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UNIVERSITY OF LUZON
COLLEGE OF ACCOUNTANCY
CPA REVIEW CENTER

ADVANCED FINANCIAL ACCOUNTING & REPORTING

PARTNERSHIP ACCOUNTING

PARTNERSHIP FORMATION & DIVISION OF PROFIT OR LOSS

PARTNERSHIP FORMATION. The partnership is a separate accounting entity, and therefore its assets and
liabilities should remain separate and distinct from the individual partner’s personal assets and liabilities.
Initial investments in a partnership are recorded in capital accounts maintained for each partner. When property
other than cash is invested in a partnership, the cost of the noncash property is measured and recorded at the fair
value of the property at the time of investment. Conceptually, the fair value should be determined by
independent valuations, but as a practical matter, the fair value is determined by agreement of all partners
because agreement is essential to partnership formation.

All liabilities assumed by the partnership are recorded at their present values.

Upon formation, the amount credited to each partner’s capital account is the difference between the fair market
value of the assets contributed and the present value of the liabilities assumed from the partner. The capital
accounts represent the residual equity of the partnership. The capital account of each partner reflects all of the
activity of an individual partner: contribution, withdrawals, and the distributive share of net income (loss). In
some cases, a drawing account is used as a clearing account for each partner’s transaction with only the net
effect of each period’s activity shown in the capital account.

A different problem of valuation arises when partners agree on relative capital interests that are not aligned with
their investments of identifiable assets. In this case, either of two approaches may be used to adjust the capital
accounts - the bonus approach or the goodwill approach. Under the bonus method, the unidentifiable asset is
not recorded. When the goodwill method is used, the unidentifiable asset is recorded as goodwill.

Partners’ Accounts
Accounts that are maintained with partners consist of (1) capital accounts, (2) drawing or personal accounts, and
(3) loan to or from partner (receivable and payable accounts).

Capital and drawing accounts. Partners’ original investments are reported in capital accounts for each partner.
Transactions between the partnership and the individual partners resulting in changes in the partners’ ownership
interest may be summarized in the capital accounts or in separate drawing accounts.
Partner’s Capital Account

Debited for: Credited for:

1. permanent withdrawal 1. original investment
2. share in net loss 2. additional investment
3. share in net income

The partnership agreement should indicate clearly those special considerations that are to apply as a result of
absolute and relative changes in partners’ interests. Entries can then be made in the accounts in a manner that
will appropriately recognize changes in interests.

Normally, increases or decreases in capital that are interpreted as permanent capital changes are recorded
directly in the capital accounts. Drawings by partners in anticipation of profits, and other increases and
decreases of relatively minor accounts that are not viewed as of a permanent character, are recorded in the
drawing accounts. At the end of the accounting period, profit or loss is summarized in the profit or loss account
and the balance in this account is transferred to the drawing accounts. The balance transferred from profit and
loss account to drawing accounts is the share of the partners in the net income or loss for the period. The share
of the partners in the net income or net loss may also be credited or debited directly to the capital accounts of
the partners. In either case, the balance of the drawing accounts must be closed to the partners’ capital
accounts.
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Loans to and from Partners. A withdrawal by a partner that is made with the assumption of ultimate repayment
to the firm normally calls for the recognition of a special receivable account. It may be charged to Receivable
from Partner, Loan to Partner, Advances to Partner or Notes Receivable from Partner, whichever is appropriate.
An advance to the firm by a partner that is made with the assumption of ultimate repayment by the firm
normally calls for the recognition of a special payable account. The amount owed to the partner may be
credited to Loans Payable to Partner, Notes Payable to Partner, Advances from Partner, whichever is
appropriate.

DIVISION OF PROFIT OR LOSS

Methods:
1. Equally
2. In an arbitrary ratio
3. In the ratio of partners’ capitals
a. original capitals
b. capitals at the beginning of each fiscal period
c. capitals at the end of each fiscal period
d. average capitals for each fiscal period
4. Interest, salaries, and bonus to be allowed for partners and the balance to be divided on some arbitrary basis
as agreed.
As a general rule, interest on capital, salaries, and bonus shall be treated as form of profit sharing agreement and
are not expenses of the partnership; therefore, they do not affect computation of net income.

FORMATION
Problem 1
P admits Q to a partnership interest in his business. Accounts in the ledger for P on November 30, 2020, just before
the admission of Q show the following balances:

Debits Credits
Cash P 26,000
Accounts receivable 120,000
Merchandise inventory 180,000
Accounts Payable P 62,000
P, Capital 264,000
P326,000 P326,000

It is agreed that for purposes of establishing P’s interest the following adjustments shall be made:

(1) an allowance for doubtful accounts of 2% of accounts receivable is to be established.

(2) the merchandise inventory is to be valued at P202,000.
(3) prepaid expenses of P6,500 and accrued expenses of P4,000 are to be recognized

Q is to invest sufficient cash to give him a one-third interest in the partnership.

