1.

Content/Discussion
PARTNERSHIP DEFINED
A partnership is an organization put up by two or more persons contributing
money, property or industry into a common fund with the purpose of dividing the
profits among themselves. (Article 1767 of the New Civil Code).

Persons forming a partnership include not only individuals but also

partnerships, corporations and other associations. Most often, partnerships are
entered into by individuals for the practice of a profession such as law, accounting,
medicine and the like. Hence, we have the ROBERT CARAG ONG & ASSOCIATES,
architects; SIGUION REYNA MONTECILLO & ONGSIAKO LAW OFFICES and the SYCIP
GORRES VELAYO & CO., CPAs. Merchandisers, manufacturers and distributors under a
partnership form of business also abound. The partnership's name usually ends with
the word associates, company or & SONS.
Based on the definition given, the following are the elements of a partnership:
1. A valid contract, whether oral or written, is necessary. Article 1772 of the Law on
Partnership provides that when the capital is P3,000 or more, it must be in a public
instrument; Article 1773 likewise provides for a written contract when the investment
is in the form of immovable property.
2. There must be two or more persons having legal capacity to enter into a contract.
3. Contributions may be in the form of money, property or service.
4. The purpose of the business is to divide the profits among themselves.

ATTRIBUTES OF A PARTNERSHIP
A partnership has both the attributes of a sole proprietorship and a
corporation. Just like a sole proprietorship, since it is an association of individuals, it
involves accounting for each partner's interest in the pooled assets. Since the
business is generally managed by the partners, they are therefore contractually liable
to outside parties for transactions entered into by them. Each of the partners has an
unlimited liability over partnership debts. It means that their personal properties can
be subject to attachment by the partnership creditors when the partnership becomes
insolvent.

Since it is a legal entity just like a corporation, the partnership can enter into
contracts to acquire, hold or dispose of properties. This attribute is in Article 1768
which provides that the partnership is a separate distinct personality. As such, a
clear distinction should also be drawn between the net assets of the partners and
that of the partnership and between personal transactions of the partners and the
business transactions entered into by them. The partnership accountant analyzes and
records only assets, liabilities, revenues and expenses affecting partnership. Like a
corporation, the partnership is a taxable entity subject to a 30 % rate (effective 2009)
unless it is a general professional partnership. Just like a corporation, a partnership
enjoys an indefinite life although the latter can easily be dissolved by the mutual
consent of the partners or when a partner retires or dies.

CHOOSING THE RIGHT FORM OF BUSINESS

If one is thinking of putting up a medium scale business where more capital is
required and the expertise of some friends or associates would be needed, then a
partnership form of business would be more appropriate compared to a sole
proprietorship. Better management would result because of the concerted efforts
and abilities of the partners. Likewise, compared to a corporation, it would be simpler
and less expensive to form a partnership there being only a few legal requirements.
Additionally, partnership creditors are more protected than the corporate creditors
because of the unlimited liability requirement. It means that the partners' personal
properties may be subject to attachment in case the partnership becomes insolvent
and fails to pay its obligations.

On the other hand, because of more persons involved, conflict of interest is

likely to occur in a partnership which might adversely affect the business. Likewise,
there is uncertainty in its life. Although it is easy to put up a partnership, it is also
easy to dissolve or liquidate it. The mere withdrawal or death of a partner, especially
if there are only two partners, would cause its immediate dissolution.

KINDS OF PARTNERSHIPS
1. As to liability -
A General Partnership is one where the partners are liable to the extent of
their personal properties. A Limited Partnership is composed of at least one general
partner with the others as limited partners whose liabilities do not go beyond their
interest in the
partnership

2. As to properties -
A Universal Partnership of Property is one where all partners invest all their
properties into a common fund (Article 1778 of the New Civil Code), while a Universal
Partnership of Profit is one where the partners contribute all what they will receive as
a result of their work or service rendered by them during the lifetime of the
partnership. Their individual properties do not become partnership properties but
are retained by them as personal properties.

KINDS OF PARTNERS
1. A general partner is one whose liability extends up to his personal properties and
has the right to manage the partnership.
2. A limited partner is one who is liable only up to his contribution in the partnership.
3. A capitalist partner is one who contributes money or property.
4. An industrial partner is one who contributes industry or service. He is also liable as
a general partner and is not allowed to engage in any other kind of business unless
expressly authorized by the other partners.
5. A real partner is an actual partner.
6. A nominal partner is a partner in name only.
7. An ostensible partner is one who is known to the public that he is a partner.
8. A secret partner is one who is not known as a partner to the general public.
9. A universal partner is one whose participation extends to the entire business
venture.
10. A particular partner is one whose participation is limited to a unit or part of the
business.

CONTRACT OF PARTNERSHIP
A basic requirement for registration of a partnership with the Securities and Exchange
Commission (SEC) is the filing of the Articles of Co-Partnership. The SEC is a
government agency tasked to supervise partnerships and corporations. The following
information are contained in the Articles of Co-Partnership:

1. Those affecting formation

a. Name of the partnership, its nature and location
b. Effective date of operation
c. Life of the partnership based on the accomplishment of its purpose or objective
d. Names and addresses of the partners
e. Initial asset contributions of partner and their monetary values
f. Initial interest of the partners and subsequent interest resulting from share in profit
or loss.

2. Those affecting operation

a. Manner of management
b. Duties, rights and obligations of the partners
c. Limitations on withdrawals
d. Manner of dividing profit among partners
e. Arbitration of conflict

3. Those affecting dissolution

a. Manner of dissolving the partnership with the rights and duties of the partners
b. Manner of liquidating the partnership with the rights and duties of the partners
c. Date of closing the books and determination of profit or loss of the partnership
d. Manner of payment of liabilities and distribution of assets to the partners

In a partnership, where there are many persons involved, conflicts and

disagreements may easily arise. It is therefore advisable that a written contract be
prepared. This will clear out all points of activities in the business and will lead to a
harmonious relationship among the partners. The success of the partnership
depends to a considerable extent on this premise.

PARTNER'S ROLE
A partner is a co-owner of the partnership property. Property invested by a
partner such as land or building ceases to be a personal property. It becomes
property of the partnership. A partner is liable to the partnership creditors
individually and up to the extent of ones personal properties. In the event that
partnership assets are insufficient to pay for the liabilities, the personal properties of
a partner may be subject to attachment by the partnership creditors. A partner is an
agent of the partnership for the purpose of carrying its objectives. Therefore, the
partnership is bound by the act of a partner.

