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Chapter 2
Partnership Operations

PROBLEM 1: TRUE OR FALSE

1. FALSE
2. TRUE
3. TRUE
4. TRUE – [(100 x 10%) + (100% x 90% x 50%)] = 55
5. TRUE (100% x 90% x 50%) = 45
6. FALSE – {50 + [(100 – 50 – 30) x 50%]} = 60
7. FALSE {30 + [(-100 – 50 – 30) x 50%]} = -60
8. TRUE (360 ÷ 120%)] = 300
9. TRUE – [(160 x 12/12) + (100 x 6/12) – (40 x 3/12)] x
10% = 20
10. TRUE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. A
2. D
3. D
Only interest on liabilities is recognized as expense.
Invested capital is considered equity. Thus, interest on
invested capital is treated as an allocation mechanism for
partnership profit or loss rather than partnership
expense.

4. A
5. A

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PROBLEM 3: EXERCISES

1. Solution:
Requirement (a):
A B Total

Amount being allocated 180,000

Allocation:
1. Salaries 80,000 40,000 120,000
2. Allocation of remaining profit
(180K profit – 120K
salaries) = 60K
(60K x 70%); (60K x 30%) 42,000 18,000 60,000
122,00
As allocated 0 58,000 180,000

Requirement (b):
Monthl A, Drawings 80,00
y B, Drawings 0
entries Cash 40,00 120,0
to record the withdrawal of 0 00
salary allowances
Year- Income summary 180,0
end A, Capital 00 122,0
entry B, Capital 00
to record the distribution 58,00
of profit 0
Year- A, Capital 80,00
end B, Capital 0
entry A, Drawings 40,00 80,00
B, Drawings 0 0
to close the drawings 40,00
accounts 0

2. Solution:
A B Total
Amount being allocated 200,000
Allocation:
160,00
1. Salaries 0 80,000 240,000
2. Allocation of remaining loss
(200K profit – 240K salaries)
= -40K (28,000 (12,000
(-40 x 70%); (-40K x 30%) ) ) (40,000)

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132,0
As allocated 00 68,000 200,000

3. Solution:
A B Total
Amount being 520,0
allocated 00
Allocation:
100, 60,00 160,
1. Salaries
000 0 000
60, 60,
2. Bonus after bonusa
000 000
3. Allocation of remaining profit
(520K – 160K - 60K) =
300K 150, 150, 300,
(300K x 50%); (300K x 000 000 000
50%)
310 210, 520,0
As allocated
,000 000 00

a
The bonus is computed as follows:
Profit before salaries and bonus 520,000
Salaries (160,000)
Profit after salaries but before
bonus 360,000
P
B = P -
1 + Br
360,000
B = 360,000 -
1 + 20%
B = 360,000 - 300,000
B = 60,000

4. Solution:
Months
outstanding
÷ Total Weight
Balanc months in a ed
es year average
Beg. Balance 120,000 12/12 120,000
Mar. 1 additional
investment 60,000 10/12 50,000
Aug. 1 withdrawal (30,000) 5/12 (12,500)

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Sept. 30 additional
investment 40,000 3/12 10,000
Nov. 1 additional
investment (9,000) 2/12 (1,500)
Weighted average capital
balance 166,000

A B Total
200,00
Amount being allocated
0
Allocation:
100,00 100,00
1. Salaries -
0 0
2. Interest on weighted ave. 16,60 16,60
capital balance (166K x -
10%)
0 0
3. Allocation of remaining loss
(200K – 100K - 16.6K) =
41,70
83.4K 41,700 83,400
(83.4K ÷ 2)
0
141,7 58,3 200,00
As allocated
00 00 0

5. Solution:
Beg. balance (Apr. 1) 100,000 9/12 75,000
(10,50
June 30 withdrawal (21,000) 6/12 0)
Sept. 30 additional
investment 8,000 3/12 2,000
(333.
Dec. 1 withdrawal (4,000) 1/12 33)
66,166.
Total 67
Multiply by: 6%
3,9
Interest on Mr. A’s weighted ave. capital balance 70

