be : Chapter 2 Chapter 2 Partnership Operations Learning Objectives 1. State the items that affect the division of a partnership’s profits or losses among the partners. 2. Compute for the share of a partner in the partnership's profit or loss. Division of profits and losses ‘The partners share in partnership profits or losses in accordance with their partnership agreement. Art. 1797 of the Philippine Civil Code provides the following additional rules in the profit or loss sharing of partners: * If only the share of each partner in the profits has been agreed upon, the share of each in the losses shall be in the same, proportion. « In the absence of stipulation, the share of each partner in the profits and losses shall be in proportion to what he may have contributed, but the industrial partner shall not be liable for the losses. As for the profits, the industrial partner shall receive such share as may be just and equitable under the circumstances. If besides his services he has contributed capital, he shall also receive a share in the profits in proportion to his capital. >» An industrial partner is one who contributes services to the partnership rather than cash or other non-cash assets. A capitalist partner is one who contributes cash or other non-cash assets to the partnership. A partner who contributes both services and cash or other non-cash asset is both an industrial and a capitalist partner.Operations 7 « ©The designation of losses and profits cannot be entrusted to one of the partners (Art. 1798). A stipulation which excludes one or more partners from any share in the profits or losses is void (Art. 1799). In addition to profit or Joss sharing, the partnership agreement may also stipulate any of the following: a. Salaries - normally, an industrial partner receives salary in addition to his share in the partnership's profits as compensation for his services to the partnership. b. Bonuses ~ the managing partner may be entitled to a bonus for excellent management performance. Unlike for salaries, a pariner is entitled to a bonus only if the partnership earns profit. The partner is not entitled to any bonus if the partnership incurs loss c. Interest on capital contributions ~ the partnership agreement may stipulate that capitalist partners are entitled to an annual interest on their capital contributions. The items above are normally provided first to the respective partners and any remaining amount of the profit or loss is shared among the partners based on their stipulated profit or loss ratio. Illustration 1: Salaries A and B’s partnership agreement provides for annual salary allowances of P50,000 for A and P30,000 for B. The salary allowances are to be withdrawn throughout the period and are to be debited to the partners’ respective drawings accounts. | Case 1: With remaining profit - different P/L ratios | The partners share profits equally and losses on a 60:40 ratio. The | partnership earned profit of P100,000 before salary allowances. _| Requirements: a. Compute for the respective shares of the partners in the profit. b. Provide the journal entriesSolution; Requirement (a): 100,000 Chapter 2 Amount being allocated Total Allocation: 1. Salaries 50,000 30,000 80,000 2. Allocation of remaining profit (100K profit - 80K salaries) = 20K QOK x 50%): (20K x 50%) 10,000 10,000 20,000 As allocated 60,000 40,000 100,000 & Notes: @ Salaries are provided first and the remaining amount is allocated based on the profit sharing ratio. 2 The sum of the amounts allocated to the partners is equal to the amount being allocated (i.e., 60K + 40K = 100K). Requirement (0): Monthly | A, Drawings 50,000 entries | B, Drawings 30,000 | Cash 80,000 | to record the withdrawal of salary allowances | Year-end | Income summary 100,000 entry | A, Capital 60,000 B, Capital 40,000 to record the distribution of profit [Year-end [A, Capital 30,000 entry | B, Capital 30,000 A, Drawings 50,000 B, Drawings 30,000 to close the drawings accounts Case 2: No remaining profit ~ different P/L ratios The partners share profits equally and losses on a 60:40 ratio. The partnership earned profit of P70,000 before sa : lary allowance: 1 | | |Partnership Operations Requirement: Compute for the respective shares of the partners in the profit. Solution: A B Total ‘Amount being allocated 70,000 Allocation: 1. Salaries 50,000 30,000 80,000 2. Allocation of remaining loss (70K profit - 80K salaries) = -10K (10K x 60%); (-10K x 40%) (6,000) (4,000) (10,000) As allocated 44,000 26,000. 