PARTNER'S INTEREST
Properties invested by the partners cease to be personal properties and
become partnership properties. However, as a partner, he is "co-owner" of the
pooled properties an at liquidation point has a right over these as represented by the
partner s capital account. This is called "right over assets". Likewise, profits obtained
as a result of partnership operation should be shared by all the partners based on
some agreement. This is called "right over profits".
One must not assume that the right over the assets is computed the same way as the
right over profit or loss. The latter may have a different ratio depending on some
factors and the partners' agreement. Assume the statement of financial position of
AB Partnership shows the following:
Assets P100,000
Liabilities 50,000
A, Capital 30,000
B, Capital 20,000

Agreed profit and loss ratio is 1:1. This shows that Partner A has a 60%
(30,000/50,000) right over the net assets but has a profit and loss ratio of 50%.

ACCOUNTING FOR A PARTNERSHIP

The accountant is guided by the Articles of Co-Partnership in analyzing and
recording transactions. Information contained herewith is useful in recording the
transactions. For instance, after determining that a net income of so much was
earned by the business, the method of distributing the net income among the
partners is provided in the articles. Whether or not the partners can make cash
withdrawals over and above their profit share or that only a definite amount can be
withdrawn in the form of salaries would depend upon the agreement contained in
the articles.
 Basically, the same accounting steps are involved whether the business unit is
a sole proprietorship, partnership or corporation. Accounting for the interest of an
owner or investor is affected by the same factors such as investments, withdrawals
and share in the net profit or net loss. The difference in the accounting procedure lies
in the closing of the net profit or loss. In a sole proprietorship, the net profit is
recorded in the drawing account which balance is closed to the capital account. In a
partnership, the net profit is recorded in the drawing accounts of the partners based
on an agreed ratio and the balances of the drawing accounts are closed to the capital
accounts as agreed upon by the partners. In a corporation, the net profit is closed to
an account title called retained earnings which is distributed to the shareholders as
dividends subject to the decision and declaration of a managing body called the
Board of Directors.

PARTNER'S CAPITAL AND DRAWING ACCOUNTS

Since a partnership is owned by two or more persons, it is necessary that
there should be as many capital accounts and drawing accounts as there are
partners. For instance, assume that there are three partners - Acosta, Bernabe and
Cruz who put up the ABC Partnership. The capital accounts are needed to record
their investments: Acosta, Capital; Bernabe. Capital and Cruz, Capital. Three capital
account is used to record permanent changes in the partner’s interest. Ordinarily,
there are three items affecting this account – partner’s investment whether original
account if it is so agreed to make this part of permanent capital. A fourth factor may
be considered in the form of asset revaluation, when for example the partnership is
to be dissolved to make way for the reorganization of the partnership and the
revision of the partner’s equity.

STATEMENT OF PARTNERS' EQUITY

For a simpler presentation of the statement of financial position, only the final
balances the partners' capital accounts are shown. A statement of partners' equity is
prepared showing all the changes affecting the partners' interests during the
accounting period.

OTHER TRANSACTIONS AFFECTING PARTNER'S EQUITY

The following are variations to the investment or withdrawal made by a partner:
1. A partnership liability is personally paid by a partner.
2. Notes receivable of a partner is collected and retained by the partnership.
3. Partner's personal liability is paid out of partnership fund.
4. Receivable of a partnership is.collected and retained by a partner.

Whether the accountant should use the capital account or drawing account
depends on whether some transactions are to be considered permanent capital or
temporary capital subject to adjustment based on partner's profit share. Again, if
after profit share the drawing account is still a credit balance, this can be withdrawn
by the partner or transferred to the capital account.

LOANS TO AND FROM PARTNERS

A partnership in need of additional funds may borrow from a partner. In this
case a liability account called Loan Payable to Partner is set up in the accounting
records. The pro forma entry will be:
Cash xxx
Loan Payable, Wency xxx
There are also instances where the partner borrows money from the partnership. In
this case, the partnership recognizes an asset Loan Receivable, Partner. The pro forma
entry be:
Loan Receivable, Wency xxx
Cash xxx

PARTNERSHIP FORMATION
The first entries in the partnership books pertain to the contributions made by
the partners. The contribution may be in cash, property, industry or an already
existing business. A certified public accountant may assist the partners in revaluing
the assets or in auditing the books of a sole proprietor prior to forming a partnership.

If the contribution is in the form of industry or service, only a memorandum

entry is prepared. If the contribution is in the form of property, it should be
recognized at the market value or appraised value. Fair value is the amount for which
an asset could be exchanged between two knowledgeable and willing parties in an
arm’s length transaction. Subsequently, any gain or loss from its sale shall be shared
by all the partners according to their profit and loss agreement.

Liabilities attached to invested properties may be assumed by the partnership,

in which case the capital of the partner will be credited only at the net amount of the
asset contribution.

To illustrate, assume that Vina, Carlo and Loy decided to form a partnership on July 1.
Vina agreed to contribute cash of P50,000 and merchandise costing P15,000 but with
a present market value of P10,000. Carlo agreed to invest land which was purchased
for P75,000 but was appraised at twice its cost price. Loy will be admitted as an
industrial partner to share 10% in the profits.
Opening entries in the partnership books –

July 1 Cash 50,000

Inventory 10,000
Land 150,000
Vina, Capital 60,000
 Carlo, Capital 150,000
To record investments of Vina and Carlo.
July 1 Admitted Loy as Sales Manager to share 10% in the profits.

Assume that the land to be invested by Carlo is currently mortgaged to a bank

against a loan payable with a balance of P50,000. If the partners agree that the
liability will be assumed by the partnership, then the entry to record the investment
of Carlo will be:

July 1 Land 150,000

Mortgage Payable 50,000
Carlo, Capital 100,000
To record the investment and the liability assumed by the business.

Take note that the land is still recorded as P150,000. It is the capital account decrease
with the recognition of the mortgage liability by the partnership.

INVESTMENT OF AN ALREADY EXISTING BUSINESS

Where a partner has an already existing business and decides to invite another
person or persons to put up a partnership, two books will be affected, namely: the
books of the existing or old business and the books of the partnership. The following
accounting procedures may be followed:
1. Presentation of the assets and liabilities of the already existing business as the
partner’s investment.
2. Revaluation or adjustment of the assets and liabilities of the already existing
business as agreed upon by the partners.
3. Adjust the existing books based on no. 2 and close it.
4. Record investments at adjusted values in the partnership books.
In lieu of nos. 3 & 4, if existing books are still to be used, the following additional
steps
should be accomplished:
● Adjust the existing books based on no. 2 and make an additional entry
recording the other partner's investment.

ACTUAL CONTRIBUTION AGAINST AGREED CAPITALIZATION

Most often, the actual contribution of a partner after adjustments becomes
the basis of the capital contribution in the partnership. A complication arises when
the agreed capital credit is not equal to his adjusted actual contribution. For instance:
Acosta's actual contribution as adjusted is P50,000. The partners agree to credit
Acosta for P60,000. This is to entice Acosta to join the partners especially if the
talent/skill of Acosta is needed by the partnership. How will the accountant recognize
the difference? The partnership may record additional credit as a goodwill or a
bonus.