6. Solution:
A B Total
250,000
Amount being allocated (b)

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Allocation:
120,00 120,00
1. Salaries (10,000 x 12 mos.) -
0 0
2. Interest on capital (200K 20,00 20,00
-
x 10%) 0 0
(a)
3. Bonus 50,000 - 50,000
4. Allocation of remainder
(250K – 120K - 20K – 50K) =
30,00
145.5K 30,000 60,000
(60K ÷ 2)
0
200,00 50,0 250,00
As allocated
0 00 0

60,0
Profit net of salaries, bonus and interest 00
Add back: Annual salary (10,000 x 12 mos.) 120,000
20,0
Add back: Interest on capital (200K x 10%) 00
Profit before annual salary and interest but 200,0
after bonus 00

Profit before salary and interest but after 200,0

bonus 00
Divide by: (100% less 20% bonus rate) 80%
250,0
(b)
Profit before salary, interest and bonus 00
Multiply by: Bonus rate 20%
50,0
(a)
Bonus (bonus before bonus scheme) 00

7. Solution:
The interest on the excess or deficiency on capital
contribution is computed as follows:
A B

Capital balance to be maintained 200,000 300,000

Actual average balance 240,000 220,000

Excess (deficiency) 40,000 (80,000)

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Multiply by: Interest rate 12% 12%

Multiply by: Months outstanding 9/12 9/12

Interest to (from) 3,600 (7,200)

A B Total
Amount being
120,000
allocated
Allocation:
3,60 (7,20 (3,60
1. Interest to (from)
0 0) 0)
2. Allocation of remainder
[120K – (-3.6K)] =
123.6K
61,80 61,80
123,600
(123.6K ÷ 2)
0 0
65,40 54,60
As allocated 120,000
0 0

Year- Income summary 120,

end A, Capital 000 65,4
entry B, Capital 00
54,6
00

8. Solution:
Profit (after salaries but before bonus and 588,0
interest) 00
72,00
Add back: Monthly salaries (8K x 9 mos.) 0
Profit before salaries, bonus & int. (Amt. to be 660,00
allocated) 0

A B Total
660,00
Amount being allocated (see computation above)
0
Allocation:
72,00
1. Salaries 72,000
0
a 60,00
2. Bonus -
60,000 0

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b 32,00 32,00
3. Interest -
0 0
4. Allocation of
remainder
(660K - 72K - 60K – 32K) 248,00 248,0 496,00
÷2 0 00 0
380,0 280,0
As allocated 660,000
00 00

a
The “bonus after bonus” is computed as follows:
P
B = P -
1 + Br
660,000
B = 660,000 -
1 + 10%
B = 660,000 - 600,000
B = 60,000

300,00
b
Beg. balance (Apr. 1) 400,000 9/12 0
22,00
July 1 additional investment 44,000 6/12 0
(2,00
Dec. 1 withdrawal (24,000) 1/12 0)
320,00
Total 0
10
Multiply by: %
32,00
Interest on B’s weighted ave. capital balance 0

A B
400,00
200,000
Capital, beg. 0
Additional investment - 44,000
280,00
380,000
Share in profit 0
(72,000) (24,00
Drawings * 0)
508,00 700,0
Capital, end. 0 00
* the monthly salaries

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PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. B
Solution:
Whit
Red e Total
Amount being allocated 80,000
Allocation:
100,00
1. Salaries 55,000 45,000 0
2. Allocation of remaining profit
(80K profit – 100K salaries)
= -20K (12,000 (20,00
(-20 x 60%); (-20K x 40%) ) (8,000) 0)

37,00
As allocated 43,000 0 80,000

2. A
Solution:
Tot
A B C
al
560,0
Amount being allocated
00
Allocation:
80,00 80,00
1. Salaries
0 0
48,00 48,00
2. Bonus (560K - 80K) x 10%
0 0
4. Allocation of remainder:
(560K - 80K - 48K) = 44K;
(432K x 2/9); (432K x 3/9); 96,00 144,00 192,0 432,0
(432K x 4/9) 0 0 00 00
224,0 144,0 192,0 560,0
As allocated
00 00 00 00