Required:
a. Give the entries to adjust the account balances in establishing P’s interest and to record the investment by Q.
P,capital 2400
Allowance for doubtful accounts 2400

Merchandise inventory 22,000

P, capital 22,000
(202-180)

Prepaid expense 6500

Accrued expense 4000
P capital 2500

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b. Prepare a statement of financial position for P and Q, Partnership.

c.
Problem 2
The partnership of Julie and Tim was formed on February 28, 2020, at that date the following assets were
contributed:

Julie Tim
Cash P35,000 P15,000
Merchandise 45,000
Building 100,000
Furniture and Equipment 25,000

J 60,000
T 130,000
Total 190,000

The building is subject to a mortgage loan of P30,000 that is to be assumed by the partnership. The partnership
agreement provides that Julie and Tim share profits and losses equally.

Required:
a. What are the capital balances of the partners on February 28, 2020?
J 60,000
T 130,000
Total 190,000

b. If the partnership agreement states that the initial capital balances of the partners should be equal and no
recognition should be given to any intangible assets contributed, what are the partners’ capital balances on
February 28, 2020?
190,000/2 = 95,000

c. Given the fact stated in requirement (b) except that any contributed goodwill should be recognized in the
accounts, what are the partners’ capital balances on February 28, 2020?

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Problem 3
On July 1, 2020, Johnny and Jenny decide to pool their assets and form a partnership. The firm is to take over
business assets and assume business liabilities, and capital is to be based on the net assets transferred after the
following adjustments:

1. Jenny’s inventory is to be valued at P14,000.

2. An allowance for bad debts of 5% is to be established on the customer accounts of each party.
3. Accrued expenses of P800 are to be recognized on Johnny’s books.

4. Jenny is to be allowed goodwill of P10,000 and is to invest additional cash so that she will have 60%
interest in the new firm.

Balance sheets for Johnny and Jenny on July 1 before adjustment are given below:

Johnny Jenny
Cash P 7,500 P 4,500
Accounts receivable 18,000 15,000
Inventory 16,000 12,000
Equipment 10,000 12,000
Accumulated depreciation (4,500) (1,500)
P47,000 P42,000

Accounts payable P13,800 P10,000

Capital 33,200 32,000
P47,000 P42,000

Jenny’s books are to be retained as the partnership books.

Required:
a. Give the entries to adjust and close Johnny’s books.
b. Give the required entries on the books of Jenny upon the formation of the partnership.
c. Prepare a statement of financial position.

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Problem 4

Mandy and Manny begin a partnership on January 1, 2020. Mandy invests P40,000 cash as well as inventory
costing P15,000 but with a current appraised value of only P12,000. Manny contributes a building with a P40,000
book value and a P48,000 market value. The partnership also accepts responsibility for P10,000 note payable
owed in connection with this building. The partners agree to begin operations with equal capital balances.

Required:
a. Assuming that the bonus method is used, make entries for the formation
b. Redo requirement (a) using goodwill method.

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Problem 5
On April 30, 2020, Algee, Belger, and Ceda formed a partnership by combining their separate business
proprietorships. Algee contributed cash of P50,000. Belger contributed property with a P36,000 carrying amount,
P40,000 original cost, and P80,000 fair value. The partnership accepted responsibility for the P35,000 mortgage
attached to the property. Ceda contributed equipment with a P30,000 carrying amount, a P75,000 original cost,
and P55,000 fair value. The partnership agreement specifies that profits and losses are to be shared equally but is
silent regarding capital contributions. Which partner has largest April 30, 2014 capital account balance?

a. Algee
b. Belger
c. Ceda
d. All capital account balances are equal

Problem 6
On September 30, 2020, Lourdes, a sole proprietor, admits Virginia for an interest in her business. On this date
Lourdes’ capital account shows a balance of P158,400. The following were agreed upon before the formation of
the partnership:
1) Prepaid expenses of P17,500 and accrued expenses of P5,000 are to be recognized.
2) 5% of the outstanding accounts receivable of Lourdes amounting to P100,000 is to be recognized as
uncollectibles.
3) Virginia is to be credited with one-third interest in the partnership and is to invest cash aside from the P50,000
worth of merchandise.

The amount of cash to be invested by Virginia and the total capital of the partnership are:
a. P32,950 and P248,850 respectively.
b. P55,300 and P221,200 respectively.
c. P82,950 and P248,850 respectively.
d. P32,950 and P171,200 respectively.

Problem 7
Joe, Well, and Sher formed a partnership on April 30, 2020 with the following assets, measured at fair market
values, contributed by each partner:
Joe Well Sher
Cash P10,000 P12,000 P30,000
Automobile 8,500

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Delivery trucks 28,000

Computer and printer 5,100
Office furniture 3,500 2,500
Land and building 150,000

Although Sher has contributed the most cash to the partnership, he did not have the full amount of P30,000 and
was forced to borrow P20,000. The land and building contributed by Joe has a mortgage of P90,000 and the
partnership is to assume responsibility for the loan.

