XADVAC – PRELIM NOTES

CHAPTER 1: Partnership Formation basis. Withdrawals are disinvestments and

should be closed to the capital accounts at
Partnership the end of each accounting period.
Association of two or more persons who 3. Loan accounts – partner may receive cash
contribute money, property, or industry to a from the partnership with the intention of
common fund with the intention of dividing the repaying the amount. Debited to the loans
profits among themselves.
receivable from partners (asset) and
sometimes bear interest but should be on
Advantages of Forming a Partnership
1. It permits the pooling of capital and other the discretion of all partners. Partners may
resources without the complexities and make a cash payment to the partnership
formalities of a corporation and is recorded by a credit to loans payable
2. It is easier and less costly to establish than a to partners (liabilities).
corporation and is generally not subject to
Accounting for Partnership Formation
much governmental regulation
3. Partners may be able to operate with more Cash investments – recorded at fair value most
flexibility because they are not subject to often known as face value
the control of a board of directors.
Noncash investments – recorded at agreed
Types of Partnerships value which is normally the fair value of the
1. General Partnership – are those in which property at the time of investment. In case
each partner is personally liable to the there is a conflict between agreed value and fair
partnership’s creditors if partnership assets value, agreed value prevails.
are not sufficient to pay such creditors.
2. Limited Partnership – only one partner Services – a memorandum entry is essential if it
needs to be a general partner. The were no value agreed upon, otherwise a journal
remaining partners can be limited, which entry would be required.
means that their obligations to creditors are
limited to their capital contributions. Liabilities – valued at the present value (fair
value) of the remaining cash flows.
Accounting for Partnership Activities
Sample Problems:

1. Max, Jones and Waters shared profits and

losses 20%, 40% and 40%, respectively and their
partnership capital balance is 10,000, 30,000
and 50,000, respectively. An appraisal of the
business and its property estimates the fair
value to be 200,000. Land with a book value of
1. A partner’s capital account may have a debit 30,000 has a fair value of 45,000. Max has
balance, called a deficiency or sometimes agreed to receive 20,000 in exchange for her
called a deficit and is usually eliminated by partnership interest. What amount should land
the additional capital contributions. be recorded on the partnership books?
2. Drawings or personal accounts – noncash
drawings should be valued at their market 45,000
value at the date of the withdrawals. Active
partners commonly withdraw regular
amounts of money on a weekly or monthly
XADVAC – PRELIM NOTES

2. On July 1, ML and PP formed a partnership percent, respectively. Assuming that the

agreeing to share profits and losses in the ratio partnership agreed to bring their respective
of 4:6, respectively. ML contributed a parcel of capital in proportion to their respective profit
land that cost her 25,000. PP contributed and loss ratio, and using FF’s capital as the base,
50,000 cash. The land was sold for 50,000 on how much cash is to be invested by CC?
July 1, four hours after formation of the
Cash 70,000
partnership. How much should be recorded in
Machinery 75,000
ML’s capital account on the partnership
Building 225,000
formation? Mortgage (90,000)
50,000 Capital account of FF 280,000
Divide P&L Ratio of FF 70%
3. On March 1, 2022, CC and FF formed Total Capital 400,000
partnership with each contributing the Multiply P&L Ratio of CC 30%
following assets: Capital of CC 120,000
Less: Cash 30,000
Machinery 5,000
F&F 10,000 65,000
Additional Cash investment 55,000

The building is subject to a mortgage loan of

90,000, which is to be assumed by the
partnership agreement provides that CC and FF
share profits and losses 30 percent and 70
percent, respectively. On March 1, 2022, the
capital account of FF would show a balance of:

Cash 70,000
Machinery 75,000
Building 225,000
Mortgage (90,000)
Capital account of FF 280,000

On March 1, 2022, CC and FF formed

partnership with each contributing the
following assets:

The building is subject to a mortgage loan of

90,000, which is to be assumed by the
partnership agreement provides that CC and FF
share profits and losses 30 percent and 70
XADVAC – PRELIM NOTES

4. CC admits DD for the partnership interest in

his business. The balance sheet accounts of CC
on November 30, 2022 prior to the admission of
DD are as follows:

It is agreed that for the purpose of establishing

CC’s interest, the following adjustments should
be made:

a. An allowance for doubtful accounts of

2% of accounts receivable is to be
established.
b. The merchandise inventory is to be
valued at 160,000.
c. Prepaid expenses of 5,200 and accrued
expenses of 3,200 are to be recognized.