3. Solution:
Annual salaries:

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 A: (10,000 x 12 months) = 120,000

 B: (4,000 x 12 months) = 48,000

Profit before salaries = 360,000 + 120,000 + 48,000 =

528,000

A B Total

528,00
Amount being allocated 0
Allocation:

120,00 168,00
1. Salaries 0 48,000 0
2. Allocation of remaining profit
(528K profit – 168K salaries)
= 360K 180,00 180,00 360,00
(360K x 50%); (360K x 50%) 0 0 0

300,0 228,00 528,00

As allocated 00 0 0

4. C Solution:
A B Total
Amount being 2,500,00
allocated 0
100,00
Salary 100,000
0
(a) 400,00
Bonus 400,000
0
Allocation: (based on
contributions)
750,00
2M x (300K / 800K) 750,000
0
1,250,00 1,250,00
2M x (500K / 800K)
0 0
1,250, 1,250,0 2,500,00
As allocated
000 00 0

(a)
2.5M – 100K = 2.4M;
2.4M – (2.4M ÷ 120%) = 400,000

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5. C
Solution:
A B Total
Amount being 100,0
allocated 00
Allocation:
48,0 30,0 78,0
1. Salaries
00 00 00
a 2,0 2,0
2. Bonus after bonus
00 00
3. Allocation of remaining profit
(100K – 78K - 2K) =
20K
(20K x 60%); (20K x 12,000 8,000 20,000
40%)
62,0 38, 100,0
As allocated
00 000 00

a
The bonus is computed as follows:
Profit before salaries and bonus 100,000
Salaries (78,000)
Profit after salaries but before deduction of
bonus 22,000

The bonus scheme is “bonus after bonus.” The formula is

as follows:

P
B = P -
1 + Br

Where: B = bonus
P = profit before bonus and tax
Br = bonus rate or bonus percentage

B = 22,000 - 22,000

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1+
10%
B = 22,000 - 20,000
B = 2,000

6. B
Solution:
A B Total
Amount being allocated (10,000)
Allocation:
1. Salaries 25,000 4,000 29,000
2. Bonus after bonus b - - -
3. Allocation of remaining loss
(-10K – 29K) = -39K
(15,600
(-39K x 60%); (-39K x (23,400) (39,000)
)
40%)
(11,600
As allocated 1,600 (10,000)
)
b
No bonus is allocated because the partnership incurred a
loss. However, salaries are provided whether the
partnership earns profit or incurs loss because salaries are
compensation for services rendered.

7. B [140K + (40K x 6/12) – (15K x 5/12) = 153.75K x

10% = 15,375
8. C
Step 1: Prepare a pro-forma allocation table.
Burt
Clif Total
on
Amount being allocated ?
Allocation:
100,0 100,00
1. Salaries -
00 0
2. Bonus ? - ?
3. Allocation of remaining profit
? ? ?
As allocated ? 296,0 ?

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00
Step 2: ‘Squeeze’ for Burton’s share in remaining profit.
Burt
Clif Total
on
Amount being allocated ?
Allocation:
100,0 100,00
1. Salaries -
00 0
2. Bonus ? - ?
3. Allocation of remaining profit
296,
? ?
000
296,0
As allocated ? ?
00

Step 3: ‘Squeeze’ for some missing amounts.

Burt
Clif Total
on
Amount being allocated ?
Allocation:
1. Salaries 100,000 - 100,000
2. Bonus ? - ?
3. Allocation of remaining profit
1,036,0 296,0 1,332,0
00(b) 00 00(a)
296,0
As allocated ? ?
00

(a)
296,000 ÷ (2/9) or 296,000 x 9/2 = 1,332,000 remaining
profit
(b)
1,332,000 x 7/9 = 1,036,000

Step 4: Compute for Cliff’s bonus.