Bonus method. Under this method, the skill and expertise of Ant cannot be
recognized as an asset specially since there is no reliable measurement basis for this.
Only the actual investment of P50,000 can be recognized as asset. The other partners
(Bug and Cat) may agree to adjust their capital amounts (assuming each one
contributed P50,000 each) and transfer interest to Ant. Ant's capital will be credited
for without making additional investment. The transfer of capital of P10,000 received
by Ant from Bug and Cat is called bonus capital. Total actual contribution stands at
P150,000. In table format, it will appear as follows:
Ant Bug Cat Total
Actual contributions P50,000 P50,000 P50,000 P150,000
Agreed Capital 60,000 45,000 45,000 150,000*
Bonus P10,000 (P5,000) (P5,000) 0

*Note that total agreed equity = total actual contributions and Acosta is credited for a
P60,000 interest as agreed with a transfer of capital from the other two partners.

Journal entry will be:

Cash 150,000
Ant, Capital 60,000
Bug, Capital 45,000
Cat, Capital 45,000

Goodwill method. The assumption here is that two contributions are made by Ant:
cash of P50,000 and an intangible asset in the form of goodwill. What is goodwill?
Goodwill is an intangible asset representing ability to generate earnings more than
what is normal or expected. Factors such as a good reputation (such as an
experienced marketer), or skill in a particular line (fifteen years head of a
manufacturing company), skills (Italian culinary expert). The partnership will surely
benefit from this and may bring in more customers and therefore more earnings for
the business. Effects on the accounting values if goodwill is recognized: assets will
increase (debit goodwill) and the partner's equity will also increase (credit partner,
capital). How much is the goodwill? Since the agreement calls for a capital credit of
P60,000 when actual investment is only P50,000, then the difference will represent
goodwill.
In table format it will appear as follows:
Ant Bug Cat Total
Actual contributions P50,000 P50,000 P50,000 P150,000
Agreed Capital 60,000 50,000 50,000 150,000*
Bonus P10,000 - - P10,000
*Note that total agreed equity is greater that the total actual contributions.
Journal entry will be:
Cash 150,000
Goodwill 10,000
Ant, Capital 60,000
Bug, Capital 50,000
Cat, Capital 50,000

PAS 38 recognizes goodwill only as a result of an acquisition made by a

reporting entity. Partnership goodwill has no related acquisition cost since no funds
have been spent to acquire the goodwill. Partnership goodwill is rare in actual
practice. The bonus method is more acceptable as it is an adjustment only on the
capital accounts and only actual contributions are recognized. Or, instead of goodwill,
if the investment of Ant is in the form of property, then it should be revalued. For
example an investment of an equipment with a cost of P50,000 made by Ant and the
partners agree to credit him for P60,000: debit equipment for P60,000 and credit Ant,
Capital for P60,000.
If goodwill is to be recognized but the amount is not stated in the problem, it is
determined by comparing the total net tangible assets (already revalued) contributed
against the agreed capitalization. If agreed capitalization is higher than the net
tangible asset contribution, then goodwill is to be recognized.

Summary:
FORMATION
Accounting Procedures:
1. Valuation of assets and liabilities contributed
Assets: Liabilities if assumed by the partnership:
a. Agreed values a. Agreed values
b. Fair values b. Present values/fair values
c. Cost/Book values

Liabilities assumed by the partnership will operate to decrease the contributed asset
of the partner in computing the contributed capital.

2. Re-alignment of capital balances

a. Goodwill method
b. Bonus method
c. Non-revaluation and bonus method

Capital contribution vs. Final Capital credit

Capital contributions (also called initial capital credit) represent the net assets
invested by a partner whereas final capital credit represents the agreed capital for a
partner. Generally, capital contribution equals capital credit. However, this may be
changed by agreement of the partners. When changed by agreement, the difference
between capital contribution and agreed capital is accounted either as:
1. Bonus – transfer of capital among the partner. Total contributed capital = total
agreed capital.
2. Goodwill – the difference is attributed to an unidentifiable intangible asset
(outlawed by PFRS 3 for external financial reports). Total contributed capital <
total agreed capital.
3. Cash settlement

*Loans to Partner/Loans from Partnership = Partnership Asset

*Loans from Partner/Loans to Partnership = Partnership Liability

References
1. Manuel, Z.V. (2016). Advanced Accounting. Manila, Philippines: GIC Enterprises
2. Advanced Financial Accounting and Reporting review materials by Wency
Giron

Module 2

A. Course Code – Title : Accounting for Special Transactions

B. Module No – Title : MO2 – Partnership Operation
C. Time Frame : 1 week – 3 hours
D. Materials : Syllabus, Learning Plan, Curriculum Map, Writing
Materials, Accounting Standards and Books.

1. Overview
This learning material provides discussion of Partnership Operation concepts.
It introduces the learner to the subject, guides the learner through the official text,
develops the learner’s understanding of the requirements through the use of
examples and indicates significant judgements that are required in accounting for
partnerships. Furthermore, the module includes questions that are designed to test
the learner’s knowledge of the concepts pertaining to accounting for special
transactions.

2. Desired Learning Outcomes

At the end of the learning session, you should be able to:
a. Understand the purpose of partnership operation.
b. Identify the legal provisions for profit and loss distribution.
c. State the items that affect the division of a partnership’s profits or
losses among partners.
d. Identify the factors for a fair and equitable method of distribution.
e. Understand the accounting procedures and concepts of partnership
operation.
f. Compute for the share of a partner in the partnership’s profit or loss.
 3. Content/Discussion

PARTNERSHIP OPERATION
The accounting process for recording revenues and expenses depends on the kind of
operation of the business. At the end of the year, these nominal accounts are closed
to the title Income Summary. For a merchandising business, the postings to this
account will appear as follows:

Income Summary
Cost of Sales Net Sales
Expenses

The Income Summary account is also to be closed. Its closing entry depends on the
form of ownership. A credit balance (representing profit) should be closed as follows:

For a sole proprietorship : Income, Summary xxx

Owner's, Capital or Drawings xxx
For a partnership : Income Summary xxx
Partner X, Drawings xxx
Partner Y, Drawings xxx
For a Corporation : Income Summary xxx
Retained Earnings xxx

