PARTNERSHIP

● Establishment of business between two or more persons, who agree to combine their
capital and abilities. A partnership can be formed by an oral or written agreement.
● Article 1767 of the New Civil Code of the Philippines (Partnership Law)
- Partnership is a contract of two or more persons binding themselves to contribute
money, property, or industry to a common fund, with the intention of dividing the profits
among themselves.
- May be formed for the purpose of engaging in a lawful trade or business (like Twitter) or
for the practice of a profession (like your future accounting firm) to secure profits and to
divide the same among partners.
- Formation of partnership involves investment by the partners in the partnership either in
the form of cash or in the form of non-cash assets or services.

PARTNERSHIP CORPORATION

Creation By voluntary agreement of By operation of law

parties. (Consensual &
Bilateral)

Number of organizers 2 or more Not more than 15

Existence Depends upon the will of the Perpetual existence

parties

Legal Personality From the time the contract From the issuance of
begins Certificate of
Incorporation/Registration

Liability of owners May extend to private Liable only up to their capital

property contributions

Right of succession None Yes

Formal requirements:
Gen. Rule: A partnership may be constituted in any form.
Exception: The contract of partnership must appear in a public instrument whenever
1. Immovable property is contributed
2. Capital is P3,000 or more

Types of Partnership
1. General Partnership
- In a general partnership, each partner shares equally in the workload, liability, and profits
generated and paid out to the partners. All partners are actively involved in the
business's operations.
2. Limited Partnership
- Liability for debts can fall to specific partners (general partner) rather than shared
equally (i.e. general partners as opposed to limited partners are responsible without limit
for all debts and obligations of the firm).
3. Partnership at Will
- Such partnership exists on the will of the partners, ie., it can be brought to an end
whenever any of the partners gives notice of his intention to do so. This kind of
partnership is formed to conduct the lawful business for an indefinite period.
4. Partnership for Fixed Term
- Such a partnership is for a fixed period of time say 2 years, 5 years or any other
duration. The partnership comes to an end automatically at the expiry of the period,
5. Flexible Partnership
- Partnerships which are formed neither for a fixed period nor for any particular venture
are called flexible partnerships.

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Types of Partners
1. Capitalist Partner
- One who became a partner in a partnership by contributing money of property.
2. Industrial Partner
- One who became a partner in a partnership by offering his or her expertise or service as
a contribution.
Note: If a partner can also contribute both cash and industry, he or she will be called
capitalist-industrial partner.
3. Active Partner
- One who contributes capital to the business and takes active part in its management.
4. Dormant Partner
- One who contributes only capital to the business, but does not take part in its
management. He is also called dormant partner or financing partner.
5. Nominal Partner
- Does not contribute capital neither does he take active part in the management. His
contribution in a partnership is limited to allowing the other partners to make use of his
name.
6. Partner by Estoppel
- Is not a partner of the firm but by his words and conduct he leads the outsiders to believe
that he is also a partner of the firm. Usually this arises, when the outgoing partner fails to
give notice about his retirement.
7. General Partner
- One whose liability to third persons extends to his separate property.
8. Limited Partner
- One whose liability to third persons is limited only to the extent of his capital contribution
to the partnership.
9. Secret Partner
- Is actually a partner of the firm but he does not hold out to the public as a partner of the
firm but keeps his existence as secret.
10. Silent Partner
- One who does not participate in the management of the partnership affairs.

Stages in the Life of the Partnership

1. Formation - the first-time creation of the partnership
2. Operation - this is the reason why a partnership is formed, to operate and earn "profit"
3. Dissolution - changes in the partnership agreement or relations among the partners
4. Liquidation - realization of the assets of the partnership and settlement of partnership
liabilities

Advantages and Disadvantages of a Partnership

Advantages: Disadvantages:
1. Ease of formation 1. Easily dissolved/ limited life
2. Shared responsibility of running the 2. Unlimited liability
business 3. Conflict among partners
3. Flexibility in decision making 4. Lesser capital compared to a corporation
4. Greater capital compared to sole 5. A partnership (other than a general
proprietorship professional partnership) is taxed like a
5. Relative lack of regulation by the corporation.
government as compared to corporations.

How is partnership formed:

● Created by agreement (oral or written)
● Partners will contribute money, property, or industry.
● Individual + Individual
● Individual + Sole Proprietorship
● Sole Proprietorship + Sole Proprietorship

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PARTNERSHIP FORMATION
● A partnership may be form by just meeting of the minds or verbal agreement.

● Primary formation issues include:

1. Valuation of contribution
2. Re-alignment of contribution with partnership agreement

● If the property (e.g. land) contributed was mortgaged and the partners decided to
assume the mortgage, this will be recorded and the entire partnership will be obliged to
pay the said liability.

Note: any liability attached to the asset contributed will only be recorded if it was assumed by
the partnership.