Profit after salary and bonus 1,332,000

Divide by: 100% - 10% ‘bonus before bonus’
scheme 90%
Profit after salary but before bonus 1,480,000
Multiply by: Bonus rate 10%
Bonus to A 148,000

Step 5: ‘Squeeze’ the other missing amounts.

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Burt
Clif Total
on
1,580,00
Amount being allocated
0 (c)
Allocation:
100,00
1. Salaries - 100,000
0
148,00
2. Bonus - 148,000
0
3. Allocation of remaining 1,036,0 296,0 1,332,00
profit 00 00 0
1,284, 296,0 1,580,00
As allocated
000 00 0

(b)
100K + 148K + 1.332M = 1,580,000

9. C
Solution:
A B Total
480,000
Amount being allocated (a)

Allocation:
60,00 60,00
1. Salary
0 0 120,000
60,000(
2. Bonus b)
60,000
3. Allocation of remainder 150,00 150,0
(480K – 120K - 60K) = 300K ÷ 2 0 00 300,000
270,0 210,0
As allocated
00 00 360,000

(a)
Profit before salaries and bonus is computed as follows:

Profit after salaries but before bonus 360,000

Salaries (60K x 2) 120,000

Profit before salaries and bonus 480,000

(b)
The bonus is computed as follows:

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P
B = P -
1 + Br
Where: B = bonus
P = profit before bonus and tax but after salaries
Br = bonus rate or bonus percentage
360,000
B = 360,000(c) - 1+
20%
300,00
B = 360,000 -
0
B = 60,000

Note: The phrase “treated as expenses” means the bonus

is computed on profit after deducting both the salaries
and the bonus.
(c)
This is the amount of profit given in the problem.

10. D
Solution:
A, Capital
- beg.
Withdrawa 120,00
ls 0 80,000 Additional investment
Share in profit
60,000 (squeeze)
end. 20,000

60,00
A's share in profit 0
Divide by: A's P/L ratio 25%
240,00
Partnership's profit 0

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PROBLEM 5: CLASSROOM ACTIVITY

The answers vary depending on the assumptions made by
the students.

PROBLEM 6: FOR CLASSROOM DISCUSSION

1. Solutions:

Case 1:
Tot
A B C
al
100,0
Amount being allocated
00
Allocation:
12,0 20,00
1. Salaries
00 8,000 0
8,00
2. Bonus (100K - 20K) x 10%
0 8,000
3. Interest on cap.
(100K x 10%);(60K x 10%); 10,0 28,00
(120K x 10%) 00 6,000 12,000 0
4. Allocation of remainder:
(100K - 20K - 8K - 28K) = 44K;
(44K x 40%); (44K x 30%); (44K 17,6 44,00
x 30%) 00 13,200 13,200 0
47,6 19,20 33,20 100,0
As allocated
00 0 0 00

Case 2:
Tota
A B C
l
10,00
Amount being allocated
0
Allocation:
12,00 20,00
1. Salaries
0 8,000 0
2. Bonus (N/A) - -
2. Interest on cap.
(100K x 10%);(60K x 10%);(120K 10,00 12,00 28,00
x 10%) 0 6,000 0 0
3. Allocation of remainder (15,20 (11,40 (11,400 (38,00
(10K - 20K - 28K) = -38K 0) 0) ) 0)
(-38K x 40%); (-38K x 30%); (-38K

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x 30%)
6,80 8,60 10,00
As allocated
0 (5,400) 0 0

Case 3:
Tota
A B C
l
(20,00
Amount being allocated
0)
Allocation:
12,00 20,00
1. Salaries
0 8,000 0
2. Bonus (N/A) - -
2. Interest on cap.
(100K x 10%);(60K x 10%);(120K 10,00 12,00 28,00
x 10%) 0 6,000 0 0
3. Allocation of remainder
(-20K - 20K - 28K) = -68K
(-68K x 40%); (-68K x 30%); (-68K (27,20 (20,40 (20,400 (68,00
x 30%) 0) 0) ) 0)
(5,20 (14,40 (400 (20,00
As allocated
0) 0) ) 0)

