FORMATION

  respective   service   to   the   partnership   through  

The  initial  investments  of  the  partners  are  recognized  at   salaries;  
FAIR   VALUES   and   credited   to   the   partners   capital   c. income   allocations   on   the   basis   of   effective  
accounts   in   the   agreed   INTEREST   RATIO.   Partnership   management   of   the   partnership   through   bonuses;  
goodwill  is  no  longer  recognized  under  IFRS.  Therefore,   and  
the  total  of  the  contributions  of  the  partners  is  deemed   d. any   numerical   ratio,   e.g.   3:2:5   will   apply   to   the  
be   also   the   total   agreed   capital,   to   be   allocated   to   residual  profit  or  loss  after  allocations  made  for  (a),  
individual   partners’   CAPITAL   ACCOUNTS   per   their   (b),  and  (c)  as  above-­‐mentioned.  
agreement.    
   
ILLUSTRATION  1:   ILLUSTRATION  2  
A   and   B   formed   a   partnership   on   January   2,   2018   by   IN  CONTINUATION  OF  THE  SAME  ILLUSTRATIVE  CASE:  
contributing   the   ff   net   assets   from   their   respective   Partner  A  invested  additional  capital  on  May  1,  2018  for  
proprietorships:   P30,000  cash;  contributed  merchandise  with  a  fair  value  
  of   P24,000   on   September   1,   2018;   and   withdrew  
  A   B   permanently   cash   of   P12,000   on   December   1,   2018.  
Cash   P30,000   P20,000   Partner  B  had  no  additional  investments  nor  permanent  
Non-­‐cash  assets   620,000   730,000   withdrawals  during  2018.  
Liabilities   (450,000)   (530,000)    
Net  Assets   P200,000   P220,000   They  agreed  to  divide  profits  and  losses  as  follows:  
  a.  Interest  6%  on  average  capital  for  each  partner  
The   non-­‐cash   assets   of   A   is   overstated   by   P24,500   while   b.  Salaries  of  P4,000  each  month  to  both  partners  
the  liabilities  of  B  is  understated  by  P5,500.  They  agreed   c.  Bonus  to  A  of  10%  of  net  income  after  interests  and  
on   an   interest/capital   ratio   of   48:52   to   A   and   B,   salaries;  and  
respectively.   d.  The  balance  is  agreed  to  be  divided  equally.  
  e.   Both   partners   withdrew   temporarily   60%   of   their  
1.  Compound  Journal  Entry   respective  salaries.  
2.  Bonus  resulted  from  agreed  ratio    
3.   If   no   bonus   is   to   be   recognized,   what   is   the   The  reported  profit  for  2018  amounted  to  P150,000  
contributions  ratio?   Compute  the  following:  
4.  Refer  to  question  3,  what  method  is  used?   1.  Interests  
  2.  Salaries  
OPERATIONS   3.  Bonuses  
During   the   operations   of   the   partnership,   loan   by   a   4.  Total  share  for  each  partner  
partner   to   the   partnership   (Loans   Payable)   or   by   the    
partnership   to   a   partner   (Loans   Receivable)   may   be   The   financial   statements   prepared   for   partnerships   are  
recognized;   temporary   drawings   in   anticipation   of   similar   to   those   prepared   for   corporations,   except   for  
profits   may   occur;   additional   investments   may   also   be   the  following  basic  differences:  
made   by   the   partners;   and   the   result   of   operations   a. In   the   balance   sheet,   ownership   equity   for   a  
during  the  period  is  reported.   partnership   will   be   partners’   capital   balances;   in   a  
  corporation,   capital   stock,   additional   paid-­‐in   capital,  
Partnership   income   or   loss   is   allocated   to   partners   in   and   retained   earnings.   In   lieu   of   a   statement   of  
many   ways.   Generally,   agreement   items   for   income   or   retained   earnings   done   for   corporations,  
loss  allocation  conform  to  the  following  remunerations:   partnerships   present   a   statement   of   partners’  
a. income   allocations   on   the   basis   of   capital   balances   capital   in   support   of   its   ownership   equity   on   the  
to  reward  partners  in  proportion  to  their  respective   balance  sheet.  
investment  through  interests.   b. a   statement   of   partners’   capital   balances   will   show  
b. income   allocations   on   the   basis   of   service   initial   or   beginning   balances,   additional  
contributions   to   reward   partners   for   their   investments,   withdrawal   of   capital,   temporary  