Note:
Overstated or Overvalued (if specific) - Minus
Understated or Undervalued (if specific) - Add
Under-depreciated - Minus
Over-depreciated- Add
Decrease/Increase by - Add “as is”
Decrease/Increase to - Add (subtract the beginning bal. - ending bal.)

Valuation of Partners Contribution (what amount will be each contribution should be

recorded)
A. Cash - at Face Value
B. Non-cash Assets - in the following priority:
1. Agreed value
2. Fair market value
3. Carrying Value
4. Historical Value

Appraised Value xx
Less: Book Value xx
Add to the unadjusted capital bal. xx

C. Liabilities related to non-cash must be assumed by the partnership

Note: The value that should be recorded for the property should be an agreed value, this means
whatever amount that has been agreed upon by the partners should be recorded. In the event
that no value has been agreed upon, use the next priority, which is Fair market value. (if again
no fair value is available, use the next priority, and so on)

D. Industry - no valuation at all (no one can assess the monetary value of a person's talent or
skill)

● Invested Capital or Contributed Capital = Assets contributed - Liabilities assumed by the

partnership
● Capital Credit = agreed capital at the date of formation
- Partner's capital in the partnership upon formation
- Maybe Equal to IC/CC
- Maybe > or < to IC/CC
- Bonus to partner/s will be recorded

Accounting for Partnership Formation (Step-by-Step Process)

1. Identify the Assets and Liabilities (if any) contributed by each partner. Consider the
proper valuation of the contributions.

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 2. Compute the Invested Capital or Contributed Capital
3. Identify if there is an agreement as to the Capital of each partner after formation.
(Capital Credit or Agreed Capital)
4. Compute the Bonus to partner/s, if any.
5. Prepare the entry or entries in the books of the partnership to record the formation.

Problems that will incounter

● Initial contribution equal to the partners capital balances
● Additional Investment / Withdrawal
● Bonus Method
● Revaluation (down) Method
● Cash settlement between partners (no journal entry)

Illustration 1:

Raven, Lito, Jurex, and Von formed a partnership. Raven contributed P30,000 cash. Lito
contributed P40,000 cash and inventories valued at P20,000. Jurex contributed a building with a
cost of 350,000. The fair value of the building was 400,000 but the partners agreed value was P
380,000. In addition, a P100,000 mortgage was attached to the building. It was agreed that it
will be assumed by the partnership. Lastly, Von will contribute his special skills and talents in
managing the partnership.
Profit or loss ratio is 2:3:4:1

To record the contributions of capitalist partners - Raven, Lito, and Jurex:

Cash 30,000
Raven, Capital 30,000
Cash 40,000
Inventories 20,000
Lito, Capital 60,000

Building 380,000
Mortgage, Payable 100,000
Jurex, Capital 280,000

To record the contribution of industrial partner - Von:

Von is admitted in the partnership as an industrial partner with 10% share on the profit only.

Illustration 2:
The partnership of Rhodsay and Blessah was formed on June 1, 2022. On this date, Rhodsay
invested P50,000 cash and an office equipment valued at P87,500. Blessah invested P40,000
cash; inventories valued at P60,000 and building valued at P170,000 subject to a mortgage of
P20,000 which the partnership will assume.
In addition, the partnership also provides that Rhodsay and Blessah will share profits and losses
in the ratio of 4:6, respectively. The agreement further provides that both Rhodsay and Blessah
should initially have an equal interest in the partnership capital.

Assuming the use of the transfer of capital or bonus method, how much is the amount of
bonus to (from) Blessah?

Suggested solution:
TIC TAC

Rhodsay 137,500 56,250 193,750 50%

Blessah 250,000 (56,250) 193,750 50%

387,500 387,500

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TIC - Total Invested Capital (Partner’s investment)
TAC - Total Agreed Capital (Total capital agreed by the partners)

Note:
● Under the Bonus Method - TIC = TAC.
● Agreed capital = TAC × Partner's interest
● Blessah transfers P56,250 of her capital to Rhodsay in order to conform to their agreed
capital ratio of 50:50. (bonus is simply a transfer of capital from one partner to another
partner)

Journal entries:
Cash 50,000
Office Equipment 87,500
Rhodsay, Capital 137,500

40,000
Cash 60,000
Inventories 170,000
Building 20,000
Mortgage, Payable 250,000
Blessah

56,250
Blessah, Capital
56,250
Rhodsay, Capital

Illustration 3:
Nicole admits Niña as a partner in business. Accounts in the ledger for Nicole on October 30,
2021, just before the admission of Niña, show the following balances:

Cash. P6,800
Accounts receivable 14,200
Merchandise inventory 20,000
Accounts payable 8,000
It is agreed that for purposes of establishing Nicole's interest, the following adjustments shall be
made:

a. An allowance for doubtful accounts of 30% of accounts receivable is to be established.

b. Nina will obtain ⅓ interest in the partnership.
c. Prepaid rent of 600 and accrued salaries expenses of 800 are to be recognized

Compute for:
a. Nicole's adjusted capital before the admission of Niña.
b. The amount of cash investment by Niña.

