AFAR NOTES
partners from any share in the profits or
 If a partner is a capitalist/industrialist
partner, he gets just and equitable
share as an industrial partner and
another share as a capitalist partner
according to his capital contribution.
 Partnership residual profit and loss
percentages have to be (always) the last
component applied in the profit and
loss allocation process.
 A bonus exists when the capital account
of a partner is credited for an amount
greater than or less than the fair value
of his contributions.
 It is possible for a partner’s capital
account to increase as a result of the
allocation of a loss.
 Individuals, partnerships, and
corporations are allowed to be partners
in a partnership.
 The interest component of partnership
profit and loss allocation rewards
partners for capital contributions.
 Partnerships are not required to
prepare financial statements in
accordance with Generally Accepted
Accounting Principles unless they have
publicly traded debt or are required to
follow GAAP by a creditor.
 The proprietary theory is based on the
notion that the business entity is an
aggregation of the owners.
 The account used when the partnership
borrowed money from the partners is
advances from partners.
 The account used when the partnership
borrowed money from the partners is
advances from partners.
 A partner usually retains title to assets
contributed to a partnership, so that
certain assets may be identified as
belonging to a given partner.
 When salary and interest allocations
exceed profit, a loss has occurred.
 A stipulation that excludes one or more
losses is valid.
 Partnerships are required to have
interest on capital clauses in the articles
of partnership.
 The form and content of the statement
of comprehensive income of a
partnership resemble those of a sole
proprietorship with no exceptions.
 The form and content of the statement
of comprehensive income of a
partnership resemble those of a sole
proprietorship with no exceptions.
 In normal circumstances, bonus to the
managing partner shall be given even
when the results of operations of the
partnership are unfavorable.
 Not all of the partners in a general
partnership are personally liable for all
debts incurred by the partnership.
 Partnerships are not required to pay
any taxes.
 Interest on loans from partners is
recognized as partnership income.
 Net income should always be a
component in the bonus calculation.
 Salary allowances given to partners are
normally considered expenses
recognized as a deduction in the
statement of income/expenses.
 Partnerships must revalue assets up
and/or down when the profit and loss
ratios are adjusted.
 In the absence of any agreement, salary
allowances shall not be given when
partnership operations yielded losses.
Partnership capital and drawings accounts are
similar to the corporate Paid in capital,
retained earnings, and dividend accounts.
In a limited partnership All but the general
partners have limited liability
Which of the following is not a component of
the formula used to distribute income? Interest
on notes to partners.
The partnership form of business is An
economic entity
Which of the following is not a characteristic of
a partnership? Any partner can be held
personally liable for all debts of the business.
Which of the following is not a characteristic of
the proprietary theory that influences
accounting for partnerships? A partnership is
not viewed as separate entity, distinct, taxable
entity.
A partnership is not viewed as separate entity,
distinct, taxable entity. In accordance with their
capital contributions.
Which of the following is not considered a
legitimate expense of a company? Interest paid
to partners based on the amount of invested
capital.
The fact that salaries paid to partners are not a
component of partnership income is indicative
of Being characteristic of the proprietary
theory.
 This means a partner is an agent and
has the authority to act for the
partnership and to enter into contracts
on its behalf. → Mutual Agency
 When Accounts Receivables are
brought into the new partnership
business, it is normally recorded at
________. → Gross Amount
 A means of achieving a fair division of
profit among the partners based on the
time and talents devoted to the
partnership business. → Salary
Allowance
 This is given to partners that give
recognition to differences on capital
contributions by partners. → Interest
Allowance
 In the loss sharing, the loss of the
partnership should be divided among
the partners in accordance with the
_____________? → Loss-sharing ratio
 A basis for allocating partnership profits
or losses that reflects capital actually
available for use by the partnership
during the year. → Average Capital
 This account is credited at the fair value
of the net assets of the partnership. →
partner’s capital account
 Is a theory that deal with the question
of who the entity is. → entity theory
 Noncash drawings are valued at
_______ the date of the withdrawals →
Market values
 When assets that are based on
depreciation (and amortization) are
brought into the new partnership
business, these assets should be
recorded at __________. → net
amount
 A statement that reports the assets,
liabilities, and equity on an entity and
which shows its financial position or
condition at a given date. → statement
of financial position,
 If there is no agreement between
partners as to the sharing of losses, the
basis of the sharing of the loss is based
on the __________? → profit-sharing
ratio
Partner Terry first contributes P200,000 of On June 1, 2021, Ramirez and Martinez formed
capital in an existing partnership on February 1, a partnership with each contributing the
2020. On June 1, 2020, the partner contributed following assets:
another P200,000. On September 1, 2020, the
partner withdraw P150,000 from the Ramirez Martinez
partnership. Withdrawals in excess of P50,000 Cash 540,000 468,000
are chargeable to the partner’s capital account. Mach & Equi 960,000 1,320,000
The partnership’s fiscal year end is December Building - 1,250,000
31. The annual weighted-average capital Furniture 828,000 -
balance is

