CHAPTER 2

DISTRIBUTION OF PROFITS OR LOSSES BASED ON PARTNERS’

AGREEMENT:

The partners may agree on any of the following scheme in distributing profits or
losses:
• Equally or in other agreed ratio

1:1:1 – EQUALY = 1/3;1/3;1/3

IN OTHER RATIO:
1:2:3 = 1/6:2/6:3/6
20%:50%:30%
100:150:180 = 100/430:150/430:180/430

• Based on the partners’ capital contribution:

 Ratio of original capital investments – the amount contributed by each partner
to start their partnership business
 Ratio of capital balances at the beginning of the year

A, Capital B, Capital C, Capital

100,000 30,000
5,000 5,000 5,000
105,000 35,000 5,000
 Ratio of the capital balances at the end of the year
 Ratio of average capital balances
• By allowing interest on partners’ capital and the balances in an agreed ratio

Example: A, B and C earned profit at the end of the year amounting to P15,000.
The profit will be distributed by allowing 10% interest on beginning capital
balances and the remainder equally. The beginning capital balances of the
partners are: A, P50,000; B, P20,000; and C, P10,000.

10% on beg. Capital

A=10% x P50,000 5,000
B=10% x P20,000 2,000
C=10% x P10,000 1,000 8,000
Remainder: Equally
A=1/3 x P7,000 2,333
B=1/3 x P7,000 2,333
C=1/3 x P7,000 2,334 7,000
7,333 4,333 3,334 15,000

Income Summary 15,000

A, Drawing 7,333
B, Drawing 4,333
C, Drawing 3,334
 If Net Loss of P15,000:

A B C Total
10% on beg. Capital
A=10% x P50,000 5,000
B=10% x P20,000 2,000
C=10% x P10,000 1,000 8,000
Remainder: Equally
A=1/3 x (P23,000) - 7,667
B=1/3 x (P23,000) - 7,667
C=1/3 x (P23,000) - 7,666 - 23,000
- 2,667 - 5,667 - 6,666 - 15,000

A, Drawing 2,667
B, Drawing 5,667
C, Drawing 6,666
Income Summary 15,000

• By allowing salaries to partners and the balances in an agreed ratio

• By allowing bonus to the managing partner based on profit and the balance in an
agreed ratio

Bonus formula:

Bonus is % of net income before bonus:

B=%(NI)
Bonus is % of net income after bonus:
B=%(NI-B)
Bonus is % of net income after interest and salaries:
B=%(NI-I-S)
Bonus is % of net income after interest, salaries and bonus:
B=%(NI-I-S-B)

• By allowing salaries, interest on partners’ capital, bonus to the managing partner

and balances in an agreed ratio (combination of 3 to 5)

Example: Labasan, Gabayan, and Villanueva are manufacturers’ representatives in

the architecture business. Their capital accounts were as follows:
 Labasan, Capital Gabayan, Capital
9/1 80,000 1/1 300,000 3/1 90,000 1/1 400,000
5/1 60,000 7/1 60,000
80,000 360,000 9/1 40,000
Bal 280,000 90,000 500,000
Bal 410,000
Villanueva, Capital
9/1 120,000 1/1 500,000
4/1 70,000 Beginning Capital
6/1 30,000 Ending Capital (Computed)
120,000 600,000
Bal 480,000
-AVERAGE CAPITAL

Labasan 1/1 300,000 4 4/12 100,000

5/1 360,000 4 4/12 120,000
9/1 280,000 4 4/12 93,333
12 313,333

Gabayan
1/1 400,000 2 2/12 66,667
3/1 310,000 4 4/12 103,333
7/1 370,000 2 2/12 61,667
9/1 410,000 4 4/12 136,667
12 368,334

Villanueva
1/1 500,000 3 3/12 125,000
4/1 570,000 2 2/12 95,000
6/1 600,000 3 3/12 150,000
9/1 480,000 4 4/12 160,000
12 530,000

Average Capital Balances P/L Ratio

Labasan 313,333 313,333/1,211,667 150,000 38,790
Gabayan 368,334 368,334/1,211,667 150,000 45,598
Villanueva 530,000 530,000/1,211,667 150,000 65,612
1,211,667 150,000

Income Summary 150,000

Labasan, Drawing 38,790
Gabayan, Drawing 45,598
Villanueva, Drawing 65,612

Required:
Case 1. Assume the partnership earned profit of P150,000, distribute the profit and record
the distribution to partners.
Labasan 1/3 150,000 = 50,000
Gabayan 1/3 150,000 = 50,000
Villanueva 1/3 150,000 = 50,000
150,000
Entry:

Income Summary 150,000

Labasan, Drawing 50,000
Gabayan, Drawing 50,000
Villanueva, Drawing 50,000

Labasan 5 5/10 150,000 = 75,000

Gabayan 3 3/10 150,000 = 45,000
Villanueva 2 2/10 150,000 = 30,000
10 150,000
Entry:

Income Summary 150,000

Labasan, Drawing 75,000
Gabayan, Drawing 45,000
Villanueva, Drawing 30,000
Equally or in other agreed ratio:
P/L Ratio
A 100,000 1/3
B 30,000 1/3
C - 1/3

P/L Ratio
A 100,000 5 5/10 50%
B 30,000 3 3/10 30%
C - 2 2/10 20%
10
5:3:2

Based on Capital Contribution:

- ORGINAL CAPITAL (assumed data)
Original Capital Balances P/L Ratio
Labasan 200,000 2/9 150,000 33,333
Gabayan 300,000 3/9 150,000 50,000
Villanueva 400,000 4/9 150,000 66,667
900,000 150,000

Income Summary 150,000

Labasan, Drawing 33,333

Gabayan, Drawing 50,000

Villanueva, Drawing 66,667

-BEGINNING CAPITAL P/L Ratio

Labasan 300,000 3/12 150,000 37,500
Gabayan 400,000 4/12 150,000 50,000
Villanueva 500,000 5/12 150,000 62,500
1,200,000 150,000

Income Summary 150,000

Labasan, Drawing 37,500
Gabayan, Drawing 50,000
Villanueva, Drawing 62,500

-ENDING CAPITAL
Ending Capital Balances P/L Ratio
Labasan 280,000 28/117 150,000 35,897
Gabayan 410,000 41/117 150,000 52,564
Villanueva 480,000 48/117 150,000 61,539
1,170,000 150,000

Income Summary 150,000

Labasan, Drawing 35,897
Gabayan, Drawing 52,564
Villanueva, Drawing 61,539
-AVERAGE CAPITAL

Labasan 1/1 300,000 4 4/12 100,000

5/1 360,000 4 4/12 120,000
9/1 280,000 4 4/12 93,333
12 313,333

Gabayan
1/1 400,000 2 2/12 66,667
3/1 310,000 4 4/12 103,333
7/1 370,000 2 2/12 61,667
9/1 410,000 4 4/12 136,667
12 368,334

Villanueva
1/1 500,000 3 3/12 125,000
4/1 570,000 2 2/12 95,000
6/1 600,000 3 3/12 150,000
9/1 480,000 4 4/12 160,000
12 530,000

Average Capital Balances P/L Ratio

Labasan 313,333 313,333/1,211,667 150,000 38,790
Gabayan 368,334 368,334/1,211,667 150,000 45,598
Villanueva 530,000 530,000/1,211,667 150,000 65,612
1,211,667 150,000

Income Summary 150,000

Labasan, Drawing 38,790
Gabayan, Drawing 45,598
Villanueva, Drawing 65,612

Labasan, Capital Gabayan, Capital

9/1 80,000 1/1 300,000 3/1 90,000 1/1 400,000
5/1 60,000 7/1 60,000
80,000 360,000 9/1 40,000
Bal 280,000 90,000 500,000
Bal 410,000
Villanueva, Capital
9/1 120,000 1/1 500,000
4/1 70,000 Beginning Capital
6/1 30,000 Ending Capital (Computed)
120,000 600,000
Bal 480,000
Case 2. Salaries are P150,000 to Labasan, P200,000 to Gabayan, and P180,000 to
Villanueva. Labasan receives a bonus of 5% of profit after bonus. Interest is 10% of ending
capital balances. Labasan, Gabayan, and Villanueva divide any remainder in a 3:3:4 ratio.
Profit was P789,600.