Suggested solution:

Unadjusted capital P33,000

Allowance for doubtful accounts (426) (P14,200 x 3%)
Merchandise inventory 3,000 (P23,000 - 20,000)
Prepaid rent 600
Accrued salaries expense (800)
Adjusted Capital P35,374

Note:
● In determining the unadjusted capital, just use the basic accounting equation or A-L = C.
● The adjustments shown are the effect to the capital (assets have a direct effect to the
capital while liabilities have indirect effect to the capital).

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Journal entries:
Merchandise Inventory
Prepaid Rent
Allowance for Doubtful Accounts
Accrued Salaries Expense
Nicole, Capital

b. P35,374÷2/3 = P53,061 x 1/3 = P17,687

Note:
● Since Niña wants to obtain a 1/3 interest in the partnership, Nicole's interest would be
2/3 (must equal to 100%).
● The capital of Nicole which is P35,374 represents 2/3 of the total agreed capital, hence,
to get the 100%, divide it by 2/3.
● Then, multiply the total agreed capital by the capital interest of Niña, which is 1/3, to get
her agreed capital or cash to be invested.

Journal Entries
Cash 17,687
Nina,Capital 17,687

NN Partnership
Balance Sheet
As of October 30, 2021

Assets Liabilities & Equity

Cash P 24,487 Accounts Payable P 8,000
Accounts Receivable 14,000 Accrued Salaries Expense 800
Allowance for Doubtful Accounts (426)
Merchandise Inventory 23,000 Nicole, Capital 35,374
Prepaid Rent 600 Nina, Capital 17,687
Total Assets P61,861 P61,861

PARTNERSHIP OPERATIONS
A partnership operates like any other forms of profit-oriented business. It manufactures,
sells, produces or provides services for a profit. The accounting process of a
partnership's transactions is basically like the accounting process for sole
proprietorships. Accounting for routine transactions like purchases and sales of
merchandise, cash receipts and cash disbursements is the same in a partnership as in a
sole proprietorship and corporate form of business organization.

Division of Profits and Losses?

The partnership agreement should include how the net income or loss will be allocated to
the partners. The profits and losses shall be distributed in conformity with the agreement of the
partners. If only the share of each partner in the profits had been agreed upon, the share of
each in the losses shall be in the same proportion. Article 1797 of the Law on Partnerships
stated the following regarding distribution of profits and losses among partners:
● The losses and profits shall be distributed in conformity with the agreement.
● If only the share of each partner has been agreed upon, the share of each partner 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 profits in proportion to his capital.

The partners should agree upon an allocation method when they form the partnership, the
partners can divide income or loss in any way, the priorities are:

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 1. Agreed upon percentages or ratios (P/L ratio): Each partner receives a previously
agreed upon percentage.
2. Percentage of capital: Each partner receives a percentage of capital calculated as
Partner Capital/ Total capital for all partners.
3. Salaries, Interest, Bonuses to partners agreed upon percent: Since owners are not
employees and typically do not get paychecks, they should still be compensated for work
they do for the business. In this method, we start with net income and give salaries out to
the partners, then we calculate interest amounts based on their investments, and any
remainder is allocated using set percentages.
Note: Bonus Formula = % (Net Income - Salaries - Interest - Bonus)
If before - ignore S, I, B
If after - reduction
4. After the allocating the above items, any remaining profit or losses is allocated based on
the stipulated P/L ratio.

Distribution of Profits/Losses
A. As to Capitalist Partner:
Distribution of Profits Distribution of Losses

1. Partner’s agreement 1. Partner’s agreement

2. In proportion to their capital 2. Distribution of losses - no agreement

contribution. Distribution of profits - stipulated in the
AOP

According to the profit ratio.

3. In proportion to their capital

contribution.

Note: The partner's agreement as to distribution of profits or losses can be through a certain
percentage, ratio, or fraction (must equal to 100%)

B. As to Industrial Partner:

Distribution of Profits Distribution of Losses

1. Partner’s agreement 1. Partner’s agreement

2. Just and equitable share. 2. If no agreement, NOT LIABLE for losses.

For equity of distribution of net income/loss, the following allowances are normally
given:

a. Salaries - time rendered by the partners to the partnership

Note: This is not a salary expense, only a way of dividing profit.

b. Interest - difference in the capital contribution to the partnership

Note:
A percentage will be multiplied to the capital of a partner and will serve as an incentive for being
a capitalist partner.
Basis:
● Original Capital (Formation)
● Beginning capital
● Ending capital
● Average (If Silent, use Weighted average)
a. Simple average capital = beg. + ending capital/2
b. Weighted average capital

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Note: not recorded as an expense of the partnership.

c. Bonus - given only if the partnership realized a PROFIT

if net loss - no bonus
Note: This is usually a percentage of profit and serves as an incentive to the managing
partner.

