Partnership Operation

Allocation of Partnership Income (Loss)

The partners should have a written agreement, called articles of partnership, specifying the manner
in which partnership income (loss) is to be distributed. Note that in the absence of a predetermined
agreement, the profit and loss (P&L) is divided according to original capital contributed by partners.

A number of issues arise which complicate the allocation of partnership income (loss).

1. Partners may receive interest on their capital balances. If so, it must be determined what
constitute the capital balance (e.g., the year-end amount of some type of weighted-average).
2. Some of the partners may receive a salary.
3. Some of the partners may receive a bonus on distributable net income. If so, you need to determine
if the bonus should be computed before or after salary, interest and bonus allocations.
4. A formula needs to be determined for allocating the remaining income. The formula agreed upon is
usually termed the residual, remainder, or profit (loss) sharing ratio.

Finally, the partners should decide upon how income is to be allocated if net income is insufficient
to cover partner’s salaries, bonuses, and interest allocations. These allocations are usually made
even if the effect is to create a negative remainder. This is important to note that partners may
choose to allocate losses (or a negative remainder) in a different manner than income.

Example: Partnership P & L Distribution

A, capital P300,000; B, capital P100,000; and C, capital P50,000 Partners receive 5% interest on
beginning capital balances Partner B receives a P60,000 salary. Partner C receives a 10% bonus after
interest and salaries The P&L ratios are A – 50%; B – 30%; C – 20%

Assuming partnership net income of P182,500, the distribution schedule would be prepared:
A B C Total
5% interest on beginning capital P15,000 P5,000 P2,500 P22,500
Salary to partner B 60,000 60,000
Bonus to Partner C after interest and 10,000
salary 10,000*
Remaining distribution 50:30:20 45,000 27,000 18,000 90,000
Total Share P60,000 P92,00 P30,500 P182,500
*(182,500-22,500-60,000) x .10 = P10,000
Note also, that if the bonus is based on net income after interest, salary and bonus then, bonus would
have been computed as follows: P182,500 – P22,500 – P60,000 divided by 110% x 10%.

Problem 1

A summary of changes in the capital accounts of the POPOL, KARINA, and CLAUDE Partnership, a law firm
before closing partnership net income to the capital accounts, is as follows:
POPOL KARINA CLAUDE Total
Balance, Jan 1 P48,000 P48,000 P54,000 P150,000
Investment, April 1 12,000 12,000
Withdrawal May 14 (9,000) (9,000)
Withdrawal June 16 (6,000) (6,000)
Withdrawal September 7 (18,000) (18,000)
Balance, December 31 P54,000 P39,000 P36,000 P129,000

Partnership net income for the year amounted to P29,300.

Required: Allocate the net income if

1. Claude receives a salary of P7,100, each partner is allowed a 10% interest on beginning capital
and the remaining profits are allocated on the basis of average capital balances. (Investments and
withdrawals are to be considered as made at the beginning of the month if made before the middle of
the month and are to be considered as made at the beginning of the following month if made after the
middle of the month.)

2. An interest of 10% of the weighted-average capital, a 20% interest shall be paid on that portion
of a partner’s average capital in excess of P45,000, salaries to Popol and Karina of P7,500 each, and
the balance in the ratio of beginning capital. (Investments and withdrawals are to be considered the
same as in No.1 in computing weighted average capitals.)

.
3. Popol will receive a bonus of 25% of net income for managing the business (treating the bonus as
an “expense” in computing the bonus amount), while the remaining balance are divided on the basis of
ending capital.

Problem 2

POPOL and KUPA formed a partnership on January 2, 2022 and agreed to share profits and loss in the
ratio of 90% and 10%, respectively. POPOL contributed capital of P25,000. KUPA contributed no capital
but has a specialize expertise and manages the firm full time. There were no withdrawals during the
year. The partnership agreement provides for the following:

Capital accounts are to be credited annually with interest at 5% of the beginning capital.
 POPOL is to be paid a salary of P1,000 a month.
 KUPA is to receive a bonus of 20% of net income calculated before deducting his salary and
interest on both capital accounts.
 The bonus and interest of both partners, and KUPA’s salary are to be considered as
partnership expenses.

Revenue P96,450
Less: Expenses (Including salary, interest and bonus) 49,700
Net Income P46,750

Required: Determine KUPA’s 2022 bonus.

