CITY COLLEGE OF

C ALAMBA
Dalubhasaan ng Lungsod ng Calamba
PROFESSIONAL ELECTIVE 1

COURSE MATERIAL NO. 2 PARTNERSHIP OPERATION

Rules for the Distribution of Profit and Losses

The losses and profits shall be distributed in conformity with the agreement. If
only the share of each partner in the profits has been agreed upon, the share of
each in the losses shall be in the same proportion.

In the absence of a stipulation, the share of each partner in the profits and
losses shall be in proportion to what he may have contributed, but the industrial
partner shall not be liable for the losses. As for profits, the industrial partner
shall receive such share as may be just and equitable under the circumstances.
If, besides his service he has contributed capital, he shall also receive a share
in the profits in proportion to his capital. (Article 1797)

A stipulation which excludes one or more partners from any share in the profits
or losses is void. (Article 1799)

The summary of the above provision of the Civil Code is as follows:

A. As to Capitalist Partner

Distribution of Profits
1. Profits shall be divided according to the partners’ agreement.
2. If there is no agreement, the profits shall be based in proportion to
their capital contribution.

Distribution of Losses
1. Loses shall be distributed according to the partners’ agreement.
2. If there is no agreement as to distribution of losses, but there is an
agreement as to profits, the losses shall be distributed according to
the profit sharing ratio.
3. In the absence of agreement, the loses shall be based in proportion to
their capital contribution.

B. As to Industrial Partner

Distribution of Profits
1. Profits shall be divided according to the partners’ agreement.
2. If there is no agreement, industrial partner receives a just and
equitable under the circumstances. Industrial partner shall receive such
share, which may be satisfied first before the capitalist partners divide
the profits.

Note: The partners shall determine what equitable share of the industrial partner
is. However, in case the parties cannot agree on what is just and equitable share,
the court will determine the just and equitable share of the industrial partner.

Distribution of Losses
1. Losses shall be distributed according to the partners’ agreement.
2. In the absence of agreement, industrial partner is not liable for losses.

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 CITY COLLEGE OF
C ALAMBA
Dalubhasaan ng Lungsod ng Calamba
PROFESSIONAL ELECTIVE 1

The partners may agree with any of the following schemes of distribution of
profits and losses:
1. Equally
2. Arbitrary ratio
3. Capital Ratio
a. Original Capital
b. Beginning Capital
c. Ending Capital
d. Average Capital
I. Simple Average
II. Weighted Average (Peso-Month/Peso-Day Average capital)
4. Salary Allowance and the balance on the agreed ratio
5. Interest Allowance and the balance on the agreed ratio
6. Bonus to managing partner and the balance on the agreed ratio
7. Order of priority distribution schemes if profits are not sufficient to
cover the salary and interest allowances.

FOR EQUITY OF DISTRIBUTION OF NET INCOME ALLOWANCES ARE GIVEN

a. Salary Allowance – it is given to recognize the time rendered by the
partners to the entity.
b. Interest Allowance -nit is given to recognize the difference in the capital
contributed to the partnership.
c. Bonus Allowance – it is given if the partnership realized a profit to give
recognition to the managerial skills of the partner.

Permanent vs Temporary Withdrawals

A. Permanent (Capital Withdrawals) – it affects the computation of average
capital. It is a withdrawal against the invested capital.
B. Temporary (Personal Withdrawals) – it does not affect the computation of
average capital. It is a withdrawal in anticipation of profit.

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 CITY COLLEGE OF
C ALAMBA
Dalubhasaan ng Lungsod ng Calamba
PROFESSIONAL ELECTIVE 1

PRACTICE PROBLEMS

PROBLEM 1

RONALD, GINO and RIZA are manufacturers’ representative in the wholesale business.
Their capital accounts in the AQX Partnership for 2030 were as follows:

RONALD GINO RIZA

January 1, balances 135,000 180,000 P75,000
March 1, withdrawal 36,000
April 1, investment 30,000
May 1, investment 72,000
June 1, investment 27,000
August 1, withdrawal 9,000
October 1, withdrawal 54,000
December 1, investment 18,000

Required: For each of the following independent income-sharing agreements, prepare

an income distribution schedule.

a. Monthly salaries are P30,000 to RONALD. P50,000 to GINO and P45,000 to

RIZA. RONALD RECEIVES a bonus of 5% of net income after deducting his bonus.
Interest is 12% of ending capital balances. Any remainder is divided by
RONALD, GINO and RIZA in a 25:40:35 ratio. The Income Summary account has
a credit balance of P2,835,000 before closing.

b. Interest is 10% of weighted average of capital balances. Annual salaries

are P480,00 to RONALD, P630,000 to GINO and P510,00 to RIZA. GINO receives
a bonus of 25% of net income after deducting the bonus and his salary. Any
remainder is divided in a 2:3:4 ratio by RONALD, GINO and RIZA,
respectively. Net income was P1,050,000 before any allocations.

c. RIZA receives a bonus 20% of net income after deducting the bonus and
salaries. Annual salaries are P600,000 to RONALD, P540,000 to GINO and
P750,000 to RIZA. Interest is 15% of the ending capital in excess of
P140,000. Any remainder is to be divided by RONALD, GINO and RIZA in the
ratio of their beginning capital balances. Net income was P1,740,000 before
any allocations.

d. Monthly salaries are P32,000 to RONALD, P40,000 to GINO and P42,000 to

RIZA. GINO receives a bonus of 10% of net income after deducting his bonus.
Interest is 25% on the excess of the ending capital balances over the
beginning capital balances. Any remainder is to be divided by RONAL, GINO
and RIZA in a 3:2:1 ratio. The Income Summary account has a debit balance
of P750,000 before closing.

