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ADVANCED ACCOUNTING
Module 1: Partnership Accounting
1.1 Partnership Formation

 The MAIN CONCERN of accounting problems on PARTNERSHIP FORMATION is the COMPUTATION

OF THE NET CONTRIBUTION AND/OR CAPITAL CREDIT of a partner at the inception of the
partnership.
 When a partnership is formed, the assets contributed by the partners and the liabilities assumed by the
partnership in behalf of the partners are all valued at agreed value, or in the absence of which, at fair
value. This means that the book value of the assets and liabilities in the separate books or records of the
prospective partners are adjusted. Adjustments are done directly to the capital account (i.e. no
nominal accounts will be debited or credited in the adjusting entries).
 To wit, the net assets contributed by the partners at fair value constitutes the TOTAL BEGINNING
CAPITAL of the partnership:

TOTAL ASSETS CONTRIBUTED BY ALL PARNTERS

Less

TOTAL LIABILITIES ASSUMED BY THE PARTNERSHIP

=
TOTAL BEGINNING CAPITAL OF THE PARTNERSHIP

 However, the INDIVIDUAL beginning capital of each partner may not necessarily be equal to the fair
value of the net assets each partner contributed. Their individual capital credits at the start of the
partnership will depend upon their agreement. The agreed capital (AC) of each partner is not
always equal to his/her Contributed capital (CC)

To illustrate, assume PARTNER A contributed P100,000 cash and PARTNER B contributed land with a
fair value of P200,000 to the partnership on January 1, 2015. However, their agreement is to have an
equal interest in the capital and profits of the partnership. The following journal entry will be made at
the start of the partnership:
1/1/15 Cash P100,000
Land 200,000
Partner A, Capital P150,000
Partner B, Capital 150,000

In the absence of any agreement, it is assumed that agreed capital is equal to contributed capital
(i.e. net investment method).
 Looking at the journal entry, their agreement of having an equal interest favors Partner A over Partner
B. It is as if a “bonus” is given by Partner B to Partner A at the start of the partnership. Another way of
understanding this is by making a table similar to the one below:

CC AC Bonus from (to)

PARTNER A P100,000 P150,000 P50,000
PARTNER B 200,000 150,000 (50,000)
TOTAL P300,000 P300,000 -
 There may be instances when an extra investment or immediate withdrawal is made by one or more
partners to equate their capital contributions to their percentage interest in the partnership. This is a
matter of applying simple algebra on the accounting equation.

ADVACC (Acctg 630) – MODULE 1: PARTNERSHIP ACCOUNTING

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Practice Problems – Partnership Formation:

Problem 1: QR and ST decided to combine their businesses and form a partnership. Below are their
balance sheets before any adjustments:

QR ST
Cash P2,048,400 P1,098,360
Accounts receivable 1,031,960 2,498,716
Inventories 528,160 1,144,448
Property, plant & equipment (net) 613,380 852,224
Other assets ___8,800___ __15,840__
Total Assets P4,230,700 P5,609,588

Accounts payable P787,336 P1,072,060

Notes payable 1,000,000 -
Mortgage payable - 1,440,000
QR, Capital 2,443,364 -
ST, Capital ______________ __3,097,528
Total Liabilities & Equity P4,230,700 P5,609,588

The partners agreed that the property, plant and equipment of QR is under depreciated by P80,000 and
that of ST is over depreciated by P200,000. Accounts receivable of P 108,000 in QR’s book and P140,000 in
ST’s book are uncollectible. The partnership decided to assume the mortgage liability of ST. The
partnership agreement provides for a profit and loss ratio and capital interest of 60% to QR and 40% to ST.
ST is willing to invest or withdraw cash from the partnership to comply with the agreement.

Question 1: What are the capital balances of QR and ST right after the formation?

A. P6,896,292 ; P4,597,528 C. P2,255,364 ; P1,503,576

B. P6,896,292 ; P3,157,528 D. P2,255,364 ; P3,157,528

Question 2: What is the total assets of the partnership after formation?