70,000 After the salaries are provided, the remaining amount is negative (i.e., loss); thus, it is allocated based on the stipulated loss ratio of 60:40. Case 3: No P/L ratio The partnership agreement does not state how profits and losses | are to be divided. A contributed P10,000, while B contributed | P20,000. The partnership earned profit of P95,000 before salary | _allowances.__ Requirement; Compute for the respective shares of the partners in the profit. Solution: A B Total Amount being allocated 95,000 Allocation: 1. Salaries 50,000 30,000 80,000 2. Allocation of remaining profit (95K profit - 80K salaries) = 15K (15K x 10K/30K*); (15K x 20K/30K") 5,000 10,000 15,000 As allocated 55,000 ___ 40,000 95,000 The fractions are derived from the partners’ respective contributions,30 Chapter 2 Illustration 2: Bonus A and B’s partnership agreement sti « Annual salary allowances of P30, * Bonus to A of 10% of the profit bonus. « The profit and loss sharing ratio is 60:40. ipulates the following: 000 for A and 10,000 for B. it after partner's salaries and | j ae 1 Case 1: With profit ; | | The partnership earned profit of P106,000 before deductions for | salaries and bonus. ; viet tal 7 - — | | | | | | i Requirement: Compute for the respective shares of the partners in the profit. Solution: A B Total Amount being allocated 106,000 Allocation: 1. Salaries 30,000 10,000 40,000 2. Bonus after bonus ©) 6,000 6,000 3. Allocation of remaining profit (106K - 40K - 6K) ~ 60K (60K x 60%); (60K x 40%) 36,000 24,000 60,000, As allocated 72,000 34,000 106,000 © The bonus is computed as follows: Profit before salaries and bonus 106,000 Salaries aano0} Profit after salaries but before deduction of bonus 66,000 The bonus scheme is “bonus after bonus.” The formula is as follows: P sas Bo= P 1+Br { before bonus and taxPartnership Operations 31 66,01 B = 66,000 - 1+ 10% B = 66,000 - 60,000 B= 6000 Refer to Chapter 27 of IntermadisteAcciusting Part? for detailed discussion on bonus Case 2: With loss. |The partnership incurred loss of P5,000 before deductions for salaries and bonus, Requirements: a. Compute for the respective shares of the partners in the profit. b. By what amount did A’s capital account change? Solutions; Requirement (a): A B Total ‘Amount being allocated (6,000) “Allocation: 1. Salaries 30,000 10,000 ~——-40,000 2. Bonus after bonus © . $ : 3, Allocation of remaining loss (5K - 40K) = -45h oe av r Ei. aon (27,000) (18,000) (45,000) As allocated 3,000 (8,000) ___(5,000) ® No bonus is allocated because the partnership incurred loss. However, salaries are nonetheless provided because salaries are compensation for services rendered. Requirement (b): A's capital increased by P3,000. Notice that a partner's capital can increase despite of partnership loss. The entry to record the allocation of loss is as follows: Year | B, Capital 8,000 we Income summary 5,000 eaty A, Capital 3,000Cha) go Illustration 2.1: Bonus — With limit aii A and B's partnership agreement stipulates the following: © First, A shall receive 10% of profit up to P100,000 and 20% over P100,000. . * Second, B shall receive 5% of the remaining profit over 150,000. © Any remainder shall be shared equally. The partnership earned profit of P280,000. Requirement: Compute for the respective shares of the partners in the profit. Solution: | A B Total Amount being allocated 280,000 Allocation: 1. Bonus to A First 100K: (100K x 10%) 10,000 10,000 Over 100K: ((280K - 100K) x 20%] 36,000 36,000 2. Bonus to B on remaining profit (280K - 10K - 36K - 150K) x 5% 4,200 4,200 3. Allocation of remaining profit 290K - 10K - 36K - 4.2K) +2 114,900 114,900 2 10 As allocated 160,900 119,100 280,000 Illustration 2.2: Bonus - choice of profit sharing scheme Mr. A, a partner in ABC Co,, is deciding on whether to alary of P8,000 or a salary of P5,000 plus a bonus of 10% after deducting salaries and bonus. partners amount to P20,000. accept @ ‘0 of profit The salaries of the other ‘at amount of profit would Mr, A be indifferentPartnership Operations 33 An algebraic equation is developed from the two choices above Let: X = profit after salaries and bonus 10%X = bonus after bonus Choice #1 Choice #2 8,000 salary = 5,000salary + 10%X X is computed from the equation above as follows: 8,000 = 5,000 + 10%X 10%X = 8,000 - 5,000 X= 3,000 / 10% X= 30,000 Profit after salaries and bonus (X) 30,000 Multiply by: Bonus rate 10% Bonus 3,000 Profit after salaries and bonus 30,000 Add back: Salaries (6K to Mr. A + 20K to other partners) 25,000 Add back: Bonus 3,000 Profit before salaries and bonus 58,000 If the partnership's profit is P58,000, it does not matter whether