If the profit and loss sharing is 40 percent, 40 percent, and 20 percent respectively for Joe, Well and Sher, what is
the total capital investment of all the partners at the opening of the business on April 30?
a. P249,600 b. P159,600 c. P139,600 d. P166,400

DIVISION OF PROFITS/LOSS
Problem 1
Evans, Fitch, and Gault operate a partnership with a complex profit and loss sharing agreement. The average
capital balance for each partner on December 31, 2020 is P300,000 for Evans, P250,000 for Fitch, and P325,000 for
Gault. An 8% interest allocation is provided to each partner. Evans and Fitch receive salary allocations of P10,000
and P15,000, respectively. If partnership net income is above P25,000, after the salary allocations are considered
(but before the interest allocations are considered), Gault will receive a bonus of 10% of the original amount of net
income. All residual income is allocated in the ratios of 2:3:5 to Evans, Fitch, and Gault, respectively.

Required:
a. Prepare a schedule to allocate income to the partners assuming that partnership net income is P250,000.
b. Prepare a journal entry to distribute the partnership's income to the partners (assume that an Income
Summary account is used by the partnership).

Problem 2
Required: Using the information from Problem 1 above:

a. Prepare a schedule to allocate income or loss to the partners assuming that the partnership incurs a net loss of
P36,000.
b. Prepare a journal entry to distribute the partnership's loss to the partners (assume that an Income Summary
account is used by the partnership).
Problem 3
The profit and loss sharing agreement for the Sealy, Teske, and Ubank partnership provides that each partner
receive a bonus of 5% on the original amount of partnership net income if net income is above P25,000. Sealy and
Teske receive a salary allowance of P7,500 and P10,500, respectively. Ubank has an average capital balance of
P260,000, and receives a 10% interest allocation on the amount by which his average capital account balance
exceeds P200,000. Residual profits and losses are allocated to Sealy, Teske, and Ubank in their respective ratios of
7:5:8.

Required: Prepare a schedule to allocate P88,000 of partnership net income to the partners.

Problem 4
Rankin and Bend organized the RB Partnership on January 1, 2020. The following entries were made in their
capital accounts during 2014:
Debit Credit Balance
Rankin, capital:
January 1 20,000 20,000
April 1 5,000 25,000
October 1 5,000 30,000
Bend, capital:
January 1 40,000 40,000
March 1 10,000 30,000
September 1 10,000 20,000
November 1 10,000 30,000

Required: If the partnership net income, computed without regard to salaries or interest, is P20,000 for 2020,
indicate its division between the partners under the following independent profit-sharing conditions:
a. Interest at 8% is allowed on average capital investments, and the remainder is divided equally.
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b. A salary of P9,000 is to be credited to Bend; 8% interest is allowed each partner on his ending capital
balance; residual profits or losses are divided 60% to Rankin and 40% to Bend.
c. Salaries are allowed Rankin and Bend in amounts of P8,300 and P9,500 respectively, and residual profits
or losses are divided in the ratio of average capital balances.
d. A bonus of twenty percent of net income is credited to Rankin, a salary of P5,000 is allowed to Bend, and
residual profits or losses are shared equally. (The bonus and salary are regarded as expenses for purposes of
calculating the amount of bonus.)

Problem 5
A partnership begins 2020 with the following capital balances:
A, capital P60,000
B, capital P80.000
C, capital 100,000
The Articles of Partnership stipulates that profits and losses be assigned in the following manner:
1) Each partner is allocated interest equal to 10% of the beginning capital balance.
2) B is allocated compensation of P20,000 per year.
3) Any remaining profits and losses are allocated on a 3:3:4 basis, respectively
4) Each partner is allowed to withdraw up to P5,000 cash per year.

Assuming that net income for 2020 is P50,000 and that each partner withdraws the maximum amount allowed,
what is the balance in C’s capital at the end of the year?
a. P105,800 b. P106,200 c. P106,900 d. P107,400

Problem 6
Arthur Plack, a partner in the Bright partnership, has a 30% participation in partnership profits and losses. Plack’s
capital account had a net decrease of P60,000 during the calendar year 2020. During 2020, Plack withdrew
P130,000 (charged against to his capital account) and contributed property valued at P25,000 to the partnership.
What was the net income of the Bright partnership for 2020?
a. P150,000 b. P233,333 c. P350,000 d. P550,000

Problem 7
X, Y, and Z, a partnership formed on January 1, 2020 had the following initial investment
X - P100,000
Y - P150,000
Z - P225,000
The partnership agreement states that profits are to be shared equally by the partners after consideration is made
for the following:
a. Salaries allowed to partners: P60,000 for X; P48,000 for Y; and P36,000 for Z.
b. Average partners’ capital balances during the year shall be allowed 10%.

Additional Information:
c. On June 30, 2020, X invested an additional P60,000.
d. Z withdrew P70,000 from the partnership on September 30, 2020
e. Share on the remaining partnership profit was P5,000 for each partner.