A. P5,618,336 C. P6,618,336
B. P8,058,336 D. P9,840,288

Problem 2: On December 1, 2014, MG and AN are combining their separate businesses to form a
partnership. Cash and noncash assets are to be contributed. The noncash assets to be contributed and the
liabilities to be assumed are as follows:

MG AN
Book Value Fair Value Book Value Fair Value
Accounts Receivable 250,000 262,500 200,000 195,000
Inventory 400,000 450,000 200,000 207,500
PPE 1,000,000 912,500 862,500 822,500
Accounts Payable 150,000 150,000 112,500 112,500

MG and AN are to invest equal amounts of cash such that the contribution of MG would be 10% more than
the investment of AN.

What is the amount of cash presented on the partnership’s Statement of Financial Position on December 1,
2014.

A. P2,762,500
B. P2,512,500
C. P5,525,000
D. P5,025,000

ADVACC (Acctg 630) – MODULE 1: PARTNERSHIP ACCOUNTING

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Problem 3: AK and BK decided to form a partnership on October 1, 2014. Their Statements of Financial
Position on this date were:

AK BK
Cash P65,625 P164,062.50
Accounts Receivable 1,487,500 896,875
Merchandise Inventory 875,000 885,937.50
Equipment 656,250 1,268,750
TOTAL 3,084,375 3,215,625

Accounts Payable 459,375 1,159,375

AK, Capital 2,625,000
BK, Capital 2,056,250
TOTAL 3,084,375 3,215,625

They agreed the following adjustments shall be made:

- Equipment of AK is under-depreciated by P87,500. BK’s is over-depreciated by P131,250.

- Allowance for bad debts is to be set up amounting to P297,500 for AK & P196,875 for BK.
- Inventories of P21,875 and P15,312.50 are worthless in the books of AK and BK respectively.
- The partnership agreement provides for profit and loss ratio of 70% to AK and 30% to BK.

Assuming the use of transfer of capital method, how much is the agreed capital of AK to bring the capital
balances proportionate to their profit and loss ratio.

A. P2,390,937.50
B. P2,935,406.25
C. P2,218,125.00
D. P1,024,687.50

Problem 4: MN and OP decided to form a partnership on June 1, 2015. The partnership will take over their
assets as well as assume their liabilities. As of June 1, 2015, the net assets of MN and OP are P220,000 and
P309,375 respectively. Liabilities of MN are 55% less than the value of its net assets while liabilities of OP
are 40% more than the value of its net assets. The partners agreed on a 25:75 profit and loss ratio.
Furthermore, the partners arrive on the following agreements: MN’s inventory is undervalued by P11,000.
An allowance for doubtful account is to be set up in the books of MN and OP at 10% of the accounts
receivable balances (MN, P27,500; OP, P41,250). Accrued salary of P20,250 was not recognized in OP’s
books.

How much cash should MN invest or withdraw so that their capital interest would be equal to their profit
and loss ratio?

A. P95,000 C. P133,250
B. P(133,250) D. P (95,000)

ADVACC (Acctg 630) – MODULE 1: PARTNERSHIP ACCOUNTING

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1.2 Partnership Operations

 The MAIN CONCERN of accounting problems on PARTNERSHIP OPERATIONS is the ALLOCATION

OF PARTNERSHIP PROFITS OR LOSSES TO THE PARTNERS.
 Due to the nature of a partnership contract, partners may agree freely, subject to very few limitations, on
how they are to share the profits and losses of a partnership. Thus, it is virtually impossible to list down
all the possible ways of doing this. The following are the common allocation bases of sharing profits and
losses:
1. Equally – normally, but not generally, profits and losses are shared by all partners equally.
2. Using an arbitrary ratio or percentage – e.g. 50:30:20; 60% and 40%; 3:2:1
3. Using their capital ratios – when using capital ratios to allocate profits and losses, there are four (4)
capital ratios that may be used:
a. Original capital ratio – the ratio of the ORIGINAL capital credits of the partners at the
FORMATION of the partnership.
b. Beginning capital ratio – the capital ratio of the partners at the beginning of the CURRENT
ACCOUNTING PERIOD.
c. Ending capital ratio – the capital ratio of the partners at the end of the current accounting period
after investments and withdrawals but before profit allocation.
d. Average capital ratio – the ratio of the partners’ average capital balances from the start of the
current accounting period to the end of the same period. There are two (2) ways of computing the
average capitals of the partners:
o Simple average – the statistical mean of the beginning capital and ending capital of a partner
(i.e. [beginning capital + ending capital]/2)
o Peso-time average – a more accurate way of computing average capital by putting weights of
time on the moving balances of a partner’s capital due to his/her additional investments or
withdrawals during the accounting period (i.e. ∑ capital balances at points in time x weights of
time)
4. Salaries and interest on capital – partner salaries and interest on capital are NOT EXPENSE ITEMS
but rather a means of allocating profits and losses. Salaries are usually expressed as a fixed annual
amount while interest is usually expressed as an annual percentage of capital balances.
5. Bonuses – the amount of bonus is usually expressed as a percentage of profit (e.g. profit before or
after interest, bonuses and salaries).
6. Multiple allocations – the use of many allocation bases.