Problem 3

The GROCK, SELENA, and LING Partnership were formed on January 2, 20x2. The original cash investments
were as follows. GROCK P96,000, SELENA 144,000 LING 216,000. According to the general partnership
contract, the partners were to be remunerated as follows:
a. Salaries of P14,400 for GROCK, P12,000 for SELENA, and P13,600 for LING.
b. Interest at 12% on the average capital balances during the year.
c. Remainder divided 40% to GROCK, 30% to SELENA and 30% for LING.

Net Income for December 31, 20x2, was P92,080. GROCK invested an additional P24,000, in the partnership
on July 1; LING
withdrew P36,000 from the partnership on October 1; and, as authorized by the partnership contract,
GROCK, SELENA and LING each withdrew P750 monthly against their shares of net income for the year.

Required:
1. The share of GROCK in the net income.
2. The capital balance of LING on December 31, 20x2.
Problem 4
A, B, and C, doctors, agree to form a partnership and to share profits in the ratio 5:3:2. They also
agreed that C is to be allowed a salary of P140,000 and that B is to be guaranteed P105,000 as his
share of the profits. During the first year of operations, income from fees are P900,000, while
expenses total P480,000. How much of the profit should be credited to A?, to B?, to C?

Problem 5
OATS Company a partnership was formed on January 1, 20x2, with four partners, C, P, A, and S. Capital
contributions were as follows:
 C-P1,000,000; P- P500,000; A- P500,000; and S- P400,000.
 The partnership agreement provides that each partner shall receive 5%interest on the amount of
his capital contribution.
 In addition, C is to receive a salary of P100,000 and P a salary of P60,000, which are to be
charged as expenses of the business. The agreement further provides that A shall receive a
minimum of P50,000 per annum from the partnership and S a minimum of P120,000 per annum, both
including amounts allowed as interest on capital and their respective shares of profits.
 The balance of the profits to be shared in the following proportions: C- 30%; P- 30%; A- 20%;
and S- 20%.

Calculate the amount that must be earned by the partnership during 20x2, before any charge for
interest on capital or partners’ salaries, in order that C may receive an aggregate of P250,000,
including interest, salary and share of profits.

Problem 6
The following Balance Sheet for the partnership of Joshua, Scarlett and Matthew were taken from the
books on October 1, 20x2
Assets Liabilities and Capital
Cash P100,000 Liabilities P200,000
Other Assets 400,000 Joshua, Capital 120,000
Scarlett, Capital 95,000
Matthew, Capital 85,000

Total Assets P500,000 Total Liabilities and Capital P500,000

The partners agreed to distribute profits as follows:

1) Annual salaries to Joshua and Scarlett of P 5,000 each
2) Annual interest of 5% on beginning capital
3) Bonus of 15% to Matthew based on income after salaries, interest and bonus
4) Remaining profit: 25% to Joshua, 35% to Scarlett and 40% to Matthew

The partnership began its operations on October 1, 20x2 and net income as of December 31, 20x2 is P
69,500. Which of the following is true?
A. The bonus to Matthew is P 5,804
B. Net Income after salaries, interest and bonus is P 38,696.
C. Scarlett’s total share in the net income is P 21,688.
D. Matthew’s share on the profit after salaries, interest and bonus is P13,543
QUIZZER
1. A and B formed a partnership to operate a retail store of various merchandise. They agreed on the
following distribution of profits and losses.
A B
Salaries P400,000 P350,000
Interest on ending balances before distribution 25% 30%
of profit(loss)
Bonus on net income after salaries and interest 15% 12%
but before bonuses
Remainder 40% 60%

Only 80% of the partners’ share in net income is distributed. The remaining 20% is retained as
partners’ capital. Partnership’s net income amounted to P2,500,000 at the end of the year. A’s and
B’s ending capital balances prior to distribution of profit/(loss) amounted to P1,250,000 and
P1,100,000, respectively.

How much is B’s share in the partnership net income?

A. 1,018,985 B. 950,000 C. 1,297,985 D. 997,985

2. From the previous number, how much is B’s ending capital after the distribution of the net income?
A. 1,359,597 B. 2,418,985 C. 1,600,000 D. 2,397,985

3. DAISYRE and MARIE are partners operating a small chain of convenience stores. Their business has
grown substantially over the last six years and they amended their partnership agreement to provide
the following distribution of profits and losses:

DAISYRE MARIE
Salaries P49,000 None
Commission None 4%
Interest on average capital balances 7% 9%
Bonus to Diana 10% of net income after salary, 10%
commission, interest and bonus
Remainder 40% 60%