7.1 Interest on average capital balances of the partners totaled:

a. P48,750 b. P53,750 c. P57,625 d. P60,625

7.2 Partnership net profit at December 31, 2020 before salaries, interests, and partners’ share on the remainder
was:
a. P199,750 b. P207,750 c. P211,625 d. P222,750

7.3 Total partnership capital on December 31, 2020 was:

a. P672,750 b. P407,000 c. P465,000 d. P480,000

PARTNERSHIP DISSOLUTION-Changes in ownership

When partnership dissolution occurs, a new accounting entity results. The partnership should first adjust its
records so that all accounts are properly stated at the date of dissolution. After the income (loss) has been
properly allocated to the existing partners’ capital accounts, all assets and liabilities should be adjusted to their
fair market value and their present values, respectively.
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After all adjustments have been made, the accounting for dissolution depends on the type of transaction that
caused the dissolution. These transactions can be broken down into two types:
1. Transactions between the partnership and a partner (e.g., a new partner contributes assets, or a retiring
partner withdraws assets)
2. Transactions between partners (e.g., a new partner purchases an interest from one or more existing partners,
or a retiring partner sells his/her interest to one or more partners)

ADMISSION BY INVESTMENT
When a new partner is admitted in the partnership, essentially three cases can result. The partner can invest
assets into the partnership and receive a capital balance
a. Equal to his/her investment
b. Greater than his/her investment
c. Less than his/her investment
If the new partner’s capital balance is equal to the assets invested, then the entry debits the assets contributed
and credits the new partner’s capital account for the fair value of the assets contributed.
If the new partner’s capital is not equal to the assets invested, then either the bonus or goodwill method must be
used.
When to apply Bonus method
New Old New Partner’s
Partnership = Partners’ + Asset
Capital Capital Investment

AGREED CAPITAL

CONTRIBUTED CAPITAL
Which Partner (s) receive Bonus
New partner:
New partner’s capital credit > New partner’s investment
(the difference represents the bonus)
Old partner:
New partner’s capital credit < New partner’s investment
(the difference represents the bonus allocated to old partners in their P/L ratio)
When to apply Goodwill method
AGREED CAPITAL > CONTRIBUTED CAPITAL
Which partner (s) Goodwill is recognized
New partner’s goodwill:
New partner’s capital credit > New partner’s Investment
(the difference represents the goodwill)
Old partners” goodwill:
New partner’s capital credit = New partner’s investment
(goodwill is allocated to old partners in their P/L ratio)
A special problem under goodwill method is the valuation of the partnership capital. If the book value acquired
is less than the asset invested, the value is determined based upon the new partner’s contribution, and goodwill
is allocated to old partners accounts. If the book value acquired is greater than the asset contributed, the value is
based upon the existing capital accounts, and goodwill is attributed to the new partners.

ADMISSION BY PURCHASE
The sale of a partnership interest is a transaction only between the partners. Thus, the treatment accorded the
transaction is determined by the partners involved.
There are two means of dealing with such a transaction. The first is to simply transfer a portion of the existing
partners’ capital to a new capital account for the buying partner. The other method available for recording a
transaction between partners involves the recording of goodwill.

PARTNER DEATH OR WITHDRAWAL

The death or withdrawal of a partner is treated in much the same manner as the admission f a new partner.
However, there is no new capital account to be recorded; we are dealing only with the capital accounts of the
original partners. Either the bonus or goodwill method may be used. The key thing to remember in regard to a
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partner’s withdrawal from the partnership is that the withdrawing partner’s capital account must be adjusted to
the amount that the withdrawing partner is expected to receive.

DISSOLUTION
Problem 1
Cesar and Damon share partnership profits and losses at 60% and 40%, respectively. The partners agree to admit
Egan into the partnership for a 50% interest in capital and earnings. Capital accounts immediately before the
admission of Egan are:

Cesar (60%) P 300,000

Damon (40%) 300,000
Total P 600,000

Required:
a. Prepare the journal entry(s) for the admission of Egan to the partnership assuming Egan invested P400,000 for
the ownership interest. Egan paid the money directly to Cesar and to Damon for 50% of each of their respective
capital interests. The partnership records goodwill.
b. Prepare the journal entry(s) for the admission of Egan to the partnership assuming Egan invested P500,000 for
the ownership interest. Egan paid the money to the partnership for a 50% interest in capital and earnings. The
partnership records goodwill.
c. Prepare the journal entry(s) for the admission of Egan to the partnership assuming Egan invested P700,000 for
the ownership interest. Egan paid the money to the partnership for a 50% interest in capital and earnings. The
partnership records goodwill.

Problem 2
A summary balance sheet for the partnership of Ivory, Jacoby and Kato on December 31, 2020 is shown below.
Partners Ivory, Jacoby and Kato allocate profit and loss in their respective ratios of 9:6:10.