 The following are the IMPORTANT RULES AND TRICKS you need to remember when solving problems
that involve the allocation of profits and losses to partners:
a. If the profit sharing ratio is not given, the following hierarchy shall apply:
i. Use the ORIGINAL capital ratio to allocate profits.
ii. In the absence of letter (a), use the BEGINNING capital ratio.
iii. In the absence of (a) and (b), allocate profits equally.
b. If the loss ratio is not given, then it is assumed to be equal to the profit sharing ratio.
c. Temporary, regular and year-end drawings should not be considered when computing for
average capital using the peso-time approach.
d. The profit or loss sharing ratio may not be equal to the percentage interests of the partners in the
partnership. However, when the problem is silent, the interest of a partner in the partnership
and his/her profit or loss ratio are equal.
e. Bonuses are not given when the partnership incurs a net loss. All other allocation bases may be
given even if there is a net loss or there is “negative allocation” due to insufficient profit.
f. When the profit or loss sharing agreement involves multiple allocations, profit or loss is allocated in
the order it is stated in the problem (e.g. salaries first, then interest, then bonuses, and so on…)
g. When the phrase “To the extent of the profit” or “as far as the profit is available” is used in the problem,
the allocation bases are used only to the extent of the profit (i.e. no negative allocation should occur).
This is most relevant when multiple allocation bases are used. For instance, if the profit or loss
agreement involves allocation of salaries and bonuses, but profit is only enough for salaries, then
bonus is no longer given.

ADVACC (Acctg 630) – MODULE 1: PARTNERSHIP ACCOUNTING

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Practice Problems – Partnership Operations:

Problem 1: AB, QR and XY are manufacturers’ representative in the wholesale business. Their capital
accounts in the AQX Partnership for 2015 were as follows:
AB QR XY
January 1, Balances P135,000 P180,000 P75,000
March 1, withdrawal - 36,000 -
April 1, investment - - 30,000
May 1, investment 72,000 - -
June 1, investment - 27,000 -
August 1, withdrawal - - 9,000
October 1, withdrawal 54,000 - -
December 1, investment - 18,000 -

Required: Prepare an income distribution schedule for each of the following independent cases:

1. Interest is 10% of weighted average capital balances. Annual salaries are P480,000 to AB, P630,000
to QR and P510,000 to XY. QR receives a bonus of 25% of net income after deducting the bonus and
his salary. Any remainder is divided in a 2:3:4 ratio by AB, QR and XY, respectively. Net income was
P1,050,000 before any allocations.
2. Monthly salaries are P30,000 to AB, P50,000 to QR and P45,000 to XY. AB receives a bonus of 5% of
net income after deducting his bonus. Interest is 12% of ending capital balances. Any remainder is
divided by AB, QR and XY in a 25:40:35 ratio. The Income Summary account has a credit balance of
P2,835,000 before closing.
3. XY receives a bonus of 20% of net income after deducting the bonus and the salaries. Annual salaries
are P600,000 to AB, P540,000 to QR and P750,000 to XY. Interest is 15% of the ending capital in
excess of P140,000. Any remainder is to be divided by AB, QR and XY in the ratio of their beginning
capital balances. Net income was P1,740,000 before any allocations.
4. Monthly salaries are P32,000 to AB, P40,000 to QR and P42,000 to XY. QR receives a bonus of 10% of
net income after deducting his bonus. Interest is 25% on the excess of the ending capital balances
over the beginning capital balances. Any remainder is to be divided by AB, QR and XY in a 3:2:1 ratio.
The Income Summary account has a debit balance of P750,000 before closing.
5. Annual salaries of P450,000 to AB, P540,000 to QR and P810,000 to XY are allowed to the extent of
the earnings only. Any remainder is to be divided equally among the partners. Net income before
allocation is P960,000.
6. Annual salaries of P350,000, P400,000 and P500,000 are given to AB, QR and XY, respectively. Any
remainder is divided among the partners using a 5:3:2 ratio. Net income before allocation is
P850,000. Salaries given to partners were accounted as operating expenses during 2015.

