A.

Partnership Formation:
All assets contributed to the partnership are recorded by the partnership at their agreed values (or fair
market values, in the absence of agreed values).

All liabilities that the partnership assumes are recorded at their net present values. Thus, if a partner
contributes a noncash asset to the partnership (e.g., land or equipment) subject to mortgage, the
contributing partner’s capital account is credited for the agreed value (or fair values) of the noncash
asset less the mortgage assumed by the partnership.

The capital account is used to account for permanent withdrawals and additional contributions. Other
important accounts include a drawing account and loans to or from partners.

The drawing account is used to account for net income or loss and personal or normal withdrawals,
i.e., share against net income. It is closed at the end of the period into the capital account. Loan
accounts are set up for amounts intended as loans, rather than as additional capital investments.

Order of Priority: (Asset Valuation) If items 1-3 are not given, check if there
1. agreed values (upon agreement of partners) are any subsequent transactions after
2. fair market value of the asset contributed the formation of the partnership where
3. book value of the asset contributed the asset contributed was eventually
4. cost of the asset contributed sold. Use the non-cash asset's selling
5. not recognized at all price as the basis of its valuation from
the partnership formation.
Cash Contribution = measured at face value

Composition of Partners: After forming the partnership, there

a. all partners are first timers could be additional investments made
: contribute a certain asset or cash that will give based on the partners' agreed
complement to the business formed. percentage of capitalization. This will
b. previous sole proprietor and first timer result to either additional investment or
: the sole proprietor may contribute assets (cash or non- withdrawal of investment from their
cash) from its previous business. original/actual contribution to follow or
: they will both form an agreement as to the valuation of be consistent with their agreement.
the non-cash assets and the liabilities that could be There could be two methods to be used.
assumed by the partnership.
c. two or more previous sole proprietors 1. Bonus Method
: for expansion purposes. : transfer of capital from one partner to
: present their financial statements and agree upon the another; any payments or consideration
valuation of the assets and the liabilities that could be transferred from each other will be
assumed by the partnership. accounted as personal attraction
between the involved parties. This is to
2. Asset Revaluation satisfy the agreed capitalization.
: additional investment or withdrawal
from particular partners to satisfy the
agreed capitalization.
Any loans or liabilities attached with the asset contributed may be assumed by the partnership or not.
If it is assumed by the partnership, the amount of the liability will be deducted from the capital to be
credited to the partnership.

After determining the valuation of the assets contributed, the liabilities assumed by the partnership,
the agreed capitalization, and the method to be used to arrive at their agreed capitalization, the
financial statements can now be presented as of a given period after the formation.

After which, the partnership has to be registered to the office of the Securities and Exchange
Commission if the combined capital exceeds P 3,000 or if there are real properties contributed. The
contract of the partnership must be in public.

The juridical personality of a partnership starts as early as the execution of the contract. Unlike for
corporations, their juridical personality starts upon receipt of the certification of registration. Finally,
the partnership must comply with all the requirements needed by various regulatory bodies.

A.1. Theory Questions

1. Which of the following statements concerning the formation of partnership business is correct?
Philippines Financial Reporting Standards (PFRS) allows the recognition of
goodwill arising from the formation of partnership.
: Goodwill is only allowed to be recognized when it arises from a business
combination and it is internally-generated.

The juridical personality of the partnership arises from the issuance of

certification of registration.
: The juridical personality of the partnership arises as early as the execution of
the contract of partnership. The statement applies to a corporation.

The parties may become partners only upon contribution of money or property but
not of industry or service.
: Contribution of partners in a partnership may vary from money or property
(called capitalist partner), and industry or service (called industrial partner).

The capital to be credited to each partner upon formation may not be the amount
actually contributed by each partner.
: Complying to the agreed capitalization may require partners to have
additional investments or withdrawals from their original contribution.

Under the generally accepted accounting principles in the Philippines, what is the acceptable reason
when the amount credited to a partner is greater than the amount actually contributed by such partner
during partnership formation?
Receipt or transfer of capital from the other partner by virtue of partner’s
agreement resulting to bonus to the said partner.

