CHAPTER FIVE

Accounting for Partnership

5. Introduction
In your previous course you have defined and studied a business enterprise, it is an
organization in which inputs converts into goods and services to customer. Based on their
Forms of Business, business enterprises are classified in to three such as sole
proprietorship, partnership and corporation. For accounting purposes, each form should
be viewed as an economic unit separate from its owners, though legally only the
corporation is considered separate from its owners. Sole proprietorship is a business
enterprise owned/managed by one individual. Partnership is a business enterprise
owned/managed by two or more individual on a contract base. In this chapter we will
see about partnership business enterprise and its accounting treatments.
5.1. Definition and Characteristics of partnerships
A partnership is a voluntary association of two or more people to pursue a business for a profit as
a co-owner. Partnerships are common especially in small retail and service business. Many
professional practitioners, including physicians, lawyers, and accountants, also organize their
practices as a partnerships. Partnerships are an important type of organization because they offer
certain advantages with their unique characteristics.
Characteristics

A. Voluntary Association: A partnership is a voluntary association of individuals rather

than a legal entity in itself. Therefore, a partner is responsible under the law for his or
her partner’s business actions within the scope of the partnership. A partner also has
unlimited liability for the debts of the partnership. Because of these potential liabilities,
an individual must be allowed to choose the people who join the partnership.
B. Limited Life: A partnership legally ceases to exist upon the withdrawal, bankruptcy or
death of an existing partner, the admission of a new partner, or the voluntary
dissolution of the entity.
C. Mutual Agency: Each partner is a fully authorized agent of the partnership. As its agent,
a partner can commit or bind the partnership to any contract within the scope of the
partnership business on its behalf. Thus the acts of each partner bind the partnership
and become the responsibility of all partners.
D. Co-ownership of partnership property: partnership assets are owned jointly by all
 partners. Any investment by a partner becomes the joint property of all partners.
Partners have a claim on partnership assets based on their capital account and the
partnership contract.
E. Unlimited Liability: In case of insolvency, each partner is individually responsible for
the liabilities of the partnership, regardless of the amount of equity that the partner has
in the partnership. Thus, if a partnership becomes insolvent, the partners must
contribute sufficient personal assets to settle the debts of the partnership. This feature is
one of the major differences between partnerships and the corporate form of
organization, where shareholders are not personally liable for the company’s debts. This
major disadvantage of unlimited liability can be circumvented by the formation of a
limited partnership, but the acts that allow this type of partnership require that at least
one partner be a general partner and that the partnership name not contain any of the
names of the limited partners.
F. Single taxable entity: a partnership has the same tax status as a sole proprietorship and
is not subject to federal income taxes on its income. The individual partners must report
their distributive share of partnership income on their personal tax returns.
Advantages and Disadvantages of partnership

Advantages:
I. Easy and inexpensive to form than a corporation. A partnership is easy to form. It only
requires the consent of two or more parties. Two or more competent persons simply
agree to be partners in some common business purpose.

II. Advantageous to raise a large amount of capital and managerial skill (talent) than a sole
proprietorship. Because a partnership is formed by two or more persons, it is possible
to raise a large amount of capital and managerial skill than a single owner.

III. Not subject to separate taxation as a case in a corporation because each partner reports
his/her own share of partnership income and is individually taxed, and

IV. Not required to observe on many restrictive laws unlike a corporation.

 Disadvantages
I. Partners assume unlimited liability. The liability of the partners is not limited to what
they have in the partnership, but it goes to the extent of their personal properties
(assets).
II. Disadvantageous if each partner does not exercise his/her good judgment because
one partner’s act can bind a partnership into a contract.
III. Limited life. Partnerships are subject to possible termination due to many
uncontrollable circumstances such as the death of a partner.
IV. The transfer of ownership from one partner to another person is difficult unless the
remaining partners approve of this
Accounting for Partnership

A. Recording Initial Investments

A separate entry is made for the investments of each partner in a partnership. The various
assets contributed by a partner are debited to the proper asset accounts. In each entry, the
monetary amounts at which the non-cash assets are stated are those agreed upon by the
partners. In arriving at an appropriate amount for such assets, consideration should be
given to their market values at the time the partnership is formed. If liabilities are
assumed by the partnership, the appropriate liability accounts are credited. The partner’s
capital account is credited for the net amount.