Note that in a sole proprietorship, it does not make a lot of difference if net
income is immediately credited to the capital account since there is only one owner
to reckon with. However, in a partnership, distinguishing the capital account from the
drawing account is important as there are two or more owners who must agree on
how profit drawings will be made by them and this is usually contained in the Articles
of Co-Partnership. It is advisable to use separately and carry to the next accounting
period the balance of the drawing accounts when it is the intention of the partners to
withdraw regularly their profit share (especially if in the form of salaries) or when
profit sharing agreement is based on capital in excess of capital investment. When
the partners' drawings accounts are used to record profit share less withdrawals, it
parallels the retained earnings account in a corporation. The balances of the capital
account and drawing account make up the partners' equity at the end of the period
whether or not the drawing account balance is closed to the capital account as
illustrated and explained in previous module.
LEGAL PROVISIONS ON DIVISION OF PROFIT OR LOSS
1. Profit and loss are distributed based on the partners' agreement as provided in the
Articles of Co-Partnership.
2. If the agreement is only on distribution of profit, but the result of operations is a
loss, the same agreement may be applied.
3. In the absence of an agreement as to how to distribute the profit or loss, then the
distribution should be based on the partners' contribution. Illustration:

PROFIT RATIO LOSS RATIO

1. Profit Ratio, Loss Ratio
✔ ✔
2. Profit Ratio, Loss Ratio Χ
✔
3. Original Capital Ratio, Loss Ratio Χ
✔
4. Original Capital Ratio, Original Capital Χ Χ
Ratio

4. An industrial partner shares in the profit only unless there is a specific agreement
that the partner shares in the loss sustained by the business.
5. The profit contemplated for distribution to the partners should be the net profit
after tax. Partnerships, like corporations, are subject to the 30% tax as provided for in
The National Internal Revenue Code. Exempted from this tax liability are the general
professional partnerships such as the consultancy firms rendering professional
services.

The law has made no specific provision on what partners' contribution balance
should be used when allocating profit. Should it be the beginning, the average or the
ending capital contribution? Author's opinion, in this case, would be to use the
average capital at the end of the year if only for a fair and equitable distribution.
Should it also consider all changes including profit share net of regular drawings? It is
the author's opinion that when the partner's withdrawal and unwithdrawn profit
share are material in amount then they must be closed to the capital account and
considered capital contributions. In both cases, it is advisable that provisions
regarding these problems be contained in the Articles of Co-Partnership.

METHODS OF DIVIDING PROFIT OR LOSS

The usual methods of dividing profits and losses are as follows:
1. Arbitrary or any agreed ratio
2. Capital ratio using either initial or original capital, beginning capital, ending capital
or average capital
3. Interest on investments, remaining profit to be divided in an agreed ratio
4. Salaries to partners, balance to be divided in an agreed ratio
5. Combination of: interest on investments, salaries to partners, balance to be
divided in an
agreed ratio
6. Bonus to the managing partner, balance to be divided in an agreed ratio

FACTORS FOR A FAIR AND EQUITABLE DISTRIBUTION METHOD

Usually the profit or loss distribution is based on the partners' capital
contributions. However, if the partners do not render equal time in managing the
business or do not have the same skills or entrepreneurial ability, then the capital
contribution would not result in a fair and equitable distribution. To illustrate,
suppose Wency, Rex and Vhinson, CPAs, contributed P200,000 each to put up an
accounting and tax service business, but only Rex is rendering full time service with
Wency and Vhinson rendering half time. A fair and equitable way of distributing the
profit would be to give them salaries in proportion to the time service rendered with
the remaining profit distributed equally among them. Or suppose all of them are
rendering full time service but their capital contributions are not the same, then the
best way is to give them equal monthly salaries for their services and any residual
profit to be distributed in proportion to their capital contributions. Or compute
interest based on their capital contributions with the residual profit distributed
equally considering the equal time of service they will render.

ACCOUNTING PROCEDURES
Compute for the Adjusted Net Income/Loss prior to distribution and allocate based
on (in particular order):
Profit Distribution Rule:
1. Profit sharing agreement
2. Capital ratio
a. Original capital balance
b. Capital during the year the profit is earned
a) Weighted average capital balance
b) Opening capital balance

Loss Distribution Rule:

1. Loss sharing agreement
2. How profit is divided

In addition to p/l agreement, the partners may provide for the following methods of
profit or loss distribution:

1. Salary – compensation for services; provided for regardless of the existence of

profit because the provision of services by a partner is independent from the
earnings of profit.
● This could be in fractional year (It considers time)
● Given, regardless of the result of operation
2. Interest – compensation for use of partner’s capital; provided for regardless of the
existence of profit because the use of the partner’s capital is independent from
the earnings of profit.
● This could be in fractional year (It considers time)
● Given, regardless whether there is profit or loss
(*Use the salary/interest ratio if the problem states that the amount to be distributed
to the partners is up to the extent of profit only or the profit is distributed based on
priority.)

3. Bonus – compensation for good performance; provided only when the

partnership has profit
Bonus bases:
a. before bonus: bonus = bonus base x bonus rate
b. after bonus: bonus = bonus base x [bonus rate/(100% + bonus rate)]

CASE 1: Net income of P500,000 before salaries of P55,000, interest of P13,000 and
bonus of 15%.

B = Net Income – Salaries -Interest

1 + Bonus Rate

B = P500,000 – P55,000-P13,000
1+.15

B =P432,000
1.15

B = P56,347.83

CASE 2: Net income of P10,000 before salaries of P5,000, interest of P3,000

and bonus of 10%.

B = Net Income + Salaries +Interest

1 – Bonus Rate

B = P100,000 + P5,000+P3,000
1 - .10

B =P108,000
0.90

B = P12,000
4. Remainder (whether positive or negative) based on P/L ratio

Illustrative Problems:
A. Basic profit or loss distribution rules
Alexander and Eddie formed a partnership on January 1, 2008 by contributing
P80,000 and P120,000, respectively. As of January 1, 2009, their partnership capital
were P90,000; P110,000, respectively.

Situations:
A. No profit sharing agreement C. Profit is divided equally
B. No loss sharing agreement D. Loss divided 30:70 to Alexander and
Eddie, respectively

Required: Compute the share of Alexander and Eddie assuming:

P40,000 profit P40,000 loss

*Situational Cases Alexander Eddie Alexander Eddie
1. A and B __________ __________ __________ __________
2. B and C __________ __________ __________ __________
3. A and D __________ __________ __________ __________
4. C and D __________ __________ __________ __________
5. C and D with guaranteed P25,000
minimum profit sharing to Eddie __________ __________ __________ __________

Weighted Interest computation

The following summarizes the capital transactions of partners Grace and Loida which
started operation during 2009:

Investments (Drawings) Grace Loida

April 1 P 90,000- P 108,000-
June 30 60,000- 12,000-
August 1 -- ( 16,000)
September 30 ( 18,000) --
November 1 27,000- --
December 31 -- ( 30,000)

Required: Compute the weighted average capital balance of each partner.