He refers to a partner who contributed not only money and property but also industry to the newly
formed partnership?
He refers to a partner who contributed not only money and property but also industry to the newly
formed partnership?
Capital-Industrial Partner

It refers to a type of partnership wherein all partners are liable to the creditors pro-rata up to the
extendof personal or separate assets after the partnership’s assets are exhausted.
General Partnership

A.2. Problem Solving Questions

1. On January 1, 2022, Len, May and Nancy decided to form a business partnership to operate
supermarket. Len and May both owned a grocery business with the Statements of Financial Position
as of December 31, 2021. The following additional notes are provided:

Len May
Cash 10,000,000 20,000,000
Accounts Receivable 20,000,000 30,000,000
Inventories 70,000,000 40,000,000
Property, Plant, and Equipment 50,000,000 10,000,000
Accounts Payable 40,000,000 20,000,000
Notes Payable 30,000,000 50,000,000
Interest on Notes Payable 10% 5%
Capital 80,000,000 30,000,000

a. Len and May will contribute all its assets and liabilities to the newly formed partnership.
b. The parties agree to provide 10% and 20% allowance for the bad debts to the accounts receivable
of Len and May, respectively.
Allowance for Bad Debts (Len - 10%) 2,000,000
Allowance for Bad Debts (May - 20%) 6,000,000
c. The inventories of LEN and MAY are reported at historical cost and have net realizable value of P
60M and P 45M, respectively.
Cost of Inventories - Len 70,000,000
(10,000,000 difference)
Net Realizable Value - Len 60,000,000
Cost of Inventories - May 40,000,000
Net Realizable Value - May 45,000,000
d. The PPE of LEN and MAY have not been depreciated and should be depreciated by 40% and 30%
respectively.
Accumulated Depreciation (Len - 40%) 20,000,000
Accumulated Depreciation (May - 30%) 3,000,000
e. The interest payable on both notes payable were unrecorded and unpaid since the date of contract.
LEN’s note payable is dated April 1 while MAY’s note payable is dated June 30.
Interest Payable - Len 2,250,000
(30,000,000 x 10% x 9/12)
Interest Payable - May 1,250,000
(50,000,000 x 5% x 6/12)
f. Nancy shall have 20% interest in the partnership upon contribution of sufficient cash.
Both the books of Len and May will be adjusted accordingly, with the adjustments charged directly to
capital. After adjusting the balances, Len and May will have to close their books as well as their TIN.
(tax ruling: Close the businesses to close their TIN, creating a new one for the partnership.)

Len Capital May Capital

2,000,000 [b] 80,000,000 [a] 6,000,000 [b] 30,000,000 [a]
10,000,000 [c] 3,000,000 [d]
20,000,000 [d] 1,250,000 [e]
2,250,000 [e] 19,750,000
45,750,000

Len's Capital Contribution 45,750,000

May's Capital Contribution 19,750,000
Nancy's Capital Contribution 20%
Total Contributions 81,875,000
(45,750,000 + 19,750,000) ÷ 80%

Nancy's Capital Contribution (20%) 16,375,000

(81,875,000 x 20%)

Balance Sheet after Formation

(Len, May, and Nancy)

Len May Total

Cash 10,000,000 20,000,000 46,375,000
(Total includes Nancy = 16,375,000)
Accounts Receivable 20,000,000 30,000,000 50,000,000
Allowance for Bad Debts (6,000,000) (2,000,000) (8,000,000)
Inventory 60,000,000 40,000,000 100,000,000
Property, Plant, and Equipment 30,000,000 7,000,000 37,000,000
Total Assets 225,375,000

Accounts Payable 40,000,000 20,000,000 60,000,000

Notes Payable 30,000,000 50,000,000 80,000,000
Interest Payable 2,250,000 1,250,000 3,500,000
Total Liabilities 143,500,000
Capital 81,875,000
(Total includes Nancy = 16,375,000)
Total Liabilities + Partners' Equity 225,375,000

(what if: Nancy gave contribution)

a. Capital agreement is equal. (bonus method)
Len 45,750,000 27,291,667 ?
May 19,750,000 27,291,667 ?
Nancy 16,375,000 27,291,667 ?
Total 81,875,000 Each partner should contribute P 27,291,667. For this to
Each Partner (1/3) 27,291,667 happen, Len will transfer to May and Nancy.