Problem 2: CD partnership begins its first year of operations with the following capital balances: C, Capital,
P224,000 ; D, Capital, P112,000. The partnership agreement regarding allocation of profits and losses is as
follows:

 C will be allowed a salary of P268,800 and P134,400 to D.

 The partners will be allowed with interest equal to 10% of the beginning capital balance of the year.
 C will be allowed a bonus of 10% of the net income after bonus.
 The remainder will be divided on the basis of the beginning capital for the first year and equally for
the second year.
 Each partner is allowed to withdraw up to P11,200 per year.

Assume that the income summary has a debit balance of P16,800 on the first year and a credit balance of
P61,600 on the second year. Assume further that each partner withdraws the maximum amount from the
business each period.

What is the balance of P’s capital account at the end of the second year?
A. P95,200 B. P39,480 C. P296,520 D. P201,600

ADVACC (Acctg 630) – MODULE 1: PARTNERSHIP ACCOUNTING

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Problem 3: CC partnership began operations on June 1, 2014. On that date, CY and CR have capital credits
of P175,000 and P240,000, respectively. The partnership has the following profit-sharing plan:

- 10% interest on partners’ capital balances at the end of each year.

- P60,000 and P75,000 annual salaries for CY and CR, respectively.
- Remaining profit will be divided to CY and CR on a 3:2 ratio, respectively.

During the year, CY invested P150,000 worth of merchandise and withdrew P40,000 cash, while CR
invested P120,000 cash. The partnership earned a profit of P266,375 during the year.

How much is CY’s capital balance at the end of 2014?

A. P422,375
B. P444,825
C. P426,625
D. P413,625

Problem 4: AY and AN are partners who have the agreement to share profits and loss in the following
manner:

AY AN
Annual Salaries P261,000 P259,000
Interest on average balances 5% 10%
Bonus on net income after salaries and interest 10% -
Remainder 50% 50%

During the year ended December 31, 2014, the partnership generated a profit of P575,000 before any
deductions. AY’s and AN’s average capital balances for this year are P600,000 and P300,000 respectively.
Income is distributed to the partners only as far as it is available.

How much is the total share of AN in the net income for the year ended 2014?

A. P286,500
B. P287,500
C. P288,500
D. P295,665

Problem 5: Hans, Lance, Arthur and Sidd own a publishing company that they operate as a partnership.
Their agreement includes the following:

- Hans will receive a salary of P20,000 and a bonus of 3% of income after all the bonuses.
- Lance will receive a salary of P10,000 and a bonus of 2% of income after all the bonuses.
- All the partners are to receive the following: Hans – P5,000, Lance – P4,500, Arthur – P2,000 and Sidd –
P4,700, representing 10% interest on their average capital balances.
- Any remaining profits are to be divided equally among the partners.
- Partnership reports a profit of P40,000.

How much is Lance’s share in the profit if profit is distributed in the following order of priority: Interest
on capital, then bonuses, then salary, and then according to P/L ratio?

A. P12,560.00
B. P13,235.75
C. P12,433.00
D. P12,830.75

ADVACC (Acctg 630) – MODULE 1: PARTNERSHIP ACCOUNTING

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1.3 Partnership Dissolution

 The MAIN CONCERN of accounting problems on PARTNERSHIP DISSOLUTION is the

COMPUTATION OF THE CAPITAL BALANCE OF A PARTNER AFTER DISSOLUTION.
 Partnership dissolution pertains to the CHANGE in the original partnership agreement or contract.
Dissolution occurs in each of the following instances.
1. Admission of a new partner 3. Death or incapacity of an existing
2. Retirement of an existing partner partner
4. Incorporation of a partnership
In Advanced Accounting, problems on partnership dissolution focus on admission or retirement.