B. Bonus Computation
Mandy and Soledad shares profit equally after providing for annual salaries of
P150,000 and P180,000, respectively, and a 10% bonus after salaries and bonus to
Mandy. The profit or loss statement of the partnership for whole year is shown
below:
Sales P 6,000,000
Cost of sales 3,000,000
Gross profit P 3,000,000
Expenses 2,450,000
Net profit P 550,000

Required:
1. Compute the amount of the bonus ______________
2. Compute the bonus assuming expenses is inclusive of the salaries
______________
3. Compute the bonus assuming expenses includes bonus and salaries
______________

4. Progress Check

1. Enumerate at least five methods of dividing partnership profit and loss. How do
you make
a choice on what is the best and equitable method of distribution?
2. The partnership of Popoy and Kokoy decided to admit Dodoy to a one-fourth
interest in the partnership upon his investment of P500,000. Does this necessarily
mean that Dodoy would be entitled to a one-fourth share in the net income or loss of
the business? Explain.
3. The partnership agreement provided for the following: Rolly and Polly are to divide
profit and loss in the ratio of 7:3, respectively and each one is to draw P5,000 salary
per month, Explain what possible difficulties may be encountered by the accountant.
4. Partners Lard and Oil had the following agreement: 24% interest on average
capital,
remainder to be divided in the average capital ratio. Comment on this agreement.
5. Partners Sammy and David established a partnership on January 1, 2010 by
investing cash of P500,000 and P750,000, respectively. There was no agreement on
the division of profit. The result of operation after one year is P250,000. How would
this amount be divided between them?
6. The partnership agreement provides for division of profit and loss based on capital
balances of the partners. Comment on this agreement.
7. If the partnership agreement provides for interest on capital contributions and
salaries to
partners, will there be a distribution for these even if the operation resulted in a net
loss? Explain.
5. Assignment
Partners A and B agreed to share profits in the following order of distribution:
a. Interest of 10% on weighted average capital
b. Salaries of P60,000 to A and P40,000 to B
c. Residual profit, equally

Loss is shared by A and B 40:60. Details of the capital accounts of A and B is shown as
follows:
A B
Debit Credit Debit Credit
January 1 - P 240,000 - P 360,000
March 30 - 40,000 P 20,000 -
April 30 - - - 18,000
July 1 P 20,000 - 21,000 -
September 30 - 80,000 - 60,000
November 1 30,000 - - -
December 30 - - 30,000 -
The partnership made P180,000 net income. B’s share in the profit is
a. P95,675 b. P95,550 c. P84,450 d. P84,325

What is A’s ending capital balance?

a. P394,325 b. P394,450 c. P394,450 d. P405,675

6. Evaluation
Answer the following questions:
1. At the end of the year of operation, the profit or loss summary has a debit
balance of P60,000. Partners A, B and C contributed P100,000, P200,000 and
P300,000 and shares profit 20:30:50, respectively. In closing the profit or loss
summary, which statement is correct?
a. A’s capital, P10,000 debit c. B’s capital, P18,000 debit
b. A’s capital, P10,000 credit d. C’s capital, P30,000 credit

2. As of December 31, 2008, D, E and F has adjusted capital balances of P100,000,

P250,000 and P150,000, respectively, and shares profit equally. At the start of
2009, the partners admitted G for a 10% interest in profit and capital by
contributing P100,000. The partnership earned P120,000 net income in 2009.
How much is E’s share in the partnership profit?
a. P24,000 b. P36,000 c. P54,000 d. P40,000

3. D and E agreed to share profits and losses 40:60, respectively after providing E
17% bonuses on partnership net income after tax and after bonus. D received
P36,000 as final profit distribution. The share of the partners on partnership profit
is subject to 10% withholding tax. The partnership is also subject to 35% income
 tax. Compute the partnership operating income assuming that it equals taxable
income.
a. P117,000 b. P150,000 c. P180,000 d. P160,000

4. Darrel, Rhad and Bal are partners. The partners agreed to share profit 40:30:20.
Darrel sold ½ o his interest to Rhad for P100,000. Subsequently, the partnership
admitted Andrix for a 10% interest. What is Rhad’s profit sharing after Andrix’
admission?
a. 27% c. 50%
b. 45% d. 54%

5. The partnership reports profits of P80,000, net of P20,000 salaries and P30,000
interest and a bonus. The bonus is computed as 20% of profits after salaries and
interest. Compute the amount of the bonus.
a. P16,000 c. P26,000
b. P20,000 d. P32,500

6. The partnership of Alec and Boy reported profits of P120,000 in 2009 and divided
the same to their profit sharing ratio of 40:60, respectively. An examination
conducted on the books revealed the following:
● An equipment costing P30,000 which should have depreciated for 4 years was
expensed on January 2, 2009.
● Supplies of P5,000 was omitted on the records.
● An inventory costing P15,000 was omitted from the records. The purchase was
not recorded because the invoice was in transit as of the balance sheet date.

What is the net adjustment to the Capital account of Alec?

a. P11,000 increase c. P17,000 increase
b. P11,000 decrease d. P17,000 decrease

7. Katrina and Horace formed a partnership. They agreed to divide profits 40:30,
respectively, after providing for salaries of P10,000 to Katrina and P20,000, to
Horace and an interest on beginning capital. Interest traceable to Katrina and
Horace were P4,000 and P2,000, respectively. If Horace received total profit
sharing of P28,000, compute the partnership profit during the year.
a. P46,200 c. P56,000
b. P48,000 d. P50,000

8. Elvie and Lito are partners sharing profits as follows:

● P10,000 and P20,000 salaries to Elvie and Lito, respectively. The salary
provision shall be increased by 50% each when profit exceeds P50,000.
● Residual profit is shared equally.
If Elvie received P25,000 profit sharing, what is the partnership profit?
a. P75,000 b. P65,000 c. P60,000 d. P50,000
9. Cabrera, Mateo and Ampil agreed to the following profit sharing:
● Salary of P20,000 and P30,000 to Mateo and Ampil, respectively.
● Residual profit sharing of 50:30:20 to Cabrera, Mateo and Ampil, respectively.
● Guaranteed minimum profit sharing of P40,000 to Cabrera and P30,000 to
Mateo, respectively.