Illustration: A, B, and C formed a partnership; A contributed Br. 50,000 in cash and

inventory with a fair market value of Br. 100,000in the partnership; B contributed
equipment with a fair market value of Br. 180,000 and a building with a fair market value
of Br. 150,000 in the partnership; C contributed Br. 100,000 in cash and equipment with
a fair market value of Br. 90,000 and in addition to this ‘C’ transferred a liability of Br.
30,000tothe partnership. The entry to record the assets contributed and the liabilities
transferred by ‘A’, ‘B’, and ‘C’.
Cash Br. 150,000
Inventory 100,000
Equipment 270,000
Building 150,000

Accounts Payable 30,000

A, Capital 150,000
B, Capital 330,000
C, Capital 160,000

Division of Net income or Net loss

As in the case of a sole proprietorship, the net income of a partnership may be said to
include a return for the services of the owners, for the capital invested, and for economic
or pure profit. It should be noted that division of the net income or net loss among the
partners in exact accordance with their partnership agreement is of the utmost
importance. If the agreement is silent on the matter, the law provides that all partners
share equally, regardless of differences in amounts of capital contributed, of special skills
possessed, or of time devoted to the business. The partners may, however, make any
agreement they wish in regard to the division of net income and net loss.

Methods to divide income or lose use:

 Division based on fractional share to each partner.
 Division based on the ratio of capital invested.
 Division based on salary allowances. Technically, partners’ salaries are profit shares, not
expenses of the business.
 Division based on interest allowances.
 Division based on both salary and interest allowances. Salary and interest allowances
exceed the amount of net income; the excess net income will simply be negative.

A. Equal division of earnings, or in some other ratio

If the partnerships are agree to share their income or loss based on equal ration, net
income will divided equally without considering other factors this method is called
silence method. But same time they may use same other ratios to share their loss or
income.
B. Division of earnings in the ratio of partners’ capital account balances
Division of partnership earnings in proportion to the capital invested by each partner is
most likely to be found in limited liability partnerships in which substantial investment is
the principal ingredient for success. To avoid controversy, it is essential that the
partnership contract specify whether the income-sharing ratio is based on:
 The original capital investment
 The capital account balance at the beginning of each year
 The average capital balances during the year
 The capital balances at end of each year (before distribution of income)

C. Income Division Recognizing Services of Partners

As a means of recognizing differences in ability and amount of time devoted to the
business, articles of partnership often provide for the division of a portion of net income
to the partners in the form of a salary allowances.
Illustration: Assume that the articles of partnership of Abebe and Emebet provide for
monthly salary allowances of Birr 2,500 and Birr 2,000 respectively, with the balances of
the net income to be divided equally, and that the net income for the year is Birr 75,000.
Net income Birr 75,000
Division of net income: Abebe Emebet Total
Salary allowance 30,000 24,000 54,000
Remaining income 10,500 10,500 21,000
Net income 40,500 34,500 75,000

The division of net income is recorded as a closing entry, regardless of whether the
partners actually withdraw the amounts of their salary allowances. The entry for the
division of net income is as follows:

December 31:
Income summary ------------------------- 75,000
Abebe, Capital-------------------------- 40,500
Emebet, Capital------------------------ 34,500
If Abebe and Emebet had withdrawn their salary allowances monthly, the withdrawals
would have accumulated as debits in the drawing accounts during the year. At the end
of the year, the debit balances of Birr 30,000 and Birr 24,000 in their drawing accounts
would be transferred to their respective capital accounts.
D. Income Division Recognizing Services of Partners and Investment
Partners may agree the most equitable plan of income sharing is to allow salaries based
on the services rendered and also to allow interest on the capital investments. The
remainder is then shared in an arbitrary ratio.