2. Solutions:

Case 1
A B Total
Amount being allocated 90,000
Allocation:
48,00
1. Salaries (4,000 x 12 mos.) - 48,000
0
(a)
2. Bonus 7,000 - 7,000
3. Interest on weighted ave.
- 4,140 4,140
capital (b)
4. Allocation of remaining profit
(90K – 48K - 7K – 4,140) = 30,860 15,43 15,43
30,860
(30,860 x 50%); (30,860 x 50%) 0 0
70,4 19,5
As allocated 90,000
30 70

(a)
(90,000 – 48,000) = 42,000;
Bonus = 42,000 – (42,000 ÷ 120%) = 7,000
(b)

Balan Months Weight

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outstanding
÷ Total
ed
months in a averag
ces year e
Beg. balance 30,000 12/12 30,000
July 1 additional
investment 10,000 6/12 5,000
Oct. 1 withdrawal (4,000) 3/12 (1,000)
Nov. 30 additional
investment 6,000 1/12 500
Weighted average capital balance 34,500
Multiply by: 12%
Interest on weighted average
capital balance 4,140

Year- Income summary 90,0

end A, Capital 00 70,4
entry B, Capital 30
19,5
70

Case 2:
A B Total
90,00
Amount being allocated
0
Allocation:
32,00 32,00
1. Salaries (4,000 x 8 mos.) -
0 0
2. Bonus (a) 9,667 - 9,667
3. Interest on weighted ave.
- 2,940 2,940
capital (b)
4. Allocation of remaining profit
(90K – 32K – 9,667 – 2,940) =
45,393
22,696. 22,696. 45,39
(45,393 x 50%); (45,393 x 50%) 50 50 3
64,36 25,63 90,00
As allocated
3.50 6.50 0

(a)
(90,000 – 32,000) = 58,000;
Bonus = 58,000 – (58,000 ÷ 120%) = 9,667

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(b)

Months Weight
outstanding
÷ Total
ed
Balan months in a averag
ces year e
Beg. balance (May 1,
20x1) 30,000 8/12 20,000
July 1 additional
investment 10,000 6/12 5,000
Oct. 1 withdrawal (4,000) 3/12 (1,000)
Nov. 30 additional
investment 6,000 1/12 500
Weighted average capital balance 24,500
Multiply by: 12%
Interest on weighted average
capital balance 2,940

Year- Income summary 90,0

end A, Capital 00 64,36
entry B, Capital 3.50
25,63
6.50

3. Solutions:

Step 1: Prepare a pro-forma allocation table.

A B Total
Amount being allocated ?
Allocation:
20,00
1. Salaries - 20,000
0
2. Bonus ? - ?
3. Allocation of remaining profit 32,00
? 0 ?
32,00
As allocated ? ?
0

Step 2: ‘Squeeze’ for A’s share in remaining profit.

A B Total
Amount being allocated ?
Allocation:
1. Salaries 20,00 - 20,000

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0
2. Bonus ? - ?
3. Allocation of remaining profit
(32K ÷ 40%) = 48,000 48,0 32,00
?
00 0
32,00
As allocated ? ?
0

Step 3: Compute for the bonus.

A B Total
Amount being allocated ?
Allocation:
20,00
1. Salaries - 20,000
0
(a) 8,00
2. Bonus - 8,000
0
3. Allocation of remaining profit
(32K ÷ 40%) = 48,000 48,00 32,00
?
0 0
32,00
As allocated ? ?
0

(a)
Profit after salary and bonus (48K + 32K (see
‘3.’ above)) 80,000
Multiply by: Bonus rate ('bonus after bonus'
scheme) 10%
Bonus to A 8,000

Step 4: ‘Squeeze’ the other missing amounts.

A B Total
108,0
Amount being allocated
00
Allocation:
20,00
1. Salaries - 20,000
0
2. Bonus 8,000 - 8,000
3. Allocation of remaining 48,00 32,00
80,000
profit 0 0
76,00 32,00 108,0
As allocated
0 0 00

1
0