Assets
Cash P 50,000
Inventory 75,000
Marketable securities 120,000
Land 80,000
Building-net 400,000
Total assets P 725,000

Equities
Ivory, capital P 425,000
Jacoby, capital 225,000
Kato, capital 75,000
Total equities P 725,000

The partners agree to admit Lange for a one-tenth interest. The fair market value for partnership land is P180,000,
and the fair market value of the inventory is P150,000.

Required:
a. Record the entry to revalue the partnership assets prior to the admission of Lange.
b. Calculate how much Lange will have to invest to acquire a 10% interest.
c. If Lange paid P200,000 to the partnership in exchange for a 10% interest, what would be the bonus that is
allocated to each partner's capital account?

Problem 3
De Shazo and Wilkins share profits equally and have equal investments in their partnership. The partnership’s net
assets are carried on the books at P28,000. Kratz is admitted to the partnership with a one-third interest in profits
and net assets. Kratz pays P10,000 cash into the partnership for his interest.

Required: Compute partners’ capital under the following method:

a. bonus method b. goodwill method.
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Problem 4
A summary balance sheet for the Almond, Brandt, and Clack partnership on December 31, 2020 is shown below.
Partners Almond, Brandt, and Clack allocate profit and loss in their respective ratios of 2:1:1. The partnership
agreed to pay partner Brandt P135,000 for his partnership interest upon his retirement from the partnership on
January 1, 2021. The partnership financials on January 1, 2021 are:

Assets
Cash P 75,000
Inventory 85,000
Marketable securities 60,000
Land 90,000
Building-net 150,000
Total assets P 420,000

Equities
Almond, capital P 210,000
Brandt, capital 105,000
Clack, capital 105,000
Total equities P 420,000

Required: Prepare the journal entry to reflect Brandt’s retirement from the partnership:
a. Assuming a bonus to Brandt.
b. Assuming a revaluation of total partnership capital based on excess payment.
c. Assuming goodwill to excess payment is recorded.

Problem 5
Long-term partners, Pop, Ping, and Pam have capital balances of P60,000, P45,000 and P30,000, respectively. They
share in profits and losses 50%-to-30%-to-20%, respectively. All assets are valued fairly. Pam decides to retire
from the partnership. Calculate the remaining partners' capital balances after the Pam withdrawal under the
following situations:

a. Pam sells the interest to Ping for P25,000.

b. Pam sells the interest to the partnership for P25,000; bonus method is used
c. Pam sells the interest to the partnership for P40,000; goodwill attributable only to
the exiting partner is recorded

Problem 6
Ron, Don, Ton, Mon and Son are partners sharing profits and losses equally, On July 1, 2020, they decided to
incorporate the partnership by transferring the assets and liabilities from the partnership to the corporation in
exchange for its stocks. The following is the post-closing trial balance of the partnership:

Debit Credit
Cash P 45,000
Accounts receivable (net) 60,000
Inventory 90,000
Fixed assets (net) 174,000
Liabilities P 60,000
Ron, Capital 61,800
Don, capital 45,000
Ton, apital 78,600
Mon, Capital 50,000
Son , Capital _______ 73,600
P369,000 P369,000

It was agreed that adjustments are to be made to the following assets with fair values as follows:

Accounts receivable P 40,000

Inventory 68,000
Fixed assets 180,600

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The Corporation was authorized to issue P10 par preference shares and P10 par ordinary shares. The partners
agreed to receive for their equity in the partnership 720 ordinary shares each, plus preference shares for their
remaining interest.

Required:
a. Determine the adjusted capital of the partners.
b. Determine the number of preference shares to be issued to each partner.
c. Opening entries on the books of the corporation.

Problem 7
1. Data for the partnership of A and B follow:
A B
Capital balances P80,000 P60,000
Profit and loss sharing ratio 60% 40%

C is to be admitted into the partnership and is to have a one-fifth interest in capital and profits with a cash
contribution of P40,000. The balances in the capital accounts of A, B, and C under the bonus method are:
a. P80,000, P60,000, and P40,000, respectively.
b. P92,000, P68,000, and P40,000, respectively.
c. P95,000, P65,000, and P40,000, respectively.
d. P82,400, P61,600, and P36,000, respectively.

2. Data for the partnership of Able and Baker follow:

Able Baker
Capital balances P80,000 P60,000
Profit and loss sharing ratio 60% 40%

Cook is to be admitted into the partnership and is to have a one-fifth interest in capital and profits with a
cash contribution of P40,000. The balances in the capital accounts of Able, Baker, and Cook under the
recording the goodwill method are:
a. P80,000, P60,000, and P40,000, respectively.
b. P92,000, P68,000, and P40,000, respectively.
c. P95,000, P65,000, and P40,000, respectively.
d. P82,400, P61,600, and P36,000, respectively.

3. Data for the partnership of X and Y follow:

X Y
Capital balances P50,000 P40,000
Profit and loss sharing ratio 60% 40%

Z is to be admitted into the partnership and is to have a one-third interest in capital and profits with a
cash contribution of P30,000. What are the balances in the capital accounts of X, Y, and Z under the bonus
method?
a. P44,000, P36,000, and P40,000, respectively.
b. P56,000, P44,000, and P20,000, respectively.
c. P50,000, P40,000, and P30,000, respectively.
d. P50,000, P40,000, and P40,000, respectively.
e. P50,000, P40,000, and P45,000, respectively.