Steps in distribution of Profit and Losses

1. Covered period of operations
2. Identify the agreement for division of profits/losses
3. Prepare a schedule of distribution of profits/losses
4. Prepare Journal Entry
5. Compute the capital balance of each partners at the end of the year

Partners Capital Account

● Permanent withdrawals ● Original Investment

● Share in Net loss ● Additional Investment
● Share in Net Income

Illustration:
Janica, Melyn, and Dana formed a partnership on January 1, 2022 and contributed P150,000,
P200,000, and P250,000, respectively. Their articles of co-partnership provides that the
operating income will be shared among the partners as follows: as monthly salary, P2,000 for
Janica, P1,500 for Melyn, and P1,000 for Dana; interest of 12% on the weighted average capital
during 2022 of the three partners; 10% bonus to Dana based on net income after salaries,
interest, and bonus; and the remainder in the ratio of 2:4:4.

Melyn contributed additional capital of P20,000 on March 31 and made a drawing of P12,000 on
November 1; and Dana made a drawing of P30,000 on December 1.

How much is the share of each partner in the partnership profit for the year ending
December 31, 2022?

Suggested solution:
Janica Melyn Dana Total

Net income P176,000

(a)Salaries P24,000 P18,000 P12,000 (54,000)

(b) Interest 19,500 25,560 29,700 (74,760)

(c) Bonus - - 4,295 (4,295)

(d) Remainder 8,589 17,178 17,178

Total share P52,089 P60,738 P63,173

(a) if a monthly salary was given, multiply it to the number of months from the date of start of
partnership operations up to the reporting date (usually on December 31).

Note: In the problem, multiply the monthly salary to each partner by 12 months Jan. 1 - Dec.
31).

(b) Since the interest is computed by 12% of their Weighted Average Capital (WAC), we will
compute first the WAC of partner Janica as an example:

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Jan. 1 150,000 x 12/12 = 150.000
Jul. 1 30,000 x 6/12 = 15,000
Oct. 1 10,000 x3/12 = (2,500)
WAC 162.500 × 12% = P19,500

Note:
● the fraction represents the number of months outstanding from the date of transaction up
to December 31. For example, on Jan. 1, the partner invested P150,000 to the partner,
from Jan.
1 up to Dec. 31, it is 12 months right? Hence multiply it by 12/12. For Jul. 1 investment,
multiply it by 6/12 since it is 6 months outstanding Jul. 1 - Dec. 31) while for Oct. 1
drawings, multiply it by 3/12 since it is 3 months outstanding (Oct. 1 - Dec. 31).
● Investments are added while drawings are deducted.
● After computing the WAG, multiply it to the given interest rate to get the partner's
interest.
● Assuming the partnership started on April 1, your P19,500 interest is to be multiplied by
9/12 which is the interest for 9 months (Apr. 1 - Dec. 31)

Additional notes:
If the interest is based on a certain percentage of WAC, consider only the following:
● Beginning capital
● Additional investment
● Permanent withdrawal (Temporary withdrawal doesn't affect the computation of the
WAC but both of them are deducted in computing the ENDING CAPITAL BALANCE)

(c) The computation of bonus to Dana is as follows:

Bonus = 10% (Net income - Salaries - Interest - Bonus)

B = 10% (176,000 - 54,000 - 74,760 - B)
B = 10% (47.240 - B)
B = 4,724 - .10B
1.10 B = 4,724
1.10. 1.10
B= 4,295

Note: "after" - deduct; "before" - ignore (e.g. net income is 10% of bonus after salaries but
before bonus - hence, bonus is only 10% of net income after deducting the salaries).

(d) The remainder P42,945 was allocated to each partner using their P/L ratio.

Journal entry:

Income and expense summary 176,000

Janica, Capital 52,089
Melyn, Capital 60,738
Dana, Capital 63,173

Computation of Partner's Equity Balance:

Beginning capital xx
Additional investments xx
Share in net income xx
Share in net loss (xx)
Drawings (xx)
Ending capital xx

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PARTNERSHIP DISSOLUTION

Dissolution of partnership is the change in the relation of the partners caused by any partner
ceasing to be associated in the carrying on as distinguished from the winding up of the
business. On dissolution, the partnership is not terminated, but continues until the winding up or
partnership affairs is completed. The partnership may be dissolved by agreement among the
partners or by operation of law. (Article 1828 - 1830 of Law on Partnerships).

● Termination - is the time when all partnership affairs are completed and is the end of the
partnership life.
● Winding up - is the process of settling the business or partnership affairs after
dissolution.