Mr. A chooses to receive a salary of P8,000 or a salary of 5,000 plus a 10% bonus because he will receive the same amount. Checking: Choice #1 Choice #2 8,000 salary - 5,000 salary + bonus* * Profit before salaries and bonus 58,000 Salaries (5K + 20K) (25,000) Profit after salaries but before bonus 33,000 P Bot Bs ——me B = 33,000 — [33,000 + (1 + 10%)] = 3,000 Choice #1 Choice #2 8,000 salary == 5,000 salary + 3,000 bonusChapter 2 Illustration 2.3: Bonus - comparison of profit sharing schemes A and B’s partnership agreement stipulates the following: © Bonus to A of 10% of the profit before bonus. © Profits are shared equally, while losses in the ratio of 2:3, Requirement: Which partner has a greater advantage when the partnership earns profit or when it incurs loss? Solution: Let: B=bonus P = profit after deducting bonus L-= loss without deducting any bonus 1. When there is profit, the profit shall be shared as follows: A's share B's share Bonus +(50%P) > 50%P_ 2. When there is Loss, the loss shall be shared as follows: A \'s share B's share 2F 3 SL < 3/5 L “ Conclusion: Partner A has a greater advantage whether the partnership earns profit or incurs loss, Iilustration 3: Interest on capital A and B’s partnership agreement stipulates the following: «Annual salary allowance of P50,000 for A. of 10% on the weighted average capital balance of B. profits and losses on a 60:40 ratio, > The partnership earned profit of P100,000, 7 The movements in B's capital account are ag follows: a csPartnership Operations 35 ___B, Capital 60,000 beg, July [Link] 30,000. | 20,000 April 1 additional investment 40,000 Sept. 30 additional investment _|10,000__ Dec. 31 additional investment end. 1,000 Requirement: Compute for the respective shares of the partners in the profit. Solution: The weighted average balance of B's capital account is computed as follows: Months outstanding + . Total months in Weighted Balances a year average _ Beg. balance 60,000 12/12 60,000 April 1 additional investment 20,000 9/2 15,000 July 31 withdrawal (30,000) 5/12 (12,500) Sept. 30 additional investment 40,000 3/12 10,000 Dec. 31 additional investment 10,000 o/12 : Weighted average capital balance 72,500 pee SO A B Total Amount being allocated 100,000 Allocation: 1. Salaries 50,000 . 50,000 2. Interest on weighted ave. capital . 7,250 7,250 balance (72.5K x 10%) 3. Allocation of remaining profit (100K ~ 50K - 7.250K) = 42.750 (42,750 x 60%); (42,750 x 40%) 25,650 17,100 42,750 As allocated 75,650 24350 100,000 —_— 0.000Chapter 2 Illustration 3.1: Interest on capital and bonus | A and B’s partnership agreement stipulates the following: « Monthly salary of P5,000 for A. : _* 20% bonus to A, based on profit before deductions for salary, interest and bonus. © 10% interest on the weighted average capital of B. % The partnership reported profit of 30,000, net of salary, interest and bonus. > B’s weighted average capital balance is P 100,000. Requirement: How much is the bonus of A? Solution: Profit after salary, interest and bonus Add back: Annual salary (5,000 x 12 mos.) Add back: Interest on capital (100K x 10%) Profit before annual salary and interest but after bonus Profit before annual salary and interest but after bonus 100,000 Divide by: (100% fess 20% bonus rate) 80% Profit before salary, interest and bonus 725,000 Multiply by: Bonus rate 20% Bonus (‘bonus before bonus’ scheme) 25,000. Illustration 3.2: Interest on capital - Partial year A and B formed a partnership on March 1, 20x1. The partnership agreement stipulates a 10% interest on B’s weighted average capital balance. The movements in B's capital account are as follows: B, Capital 60,000 March 1 initial investment 40,000 Sept.30 10,000 additional investment Dec 41 additional investment Requirement: Compute for the interest on the weighted average balance of 8's capital nS dcPartnership Operations 37 Solution: Months ‘ickiea outstanding + ‘eigh tec Balances atmos yuenage ina year March 1 - beg. Balance 80,000 10*/12 66,667 July 31 withdrawal (30,000) 5/12 (12,500) Sept. 30 additional investment 40,000 3/12 10,000 Dec. 31 additional investment 10,000 o/l2 = Weighted average capital balance 64,167 Multiply by: Interest rate 10% Interest on weighted average capital 6417 “Months outstanding (March 1 to December 31) Notice that the solution above is similar to the solution in ‘Tlustration 3’ for a full year. Alternative solution 1: ‘Monts ulslanding = , ee during the auerage period March 1 - beg. Balance 80,000 10/10" 80.000 July 31 withdrawal (30,000) 5/10 (15,000) Sept. 30 additional investment 