Compute the partnership profits if Ampil received P40,000 profit sharing.

a. P115,000 b. P120,000 c. P135,000 d. P150,000

10. As of February 1, 2010, A, B and C have beginning capital balances of P100,000,

P200,000 and P200,000, respectively. They agreed to share any losses in the ratio
of 30:30:40, respectively. The partnership profit was reported as P50,000. Ending
capital balances of A, B and C was properly determined as P120,000, P220,000
and P180,000, respectively, based on the reported profit.
An evaluation of the books as of December 31, 2010 disclosed that the correct
partnership income was only P30,000. Based on the above facts, compute the net
drawings or additional investments made by partners A, B and C during the year,
respectively.
a. P5,000, P5,000; (P40,000) c. P10,000; P0; (40,000)
b. P5,000, P5,000; (P20,000) d. P14,000; P8,000; (P32,000)

E. References

1. Manuel, Z.V. (2016). Advanced Accounting. Manila, Philippines: GIC Enterprises

2. Advanced Financial Accounting and Reporting review materials by Wency
Giron

1. Overview
This learning material provides discussion of Partnership Dissolution concepts.
It introduces the learner to the subject, guides the learner through the official text,
develops the learner’s understanding of the requirements through the use of
examples and indicates significant judgements that are required in accounting for
partnerships. Furthermore, the module includes questions that are designed to test
the learner’s knowledge of the concepts pertaining to accounting for special
transactions.

2. Desired Learning Outcomes

At the end of the learning session, you should be able to:
a. Define partnership dissolution
b. Understand the causes of partnership dissolution.
 c. Enumerate the general procedures in partnership dissolution
d. Understand the accounting procedures, concepts of partnership
dissolution and how it affects partnership equity.

3. Content/Discussion

PARTNERSHIP DISSOLUTION
Dissolution takes place when there is a change in the original association of
the partners but without cessation of business operations. This is called dissolution
without liquidation and will be the discussed in this chapter. For example, the
admission of a new partner or the withdrawal of any partner dissolves the
association to carry on its original purpose but the partnership may continue to
operate as a new business with a revised Articles of Co-Partnership. On the other
hand, dissolution with liquidation brings about permanent cessation not only of the
legal entity of the company but its operating activities, as well. This will be discussed
in the next module.

CONDITIONS AFFECTING DISSOLUTION

The following are the conditions that will cause the partnership to be
dissolved:
1) By the acts of the partners - examples: the purpose of the partnership has been
accomplished, partners agree to admit a new partner or partners agree to
incorporate.
2) By operation of law - examples: insolvency or death of a partner.
3) By judicial decree - examples: insanity or incapacity of a partner, internal
dissension,
commission of fraud or misrepresentation of a partner.

ACCOUNTING FOR DISSOLUTION (GENERAL PROCEDURES)

The accountant must accomplish the following in effecting a partnership
dissolution:
1. Revalue the properties
2. Correct prior period errors.
3. Update the partners' capital accounts by determining the profit or loss from
operations and
distributing the same as at date of dissolution.
4. If dissolution contemplated upon is not provided in the Articles of Co-Partnership,
determine from the partners the terms and conditions of the dissolution.
5. Revise the Articles of Co-Partnership.

Most often, before dissolution takes place, the financial statements are
audited by an independent certified public accountant. The reason for the above
procedure is that it is as if a new partnership is established which is considered a
separate entity from the old partnership, thus a new accountability of the assets,
liabilities and partners' equity is necessary.
The following causes of dissolution will be discussed in this chapter:
a) admission of a new partner by purchase
b) admission of a new partner by investment
c) withdrawal of a partner
d) death of a partner, and by
e) incorporation.

ADMISSION OF A NEW PARTNER BY PURCHASE

Legal provision requires the unanimous consent of all the partners before a
new partner may be admitted. In admitting a new partner by purchase the following
rules must be observed:
1. An outside party comes in as a new partner by buying interest from any one or all
of the current partners or the current partners may buy or sell interest with one
another. The
transaction is considered personal between the buying partner and the selling
partner.
2. Since it is a personal transaction, generally the assets of the partnership are not
affected since payment is made directly to the selling partner(s) in exchange for a
proportionate interest or right in the partnership.
3. Regardless of the amount of payment made, the general rule is to record a transfer
of interest to the buying partner, thus:
Selling Partner, Capital *xxx
Buying Partner, Capital *xxx
*Amount is computed = % Interest acquired x Selling Partner’s Capital
4. Total assets and total partners' equity before and after admission remains the
same.
5. Goodwill, bonus and asset revaluation must be expressly agreed upon to warrant
accounting recognition.

ADMISSION OF A NEW PARTNER BY INVESTMENT

The following rules must be observed in admission of a new partner by investment:
1. The transaction is between the new partner and the partnership.
2. Contribution is received by the partnership hence there is an increase in
partnership assets with a corresponding increase in partners' equity.
3. If total investments are not the same as total agreed equity and or the capital
credit for the new partner is not equal to his actual contribution, the capital accounts
of the partners may be adjusted by:
a. revaluation of properties
b. recognition of goodwill
c. recognition of bonus
 To determine the amount of goodwill or bonus to be recognized and who
should recognize this, use format given below:
Contributed Capital Bonus/Goodwill Agreed Capital
Old Partners XX XX XX
New Partners XX XX XX
Total XX XX XX

IMPLIED GOODWILL OR BONUS

In admission by purchase, there is no implied goodwill or bonus. In admission
by investment, however, implied goodwill or bonus may be determined by the
following rules:
1. There is no goodwill or bonus if:
Total actual contributions = Total agreed partners' equity and Actual contribution of
new partner = capital credit of new partner
2. There is goodwill for the new partner if:
Agreed partners' equity is > than total actual contributions and
Capital credit for new partner > than his actual investment.
3. There is goodwill for the current partners if:
Agreed partners' equity is > than total actual contributions and
Capital credit for the new partner = to actual contribution of new partner.
4. There is bonus for the new partner if:
Total agreed partners' equity = total actual contributions but
capital credit for the new partner is > than actual contribution of new partner.
5. There is bonus for the current partners if:
Agreed partners' equity = total actual contributions but capital credit for the new
partner is < than actual contribution of new partner.
It is worth remembering that asset revaluation affects only current partners since this
involves partnership properties acquired before a new partner is admitted.
Take note that Bonus/Goodwill is to be distributed based on profit/loss ratio.

