AFAR 1 Module Topic 2

Accounting for partnership operation /profit and loss distribution

Learning Objectives:

After studying this lesson, you should be able to:

1. Summarize the rules and procedures for distribution of profit and losses
2. Identify and describe the various methods of profit and loss distribution.
3. Understand ratios based on capital balances as basis profit and loss distribution
4. Illustrate the effects of interest in partners’ capital, partners’ salaries and bonus in profit and loss
distribution

In partnership, there must be an intention to the divide the profits.

What are the rules Accounting procedures on profit and loss distribution?

1. Rules on profit distribution.

a. The profits should be divided according to partners’ agreement.

b. If there is no agreement:

 As to the capitalist partners, the profits shall be divided according to original capital
contributions.

 As to the industrial partner (if any), such share as may be just and equitable under the
circumstances, provided, that the industrial partner shall receive such share before the capitalist
partners shall divide the profits.

2. Rules on Losses distribution

a. The losses will be divided according to partners’ agreement.

b. If there is no agreement as to the distribution of losses but there is an agreement as to the
division profits, the losses shall be distributed according to the profit-sharing agreement.
c. In the absence of any agreement:

 As to the capitalist partners, the losses shall be divided according to their capital contributions

 As to purely industrial partner (if there’s any), shall not be liable for any losses.

Partners’ agreement as to the distribution of profit and losses is called profit and loss ratio

The profit and loss ratio may be distributed according to the following methods:

1. Equally

2. Unequal or Arbitrary ratio

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 3. Based on Partners’ capital contributions

a. ratio of original capital investments

b. ratio of capital balances at the beginning of the year
c. ratio of capital balances at the end of the year.
d. ratio of average capital balances
1. Simple average
2. Peso-month / Peso month method

4. By allowing interest on partners’ capital and the balance in an agreed ratio

5. By allowing salaries to partners and the balance on agreed ratio

6. By allowing bonus to the managing partner based on income and the balance on agreed
ratio

7. By allowing salaries, interest on partners’ capital, bonus to the managing partner and the
balance in an agreed ratio (combination of 3 to 5)

Illustrations for profit and loss distribution

1. On January 2, 2019 Matt and Jeff form a partnership. Matt invest P20,000 Cash while Jeff invest P20,000
cash and an office equipment worth P40,000. On December 31, 2019 they have an income of P50,000.

Required: Distribute the profits to the on the following methods:

1. Equally
2. Unequal or arbitrary ratio.
a. 1/5, 4/5
b. 1:3
c. 40%, 60%

Matt Jeff
1. Equally
(P50,000 / 2) P25,000 P25,000

2. Unequal or Arbitrary ratio

a. 1/5, 4/5
P50,000 x 1/5 P10,000
P50,000 x 4/5 P40,000

b. 1:3
P50,000 x 1/4 P12,500
P50,000 x 3/4 P37,500

c. 40%, 60%
P50,000 x 40% P20,000
P50,000 x 60% P30,000

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2. Dick and Jane formed a partnership on January 1, 2020. On December 31 of the same year after closing
the income and expense account shows a credit balance of P30,000 representing the profit for year 2020.
Changes in the capital balances during the year 2020 are shown below:
Dick Jane
Capital Balances, January 1, 2020 P20,000 P30,000
Additional Investment March 1, 10,000 25,000
Additional investment August 1 10,000 20,000
Withdrawals October 1 (10,000)
Withdrawals November 1 (25,000
Capital balances, December 31, 2020 P30,000 P50,000

Required: Distribute the profits to Dick and Jane on the following:

Division of profit and loss in the ratio of Partners Capital account balances
a) ratio on Beginning Capital Balances
b) ratio on Ending Capital Balances
c) ratio of Average Capital Balances
1. Simple Average
2. Peso-Month / Peso Day Method