Illustration: Assume that Abebe and Emebet (1) are allowed monthly salaries of Birr
2,500 and Birr 2,000 respectively; (2) are allowed interest at 12% on capital balances at
January 1 of the current fiscal year, which amounted to Birr 80,000 and Birr 60,000
respectively; and (3) divide the remainder of net income equally.

Net income Birr 75,000

Division of net income: Abebe Emebet Total
Salary allowance 30,000 24,000 54,000
Interest allowance 9,600 7,200 16,800
Remaining income 2,100 2, 100 4,200
Net income 41,700 33,300 75,000

E. Income Division-Allowances Exceed Net Income

In the illustration presented above, the net income has exceeded the sum of the
allowances for salary and interest. If the net income is less than the total of the special
allowances, the “remaining balance” will be a negative figure that must be divided
among the partners as though it were a net loss.
Illustration: Take the above example but change the net income as though it were Birr
50,000.

Net income Birr 50,000

Division of net income: Abebe Emebet Total
Salary allowance 30,000 24,000 54,000
Interest allowance 9,600 7,200 16,800
Excess of allow. Over income (10,400) (10,400) (20,800)
Net income 29,200 20,800 50,000

Partnership Dissolution
One of the basic characteristics of the partnership form of organization is its limited life.
Any change in the personnel of the ownership results in the dissolution of the
partnership. Thus, admission of a new partner dissolves the old firm. Similarly, death,
bankruptcy, or withdrawal of a partner causes dissolution. Dissolution of partnership is
not necessary followed by the winding up of the affairs of the business. For example, a
partnership composed of two partners may admit an additional partner. Or if one of three
partners in a business withdraws, the remaining partners may continue to operate the
business. In all such cases, a new partnership is formed and new articles of partnership
should be prepared.

A. Admission of a Partner:
An additional person may be admitted to a partnership enterprise only with the consent
of the current partners. An additional person may be admitted to a partnership through
either of two procedures.
1. Purchase of an interest from one or more of the current partners.
2. Contribution of assets to the partnership.
Admission by purchase of an interest from one or more of the current partners:
When an additional person may be admitted to a partnership by purchasing an interest
from one or more of the existing partners, the capital interest of the incoming partner is
obtained from current partners, and neither the total asset nor the total owner’s equity of
the business is affected. The purchase price is paid directly to the selling partners.
Payment is for partnership equity owned by the partners as individuals, and hence the
cash or other consideration paid is not recorded in the accounts of the partnership. The
only entry needed is the transfer of the proper amounts of owner’s equity from the capital
accounts of the selling partners to the capital account established for the incoming partner.
Example: assume that partners Kebede and Belaay have capital balances of Br. 50,000
each. On June 1, each sells one fifth of his respective equity to Teklay for Br. 10,000 in
cash. The exchange of cash is not a partnership transaction and thus is not recorded by
the partnership. The only entry required in the partnership accounts is as follows
Kebede, Capital ---------------------- 10,000
Belay, Capital-- ----------------------- 10,000
Teklay, Capital------------------ 20,000

Admission by Contribution of Assets: - Instead of buying an interest from the current

