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ADVANCED FINANCIAL ACCOUNTING AND REPORTING

Partnership Accounting

PARTNERSHIP FORMATION

Problem 1:
Sergio admits Andres to a partnership interest in his business. Accounts in the ledger of Sergio on December 31, 2021,
before Andres’ admission, show the following:

Debit Credit
Cash P100,000
Accounts receivable 75,000
Inventory 80,000
Accounts payable P76,500
Sergio, Capital 178,500
255,000 255,000

It is agreed that for the purpose of establishing the interest of Sergio, the following adjustments shall be made:
(1) An allowance for doubtful accounts must be established at 10% of accounts receivable.
(2) The inventory is understated by P32,000.
(3) Prepaid expenses of P40,000 and accrued expenses of P25,000 are to be recognized.

REQUIRED:
1. How much is the adjusted capital of Sergio prior to Andres’ admission?
2. How much cash shall Andres invest to acquire a one-third interest in the partnership?
3. Assuming Andres is to invest an equipment with carrying value and fair value of P30,000 and P37,500, respectively.
How much cash shall Andres invest in addition to the equipment to secure a 20% interest in the partnership?

Assume Andres is to invest a building with carrying value, fair value and an agreed value of P90,000, P100,000 and P120,000,
respectively. The building is subject to real mortgage at PCI Bank amounting to P50,000. How much shall be credited to Andres’
capital if:
1. The partnership will assume the mortgage in full?
2. The partnership will only assume half of the mortgage?
3. The partnership will not assume the mortgage?

Problem 2:
On March 1, 2021, HELSINKI and NAIROBI decide to combine their businesses and form a partnership. After forming
the partners agreed to share profits and losses in the ratio of 75:25, respectively. Their adjusted trial balances on March
1, 2021 showed the following:

HELSINKI NAIROBI
Cash 9,000 3,750
Accounts receivable 18,500 13,500
Inventories 30,000 19,500
Furniture and fixtures 30,000 9,000
Office equipment 11,500 2,750
Prepaid expenses 6,375 3,000
Cost of goods sold 70,000 48,000
Operating expenses 20,000 37,000
Total 195,375 136,500

Allowance for bad debts 500 900

Accumulated Depreciation – Furniture and fixtures 9,000 1,200
Accumulated Depreciation – Office equipment 1,500 500
Accounts payable 21,000 18,000
Capital 61,375 35,900
Sales 100,000 80,000
____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR)
Auditing (AUD) Page 1 of 7
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Miscellaneous income 2,000 -
195,375 136,500

They agreed to have the following items adjusted in their books:

(a) 5% of the accounts receivable of HELSINKI and NAIROBI are estimated to be uncollectible.
(b) The inventory of HELSINKI should be valued at P32,000 while 10% of NAIROBI’s inventory is to be considered
obsolete and worthless, therefore, must be written off.
(c) HELSINKI’s furniture and fixtures should be carried at P24,500, while NAIROBI’s office equipment is under-
depreciated by P1,000.
(d) Rent expense incurred previously by HELSINKI was not yet recorded amounting to P1,000, while salary expense
incurred by NAIROBI was not also recorded amounting to P800.

What are the capital balances of HELSINKI and NAIROBI, respectively, after adjustments?

Case 1: After adjustments, HELSINKI will either invest or withdraw cash to make his capital proportionate to his profit
or loss ratio.
1. What are the capital balances of the partners immediately after formation?
2. How much is the cash to be invested (withdrawn) by HELSINKI to make his capital balance proportionate to his
profit or loss ratio?

Case 2: After adjustments, the partners will adjust their capital balances by the use of transfer of capital (or bonus method)
to make their capital balances proportionate to their profit and loss ratio.
1. What are the capital balances of the partners immediately after the formation?
2. How much capital was transferred to (from) NAIROBI?

PARTNERSHIP OPERATIONS

Problem 1:
On January 1, 2020, ARTURO, MONICA, and DENVER put up a partnership with original capital contribution ratio of
[Link] for a total agreed capitalization of P2,000,000. The profit or loss ratio agreement provides that profits shall be
distributed in the ratio of [Link] during the first six months of operations and in the ratio of [Link] thereafter while losses
shall be distributed in the ratio of [Link]. Net income is earned evenly throughout the year.