Here’s how we distribute the profits of Dick and Jane on the above methods

a. Distribution based on Beginning capital balances

Capital balances: Dick Jane Total
Beginning capital
30,000 x 20/50 12,000 12,000
30,000 x 30/50 18,000 18,000
Profit distribution 12,000 18,000 30,000

b. Distribution based on Ending capital balances

Ending capital balances Dick Jane Total
30,000 x 30/80 11,250 11,250
30,000 x 50/80 18,750 18,750
Profit distribution 11,250 18,750 30,000

c. Distribution based on Average Capital balances

Average capital balances
1. simple average Total
beg 20,000 30,000
ending 30,000 50,000
total 50,000 80,000
/2 /2
average 25,000 40,000 65,000

Dick Jane Total

30000 x 25/65 11,538 11,538
30000 x 40/65 18,462 18,462
Profit distribution 11,538 18,462 30,000

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 2. Peso-month / Peso day method Dick
Date (Dr ) Cr Balance Fraction average
01-Jan 20,000 20,000 2 / 12 3,333
01-Mar 10,000 30,000 5 / 12 12,500
01-Aug 10,000 40,000 2 / 12 6,667
01-Oct (10,000) 30,000 3 / 12 7,500
total 30,000

Peso-month / Peso day method Jane

Date (Dr ) Cr Balance Fraction average
01-Jan 30,000 30,000 2 / 12 5,000
01-Mar 25,000 55,000 5 / 12 22,917
01-Aug 20,000 75,000 3 / 12 18,750
01-Nov (25,000) 50,000 2 / 12 8,333
total 55,000
grand total 85,000

Dick Jane Total

30000 x 30/85 10,588 10,588
30000 x 55/85 19,412 19,412
Profit distribution 10,588 19,412 30,000

Note: If the division of profit agreement is based on capital balances, but not specify which capital balance.
The bases should be the average capital balances if it can be determined.

Interest allowed on Partners’ capital with remaining profit or loss divided in an agreed
ratio

3. Kenny and Roger formed a partnership on January 1, 2020. On December 31 the average capital balances
of Kenny and Roger were P30,000 and P55,000 respectively. The partnership agreement on profit and loss
distribution allows interest on partners’ average capital balances at 12% with the remainder divided equally.
Based on the above information distribute the profit or loss on the following result of operations:
a. Net Income for the year ended December 31 2020 was P30,000.
b. There was a Net loss of P5,000 for the year ended December 31, 2020.
c. There was a Net loss of P500 for the year ended December 31, 2020

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Distribution of profit or loss
interest Allowed on Capital Balances Kenny Roger Total
30,000 x 12% 3,600 3,600
55,000 x 12% 6,600 6,600
bal. equally 9,900 9,900 19,800
a. Profit distribution 13,500 16,500 30,000

Kenny Roger Total

30,000 x 12% 3,600 3,600
55,000 x 12% 6,600 6,600
bal. equally (7,600) (7,600) (15,200)
b loss distribution (4,000) (1,000) (5,000)

Kenny Roger Total

30,000 x 12% 3,600 3,600
55,000 x 12% 6,600 6,600
bal. equally (5,350) (5,350) (10,700)
c loss distribution (1,750) 1,250 (500)

Salary Allowance to partners with remaining net profit or loss divided in an agree ratio

4. Rodrigo and Leni formed a partnership on January 1, 2020. On December 31 the capital balances of
Rodrigo and Leni were P20,000 and P30,000 respectively. The partnership agreement on profit and loss
provides annual salary of P15,000 to Rodrigo P10,000 to Leni with the remainder divided to divided
equally.
Based on the above information distribute the profit or loss on the following result of operations:
a. Net income P30,000
b. Net loss P10,000, before salary allowances.

Distribution of Profit or loss

Salary allowances to partners
Rodrigo Leni Total
Salaries 15,000 10,000 25,000
bal. equally 2,500 2,500 5,000
Profit distribution 17,500 12,500 30,000

Rodrigo Leni Total

Salaries 15,000 10,000 25,000
bal. equally (17,500) (17,500) (35,000)
Loss distribution (2,500) (7,500) (10,000)

Note: Salary allowances will be provided even when business operation resulted in a loss.
Bonus to Managing Partner Based on net income
The computation of bonus may be based on:

1. Net income before allowances for salaries, interest and bonus.

2. Net income before allowances for salaries, interest but after deduction of bonus
3. Net income after allowances for salaries, interest but before bonus
4. net income after allowances for salaries, interest and bonus

Illustration. Assume that Paul and John have a net income of P95,100 before salaries, interest and bonus to
partners.
The partnership contract provides the following:
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 a. Annual salaries to Paul and John, P15,000 each
b. Interest on capital account balances:
Paul P3,500
John 1,600
c. Bonus to Paul, 20% of net income
d. Remaining profit or loss after salaries, interest and bonus, divided equally.

