YOUTH ON THE ROCK  OCT.

10, 2020

Partnership
Accounting
ANJIELICA M. CAVENTA, CPA
Youth on the Rock  Partnership Accounting (Part 2)
Reminders
1. Non-cash assets contributed are recorded in the
books at their agreed values or fair market value at
the time of contribution.
2. No Accumulated Depreciation is recorded in the
partnership books.
3. The Allowance for Uncollectible Accounts is carried
in the partnership because of the possibility of
collection.

Youth on the Rock  Partnership Accounting (Part 2)

Reminders
1. The capital account is debited or credited for any
increase or decrease in the value of assets.
2. The sole proprietors can contribute their assets and
liabilities to the newly formed partnership upon
formation and recording the contributions at agreed
values or fair market values.

Youth on the Rock  Partnership Accounting (Part 2)

ARE YOU READY?

Youth on the Rock  Partnership Accounting (Part 2)

Problem 1
Partnership Formation

On January 1, 2020, Hisoka and Illumi

decided to combine their business and form a
partnership. The statement of Hisoka and
Illumi before adjustments are as follows:

Youth on the Rock  Partnership Accounting (Part 2)

 HISOKA ILLUMI
Cash 180,000 75,000
Accounts Receivable 370,000 270,000
Inventories 600,000 390,000
Furnitures and fixtures, net 600,000 180,000
Office equipment, net 230,000 55,000
Prepaid expenses 127,500 60,000
2,107,500 1,030,000
Accounts Payable 915,000 360,000
Hisoka, Capital 1,192,500 -
Illumi, Capital - 670,000
2,107,500 1,030,000
- -

They agreed to provide P11,100 and P8,100 respectively for

uncollectible accounts on their receivables and found Illumi’s
furniture to be underdepreciated by P18,000.

Youth on the Rock  Partnership Accounting (Part 2)

If the partner’s share is equal to net assets invested, the
capital accounts of Hisoka and Illumi would be:

a. 1,163,400 and 661,900 respectively FORMULA:

Hisoka
b. 1,166,400 and 658,900 respectively 1,192,500 – 11,100 = 1,181,400
c. 1,181,400 and 643,900 respectively Illumi
d. 2,096,400 and 1,003,900 respectively 670,000 – 8,100 – 18,000 = 643,900

Youth on the Rock  Partnership Accounting (Part 2)

Using the same information, assuming that the partners agreed
that equity is to be 60% and 40% to Hisoka and Illlumi
respectively, the capital accounts would be:
a. 1,095,180 and 730,120 respectively FORMULA:

b. 1,181,400 and 643,900 respectively Total Capital = 1,825,300

(1,181,400 + 643,900 )
c. 1,860,180 and 1,240,120 respectively
d. 1,117,500 and 745,000 respectively Hisoka = 1,095,180 (1,825,300*60%)
Illumi = 730,120 (1,825,300*40%)

Youth on the Rock  Partnership Accounting (Part 2)

PARTNERSHIP
OPERATIONS
Youth
Youthon
onthe
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PartnershipAccounting
Accounting(Part
(Part2)2)
CLOSING ENTRIES OF A
PARTNERSHIP
Partnership Profit
Income Summary 480,000
Juan, Capital 240,000
Cruz, Capital 240,000

Partnership Loss
Juan, Capital 240,000
Cruz, Capital 240,000
Income Summary 480,000

Youth on the Rock  Partnership Accounting (Part 2)

Division of Profits and
Losses
SERVICES RENDERED BY
PARTNERS
Salaries are given to partners proportionate to time
devoted to the organization.

AMOUNT OF CAPITAL
CONTRIBUTED
Interest on capital contribution is allowed to each partner.

ENTREPRENUERIAL ABILITY
Bonus is allowed to partners when the partnership realizes
profits.

