Partnership Operations

Mary the Queen College of Pampanga

July 02, 2016
Partnership Operations
Proper distribution of partnership profits and
losses
Changes in the profits and loss ratios
Correction of net income (loss) of prior years
Preparation of financial statements for the
partnership, such as BS, IS, SPC, Cash Flow
RULE OF THUMB-
Division of Profit and Losses
It should be based on partners agreement
If no agreement, it should be based on original capital
contributions
If partners agreed to divide profits only, losses if any
should be divided in the same manner
Industrial partner shares in profit as maybe provided
by the other partner/s but not in losses
Methods of Distribution
Equally
Unequal or arbitrary ratio
Ratio of partners capital balances on a particular date,
or average capital account balance ratio
Allowing interest partners capital account prior to
dividing the remaining net income or loss in a specified
ratio
Allowing salaries to partners prior to dividing the
remaining net income or loss in a specified ratio
Bonus to managing partner based on net income
Problem 2-1
Req1: Based on Beginning Capital
balances or the fiscal period
Intheratioofinvestmentatthebeginningorthefiscal
period.

Castro : (P26,000/P42,500) xP23,800 =P14,560

Diaz: (P16,500/P42,500) xP23,800 =9,240

P23,800

JournalEntry:

IncomeSummary 23,800
CastroCapital 14,560
DiazCapital 9,240
 Req2: continuation
Castro:
 Req2: continuation
Diaz:
Req2: Based on Average Capital
Investmentandwithdrawalsaretobeconsideredas
madeatthebeginningofthemonthifmadebefore
themiddleofthemonth,andaretobeconsideredas
madeatthebeginningofthefollowingmonthifmade
afterthemiddleofthemonth.

Castro:(P31,250/P50,000) xP23,800 = P14,875

Diaz:(P18,750/P50,000) xP23,800 = __8,925
P23,800
Req3: Based on interest on
average capitals, salaries and
remaining equally
Interestof24%onaveragecapitals,salariesto
CastroandDiazofP36,000andP24,000respectively
andanybalanceequally.
Investmentandwithdrawalsaretobeconsideredas
madeatthebeginningofthemonthifmadebefore
themiddleofthemonth,andaretobeconsideredas
madeatthebeginningofthefollowingmonthifmade
afterthemiddleofthemonth.
 Req3: continuation
Castro Diaz Total
Interest P7,500 P4,500 P12,000
Salaries 36,000 24,000 60,000
Balance,equally (24,100) (24,100) (48,200)
Total P19,400 P4,400 P23,800
Req4: Based on allowance,
interest and arbitrary ratio
AllowancetoCastroofabonusof25%ofthenetprofit
afterbonusinterestof10%tobeallowedonthe
excessoftheaverageinvestment(simpleaverage)of
onepartneroverthatoftheother,andanybalancein
theratioof3:2toCastroandDiaz,respectively.
Req4: continuation
Castro Diaz Total
Bonus(a) P4,760 P P4,760
Interest(b) 1,100 1,100
Balance,3:2 _10,764 _7,176 _17,940
Total P16,624 P7,176 P23,800

Computations:
a. Netprofitbeforebonus P23,800
Netprofitafterbonus(P23,800/125%) _19,040
Bonus P4,760

b. AveragecapitalofCastro[(P26,000+P32,000)/2] P29,000
AverageofDiaz[(P16,500+P19,500)/2] _18,000
Castro'sexcess P11,000
Multiplyby ___10%
Interest P1,100
Req5: Based on salaries,
arbitrary ratio and loss
distributed equally
SalariesofP3,000andP2,000amonthtoCastroand
Diaz,respectivelyprovidedannualearningare
sufficienttocovertheallowanceifearningare
insufficient,theprofitsshallbedistributedinthe
salaryratioifoperationsresultinanloss,itshallbe
distributedequally.
 Req5: continuation
Castro:(P3,000/P5,000)xP23,800=P14,280

Diaz:(P2,000/P5,000)xP23,800=__9,520

P23,800

Problem 3.1
Problem 3.2
Problem 3.3
Problem 3.4
Problem 3.7
Problem 3.8
Problem 6.1
Problem 6.2
Problem 6.3
Problem 8
Problem 13.1
Problem 13.2
Problem 13.3
Problem 13.4
Correction of Partnership Net
Income of Prior Period
Determinethecorrectnetprofitofthepriorperiod
Computethepropershareofeachpartnerusingthe
profitandlossintheyearinwhichtheerroroccurred.
Computethedifferencebetweentheshareinthe
profitthateachactuallyreceivedandtheshareeach
wouldhavereceivedfromNo.2
Adjustthepartnerscapitalaccountsbytheamountin
No.3
MP 49
Issues in Changing the P&L ratio
Under/over valuation of existing assets
Intangible assets not recorded
Unrecorded other assets and liabilities
Approaches for Fair Valuation
Adjust all assets and liabilities to reflect their fair
values
Calculate the effects of all the differences between
the book values and fair values as well as the
unrecorded assets and liabilities, and
Adjust only the partners capital account for the net
effect of these adjustments using the old profit and
loss ratio
Sample Problem
Assume that Ben and Cob, sharing profits and losses 10%
and 90%, respectively, decided to change their ratio to
25% to Ben and 75% to Cob. Assume also that on the date
of the change, the partnership held land that was carried
at a cost of P50,000 but had a fair value of P350,000.
Further assume that the land was later sold for P400,000.

How much would Ben and Cab received?

Sample Problem-contn
1. Land (FV 350,000-BV50,000) 300,000
Ben Capital (300,000 x .10) 30,000
Cob Capital (300,00 x .90) 270,000

2. Ben: 50,000 x 25% 12,500

Cob: 50,000 x 75% 37,500
Sample Problem-contn
Be n Co b T o ta l
P o rtio n o f g a in d e v e lo p e d p rio r
to c h a n g e in P & L ra tio 3 0 ,0 0 0 2 7 0 ,0 0 0 3 0 0 ,0 0 0
P o rtio n o f g a in d e v e lo p e d
s u b s e q u e n tly 1 2 ,5 0 0 3 7 ,5 0 0 5 0 ,0 0 0
T o ta l a m o u n t re c e iv e d b y
p a rtn e rs 4 2 ,5 0 0 3 0 7 ,5 0 0 3 5 0 ,0 0 0
Assignment
Multiple choice problems
15-20
24-27
45-48
50-51
MP 18
MP 19
MP 20
MP 24-27
MP
45-
48
MP 50-51
Thank you and Good Day!