Distribution of profit

1. Net income before allowances for salaries, interest and bonus.

Paul John Total

Salaries 15,000 15,000 30,000
interest 3,500 1,600 5,100
20% x 95,100 19,020 19,020
bal. equally 20,490 20,490 40,980
Profit distribution 58,010 37,090 95,100

2. Net income before allowances for salaries, interest but after deduction of bonus

Paul John Total

Salaries 15,000 15,000 30,000 95,100 before bonus 120%
interest 3,500 1,600 5,100 79,250 after bonus 100%
20% after bonus 15,850 15,850 15,850 bonus 20%
bal. equally 22,075 22,075 44,150
Profit distribution 56,425 38,675 95,100

[Link] income after allowances for salaries, interest but before bonus
Paul John Total
Salaries 15,000 15,000 30,000 95,100 before bonus
interest 3,500 1,600 5,100 (30,000) salaries
20% x 60,000 12,000 12,000 (5,100) interest
bal. equally 24,000 24,000 48,000 60,000 after salaries, interest
Profit distribution 54,500 40,600 95,100 before bonus

[Link] income after allowances for salaries, interest and bonus

Paul John Total 95,100 before bonus
Salaries 15,000 15,000 30,000 (30,000) salaries
interest 3,500 1,600 5,100 (5,100) interest
20% bonus 10,000 10,000 60,000 after sal, int before bonus 120%
bal. equally 25,000 25,000 50,000 50,000 after sal, int and bonus 100%(60,000/120%)
Profit distribution 53,500 41,600 95,100 10,000 bonus

Review assessment
True or False
1. If there is no agreement as to the division of profit, the profit shall be divided equally.

2. Losses shall be distributed on the basis of partnership agreement. It there is no agreement as the division
of losses, it shall divide base on original capital contributions.

3. If there is an agreement as to the division of losses but has no agreement as to the division of profit, the
profit shall be divided base of losses sharing agreement.

4. Salary allowances and interest on partners’ capital are business expenses.

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5. A partnership income sharing ratio applies to partnership income after salaries and interest are deducted.

6. Partnership income is defined as partnership income after deducting partners salaries and interest.

7. A partnership agreement whereby it stipulates that one or more partners maybe excluded from any
share in the profits or losses is valid.

8. If partnership operations resulted in a loss, the provision for interest on partners’ capital will not be
honored even if the agreement provided for such interest.

9. If partnership agreement provides that income shall be divided on the basis of capital balances, this
would mean that it uses the beginning capital balances.

10. In certain cases when distribution of profits or losses involves salary and interest allowances, some
partners may receive an increase in equity and others may suffer decrease.

Solve the following independent problems

1. On January 31, 2020, Jose and Pedro formed a partnership and agree to share profits and losses in the
ratio of 6:4 respectively. Annual salary of Jose is P60,000 and Pedro P30,000. The partners also are
paid interest on their average capital balances. At the end of 2018, Jose received P30,000 of interest
and Pedro, P20,000. The profit and loss allocation are determined after deductions for the salary and
interest payments. If Pedro’s total share of the partnership income was P200,000 in 2020, what was
the total partnership income? __________

2. Peter and Pan entered into a partnership as of March 1, 2020 by investing P125,000 and P75,000
respectively. They agreed that Peter the managing partner, was to receive an annual salary of
P30,000 and a bonus computed at 10% of the net profit after adjustment for the salary; the balance of
the profit was to be distributed in the ratio of their original capital balances. On December 31, 2020,
account balances were as follows:

Cash P 70,000 Accounts payable P 60,000

Accounts receivable 67,000 Peter, capital 125,000
Furniture and fixtures 45,000 Pan, capital 75,000
Sales returns 5,000 Peter drawing ( 20,000)
Purchases 196,000 Pan drawing ( 30,000)
Operating expenses 60,000 Sales 233,000

Inventories on December 31, 2020 were as follows: supplies, P2,500, merchandise, P73,000 Prepaid
insurance was P950 while accrued expenses were P1,550. Depreciation rate was P20% per year.
What is Peter capital balance on December 31, 2020, after closing the profit and drawing accounts?
_____________________

3. On January 1, 2020, Jose and Marie have capital balances of P20,000 and P16,000 respectively. On
July 1, 2020 Jose invests an additional P4,000 and Marie withdraws P1,600. Profits and losses are
divided as follows: Marie is the managing partner and as such shall receive P16,000 salary and Jose
shall receive P7,200; both partners shall receive interest 10% on their beginning capital balances to
offset whatever difference in capital investments they have and any remainder shall be divided
equally. Income of the Jose-Marie partnership for the year 2020 is P9,600. Jose’s share in the net
income is: _________________

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4. Billy and Vice formed a partnership on July 1, 2020 and agreed to share profits 90%, 10%,
respectively. Billy contributed capital of P25,000. Vice contributed no capital but has a specialized
expertise and manages the firm full time. There were no withdrawals during the year. The
partnership agreement provides for the following:

a. Capital accounts are to be credited annually with interest at 5% of beginning capital

b. Vice to be paid an annual salary of P12,000
c. Vice is to receive a bonus of P20% of income calculated before deducting his salary and interest
on both capital accounts.
d. Bonus, interest and Vice’s salary are to be considered partnership expenses.

The partnership 2020 income statement follows:

Sales P365,000
Cost of sales 270,300
Gross profit on sales 94,700
Expenses (including salary, interest, and bonus) 49,700
Net income P 45,000

Based on the above data, Vice bonus is _________________

5. On July 1, 2020 Vic and Joey formed a partnership with capital contributions of P100,000 and
P60,000 respectively. They agree to divide the profit and losses on the following:

a. 5% annual interest on their capital investments

b. Annual salary of P10,000 for each partner
c. Remainder in the ratio 1:3.
If Vic received a total P15,000 as his profit share at the end of the year, what was the total
partnership profit? _______________
6. On October 1, 2020, Peter and Paul formed a partnership by investing cash of P150,000 an
P100,000, respectively. The partners agreed to receive an annual salary allowance of P180,000, and
to give Peter a bonus of P20% of the net income after partners’ salaries, the bonus being treated as an
expense. If the profits after salaries and bonus are to be divided equally, and the profits on December
31, 2020 after partners’ salaries but before bonus of Peter is P180,000, how much is the share of
Peter in the profit? _______________

7. Tim, Tam and Tom are partners when the partnership earned a profit of P60,000. Their agreement
provides the following regarding the allocation of profits and losses:

a. 10% interest on partners’ ending capital in excess of P150,000.

b. Salaries of P40,000 for Tim an P60,000 for Tam.
c. Any balance is to be distributed 2:1:1 for Tim, Tam and Tom respectively.

Assume ending capital balances of P120,000, P160,000, and P200,000 for partners Tim, Tam and
Tom, respectively, what is the amount of profit allocated for Tom, if each provision of the profit and
loss agreement is satisfied to whatever extent possible using the priority order shown above?
__________________
8. Jude and Joseph who are partners have a net income of P50,000 before salaries, interest and bonus at
the end of year. Capital balances at the beginning of year were P50,000 and P70,000 respectively.

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 The partnership contract provides the following:

a. Annual salaries to Jude and Joseph of P15,000 each

b. 10% Interest on beginning capital balances:
c. Jude will receive a bonus of 20% on net income after salaries and bonus
d. Remaining profit or loss after salaries, interest and bonus, divided equally.