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on the the Rock  Partnership
 Partnership Accounting
Accounting (Part(Part
2) 2)
Division of Profits and
Losses
The profit or loss division of the partners
may be expressed in terms of:

Percentage
Fraction
Decimal
Ratio

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on the the Rock  Partnership
 Partnership Accounting
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ILLUSTRATION
Chan and Cristine are partners sharing profits and losses based on their capital
contributions of P600,000 and P400,000, respectively.
Their profit and loss sharing can be expressed as follows:

By percentage Chan 60%

Cristine 40%
By fraction Chan 6/10 or 3/5
Cristine 4/10 or 2/5
By decimal Chan .6
Cristine .4
By ratio Chan
6:4 or 3:2,
Cristine respectively
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Youth on Rock
on the the Rock  Partnership
 Partnership Accounting
Accounting (Part(Part
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RULES FOR DIVIDING PROFITS AND LOSSES
AS TO CAPITALIST
PARTNERS
Division of Profits
1. In accordance with agreement
2. In accordance with capital contribution

Division of Losses
1. In accordance with agreement
2. If only the division of profits is agreed upon,
division of losses will follow the same proportion
3. In accordance with capital contribution

Youth
Youthon
onthe
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RockPartnership
PartnershipAccounting
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RULES FOR DIVIDING PROFITS AND LOSSES
AS TO INDUSTRIAL
PARTNERS
Division of Profits
1. In accordance with agreement
2. In the absence of agreement:
a. Industrial partner – Just and equitable share of
the profits
b. Capitalist partner – In accordance with capital
contribution

Youth
Youthon
onthe
theRock
RockPartnership
PartnershipAccounting
Accounting(Part
(Part2)2)
RULES FOR DIVIDING PROFITS AND LOSSES
AS TO INDUSTRIAL
PARTNERS
Division of Losses
1. In accordance with agreement
2. In the absence of agreement:
Capitalist-industrial partner
a. No share in losses as an industrial partner
b. Share in proportion to capital contribution as a
capitalist partner.

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METHODS OF DISTRIBUTING PROFITS BASED ON
PARTNERS’ AGREEMENT
Equally

Bonus to
managing Arbitrary ratio
partner

Salary
allowances to Capital Ratio
partners

Interest on
Capital
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KNOWLEDGE QUIZ

Youth on the Rock  Partnership Accounting (Part 2)

 T R U E O R FA L S E

A capitalist-industrial partner has a share in

partnership loss in proportion to his capital
contribution as a capitalist partner.

TRUE

Youth on the Rock  Partnership Accounting (Part 2)

 T R U E O R FA L S E

All kinds of partners participate in the

distribution of partnership losses.

FALSE

Youth on the Rock  Partnership Accounting (Part 2)

 M U LT I P L E C H O I C E

In the absence of partnership loss agreement,

how shall capitalist partners share in loss?
a. Based on capital contribution ratio
b. Based on profit agreement ratio
c. Just and equitable share
d. Equally

Youth on the Rock  Partnership Accounting (Part 2)

 M U LT I P L E C H O I C E

In the absence of partnership profit agreement, how

shall industrial partner share in partnership profit?

a. Equal at least to the share of capitalist partner

b. Equal to the share of highest capitalist partner
c. Just and equitable share
d. Equal to the share of average capitalist partner

Youth on the Rock  Partnership Accounting (Part 2)

 M U LT I P L E C H O I C E

How should the partnership profit or loss be distributed to

the partners, whether capitalist or industrial?

a. In accordance with capital contribution ratio

b. In accordance with just and equitable sharing
c. Equally
d. In accordance with the partnership agreement

Youth on the Rock  Partnership Accounting (Part 2)

 ILLUSTRATION
JC Enterprises realized a profit of P480,000 for the year. Changes in capital accounts
of the partners during the year are as follows:

Juan, Capital Jan. 1 Balance P1,000,000

Apr 1 Additional Investment 100,000
May 1 Withdrawal 40,000
Oct. 1 Additional investment 200,000

Cruz, Capital Jan. 1 Balance P600,000

June 1 Withdrawal 60,000
Sept. 1 Additional investment 200,000
Dec. 1 Withdrawal 20,000

Youth on the Rock  Partnership Accounting (Part 2)