Len 45,750,000 (18,458,333) 27,291,667

May 19,750,000 7,541,667 27,291,667
Nancy 16,375,000 10,916,667 27,291,667
Leni will transfer to May P 7,541,667 (27,291,667 - 19,750,000). Leni will then transfer P 10,916,666
(18,458,333 - 7,541,667).

b. Capital agreement is equal. (asset revaluation)

: If Leni is the basis, May and Nancy will : If May is the basis, Leni will withdraw
contribute additional investments to and Nancy will invest additionally to
increase their contribution. meet May's contribution.

c. Capital agreement is P/L ratio. (bonus method)

P/L ratio is 1:2:2.

Len 10,000,000 (2,000,000) 8,000,000

May 20,000,000 (4,000,000) 16,000,000
Nancy 10,000,000 6,000,000 16,000,000
Total 40,000,000
Each Partner: (1/5) : Both Len and May will withdraw P 2,000,000 and P
Len (1/5) 8,000,000 4,000,000 respectively. The total of which will be transferred
May (2/5) 16,000,000 to Nancy.
Nancy (2/5) 16,000,000

d. Capital agreement is P/L ratio. (asset revaluation)

P/L ratio is 1:2:2. (If Len is the basis…)

Len (basis) 10,000,000 1/5 10,000,000

May 20,000,000 2/5 20,000,000
Nancy 10,000,000 2/5 20,000,000 (add 10,000,000)
Total (10,000,000 ÷ 1/5) 50,000,000

P/L ratio is 1:2:2. (If Nancy is the basis…)

Len (basis) 10,000,000 1/5 5,000,000 (less 5,000,000)

May 20,000,000 2/5 10,000,000 (less 10,000,000)
Nancy 10,000,000 2/5 10,000,000
Total (10,000,000 ÷ 2/5) 25,000,000

2. A, B, C decided to form ABC Partnership. It was agreed that A will contribute an equipment with
assessed value of P 100,000 with historical cost of P 800,000 and accumulated depreciation of P
600,000. A day after the partnership formation, the equipment was sold for P 300,000.
B will contribute a land and building with carrying amount of P 1,200,000 and fair value of P 1,500,000.
The land and building are subject to a mortgage payable amounting to P 300,000 to be assumed by the
partnership. The partners agreed that B will have 60% capital interest in the partnership. The partners
also agreed that C will contribute sufficient cash to the partnership.

Partner A (equipment) 300,000

: selling price (transaction after formation)
Partner B (land and building) 1,200,000
: fair value (owns 60% interest)
: less mortgage (assumed by partnership)
Partner C (cash) ? 500,000
Total Contribution 2,000,000
(1,200,000 ÷ 60%)

3. Charlie and Delta formed a partnership. Charlie invested cash worth P 85,000 and a machine. On the
other hand, Delta contributed cash worth P 55,000 and an equipment which has a mortgage of P
35,000 which Delta will pay personally. The total capital after formation was P 360,000. They also
further agreed to reflect 55:45 ratio as to their capital balances respectively. No other investment of
withdrawal occurred other than mentioned to reflect their capital ratio agreement.

Charlie (cash and machine) 85,000 113,000 198,000

: owns 55% interest (machine)
Delta (cash and equipment) 55,000 107,000 162,000
: owns 45% interest (equipment)
: mortgage not assumed by partnership
Total Contribution 360,000

4. On January 1, 2022, Regina, Jessica and Nataly formed a partnership with profit or loss sharing
agreement of 2:3:5.

Regina contributed a land with assessed value from the city assessor in the amount of P 1,000,000.
The land is subject to a real estate mortgage which is annotated to the title of the land in the amount
of P 800,000 and will be assumed by the partnership. The appraised value of the land is P 2,400,000.
Jessica, contributed a building with a cost of P 2,000,000 and accumulated depreciation of P
1,500,000. The fair value of the building is P 800,000. Nataly contributed investment in trading
securities with historical cost of P 6,000,000. The trading securities have quoted price in active market
of P 3,000,000.

