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05-23-2022 CRC-ACE - AFAR - Week 01 Accounting for Partnership - Part 1 Operations
BS accountancy
University of Cebu
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ADVANCED FINANCIAL ACCOUNTING & REPORTING PROF. ROEL E. HERMOSILLA
WEEK 1 - ACCOUNTING FOR PARTNERSHIP
PARTNERSHIP OPERATIONS
Allocation of Partnership Income (Loss) The partners should have a written agreement, called articles of co-partnership, specifying the manner in which partnership income (loss) is to be distributed. Note that in the absence of a predetermined agreement, the profit and loss (P&L) is divided according to original capital contributed by partners.
A number of issues arise which complicate the allocation of partnership income (loss).
Partners may receive interest on their capital balances. If so, it must be determined what constitute the capital balance (e., the year-end amount of some type of weighted-average).
Some of the partners may receive a salary.
Some of the partners may receive a bonus on distributable net income. If so, you need to determine if the bonus should be computed before or after salary, interest and bonus allocations.
A formula needs to be determined for allocating the remaining income. The formula agreed upon is usually termed the residual, remainder, or profit (loss) sharing ratio.
Finally, the partners should decide upon how income is to be allocated if net income is insufficient to cover partner’s salaries, bonuses, and interest allocations. These allocations are usually made even if the effect is to create a negative remainder. This is important to note that partners may choose to allocate losses (or a negative remainder) in a different manner than income.
Example: Partnership P & L Distribution A, capital P300,000; B, capital P100,000; and C, capital P50, Partners receive 5% interest on beginning capital balances Partner B receives a P60,000 salary Partner C receives a 10% bonus after interest and salaries The P&L ratios are A – 50%; B – 30%; C – 20%
Assuming partnership net income of P182,500, the distribution schedule would be prepared: A B C Total 5% interest on beginning capital P15,000 P 5,000 P 2,500 P 22, Salary to partner B 60,000 60, Bonus to partner C after interest & salaries
10,000* 10,
Remaining distribution 50:30:20: 45,000 27,000 18,000 90, Total share P60,000 P92,000 P30,500 P182,
*(P182,500 – P22,500 – P60,000) x .10 = P10,
Note that if the interest, salary, and bonus allocation had exceeded net income, the excess would have been deducted on the distribution schedule in the P&L ratio.
Note also, that if the bonus is based on net income after interest, salary and bonus then, bonus would have been computed as follows: P182,500 – P22,500 – P60,000 divided by 110% x 10%.
Sometimes, problems in the CPA board exam will require the examinee to determine first the net income before allocation is made. In this case, the method of determining net income must first be determined in order to compute the distributed net income. If the problem is silent as to the method used, then the generally accepted method must be the accrual basis of accounting net income.
TThhee PPrrooffeessssiioonnaall CCPPAA RReevviieeww SScchhooooll
Davao 3/F GCAM Bldg. Monteverde St. Davao City 0917-
Baguio 2 nd Flr. #12 CURAMED Bldg. Marcos Highway, Baguio City 0906-0775156 / 09618683385
Main: 3F C. Villaroman Bldg. 873 P. Campa St. cor Espana, Sampaloc, Manila (02) 8735 8901 / 0917- email add: crc_ace@yahoo.com/crcacemanila@gmail
PROBLEMS
- A and B formed a partnership to operate a retail store of various merchandise. They agreed on the following distribution of profits and losses. A B Salaries 400,000 350, Interest on ending balances before distribution of profit/(loss)
25% 30%
Bonus on net income after salaries and interest but before bonuses
15% 12%
Remainder 40% 60%
Only 80% of the partners’ share in net income is distributed. The remaining 20% is retained as partners’ capital. Partnership’s net income amounted to P2,500,000 at the end of the year. A’s and B’s ending capital balances prior to distribution of profit/(loss) amounted to P1,250,000 and P1,100,000, respectively.
A) How much is B’s share in the partnership net income? A. 1,018,985 B. 950,000 C. 1,297,985 D. 997,
B) How much is B’s ending capital after the distribution of the net income? A. 1,359,597 B. 2,418,985 C. 1,600,000 D. 2,397,
- Diana and Elizabeth are partners operating a small chain of convenience stores. Their business has grown substantially over the last six years and they amended their partnership agreement to provide the following distribution of profits and losses: Diana Elizabeth Salaries 49,000 None Commission on gross sales None 4% Interest on average capital balances 7% 9% Bonus to Diana is 10% of net income after salary, commissions, interest and bonus. Remainder 40 60
Gross sales for 202A was 3,000,000. Income after deducting salaries, commissions and interest was 132,000. Average capital balances were 720,000 and 540,000 for Diana and Elizabeth.