When partnership dissolution occurs, a new accounting entity is formed. The old partnership
should first adjust its books so that all accounts are properly stated at the date of dissolution. In
general, the accounting for partnership dissolution covers the following primary causes:
1. Admission of a new partner
2. Withdrawal, retirement, or death of a partner
3. Insolvency of a partnership or a partner
4. Incorporation of partner

General Rule
capital balances should be adjusted as to:
1. Assets/Liabilities revaluation or adjustments
2. Share in profit or losses
3. Correction of errors
4. Additional Investment and/or withdrawals

ADMISSION OF A NEW PARTNER

A. Step 1: Identify the type of admission of a new partner
(1) Admission by purchase
(2) Admission by investment
Note:
1. Bonus
- TAC = TIC
- Capital of old or new partner/s increase
2. Goodwill
- TAC > TIC
- Capital of old or new partner/s increase
- Capital of old/new partner/s may decrease and increase if both bonus and
goodwill arises
3. Revaluation

B. Step 2:
(1) Admission by purchase
Compute the capital to be transferred from the selling partner to the buying partner.
Then, prepare the entry to record the admission.

(2) Admission by investment

Identify the amount invested or amount contributed. Then, proceed to step 3.

C. Step 3: Identify the total agreed capital of the partnership after admission

D. Step 4: Compute if there is bonus or goodwill

E. Step 5: Prepare the entry to record the admission

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 A. Admission of a new partner
- Dissolution doesn't only mean a partner will go out of the partnership, if a new partner is
admitted, dissolution also occurs. We call this as admission of a new partner by:

1. Purchase of Capital Interest

● the new partner purchases a certain percentage of the selling partner/s capital interest.

Illustration 1:
Presented below is the condensed balance sheet of the partnership of Kevin, Kit, and Kenneth
who share profits and losses in the ratio of 6:3:1, respectively:

Cash P85,000 Liabilities P80,000

Other Assets 415,000 Kevin, Capital 252,000
Kit, Capital 126,000
———— Kenneth, Capital 42,000
Total P500,000 Total P500,000

The partners agreed to sell KT 20% of their respective capital and profit and loss interest for a
total payment of P90,000. The payment of KT is to be made directly to the individual partners.

What is the capital balances of each partner immediately after the admission of KT?

Suggested solution:

TIC TAC

Kevin 252,000 20% (50,400) 201,600

Kit 126,000 20% (25,200) 100,800

Kenneth 42,000 20% (8,400) 33,600

KT - 84,000 84,000

420,000 420,000

TIC - Total Invested Capital (Old partner's capital + New partner's investment)
TAC - Total Agreed Capital (Total capital agreed by the partners)

Note:
● Admission by purchase of interest is a personal transaction between the new partner
and the selling partner/s.
● No cash nor gain/loss will be recorded in the partnership books.
● Only the interest purchased is to be recorded in the partnership books (it is simply a
transfer of capital).
● Interest purchased = Selling partner's equity × Ownership interest purchased

Journal Entries:
Kevin, Capital 50,400
Kit, Capital 25,200
Kenneth, Capital 8,400
KT, Capital 84,000

Problem 2
Joy and Sheila are partners with capital balances of 600,000 and 900,000, respectively, and
share profits equally. They invited Cherry to join the partnership in preparation for expanded
business operations by the middle of the current year. Cherry purchases ¼ of Joy interest for
450,000. Prior to her admission, the partners discovered that the merchandise inventory is
understated by 150,000 and decided to revalue the asset.

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 Joy Sheila Cherry

Beg. bal 600,000 900,000

Asset Revaluation 75,000 75,000

End. Bal 675,000 975,000

Purchase of Interest (168,750) 168,750

Balance after 506,250 975,000 168,750

admission

Journal Entry
Inventory 150,000
Joy, Capital 75,000
Sheila, Capital 75,000

2. Investment of Assets
• the new partner invests or contributes asset into the partnership

Illustration 2:

Shag and Kobe are partners sharing profits and losses in the ratio of 6:4 respectively. The
capital investments of Shag and Kobe are as follows; Shaq - P300,000; and Kobe - P200,000.
The partners decided to admit Jordan as a new partner. Jordan invests P100,000 for a 1/5
interest in an agreed total capitalization of P600,000.

What is the capital balances of each partner immediately after the admission of Jordan?

Suggested solution:
TIC Bonus TAC

Shaq 300,000 (12,000) 288,000

Kobe 200,000 (8,000) 192,000

Jordan 100,000 20,000 120,000 ⅕

600,000 600,000

*Multiply the TAC by the fraction of interest of the new partner to get the capital credit of the new
partner (P600,000 × 1/5 = P120,000)

Journal entries:
(1) Cash 100,000
Jordan, Capital 100,000

(2) Shaq, Capital 12,000

Kobe, Capital 8,000
Jordan, Capital 20,000

Problem 2: Jordan invest 200,000 for ⅕ interest in an agreed capitalization of 750,000. They
share profits and losses in proportion to their capital ratio.

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 TIC Revaluation TAC

Shaq 300,000 60,000 360,000

Kobe 200,000 40,000 240,000

Jordan 200,000 (50,000) 150,000 ⅕

700,000 50,000 750,000

Journal Entry
(a) Investment
Cash 200,000
Jordan, Capital 200,000

(b) Revaluation
Assets 50,000
Jordan, Capital 50,000
Shaq, Capital 60,000
Kobe, Capital 40,000

Problem 3: Jordan invests 400,000 for a 40% interest in the capital of the film and if goodwill
and bonus is to be recorded.

