PARTNERSHIP
By the contract of partnership two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing the profits
among themselves. Two or more persons may also form a partnership for the exercise of a
profession.
Priority in Valuing Contribution
1. Agreed Value
2. FMV/ Appraised- Not Assessed
3. Any liability assumed by the partnership will be included in the partnership books
Contributed Asset less liability assumed equals Contributed Capital
Capital Credit
1. Capital of partner after formation
2. Always based on agreed capital
3. If silent: contributed = capital
DISTRIBUTION OF P&L IS ALWAYS BASED ON AGREEMENT
1. P&L Ratio
2. Income distribution tool
a. Interest*
b. Salaries*
c. Bonus
d. Remainder
*Should be prorated annually
Bonus = after interest and salaries
B= %( Net income – Sal – Int)
Bonus = after interest, salaries and bonus
B= % (Net Income-Sal-Int-Bonus)
Scenarios that no bonus is allocated:
1. Net loss
2. Negative Basis
Average Capital
1. Simple = (Beg + End)/2
2. Weighted, every investment and withdrawal is accounted
Additional Notes:
1. If there is no Profit ratio, assuming there is an operating gain, do not use the loss ratio
instead go with original contribution
2. If there is no Loss ratio, assuming there is an operating loss, do use the profit ratio
The business assets of RR and QQ appear below:
Account Titles QQ RR
Cash 11,000 22,354
Accounts Receivable 234,536 567,890
Inventories 120,035 260,102
Land 603,000 0
Building 0 428,267
Furniture and Fixtures 50,345 34,789
Other Assets 2,000 3,600
Total 1,020,916 1,317,002
Accounts Payable 178,940 243,650
Notes Payable 200,000 345,000
QQ, Capital 641,976 0
RR, Capital 0 728,352
Total 1,020,916 1,317,002
QQ and RR agreed to form a partnership by contributing their respective assets and equities
subject to the following adjustments:
a, Accounts Receivable of P20,000 in QQ’s books and P35,000 in RR’s books are
uncollectible.
b, Inventories of P5,500 and P6,700 are worthless in QQ’s and RR’s books,
respectively.
c. Other assets of P2,000 and P3,600 in QQ’s and RR’s books are to be written off.
Required:
Compute for the following :
1. How much is the capital account of partner QQ after adjustments? 614,476
2. How much is the capital account of partner RR after adjustments? 683,052
3. The total assets of the partnership just after formation is 2,265,118
The partnership of DouDou and MiaoMiao was formed and commenced operations on March
01, 2019 with DouDou contributing P30,000 cash and MiaoMiao investing cash of P10,000 and
equipment with an agreed upon valuation of P20,000. On July 01, 2019, MiaoMiao invested an
additional P10,000 in the partnership. DouDou made capital withdrawal of P4,000 on May 02,
2019 but reinvested the P4,000 on October 01, 2019. During 2019, DouDou withdrew P800 per
month and MiaoMiao, the managing partner, withdrew P1,000 per month. These drawings were
charged to Salary Expense. A preclosing trial balance taken at December 31, 2019 is as
follows:
DEBIT CREDIT
Cash 9,000
Receivable, net 15,000
Equipment, net 19,000
Other Assets 50,000
Liabilities 17,000
DouDou, capital 30,000
MiaoMiao, capital 40,000
Service Revenue 50,000
Supplies Expense 17,000
Utilities Expense 4,000
Salaries to partners 18,000
Other Miscellaneous Expenses 5,000
Total 137,000 137,000
the partners agreed on the following: a monthly salary allowances of P800 and P1,000 for
DouDou and MiaoMiao, respectively; interest allowance at 12% annual rate on average capital
balances and remaining profits allocated equally.
Required
1. How much is the partnership net income?
2. How much is the average capital of DaoDao?
3. How much is the average capital of MiaoMiao?
4. How much is DaoDao's share in the partnership profits?
5. How much is MiaoMiao's share in the partnership profits?
1.
Service Revenues 50,000
Less: Expenses
Supplies 17,000
Utilities 4,000
Other Miscellaneous Expenses 5,000 26,000
Net Income 24,000
2.
DouDou 30,000 x 2 60,000
130,00
26,000 x 5 0
30,000 x 3 90,000
280,00
0
Average annual capital
(P280,000/12) 23,333
3.
MiaoMiao 30,000 x 4 120,000
40,000 x 6 240,000
360,000
Average annual capital
(P360,000/12) 30,000
4.
DouDou MiaoMiao Total
Salary Allowances(10 months) 8,000 10,000 18,000
Interest on Average capital(12%) 2,800 3,600 6,400
Balance, equally (P24,000 - 24,400) -200 -200 -400
10,600 13,400 24,000