In the balance sheet of the partnership, building

will be --- 1,250,000

The journal entry recognizing the investment of

Martinez include a credit to Martinez, Capital of
On January 1, 2019, A, B, C, and D formed ABCD → P2,388,000,
Trading Co., a partnership with capital
contributions as follows: A, P500,000; B, In the balance sheet of the partnership,
P250,000; C, P250,000; and D, P200,000. The machinery and equipment will be →
partnership contract provided that each partner P2,280,000,
shall receive a 5% interest on contributed
capital, and that A and B shall receive salaries of In the balance sheet of the partnership, cash
P50,000 and P30,000, respectively. The contract will be → P1,008,000,
also provided that C shall receive a minimum of
P25,000 per annum, and D a minimum of The journal entry recognizing the investment of
P60,000 per annum, which is inclusive of Ramirez include a credit to Ramirez, Capital of
amounts representing interest and share of → P2,328,000
remaining profits. The balance of the profits
shall be distributed to A, B, C, and D in a 3:3:2:2
ratio. What amount must be earned by the
partnership, before any charge for interest and
salaries, so that A may receive an aggregate of
P125,000 including interest, salary and share of
RR, a partner in the RD partnership, is entitled
to 40% of the profits and losses. During 2019,
RR contributed land to the partnership that cost
her P50,000, but had a fair value of P60,000.
Also, during 2019, RR had drawings of P80,000.
The balance of RR’s capital accounts was
P120,000 at the beginning of the year and
P150,000 at the end of the year. What is the
partnership’s comprehensive income (loss) for
2019?
MM is trying to decide whether to accept a
salary of P40,000 or a salary of P25,000 plus a
bonus of 10% of net income after salaries and
bonus as a means of allocating profit among the
partners. Salaries traceable to the other
partners are estimated to be P100,000. What
amount of income would be necessary so that
MM would consider the choices to be equal?
Partners A & B share profits and losses equally
after each has been credited in all
circumstances with annual salary allowances of
P30,000 and P24,000, respectively. Based on
this agreement, in which of the following
circumstances will Partner A benefit by P6,000
more than Partner B?
Arturo Perez, a partner in the AP Partnership,
has a 30% participation in partnership profits
and losses. Perez’s capital account has a net
decrease of P60,000 during the calendar year
2019. During 2019, Perez withdrew P130,000
(charged against his capital account) and
contributed property valued at P25,000 to the
partnership. What was the net income of the AP
Partnership for 2019?
Acer and Dell formed a partnership and agreed
to divide initial capital equally, even though
Acer contributed P100,000 and Dell contributed
P84,000 in identifiable assets. Under the bonus
approach to adjust the capital accounts, Dell’s
unidentifiable asset should be debited for
Mary admits Jane as partner in the business.
Balance sheet accounts of Mary just before the
admission of Jane show: Cash, P26,000;
Accounts Receivable, P120,000; Merchandise
Inventory, P180,000; and Accounts Payable,
P62,000. It was agreed that for purposes of
establishing Mary’s interest, the following
adjustments be made: 1) an allowance for
doubtful accounts of 3% of accounts receivable
is to be established; (2) merchandise inventory
is to be adjusted upward by P25,000, and (3)
prepaid expenses of P3,600 and accrued
liabilities of P4,000 are to be recognized. If Jane
is to invest sufficient cash to obtain 2/5 interest
in the partnership, how much would Jane
contribute to the new partnership?
KK, SS and WW formed a partnership on Rey and Tom Partnership was organized and
January 1, 2019. Each contributed P144,000. began operations on March 1, 2020. On that
Salaries were to be allowed as follows: KK, date, Rey invested P950,000 and Tom invested
P36,000; SS, P36,000; and WW, P54,000. machinery and equipment with current fair
Drawings were equal to salaries and be taken value of P800,000. Because of shortage of cash,
out evenly throughout the year. With sufficient on November 1, 2020 Tom invested additional
partnership net income, KK and SS could split a cash of P200,000 in the partnership. The
bonus equal to 25 percent of partnership net partnership contract includes the following
income after salaries and bonus (in no event remuneration plan:
could the bonus go below zero). Remaining
profits were to be divided as follows: 30% for
Rey Tom
KK; 30% for SS, and 40% for WW. For the year,
Monthly Salary 20,000 25,000
partnership total comprehensive income was
(recognized expense)
P144,000. What are the capital balances of the
Annual Interest on 12% 12%
partners on December 31, 2019:
beg. capital
Bonus on the net 4%
profit before salaries
and interest but after
bonus
Balance 45% 55%

 The ending capital of Rey (December

On January 2, 2019, Abel, Cain, and Joshua
formed a partnership. Abel contributed cash of
P100,000 and a delivery equipment that
originally costs him P120,000, but with a second
hand value of P50,000. Cain contributed
P160,000 in cash. Joshua, whose family sells
office equipment, contributed P50,000 in cash
and office equipment that cost his family’s
dealership P100,000 but with a regular selling
price of P120,000. In 2019, the partnership
reported net income of P120,000. On December
31, 2019, what would be the capital balance of
partners Abel, Cain, and Joshua, respectively?
31, 2020) will be → P1,425,250,
 The bonus of Rey will be → P54,000,
 In the profit distribution schedule, the
total salary allowance will be →
P175,000,
 Of the P1,404,000 net profit of the
partnership, the share of Tom will be →
P728,750,
 The ending capital of Tom (December
31, 2020) will be → P1,478,750,

 In the profit distribution schedule, the

residual income (remainder) will be →
P725,000,
 Of the P1,404,000 net profit of the
partnership, the share of Rey will be →
P675,250,

 In the profit distribution schedule, the

total salary allowance will be →
P450,000,

 In the profit distribution schedule, the

salary allowance of Tom will be →
P80,000,

 The total withdrawal of Tom will be →

P250,000