TIC Bonus TAC

Shaq 300,000 (30,000) 270,000

Kobe 200,000 (20,000) 180,000

Jordan 250,000 50,000 300,000 40%

750,000 50,000 750,000

Goodwill

TIC Goodwill TAC

Shaq 300,000 375,000

Kobe 200,000 250,000

Jordan 250,000 166,667 416,667 40%

750,000 166,667 1,041,667

Journal Entry
(a) Investment
Cash 250,000
Jordan, Capital 250,000

(b) Goodwill
Goodwill 166,667
Jordan, Capital 166,667

How to compute TAC?

1. Divide the capital of the old partners with their capital ratio
625,000/60% = 1,041,667
2. Divide the capital of the new partner with the capital ratio

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 250,000/40% = 625,000
3. Choose which one is higher

RETIREMENT/WITHDRAWAL OF A PARTNER INVOLVING PARTNERSHIP'S ASSETS

Cash P 80,000 Liabilities P 24,000

Non-cash Assets 664,000 Domingo, Loan 36,000
Domingo, Capital 168,000
Roque, Capital 156,000
————— Ballada, Capital 360,000
Total P 744,000 Total P 744,00

Domingo has decided to retire from the partnership on October 31, 2021. Partners agreed to
adjust the non-cash assets to their fair market value of P784,000. The partnership profit on
October 31, 2021 is P160,000. Domingo will be paid P276,800 for his partnership interest
inclusive of his loan which is to be paid in full. Their profit and loss ratio is 3:4:3 to Domingo,
Roque, and Ballada, respectively.

Using the bonus approach, what will be the balance of Roque's capital account after the
retirement of Domingo?

Suggested solution:
Domingo Roque Ballada

Capital balance 168,000 156,000 360,000

Increase in FV of NCA 36,000 48,000 36,000

Share in net income 48,000 64,000 48,000

Adjusted capital balance 252,000 268,000 444,000

Loan to Domingo 36,000

Total capital interest 288,000

Cash paid to Domingo 276,800

Bonus from Domingo 11,200 6,400 4,800

Total capital balance 274,400 448,800

*Increase of FV of NCA = P784,000 - P664,000 = P120,000 (allocate using P/L ratio)

Note:
● To account for retirement, the capital should be updated first by the increase/decrease of
the value of the partnership assets, share in net income/loss, and any loan to/from
partner.
● Under the bonus approach:
If Cash Payment > Total Interest = Bonus to Retiring Partner
If Cash Payment < Total Interest = Bonus from Retiring Partner

Journal entries:
(1) Non-cash Assets 120,000
Domingo, Capital 36,000
48,000
Roque, Capital
36,000
Ballada, Capital

(2) Income and expense summary 160,000

14
 Domingo, Capital 48,000
Roque, Capital 64,000
Ballada, Capital 48,000

(3) Domingo, Capital 252,00

Domingo, Loan 36,000
Cash 276,800
Roque, Capital 6,400
Ballada, Capital 4,800

Problem 1
On June 30, 2021, the balance sheet for the Atom, Jen, Joce partnership together with their
respective P/L ratio 20:40:40 was as follows:

Asset, at cost. 180,000 Atom 42,000

Jen 39,000
Joce 90,000
Atom, loan 9,0000

Atom has decided to retire from the partnership. By mutual agreement, the assets are to be
revalued to their current value of 216,000 and the partnership is to pay Atom 61,200 for his
partnership interest, including his loan, which is to be repaid in full.

(a) Only Atom’s share of the goodwill is recorded

TCC Revaluation Adjusted Loan, Total Interest

Capital Payable

Atom 42,000 7,200 49,200 9,000 58,200

Jen 39,000 14,400 53,400

Joce 90,000 14,000 104,400

Total Interest 58,200

Retirement Price 61,200
3,000

Journal Entry
Assets 36,000
Atom, Capital 7,200
Jen, Capital 14,400
Joce, Capital 14,400

Atom, Capital 49,200

Atom, loan 9,000
Goodwill 3,000
Cash 61,200

(b) If bonus is used:

Adjusted Atom, loan Total Interest Bonus TAC

Capital

Atom 49,200 9,000 58,200 3,000

15
 Jen 53,400 (1,500) 51,900

Joce 104,400 (1,500) 102,900

Total Interest 58,200
Retirement Price 61,200
3,000

Journal Entry
(a) Revaluation
Asset 36,000
A, Capital 7,200
Jen, Capital 14,400
Joce, Capital 14,000

(b) Bonus
Jen, Capital 1,500
Joce, Capital 1,500
Atom, Capital 3,000

(c)Retirement
Atom, Capital 49,200
Atom, loan 9,000
Bonus 3,000
Cash 61,200

(c)All implied goodwill is recorded

Total Goodwill = 3,000/20% = 15,000

20% = 3,000
40% = 6,000
40% = 6,000

Journal entries
Atom, Capital 49,2000
Loan, Payable 9,000
Goodwill 15,000
Cash 61,200
Jennifer, Capital 6,000
Jocelyn, Capital. 6,000

PARTNERSHIP LIQUIDATION
- also referred to as "winding up", is the process by which a company's assets are
liquidated and the company closed, or deregistered.
- Termination of operations of Partnership.