partners, the incoming partner may contribute assets to the partnership. In this case both
the assets and the owner’s equity of the firm are increased.
 Illustration: - Assume that X and Y are partners with capital accounts of Br. 35,000 and
Br. 25,000 respectively. On June 1, Z invests Br. 20,000 cash in the business, for which she
is to receive ownership equity of Br. 20,000. The entry to record this transaction is as
follows:
Cash 20,000
Z, Capital----------------- 20,000
With the admission of Z, the total owners’ equity of the new partnership becomes Br. 80,
0000. Revaluation of Assets: If the partnership assets are not fairly stated in terms of
current market value at the time a new partner is admitted, the accounts may be
adjusted accordingly. The net amount of the increases and decreases in asset values are
then allocated to the capital accounts of the old partners according to their income-
sharing ratio.
Illustration: Assume that in the above illustration for the X and Y partnership the balance
of the merchandise inventory account had been Br. 14,000 and the current replacement
price had been Br. 17,000. Prior to Z’s admission, the revaluation would be recorded as
follows, assuming that Donald and Gerald share net income equally.
Merchandise inventory ------------ 3,000
X, Capital------------------ 1,500
Y, Capital------------------- 1,500
Partner Bonuses
When a new partner is admitted to a partnership, the incoming partner may pay a bonus to
the existing partners for the privilege of joining the partnership. Existing partners can pay a
bonus to a new partner. This usually occurs when they need additional cash or the new
partner has exceptional or special talents & skill. The amount of any bonus paid to the
partnership is distributed among the partner capital accounts.
Bonus to old partners
Assume that on June 1 the partnership of Ashenafi and Dereje is considering admitting a new
partner, Hiwot. After the assets of the partnership has been adjusted to current market
values, the capital balance of Ashenafi is $150.000 and the capital balance of Dereje $ 30.000.
Ashenafi and Derege agree to admit Hiwot to the partnership for $ 80.000. In return, Hiwot
will receive a 25% share in both equity and partnership income or losses.
Hiwot’s equity is determined as follows:
Equity of existing partners:
Ashenafi $ 150.000
Dereje 30.000
Investment of new partner, Hiwot 80.000
Total partnership equity $ 260.000
Equity of Hiwot (25% of total) $ 65.000
Contribution of Hiwot $ 80.000
Hiwot’s equity after admission 65.000
Bonus paid to Ashenafi & Derege $ 15.000
The bonus is distributed to Ashenafi and Dereje according to their income-sharing ratio.
Assume that Ashenafi & Dereje share profits and losses in the ration of 5:1; the entry to record
the admission of Hiwot to the partnership is as follows:

June1. Cash …………………….…. 80.000

Hiwot, capital ………………………….65.000
Ashenafi, capital ………………………12.500
Derege, capital …………………………2.500
(To record admission of Hiwot and bonus to old partners)
Bonus to New partner
The new partner gets a larger share of equity than the amount invested (contributed).
Example:
Let’s say, from the preceding example, Ashenafi and Dereje agree to accept Hiwot as a partner
with a 25% interest in both the partnership’s income or loss and equity, but they require
Hiwot to only invest 20.000. Hiwot’s equity is determined as:
Equities of existing partners ($ 150.000 + $ 30.000) $ 180.000
Investment of new partner, Hiwot 20.000
Total partnership equity $ 200.000
Equity of Hiwot (25% x $200.000) $ 50.000
Bonus to new partner, (Hiwot) ($50.000-$20.000) = $ 30.000
The entry to record Hiwot’s investment is:
June 1. Cash ………………………………………..20.000
Asenafi, capital ($30.000 x 5/6) …………...25.000
Dereje, capital ($ 30.000x 1/6) ………………5.000
Hiwot, capital ……………………………. 50.000
(To record Hiwot’s admission and bonus)
B. Withdrawal of a Partner
When a partner retires or for some reason wishes to withdraw from the firm, one or more
of the remaining partners may purchase the withdrawing partner’s interest and the
business may be continued without apparent interruption. In such cases, settlement for
the purchase and sale is made between the partners as individuals, in a manner similar
to the admission of a new partner by purchase of an interest, and thus is not recorded by
the partnership. The only entry required by the partnership is a debit to the capital
account of the partner withdrawing and a credit to the capital account of the partner or
partner’s acquiring the interest.
Illustration 1: Alan is to retire/withdraw from the partnership of Theodor, Alan, and
Smith. The capital balances of the partners are as follows: Alan, Br.200, 000, Theodor, Br.
100,000; and Smith, Br.100, 000. Alan has sold his interest to Theodor for Br. 200,000.
Hence, the only entry required by the partnership to record the withdrawal of Alan is
follows:
Alan, Capital ……………………………200,000
Theodor, Capital …………………. 200,000
N.B: when a partner withdraws him/her from the partnership by selling his/her interest
to one or more of the existing partners, the capital interest of the outgoing partner is
given to the current partners purchasing the interest, and the total asset nor the total
owner’s equity of the business is affected.
However, if the settlement with the withdrawing partner is made by the partnership, the
effect is to reduce the assets and the owner’s equity of the firm. To determine the
ownership equity of the withdrawing partner, the asset accounts should be adjusted to
current market prices. The net amount of the adjustments should be divided among the
capital accounts of the partners according to the income sharing ratio. In the event that
the cash or the other available assets are insufficient to make complete payment at the
time of withdrawal, a liability account should be credited for the balance owed to the
withdrawing partner.
Illustration 2:
Alan is to retire/withdraw from the partnership of Alan, Theodor, and Smith. The capital
balances of the partners are as follows: Alan, Br. 200,000, Theodor, Br. 100,000; and Smith,
Br. 100,000. Their net income/net loss sharing ratio is 2:1:1 respectively. At the time of the
valuation of assets at their market prices, the partners agreed that the merchandise
inventory should be increased by Br. 10,500 and the allowance for doubtful accounts
should be increased by Br. 2,100.
Required: - Present entries to record;
1. The adjustment of the assets to bring them into agreement with market prices.
2. The withdrawal of Alan from the partnership if (a) Alan receives the full amount
in cash
(b) Alan agreed to accept an interest bearing note of Br. 150,000 in partial
settlement of his ownership equity and the remainder of his claim to receive in
cash.
Solution:
Merchandise inventory----------------------------- 10,500
Alan, Capital 4,200
Theodor, Capital------------------------------- 2,100
Smith, Capital 2,100
Allowance for doubtful accounts------------ 2,100
(a)Alan, Capital -------------------------- 204,200
Cash 204,200
(b) Alan, Capital ------------------------ 204,200
Notes payable------------------ 150,000
Cash 54,200