1.3.1 Admission of a New Partner

 When a new partner is admitted into the partnership, the transaction may be accounted for
either as a purchase of interest from other partners or as an investment of net assets into the
partnership. The accounting differences between the two are as follows:

1. Admission by PURCHASE (Key verbs: purchases, buys, pays, transfers) – this constitutes a
mere transfer of capital. The new partner has no net asset contributions to the partnership.
The capital balances of the old partners are simply debited and the capital balance of the new
partner is credited. Hence, the total capital of the partnership remains the same and any cash
settlement is considered to be a personal transaction among the partners.
However, there are instances where assets are required to be revalued prior to the transfer of
capital to the new partner. This is usually done to equate the personal cash settlement with
the capital credit of the new partner. The ff. computation is necessary:
Personal cash settlement of the new partner xxx
Divide: Interest of the new partner in the partnership _÷ %_
New total capital of the partnership xxx
Less: Old total capital of the partnership (prior to admission) _(xxx)_
Revaluation amount (to be allocated to OLD partners only) xxx

2. Admission by INVESTMENT (Key verbs: invests, contributes) – In this type of admission, there
is an actual investment of net assets on the partnership by the new partner. Consequently,
total capital of the partnership will definitely change upon the admission of the new partner.
Similar to what happens when forming a partnership, the capital credit of the new partner
upon his admission may not necessarily be equal to the fair value of his/her investment.
One way of solving accounting problems involving the admission of a new partner via
investment is through using the AC-CC table:

AC CC Bonus/Revaluation
Old partners XXXX XXXX XXX
New partner _XXXX_ _XXXX_ _____ XXX________
TOTAL XXXX XXXX XXX

The following shall be observed when using the table:

 The CC of the OLD partners are simply equal to their capital balances prior to admission.
 The CC of the NEW partner is simply equal to his/her net asset contributions (i.e. invested
capital).
 The AC of the new partner depends on their agreement. Normally, it is computed in the
following manner: Total AC x % interest of new partner = AC of new partner
 If AC-new partner > CC-new partner, the difference is BONUS to NEW partner.
If AC-new partner < CC-new partner, the difference is BONUS to OLD partners.
If AC-new partner = CC-new partner, there is NO BONUS.
If TOTAL AC > TOTAL CC, the difference is POSITIVE REVALUATION.
If TOTAL AC < TOTAL CC, the difference is NEGATIVE REVALUATION.
If TOTAL AC = TOTAL CC, the difference is NO REVALUATION.
 Bonuses to old partners and revaluations are allocated to the OLD partners ONLY using their
original profit/loss sharing ratio.
 If the problem is silent, the bonus method is used (TAC = TCC, but AC-new ≠ CC-new).
 A bonus and revaluation can occur at the same time (TAC ≠ TCC, AC-new ≠ CC-new).
ADVACC (Acctg 630) – MODULE 1: PARTNERSHIP ACCOUNTING
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1.3.1 Retirement/Withdrawal of an Existing Partner

 When a partner of an existing partnership RETIRES or withdraws from the partnership, the
partnership settles his/her capital balance usually through payment of an agreed amount of
cash. The amount of the cash settlement and the retiring partner’s capital balance may not
necessarily be equal. The difference may be accounted for as a:
o Bonus to/from remaining partners – the difference between the cash settlement and the
capital balance of the retiring partner is considered as a bonus to/from the remaining
partners, as the case may be.
o Revaluation of assets – some of the partnership assets are revalued to equate the retiring
partner’s capital balance with his/her cash settlement. This can be done via:
 Total revaluation – all the partners’ capital balances are adjusted for the revaluation. This
involves “grossing up” the difference of the retiring partner’s capital balance and his/her
cash settlement, then allocating such amount to the partners.
Capital balance of retiring partner xxx
Cash settlement _(xxx)_
Partial revaluation xxx
Divide: P/L ratio of retiring partner _÷ %_
Total asset revaluation to be allocated to ALL partners xxx
 Partial revaluation – the retiring partner’s capital balance is equated with the cash
settlement by adjusting his/her capital ONLY and recognizing a corresponding asset
revaluation.
 Other important things to remember when solving partnership dissolution problems:
1. Make sure to allocate net income and close drawings and additional investments to the capital
balances of the partners before effecting the dissolution.
2. When the problem is silent, the bonus method is used. Assets are only revalued when it is
explicitly stated in the problem.
3. The amount of the bonus and/or revaluation is allocated to the partners using the profit/loss
sharing agreement in effect BEFORE the dissolution occurs.
4. There are instances when the remaining partners will adjust their capital balances to comply
with their new interest ratios after the retirement.