1  
 
 drawings,   share   of   net   income   or   net   loss,   and   b. Admission  by  purchased  interest  is  one  in  which  the  
partners’   compensation   treated   as   operating   new  partner  transfers  assets  directly  to  one  or  more  
expenses.   partners   (NOT   TO   THE   PARTNERSHIP)   in  
c. per   GAAP,   partners’   compensation   items   such   as   consideration   for   the   purchased   interest.   Thus   the  
interests,   salaries,   and   bonuses   are   simply   items   net   assets   of   the   partnerships   remain   the   same  
selected   by   the   partners   to   make   the   profit   even  after  the  admission  of  the  new  partner.  
distribution   fair.   Nevertheless,   in   some   cases,    
partners’   remuneration   items   are   treated   as   ILLUSTRATION  4  
operating  expenses  and  accordingly  included  in  the   IN  CONTINUATION  OF  ILLUSTRATIVE  CASE  2:  
income   statement.   This   latter   case   requires   Assuming   the   old   partner   sells   40%   of   their   respective  
additional   accounting   procedures   and   the   profit   interests  for  a  total  consideration  of  P200,000.  
agreement   will   then   apply   to   the   decreased   net   1.   How   much   is   the   total   capital   after   admission   of  
income   as   a   consequence   of   the   increased   Partner  C?  
operating  expenses.   2.   Provide   the   journal   entry   to   be   recorded   upon   C’s  
  admission  
   
  WITHDRAWAL  or  RETIREMENT  of  a  PARTNER  
  If   a   partner   withdraws   from   the   partnership,   the  
  partnership   must   liquidate   the   withdrawing   partner’s  
  ownership  equity,  as  follows:  
ADMISSION  OF  A  NEW  PARTNER   a. Payment   to   withdrawing   partner   will   not   come  
Any  major  change  in  ownership,  such  as  admission  of  a   from  partnership  assets  
new   partner,   or   withdrawal   of   a   partner   from   an     The   withdrawing   partner   may   just   sell   his/her  
existing  partnership  dissolves  the  entity,  dissolution  of  a   interest  to  the  remaining  partners  or  to  an  outsider  with  
partnership   entity   does   not   however   imply   liquidation,   the   permission   of   the   remaining   partners.   In   this   case  
for   oftentimes   the   business   entity   continues   its   the   entry   required   to   be   recorded   in   the   books   of   the  
operations  undisturbed.   partnership   is   simply   the   transfer   of   interest   from   the  
  withdrawing   partner   to   the   buying   partner(s)  
Two   ways   a   new   partner   can   get   admitted   into   account(s).  
partnerships:    
a. Admission   by   investment   is   one   in   which   the   new   ILLUSTRATION  5  
partner   transfers   net   assets   into   the   partnerships.   IN  CONTINUATION  OF  ILLUSTRATIVE  CASE  3:  
Thus,  the  net  assets  of  the  partnerships  increase  by   Assuming  partner  A  died  due  to  head  injuries  from  a  car  
the   amount   contributed   and   also   increase   total   accident  a  day  after  C’s  admission  by  investment.  
capital   by   the   same   amount.   Capital   credits   to   all   • What  is  the  journal  entry  to  be  recorded  by  the  
partners   upon   admission   of   a   new   partner   will   partnership  if  the  heirs  of  A  sold  the  partnership  
depend  upon  the  agreement.   equity   to   D   (with   B   and   C’s   permission)   for  
  P300,000?  
ILLUSTRATION  3    
IN  CONTINUATION  OF  ILLUSTRATIVE  CASE  2:   b. Payment   to   the   withdrawing   partner   will   come  
Assume   C   was   admitted   as   a   partner   in   the   AB   from  partnership  assets  
Partnerships   by   investing   P200,000   for   a   40%   interest   in     Under  this  arrangement,  one  of  three  situations  
capital  and  in  profits.   can  occur:  
  1. Payment  is  equal  to  the  interest  withdrawn,  which  is  
The   total   contributions   by   the   partners   will   be   P724,400   easily   recorded   by   a   debit   to   the   capital   account   of  
(P277,191  +  247,209  +  200,000).  The  acquired  interest  is   the   withdrawing   partner   and   a   credit   for   the  
P289,760  at  40%,  resulting  in  P89,760  excess  credit  over   payment  made,  since  both  amounts  are  equal.  
the  amount  contributed.  
 

