Partnership Formation
Exercise 1: A and B are combining their separate business to form a partnership. Cash and non-cash assets
are to be contributed for a total capital of P600,000. The contributed liabilities are to be assumed by the
partnership. They further agreed that their capital balances after formation must be equal.
The following are the assets and liabilities to be contributed by each entity:
A B
Book Value Fair Value Book Value Fair Value
Accounts Receivable 40,000 40,000 - -
Inventories 60,000 80,000 40,000 50,000
Equipment 120,000 90,000 80,000 100,000
Accounts Payable 30,000 30,000 20,000 20,000
180 130
1. What is the amount of the additional cash to be contributed by A in accordance with their agreement?
120,000
2. What is the amount of the capital credit to B after formation? 300,000
Exercise 2: E and F form partnership. E is to invest certain business assets, and his liabilities will be
assumed by the partnership. E will also contribute sufficient cash to bring his total capital to an agreed
P360,000, which is 60% of the total agreed capital of the partnership. F on the other hand will invest cash
in the amount of P60,000 and a certain merchandise valued at the current market price.
The following are the assets and liabilities of E to be contributed to the partnership:
Book Value Agreed Value
Accounts receivable 108,000 108,000
Allowance for doubtful accounts 7,200 -12,000
Inventories 193,200 210,000
Store equipment 54,000 54,000
Accumulated depreciation – store equipment 36,000 -26,400
Office equipment 36,000 36,000
Accumulated depreciation – office equipment 19,200 -9,600
Accounts payable 96,000 -96,000 = 264,000
1. What is the amount of additional cash to be invested by E in accordance with their agreement? 96,000
2. What is the current market value of the merchandise to be contributed by F? 180,000
360 / 60% x 40% = 240 – 60
Exercise 3: A and B decided to combine their businesses and form a partnership. The following were their
assets before formation:
A B
Assets 421,500 206,000
Liabilities 183,000 72,000
The following were the agreements made to adjust their assets and liabilities:
• Both parties will provide P10,000 for doubtful accounts. (20,000)
• A and B’s fixed assets were over-depreciated by P2,000 and under-depreciated by P1,000
respectively. +2,000, (1,000)
• Accrued expenses are to be recognized in the books of A and B in the amount of P2,400 and
P2,000 respectively. liab
• Obsolete inventory to be written off by A amounted to P7,000 (7,000)
• A and B also agreed to share profits and losses equally.
1. What is the total asset of the partnership after formation? 601,500
Exercise 4: A and B each operates a separate business and agreed to form a partnership. The assets and
liabilities of the two sole proprietors before formation were the following:
A B
Cash 38,400 144,000
Accounts receivable 384,000 326,400 288,000 259,200
Inventory 480,000 432,000
Equipment 120,000 144,000 x 90% = 129,600 = 14,400 loss
Accounts payable 120,000 192,000
Notes payable 24,000 -
Unadjusted 878,400 816,000
AR (57,600) (28,800)
Loss ¼; ¾ (3,600) (10,800)
Adjusted 817,200 776,400
The following were agreed upon formation:
• A’s accounts receivable was to be taken over at book value less 15% and B’s accounts receivable
at book value less 10%.
• A’s equipment is new and considered adequate for the new business, however B’s equipment was
disposed at 90% of its book value. One-fourth of any gain or loss resulting from the sale of
equipment were borne by A.
• Any liabilities were assumed by the new partnership.
1. Assuming B invest sufficient cash to give him a one-half interest in the partnership after charging to A’s
capital account his share in the loss on the sale by B of the equipment, how much must B invest? 40,800
Partnership Operation
Exercise 1: On January 1, 2023, A, B and C formed ABC Partnership with original capital contribution of
P1,500,000, P2,500,000 and P1,000,000. A was appointed as managing partner.
During 2023, A, B and C made additional investments of P2,500,000, P1,000,000 and P1,500,000,
respectively. At the end of 2023, A, B and C made permanent withdrawals of P1,000,000, P500,000 and
P2,000,000, respectively. Also, at the end of the current year, the capital balance of C was reported at
P1,600,000. The profit or loss agreement of the partners were as follows:
• 10% interest on original capital contribution of the partners.