How much profit share will Diana receive? A. 158,920 B. 152,800 C. 159,400 D. 152,
- The following Balance Sheet for the partnership of Apple, Sam and Sophia were taken from the books on October 1, 202A. ASSETS LIABILITIES & CAPITAL Cash P 100,000 Liabilities P 200, Other Assets 400,000 Apple, capital 120, Sam, capital 95, ________ Sophia, capital 85, Total Assets P 500,000 Total Liabilities and Capital 500,
The partners agreed to distribute profits as follows: 1) Annual salaries to Apple and Sam of P 5,000 each 2) Annual interest of 5% on beginning capital 3) Bonus of 15% to Sophia based on income after salaries, interest and bonus 4) Remaining profit: 25% to Apple, 35% to Sam and 40% to Sophia
The partnership began its operations on October 1, 202A and net income as of December 31, 202A is P 69,500. Which of the following is true? A. The bonus to Sophia is P 5, B. Net Income after salaries, interest and bonus is P 38,696. C. Sam’s total share in the net income is P 21,688. D. Sophia’s share on the profit after salaries, interest and bonus is P13,543.
What amount must be earned by the partnership in 202A, before any charge for interest and partners’ salaries, in order that Kim may receive an aggregate of P12,500 including interest, salary and share of profits? A. 30,667 C. 16, B. 32,333 D. 30,
- The IKEA Co., a partnership was formed on January 1, 202A, with four partners, Isla, Kenneth, Edwin, and Ava. Capital contributions were as follows: Isla – P 1,500,000; Kenneth– P 750,000; Edwin – P 750,000; and Ava – P 600,000. The partnership agreement provides that each partner shall receive 5% interest on the amount of his capital contribution. In addition, Isla is to receive a salary of P150,000 and Kenneth a salary of P 90,000, which are to be charged as expense of the business. The agreement further provides that Edwin shall receive a minimum of P 75,000 per annum from the partnership and Ava a minimum of P 180,000 per annum, both including amounts allowed as interest on capital and their respective shares of profits. The balance of the profits to be shared in the following proportions: Isla – 30%; Kenneth – 30%; Edwin – 20%; and Ava– 20%.
Calculate the amount that must be earned by the partnership during 202A, before any charge for interest on capital or partners’ salaries, in order that Isla may receive an aggregate of 375,000, including interest, salary and share of profits.
- The income statement of Zoey-Riley Partnership for the year ended Dec. 31, 202A appear below: Sales P 300, Less: Cost of Goods Sold 190, Gross profit P 110, Less: Operating Expenses 30, Net Income P 80,
Additional Information: 1. Zoey and Riley began the year with a capital balance of P 40,800 and P 112,000, respectively. 2. On April 1, Zoey invested an additional P 15,000 into the partnership and on August 1, Riley invested an additional P 20,000 into the partnership. 3. Throughout 202A, each partner withdrew P 400 per week in anticipation of partnership net income. The partners agreed that these withdrawals are not to be included in the computation of average capital balances for purposes of income distributions.
Zoey and Riley have agreed to distribute partnership net income according to the following: Zoey Riley
- Interest on average capital balances 6% 6%
- Bonus on net income before the bonus but after interest on average capital balances 10%
- Salaries P 25,000 P 30,
- Residual (if positive) 70% 30%
- Residual (if negative) 50% 50%
A. The share of Zoey and Riley on the net income: B. The ending capital balance of Riley:
- The following information relates to Sophia and Amelia’s partners capital accounts for fiscal year ending June 30: Sophia Amelia
Balance July 1 P 86,400 P115, Add: Additional investment, Jan 1 38,400 19, Net Income for the year Salaries 20,500 14, Interest 7,920 9, Bonus 3, Remainder 14,880 9, Total 171,820 168, Deduct: Drawings Monthly amounts 15,070 15, Additional drawings, June 30 2,400 403 Balance June 30 154,350 152, Bonus is based on net income after salaries, interest and bonus. If the net income remains the same the following fiscal year, and there is no Amelia change in the partnership agreement nor any additional investment. How much will be Amelia’s total share in the net income in the following year? A. P33,454. B. P33,577. C. P33,780. D. P31,873.
reh/cde
05-23-2022 CRC-ACE - AFAR - Week 01 Accounting for Partnership - Part 1 Operations
Course: BS accountancy
University: University of Cebu
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