Additional Notes:
1. Admission by Purchase without Revaluation
▪ Silent

▪ Personal transactions

▪ Total asset and capital will remain unchanged

▪ Purchase price is ignored

2. Admission by Purchase with Revaluation
Two steps to be followed:
▪ Determine the asset valuation
 ▪ Distribute the interest to the buying partner

Illustrative: For each admission case, indicate whether the admission agreement results
to bonus or goodwill and whether it pertains to new or existing partners:

Contributed capital
Agreed Existing New Interes Goodwill(G) or
Cas capital partners partners t Bonus(B) to new(n)
e acquire or existing(e)
d
1 400,000 300,000 80,000 25%
2 400,000 250,000 100,000 25%
3 400,000 300,000 100,000 20%
4 400,000 300,000 100,000 30%
5 500,000 300,000 120,000 50%

WITHDRAWAL OF A PARTNER
A partner must withdraw in accordance with the partnership agreement, or
else he will be liable for damages resulting from such action.
Again, the capital balances of the partners must be adjusted for prior period
errors or for revaluation of properties. Likewise, these should be updated for any
profit share. The problem lies with the profit or loss to be determined at the date of
withdrawal. If retirement takes place during the year, only the profit share of the
retired partner may be estimated by the accountant with the remaining partners
waiting until the end of the year for the final net profit to be distributed to them less
the estimated profit share of the retired partner.
Assets withdrawn by the partner are measured at agreed/fair value. Changes
in the value of the asset should be recognized as a gain/loss before the withdrawal.

Retiring Partner’s Capital xxx

Share in undistributed income/loss xxx/(xxx)
Drawings (xxx)
Loans xxx/(xxx)
Capital interest xxx
Net settlement (xxx)
Bonus/Goodwill xxx

1. If payment given to retiring partner is less than his interest, credit remaining
partner’s capital proportionately.
● Bonus method (IF SILENT)
 ● The difference will be credited to remaining partners’ capital
proportionately.
A Capital XX
Cash XX
B Capital XX
C Capital XX
● Goodwill method (NEGATIVE GOODWILL/ASSET WRITE-DOWN)
● The difference represents the share of the retiring partner in the
asset write-down. (the problem usually identifies the asset to be
written down, i.e. PPE, Goodwill)
A Capital XX
B Capital XX
C Capital XX
Cash XX
Goodwill/Land/Acc. Depn. XX
2. If payment is more than the interest of the retiring partner:
● Bonus method – debit remaining partners’ capital proportionately.
● Goodwill method (partial) – debit goodwill for the excess.
● Goodwill method (total) – use this computation:
Cash payment to partner
Less: Partner’s capital
Equal: Excess
Divide by: Retiring partner’s P&L ratio
Equal: Goodwill

DEATH OR INCAPACITY OF A PARTNER

The death or incapacity of a partner will dissolve the original association but
the busine may be continued by the remaining partners. What will happen to the
interest of the deceased partner? It could be purchased by the remaining partners or
by an outsider in which case the accounting procedure for admission by purchase will
be applied with a transfer of interest from the deceased partner to the buying
partner. Or his interest may be paid out of the partnership funds in which case the
accounting procedure is similar to the withdrawal of partner.
If the deceased partner's equity is not immediately settled, this should be
transferred a liability account "Payable to Partners' Estate", after it has been updated
for share in the profit from the last accounting period to date of death. From date of
death to date settlement, the liability account is updated for accrued interest,
assuming there is a provision to this effect. Remember that a partner ceases to be
one at date of death although he is no released from his liabilities as partner prior to
his death.
It is possible that the deceased partner's interest in the partnership be
transferred to a heir or an appointed person subject to some specific provision in the
Articles ( Co-Partnership. In this case there is merely a change of partner's name in
the accounting records with no additional accounting problem involve.

Illustrative
On January 1, 2008, the partnership of D, E and F started with an initial
contribution from the partners of P100,000, P200,000 and P300,000, respectively.
The partners stipulated that in case of death of any partner, the parties will compute
profits up to the nearest month and to provide for 20% annual interest for the
deceased partner interest prior to its settlement.

On July 1, 2008, D was heart-attacked and instantly died. The newly hired accountant
of the partnership prepared the following entries during the year:

7/1/8 D, capital 100,000

Payable to D’s estate 100,000
To set-up D’s capital as a liability

12/31/8 Interest expense 10,000

Payable to D’s estate 10,000
To recognize interest on D’s estate

12/31/8 Sales 700,000

Inventory, end 50,000
Purchases 300,000
Operating expenses 160,000
Interest expense 10,000
Profit and loss summary 280,000
To close nominal accounts

12/31/8 Profit and loss summary 280,000

E, capital (40%) 160,000
F, capital (30%) 120,000
To close profit and loss to E and F’s remaining P&L sharing ratio.

Profits were evenly earned throughout the year. Compute the correct capital
balances of E and F as of December 31, 2008, respectively.
a. P302,333; P453,500 c. P298,666; P440,500
b. P332,657; P399,493 d. P320,000; P460,000

INCORPORATION OF A PARTNERSHIP
When a partnership business requires more funds to be able to expand, it may
be wise t incorporate it. Among the advantages of incorporating are: limited liability
of a shareholder, more capital for the firm and opportunity to avail of services of an
expert and possible tax savings for the partners (now incorporators).

Again, in all cases of dissolution, the Articles of Co-Partnership should be

revised Before dissolution, accounts must be examined, adjusted and even corrected
for prior period errors. Incorporation entries would depend on whether the
partnership books will be retained or a new set of books will be used for the
corporation.

Illustrative
Partners Amy, Beny, Conie, Devie and Elly decided to incorporate their
partnership. Immediately before incorporation the partnership had P1,000,000 total
liabilities while the partners have capital balances of P2,200,000, P2,000,000,
P2,500,000, P1,500,000 and P1,800,000, respectively. The corporation was
authorized to issue 1,000,000 P10-par value ordinary shares and 10,000 P100-par
preference shares. As agreed, the preference shares are to be divided among the
incorporating partners based on the ratio of their capital balances. The ordinary
shares are to be issued in the ratio of 15 ordinary shares for each P200 of share
capital of the partners. The remaining shares are to be issued to the public.
Subsequently, 10,000 shares were issued to the public at a total proceeds of
P180,000. The partners incurred P120,000 for organization costs (40,000 was on
account) and P20,000 for registration of shares of stocks with the SEC.

Required: Answer the following:

1. Compute the total assets of the corporation after incorporation ____________
2. Determine the number and class of shares given to each partner
Amy Beny Conie Devie Elly
Preferre _________ _________ _________ _________ _________
d __ __ __ __ __
Commo _________ _________ _________ _________ _________
n __ __ __ __ __

4. Progress Check
1. Explain why the assets of the partnership should be revalued to correspond to the
current market values before dissolving the partnership.
2. Give the differences in accounting for admission by purchase and admission by
investment?
3. In admission by investment, how do you determine if there is implied goodwill?
4. Why is partnership goodwill frowned upon in recognizing a higher capital credit for
a partner?
5. When a new partner is admitted to an already established business and is required
to
invest an amount higher than the book value of the interest he acquires, what would
be three possible treatments for this?
6. Partner Z decided to retire from X, Y and Z partnership n March 1, 2008. Explain
why the accountant should not use the balance sheet as of December 31, 2007 as a
basis for settlement? What should be the accounting procedures?