For the year ended December 31, 2020, the partnership reported net income of P1,200,000 with ARTURO and MONICA
withdrawing P50,000 and P100,000, respectively.

For the year ending December 31, 2021, the partnership suffered a net loss of P250,000 with MONICA investing an
additional P80,000 and DENVER withdrawing P120,000.

1. Compute for the 2020 profit share of each partner.

2. Compute for each partner’s capital balance on December 31, 2021.

Problem 2:
RAQUEL, ANGEL, and SUAREZ put up a partnership on April 1, 2020. The partners invested the following amounts on
that date:

RAQUEL P94,000
ANGEL 114,000
SUAREZ 70,000

During the year, RAQUEL withdrew P10,000 cash while SUAREZ invested a property with a fair value of P22,000.

The partners agreed to distribute the profits as follows:

• Annual salary of P30,000 to ANGEL and P25,000 to SUAREZ.
• Allow a 5% interest to each partner on their capital at the beginning of the period.
• Allow a 20% bonus to RAQUEL based on net income after salaries, interests, and bonus.
• Any remaining undistributed profit or loss will be distributed in the following manner:
➢ In the ratio [Link], if under-allocated
➢ Equally, if over-allocated
____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR)
Auditing (AUD) Page 2 of 7
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Case 1: The partnership realized profit of P100,000 during the year 2020.
1. How much is the bonus given to RAQUEL?
2. How much is the share of each partner in the 2020 net income?
3. What are the capital balances of the partners on December 31, 2020?
4. Assume the net income of the partnership during the year 2021 is P150,000. How much is the share of each
partner in the 2021 net income if there were no additional investments nor withdrawals made?

Case 2: the partnership realized profit of P45,000 during the year 2020.
1. How much is the bonus given to RAQUEL?
2. How much is the share of each partner in the 2020 net income?

Problem 3:
TOKYO and RIO are partners engaged in a partnership which began operations several years ago. Transactions affecting
the partners’ capital accounts in 2020 are as follows:

TOKYO, Capital RIO, Capital

DR. CR. DR. CR.
Beg. Bal 150,000 175,000
4/1 40,000
5/31 25,000
7/31 25,000
8/1 50,000
9/30 40,000
10/1 15,000
11/30 10,000 10,000
12/31 35,000

Shown below are the partners’ drawing accounts during 2020:

TOKYO, Drawing RIO, Drawing

2/1 15,000 4/30 21,000
7/31 27,000 10/1 12,000

REQUIRED: What are the average capital balances of TOKYO and RIO, respectively?

Problem 4:
ANDRES and PALERMO formed a partnership on March 1, 2020 and agreed to share profit 80% and 20%, respectively.
ANDRES invested cash of P150,000. PALERMO invested no assets but has a specialized expertise and manages the firm
full time. There were no other investments nor withdrawals during the year. The partnership contract provides for the
following:
▪ Capital accounts are to be credited annually with interest at 10% of original capital contribution.
▪ PALERMO is to be paid a monthly salary of P 3,000.
▪ PALERMO is to receive a bonus of 20% of profit before deducting interest on capital, salary, and the bonus.

The 2020 condensed income statement for the partnership includes the following:

Revenues P 550,000
Expenses (including interest, salary and bonus) (375,000)
Net income 175,000

1. How much is the bonus given to PALERMO in 2020?

2. How much net income was realized by the partnership for the year 2020?
3. How much is PALERMO’ profit share for 2020?

PARTNERSHIP DISSOLUTION

Problem 1: (Admission by Purchase of Interest)

____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR)
Auditing (AUD) Page 3 of 7
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X and Y are partners sharing profits and losses on a 40:60 ratio and have the following capital balances: P100,000 and
P200,000, respectively. Z directly purchased a 30% interest in the partnership by paying X P40,000 and Y P60,000.

CASE 1: Net assets are fairly valued prior to Z’s admission. What are the capital balances of the partners immediately
after’s Z’s admission?

CASE 2: Assets are undervalued by P20,000 prior to Z’s admission.

1. How much is the gain or loss that will be recognized in the partnership books upon purchase of interest by Z?
2. What are the capital balances of the partners immediately after’s Z’s admission?

CASE 3: Assets are overvalued by P30,000 prior to Z’s admission.

1. How much is the gain or loss that will be recognized in the partnership books upon purchase of interest by Z?
2. What are the capital balances of the partners immediately after Z’s admission?