2  
 
2. Payment  is  less  than  the  interest  withdrawn,  which  is   B,  loan   (12,000)  
recorded   with   bonus   to   the   remaining   partners   A,  Capital   (386,000)  
divided  in  the  remaining  profit  and  loss  ratio.   B,  Capital   (356,000)  
3. Payment   is   more   than   the   interest   withdrawn,   the    
excess   is   recorded   as   bonus   to   the   retiring   partner   AB   divide   profits   and   losses   on   a   3:4   ratio   to   A   and   B,  
and   charged   to   the   remaining   partners   in   the   respectively.  
remaining  profit  or  loss  ratio.    
  The  following  are  liquidation  transactions:  
ILLUSTRATION  6    
IN  CONTINUATION  OF  ILLUSTRATIVE  CASE  3:   In  October  2018:  
This   time,   payment   to   A’s   heirs   will   be   P240,109   from   10/1-­‐31/2018  
partnership  assets.   Realized  cash  P285,000  from  a  sale  of  non-­‐cash  
a.   Provide   the  journal  entry   to   record   A’s   withdrawal   by   assets  of  P300,000  
death.   10/10/2018  
b.  Total  capital  of  each  remaining  partner.     Paid  liquidation  expenses  P4,000  
  10/15/2018  
LIQUIDATION  OF  A  PARTNERSHIP     Paid  third-­‐party  creditors  of  P50,000  
A   liquidation   winds   up   all   operations   of   the   10/31/2018  
partnerships,   converts   all   partnerships   assets   into   cash     Paid  partners  cash  of  P370,000  
and  distributes  to  creditors  of  the  partnerships,  then  to    
accounts  with  partners.   In  November  2018:  
  11/02/2018  
Statement  of  Liquidation   Realized   P312,000   from   the   sale   of   the  
Summarizes  all  liquidation  activities,  including  payments   remaining  non-­‐cash  assets  
to   partners.   There   are   two   types   of   distribution   in   11/15/2018  
partnerships  liquidation,  as  follows:     Paid  liquidation  expenses  of  P6,000  
a. Liquidations  in  which  all  distributions  are  made  in  a   11/25/2018  
single  time  following  the  sale  of  all  non-­‐cash  assets     Paid  third-­‐party  creditors  in  full  
(LUMP-­‐SUM   or   TOTAL   LIQUIDATION).   It   is   a   11/30/2018  
summary   of   the   entire   liquidation   process   upon   its   Paid   partners   cash   of   P306,000   in   final  
completion.   It   is   one   in   which   at   the   time   cash   is   settlement.  
distributed   to   partners’   non-­‐cash   assets   had   been   -­‐-­‐-­‐OoO-­‐-­‐-­‐  
already   disposed   and   the   full   loss   or   gain   on    
realization  reflected  in  partners’  capital  balances.   Distribution   of   partnership   cash   in   liquidation   must   be  
b. Liquidations  in  which  there  are  several  distributions   made   to   creditors   first,   and   then   to   partners’   accounts  
during   the   course   of   liquidation,   oftentimes   at   which   are   always   based   on   free-­‐interest   computations.  
points   when   there   are   unrealized   non-­‐cash   assets   Loan  accounts  are  prioritized  over  capital  balances  only  
and   unpaid   third-­‐party   creditors.   (INSTALLMENT   if   they   belong   to   the   same   partner   and   only   after   the  
LIQUIDATION)   amount  payable  to  that  partner  has  been  established  by  
  the  free  interest  calculations.  
   