40,000 3/10 12,000 Dec. 31 additional investment 10,000 0/10 # Total 77,000 Multiply by: Interest rate 10% Total 7,700 Multiply by: 10/12 Interest on weighted average capital 6417 “Total months during the period (March 1 to December 31)38 Chapter2 Alternative solution 2: ‘No. of months the Amounts Of Running running balance is transact-—patance outstanding wntit fions the next transaction Totals ee March 1 - aI a wae aan July 31 withdrawal (30,000) 50,000 a" 100,000 Sept. 30 investment 40,000 90,000 3 270,000 Dec. 31 investment 10,000 100,000 a ee Total *,, Beene Divide by: No. of months in the period —_ Total 77,000 Multiply by: Interest rate 10% Multiply by: 10/12 Interest on weighted average capital 6 AIT *(from March 1 to July 31 is 5 months) (from July 31 to Sept. 30 is 2 months) Illustration 3.3: Interest on capital - With limit A and B’s partnership agreement stipulates the following: « A and B shall maintain average investments of P100,000 and 150,000, respectively. Any excess (deficiency) will earn (incur) 10% annual interest. © The P/L ratio is 60:40. > The partnership incurred loss of P60,000 in the first six months of its operations >» A and B's average capital balances were P120,000 and 110,000, respectively. Requirement: Compute for the respective shares of the partners in the loss. Solution. The interest on the excess (deficiency) in capital contribution is computed as follows; -Partnership Operations 39 A B Actual balance 120,000 110,000 Required balance 100,000 150,000 Excess (Deficiency) 20,000 (40,000) Multiply by: Interest rate 10% 10% Multiply by: Months outstanding 6/12 6/2 Interest to (from) 1,000 (2,000) A B Total Amount being allocated (60,000) Allocation: 1. Interest to (from) 1,000 (2,000) (1,000) 2. Allocation of remaining loss [60K + (-1K)] = 59K aires resmcseane) (85,400) (23,600) (59,000) As allocated (34,400) ___ (25,600) __(60,000) Illustration 4.1: Partner's capital account A and B’s partnership began operations on March 1, 20x1. A invested P100,000 cash, while B invested equipment with book value of P300,000 and fair value of ?180,000. A invested additional cash of P20,000 on August 31, 20x1,. The partnership agreement stipulates the following: © Monthly salaries of 2,000 and P10,000 to A and B, respectively, recognized as expenses. * 20% bonus to B, based on profit before deducting salaries and interest but after deducting the bonus. 12% annual interest on the beginning capital of A. © Balance equally. > The partners received their monthly salaries at each month- end. > The partnership earned profit of P210,000 before deductions for bonus and interest. Requirement: Compute for the ending balances of the capital accounts of the partners.oS Solution: The profit given in the problem i were recognized as expenses. We need the gross the one subject to allocation. This is computed as follows: is net of the monthly salaries that amount which is Profit (after deduction of monthly salaries) 210,000 Add back: Monthly salaries (2K x 10 mos.) + (10K x 10mos.) 120,000 Profit before salaries (Amount to be allocated) 330,000 The bonus and the interest on capital are not yet deducted from the profit figure given in the problem. Unlike for monthly salaries which are withdrawn periodically (i.e. monthly basis), interests and bonuses are normally computed only at year-end. Thus, we cannot validly assume that these items were already recognized during the period. © The profit before salaries, interest and bonus is allocated as follows: A B Total Amount being allocated (see computation above) 330,000 Allocation: 1. Salaries 20,000 100,000 120,000 2. Bonus 55,000 55,000 3. Interest (100K x 12% x 10/12) 10,000. - 10,000 4. Allocation of remaining profit (330K - 120K - 55K - 10K) +2 72,500 72,500 145,000 ‘As allocated 102,500 227,500 330,000 © The “bonus after bonus” is computed as follows: FP = P -———— B 1+Br B = 330,000 — [330,000 + (1 + 20%)] = 55,000 «The ending balances of the partners’ capi . capital accounts are computed as follows; Ss41 B Capital, beg. 7 ~~ 400,000 ~———‘180,000 Additional investment 20,000 . Share in profit 102,500 227,500 _Drawings (monthly salaries) (20,000) (100,000) Capital, end. 202,500 307,500 Illustration 4.2: Reconstruction of information Partner A has a 25% participation in the profits of a partnership. During the year, A’s capital account had a net increase of P10,000. Partner A made contributions of P40,000 and capital withdrawals of P60,000 during the year. Requirement: How much profit did the partnership earn during the year? Solution: A, Capital = beg. Withdrawals 