4. Data for the partnership of X and Y follow:

X Y
Capital balances P50,000 P40,000
Profit and loss sharing ratio 60% 40%

Z is to be admitted into the partnership and is to have a one-third interest in capital and profits with a
cash contribution of P30,000. What are the balances in the capital accounts of X, Y, and Z under the goodwill
method?
a. P44,000, P36,000, and P40,000, respectively.
b. P56,000, P44,000, and P20,000, respectively.
c. P50,000, P40,000, and P30,000, respectively.

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d. P50,000, P40,000, and P40,000, respectively.

e. P50,000, P40,000, and P45,000, respectively.

5. Cicci and Arias are partners who share profits and losses in the ratio of 7:3 respectively. On October 5, 2020,
their respective capital accounts were as follows:

Cicci 35,000
Arias 30,000

On that date they agreed to admit Soto as partners with a one – third interest in capital and profits and losses,
upon his investment of P25,000. The new partnership will begin with a total capital of P90,000. Immediately
after Soto’s admission, what are the capital balances of Cicci, Arias, and Soto, respectively?
a. P30,000;P30,000;P30,000. c. P31,667;P28,333;P30,000.
b. P31,500;P28,500;P30,000. d. P35,000;P30,000;P25,000.

6. On June 30, 2020, the balance sheet for the partnership of Coll, Maduro and Prieto, together with their profit
and loss ratios, were as follows:

Assets, at cost 180,000

Coll, loan 9,000

Coll, capital (20%) 42,000
Maduro, capital (20%) 39,000
Prieto, capital (60%) 90,000
Total 180,000

Coll has decided to retire from the partnership. By mutual agreement, the assets are to be adjusted to their fair
value of P216,000 at June 30, 2020. It was agreed that the partnership would pay Coll P61,200 cash for Coll’s
partnership interest, including Coll’s loan which is to be repaid in full. No goodwill is to be recorded. After
Coll’s retirement, what is the balance of Maduro’s capital account?
a. P36,450 b. P39,000 c. P45,450 d. P46,200

7. X and Y are partners and have capital balances of P70,000 and P30,000, re spectively. X and Y share profits and
losses in the ratio 6:4, respectively. Z is admitted into the partnership by purchasing one-fifth of the capital
interests of X and Y for a total price of P25,000. The capital balances of X, Y, and Z will be:
a. P56,000, P24,000, and P20,000, respectively.
b. P56,000, P24,000, and P25,000, respectively.
c. P73,000, P32,000, and P20,000, respectively.
d. P70,000, P30,000, and P25,000, respectively.
e. P70,000, P30,000, and P20,000, respectively.

PARTNERSHIP LIQUIDATION

A liquidation is the winding up of the partnership business. That is, it sells all of its non-cash assets, pays its
liabilities, and makes a final liquidating distribution to the remaining partners.

There are four basic steps to a partnership liquidation.

1. Any operating income or loss up to the date of liquidation should be computed and allocated to the
partners’ capital accounts on the basis of their P & L ratio.
2. All non-cash assets are sold and converted to cash. The gain (loss) realized on the sale of such assets is
allocated to the partners’ capital accounts on the basis of their P & L ratio.
3. Any creditors’ claims, including liquidation expenses, or anticipated future claims, are satisfied through the
payment or reserve of cash.
4. The remaining unreserved cash is distributed to the remaining partners in accordance with the balance in
their capital accounts. Note that this is not necessarily the P & L ratio.

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Two factors that may complicate the liquidation process are the existence of loans or advances between the
partnership and one or more of the partners, or the creation of a deficit in a partner’s capital account because of
the allocation of a loss. When loans exist between the partnership and a partner, the capital account and the
loan (s) are combined to give a net amount. This is often referred to as the right of offset. When a deficit exists,
the amount of the deficit is allocated to the remaining solvent partners’ capital accounts on the basis of their
relative P & L ratio. If the partner with the capital deficit is personally solvent, he has to contribute for his
deficiency

STATEMENT OF PARTNERSHIP LIQUIDATION

The statement of partnership liquidation shows in detail all of the transactions associated with the liquidation of
the partnership. A liquidation can take one of two forms: lump sum or installment. A lump sum or simple
liquidation is one in which all of the assets are sold in bulk and all of the creditors’ claims are satisfied before a
single liquidating distribution is made to the partners. In an installment liquidation the assets are sold over a
period of time and the cash is distributed to the partners a s it becomes available.