ILLUSTRATION
Assumption 1 – Profit is divided equally
Income Summary 480,000
Juan, Capital 240,000
Cruz, Capital 240,000
P480,000/2 = P240,000

Assumption 2 – Profit is divided in the ratio of 3:2

Income Summary 480,000
Juan, Capital 288,000
Cruz, Capital 192,000
P480,000 x 3/5 = P288,000
P480,000 x 2/5 = P192,000

Youth on the Rock  Partnership Accounting (Part 2)

ILLUSTRATION
Assumption 3 – Profit is divided 55% to Juan and 45% to Cruz
Income Summary 480,000
Juan, Capital 264,000
Cruz, Capital 216,000
P480,000 X 55% = P264,000
P480,000 X 45% = P216,000

Assumption 4 – Profit is divided according to beginning capital ratio

Income Summary 480,000
Juan, Capital 300,000
Cruz, Capital 180,000
P480,000 x 1M/1.6M= P300,000
P480,000 x 600k/1.6M = P180,000
Youth on the Rock  Partnership Accounting (Part 2)
ILLUSTRATION
Assumption 5 – Profit is divided according to average capital ratio
Income Summary 480,000
Juan, Capital 305,040
Cruz, Capital 174,960
P480,000 X 1,098,340/1,728,340 = P305,040
P480,000 X 630,000/1,728,340 = P174,960

Juan, Capital Cruz, Capital

Jan. 1 – Mar. 31 (P1,000,000 x 3) P3,000,000 Jan. 1 – May 31 (P600,000 x 3) P3,000,000
Apr. 1 – Apr. 30 (P1,100,000 x 1) 1,100,000 Jun. 1 – Aug. 31 (P540,000 x 3) 1,620,000
May 1 – Sept. 30 (P1,060,000 x 5) 5,300,000 Sept. 1 – Nov. 30 (P740,000 x 3) 2,220,000
Oct .1 – Dec. 31 (P1,260,000 x 3) 3,780,000 Dec. 1 – Dec. 31 (P720,000 x 1) 720,000
Total P13,180,000 Total P7,560,000
Average capital (Total ÷ 12) 1,098,340 Average capital (Total ÷ 12) 630,000

Youth on the Rock  Partnership Accounting (Part 2)

INTEREST ON
CAPITAL
Interest shall be provided whether the profit is
sufficient or insufficient or there is net loss unless
otherwise agreed upon by the partners.

Youth on the Rock  Partnership Accounting (Part 2)

ILLUSTRATION
Assumption 6 – Each partner is allowed 10% interest on ending capital and the
remaining profit is divided equally.
Income Summary 480,000
Juan, Capital 267,000
Cruz, Capital 213,000

Juan Cruz Total

Interest on ending capital:
P1,260,000 x 10% P126,000
P720,000 x 10% P72,000 P198,000
Remainder equally
(P282,000/2) 141,000 141,000 282,000
Net Profit P267,000 P213,000 P480,000

Youth on the Rock  Partnership Accounting (Part 2)

SALARIES

Salaries shall be provided whether there is profit or

loss or in case of profit, whether it is sufficient or not,
unless otherwise agreed upon by the partners.

Youth on the Rock  Partnership Accounting (Part 2)

ILLUSTRATION
Assumption 7 – Cruz is allowed salaries of P300,000 and the remaining profit is
divided in the ratio 4:1
Income Summary 480,000
Juan, Capital 144,000
Cruz, Capital 336,000

Juan Cruz Total

Salaries to Cruz P300,000 P300,000
Remainder – 4:1
P180,000 x 4/5 P144,000
P180,000 x 1/5 36,000
Net Profit P144,000 P336,000 P480,000

Youth on the Rock  Partnership Accounting (Part 2)

BONUS
1. Bonus based on profit before deducting bonus and
income tax.
2. Bonus based on profit after deducting bonus but
before deducting income tax.
3. Bonus based on profit before deducting bonus but
after deducting income tax.
4. Bonus based on profit after deducting bonus and
income tax.