60,000 | 40,000 Additional investment 30,000 __ A's share in profit (squeeze) end. 10,000 A's share in profit 30,000 Divide by: A's P/L ratio 25% Partnership's profit 120,000 Illustration 4.3: Reconstruction of information - Required profit A,B, C and D’s partnership agreement stipulates the following: e A and B shall receive salaries of P20,000 and P10,000, respectively, and 10% interest on their capital contributions of P100,000 and P60,000, respectively. ® Balance is divided on a 4:4:1:1 basis. However, C and D are guaranteed minimunt shares of P5,000 each.a2 Chapter? ing a housing Joan which he from the partnership profit, £ 742,000. Partner A wants to Partner A is contemplating on obtain intends to repay through his share The loan requires annual payment o! know the minimum level of partnership profit that could secure him a share of P42,000, inclusive of salaries, interest and share in remaining profit. Requirement: Help Partner A. Solution: Step 1: Prepare a pro-forma allocation table. ‘A (40%) _B (40%) _C (10%) D (10%) Total Salaries. 20,000 10,000 * ¥ 30,000 Interests on capital “ 10,000 6,000 “ = 16,000 Allocation of balance ? ? 2 £ 2 As allocated 42,000) 2 000 5,000 2 © (100K x 10%) = 10,000; (GOK x 10%) = 6,000 © Partner A’s needed share in partnership profit (© Guaranteed minimum share Step 2:’Squeeze’ for A's share in the allocation of balance. A (40%) B (40%) C@0%) D (10%) Total Salaries 20,000 10,000 - 30,000 Interests on capital 10,000 6,000 5 - 16,000 Allocation of balance 12,000 2 2 > > As allocated _ 42,000 2 5,000 5,000 ? (® 42K - 20K - 10K - 12K | | Step 3: ‘Squeeze’ for the total remaining profit for allocation. j A 40%) _B (40%) (10%) DM0%) Total | Salaries 20,000 10,000 E ~ 30,000 Interests on capital 10,000 6,000 2 ‘ 16,000 Allocation of balance__12,000 2 ? > 30,000 As allocated 42,000 2 ? 4 © 12K allocation to A ratio of A= 30,000 |Partnership Operations 13 _Step 4: Allocate the remaining profit. A 40%) B 0%) —C40%) Da Total Salaries 20,00010,000 ~ 30,000 Interests on capital 10,000 6,000 16,000 Allecationof balance __12,000 12,000 3,000 3,000" 30,000 Asallocated 42,000 2 000 ? (30K x 40% 2,090; 30K x 10% » 3,000; 30K x 10° Step 5: Adjust the shares of C and D to their guaranteed amounts. A (40%) __B (40%) _C (10%) D (10%) Total Salaries 20,000 10,000 - 30,000 Interests on capital 10,000 6,000 - - 16,000 Allocation of balance 12000 12,000 3,000 = 3,000-——-30,000 Adjustments (squeeze) 2,000 2,004,000 As allocated 42,000 28,000 _5,000__—-5,000 80,000 _—_S 28,000 5,000 5,000 80,000 Answer: In order for Partner A to secure a P42,000 share, the partnership profit must be at Jeast P80,000. Chapter 2: Summary ¢ The partners share in partnership profits and losses based on their agreement. + If only the share in profits has been agreed upon, the share in losses shall be in the same proportion. *. If no profit sharing has been agreed upon, the partners shall share in proportion to their contributions. However, an industrial partner shall not be liable for losses. * Profit or loss is allocated as follows: (1) Salaries, Bonus (allocated only if there is profit), and Interest on capital, if these are stipulated; and (2) Any remaining amount is allocated based on the P/L ratio.44 Chapter 2 PROBLEMS PROBLEM 1: TRUE OR FALSE ; ini 1. According to the law, ifno profit or loss sharing ratio has been agreed upon, the partners shall share equally. 2. Mr. A and Ms. B formed a partnership. Mr. A contributed PIM cash, while Ms. B will contribute her services. Mr. A is a capitalist partner, while Ms. B is an industrial partner. Fact pattern: You and I are partners. We share in profits equally. Because I am the managing partner, I am entitled to a 20% bonus computed on profit before deducting the bonus. 3. If our partnership earns profit of PIM (before deducting my bonus), your share would be 500,000. 4. If our partnership incurs loss of PIM, your share would be negative P400,000. 5. Normally, partners are entitled to salaries for the services they have rendered to the partnership business only if the business earns profit. Fact pattern: He and She are partners, with 60% and 40% interests in partnership profit, respectively. He is entitled to P2M annual salary, 6. If the partnership earns P12M profit before deducting He’s salary, She’s share would be P4M. 7. If the partnership incurs P8M loss before deducting He's salary, She's share would be negative PAM. Fact pattern A and B formed a partnership. The partne . ‘ tshi) ment stipulates the following: ip agree!Partnership Operations 45 e Annual salary allowances of P50 for A and P30 for B * Any remaining amount of profit or loss shall be divided equally. 