INSTALLMENT METHOD OF CASH DISTRIBUTION

There are two keys to preparing a statement of partnership liquidation under the installment method: the
determination of the available cash balance at any given point in time and the determination of which partner (s)
is (are) to receive the payment of that cash. The reason that the cash is not distributed in accordance with the P
& L ratio is twofold: first, the final cash distribution is based upon the balance in each partner’s capital account,
not the P & L ratio, and second, there will be situations where one or more partners will have deficit balances in
their capital accounts. If this is the case, they should never receive a cash distribution, even if the deficit does
not arise until late in the liquidation process.
The determination of the available cash balance is generally straightforward. The beginning cash balance is
adjusted for the cash receipts, payments to creditors, and liquidation expenses incurred. A situation may occur
where a certain amount of cash is to be reserved for payment of future liabilities that may arise. If this is the
case, this cash should be treated as a non-cash asset which makes it unavailable for current distribution to
partners.
The determination of which partner (s) is (are) to receive the available cash is somewhat more difficult. This
determination can be made at the beginning of the liquidation process or at the time of each payment. In
making this determination there are two key assumptions that must be made: (1) the individual partners are
assumed to be personally insolvent, and (2) the remaining non-cash assets are deemed to be worthless (thus
creating a maximum possible amount of loss).
INSTALLMENT CASH DISTRIBUTION SCHEDULE
This schedule is prepared by determining the amount of loss required to eliminate each partner’s capital account
(loss absorption capacity). All of the non-cash assets are to be considered worthless, thus, if we determine the
amount of loss required to eliminate each partner’s capital balance, we can determine the order in which the
partners should receive the cash payments

SCHEDULE OF SAFE PAYMENT

This schedule is prepared by determining the capital balances of the partners after allocation of all possible
losses on non-cash assets still to be realized and allocation of additional losses on partner’s capital deficiency.
The balance is the amount cash safely distributable to the partners.

NOTE: In preparing schedule, it is important to make sure that the proper capital account balance is used. The
capital balance must be inclusive of any loans or advances between the partnership and the partners.

LIQUIDATION
Problem 1
The balance sheet of the Alba, Blick, and Calvo partnership on January 1, 2020 (the date of partnership liquidation)
was as follows:

Cash P 2,000 Liabilities P 4,010

Other assets 13,000 Loan from Alba 500
Loan to Calvo 1,000 Alba, capital (20%) 990
Blick, capital(40%) 4,500
Calvo, capital(40%) 6,000

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Total assets P 16,000 Total liab./equity P 16,000

In January, other assets with a book value of P8,000 were sold for P5,000 in cash.

Required: Determine how the available cash on January 31, 2020 will be distributed.

Problem 2
The balance sheet of the Omar, Paolo, and Quek partnership on November 1, 2020 (before commencement of
partnership liquidation) was as follows:

Cash P 58,000 Accounts payable P 34,000

Inventory 60,000 Notes payable 62,000
Loan to Omar 8,000 Omar, capital(40%) 24,000
Loan to Quek 14,000 Paolo, capital(25%) 26,000
Plant assets-net 70,000 Quek, capital (35%) 64,000

Total assets P 210,000 Total liab./equity P 210,000

Liquidation events in November were as follows:

- The inventory was sold for P10,000 above book value;
- Plant assets with a book value of P60,000 were sold for P34,000.

Required: Determine how the available cash on November 31, 2020 should be distributed.

Problem 3
Luis, Mac, Nel, and Oma are partners who share profits and losses 40%, 25%, 25%, and 10%, respectively. The
partnership will be liquidated gradually over several months beginning January 1, 2021. The partnership trial
balance at December 31, 2020 is as follows:

Debits Credits
Cash P 3,000
Accounts receivable 19,000
Inventory 25,000
Loan to Nel 5,000
Furniture 15,000
Equipment 10,000
Goodwill 12,000
Accounts payable P 14,000
Note payable 30,000
Loan from Luis 5,000
Luis, capital (40%) 15,000
Mac, capital (25%) 9,000
Nel, capital (25%) 12,000
Oma, capital (10%) 4,000
Totals P 89,000 P 89,000

Required:
Prepare a cash distribution plan for January 1, 2021, showing how cash installments will be distributed among the
partners as it becomes available.

Problem 4
The partnership of Hanly, Ide, and Jen was dissolved. By August 1, 2020, all assets had been converted into cash
and all partnership liabilities were paid. The partnership balance sheet on August 1, 2020 (with partner residual
profit and loss sharing percentages) was as follows:

Cash P 50,000 Hanly, capital(30%) P 4,000

Ide, capital(20%) (60,000)
Jen, capital(50%) 106,000

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Total assets P 50,000 Total equity P 50,000

The value of partners' personal assets and liabilities on August 1, 2020 were as follows:

Hanly Ide Jen

Personal assets P 74,000 P 120,000 P 56,000
Personal liabilities 72,000 80,000 60,000

Required: Prepare the final statement of partnership liquidation.

Problem 5
The partnership of Felly and Frilly is in the process of liquidation. On January 1 the ledger shows account balances
as follows:

Cash P10,000 Accounts payable P15,000

Accounts receivable 25,000 Felly, capital 40,000
Lumber inventory 40,000 Frilly, capital 20,000

On January 10 the lumber inventory is sold for P25,000, and during January, accounts receivable of P21,000 are
collected. No further collections on the receivables are expected. Profits are shared 60% to Felly and 40% Frilly.

