INTEGRATED REVIEW II: ADVANCED FINANCIAL ACCOUNTING AND REPORTING

MODULE 2: PARTNERSHIP OPERATIONS

PART I. NOTES

Rules in distribution of profit or losses

In case of profits (in order of priority)

1. Agreement
2. Original capital balance
3. Beginning capital balances
4. For purely industrial partners, just and equitable share under the circumstances
In case of loss (in order of priority)
1. Agreement
2. Profit ratio, if there is no separate loss sharing ration
3. Original capital balance
4. Beginning capital balance
5. Purely industrial partners do not share is losses

Specific Agreement as to Profit or Loss Sharing

This is divided into 3 groups:

1. Arbitrary ratio (example: equally, 5:3:2, 60% - 40% sharing

2. Ratio based on capital balances. It may be based on beginning, ending or weighted average capital balance. Note
that is determining weighted average capital balance, temporary withdrawals are not included in the computation.
3. Provisions for salaries, interest and bonuses
a. As a general rule, interest on capital balances, salary allowances to partners, and bonus to partners are not
expenses of the firm but as a manner of distribution of profits and losses
b. Salary allowances to partners and interest on capital balances are given to partners regardless of the result of
the operations of business (whether net income or net loss)
c. Salary allowance to partners are given to compensate the partners in managing the day to day operations of
the business. Interest on capital balances are given to reward the investments made by the partners to the
business.
d. Bonus to partner is performance based incentive, thus it is only given in case of profitable results of operations
of business (net income). Bonus rate may be fixed or variable.

Statement of Partner’s Equity

Partner’s Capital
Permanent withdrawals xx Beginning capital balance xx
Share in net loss xx Additional investments xx
Share in net income xx
Ending capital balance xx

PART II. STRAIGHT PROBLEMS

PROBLEM 1 (Provisions for salaries, interest and bonus ). The PQ Partnership has the following plan for the distribution of
partnership net income (loss):
Particulars P Q
Salaries P80,000 P100,000
Bonus on net income 6% 12%
Interest on average capital balance 7% 7%
Remainder (if positive) 60% 40%
Remainder (if negative) 50% 50%

Required: Calculate the distribution of partnership net income (loss) for each independent situations below (for each
situation, assume the average capital balance of P is P140,000 and of Q is P240,000:

a. Partnership net income is P360,000

b. Partnership net income is P200,000
c. Partnership net loss is P40,000

PROBLEM 2 (Weighted Average Capital Balance). A and B organized the AB Partnership on 1/1/20x4. The following
entries were made into their capital accounts during 20x4.

A, Capital B, Capital
Date Debits Credits Date Debits Credits
1/1 P20,000 1/1 P40,000
4/1 5,000 3/1 P10,000
10/1 5,000 9/1 P10,000
11/1 P10,000

The partnership agreement called for the following in the allocation of partnership profits and losses:
Salaries of P48,000 and P36,000 would be allocated to A and B, respectively
Interest of 8% on average capital balances
B will receive a bonus of 10% on all partnership billings in excess of P300,000
Any remaining profits/losses will be allocated 60/40 to A and B respectively.

Required: (Account for each situation independently)

a. Determine the distribution of partnership net income. Assume the partnership income of P85,000; partnership billings
amounted to P400,000

b. Determine the distribution of partnership net income of P165,000 on billings of P400,000.

PROBLEM 3 (Computation of Bonus). The net income of A and B partnership for 20x4 amounted to P504,000. A is their
managing partner. Assume that the partners agreed on the allocation of net income as follows:
Bonus of 20% to A
Salaries to A, P48,000 and B, P72,000
Interest on average capital balances – A, P14,400 and B, P9,600
Residual balance in net income to be allocated to A and B in the ratio of 2:1 ratio.