Case 2 Solution:

Labasan Gabayan Villanueva Total

Salaries to partners 150,000 200,000 180,000 530,000

10% interest on ending Capital Balances:

Labasan = 10% x P280,000 28,000
Gabayan = 10% x P410,000 41,000
Villanueva = 10% x P480,000 48,000 117,000

5% Bonus to Labasan 37,600 37,600

Remainder: (3:3:4 ratio)

Labasan = 30% x P105,000 31,500
Gabayan = 30% x P105,000 31,500
Villanueva = 40% x P105,000 42,000 105,000
Totals 247,100 272,500 270,000 789,600

Bonus Computation: Remainder Computation:

B = 5% (789,600-B) Profit 789,600
B = (5% x 789,600) -5%B Less: Salaries 530,000
B = 39,480 - 5%B Interest 117,000
B+5%B = 39,480 Bonus 37,600 684,600
105%B = 39,480 Remainder 105,000
105% 105%
B = 37,600

Income Summary 789,600

Labasan, Drawing 247,100
Gabayan, Drawing 272,500
Villanueva, Drawing 270,000
Case 3. Interest is 10% of average capital balances. Salaries are P240,000 to Labasan,
P210,000 to Gabayan, and P250,000 to Villanueva. Gabayan receives a bonus of 10% of
profit after bonus and salary. Any remainder is divided equally. Profit was P680,800.

Case 3 Solution:

Labasan Gabayan Villanueva Total

Salaries to partners 240,000 210,000 250,000 700,000

10% interest on average Capital Balances:

Labasan = 10% x P313,333 31,333
Gabayan = 10% x P368,334 36,833
Villanueva = 10% x P530,000 53,000 121,167

10% Bonus to Gabayan - -

Remainder: (equal ratio)

Labasan = (P140,367) x 1/3 - 46,789
Gabayan = (P140,367) x 1/3 - 46,789
Villanueva = (P140,367) x 1/3 - 46,789 - 140,367
Totals 224,544 200,044 256,211 680,800

Bonus Computation: Remainder Computation:

B = 10% (680,800-S-B) Profit 680,800
B = (10% x {680,800-700,000}) -10%B Less: Salaries 700,000
B =0 Interest 121,167
Bonus - 821,167
Remainder - 140,367

Income Summary 680,800

Labasan, Drawing 224,544
Gabayan, Drawing 200,044
Villanueva, Drawing 256,211
Case 4. Villanueva receives a bonus of 20% of profit after bonus and salaries. Salaries are
P210,000 to Labasan, P180,000 to Gabayan, and P150,000 to Villanueva. Interest is 10%
of beginning capital balances. Labasan, Gabayan and Villanueva divide any remainder in an
8:7:5 ratio. Profit was 929,400.

Case 4 Solution:

Labasan Gabayan Villanueva Total

Salaries to partners 210,000 180,000 150,000 540,000

10% interest on beginning Capital Balances:

Labasan = 10% x P300,000 30,000
Gabayan = 10% x P400,000 40,000
Villanueva = 10% x P500,000 50,000 120,000

20% Bonus to Villanueva 64,900 64,900

Remainder: (8:7:5 ratio)

Labasan = P204,500 x 8/20 81,800
Gabayan = P204,500 x 7/20 71,575
Villanueva = P204,500 x 5/20 51,125 204,500
Totals 321,800 291,575 316,025 929,400

Bonus Computation: Remainder Computation:

B = 20% (929,400-S-B) Profit 929,400
B = (20% x {929,400-540,000}) -20%B Less: Salaries 540,000
B = (20% x 389,400) - 20%B Interest 120,000
B = 77,880 -20%B Bonus 64,900 724,900
B + 20%B = 77,880 Remainder 204,500
120%B = 77,880
120% 120%
B = 64,900

Income Summary 929,400

Labasan, Drawing 321,800
Gabayan, Drawing 291,575
Villanueva, Drawing 316,025
Case 5. Same data with Case 4 except the partnership incurred losses of 129,400.

Case 5 Solution:

Labasan Gabayan Villanueva Total

Salaries to partners 210,000 180,000 150,000 540,000

10% interest on beginning Capital Balances:

Labasan = 10% x P300,000 30,000
Gabayan = 10% x P400,000 40,000
Villanueva = 10% x P500,000 50,000 120,000

20% Bonus to Villanueva - -

Remainder: (8:7:5 ratio)

Labasan = (P789,400) x 8/20 - 315,760
Gabayan = (P789,400) x 7/20 - 276,290
Villanueva = (P789,400) x 5/20 - 197,350 - 789,400
Totals - 75,760 - 56,290 2,650 - 129,400

Bonus Computation: Remainder Computation:

B = 20% (129,400-S-B) Net Loss - 129,400
Less: Salaries 540,000
No bonus since the result of the operation is net loss Interest 120,000
Bonus - 660,000
Remainder - 789,400

Labasan, Drawing 75,760

Gabayan, Drawing 56,290
Income Summary 129,400
Villanueva, Drawing 2,650

B + b = 2b

1B+20%B=?
100%+20%B=120%B

BxB=