Practice Problems – Partnership Dissolution:

Problem 1: On August 1, 2010, Marie and Paz formed a partnership. Marie contributed inventory of
P500,000 with a fair value of P300,000 while Paz contributed cash of P250,000 and a land valued
that cost her P900,000 with a carrying amount of P1,000,000 and a fair value of P1,250,000. The
partnership did not assume the mortgage attached to the property worth P250,000. The partners
agree to allocate profits and losses as follows:
1. Each partner shall receive 5% interest on the amount of his beginning capital.
2. Marie will receive a salary of P8,000 per month.
3. The remainder will be divided equally on the first year and 60:40 on subsequent years.
4. Marie and Paz are allowed to withdraw P5,000 per month. Any withdrawal is treated as a
direct reduction of capital.
In 2010, the partnership has a credit balance of income summary of P100,000. On July 1, 2011,
Ivonne was admitted in the partnership by investing P800,000 for a 25% interest. Asset revaluation
is to be recognized. After admission of Ivonne, the partners agreed to divide profits as follows:
1. Each partner shall receive 5% interest on the amount of his beginning capital.
2. All partners will receive a salary of P2,000 per month.
3. The balance to be divided 45% to Marie, 30% to Paz and 25% to Ivonne.
4. Each partner is allowed to withdraw P2,000 per month. Any withdrawal is treated as a
direct reduction of capital.

In 2011, the partnership earned a profit of P300,000 evenly throughout the year. How much is the
capital balance of Marie at the end of December 31, 2011.

ADVACC (Acctg 630) – MODULE 1: PARTNERSHIP ACCOUNTING

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A. P707,623.44 B. P694,554.69 C. P670,652.97 D. P705,586.25

Problem 2: Vida, Vina and Vita, sharing profits and losses 5:3:2, have capital credit balances of
P400,000, P300,000 and P200,000 respectively. They decided to admit a new partner, Vera to a
30% interest in the partnership upon Vera’s investment of an amount equal to five-sixths of her
capital credit with no asset adjustment recognized. Immediately after the admission of Vera, the
capital credit balance of Vina will be:

A. P300,000 B. P330,000 C. P318,000 D. P282,000

Problem 3: PV, BK and TF were partners in Omaha Partnership. Their profit ratio is 50%, 30%,
20%, while their original capital interest ratio is 4:4:2. On July 1, 2014, JP was admitted by the
partnership for 20% interest in capital and 25% in profits by contributing P87,500 cash, and the
old partners agree to bring their interest to their original capital and profit interest sharing ratio.
JP is the recipient of the transfer of capital of P280,000 from the existing partners. The partnership
had net income of P210,000 before admission of JP and the partners agree to revalue its
overvalued equipment by P35,000. Capital balance of BK increased by P10,500 as a result of the
admission of JP, while the capital balance of TF at the start of the year is P700,000. The capital
balance of PV at the start of the year is:

A. P577,500 B. P350,000 C. P354,200 D. P441,000

Problem 4: SG, AP and TS are partners with capital balances of P784,000, P2,730,000 and
P1,190,000 respectively, sharing profits and losses in the ratio of 3:2:1. DJ is admitted as a new
partner bringing with him expertise and is to invest cash for a 25% interest in the partnership
which includes a credit of P735,000 for bonus upon his admission. How much cash should DJ
contribute?

A. P1,323,000 B. P1,575,000 C. P2,100,000 D. P588,000

Problem 5: On December 30, 2010, the balance sheet of Danger Co. has the following balances:
Total assets P450,000: Willie loan P25,000; Willie capital P103,750; Manny capital P96,250 and
Loren capital P225,000. The partners share profits and losses in the ratio of 25% to Willie, 25% to
Manny, and 50% to Loren. It was agreed among the partners that Willie retires from the
partnership and the partnership assets be adjusted to their fair values of P510,000 as of December
31, 2010. The partnership also suffered net loss of P150,000. The partnership would pay Willie
P108,500 cash for his total interest in the partnership.

