounts.

Accounting Treatment of Partnership’s Profit and Loss

Rules for developing distribution of profits or losses

Distribution of profits or loss based on partner’s

Entry on distribution of profit and loss

Based on the partner’s capital contribution

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

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

A and B form a partnership. A contributes cash of P50,000, while B contributed land

a) T’s inventory is to be increased by P3,000.

How much capital must be credited to S?

Cash P 50,000 Furniture & Fixtures

a. An allowance for doubtful accounts of 2% is to be established.

a. The profits will be divided according to the

a. The losses will be divided according to the

− The industrial partner is not liable for

Distribution of profits or loss based on partner’s agreement

Entry on distribution of profit and loss

Based on the partner’s capital contribution

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

Requirement: Compute for the respective shares of the partners in

ADDITIONAL NOTES: PARTNERSHIP OPERATIONS

SCENARIO PROFIT LOSS RESULT

Statement of Changes in Partner’s Capital

The dissolution of the partnership does not necessarily imply that

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

Liability of Incoming Partner for Existing Obligation

Purchase of an Interest from Existing Partners

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

Investment of Assets in a Partnership

Bonus to old partners

Case 1. Total agreed capital is stated

Bonus to new partner

Case 1. Total agreed capital is stated

rto Magdaraog Jr., Capital 37,500