C. Death of a Partner
The death of a partner dissolves the partnership. In the absence of any contrary
agreement, the accounts should be closed as of the date of death, and the net income for
the fractional part of the year should be transferred to the capital accounts. The balance
in the capital account of the dead partner is then transferred to a liability account until
the law orders to whom should the dead capital should be given.
 4.2 Liquidation of Partnership
Liquidation is refers to the process of a wind-up of a business firm. When a partnership
goes out of business, it usually sells the assets (i.e. non cash assets). The sale of non-cash
assets is called realization. During the process of realization, any gain or loss resulted
from the sale of non-cash assets is shared among the partners based on their income
sharing agreement. As cash is realized, it is applied first to the payment of the claims of
creditors. After all liabilities have been paid, the remaining cash is distributed to the
partners, based on their ownership equities as indicated by their capital accounts.
Illustration:-
The partnership of Dawit, Alemu, and Almaz share income in a ratio of 5:3:2, after
discontinuing the ordinary business operations of their partnership and closing the
accounts, the following summary of the general ledger is prepared:
Cash Br. 11,000
Non cash assets----------------------64,000
Liabilities Br. 9,000
Dawit, Capital ---------------------- 22,000
Alemu, Capital ----------------------22,000
Almaz, Capital --------------------- 22,000
Total-------------------------------Br. 75,000 Br. 75,000
Based on these facts, accounting for the liabilities of the partnership will be illustrated
using three different selling prices for the non-cash assets.
A. Gain on Realization
Dawit, Alemu, and Almaz sell all non-cash assets for Br. 72,000, realizing a gain of Br.
8,000 (Br. 72,000 - Br. 64,000). The gain is divided among the capital accounts of the
partners in the income sharing ratio of 5:3:2. The liabilities are paid, and the remaining
cash is distributed to the partners according to the balances in their capital accounts.
A statement of partnership liquidation, which summarizes the liquidation process, is
presented hereunder:
 Dawit, Alemu, and Almaz
Statement of Partnership Liquidation
For period of xxxx
Asset Liability Capital
Cash + Non-cash + Dawit Alemu Almaz
50%) 30% 20%
Balance before realization 11,000 64,000 9,000 22,000 22,000 22,000
Sale of non-cash assets & Division of +72,000 -64,000 ------- +4,000 +2,400 +1,600
gain
Balance after realization 83,000 -0- 9,000 26,000 24,400 23,600
Payment of liabilities -9,000 ---- -9,000 ------- ------- -------
Bal. after payment of liability 74,000 -0- -0- 26,000 24,400 23,600
Distribution. Of cash to partner -74,000 ---- ---- -26,000 -24,400 -23,600
Balance -0- -0- -0- -0- -0- -0-