Problem 2: (Admission by Investment)

HAYABUSA and HANABI are partners with capital balances of P78,400 and P117,600, respectively. They share profits
and losses in the ratio of 2:3. HAYABUSA and HANABI decided to admit KAGURA as a new partner with 20% interest.

CASE 1: The assets and liabilities are fairly valued on the balance sheet provided.
1. What amount should KAGURA invest into the partnership assuming no bonus is to be recognized?
2. Assuming KAGURA invested a total of P34,000 into the partnership, how much is the bonus upon
admission of KAGURA?
3. In connection with item no. 2, what are the capital balances of the partners immediately after the
admission of KAGURA?
4. Assuming KAGURA invested a total of P74,000 into the partnership, how much is the bonus upon
admission of KAGURA?
5. In connection with item no. 4, what are the capital balances of the partners immediately after the
admission of KAGURA?

CASE 2: KAGURA invested P88,000 cash in the partnership. After the admission of KAGURA, the total partnership capital will be
P460,000.
1. How much is the asset revaluation?
2. What is the amount of bonus upon admission of KAGURA?
3. What are the capital balances of the partners immediately after the admission of KAGURA?

CASE 3: KAGURA invested a total of P75,000 into the partnership. After the admission of KAGURA, the total partnership capital
will be P250,000.
1. What is the amount of the asset revaluation?
2. What is the amount of bonus upon admission of KAGURA?
3. What are the capital balances of the partners immediately after the admission of KAGURA?

Problem 3: (Retirement of a partner – The incoming/remaining partners paid the retiring partner)
A, B, and C are partners with capital balances of P80,000, P200,000 and P120,000, respectively. Profits and losses are
shared in a [Link] ratio. B decided to retire and the partnership revalued its assets. The value of inventory was decreased
by P20,000 and the value of land was increased by P50,000.

Required: Prepare the journal entry to record B’s withdrawal under each of the following independent assumptions:
1. As agreed by all the partners, B sold his interest to D, an outsider, for P250,000.
2. As agreed by all the partners, B sold 60% his interest to A and 40% to C for a total of P250,000.

Problem 4: (Retirement of a partner – Partnership paid the retiring partner)

You are given the following information together with the profit and loss ratio of the partners as of March 31, 2021:

Assets P1,200,000
Liabilities to outsiders 308,000
Due to P 19,000
Loan from A 33,000
C, Capital (30%) 432,000
P, Capital (50%) 241,000
A, Capital (20%) 167,000

____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR)
Auditing (AUD) Page 4 of 7
BCSVillaluz
P decided to retire from the partnership. The partners agreed that the assets of the partnership are to be adjusted to
their fair value of P1,500,000 at March 31, 2021.

CASE 1: It was agreed that the partnership will pay P P450,000 cash for his total interest in the partnership.
1. How much is the bonus upon P’s retirement?
2. What are the capital balances of C and A immediately after P’s retirement?

CASE 2: It was agreed that the partnership will pay P P360,000 cash for this total interest in the partnership.
1. How much is the bonus upon P’s retirement?
2. What are the capital balances of C and A immediately after P’s retirement?

Problem 5: (Incorporation of a Partnership)

X and Y, partners of XY Partnership (who share profit and loss in 80:20 ratio) organized XY Corporation to take over
the net assets of the partnership. The balance sheet of the partnership on September 30, 2020, the date of incorporation,
contains the following accounts:

Cash P14,400
Accounts receivable (net) 33,000
Inventory 30,600
Equipment (net) 40,800
Accounts payable 42,000
X, capital 57,588
Y, capital 19,212

After an appraisal of the equipment and an audit of the partnership’s financial statements, the partners agree that the
following adjustments are required to restate the net assets of the partnership to current fair value:
▪ Increase the allowance for doubtful accounts by P480.
▪ Increase the inventories to current replacement cost of P36,000.
▪ Increase the equipment to its current fair value of P47,400.
▪ Recognize accrued liabilities of P1,320.
▪ Recognize prepaid expenses of P12,000.

XY Corporation is authorized to issue 12,000 shares of P10 par common stock. It issues 9,000 shares of common stock
valued at P11 a share to the partnership in exchange for the net assets of the partnership.

1. How many shares of common stocks were issued to X and Y, respectively, upon incorporation?
2. Immediately after effecting the transfer of the net assets, and the issuance of common stocks, XY
Corporation’s additional paid-in capital account would be credited for what amount?