Required: Prepare a schedule showing how the cash available on January 31 should be distributed.

Problem 6
The partnership of Jason, Kelly, and Becky, who share partnership profits 50%, 30%, and 20% respectively, decide
to liquidate their partnership. A summary balance sheet on January 1 is as follows:
Cash P16,500 Accounts payable P21,000
Receivable 28,000 Loan from Becky 9,500
Inventory 20,500 Jason capital 69,000
Equipment-net 101,000 Kelly capital 47,000
Loan to Jason 14,000 Becky capital 33,500
P180,000 P180,000

If cash is distributed to the partners on installment, P5,000 will be retained for possible contingencies in the
liquidation process.
During January, Jason agreed to offset his capital balance with his loan from the partnership, P25,000 was collected
on the accounts receivable, and the balance is determined to be uncollectible. Liquidation expenses of P2,000
were paid.

During February, P18,000 was collected from sale of inventories and P90,000 from sale of equipment. Additional
liabilities of P3,000 were discovered and P2,000 of liquidation expenses were paid. All cash was then distributed
in a final liquidation.

Required:
Assuming installment liquidation:
a. What is the total possible loss to be considered at the end of January ?
b. Compute the safe payment to partners on January 31.
c. Determine the final distribution to partners at end of February.
Assuming lump-sum liquidation:
d. The balances of each partner’s capital account at end of January.
e. Determine the amount received by partners on final cash distribution.

Problem 7 (Multiple Choice)

1. Partners Dalton, Edwards, and Finley have capital balances of P40,000, 90,000 and P30,000, respectively,
immediately prior to liquidation. Total remaining assets have a book value of P160,000, the liabilities having
been paid. Among these remaining assets is a machine with a fair value of P35,000. The partners split profits
and losses equally. Edwards covets the machine and is willing to accept it for P35,000 in lieu of cash. The other

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partners have no designs on specific assets, only cash in liquidation. How much cash, in addition to the
machine, would be first distributed to Edwards, before any of the other partners received anything?

a. P15,000 b. P50,000 c. P166,667 d. P300,000

2. On January 1, 2020, the partners of Coo, Daisy, and Ely, who share profits and losses in the ratio of 5:3:2,
respectively, decided to liquidate their partnership. On this date, the partnership condensed balance sheet was
as follows:

Cash P 50,000
Other assets 250,000
Total Assets P300,000

Liabilities P 60,000
Coo, Capital 80,000
Daisy, Capital 90,000
Ely, Capital 70,000
Total Liabilities and Equity P300,000
On January 15, 2020, the first cash sale of other assets with a carrying amount of P150,000 realized P120,000.
Safe installment payments to the partners were made the same date. How much cash should be distributed to
each partner?
Coo Daisy Ely
a. P15,000 P51,000 P44,000
b. P40,000 P45,000 P35,000
c. P55,000 P33,000 P22,000
d. P60,000 P36,000 P24,000

3. Andy, Brandy and Charlie are partners in textile distribution business, sharing profits and losses equally. On
December 31, 2020 the partnership capital and partners drawings were as follows:
Andy Brandy Charlie
Capital P100,000 P80,000 P300,000
Drawings 60,000 40,000 20,000
The partnership was unable to collect on trade receivables and was forced to liquidate. Operating profit for the
year amounted to P72,000 which was all exhausted including the partnership assets. Unsettled creditors’
claims at December 31 totaled P84,000. Brandy and Candy have substantial private resources but Andy has no
personal assets. Final cash distribution to Charlie was:
a. P78,000 b. P84,000 c. P108,000 d. P162,000

4. Allen, Branden & Caylin are in the process of liquidating their partnership. They have the following capital
balances and profit and loss percentages:
Capital Balance Profit/Loss
Allen P5,000 debit 20%
Branden P18,000 credit 50%
Caylin P6,000 credit 30%
The partnership balance sheet shows cash of P5,000, non-cash assets of P14,000, and no liabilities. Assuming
no liquidation expenses, what safe payment could be made?
a. P5,000 split between Branden & Caylin by a ratio of 5/8 and 3/8, respectively.
b. P5,000 to Branden only.
c. P1,000 to Allen, P2,500 to Branden, and P1,500 to Caylin.
d. P18,000 to Branden only

5. P, W and U decided to dissolve the partnership on November 30. Their capital balances and profit and loss ratio
on this date follow:
P P50,000 40%
W 60,000 30%
U 20,000 30%
The net income from January 1 to Nov. 30, is P44,000. Also, on this date, cash and liabilities are P40,000 and
P90,000 respectively. For P to receive P55,200 in full settlement of his interest in the firm, how much must be
realized from the sale of firm’s non-cash assets?
a. P196,000 b. P177,000 c. P193,000 d. P187,000

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