• Quarterly salary of P200,000 and P50,000 for A and B, respectively.
• Bonus to A equivalent to 20% of Net Income after interest and salary to all partners
• Remainder is to be distributed equally among the partners.
1. What is the partnership profit for the year ended December 31, 2023?
2. What is A’s share in partnership profit for 2023?
3. What is B’s share in partnership profit for 2023?
Exercise 2: On January 1, 2023, K and S formed KS Partnership and the article of co-partnership provides
that profit or loss shall be distributed accordingly:
• 10% interest on average capital balance.
• P250,000 and P500,000 quarterly salary for K and S, respectively.
• The remainder shall be distributed in the ratio of 3:2 for K and S, respectively.
The following transactions regarding the capital balance of the partners for year 2023 are provided:
K, Capital S, Capital
January 1, 2023 investment P5,000,000 x 12/12 = 5M P2,500,000 x 12/12 = 2.5M
March 31, 2023 investment 500,000 x 9/12 = 375k
July 1, 2023 withdrawal (1,000,000) x 6/12 = (500k)
September 30, 2023 withdrawal (1,000,000) x 3/12 = (250k)
October 1, 2023 investment 3,500,000 x 3/12 = 875
AVERAGE 5,375 2,625
The chief accountant of the partnership reported net income of P5,000,000 for the year 2023.
1. What is the capital balance of K on December 31, 2023?
K S
Ending before income 7,500 2,000
10% interest 537,500 262,500
Salaries 1,000,000 2,000,000
Remainder 3:2 720,000 480,000
Ending after income 9,757,500 4,742,500
Exercise 3: On July 1, 2023, D and J formed DJ Partnership with initial investment of P5M and P10M,
respectively. D is appointed as the managing partner.
The articles of co-partnership provide that profit or loss shall be distributed accordingly:
• 30% interest on original capital contribution ratio.
• Monthly salary of P100,000 and P50,000 respectively for D and J.
• D shall be entitled to a bonus equivalent to 20% of net income after interest, salary and bonus.
• The remainder shall be distributed in a ratio of 3:2 for D and J respectively.
For the year ended December 31, 2023, the partnership reported net income of P3,750,000.
1. What is the share in net income of D for the year ended December 31, 2023? 1,750,000
2. Using the same data, what is the share in net income of J assuming the bonus is equivalent to 20% of net
income after interest and salary but before bonus for the year ended December 31, 2023? 1,992,000
D J
30% Interest 750 (5M x 30%) 1,500 (10m x 30%)
Salaries 600 (100k x 6) 300 (50k x 6)
Bonus 100*
Remainder 500k (3:2) 300 200
1,750,000 2,000,000
*3,750 – interest and salaries = 600 / 1.20 = 500 x 20%
If before bonus: 600 x 20% = 120
D J
30% Interest 750 1,500
Salaries 600 300
Bonus 120
Remainder 3:2 480 288 192
1,758,000 1,992,000
Exercise 4: Partners SB and DK have profit and loss agreement with the following provisions: salaries of
P450,000 and P675,000 for SB and DK, respectively: a bonus to SB of 10% of net income after salaries;
and interest of 10% on average capital balances of P300,000 and P525,000 for SB and DK, respectively.
One-third of any remaining profits will be allocated to SB and the balance to DK.
1. If the partnership had net income of P330,000, how much should be allocated to Partner SB, assuming
that the provisions of the profit and loss agreement are ranked in order of priority starting with 1) salaries,
2) interest, 3) bonus and are provided to the extent of the earnings only?
Ratio: 450/1,125 x 330,000 = 132,000
SB DK
450/1125 675/1125
Salaries 132,000 198,000
Interest - -
Bonus - -
Remainder 1:2 - -
330,000 132,000 198,000
2. If the partnership had net income of P330,000, how much should be allocated to Partner SB, assuming
that the provisions of the profit and loss agreement are ranked in order of priority starting with 1) salaries,
2) interest, 3) bonus
SB DK
Salaries 450 675
Interest 30k 52.5k
Bonus - -
Remainder 1:2 (877,500) (292,500) (585,000)
330,000 187,500 142,500