Youth on the Rock  Partnership Accounting (Part 2)

ILLUSTRATION
Assumption 8 – Cruz, the managing partner, is allowed a bonus of 20% of profit
BEFORE bonus and income tax and the remainder divided equally
Income Summary 480,000
Juan, Capital 171,429
Cruz, Capital 308,571

Juan Cruz Total

Bonus to Cruz
P685,714 x 20% P137,142 P137,142
(P480,000 ÷ 70%)
Remainder - equally 171,429 171,429 342,858
Net Profit P171,429 P308,571 P480,000
B = .20(P685,714)
Youth on the Rock  Partnership Accounting (Part 2)
ILLUSTRATION
Other assumptions on the computation of bonus (using Assumption 8 -Cruz, the
managing partner, is allowed a bonus of 20% of profit)

a. The bonus is based on profit AFTER deduction for bonus but BEFORE deduction
of income tax

B = .20(P685,714 – B)
B = P137,143 - .20B
B + .20B = P137,143
1.20B = P137,143
B = P137,143 ÷ 1.20
B = P114,286

Youth on the Rock  Partnership Accounting (Part 2)

ILLUSTRATION
Other assumptions on the computation of bonus (using Assumption 8 -Cruz, the
managing partner, is allowed a bonus of 20% of profit

b. The bonus is based on profit BEFORE deduction for bonus but AFTER deduction
of income tax
B = .20(P685,714 - T)
T = .30 (P685,714)
T = P205,714
B = .20(P685,714 - P205,714)
B = .20(P480,000)
B = P96,000

Youth on the Rock  Partnership Accounting (Part 2)

ILLUSTRATION
Other assumptions on the computation of bonus (using Assumption 8 -Cruz, the
managing partner, is allowed a bonus of 20% of profit

c. The bonus is based on profit AFTER deduction for bonus and income tax
B = .20(P685,714 – B - T)
B = .20(P685,714 – B - P205,714)
B = .20(480,000 – B)
B = P96,000 - .20B
B + .20B = P96,000
1.20B = P96,000
B = P96,000 ÷ 1.20
B = P80,000
Youth on the Rock  Partnership Accounting (Part 2)
ORDER OF PROFIT
SHARING PROVISION

Youth on the Rock  Partnership Accounting (Part 2)

ILLUSTRATION
Assumption 9 – The partnership agreement provides salaries of P200,000 and
P100,000 to Juan and Cruz, respectively; 10% interest on ending capital; 20% bonus
to managing partner Cruz if the net profit is sufficient; and the balance will be
divided equally.
Income Summary 480,000
Juan, Capital 317,000
Cruz, Capital 163,000
Juan Cruz Total
Interest on ending capital 126,000 72,000 198,000
Salaries 200,000 100,000 300,000
Bonus to Cruz - -
Remainder – equally (9,000) (9,000) (18,000)
Net Profit P317,000 P163,000 P480,000
Youth on the Rock  Partnership Accounting (Part 2)
ORDER OF PRIORITY
PROVISION

Youth on the Rock  Partnership Accounting (Part 2)

ILLUSTRATION
Assumption 10 – The partnership agreement provides salaries of P200,000 and
P100,000 to Juan and Cruz, respectively; 10% interest on ending capital; and the
balance will be divided equally. Profit is to be allocated by first giving priority to
interest on invested capital and then on salary allowance.
Income Summary 480,000
Juan, Capital 314,000
Cruz, Capital 166,000

Juan Cruz Total

Interest on ending capital 126,000 72,000 198,000
Salaries (ratio of 2:1) 188,000 94,000 282,000
Net Profit P314,000 P166,000 P480,000

Youth on the Rock  Partnership Accounting (Part 2)

REMINDERS

1. Interest allowed to partners is

proportionate to the period the capital is
invested into the business.
2. Salaries allowed to partners is
proportionate to the period the partners
actually rendered service to the firm.
3. Bonus is computed on the basis of
“partnership net profit”. In such case, no
bonus is allowed if there is insufficient
profit after the distribution of interest and
salaries.

Youth on the Rock  Partnership Accounting (Part 2)