Required: Prepare a schedule to allocate net income assuming:

a. Bonus is based on net income before bonus, salaries and interest
b. Bonus is based on net income after bonus but before salaries and interest
c. Bonus is based on net income after bonus, salaries and interest
d. Bonus is based on net income before bonus but after income tax (tax rate is 35%)
e. Bonus is based on net income, that is, after bonus and income tax of 35%
PART III. MULTIPLE CHOICE QUESTIONS

1. Partner A had a capital balance on January 1, 20x4 of P45,000 and made additional capital contributions during
20x4 totaling P50,000. During the year 20x4, A withdrew P8,000 per month. A’s post-closing capital balance on
December 31, 20x4 is P30,000. A’s share of 20x4 partnership income is:
a. P96,000 b. P50,000 c. P31,000 d. P8,000
2. Red and White formed a partnership in 2011. The partnership agreement provides for annual salary allowances
of P55,000 for Red and P45,000 for White. The partners share profits equally and losses in a 60/40 ratio. The
partnership had earnings of P80,000 for 2011 before any allowance to partners. What amount of these earnings
should be credited to each partner’s capital account?
Red White Red White
a. 40,000 40,000 c. 44,000 36,000
b. 43,000 37,000 d. 45,000 35,000
3. Fox, Greg, and Howe are partners with average capital balances during 2011 of P120,000, P60,000, and P40,000,
respectively. Partners receive 10% interest on their average capital balances. After deducting salaries of P30,000
to Fox and P20,000 to Howe, the residual profit or loss is divided equally. In 2011 the partnership sustained a
P33,000 loss before interest and salaries to partners. By what amount should Fox’s capital account change?
a. P7,000 increase b. P11,000 decrease c. P35,000 decrease d. P42,000 increase
4. The partnership agreement of Reid and Simm provides that interest at 10% per year is to be credited to each
partner on the basis of weighted-average capital balances. A summary of Simm’s capital account for the year
ended December 31, 2011, is as follows:
Balance, January 1 P140,000
Additional investment, July 1 40,000
Withdrawal, August 1 (15,000)
Balance, December 31 165,000
What amount of interest should be credited to Simm’s capital account for 2011?
a. 15,250 b. 15,375 c. 16,500 d. 17,250
5. Partners A and B have a profit and loss agreement with the following provisions: salaries of P20,000 and P25,000
for A and B respectively; a bonus to A of 10% of net income after bonus; and interest of 20% on average capital
balances of P40,000 and P50,000 for A and B, respectively. Any remainder is to be split equally. If the
partnership had net income of P88,000, how much should be allocated to Partner A
a. P36,000 b. P44,500 c. P50,000 d. P43,500
6. The partnership agreement of Axel, Berg & Cobb provides for the year-end allocation of net income in the
following order:
• First, Axel is to receive 10% of net income up to P100,000 and 20% over P100,000.
• Second, Berg and Cobb each are to receive 5% of the remaining income over P150,000.
• The balance of income is to be allocated equally among the three partners.
The partnership’s 20111 net income was P250,000 before any allocations to partners. What amount should be
allocated to Axel?
a. 101,000 b. 103,000 c. 108,000 d. 110,000

The partnership agreement of ROGER, REGGIE and BOBBY provides for the division of net income as follows:
• REGGIE, who manages the partnership is to receive a salary of P35,200 per year.
• Each partner is to be allowed interest at 20% on beginning capital.
• Remaining profits are to be divided equally.

During 2020, ROGER invested an additional P12,800 in the partnership. REGGIE and BOBBY had permanent capital
withdrawals of P16,000, and P12,800, respectively. REGGIE had a temporary drawing of P4,500. No other investments or
withdrawals were made during 2018. On January 1, 2020, the capital balances were ROGER, P208,000; REGGIE,
P240,000; and BOBBY, P224,000. Total capital at year-end was P806,400.

7. Compute the capital balance of each partner at year-end:

ROGER REGGIE BOBBY
a. P257,500 P297,800 P251,100
b. 258,300 297,000 251,100
c. 250,665.6 292,800 244,266.4
d. 258,300 297,000 251,100