PARTNERSHIP ILLUSTRATIONS

Sample Transactions for Partnership FormationsTransactions Solutions

Cash 150,000 A, Capital (150,000 x 40%) 60,000 B, Capital (150,000 x 60%) 90,000

Cash 150,000 A, Capital (equally) 75,000 B, Capital (equally) 75,000

Note: in absence of agreement it shall be contributed equally.

Land 110,000Equipment 60,000 Notes Payable 20,000 C, Capital 150,000(to record the contribution of partner C)

Cash 100,000Equipment 40,000Supplies 10,000 D, Capital 150,000(to record the contribution of partner D)

Note: Partner E as industrial partner will have a memorandum

entry on his capital ledger account. Valuation will be based on (in order of priority):

1. Agreed value2. Fair value or Fair Market Value3. Book Value

Cash 150,000Accounts Receivable 140,000Equipment 150,000 Allowance for Bad Debts 40,000 Accounts Payable 100,000 Acosta, Capital 300,000(to record the contribution of Acosta)

Cash 140,000Accounts Receivable 135,000Equipment 175,000 Allowance for Bad Debts 40,000 Accounts Payable 150,000 Acosta, Capital 260,000(to record the contribution of Beltran)

Note: sample for valuation of cash and non cash contribution.

Sample Transactions for Partnership Divisions of Profits or Losses

Income Summary 100,000 Adam, Capital(100,00 x 60%) 60,000 Eve, Capital (100,00 x 40%) 40,000

Note: Division of profits is in accordance with agreement in the absence of agreement it shall be based on their original capital contributions.

In the illustration, if no agreement the entry will be:

Income Summary 100,000 Adam, Capital(100,00 x 60/90) 66,667 Eve, Capital (100,00 x 30/90) 33,333

Case 1: Equally

Income Summary 100,000 Adam, Capital 50,000 Eve, Capital 50,000

Case 2: 60% to Adam, 40% to Eve

Income Summary 100,000 Adam, Capital(100,00 x 60%) 60,000 Eve, Capital (100,00 x 40%) 40,000

Case 3: Based on capital contributions

Original capital contributionsIncome Summary 100,000 Adam, Capital(100,00 x 60/90) 66,667 Eve, Capital (100,00 x 30/90) 33,333

Beginning capital balance (check beg balance on their respective ledger account. Because the partnership is in the 1st year of operations beginning capital is the same to their original capital contributions. Entry will be the same as above.

Ending capital balancesAdam ending capital (60,000+20,000-10,000) = 70,000Eve ending capital (30,000+10,000-5,000) = 35,000

Income Summary 100,000 Adam, Capital(100,00 x 70/105) 66,667 Eve, Capital (100,00 x 35/105) 33,333

Case 4: 10% Interest on beginning capital and the balance will be distributed equally Adam Eve Balance Net income 100,000 Interest 6,000 3,000 91,000 Balance 45,500 45,500 ---- Total 51,500 48,500

Income Summary 100,000 Adam, Capital 51,500 Eve, Capital 48,500

Case 5: Salary to Eve for P10,000 and the balance distributed 60% for Adam and 40% to Eve. Adam Eve Balance Net income 100,000 Salary 10,000 90,000 Balance 54,000 36,000 ---- Total 54,000 46,000

Income Summary 100,000 Adam, Capital 54,000 Eve, Capital 46,000

Case 6: 10% interest on ending capital, salary to Eve for 10,000, 10% bonus based on Net Income before salaries and interest for Adam. The balance will be divided equally. Adam Eve Balance Net income 100,000 Interest 7,000 3,500 89,500 Salary 10,000 79,500 Bonus 10,000 69,500 Balance 34,750 34,750 ---- Total 51,750 48,250

Income Summary 100,000 Adam, Capital 51,750 Eve, Capital 48,250

Case 7: 10% interest on ending capital, salary to Eve for 10,000, 10% bonus based on Net Income after salaries and interest for Adam. The balance will be divided equally. Adam Eve Balance Net income 100,000 Interest 7,000 3,500 89,500 Salary 10,000 79,500 Bonus 7,950 71,550 Balance 35,775 35,775 ---- Total 50,725 49,275

Income Summary 100,000 Adam, Capital 50,725 Eve, Capital 49,275

Adam Eve Balance Net income 10,000 Interest 7,000 3,500 (500) Salary 10,000 (10,500) Bonus ----- (10,500) Balance (60, 40) (6,300) (4,200) ---- Total 700 9,300

Income Summary 10,000 Adam, Capital 700 Eve, Capital 9,300

Note: If the net income is insufficient, interest on their capital balances and salary should still be given but no bonus should be allocated. This rule applies also if the operations resulted to net loss.

Sample transactions for admission of new partner by purchase of interest

B2, Capital (50% x 750,000) 375,000 Doding Daga, Capital 375,000

Old P&L New P&LB1 25% 25%B2 75% 37.5%D. Daga - 37.5%

Note: gain or loss in the purchase of interest transaction is a personal gain or loss of the partner/s involved. Entry for case 2 and case 3 will be the same.

Pat, Capital (150,000 x 20%) 30,000Sponge, Capital (350,000 x 20%) 70,000 Mr. Crab, Capital 100,000

Old P&L New P&LPat 30% 24%Sponge 70% 56%Mr. Crab - 20%

Note: gain or loss in the purchase of interest transaction is a personal gain or loss of the partner/s involved. Entry for case 2 and case 3 will be the same. New P&L for the old partners were multiplied to remaining interest of 80% to arrive in their new P & L

Sample transactions for admission of new partner by investment

Cash 200,000 Judy, Capital 200,000(to record the contribution of Judy)

Job, Capital (40,000x20%) 8,000John, Capital (40,000x40%) 16,000Jun, Capital (40,000x40%) 16,000 Judy, Capital 40,000(to adjust capital balances according to agreement)

Old P&L New P&LJob 20% 14%John 40% 28%Jun 40% 28%Judy - 30%

Note: Total agreed capital after admission of Judy is P800,000. Judy invested for 30% interest in the partnership (P800,000x30%) resulted to P40,000 bonus. (P240,000 – P200,000)