How much is the share of Jude in the profit? ______________

9. Efren and Robin formed a partnership on January 1, 2020. On December 31, the capital balances of
Efren and Robin were P20,000 and P30,000 respectively. The partnership agreement on profit and
loss provides annual salary of P12,000 to Efren P8,000 to Robin with the remainder to be divided on
the ratio of 1:3. If the partnership result operations as of December 31, was a net loss of P2,000, what
would be capital balance of Efren after loss distribution? ___________

10. LeBron, Westbrook and Irving formed a partnership. LeBron contributed cash of P70,000 and
Westbrook invest a computer equipment with a fair value of P80,000. Irving is an industrial partner.
The partners agree to receive an equal capital interest in the partnership. After a year of operation,
partnership net income was P30,000 which was distributed among the partners. Using the bonus
method, what is the capital balance of LeBron after distribution of profit? ______________

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AFAR 1 Module Topic 4

Accounting for Partnership Dissolution

Learning Objectives:

After studying this lesson, you should be able to:

1. State the causes of partnership dissolution
2. Account for the effects of partnership dissolution on the partnership equity

What is Dissolution of Partnership?

Dissolution of partnership means change of business relationship between partners cause by disassociation
of any partner from the partnership. It is different from liquidation where the partnership operation is
terminated and assets and liabilities are settled. In dissolution the partnership may continue to operate but
there are changes in its number of partners or members of the partnership.

What are the major causes of Dissolution?

Causes of dissolution due to changes in ownership interest:

1. Admission of a partner
2. Withdrawal or retirement of a partner
3. Death of a partner
4. Incorporation of a partnership.

ADMISSION OF A NEW PARTNER

A new partner may be admitted in an existing partnership with the consent of all the partners. When a new
partner is admitted, the original partnership is dissolved and a new partnership is formed.

A new partner may be admitted in an existing partnership by:

1. Purchase of interest of one or all of the existing partners.

2. Investment of assets in the partnership by the incoming partner.

Accounting for admission of a new partner by purchased of interest.

When a new partner is admitted in the partnership by purchase of interest, the transaction is between the
incoming (new) partner and the selling (old) partner. To record the admission of the new partner to the
partnership should only be the transfer of interest from the old partner to the new partner thereby decreasing
the capital of the old partner. The total capital of the partnership does not change. Cash payment is not
recorded in the books of the partnership since it is a personal transaction between the selling and the buying
partner so no gain or loss is taken up in the partnership books.

Illustration: Assume that A and B are partners with following capital balances:

A, Capital P 50,000
B, Capital 50,000
Total P100,000
======
Case 1. C is admitted into the partnership by purchasing one half interest of partner A for P25,000 with the
consent of B. The entry to record the admission of C in the books of the partnership;

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 A, Capital 25,000
C, Capital 25,000

A, Capital P50,000 x 1/2 = P25,000 interest transferred to C (new partner)

Case 2. C is admitted into the partnership by purchasing one half interest of partner A for P30,000 with the
consent of B. The entry to record the admission of C in the books of the partnership;

A, Capital 25,000
C, Capital 25,000

A, Capital P50,000 x 1/2 = P25,000 interest transferred to C (new partner)

Although C paid A P30,000, the interest transferred to C is still P25,000 which is one half interest of A,
because it is a personal transaction between C and A in which C personally receive the payment of A.

Capital balances before admission of C Capital balances after admission of C

A, Capital P 50,000 A, Capital P 25,000

B, Capital 50,000 B, Capital 50,000
_ C, Capital 25,000
Total P 100,000 Total P 100,000
====== =======

Case 3. C is admitted into the partnership by purchasing one half interest of partners A and B for P60,000.
The entry to record the admission of C in the books of the partnership:

A capital 25,000
B capital 25,000
C capital 50,000

[Link] of a new partner by investment of additional assets.

A new partner may be admitted as a new partner in exchange for contributed assets. Admission of the new
partner and contribution of assets may be recorded on the basis of bonus method.

a. Bonus granted to the old partners.

When the fair market value of the assets contributed by the incoming partner exceeds the amount of
ownership interest to be credited to his account, the old partners recognize a bonus equal to this
excess. This bonus is allocated on the basis of the same ratio used for income allocation. (unless
there is an specified partnership agreement). Recording involves crediting the old partners capital
accounts by the allocated amount

Example:

A, B and C have capital balances in partnership of P30,000, P45,000 and 25,000 respectively and
share profit and losses in a ratio 2:1:2 respectively. The partners have agreed to admit D in the
partnership. D is to invest P37,500 cash for a one-fifth interest in the partnership.