PARTNERSHIP LIQUIDATION

Problem 1: (Lump sum liquidation)

On December 31, 2020, A, B, and C decided to liquidate their partnership. The statement of financial position accounts
consisted of the following prior to liquidation:

Cash P100,000 Liabilities to outsiders P603,000

Loan to B 25,000 Due to C 32,000
Other assets 1,075,000 A, Capital 216,000
B, Capital 187,000
C, Capital 162,000
TOTAL ASSETS 1,200,000 TOTAL 1,200,000

A, B, and C share profits and losses in the ratio of [Link], respectively.

CASE 1: The partnership was able to sell all the other assets for P1,120,000 and paid liquidation expenses of P10,000. How much
cash should A, B, and C receive?

CASE 2: The partnership was able to sell all the other assets for P500,000 and paid liquidation expenses of P5,000. A and C are
personally solvent while B is personally insolvent. How much cash should C receive?

CASE 3: B received a total of P161,000 and liquidation expenses of P10,000 were paid.
____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
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1. How much is the amount of gain or loss on realization of other assets?
2. How much is the total proceeds from sale of other assets?
3. How much cash did A and C received?

Problem 2: (Schedule of Safe Payments)

Sergio, Andres, and Palermo are partners sharing profits and losses in the ratio [Link], respectively. On December 31, 2020,
they decided to liquidate their partnership. A statement of financial position prepared on this date follows:

ASSETS LIABILITIES AND

EQUITY
Cash 2,000 Liabilities 20,000
Non-cash assets 32,500 Sergio, loan 1,000
Andres, loan 500 Sergio, Capital 4,000
Andres, Capital 6,000
Palermo, Capital 4,000
TOTAL ASSETS 35,000 TOTAL 35,000

The result of liquidation are summarized below:

Book Cash Liquidation Outside Cash withheld for

value realized expenses liabilities paid anticipated
paid expenses
January 12,000 9,000 800 7,500 1,500
February 10,000 13,500 700 10,000 900
March 7,500 3,000 200 2,500 500
April 3,000 1,500 100 --- ---

Cash available, if any is distributed to the partners at the end of each month.

1. How much is the maximum possible loss in the safe payments schedule for the month of January?
2. How much cash was withheld during January?
3. How much cash did each partner received in January?
4. How much is the maximum possible loss in the safe payments schedule for the month of February?
5. How much cash was withheld during February?
6. How much cash was paid to the partners during February?
7. How much cash did each partner received during February?
8. How much is the maximum possible loss in the safe payments schedule for the month of March?
9. How much cash was withheld during March?
10. How much cash was paid to the partners during March?
11. How much cash did each partner received during March?
12. How much cash did each partner received during April?
13. How much cash in total did each partner received during the course of liquidation?

Problem 3: (Cash priority program)

Hyatt, Mariotte, and Bien are partners who share profits and losses in the ratio of [Link], respectively. Due to financial
difficulties, they decided to liquidate the partnership. You were hired to account for the partnership liquidation and the
following information were provided:

Cash P 225,000
Liabilities 760,000
Loan to Hyatt 40,000
Receivable from Mariotte 60,000
Payable to Bien 50,000
Hyatt, Capital 520,000
Mariotte, Capital 480,000
Bien, Capital 450,000

____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR)
Auditing (AUD) Page 6 of 7
BCSVillaluz
The following information was available during the 3-month liquidation period:

Proceeds from Liquidation Payment to Cash withheld for anticipated liquidation

realization expenses paid outside creditors expenses and unrecorded liabilities
January P825,000 P10,000 P285,000 P100,000
February 200,000 5,000 475,000 45,000
March (final) 58,000 3,000 - -

1. The partner most vulnerable to partnership losses on liquidation is…

2. How much is the cash available for distribution to the partners during January, February and March, respectively?
3. How much cash was received by each partner during January?
4. How much cash was received by each partner during February?
5. How much cash was received by each partner during March?
6. How much cash in total did each partner received during the course of liquidation?

-END OF HANDOUT-

____________________________________________________________________________________________________________
Brian Christian S. Villaluz, CPA
CPA Reviewer in:
Advanced Financial Accounting & Reporting (AFAR)
Financial Accounting & Reporting (FAR)
Auditing (AUD) Page 7 of 7