The partners decided to bring their capital balances in accordance with their profit or loss sharing
agreement. The total agreed capitalization of the new partnership is P 10,000,000.

Regina (2/10; land) 1,600,000 400,000 2,000,000

: assessed value less mortgage (assumed)
Jessica (3/10; building) 800,000 2,200,000 3,000,000
: at fair value
Nataly (5/10; investment in trading sec.) 3,000,000 2,000,000 5,000,000
: at quoted price in active market
Total Agreed Capitalization 10,000,000

B. Partnership Operation:
Division of Profits and Losses:
As a rule profits and losses are allocated based on agreement. Various methods exist for the
division of partnership profits and losses, including the following:
1. Equally;
2. Arbitrary ratio;
3. Capital contribution ratio;
a. Original Capital/Initial Investment
b. Beginning Capital of Each Year
c. Average Capital (fairest)
d. Ending Capital of Each Year
4. Interest on capital balance and/or loan balances and the balance on agreed ratio;
5. Salaries to partners and balance on agreed ratio;
6. Bonus to partners and the balance on agreed ratio;
a. Bonus as an “expense” in computing the bonus amount. Here, bonus is
computed based on net income after bonus.
b. Bonus as a distribution of profit. Here, the bonus is computed based on net
income before deducting the bonus.
7. Interest on capitals and/or loan balances, salaries to partners, and bonus to partner and
balance on agreed ratio.

The method of division to be used in any given situation is generally the method specified in the
partnership agreement. This agreement must always be consulted first since it is legally binding on the
partners.

If no profit and loss sharing arrangement is specified in the partnership agreement, the partnership
requires that profits and losses be shared according to capital contribution.

Capital contribution should be interpreted to be original capital/beginning capital of each year in the
absence of original capital.

Similarly, if the agreement specifies how profits are to be shared but it is silent as to losses, losses are
to be shared in the same manner as profits.

Notice that the profit and loss sharing ratio is totally independent of the partners’ ownership interests.

B.1. Theory Questions

1. Which of the following transactions shall not affect the capital balance of a partner?
Share of a partner in the partnership’s net loss.
: will eventually affect the capital balance; it is first debited to drawings.
Receipt of bonus by a partner from another partner based on the agreement.
 : pertains to a transfer of capital.
Advances made by the partnership to a partner.
: part of receivables; normally deducted to the capital balance during dissolution.
Additional investment by a partner to the partnership.

2. In the absence of agreement as to distribution of profit, how shall the partnership profit be
distributed to the partners?
The industrial partner shall receive a just and equitable share and the remainder
shall be distributed to the capitalist partners on the basis of capital contribution
ratio.
: in the distribution of profits, the industrial partners always receives first. The
remainder will be distributed to the capitalist partners by agreement.

3. In the absence of agreement as to distribution of loss, how shall the partnership loss be distributed
to the partners? (with the assumption that there is a profit agreement ratio)
The industrial partner shall be exempted from partnership loss while the capitalist
partners shall be distributed in accordance with profit agreement ratio.
: no losses shall be shared to the industrial partner and the capitalist partners will
distribute the loss in accordance with profit ratio or contribution ratio.

4. Which of the following will decrease the capital balance of a partner?

Drawing made by a partner.
: withdrawals made by a partner decreases the capital balance.

B.2. Problem Solving Questions

1. On July 1, 2022, Drumond and Jordan formed Free-Throw Partnership organized to train prospective
professional basketball players on how to shoot Charity Shot without accuracy with initial investment
of P1M and P2M, respectively. Drumond is appointed as the managing partner. The articles of co-
partnership provides that profit or loss shall be distributed accordingly:

: 30% interest on original capital contribution ratio. (1:2)

: Monthly salary of P 20,000 and P 10,000 respectively for
Drumond and Jordan. (only for 6 months)
: Drumond shall be entitled to bonus equivalent to 20% of
net income after interest, salary and bonus.
: The remainder shall be distributed in ratio of 3:2 for
Drumond and Jordan respectively.