Gross sales for 202A were 3,000,000. Income after deducting salaries, commissions and interest was
132,000. Average capital balances were 720,000 and 540,000 for DAISYRE and MARIE.
How much profit share will DAISYRE receive?
A. 158,920 B. 152,800 C. 159,400 D. 152,500

4. CARLO ANEIRO partnership begins its first year of operations with the following capital balances,
CARLO, P80,000; ANEIRO, P40,000. According to the partnership agreement, all profits will be
distributed as follows:

a. CARLO will be allowed a monthly salary of P8,000 with P4,000 assigned to ANIERO.
b. The partners will be allowed interest equal to 10% of the capital balance as of the first
day of the year.
c. CARLO will be allowed a bonus of 10% of the net income after bonus.
d. The remainder will be divided on the basis of the beginning capital for the first year and
equally for the second year.
e. Each partner is allowed to withdraw up to P4,000 a year

Assume that the income summary for the first year of operations has a debit balance of P6,000 and a
credit balance of P22,000 in the following year and assuming further that each partner withdraws the
maximum amount from the business each period, what is the balance of CARLO’s capital account at the
end of the second year?
A. P105,900 B. P113,900 C. P 73,900 D. P 72,000

5. The partnership of TIGREAL, GROCK, ATLAS and LAYLA reflected capital balances before the
distribution of the net income amounting to P125,000; P100,000, P175,000 and P150,000. The partners
are to divide profits and losses among themselves based on the following stipulations that they
agreed on:
A) Salary of P30,000 to TIGREAL, GROCK and LAYLA.
B) 10% interest on the capital balance before the distribution of income to the partners.
C) A 20% bonus after bonus and interest to Samuel is to be given to ATLAS.
D) The balance is to be divided on a 3:4:2:1 ratio.

If GROCK receives P70,000 from the partnership results of operations, what is the net income of the
partnership?
A. 300,625 B. 260,500 C. 270,625 D. 277,500

6. On January 1, 202A, Anna, Bea, and Cara formed a partnership with original capital contribution
ratio of 4:5:1 for a total agreed capitalization of P5,000,000. The profit or loss ratio agreement
provides that profits shall be distributed in the ratio of 3:2:5 while losses shall be distributed in
the ratio of 6:1:3.

During 202A, the partnership reported net income of P2,000,000 with Anna and Bea withdrawing P500,000
and P300,000, respectively. During 202B, the partnership reported net loss of P1,000,000 with Bea and
Cara withdrawing P200,000 and P400,000 respectively. What is the capital of Bea on December 31, 202B?
A. 2,600,000 B. 2,500,000 C. 2,300,000 D. 2,400,000
7. The partnership agreement of Courtney, Denver, and Sherwin provides for the year – end allocation
of net income in the following order:
 First, Courtney is to receive 10% of net income up to P200,000 and 20% over P200,000.
 Second, Denver and Sherwin each are to receive 5% of the remaining income over P300,000.
 The balance of income is to be allocated equally among the three partners.

The partnership’s 202A net income was P500,000 before any allocations to partners. What amount should
be allocated to Courtney?
A. P216,000 B. P222,000 C. 202,000 D. 206,000

8. Kyle and Edna formed the K & E partnership several years ago.
Capital account balances on January 1, 202A were: Kyle, P993,500; and Edna, P536,500.

The partnership agreement provides Kyle with an annual salary of P20,000 plus a bonus of 5% of
partnership net income for managing the business. Edna is provided an annual salary of P30,000 with
no bonus. The remainder is shared evenly. Partnership net income for 202A was P60,000. Edna and Kyle
each invested an additional P10,000 during the year to finance a special purchase. Year-end drawing
account balances were P30,000 for Kyle and P20,000 for Edna. Edna’s capital balances as of December
31, 202A should be
A. P 560,000
B. P 998,750
C. P 561,250
D. P1,000,000

9. D, S, and T have capital balances of P30,000, P20,000, and P40,000, respectively. Their P/L ratio
is 10% interest on capital balances; S is entitled to a salary of P12,000; T is guaranteed a minimum
share of P24,000 and remainder is divided 30:30:40.

The minimum profit to give an aggregate of P20,000 to S is:

A. P60,000
B. P53,000
C. P56,000
D. P49,000

10. G and H formed a partnership on January 2, 202A, and agreed to share income 90%, 10%, respectively.
G contributed a capital of P25,000. H contributed no capital but has a specialized expertise and
manages the firm full-time. There were no withdrawals during the year. The partnership agreement
provides for the following:
a. Capital accounts are to be credited annually with interest at 5% of beginning capital.
b. H is to be paid a salary of P1,000 a month.
c. H is to receive a bonus of 20% of income calculated before deducting his bonus, his salary, and
interest on both capital accounts.
d. Bonus, interest, and H’s salary are to be considered partnership expenses.