  Safe-­‐payment   computations   is   required   for   every  
ILLUSTRATION  7   distribution   to   partners   when   non-­‐cash   assets   remain  
AB   Partnerships   is   to   be   liquidated   on   September   30,   unsold   (and   the   profit   and   loss   ratio   and   the   interest  
2018.  On  this  date,  its  balance  sheets  is  as  follows:   ratio  at  that  point  are  not  identical).  The  purpose  of  this  
Cash   P185,000   calculation   is   to   determine   who   among   the   partners  
Non-­‐cash  assets   645,000   have   the   free-­‐interests   to   deserve   the   payment   from  
A,  loan   20,000   the  partnerships.  
Accounts  payable   (96,000)    

3  
 
Cash  Distribution  Program   Assume   that   the   adjusted   capital   balances   of   the  
An  alternate  method  to  avoid  preparing  the  calculation   partners  are  used  in  determining  the  number  of  shares  
for   safe-­‐payment   every   time   there   is   an   installment   to  be  issued  to  each  partner.  
distribution,   a   cash   distribution   program   to   partners   is   a. What   is   the   aggregate   par   value   of   the   shares  
prepared.   This   statement   is   prepared   just   before   the   issued  to  X,Y,  and  Z?  
start   of   liquidation,   i.e.   before   any   realization   of   assets   b. How  many  shares  are  issued  to  each  partner?  
and   replaces   the   safe-­‐payment   calculations   by   the   use   c. Provide  the  necessary  journal  entries.  
of   just   one   schedule   for   the   numerous   distributions   to    
partners  normally  occurring  in  liquidation.   Case  2:  
  Assume   that   partners   X,Y,   and   Z   agreed   to   be   issued  
INCORPORATION  OF  A  PARTNERSHIP   14,000,   21,000,   and   35,000   shares,   respectively.   How  
When   a   partnership   is   converted   into   a   corporation,   the   much  I  the  credit  to  the  share  premium  account?  
corporation   acquires   and   assumes   the   assets   and    
liabilities   of   the   partnership   in   exchange   for   shares   of    
stocks   which   shall   be   issued   in   settlement   of   the    
partners’  respective  interests.    
  Case  3:  
On  date  of  incorporation:   Assume   that   the   corporation   was   authorized   to   issue  
a. The   partners’   capital   balances   are   adjusted   for   P100   par   preference   shares   and   P10   par   ordinary  
their   respective   shares   in   any   profits   and   loss   shares.   The   partners   agreed   to   receive   1,000   ordinary  
and   revaluation   gains   or   losses   as   at   the   date   of   shares   each,   plus   even   multiples   of   10   shares   for   their  
incorporation.   The   adjusted   capital   balances   remaining  interest.  How  many  ordinary  and  preference  
may   be   used   in   determining   the   number   of   shares  did  each  partner  receive?  
shares  to  be  issued  to  each  partner.    
b. Usually,   the   books   of   the   partnership   are   closed    
and  new  books  are  set-­‐up  for  the  corporation.   TRUE  OR  FALSE  
  1. Salary   and   interest   allowances   in   a   partnership  
ILLUSTRATION  8   agreement   do   not   affect   the   measurement   of   total  
On   January   1,   2018,   the   partners   of   XYZ   Partnership   partnership  income.  TRUE  
decide   to   admit   other   investors.   As   a   result,   the   2. Partnership   drawings   are   withdrawals   of   the  
partnership   shall   be   converted   to   a   corporation.   The   partners   that   are   closed   to   the   capital   accounts   at  
following  information  was  provided:   the  end  of  the  period.  TRUE  
  3. When   non-­‐cash   property   is   contributed   to   a  
  CA   FV   Inc  (Dec)   partnership,   it   is   recorded   in   the   books   of   the  
Cash   P20,000   20,000   -­‐   partnership  at  its  fair  market  value.  TRUE  
Receivables   60,000   40,000   (20,000)   4. All  property  brought  into  the  partnership  or  acquired  
Inventory   80,000   70,000   (10,000)   by  the  partnership  is  partnership  property.  TRUE  
Equipment   540,000   670,000   130,000   5. If   an   asset   is   contributed   to   the   partnership   subject  
Payables   50,000   50,000   -­‐   to   the   liability,   the   amount   credited   to   the  
X,  Cap  (20%)   150,000   N/A   -­‐   contributing  partner’s  capital  account  is  still  equal  to  
Y,  Cap  (30%)   200,000   N/A   -­‐  
the  full  fair  market  value  of  the  asset.  FALSE  
Z,  Cap  (50%)   300,000   N/A   -­‐  
6. It   is   possible   to   admit   a   new   partner   into   the  
 
partnership  without  said  partner  investing  any  assets  
The   corporation   has   an   authorized   capitalization   of  
into   the   partnership.   TRUE   –   PURCHASE   OF  
P2,000,000   divided   into   200,000   ordinary   shares   with  
INTEREST  
par  value  of  P10  per  share.  
7. If   salary   and   interest   allocation   methods   are   being  
 
used   to   allocate   partnership   profits,   such   methods  
Case  1:  
would   not   be   applied   in   accounting   periods   when  
there  is  a  partnership  loss.  FALSE  