What is the entry to record the admission of D?

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 Answer:

Cash 37,500
A capital 4,000
B capital 2,000
C capital 4,000
D capital 27,500

Solution/explanation:

TCC Bonus TAC

A 2/5 30,000 4,000 34,000
B 1/5 45,000 2,000 47,000
C 2/5 25,000 4,000 29,000
D 37,500 (10,000) 27,500
137,500 137,500

In bonus method the Total Contributed Capital (TCC) is equal to Total Agreed Capital (TAC). D’s
Agreed Capital of P27,500 was derived from multiplying D’s agreed interest of (1/5) to the total
agreed (P137,500 x 1/5) capital. Since D’s contributed capital is more than his agreed capital (37,000
– 27,000) the difference of P10,000 granted as bonus to the old partners and allocated based on their
Profit and loss ratio and credited to their capital accounts.

b. Bonus granted to the new partner.

Example:

A, B and C have capital balances in partnership of P30,000, P45,000 and 25,000 respectively and
share profit and losses in a ratio 2:1:2 respectively. The partners have agreed to admit D in the
partnership. D is to invest P25,000 cash for 30% interest in the partnership.

What is the entry to record the admission of D?

Answer:

Cash 25,000
A capital 5,000
B capital 2,500
C capital 5,000
D capital 37,500

Solution/explanation:
TCC Bonus TAC
A 2/5 30000 -5000 25000
B 1/5 45000 -2500 42500
C 2/5 25000 -5000 20000
D 25000 12500 37500 Bonus
125000 125000

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 In bonus method the Total Contributed Capital (TCC) is equal to Total Agreed Capital (TAC). D’s
Agreed capital of P37,500 was derived from multiplying D’s agreed interest of (30%) to the total
agreed (P125,000 x 30%) capital. Since D’s contributed capital is less than his agreed capital (37,500
– 25,000) the difference of P10,000 was granted as a bonus to D and allocated to partners based on
their Profit and loss ratio and debited to their capital accounts.

c. No Bonus Recognized

When incoming partner’s capital account (ownership interest) is equal to his FMV of
contributed asset, no bonus is recognized and the partnership records the admission as debit to
cash or other asset and credit capital of the new partner. In admission of a new partner by
investment the transaction is between the partnership and the incoming partner. While in
purchase of interest, it is a personal transaction between the old partners and the incoming
partner but consent of all the partners is required.

A and B have capital balances in partnership of P25,000, and 35,000 respectively and share profit
and losses equally. The partners have agreed to admit C in the partnership. C is to invest P30,000
cash for 1/3 interest in the partnership.

What is the entry to record the admission of C?

Cash P30,000
C capital P30,000

C capital interest is equal to his capital contribution. (TCC P25,000 + 35,000 + P30,000) x 1/3.

WITHDRAWAL OF A PARTNER

A partner may leave or retire from the partnership. If a partner leaves or retire from the partnership
the total interest of a partner should be properly determined which includes the following:

a. Share in the profit and loss of the partnership

b. Adjustment in the assets and liabilities to reflect the fair market values.
c. Loans to and from partnership
d. Drawing accounts and Capital interest accounts
Accounting for withdrawal or retirement of a partner in a partnership
A partner may withdraw or retire from the partnership by the following:
1. Selling his interest to an outsider. This is similar to admission by purchase.
2. Selling his interest to an existing partner.
3. Selling his interest to partnership / payment from partnership fund.

Selling his interest to the partnership can be of the following:

a. Payment at book value
b. Payment at more than the book value – bonus method (bonus to withdrawing
partner)
c. Payment at less than book value – bonus method (bonus to remaining partners)
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Example:

1. A, B and C have capital balances in partnership of P20,000, P30,000 and 50,000 respectively and
share profit and losses in a ratio 2:3:5 respectively. Partner A decided to withdraw from the
partnership by selling his interest to D for 30,000 in which B and C agreed.