8. During the period the partnership earned profit of 100 before salary allowances. A’s share in the partnership profit is P10. 9. During the period the partnership incurred loss of P100 before salary allowances. A’s share in the partnership loss is -P40. 10. Mr. C, the managing partner in ABC Co. is entitled to a 20% bonus on profit after partners’ salaries and bonus. ABC Co reported profit of P360 after deducting the partners’ salaries but before deducting Mr. C’s bonus. Mr. C’s bonus is P80. PROBLEM 2: MULTIPLE CHOICE - THEORY 1. How should the partners in a business partnership share in the profits or losses of the partnership? a. Equally. b. At whatever basis of allocation that the dominating partner deems reasonable. “¢ Inaccordance with the partnership agreement. d. Based on “rock, paper, scissors;” winner takes all. 2. According to the Philippine Civil Code, if only the share of each partner in the profits has been agreed upon, the share of each in the losses shall be a. in equal amounts. b, in equal amounts, but excluding the industrial partner. ¢._ in proportion to the partners’ contributions. d. the same as the sharing in profits. 3. According to the Philippine Civil Code, in the absence ofa stipulation on the sharing of profits or losses, partnership Profits and losses shall be shared by the partners a. equally.46 Chapter 2 . in accordance with the partnership agreement. ¢. in proportion to what the pariners May have contributed. d. in proportion to what the partners may have contributed, but the industrial partner shall not be liable for the losses. is not a component of the formula 4. Which of the following the partners? used to distribute partnership profits to a. Salary allocation to those partners working. b. After all other allocation, the remainder divided according to the profit and loss sharing ratio. c. Interest on the average capital investments. d. Interest on notes to partners. (AICPA - Adapted) 5, When allocating a partnership loss to the partners which of the following items is provided first? a. salaries b. bonuses to partners c. interest on the capital contribution of an industrial partner d. all of these PROBLEM 3: EXERCISES 1. Partners A and B share in profits and losses equally after salaries of P100,000 for A and P60,000 for B. The business earned profit of ?200,000 before deduction for the salaries. Requirements: a. Compute for the partners’ respective shares in the profit. b. Provide the journal entries (the salaries are withdrawn periodically). 2. A and B's partnership agreement provides for annual salary allowances of ?160,000 for A and P80,000 for B, Profits are shared equally, while losses on a 60:40 rati : : " m atio. The earned profit of P200,000. he partnershipPartnership Operations "7 Requirement: Compute for the respective shares of the partners in the profit. 3. Aand B’s partnership agreement states the following: « Annual salaries of 96,000 for A and P60,000 for B. * 10% bonus to A, based on profit after salaries and bonus. e P/Lratio of 60:40, The partnership eared profit of 200,000 before salaries and bonus. Requirement; Compute for the respective shares of the partners in the profit. 4. A and B’s partnership agreement provides for an annual salary allowance of P100,000 for A and 10% interest on the weighted average capital balance of B. The remainder is shared on a 60:40 ratio, respectively. During the period, the partnership earned profit of P200,000. B’s capital account had a beginning balance of P120,000. B made additional investments of P40,000 on April 1, P80,000 on Sept. 30, and 20,000 on Dec. 31, and made drawings of P60,000 on July 31. Requirement: Compute for the respective shares of the partners in the profit. 5. A&B Co, started operations on April 1, 20x1. Mr. A, a partner in A&B Co,, is entitled to 12% interest on the weighted average balance of his capital account. Mr. A’s ledger shows the following: it_ | Balance 100,000.00 | 100,000.00 | ef | T — 21,000.00 | |___73,000.00 x 8,000.00 | "87,000.00 |Chapter 2 #8 Requirement: Compute for the interest on Mr. A’s weighted average capital balance. . The partnership agreement of A and B states the following: © Monthly salary of P10,000 for A. © 20% bonus to A, before deductions for salary, bonus. * 10% interest on the weighted average capital of B. e Balance is shared equally. interest, and B's weighted average capital balance is 200,000. The partnership reported profit of ?60,000 for the year, net of salaries, bonus and interest. Requirement: Compute for A’s share in the profit. 