4  
 
8. All   dissolutions   are   liquidations   but   not   all   d. Total   partnership   capital   is   less   than   the   fair  
liquidations   are   dissolutions.   FALSE   –   CHANGES   IN   value  of  the  net  contributions  to  the  partnership,  
MGT   if  the  bonus  is  given  to  the  incoming  partner.  
9. It   is   illegal   for   a   partnership   to   pay   a   partner’s    
personal   expenses   out   of   partnership   assets.   FALSE   –   3. If   only   the   share   of   each   partner   in   the   profits   has  
NOT   ILLEGAL   BUT   SHOULD   BE   PERMITTED   BY   THE   been   agreed   upon,   the   share   of   each   in   the   losses  
OTHER  PARTNERS   shall  be  
10. When  an  incoming  partner  purchases  a  partnership   a. In  accordance  with  the  partnership  agreement.  
interest  by  making  a  payment  directly  to  the  current   b. Equally  
partner,  no  entry  will  be  needed  on  the  partnership   c. A  determined  in  accordance  with  the  Partnership  
books.   FALSE   –   CASH   WILL   BE   RECEIVED   BY   THE   Code  of  the  Philippines.  
SELLING   PARTNER   (TRANFER   OF   CAPITAL   AS   d. In  the  same  proportion.  
JOURNAL  ENTRY)    
11. A  partnership  interest  is  considered  a  personal  asset   4. If   the   partnership   agreement   does   not   specify   how  
of  the  partner  and  may  be  sold  or  gifted  or  conveyed   income  is  to  be  allocated,  profits  and  loss  should  be  
to  others  in  any  manner  that  is  legal  and  acceptable   allocated  
to  other  partners.  TRUE   a. Equally.  
12. Drawing   accounts   are   debited   for   partner’s   b. In  proportion  to  the  weighted  average  of  capital  
withdrawal   and   for   the   partners’   personal   expenses   invested  during  the  period.  
paid  by  the  partnership.  TRUE   c. Equitably   so   that   the   partners   are   compensated  
13. The   amount   of   partnership   profits   and   losses   that   for  the  time  and  effort  expensed  on  behalf  of  the  
are   allocated   to   the   partners   using   salary   and   partnership.  
interest   allocation   procedures   also   produce   d. In  accordance  with  their  capital  contributions.  
deductions  to  the  partnership  for  salary  and  interest    
expense.  FALSE   5. Before   allocation   of   loss,   which   of   the   following  
14. It   is   highly   unusual   to   find   profit   and   loss   sharing   items  are  allocated  first?  
agreement  that  would  include  salary  allocations  and   a. Salaries  
bonus  payments  all  in  the  same  agreement.  FALSE   b. Bonuses  to  partners  
15. If  Partner  A  invested  twice  as  much  a  Partner  B,  and   c. Interest  on  the  capital  of  an  industrial  partner  
there   are   only   two   partners,   the   income   must   be   d. All  of  these  
divided  in  a  ratio  of  2:1,  respectively.  TRUE    
   
MULTIPLE  CHOICE    
1. Partnership  capital  and  drawings  accounts  are  similar    
to  the  corporate   6. When   property   other   than   cash   is   invested   in   a  
a. Paid   in   capital,   retained   earnings,   and   dividends   partnership,   at   what   amount   should   the   noncash  
accounts.   property   be   credited   to   the   contributing   partner’s  
b. Retained  earnings  account.   capital  account?  
c. Paid  in  capital  and  retained  earnings  account.   a. Fair  value  at  the  date  of  contribution  
d. Preferred  and  common  stock  accounts.   b. Contributing  partner’s  original  cost  
  c. Assessed  valuation  for  property  tax  purposes.  
2. Under  the  bonus  method,   d. Contributing  partner’s  tax  basis.  
a. Total   partnership   capital   is   equal   to   the   fair    
value   of   the   net   contributions   to   the   7. In   all   cases   of   dissolution,   the   partnership   assets  
partnership.   and  liabilities  at  date  of  dissolution  may  need  to  be  
b. Total   partnership   capital   is   less   than   the   fair   revalued   to   their   fair   values.   Any   revaluation  
value  of  the  net  contributions  to  the  partnership.   increase  or  decrease  is  
c. Total   partnership   capital   is   greater   than   the   fair   a. Allocated  to  all  of  the  existing  partners  as  at  the  
value  of  the  net  contributions  to  the  partnership.   date  of  dissolution.  