5. Assignment
Prepare a concept map regarding accounting procedures for each type of
partnership dissolution.
6. Evaluation

1. On December 31, 2008, A and B who share profits and losses equally, have capital
balances of P170,000 and P200,000, respectively. They agree to admit C for a one
third interest in the capital and profits for his investment of P200,000. Partnership
net assets are not to be revalued. Capital accounts of A, B and C, respectively,
immediately after C’s admission to the partnership are:
a. P170,000, P200,000; P200,000 c. P165,000; P195,000; P200,000
b. P175,000; P205,000; P190,000 d. P185,000; P215,000; P200,000

2. AB Partnership had a net income of P2,000 for the month ended September 30,
2004. C purchased an interest in AB Partnership of A and B by paying A P8,000 for
half of his capital and half of his 50% profit sharing interest on October 1, 2004. At
this time, A capital balance was P6,000 and B capital balance was P14,000. C
should receive a credit to his capital account balance of:
a. P4,000 b. P3,000 c. P5,000 d. P6,667

3. The following are capital account balances and profit and loss ratios of the
partners in Priced Company.
Capital P&L Ratio
A P 2,250,000 2
B 750,000 1

They agreed to admit C as a partner with a 25% interest in capital upon her
investment of P1,000,000. A, B and C are to share profits 5:3:2 respectively.
Subsequently, D joins the partnership by investing P1,200,000 for a 20% interest in
profit and capital, the old partners are to share profit in their original ratio. If goodwill
method is used, how much is the goodwill to be recorded upon the admission of D?
a. P800,000 b. P600,000 c. P400,000 d. P240,000
4. G, H and I have capital balances of P100,000, P150,000 and P200,000,
respectively. The partners share profits equally. I is withdrawing from the
partnership and is to be paid P220,000 for his capital. After I’s withdrawal, G and
H will share profits 60% and 40%, respectively. If you were H, what you would
prefer between goodwill and bonus method assuming that the partnership record
only the “purchased goodwill”.
a. the bonus method for an advantage of P2,000 c. either goodwill method or
bonus method
b. the goodwill method for an advantage of P2,000 d. the bonus method
for an advantage of P10,000

5. The capital accounts of the partnership of Newton, Sharman and Jackson on June
1, 2008 are presented, along with their profit and loss ratios:
Newton P 139,200 1/2
Sharman 208,800 1/3
Jackson 96,000 1/6

On that date, Sidney was admitted to the partnership when he purchased for
P132,000, a proportionate interest from Newton and Sharman in the net assets and
profits of the partnership. As a result of this transaction, Sidney acquired a one-fifth
interest in the net assets and profits of the firm.
Assuming that implied goodwill is not to be recorded, what is the combined gain
realized by Newton and Sharman upon the sale of a portion of their interest in the
partnership to Sidney?
a. P0 b. P43,200 c. P62,400 d. P82,000

6. After several years of operation, J retired from JKL Partnership. J, K and L have
outstanding capital balances prior to J’s withdrawal of P100,000, P300,000 and
P150,000, respectively. The partners also shares profits and losses 20%:50%:30%
to J, K and L, respectively. J has a loan to the partnership totaling P30,000. The
partnership also has outstanding loans: P50,000 to K and P10,000 to L. J agreed to
take an item of equipment with a book value of P40,000 for an agreed value of
P50,000. How much cash is necessary to for the full settlement of J’s interest?
a. P100,000 b. P20,000 c. P82,000 d. P80,000

7. Q, R and S are partners with capital balances on December 31, 2008 of P300,000,
P300,000 and P200,000, respectively. Profits are shared equally. S wished to
withdraw and it is agreed that she is to take certain furniture and fixture with
second hand value of P50,000 and note for the balance of his interest. The
furniture and fixtures are carried in the books at P65,000. Brand new, the
furniture and fixtures may cost P80,000. S acquisition of the second-hand
furniture will result to
 a. reduction in capital of P5,000 to each partner c. reduction in capital of
P15,000 each for Q and R.
b. reduction in capital of P10,000 for S. d. reduction in capital of
P7,500 each for Q and R.

8. D, E and F were partners with capital balances as of January 1, 2008 of P100,000,

P150,000 and P200,000, respectively, sharing profits and losses on a 5:3:2 ratio.
On July 1, 2008, D withdrew from the partnership. The partners agreed that at the
time of withdrawal, certain inventories had to be revalued at P70,000 from its
cost of P50,000. For the six-month period ending June 30, 2008, the partnership
generated a net income of P140,000. Further, the partners agreed to pay D
P195,000 for her interest and that the remaining partner’s capital accounts would
be adjusted for whatever goodwill the settlement would generate. The payment
to D included goodwill of
a. P15,000 b. P25,000 c. P50,000 d. P42,500

9. A and B are partners sharing profits and losses in the ratio of 1:2, respectively. On
July 1, 2004, they decided to form the A & B Corporation by transferring the
assets and liabilities from the partnership to the Corporation in exchange of its
stocks. The following is the post-closing trial balance of the partnership:

Debit Credit
Cash P 45,000
Accounts receivable (net) 60,000
Inventory 90,000
Fixed asset (net)174,000
Liabilities P 60,000
A, Capital 94,800
B, Capital 214,200
P 369,000 P 369,000

It was agreed that adjustments be made to the following assets to be transferred to

the corporation:
Accounts receivable P 45,000
Inventory 68,000
Fixed assets 180,600

A and B corporation was authorized to issue P100 par preferred stock and P10 par
common stock. A and B agreed to receive for their equity in the partnership 720
shares of the common stock each, plus even multiples of 10 shares of preferred stock
for their remaining interest.
The total number of shares of preferred and common stock issued by the Corporation
in exchange of the assets and liabilities of the partnership are:
Preferred Common Preferred Common

a. 2,540 shares 1,500 shares c. 2,642 shares 1,440

shares
b. 2,592 shares 1 ,440 shares d. 2,642 shares 1,550
shares

10. The condensed balance sheet of the partnership of A and B as of December 31,
2006 showed the following:

Total assets P 200,000

Total liabilities 40,000
A, Capital 80,000
B, Capital 80,000

On this date, the partnership was dissolved and its net assets were transferred to a
newly-formed corporation. The fair value of the assets was P24,000 more than the
carrying value on the firm’s book. Each of the partners was issued 10,000 shares of
the corporation’s P1 par common stock. Immediately after effecting the transfer of
the net assets, and the issuance of stock, the corporation’s additional paid in capital
account would be credited for:
a.P136,000 b. P140,000 c. P154,000 d. P164,000

B. References

1. Manuel, Z.V. (2016). Advanced Accounting. Manila, Philippines: GIC Enterprises

2. Advanced Financial Accounting and Reporting review materials by Wency
Giron