The entries to record the several steps in the liquidation procedure are as follows:
1. To record the sale of non-cash assets
Cash 72,000
Non cash assets------------------ 64,000
Loss & gain on realization----- 8,000
2. To record the division of gain
Loss & gain on realization --- 8,000
Dawit, Capital------------------- 4,000
Alemu, Capital------------------ 2,400
Almaz, Capital------------------ 1,600
3. To record the payment of liabilities
Liabilities 9,000
Cash 9,000
4. To record the distribution of cash to
partners
Dawit, Capital 26,000
Alemu, Capital 24,400
Almaz, Capital 23,600
Cash 74,000
 2. Loss on Realization; No Capital Deficiencies
Assume that the foregoing example, Dawit, Alemu, and Almaz dispose all of non-cash
assets for Br. 44,000, incurring a loss of Br. 20,000 (Br. 64,000 - Br. 74,000). The various steps
in the statement of partnership liquidation are presented hereunder:

Dawit, Alemu, and Almaz

Statement of Partnership Liquidation
For period of xxxx
Asset Liability Capital
Cash + Non- + Dawit Alemu Almaz
cash 50%) 30% 20%
20%
Balance before realization 11,000 64,000 9,000 22,000 22,000 22,000
Sale of non-cash assets & Division of +44,000 - -------- -10,000 -6,000 -4,000
loss 64,000
Balance after realization… 55,000 -0- 9,000 12,000 16,000 18,000
Payment of liabilities…….. -9,000 ---- -9,000 ------- ------- -------
Bal. after payment of liability 46,000 -0- -0- 12,000 16,000 18,000
Distribution. Of cash to part -46,000 ---- ---- -12,000 -16,000 -18,000
Balance -0- -0- -0- -0- -0- -0-

The entries to record the several steps in the liquidation procedure are as follows:
1. To record the sale of non-cash assets
Cash 44,000
Loss & gain on realization ------- 20,000
Non cash assets------------------ 64,000
2. To record the division of loss
Dawit, Capital------------------- 10,000
Alemu, Capital------------------ 6,000
Almaz, Capital------------------ 4,000
Loss & gain on realization------- 20,000
3. To record the payment of liabilities
Liabilities 9,000
Cash 9,000
4. To record the distribution of cash to partners
Dawit, Capital-----------------------12,000
Alemu, Capital --------------------- 16,000
Almaz, Capital --------------------- 18,000
Cash 46,000
 3. Loss on Realization; Capital Deficiency
Assume that the foregoing example, Dawit, Alemu, and Almaz dispose all of non-cash
assets for Br. 10,000, incurring a loss of Br. 54,000 (Br. 64,000 - Br. 10,000). The various steps
in the statement of partnership liquidation are presented hereunder:
Dawit, Alemu, and Almaz
Statement of Partnership Liquidation
For period of xxxx
Asset Liability Capital
Cash + Non- + Dawit Alemu Almaz
cash 50%) 30% 20%
Balance before realization 11,000 64,000 9,000 22,000 22,000 22,000
Sale of non-cash assets & Division of loss +10,000 -64,000 -------- -27,000 16,200 -10,800
Balance after realization 21,000 -0- 9,000 -5,000 5,800 11,200
Payment of liabilities -9,000 ---- -9,000 ------- ------- -------
Bal. after payment of liability 12,000 -0- -0- -5,000 5,800 11,200
Distribution. Of cash to part -12,000 ---- ---- ---- -2,800 -9,200
Balance -0- -0- -0- -5,000 3,000 2,000

The entries to record the liquidation to this point are as follows:

1. To record the sale of non-cash assets
Cash 10,000
Loss & gain on realization ------- 54,000
Non cash assets------------------ 64,000