7. Aand B's partnership started operations on July 1, 20x1. The partnership agreement requires A and B to maintain average capital balances of P200,000 and P300,000, respectively. A 10% annual interest is to be computed on any excess or deficiency. Any remaining amount of profit or loss is to be shared on a 60:40 ratio. The partnership incurred loss of #120,000 in 20x1. The average capital balances in 20x] were P240,000 for A and 220,000 for B. Requirement: Compute for the respective shares of the partners in the loss. 8. Aand B formed a partnership and began operations on March 1, 20x1. A invested 200,000 cash, while B invested equipment with a book value of P600,000 and a fair value of P360,000. On August 31, 20x1, A invested additional cash of P40,000. The partnership agreement stipulates the following: i * Monthly salary allowances of P4,000 and P20,000 to A and B, respectively, [Link]-expenses:Partnership Operations 49 * 20% bonus on profit before salaries and interest but after bonus to B. ¢ 12% annual interest on the beginning capital of A. Balance equally. The monthly salaries are withdrawn by the partners at each month-end. The partnership earned profit of P420,000 during the period before deductions for bonus and interest Requirement: Compute for the ending balances. of each of the partners’ capital accounts. PROBLEM 4; MULTIPLE CHOICE - COMPUTATIONAL 1. A and B formed a partnership. The partnership agreement stipulates the following: e Annual salary allowances of P80,000 for A and P40,000 for B The parimers share profits equally and losses on a 60:40 ratio, During the period, the partnership earned profit of P100,000. How much was the share of A? a. 72,000 c. 52,000 b. 68,000 d. 32,000 2. A, Band C are partners, sharing in partnership profits in the ratio of 2:3:4. A, the managing partner, is entitled to an annual salary of P80,000 and a 10% bonus on profit after deducting the salary but before deducting the bonus. The partnership eamed profit of P560,000. How much is the share of A? a. 214,400 ¢. 224,000 b. 196,000 d. 189,667 3. The partnership agreement of A, B and C stipulates the following: « A, the managing partner, shall receive a bonus of 10% of profit.Chapter 2 Each partner shall receive a 6% interest on average Capital investments. © Any remaining profit or loss shall be shared equally. partners during the year and 30,000 for C. The the period. How The average capital investments of the were P80,000 for A, P50,000 for B, partnership earned profit of 100,000 during much was A’s share? a. 23,800 c. 29,800 b. 28,600 - d. 41,600 (AICPA ~ adapted) A and B’s partnership agreement stipulates the following: Annual salary allowance of P100,000 for A. * Bonus to A of 10% of the profit after partner's salaries and bonus. © The partners share in profits and losses on a 60:40 ratio. The partnership incurred loss. of P40,000 before deduction for salaries. How much is the change in A’s capital account? a. 56,000 decrease c. 16,000 increase b. 15,000 decrease d. 9,000 increase 5. In its first year of operations, A and B’s partnership business earned profit of P2,500,000. It was agreed that A is to have an annual salary allowance of P100,000 and a 20% bonus based on profit after deducting the salary and the bonus. However, there has been no stipulation on how the remaining profit is to be shared between A and B. A contributed 300,000, while B contributed P500,000. How much is the share of B? a. 1,250,000 c. 1,350,000 b. 1,060,000 d. 1,080,000 6. Billy and Sheehan are partners in Bass Co. Their partnership agreement states that Billy is entitled to an arma salary of P100,000 and a bonus of 10% of profit-after salary: but beforePartnership Operations 51 bonus. The remainder is shared in the ratio of 7:2. Sheehan's share in partnership profit for the year was 296,000. How much was the partnership profit before Billy's salary and bonus? a. 1,580,000 ¢. 1,751,348 b. 1,672,342 d. 1,420,000. uM A&B Partnership ears profit of 240,000 in 20x1. The movements in the capital accounts of the partners are shown below: A, capital ___B, capital Dr. Cr. Dr. Cr. Jan. 1 May1 20,000 10,000 July 1 20,000 Aug.1 10,000 Oct. 1 10,000 How much is the share of A if profits are to be divided based on average capital? a. 108,333 c. 103,457 b. 121,500 d. 136,543 (PCPA) 8. Partner A first contributed P50,000 of capital into an existing partnership on March 1, 20x1. On June 1 20x1, Partner A contributed another P20,000. On September 1, 20x1, Partner A withdrew P15,000 from the partnership. Withdrawal in excess of P10,000 is charged to the partner's capital account. The annual interest rate applicable to capital contributions is 12%. How much is the interest on the weighted average capital balance of Partner A in 20x1? a. 6,200 ©. 