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 b. Allocated   only   to   the   partners   exiting   after   the   b. I,II,III  
dissolution.   c. III,II,I  
c. Allocated   only   to   the   partner   ceasing   to   be   d. II,I,III  
associated  with  the  partnership.    
d. No  revaluation  shall  be  made.   12. Under   the   cash   priority   program,   when   all   of   the  
  priorities   are   paid,   any   remaining   cash   distribution  
8. The   admission   of   a   new   partner   effected   through   is  
purchase  of  interest  in  the  partnership  is   a. Allocated   to   the   partners   based   on   their  
a. Recorded   in   the   partnership   books   as   a   debit   to   respective  profit  or  loss  ratio.  
cash   or   other   asset   and   credit   to   the   incoming   b. Allocated  to  the  partners  based  on  the  balances  
partner’s  capital  account.   in   their   capital   accounts   after   allocation   of  
b. Recorded  in  the  partnership  books  as  a  transfer   losses.  
within  equity.   c. Allocated   to   the   partners   based   on   their   pre-­‐
c. Recorded   in   the   partnership   books   as   a   transfer   computed  priorities.  
from  equity  to  liability.   d. Allocated   to   the   partner   based   on   the   relative  
d. Not  recorded  in  its  entirety.   values  of  their  capital  balances.  
   
9. After   the   admission   of   a   new   partner,   the   total   13. When   A   retired   from   the   partnership   of   A,   B,   and   C,  
partnership  capital  increased  by  the  fair  value  of  the   the   final   settlement   of   A’s   interest   exceeded   A’s  
new  partner’s  net  contributions  to  the  partnership.   capital   balance.   Under   the   bonus   method,   the  
The  admission  was  accounted  for   excess  
a. Under  the  goodwill  method   a. Was  recorded  as  goodwill  
b. Under  the  bonus  method   b. Was  recorded  as  an  expense  
c. As  a  purchase  of  interest   c. Reduced  the  capital  balances  of  B  and  C.  
d. As  an  investment  in  the  partnership   d. Had  no  effect  on  the  capital  balances  of  B  and  C.  
   
10. In  the  AB  Partnership,  A  and  B  had  a  capital  ratio  of   14. The   following   are   reasons   for   incorporating   a  
3:1   and   a   profit   and   loss   ratio   of   2:1,   respectively.   partnership  except:  
The   bonus   method   was   used   to   record   C’s   a. Non-­‐transferability  of  ownership  
admittance   as   a   new   partner.   What   ratio   would   be   b. Limited  liability  of  shareholders  
used   to   allocate,   to   A   and   B,   the   excess   of   C’s   c. Ease  of  raising  additional  capital  
contribution  over  the  amount  credited  to  C’s  capital   d. Dispersion  of  risk  
account?    
a. A  and  B’s  new  relative  capital  ratio   15. This   schedule   determines   which   partner   shall   be  
b. A   and   B’s   new   relative   capital   profit   and   loss   paid  first  and  which  partner  shall  be  paid  last,  after  
ratio   all   liabilities   are   settled.   This   schedule   can   be  
c. A  and  B’s  old  capital  ratio   prepared  even  prior  to  the  sale  of  any  asset.  
d. A  and  B’s  old  profit  and  loss  ratio   a. Cash  priority  program  
  b. Safe  payment  schedule  
  c. Statement  of  liquidation  
  d. Marshalling  of  assets  
 
 
 
11. State  the  proper  order  of  liquidation  
I. Outside  creditors  
II. Owners’  interests  
III. Inside  creditors  
a. I,III,II  

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