2. To record the division of loss

Dawit, Capital------------------- 27,000
Alemu, Capital------------------ 16,200
Almaz, Capital------------------ 10,800
Loss & gain on realization----------------54,000

3. To record the payment of liabilities

Liabilities 9,000
Cash 9,000

4. To record the distribution of cash partners

Alemu, Capital ------------------- 2,800
Almaz, Capital ------------------- 9,200
Cash 12,000
N.B: The affairs of the partnership are not completely wound up until the claims among
the partners are settled. Payments to firm by the deficient partner are credited to that
partner’s capital account. Any uncollectible deficiency becomes a loss to the partnership
and is written off against the balances of the remaining partners. Finally, the cash received
 from the deficient partner is distributed to the other partners according to their
ownership claims.
Assumption 1: Dawit pays the entire amount of the Br. 5,000 deficiency to the
partnership (no loss).
The receipt of the Br. 5,000 paid by Dawit to the partnership and the distribution of the
Br. 5,000 to the partners are indicated in the following statement of partnership
liquidation.
Dawit, Alemu, and Almaz
Statement of Partnership Liquidation
For period of xxxx

Asset Liability Capital

Cash + Non-cash + Dawit Alemu Almaz
50%) 30% 20%
Balance -0- -0- -0- -5,000 3,000 2,000
Receipt of deficiency +5,000 --- -------- +5,000 - -
Balance +5,000 -0- - -0- 3,000 2,000
Distribution of cash to partner -5,000 ---- - ------- -3,000 -2,000
Balance -0- -0- -0- -0- -0- -0-

The entries to record the final settlement are as follows:

1. To record the receipt of deficiency
Cash 5,000
Dawit, Capital------------------------- 5,000
2. To record the distribution of cash to partners
Alemu, Capital 3,000
Almaz, Capital 2,000
Cash 5,000
Assumption 2: Dawit pays Br. 3,000 of the deficiency to the partnership, and the
remainder is considered to be uncollectible (Br. 2,000 loss) The receipt of the Br. 3,000 paid
by Dawit to the partnership, the division of the Br. 2,000 loss, and the distribution of the
Br. 3,000 to the partners are indicated in the following statement of partnership
liquidation.
 Dawit, Alemu, and Almaz
Statement of Partnership Liquidation
For period of xxxx
Asset Liability Capital
Cash + Non-cash + Dawit Alemu Almaz
50%) 30% 20%
Balance -0- -0- -0- -5,000 3,000 2,000
Receipt of deficiency +3,000 --- -------- +3,000 - -
Balance 3,000 -0- - -2,000 3,000 2,000
Division of loss - ---- - +2,000 -1,200 -800
Balance 3,000 -0- 1,800 1,200
Distribution of cash to partner -3,000 -1,800 -1,200

It should be noted that the Br. 2,000 loss was divided between Alemu and Almaz in their
income sharing ratio of 3:2. The entries to record the final settlement are as follows:
1. To record the receipt of part of deficiency
Cash 3,000
Dawit, Capital--------------------- 3,000
2. To record the division of loss
Alemu, Capital 1,200
Almaz, Capital 800
Dawit, Capital---------------------- 2,000
3. To record the distribution of cash to partners
Alemu, Capital 1,800
Almaz, Capital 1,200
Cash 3,000
Assumption 3: Dawit is unable to pay any part of the Br. 5,000 deficiency (5,000 loss)
The division of the Br. 5,000 loss indicated in the following statement of partnership
liquidation.
Dawit, Alemu, and Almaz
Statement of Partnership Liquidation
For period of xxxx
Asset Liability Capital
Cash + Non-cash + Dawit Alemu Almaz
50% 30% 20%
Balance -0- -0- -0- -5,000 3,000 2,000
Division of loss - ---- - +5,000 -3,000 -2,000
Final balance -0- -0- -0- -0- -0- -0-

It should be noted that the Br. 5,000 loss was divided between Alemu and Almaz in their
income sharing ratio of 3:2. The entries to record the final settlement is as follows:
1. To record the division of loss
Alemu, Capital 3,000
Almaz, Capital 2,000
Dawit, Capital---------------------- 5,000