DD is to invest cash of 113,640 to give him a

one-third (1/3) interest in the firm.

The balance of the capital of CC before

adjustment is:

The total assets of the partnership after the

formation is:
XADVAC – PRELIM NOTES

5. On July 1 of the current year, JJ and GG form

a partnership. JJ is to invest certain business
assets at values which are yet to be agreed
upon. He is to transfer his business liabilities
and is to contribute sufficient cash to bring his
total capital to 180,000, which is 60% of the
capital as had been agreed upon. Details
regarding the book values of JJ’s business assets
and liabilities and their corresponding
valuations follow:

GG agrees to invest cash of 30,000 and

merchandise valued at current market price.
The value of the merchandise to be invested by
GG is:

The cash to be invested by JJ is:

The cash to be invested by JJ is:

JJ Capital 180,000
Divide: Capital Ratio 60%
Total Capital 300,000
Multiply: Capital Ratio GG 40%
Total Capital of GG 120,000
Less: Cash 30,000
Total Noncash Investment 90,000
XADVAC – PRELIM NOTES

CHAPTER 2: Partnership Operations 4. Interest on Partners’ Capital accounts and

dividing the balance on agreed ratio – net
Accounting for Partnership Operations income / loss
→ In Measuring partnership profit for a period, 5. Salaries to partners and dividing the balance
on agreed ratio – net income / loss
expenses should be scrutinized to make
6. Bonus to partners and dividing the balance
sure partners’ personal expenses are
on agreed ratio – net income
excluded for the partnership’s business 7. Interest on Capital, salaries and bonus to
expenses. If so, such expenses should be partners and dividing the balance on agreed
charged to drawing or capital accounts of ratio.
the partners.
→ All partnerships have profit or loss Additional Profit Sharing Considerations
allocation agreement.
→ The partnership Law provides that if the
1. Interest on Capital Balances
profit has been agreed upon, the share of
- Its purpose of allowing this is to give
each partner in the losses shall be in the
recognition to differences on capital
same proportion with the net income
contribution by partners. It is to
allocation. It also provides that in the
encourage partners to invest more and
absence of any agreement , the share of
to avoid withdrawals of capital.
each partner in the profits and losses shall
Interest on capital is more appropriate
be in the proportion to what they have
when the business in capital intensive
contributed, but the industrial partner shall
versus labor intensive. Remember, this
receive such share as may be just and
is not an expenses on the partnership.
equitable under the circumstances.
2. Salary Allowances
→ The law is not clear as to what capital
- This is allowed in order to give
balances shall be applied, whether the
recognition on the personal services
capital balances refer to original capital,
rendered by partners. The purpose of
beginning or end of each period or the
salary allowances are means of
average capital during the period.
achieving a fair division of profit among
→ The Law, however, does not clearly specify the partners based on the time and
the capital balance, it is presumed to be the talents devoted to partnership
ORIGINAL CAPITAL, in the absence of the business.
original capital, it should be the BEGINNING 3. Bonuses
CAPITAL. - these are sometimes used as a means
Methods to Allocate Net Income or Loss of providing additional compensation
to partners who have provided services
1. Equally to partnership, usually to the managing
2. Arbitrary Ratio (Ex. 2:2; 5:3:2) partner.
3. In the ratio of Capital Balances
* Original Note that:
* Beginning Capital of the period
* Average Capital Interest on Capitals and Salary allowances are
- Simple Average provided in the distribution whether the result
- Weighted Average is an income or a loss, unless otherwise, it is
= Peso-day approach stipulated in the problem that such items are
= Peso-month approach not considered when the result is a loss.
XADVAC – PRELIM NOTES

Note well that: the partnership had net income of 88,000, how
much should be allocated to Partner A?
The concept of bonus is not applicable to a net
loss. When a partnership operates at a loss, the
bonus provision is disregarded because it
defeats the purpose of giving a bonus.

Sample Problem:

1. Partner Alta had a capital balance on January

1, 2022 of 45,000 and made additional capital
contributions during 2022 totaling 50,000. 4. Partners Acker, Becker and Checker have the
During the year, Alta withdrew 8,000 per following profit and loss agreement:
month. Alta’s post-closing capital balance on
December 31, 2022 is 30,000. Alta’s share of • Acker and Becker receive salaries of
2022 partnership income is? 40,000 each
• Checker gets a bonus of 10% of net
Cap. Bal45,000 + 50,000 = 95,000 income after salaries and bonus.
Withdrawal (8,000 * 12) = (96,000) • Remaining profits are shared by Acker,
Net income (30,000 + 96,000 – 95,000) 31,000 Becker and Checker in the following ratios
Ending Bal 30,000 respectively: 3:4:3
2. A partnership has the following accounting The partnership had a net income of 91,000.
amounts: How much should be allocated to Checker?
• Sales = 70,000
• Cost of goods sold = 40,000
• Operating expenses = 10,000
• Salary allocations to partners = 13,000
• Interest paid to banks = 2,000
• Partners’ withdrawals = 8,000

Partnership net income (loss) is?