Statement of liquidation
- A statement of Liquidation is prepared to guide and to make a summary of the lieuidation
process.
- It is the basis of the journal entries made to record the liquidation.
- It shows the conversion of assets into cash, the allocation of sting or losses to the
partners, and the distribution of cash to creditors and partners.

Methods of Liquidation
1. Lump-Sum
- A simple partnership liquidation (lump-sum liquidation) is a conversion of all partnership
assets into cash within a very short time, creditors are paid, and a single distribution of
cash to partners in final settlement of the partnership’s affairs.

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2. Installment
- Installment liquidation means we will schedule the sale of the assets and when cash is
available, we distribute them to the creditors and owners.
- liquidation in which all the assets of the partnership are converted into cash over a
longer period of time, outside creditors are paid, and periodic payments are made to the
partners for their capital interests.

Note: These two methods only differ on the timing or manner of cash payment to the creditors
and owners.

Steps in Preparing Partnership Liquidation Table

a. Realization of the NON-CASH ASSETS (e.g. Accounts Receivable, Inventory and PPE
- to convert all assets into cash by (selling them or collecting them) so we can pay the
interested parties.
b. Payment of liabilities
- creditors are the first priority in receiving the cash payments.
c. Settlement of partners' interests in the partnership
- distribution of any remaining cash to the partners

STEPS FOR LUMP-SUM LIQUIDATION OF PARTNERSHIP

1. Adjust the capital balance - close all nominal or temporary accounts
2. Sale of Non-cash Assets - Identify the book value and selling price; compute the gain
or loss from sale.
3. Liquidation Expenses - Identify if liquidation expenses were incurred and paid; allocate
to partners based on P/L
4. Capital Deficiency - Eliminate capital deficiency; consider loan payable, solvent, or
insolvent partner/s
i. Apply the Right of offset, if there is a payable to partner (check if the
payable to partner is sufficient or not)
● If sufficient, no problem, fully apply right of offset
● If not sufficient, identify if the partner is solvent or insolvent
ii. If solvent, let the partner make additional cash investment
iii. If insolvent, the efficiency will be absorb by other partners (deduction from
the capital of other partners with no deficiency), using P/L ratio.

5. Liabilities
a. Outside Creditors
b. Partner/s
Note: Payable to - Partnership loan to partner
Payable from - Partner loan from partnership
6. Cash Distribution to partners - Distribute cash to partners (based on the capital
balance in the statement of liquidation; not based on P/L may include loans.

TRANSACTION Effect to Capital

Sale or realization of Assets Increase

a. Gain on sale Decrease
b. Loss on sale

Payment of liquidation expenses Decrease

Payment of liabilities to outside creditors -

Absorption of capital deficiency Decrease

Final cash distribution to partners Decrease

Capital Deficient Partner
● Negative Capital Balance

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Three remedies to eliminate the deficiency:
(1) offset a loan made by the partnership from the partner.
(2) make an additional investment (only if the deficient partner is solvent)
(3) absorption of the negative amount by other partners with positive capital.

Note: If offset is not enough, next make an investment. If none of these are possible, the
negative amount will be absorbed by the other partners with positive capital.

Illustration 1:

Jamie, Gordon, and Roger (IGR Partnership) are in the process of liquidating their partnership
and their account balances as of October 31, 2022 are as follows:

Cash P 21,000
Non-cash Assets 120,000
Liabilities P 40,000
Jamie, Loan 2,000
Jamie, Capital 10,000
Gordon, Capital 35,000
Roger, Capital 54,000

The profit and loss sharing ratio has been 2:3:5 between Jamie, Gordon, and Roger,
respectively. The partnership realized P50,000 from the sale of the non-cash assets and that
Jamie had personal assets of P3,000 and personal liabilities of P2,000.