What is the capital balance of the remaining partners after the retirement of Willie under the:
a. Bonus method?
b. Partial revaluation method?
c. Total revaluation method?

Problem 6: Ester, Judith and Martha were partners with capital balances on January 2, 2014 of
P70,000, P84,000 and P56,000, respectively. Their loss sharing ratio 3:5:2. On July 1, 2014, Ester
retires from the partnership. On the date of retirement the partnership net profit from operations
is P48,000. The partners agreed further to pay Ester P76,560 in settlement of her interest.

How much will be the capital of Judith after retirement of Ester?

A. P103,200 B. P114,743 C. P108,864 D. P107,904

Problem 7: On December 30, 2014, the Statement of Financial Position of DG Co. has the following
balances: Total assets of P2,250,000, VL loan P125,000, VL capital P518,750, MD capital P481,250
and LV capital P1,125,000. The partners share profits and losses in the ratio of 25% to VL, 25% to
MD and 50% to LV. It was agreed among the partners that VL retires from the partnership and the
partnership assets be adjusted to their fair value of P2,550,000 as of December 31, 2014. The
partnership also suffered net loss of P750,000. The partnership would pay VL the amount of
P542,500 cash for his total interest in the partnership.

What is the total capital of MD after retirement of VL?

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A. P383,750 B. P368,750 C. P365,000 D. P380,000

1.4 Partnership Liquidation

 The MAIN CONCERN of accounting problems on PARTNERSHIP LIQUIDIATION is the CASH

SETTLEMENT TO PARTNERS at the end of the liquidation process.
 As far as cash settlement is concerned, there are two ways to liquidate a partnership:
1. Lump-sum liquidation – settlement of capital balances through payment of cash is done
only after all the partnership assets are realized and all liabilities to creditors are settled,
i.e. one-time payment
2. Installment liquidation – cash payments to partners are done at different intervals of
the liquidation process when assets are partially realized and liabilities to outside
creditors can be settled in full.
 When a partnership is liquidated through installment payments, the following may be used to
facilitate your computation:
o Schedule of safe payments (SSP) - the concept of the SSP is to compute the safest
installment payment to the partners assuming the ‘worst possible scenario’ after the
initial realization of assets. The worst possible scenario assumes the following:
a. All the remaining non-cash assets will no longer be realized (i.e. sold). This means
the book value of these assets are written-off as a loss.
b. Liabilities to external creditors are paid first before the partners.
c. Anticipated expenses are incurred.
b. All the partners are insolvent.
o Cash distribution program (CDP) – the CDP is somewhat similar to the SSP except that
it computes the loss absorption capacity (LAC) of each partner. The LAC is simply the
maximum loss a partner can absorb before his/her capital balance is reduced to zero.
Cash payments to partners are made first to the partner with the biggest LAC and so on.
Priority payments are computed by multiplying the partner’s P/L ratio with the
difference of his/her LAC and the next biggest LAC. Any cash in excess of the priority
cash payments are allocated using the P/L ratios.

When to use which? Using the SSP and CDP should yield the same results as far as
installment payments to partners are concerned. However, the SSP is more preferable if the
amount of unsold assets and liquidation expenses are given. The CDP is best used when only
the cash available for distribution is given or may be obtained.

THE SHORTCUT:

Since Advanced Accounting in the board examination usually involves problems that require you to
do a lot of ‘working back’, the following shortcut is proven to be useful to hasten your
computations:

*Breakdown of total loss:

Total interest of partner
Cash settlement to partner
Loss (gain) on liquidation absorbed
Divide: P/L Ratio of partner
Total loss on liquidation
xxx* (1) Ga i n (l os s ) on rea l i za ti on of a s s ets
__(xxx) (2) Book va l ue of uns ol d a s s ets
xxx (3) Li qui da ti on expens es
(4) Anti ci pated expens es (ca s h wi thhel d for
÷ %__ a nti ci pa ted expens es )
XXX (5) Ins ol vency of s ome pa rtners

*Total interest = capital balance +/- undistributed share in profits or losses +/- loan to (from) partners

 Things to remember:
o When the problem is silent, all the partners are assumed to be insolvent.
o Due to the nature of the accounting equation, the cash available will ALWAYS equal the total
capital of the partnership after all non-cash assets are realized and all liabilities are settled.
o Gains and losses during the liquidation process is allocated to the capital balances of the
partners using their existing profit or loss agreement.