5. The APB partnership agreement specifies that
Sales 70,000
partnership net income be allocated as follows:
Cost of goods sold (40,000)
Operating expenses (10,000)
Interest paid to banks (2,000)
Income 18,000

3. Partners A and B have a profit and loss

agreement with the following provisions: Average capital balances for the current year
salaries of 20,000 and 25,000 for A and B, were 50,000 for A, 30,000 for P, and 20,000 for
respectively; a bonus to A of 10% net income B. Assuming a current year net income of
after bonus; and interest of 20% on average 150,000, what amount should be allocated to
capital balances of 40,000 and 50,000 for A and each partner?
B, respectively. Any remainder is split equally. If
XADVAC – PRELIM NOTES

withdrew the maximum amount from the

business each year. What was Young’s share of
loss for the first year?

The APB partnership agreement specifies that

partnership net income be allocated as follows:

What was the balance of Eaton’s Capital

account at the end of first year?

Average capital balances for the current year

were 50,000 for A, 30,000 for P, and 20,000 for
B. Assuming a current year net income of
50,000, what amount should be allocated to
each partner?

What was Thurman’s share of income and loss

for the second year?

6. A partnership began its first year of

operations with the following capital balances: What was the balance in Young’s Capital
Young, Capital = 143,000. Eaton, Capital = account at the end of the second year?
104,000. Thurman, Capital = 143,000

The Articles of Partnership stipulated that

profits and losses be assigned in the following
manner: Young was to be awarded an annual
salary of 26,000 with 13,000 salary assigned to
Thurman. Each partner was to be attributed
with interest equal to 10% of the capital
balances as of the first day of the year. The
remainder was to be assigned on 5:2:3 basis,
respectively. Each partner was allowed to
withdraw up to 13,000 per year. Assume that
the net loss for the first year of operations was
26,000 with net income of 52,000 in the second
year. Assume further that each partner
XADVAC – PRELIM NOTES

Chapter 3 Order of Priority

Partnership Dissolution: Changes in Ownership
1. If there is an agreement among partners
Partnership Dissolution that revaluation is allowed, then reflect the
necessary adjustment before dissolution.
• The change in the relation of the partners
2. In the absence of an agreement, use either:
caused by any partner ceasing to be
associated in the carrying on as 1. Revaluation Approach or Goodwill
distinguished from the winding up of the Procedure
business 2. Bonus Approach or Book Value
Approach
Capital Interest vs. Profit and Loss Interest 1. Recognition of Decreases in
Net Asset Revaluations
• A partner’s capital interest is a claim against
2. Non-recognition of Increases
the net assets of the partnership as shown in Net Asset Revaluations
by the balance in the partner’s capital * If the problem is silent – use bonus approach
interest.

• An interest in profit and loss determines Problems that Arise Upon Dissolution
how the partner’s capital interest will
increase or decrease as a result of • Admission of a new partner – with the
subsequent operations. consent of all partners.
- By Purchase of interest – a personal
Assignment of an Interest to a Third Party transaction, no additional money or
properties are invested in the
• A partnership is not dissolved when a partnership
partner assigns his/her interest in the - By Investment – investing something of
partnership to a third party, because such value to the partnership. Any gain or
an assignment does not itself change the loss recognized on sales subsequent to
relationship of the partners. recording the admission will be
• The assignee does not become a partner allocated on the basis of the new P&L
and does not obtain the right to share in ratio.
management of the partnership or to • Withdrawal or Retirement of a Partner
review transactions and records of the • Death or incapacity of a Partner
partnership. • Incorporation of a Partnership

Valuation

1. Revaluation approach or Goodwill

Procedure (Non-GAAP) – the assets and
liabilities should be recorded at their fair
value.
2. Absence of revaluation or Bonus/Book
Value Approach (GAAP) – existing book
values should not be adjusted to fair value
unless such adjustments would have
otherwise been allowed by GAAP.
XADVAC – PRELIM NOTES