What is the entry to record the withdrawal of A?

Answer:

A capital 20,000
D capital 20,000

Only the transfer of capital from A to D is recorded in the books of the partnership

2. A, B and C have capital balances in partnership of P20,000, P30,000 and 50,000 respectively and
share profit and losses in a ratio 2:3:5 respectively. Partner A decided to withdraw from the
partnership by selling his interest to partner C for 30,000 in which B agreed.

What is the entry to record the withdrawal A?

Answer:

A capital 20,000
C capital 20,000

Again, only the transfer of A capital to C is recorded in the books of the partnership.
3. A, B and C have capital balances in partnership of P20,000, P30,000 and 50,000 respectively and
share profit and losses in a ratio 2:3:5 respectively. Partner A decided to withdraw from the
partnership
And received P20,000 for his interest.

What is the entry to record the withdrawal A?

Answer:

A capital 20,000
Cash 20,000

4. A, B and C have capital balances in partnership of P20,000, P30,000 and 50,000 respectively and
share profit and losses in a ratio 2:3:5 respectively. Partner A decided to withdraw from the
partnership
And received P35,000 for his interest. At the time of his withdrawal there is an undistributed profit
of P50,000.

What is the entry to record the withdrawal A?

First, the partners’ capital balances should be adjusted up to the time of partner A’s withdrawal. In
this case, the P50,000 profit should be distributed to partners A, B and C. as follows:

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 A B C
Unadjusted capital balance 20,000 30,000 50,000
Profit distribution (P&L ratio) 10,000 15,000 25,000
Adjusted capital balances 30,000 45,000 75,000
Bonus receive from B & C 5,000 ( 1,875) ( 3,125)
Payment to A (35,000)___________________________
Capital balances after withdrawal - 43,125 71,875

Cash receive by Partner A upon his withdrawal P35,000

Capital balance of A 30,000
Bonus receive by A from B & C 5,000
Journal entry
A capital 30,000
B capital (5,000 x 3/8) 1,875
C capital (5,000 X 5/8) 3,125
Cash 35,000

5. A, B and C have capital balances in partnership of P20,000, P30,000 and 50,000 respectively and
share profit and losses in a ratio 2:3:5 respectively. Partner A decided to withdraw from the
partnership
And received P25,000 for his interest. At the time of his withdrawal there is an undistributed profit
of P50,000.
What is the entry to record the withdrawal A?

A B C
Unadjusted capital balance 20,000 30,000 50,000
Profit distribution (P&L ratio) 10,000 15,000 25,000
Adjusted capital balances 30,000 45,000 75,000
Bonus receive by B&C from A ( 5,000) 1,875 3,125
Cash payment to A (25,000) ________________
Capital balances after withdrawal - 46,875 78,125

Capital balance of A 30,000

Cash receive by Partner A upon his withdrawal 25,000
Bonus receive by B & C from A 5,000
Journal entry
A capital 30,000
B capital (5,000 x 3/8) 1,875
C capital (5,000 X 5/8) 3,125
Cash 25,000
Retirement and Death of a partner has similar accounting procedures to that of withdrawal of a partner in
which first adjust the capital balances of the partners at the time of retirement or death.
Example:
1. A, B and C have capital balances in partnership of P20,000, P30,000 and 50,000 respectively and
share profit and losses in a ratio 2:3:5 respectively. Partner A decided to retire from the partnership.
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 He received cash of P21,000 and office equipment with a book value of P10,000 and fair value of
P15,000 as settlement for his partnership interest. At the time of his retirement there was also an
undistributed profit of P50,000.

What are the journal entries to record the retirement of A?