7,567 b. 6,667 d. 8,993. (AICPA) := Chapter 2 ¢ and losses on a 40:60 nt had a net increase of £ 10,000 and capital How much was the 9. A and B share in partnership profit: ratio. During the year, A’s capital accoul 50,000. Partner A made contributions © withdrawals of P60,000 during the year. share of B in the partnership profit for the year? a. 100,000 cc. 200,000 b. 150,000 d. 180,000 . 10. The Articles of Partnership of partners A and B stipulates the following: e Annual salary of P60,000 each. © Bonus to Partner A of 20% of the profit after partners’ salaries. The bonus and salaries are treated as expenses. © Balance to be divided equally. The partnership earned profit of P480,000 before partners’ salaries and bonus. How much is the total share of A, including salary and bonus? a. 270,000 c, 230,000 b. 250,000 d. 210,000 catcra) PROBLEM 5: CLASSROOM ACTIVITY INSTRUCTIONS: 1. Find a study partner. 2. Imagine that you and your study. partner are business partners. 3. Fill-out the missing information below in accordance with your agreement 4. Answer the succeeding requirements, After answering the requirements, have your computations audited by your kind classmates. . w Your Articles of Partnership stipulates the following:Partnership Operations : es) e Partner 1 shall be entitled to an annual salary of P. . ¢ Partner 2 shall be entitled to an annual salary of ¥ a e Partner ___ shall be entitled toa ___% bonus on profit after deducting both salaries and bonus. Each partner shall receive investments. % interest on average capital *. Any remaining profit or loss is divided ona__:__ratio. The movements in your capital accounts during the year are as follows: Jan.1 Additional investment on Jan. 1 Additional investment on. Case #1: During the P year, _Partner 1 P Withdrawal Pr P on . Dec. 31 Partner 1 £ Withdrawal P F on & Dec. 31 your partnership earned profit of Requirement: Compute for your respective shares in the profit. Prepare working papers / solutions like a pro. Case #2: During ® the year, your partnership incurred loss of54 Chapter 2 i in the our respective shares In loss, Requirement: Compute for iis Pae x son with a sound Prepare working papers / solutions like a pe! mind, not like a crazy animal. PROBLEM 6: FOR CLASSROOM DISCUSSION Division of profits and losses 1. A, Band C's partnership agreement stipu ¢ Annual salaries of P12,000 to A and P8,000 to C. ¢ 10% bonus to A, based on profit after salaries but before deducting the bonus. * 10% interest on the following capital contributions: A, 100,000; B, P60,000; and C, P120,000. ® PYL ratio of 40:30:30. lates the following: Case 1: Sufficient profit The partnership earns profit of ?100,000. Compute for the partners’ respective shares. Case 2: Insufficient profit The partnership earns profit of 10,000. Compute for the partners’ respective shares. Case 3: Loss The partnership incurs loss of P20,000. Compute for the partners’ respective shares. Interest on Weighted average capital 2. Aand B's partnership agreement stipulates the following: ¢ Monthly salary of P4,000 to A. * 20% bonus to A, based on profit after deductions for salary and bonus, but before deduction for interest * 12% interest on B’s weighted average capital balaiice B initially contributed 30,000. During the period, BPartnership Operations contributed additional P10,000 on July 1 and 6,000 on Nov. 30, and withdrew P4,000 on Oct. 1. * Balance is shared equally Case 1: Full year The partnership earned profit of 790,000, before salaries, bonus and interest on capital, for the year ended Dec. 31, 20x1. Requirement: Provide the journal entry to close the income summary account to the partners’ respective capital accounts. Case 2: Partial year The partnership earned profit of P90,000, before salaries, bonus and interest on capital, for the eight months ended Dec. 31, 20x1. Requirement: Provide the journal entry to close the income summary to the partners’ respective capital accounts. Reconstruction of information 3. Aand B’s partnership agreement stipulates the following: «Annual salary of P20,000 to A. « 10% bonus to A, based on profit after salaries and bonus. «Balance is shared on a 60:40 ratio. a Requirement: If B’s share in the partnership profit for the year is 32,000, how much is the partnership profit before salary and bonus?