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 CITY COLLEGE OF
C ALAMBA
Dalubhasaan ng Lungsod ng Calamba
PROFESSIONAL ELECTIVE 1

PROBLEM 2

The capital accounts of Chris and Toper shows the following information for the
year 2020:

Chris Toper
January 1 520,000 330,000
March 14 30,000
March 20 (temporary) (15,000)
April 30 24,000
May 25 (permanent) (22,500) (12,000)
July 1 5,000
September 10 (temporary) (15,000)
October 1 30,000

The income summary account shows a credit balance of P450,000 on December 31,
2020. The profit and loss of the partnership shall be distributed in the following
manner:

- Salary allowance of P200,000 to Chris and P230,000 to Toper.

- Interest allowance of 12% on average capitals
- Bonus of 10% on net income after salary and interest but before bonus to
Toper.
- Balance divided equally.

Req. 1: What is the ending capital of the Toper?

a. P585,728
b. P599,377
c. P584,377
d. P600,727

PROBLEM 3

Pam and Drix formed a partnership in 20x1 to operate a bookkeeping service. Pam
contributed the initial capital while Drix managed the business. With the
assistance of their consultants, they have arrived at the following agreement:

1. Each partner is allowed to withdraw P1,000 in cash from business every

month. Any withdrawal in excess of that figure will be accounted for as a
direct reduction to the partners’ capital balance.
2. Partnership profits and losses will be allocated each year according to the
following plan:
- Interest of 15% will be accrued by each partner based on the monthly
average capital balance for the year.
- As the managing partner, Drix is to receive the credit for a bonus equal
to 20% of the year’s net income.
- Any remaining profit or loss will be divided equally between the two
partners.

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 CITY COLLEGE OF
C ALAMBA
Dalubhasaan ng Lungsod ng Calamba
PROFESSIONAL ELECTIVE 1

Pam and Drix begin the year of 20x1 with capital balances of P150,000 and P30,000,
respectively. On April 1, of the year, Pam invested additional P8,000 cash in the
business, while on July 1, Drix withdraws P6,000 in excess of the specified
drawing allowance. The partners withdraw the amount of cash allowed every month.
The partnership reports net income of P30,000 for 20x1.

The amount of capital balances of Pam and Drix on December 31, 20x1 will be:
a. P167,675; P20,325
b. P155,675; P26,325
c. P158,000; P14,00
d. P159,675; P22,325

PROBLEM 4

The partnership of Mark, Luke and John was formed on January 1, 2030. The original
investments were as follows: Mark, P840,000; Luke, P1,260,000; John, P1,890,000.
According to the partnership agreement, net
income or loss will be divided among the respective partners as follow: (1)
salaries of P126,000 for Mark, P105,000 for Luke, and P84,000 for John. (2)
Interest of 8% on the average capital balance during the year to each partner.
(3) The remainder is divided equally.

Additional information is as follows: Net income of the partnership of the year

ended December 31,2030 was P735,000. Mark invested an additional P210,000 in the
partnership on July 1, 2030. Mark, Luke and John made regular drawings against
their shares of net income during 2030 of P105,000 each.

The partner’s capital balances as of December 31, 2030 are:

Mark Luke John

a. P1,179,000 P1,393,700 P1,731,800
b. 1,074,500 1,288,700 1,626,800
c. 966,000 1,071,000 1,416,800
d. 1,284,500 1,393,700 1,731,800

PROBLEM 5

Marie, Paz and Love formed partnership on January 1, 20x1. The contribution of
the partners are as follows: Marie P300,000; Paz P250,000 and Love P450,000. The
following are the agreements of the partners:

- Monthly salary to Marie, Paz and Love of P5,000 each.

- Bonus to Marie of 10% of net income after interest and bonus
- Interest of 5% based on the capital contribution. The interest is treated
as expense as per agreement of the partners.

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 CITY COLLEGE OF
C ALAMBA
Dalubhasaan ng Lungsod ng Calamba
PROFESSIONAL ELECTIVE 1

The net income of the partnership in year 20x1 is P264,000. What is the total
income of Marie received from the partnership?
a. P 98,819
b. P102,000
c. P117,000
d. P 87,000

PROBLEM 6

AB Partnership has net income of P50,000 for the year. Partner A contributed
P90,000 and Partner B contributed P60,000. The partners agree to share profits
and losses as follows:

- Salary allowance of P15,000 and P30,000 of A and B, respectively.