For the year ended December 31, 2022, the partnership reported net income of P 750,000. What is the
share in net income of Drumond for the year ended December 31, 2022?

Drumond (3) Jordan (2) Total

Interest on Original Capital 150,000 300,000 450,000
Drumond = 30% x 1,000,000 x 6/12
Jordan = 30% x 2,000,000 x 6/12
 Annual Salary (6 months) 120,000 60,000 180,000
Drumond = 20,000 x 6
Jordan = 10,000 x 6
Bonus (for Drumond only) 20,000 0 20,000
(see computation below)
Remainder (ratio = 3:2) 60,000 40,000 100,000
(750,000 - 450,000 - 180,000 - 20,000)
Drumond = 100,000 x 3/5
Jordan = 100,000 x 2/5
Total 350,000 400,000 750,000

Bonus Computation: Problem 1 Drumond Jordan

Beg. Capital 1,000,000 2,000,000
B = 20% (NI - I - S - B)
B = 0.2 (750,000 - 450,000 - 180,000 - B) Profit (2022) 350,000 400,000
B = 0.2 (120,000 - B) End. Capital 1,350,000 2,400,000
B = 24,000 - 0.2B
B + 0.2B = 24,000 Entry to Record:
1.2B = 24,000 Income Summary 750,000
1.2 1.2 Drumond, Capital 350,000
B = 20,000 Jordan, Capital 400,000

(What if the bonus was based on net

income after interest and salary?)
Drumond (3) Jordan (2) Total
Interest on Original Capital 150,000 300,000 450,000
Drumond = 30% x 1,000,000 x 6/12
Jordan = 30% x 2,000,000 x 6/12
Annual Salary (6 months) 120,000 60,000 180,000
Drumond = 20,000 x 6
Jordan = 10,000 x 6
Bonus (for Drumond only) 24,000 0 24,000
(see computation below)
Remainder (ratio = 3:2) 57,600 38,400 96,000
(750,000 - 450,000 - 180,000 - 24,000)
Drumond = 96,000 x 3/5
Jordan = 96,000 x 2/5
Total 351,600 398,400 750,000

Bonus Computation: Problem 1 Drumond Jordan

Beg. Capital 1,000,000 2,000,000
B = 20% (NI - I - S)
B = 0.2 (750,000 - 450,000 - 180,000) Profit (2022) 351,600 398,400
B = 0.2 (120,000) End. Capital 1,351,600 2,398,400
B = 24,000
2. On January 1, 2022, Klay and Steph formed Splash Brother Partnership organized to train
prospective professional basketball players on how to shoot 3-pointer with splash. The articles of co-
partnership provides that profit or loss shall be distributed accordingly:

: 10% interest on average capital balance.

: P 50,000 and P 100,000 quarterly salary for Klay and Steph,
respectively.
: The remainder shall be distributed in the ratio of 3:2 for Klay
and Steph, respectively.

The following transactions regarding the capital balance of the partners for year 2022 are provided:

Klay, Capital Steph, Capital

January 1, 2022 investment 1,000,000 500,000
March 31, 2022 investment 100,000
July 1, 2022 withdrawal (200,000)
September 30, 2022 withdrawal (200,000)
October 1, 2022 investment 700,000

The chief account of the partnership reported net income of P1,000,000 for year 2022. What is the
capital balance of Klay on December 31, 2022?