Admission by Investment accounts are credited for revaluation of

net assets, if any.
• Bonus Approach
2. If the CC > AC, the difference is a capital
– The total agreed capital of the new
transfer or bonus to the old partners.
partnership consists of the following:
3. If the CC < AC, the additional capital
1. The book value of the previous
credit is either share in bonus or
partnership less
revaluation of net assets from the old
2. Any write-downs in the value of partners as the case maybe.
the previous partnership’s assets
Partnership Admission
as recognized by GAAP
• New Partner Invests in Partnership
3. The fair value of the consideration
paid to the partnership by the – Case 1 – New Partner’s investment
incoming partner equals the new partner’s proportion
of the partnership book value
• Revaluation Approach
– Case 2 – New Partner’s investment is
– The total agreed capital of the new
more than the new partner’s
partnership consists of the following:
proportion of the partnership book
1. The book value of the net assets value
of the previous partnership plus
– Case 3 – New Partner’s investment is
2. Unrecognized appreciation or less less than the new partner’s
unrecognized depreciation on the proportion of the partnership book
recorded net assets of the value
previous partnership plus

3. Unrecognized revaluation of net

assets (goodwill) traceable to the
previous partnership

4. The fair value of the consideration

paid, both tangible and intangible,
received from the incoming
partner

The traceability of bonus or revaluation

(goodwill) to either old or new partners can be
determined by comparing the contributed
capital (CC) of the new partner with his agreed
capital (AC):
Withdrawal/Retirement of a Partner
1. If the CC = AC, there is no transfer of
• If a partner withdraws in violation of the
capital between old and the new
partnership agreement without approval of
partners. The old partners’ capital
the remaining partners, he is entitled only
XADVAC – PRELIM NOTES

to his interest in the firm without

consideration of revaluation
• If a partner is forced to withdraw from a
partnership is entitled to compensation for
his full interest including revaluation. 40,000
1. The retiring partner may elect to sell his (10,000) X 30% = 3,000
37,000
interest to an outside party – treatment like
admission by purchase
3. Bishop has a capital balance of P120,000 in a
2. The retiring partner may elect to sell his local partnership, and Cotton has a P90,000
interest to one or more of the remaining balance. These two partners share profits and
partners – admission by purchase losses by a ratio of 60 percent to Bishop and 40
percent to Cotton. Lovett invests P60,000 in
3. The partners may mutually agree to transfer cash in the partnership for a 20 percent
partnership assets to the retiring partner for ownership. The goodwill method will be used.
his interest in the firm. – bonus and What is Cotton’s capital balance after this new
revaluation approach investment?
Sample Problems:

1. Capital balances and profit and loss sharing

ratios of the partners in the ABC Partnership are
as follows:

A, Capital (40%) 168,000 102,000

B, Capital (40%) 192,000
C, Capital (20%) 120,000 3. On January 31, 2022, partners of Lon, Mac &
Total 480,000 Nan Partnership, had the following loan and
capital account balances:
A needs money and agrees to assign one-fourth
of his interest in the partnership to D for
P45,000 cash. D pays P45,000 directly to A. (1)
Compute the capital balance of D, and (2) the
total capital of the ABC Partnership immediately
after the assignment of the interest to D?
The partnership’s income sharing ratio was Lon,
• (168,000 X 1/3) = 42,000
50%; Mac, 20%; and Nan, 30%. On January 31,
2022, Ole was admitted to the partnership for a
• 480,000 20% interest in total capital of the partnership in
2. The capital balance for Bolcar is P110,000 and exchange for an investment of P40,000 cash.
for Neary is P40,000. These two partners share Prior to Ole’s admission, the existing partners
profits and losses 70% and 30%, respectively. agreed to increase the carrying amount of the
Kansas invests P50,000 in cash into the partnership’s inventories to current fair value, a
partnership for a 30% ownership. The bonus P60,000 increase. The capital account to be
method will be used. What is Neary’s capital credited to Ole:
after Kansas’s investment? 52,000
XADVAC – PRELIM NOTES

4. James Dixon, a partner in an accounting firm,

decided to withdraw from the partnership.
Dixon’s share of the partnership profits and
losses was 20%. Upon withdrawing from the
partnership, he was paid P74,000 in final
settlement for his partnership interest. The total
of the partners’ capital accounts before
recognition of partnership goodwill prior to
Dixon’s withdrawal was 210,000. After his
withdrawal, the remaining partners’ capital
accounts, excluding their share of good will,
totaled 160,000. The total agreed-upon
goodwill of the firm was?