ADVACC (Acctg 630) – MODULE 1: PARTNERSHIP ACCOUNTING

Ateneo de Zamboanga University – School of Management and Accountancy
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o Remember that the final cash settlement is made at the final capital balances of the partners,
not using their profit or loss ratio.

Practice Problems – Partnership Liquidation:

Problem 1: SCA Partnership has the following account balances before liquidation:
Cash P350,000 Liabilities P1,125,000
Noncash assets 7,375,000 Loan from A 50,000
Loan to C 150,000 S, Capital (40%) 1,250,000
Receivable from S 20,000 C, Capital (40%) 1,900,000
Expenses 2,230,000 A, Capital (20%) 1,000,000
Revenues 4,800,000
During June, some noncash assets were sold that resulted to a loss of P46,125. Liquidation
expenses of P175,000 were paid and additional expenses amounting to P90,000 were expected to
be incurred through the following months of liquidation of the partnership. Liabilities to outsiders
amounting to P875,000 were paid. What is the book value of the noncash assets which were sold for
C to receive P555,550?

A. P2,375,000 B. P2,130,000 C. P2,328,875 D. P2,083,875

Problem 2: JFK partnership engaged in steel manufacturing business had the following condensed
financial position prior to liquidation:
ASSETS LIABILITIES AND CAPITAL
Cash P24,000 Liabilities P70,000
Noncash assets 360,000 Loan payable to J 30,000
J, Capital (50%) 90,000
F, Capital (30%) 140,000
____________ K, Capital (20%) __54,000__
Total P384,000 Total P384,000

Assuming assets with a book value of P140,000 were sold for P100,000 and that all available cash
was distributed. For what amount would the remaining assets have to be sold in order for partner F
to receive a total of P158,000 cash after liquidation?

A. P310,000 B. P300,000 C. P320,000 D. P330,000

Problem 3: After a long dispute, Chris, Ann and Nine decided to liquidate their partnership. Their
total interests as of January 1, 2014 are: Chris (25%) P375,000; Ann (40%) P450,000; Nine (35%)
P280,000. Partnership’s total assets on this date include P125,000 cash, a receivable from Chris
amounting to P25,000, and noncash assets of a certain amount. Total liabilities to outside creditors
are P320,000 and the partnership still owes Nine an amount of P20,000. At the end of the
liquidation, Ann received P75,000. How much were the noncash assets sold for?

A. P362,500 B. P312,500 C. P405,625 D. P410,625

Problem 4: Ebay, Amazon and Sulit divide profits and losses in a 2:3:4 ratio. Just prior to
liquidating their partnership, their respective account balances were P50,000, P96,000 and P74,000
as of April 1, 2009. Their total assets include cash of P5,000 and a loan to Ebay for P10,000, while
their total liabilities of P90,000, include a loan from Sulit for P30,000. The partners agreed to
distribute cash, as it becomes available, at month-end. Realization proceeds were P68,000 in April,
P56,000 in May and P63,000 in June. In the cash distribution on June 30, 2009, Sulit will receive:

A. P14,000 B. P28,000 C. P21,000 D. P35,000

Problem 5: Kevin, Paul and Rey have capital balances of P60,000, P100,000 and P36,000,
respectively and they share profits in the respective ratio of 4:2:1. Paul received P52,000 as a result
of the liquidation of the partnership. Loss on assets realization is:

ADVACC (Acctg 630) – MODULE 1: PARTNERSHIP ACCOUNTING

Ateneo de Zamboanga University – School of Management and Accountancy
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A. P118,000 B. P144,000 C. P132,000 D. P168,000

ADVACC (Acctg 630) – MODULE 1: PARTNERSHIP ACCOUNTING

Ateneo de Zamboanga University – School of Management and Accountancy