Klay, Capital Months Used Total

Beginning Capital (1/1) 1,000,000 12 over 12 1,000,000
Additional Investment (10/1) 700,000 3 over 12 175,000
Withdrawals (7/1) (200,000) 6 over 12 (100,000)
Average Capital - Klay 1,075,000

Steph, Capital Months Used Total

Beginning Capital (1/1) 500,000 12 over 12 500,000
Additional Investment (3/31) 100,000 9 over 12 75,000
Withdrawals (9/30) (200,000) 3 over 12 (50,000)
Average Capital - Steph 525,000

Klay (3) Steph (2) Total

Interest on Average Capital 107,500 52,500 160,000
Klay = 10% x 1,075,000
Steph = 10% x 525,000
Annual Salary (quarterly) 200,000 400,000 600,000
Klay = 50,000 x 4
Steph = 100,000 x 4
Remainder (ratio = 3:2) 144,000 96,000 240,000
(1,000,000 - 160,000 - 600,000)
Drumond = 240,000 x 3/5
Jordan = 240,000 x 2/5
 Total 451,500 548,500 1,000,000

Drumond Jordan
Beg. Capital 1,000,000 500,000
Profit (2022) 451,500 548,500
Additional Inv. 700,000 100,000
Withdrawals (200,000) (200,000)
End. Capital 1,951,500 948,500

3. On January 1, 2022, Kobe, Lebron and Michael formed a partnership with respective capital
contribution of P 2,000,000, P 5,000,000 and P 3,000,000. The articles of co-partnership provides that
profit or loss shall be distributed accordingly:

: 20% interest on original capital contribution.

: P 30,000 monthly salary for Kobe and P 50,000 monthly
salary for Michael.
: The remainder shall be distributed on the basis of original
capital contribution ratio. (2:5:3)

On December 31, 2022, Kobe and Lebron made withdrawals of P 500,000 and P 1,000,000, respectively.
The statement of financial position of the partnership shows that Lebron’s capital on December 31,
2022 is P 6,500,000. What is the capital balance of Kobe on December 31, 2022?

Kobe (2) Lebron (5) Michael (3)

Interest on Original Capital 400,000 1,000,000 600,000
Kobe = 20% x 2,000,000
Lebron = 20% x 5,000,000
Michael = 20% x 3,000,000
Annual Salary (quarterly) 360,000 0 600,000
Kobe = 30,000 x 12
Michael = 50,000 x 12
Remainder (ratio = 2:5:3) 600,000 1,500,000 900,000
Total Remainder = 3,000,000
Kobe = 3,000,000 x 2/10
Lebron = 3,000,000 x 5/10
Michael = 3,000,000 x 3/10
Total 1,360,000 2,500,000 2,100,000

Lebron, Remainder = 2,500,000 - 1,000,000 - 0 = 1,500,000

Total Remainder = 1,500,000 ÷ 5/10 = 3,000,000

Kobe Lebron Michael

Beg. Capital 2,000,000 5,000,000 3,000,000
Profit (2022) 1,360,000 2,500,000 2,100,000
Withdrawals (500,000) (1,000,000)
 End. Capital 2,860,000 6,500,000 5,100,000

Lebron, Profit (2022) = 6,500,000 + 1,000,000 - 5,000,000 = 2,500,000

4. On January 1, 2021, Angel, Bea and Colleen formed a partnership with original capital contribution
ratio of 4:5:1 for total agreed capitalization of P 5,000,000. The profit or loss ratio agreement provides
that profits shall be distributed in the ratio of 3:2:5 while loss shall be distributed in the ratio of 6:1:3.

During 2021, the partnership reported net income of P 2,000,000 with Angel and Bea withdrawing P
500,000 and P 300,000, respectively. During 2022, the partnership reported net loss of P 1,000,000 with
Bea and Colleen withdrawing P 200,000 and P 400,000 respectively.

What is the capital balance of Bea on December 31, 2022?

Angel (3; 6) Bea (2;1) Colleen (5;3)

Beginning Capital, 2021 2,000,000 2,500,000 500,000
Share in Profit (2021) 600,000 400,000 1,000,000
Withdrawals (500,000) (300,000)
Ending Capital, 2021 2,100,000 2,600,000 1,500,000
Beginning Capital, 2022 2,100,000 2,600,000 1,500,000
Share in Loss (2022) (600,000) (100,000) (300,000)
Withdrawals (200,000) (400,000)
Ending Capital, 2022 1,500,000 2,300,000 800,000

Angel (4/10) 2,000,000

Bea (5/10) 2,500,000
Colleen (1/10) 500,000
Total 5,000,000