- Interest allowance of P 10% based on average capital.
- Bonus of 10% based on net income to be given to A.
- Balance equally

The net income is allocated up to the extent of earning only by giving first
priority to salary, then interest and then to bonus.

Req. 1: Compute the share of B in the net income

a. P32,000 c. P28,500
b. P31,000 d. P36,000

Req. 2: Using the information above, except that the net income is P61,000. What
is the net income share of A?
a. P27,000 c. P30,100
b. P25,000 d. P33,450

PROBLEM 7

John and Earl formed a partnership on May 1, 20x1. John invested P350,000 cash
while Earl invested equipment’s with book value of P600,000 and fair value of
P450,000. On September 1, 20x1, John invested additional cash of P50,000. ON
October 31, 20x1, Earl withdrew cash against his capital amounting to P20,000.
The partners agree on the following:

- Monthly salary allowances of P2,500 and P3,000 to John and Earl,

respectively. The salary allowance is treated as expense
- 12% interest based on the beginning capital.
- 25% bonus on net income after bonus to partner John.

The interest allowance is withdrawn by the partners in anticipation of profit

share. The income summary has a credit balance amounting to P125,000.

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 CITY COLLEGE OF
C ALAMBA
Dalubhasaan ng Lungsod ng Calamba
PROFESSIONAL ELECTIVE 1

Req. 1: The total share in net income of partner Earl in the partnership is:
a. P68,750 c. P56,250
b. P69,500 d. P55,500

Req. 2: What is the capital balance of partner John on December 1, 20x1?

a. P440,750 c. P449,500
b. P441,500 d. P450,250

PROBLEM 8

FRANCIS, CHINO and APRIL formed a partnership on January 1, 1030, with each
partner contributing P600,000 cash. The partnership agreement provided that APRIL
receives a salary of P30,000 per month for managing the partnership business.
APRIL has never withdrawn any money from the partnership. FRANCIS withdrew
P120,000 in each of the years 2030 and 2031, and CHINO invested an additional
P240,000 in 2030 and withdrew P240,000 during 2031. Due to an oversight, the
partnership has not maintained formed accounting records, but the following data
as of December 31, 2031 is available.

Cash 855,000
Accounts Receivable 600,000
Merchandise Inventory 1,200,000
Computer Equipment, net 1,110,000
Prepaid Expenses 120,000
Total 3,885,000

Accounts Payable 570,000

Notes Payable 315,000
Total 885,000

Additional Data:
1. The partners agree that income for 2031 was about half of the total income
for the first two years of operations.
2. The partnership agreement provides that profits, after allowance for
APRIL’s salary, are to be divided each year on the basis of the beginning
of the year capital balances.

For the year ended December 31, 2031, the capital balances of the partners are:
FRANCIS CHINO APRIL
a. P600,000 P960,000 P1,080,000
b. P561,818 P850,909 P1,587,273
c. P480,000 P720,000 P1,080,000
d. P561,818 P720,000 P1,587,273

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 CITY COLLEGE OF
C ALAMBA
Dalubhasaan ng Lungsod ng Calamba
PROFESSIONAL ELECTIVE 1

PROBLEM 9

Ely and Marcus are partners engaged in a manufacturing business. Transactions

affecting the partners’ capital accounts in 2030 are as follows:

Ely Marcus
Debit Credit Debit Credit
Beg. Balance P 50,000 P 70,000
April 1 30,000 P 20,000
June 30 P 25,000 50,000
Sept. 1 45,000 60,000
Oct. 1 70,000 40,000

The income summary has a debit balance of P45,000.

Agreement between Ely and Marcus are as following:

o Interest on average capital at 8%

o Salaries of P25,000 and P35,000 are given to Ely and Marcus, respectively
o Bonus to Marcus at 25% of net income after deducting interest and salaries
but before deducting bonus
o Balance is to be divided equally.

How much is the net / decrease in Marcus’s capital account during 2015?
a. P 33,600 c. P (6,400)
b. P(16,400) d. P 1,400

PROBLEM 10

PLANET GARAPATA was organized and began operations on May 1, 2030. On that date,
Buddy invested P1,000,000 cash and Raymond invested land and building with current
fair values of P1,750,000 and 850,000, respectively. The average capital balances
of Buddy and Raymond were determined to be 1,223,890 and 1,222,090, respectively.
The partnership contract includes the ff.

Remuneration plan:
Buddy Raymond
Annual salaries 152,200 151,800
Annual interest on Ave. balance 20% 30%
Remainder 60% 40%

During the year ended April 30,2031, the partnership had net sales of P3,000,000,
cost of goods sold amounting to P1,000,000 and operating expenses of 391,090. The
partner’s salaries had been recorded as part of the operating expenses.

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 CITY COLLEGE OF
C ALAMBA
Dalubhasaan ng Lungsod ng Calamba
PROFESSIONAL ELECTIVE 1

How much is the total share of Buddy in the net income for the period?
a. P843,281 c. P995,481
b. P795,829 d. P917,429

***END***

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