JGR Partnership
Statement of Liquidation
October 31, 2022

Cash Non-cash Liabilities Jamie, Jamie, Gordon, Roger,

Assets Loan Capital Capital Capital

Balances 21,000 120,000 40,000 2,000 10,000 35,000 54,000

Proceeds 50,000 (120,000) (14,000) (21,000 (35,000)

from sale )

Balances 71,000 0 40,000 2,000 (4,000) 14,000 19,000

Payment of (40,000) (40,000)

Liabilities

Balances 31,000 0 0 2,000 (4,000) 14,000 19,000

Offset of (2,000) 2,000

loan

Balances 31,000 0 0 0 (2,000) 14,000 19,000

Additional 1,000 1,000

investment

Balances 32,000 0 0 0 (1,000) 14,000 19,000

Absorption 1,000 (375) (625)

Balances 32,000 0 0 0 0 13,625 18,375

Payment to (32,000) (13,625) (18,375)

partners

Balances 0 0 0 0 0 0 0

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Guide:
(a) The non-cash assets worth P120,000 was sold for P50,000 thus incurring a loss of P70,000.
Divide this loss using the P/L ratio and deduct the shared loss to each partner's capital.
Note: Always check the balances if it follows the basic accounting equation A = L + C (Assets
are divided into two; cash and non-cash assets, followed by Liability and Capital; Liabilities,
Loan from Jamie, and the capital of each partner.

Journal entry:
Cash 50,000
Jamie, Capital 14,000
Gordon, Capital 21,000
Roger, Capital 35,000
Non-cash assets 120,000

(b) Payment of the liabilities should be made in full. Deduct the liability and cash with the same
amount which is taken from the liability column.

Journal entry:
Liabilities 40,000
Cash 40,000

(c) Since the capital of Jamie is negative, we will use the first remedy to eliminate the deficiency
which is the right of offset. Deduct the whole P2,000 from the loan and add it to the negative
capital. Our goal here is to make it zero balance. If the loan is already enough to eliminate the
negative balance, add only the amount needed,

Note: A negative capital means the partner will pay to the partnership. Why would the partner
pay if he has something (the loan) to collect from the partnership? I pay you partnership for my
negative capital and you pay me for the loan. Just offset.

Journal Entry:
Jamie, Loan 2,000
Jamie, Capital 2,000

(d) After the offset, there is still a negative balance, next go to the personal capital of the partner.
From the given, Jamie has excess personal asset of 1,000 (asset P3,000 less liability P2,000).
Since this is an investment, cash will be added by P1,000 and negative capital will be added
also by P1,000.

Note: If the additional investment is already enough to eliminate the negative balance, add only
the amount needed.

Journal entry:
Cash 1,000
Jamie, Capital 1,000

(e) Last remedy to remove the negative capital is to let it absorbed by the remaining partners
with positive capital. To absorb, add the P1,000(remaining negative capital) to the capital of
Jamie to make it zero. Then, divide this amount using the remaining P/L ratio and deduct it to
the other partner's capital. (in short, you will get the amount from the positive and add it to the
negative make it zero).

Journal entry:
Gordon, Capital 375
Roger, Capital 625
Jamie, Capital 1,000

(f) Last is payment of remaining cash to the partners. If you have done correctly the steps
above, cash is equal to the capital of the other partner.

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Journal entry:
Gordon, Capital 13,625
Roger, Capital 18,375
Cash 32,000

Illustration 2:

Alba, Bautista, and Castro decided to dissolve and liquidate their partnership on Dec. 31, 2021.
On this date, the statement of financial position is as follows:

Cash 40,000 A/P 70,000

Equipment 200,000 Loan Payable, to Alba 20,000
Loan Payable, to Castro 10,000
Alba, Capital (50%) 40,000
Bautista, Capital (30%) 50,000
Castro, Capital (20%) 50,000

(a.) The equipment was sold for 30,000 and all partners are solvent
(b.) The equipment was sold for 30,000 and all partners are insolvent

(a.) Cash Non- A/P A/P A/P to Alba, Bautista, Castro,

Cash to Castro Capital Capital Capital
Assets Alba (50%) (30%) (20%)

Balances 40,000 200,000 70,000 20,000 10,000 40,000 50,000 50,000

Proceeds 30,000 (200k) (85k) (51k) (34k)

from sale

Balances 70,000 0 (45k) (1,000) 16,000

Offset of (20k) 20k

loan

Balances (25k) (1,000) 16,000

Add. 26,000 25k 1,000

Invest.

Balances 96,000 0 0 16,000

Payment (70k) (70k)

to A/P

Payment (10k) (10k)

to
partners

Balances 16,000

Payment (16,000) (16,000)

to
partners

Balances 0 0 0 0 0 0 0

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(b.) Cash Non- A/P A/P A/P to Alba, Bautista, Castro,
Cash to Castro Capital Capital Capital
Assets Alba (50%) (30%) (20%)

Balances 40,000 200,000 70,000 20,000 10,000 40,000 50,000 50,000

Proceeds 30,000 (200k) (85k) (51k) (34k)

from sale

Balances 70,000 0 (45k) (1,000) 16,000

Offset of (20k) 20k

loan

Balances (25k) (1,000) 16,000

Absorptio 25k 1,000 (26,000)

n of
Castro.

Balances 0 0 (10,000)

Right of (10k) 10,000

offset

Balances 0 0 0

Payment (70k) (70k)

to A/P

Balances 0

Payment
to
partners

Balances 0 0 0 0 0 0 0

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