Answer:

Income summary 50,000

A Capital 10,000
B Capital 15,000
C Capital 25,000

To allocate and record undistributed profit to partners

Office equipment 5,000

A Capital 1,000
B Capital 1,500
C Capital 2,500

To record revaluation of office equipment

A Capital 31,000
B Capital 1,875
C Capital 3,125
Office Equipment 15,000
Cash 21,000
To record settlement of A capital interest

Solution Explanation
A 20% B 30% C 50% Total
Capital balances 20,000 30,000 50,000 100,000
share in profits 50k x20%; 30% & 50% 10,000 15,000 25,000 50,000
share in revaluation (15k-10k)x 20%;30% & 50% 1,000 1,500 2,500 5,000
adjusted capital balances 31,000 46,500 77,500 155,000

Adjusted capital Balances 31,000 46,500 77500 155,000

Payment to A (21K cash + 15K equipt.) (36,000) (36,000)
Bonus to A from B & C( 5k x 3/8; 5/8) 5,000 (1,875) (3,125) -
Capital balances after retirement - 44,625 74,375 119,000

Death of a Partner
Same example as the above except that C dies before he was able to retire, the entries would be same
except for number 3 in which the entry would be before settlement
A Capital 31,000
B Capital 1,875
C Capital 3,125
Liability to estate of A 36,000

Liability to the estate of A 36,000

Office Equipment 15,000
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 Cash 21,000
To record the settlement to the estate of C.

Incorporation of a Partnership
Accounting procedures
Partners’ capital balances are adjusted for undistributed profits and gains or losses on revaluation.
Books of the partnership are closed and new sets of books are open for the corporation.
Illustration:
ABB Company
Statement of Financial Position
January 1, 2020
` P/L
Cash 360,000 Anne capital 20% 300,000
Furniture 100,000 Billy capital 30% 400,000
Office Equipment 400,000 Bong capital 50% 400,000
Delivery Equipment __ 240,000 __________
Total Asset P1,100,000 Total Capital P 1,100,000

Anne Billy and Bong decided to convert their partnership into a corporation. At the time of the
incorporation, the fair value of the delivery equipment was P290,000, furniture P90,000 and office
equipment P385,000. The corporation’s authorized capitalization is P1,500,000 divided by 150,000
shares with a part value of P10 per share.
What are the journal entries necessary for the incorporation?
First is to adjust their capital balances on the share on gain or loss on revaluation of assets.
Journal entries:

Delivery Equipment (290k-240k) 50,000

Furniture (100k-90k) 10,000
Office Equipment (400k-380k) 20,000
Anne capital 4,000
Billy capital 6,000
Bong capital 10,000
To adjust the assets to fair values

Anne capital 304,000

Billy capital 406,000
Bong capital 410,000
Cash 360,000
Delivery Equipment 290,000
Furniture 90,000
Office Equipment 380,000

Cash 360,000
Delivery Equipment 290,000
Furniture 90,000
Office Equipment 380,000

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 Share Capital 1,120,000

Anne 20% Billy 30% Bong 50% Total

Capital balances 300,000 400,000 400,000 1,100,000
share in revaluation of asseta 20k x 20%;30% & 50% 4,000 6,000 10000 20,000
Adjusted capital balances 304,000 406,000 410,000 1,120,000
Divide by par value per share 10 10 10 10
number of shares 30,400 40,600 41,000 112,000

Based on the above illustration if Anne, agreed to received 30,000 shares Billy 40,000 shares and
Bong 40,000 shares, the entry to record the initial investment would be:

Cash 360,000
Delivery Equipment 290,000
Furniture 90,000
Office Equipment 380,000
Share Capital (30K sh+ 40k sh +40K sh)xP10 1,100,000
Share premium 20,000

Based on the above illustration if the corporation was authorized to issue preference shares at P100
par and Anne, agreed to received 1,400 ordinary shares Billy 1,600 ordinary shares and Bong 1,000
ordinary shares and the remainder distributed to preference share what would be the distribution of
shares to partners?

Anne 20% Billy 30% Bong 50% Total

Adjusted capital balances 304,000 406,000 410,000 1,120,000
Less ordinary shares @ P10 Par (14,000) (16,000) (10,000) (40,000)
Remaining interest 290,000 390,000 400,000 1,080,000
Divide by preference share par 100 100 100 100
Number of prference shares issued 2,900 3,900 4,000 10,800
Ordinary shares issued 1,400 1,600 1,000 4,000
Total shares issued 4,300 5,500 5,000 14,800

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