The partnership’s 202A income statement follows:

Revenues P 96,450
Expenses (including salary, interest and bonus) 49,700
Net income P 46,750

How much is the total share of H on the 202A partnership net income?
A. P31,675
B. P28,650
C. P32,388
D. P28,338

11. Aubrey and Ivy, partners, divide profits and losses on the basis of average capitals. Capital
accounts for the year ended December 31, 202A, are shown below. The net profit for 202A is P270,000.
(Changes in capitals during the first half of a month are regarded as effective as of the beginning
of the month; changes during the second half of a month are regarded as effective as of the beginning
of the following month.)
Aubrey Capital Ivy, Capital
Debit Credit Debit Credit
January 1 P600,000 P660,000
March 9 P100,000
April 14 300,000
July 1 200,000
September 1 P80,000
September 22 200,000
October 26 150,000

The share of Aubrey on the 202A profit is:

A. P114,500
B. P154,500
C. P115,500
D. P125,260

12. Olivia and Hector created a partnership to own and operate a health food store. The partnership
agreement provided that Olivia receive a salary of P20,000 and Hector a salary of P10,000 to recognize
their relative time spent in operating the store. Remaining profits and losses were divided 60:40 to
Olivia and Hector, respectively. Income for 202A, the first year of operations, of P26,000 was
allocated P17,600 to Olivia and P8,400 to Hector.
On January 1, 202B the partnership agreement was changed to reflect the fact that Hector could no
longer devote any time to the store’s operations. The new agreement allows Olivia a salary of P36,000
and the remaining profits and losses are divided equally. In 202B an error was discovered such that
the 202A reported income was understated by P8,000. The partnership income of P50,000 for 202B included
this P8,000 related to 202A.

By what amount should Olivia’s capital change in 202B?

A. P 39,000
B. P46,200
C. P43,800
D. P43,000

13. L, M, and N are partners with capital balances on January 1, 202A of P1,200,000, P480,000, and
P240,000, respectively. They agreed to share profits and losses as follows:
a. Salary allowances of L, P192,000; M, P240,000, and N, P240,000.
b. 6% interest allowed on beginning of the year’s capital balances.
c. The managing partner, L to be entitled to a 20% bonus after allowing as expenses partners’ salaries,
interest and bonus; and
d. Profits after partners’ salaries, interest, and bonus to be divided equally.

For the year 202A, the partnership reported profit before interest, salaries and bonus of P1,176,000.
For the year, the partners’ drawings were L, P408,000, M, P80,000 and N, P424,000. Each partner’s
share in the profits after salaries, interest and bonus was
A. P 108,000
B. P 129,600
C. P 392,000
D. P 103,68

14. X, Y and Z formed a partnership on November 10, 202A, known as XYZ Trading. X and Y each contributed
P60,000 cash. Z contribution consisted of 100 shares of A Company stock which had cost him P40,000.
On November 10, 202A, the stock had a market value of P60,000. The net profit from operations, after
adjustment is P236,700 as of December 31, 202B, and after considering the following information:
A) Personal consumption of partners and families is P4,000 for each partner per month.
B) Each of the partners devote full time to the business and withdrew P3,000 per week in 202B.

Ignoring result of operation for the prior year, the capital account of each partner as of December
31, 202B is:
A. X, P90,900; Y, P90,900; Z, P90,900
B. X, P138,900; Y, P138,900; Z, P138,900
C. X, P186,900; Y, P186,900; Z, P186,900
D. X, P330,900; Y, P330,900; Z, P330,900

15. Liam and Oliver operate Ilustrado Restaurant as a partnership. Their partnership agreement has
the following provisions for sharing profits and losses:
A) Income is distributed only as far as it is available.
B) Available income is to be distributed in the following sequence:
1. Liam, who is the chef, gets a salary of P50,000 a year; Oliver, who is still learning, gets
a salary of P20,000.
2. Interest is imputed on the average capital balances at 15 percent.
3. Any remaining profits and losses are to be shared equally.
The average capital balances during the year were P40,000 for Liam and P100,000 for Oliver. If the
partnership income for the year is P35,000, it should be distributed to the partners as follows:
A. Liam P16,000; Oliver P19,000
B. Liam P17,500; Oliver P17,500
C. Liam P25,000; Oliver P10,000
D. Liam P28,000; Oliver P7,000