ACCOUNTING FOR SPECIAL

TRANSACTIONS
(ADVANCED ACCOUNTING 1)

Lecturer:
Prof. Reah M. Gilera

Reference: ACCOUNTING FOR SPECIAL TRANSACTIONS 2021 Edition (by: MILLAN)

Chapter 2

PARTNERSHIP OPERATION
LEARNING OBJECTIVES
• State the items that affect the division of a partnership’s profits
or losses among the partners.

• Compute for the share of a partner in the partnership’s profit or

loss.
DIVISION OF PROFITS AND LOSSES

• The partners shall share in the profits or losses of a partnership in

accordance with the partnership agreement.

DIVISION OF PROFITS AND LOSSES
• 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 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. (Art. 1797 of the Philippine Civil Code)

• The designation of losses and profits cannot be entrusted to one

of the partners (Art. 1798).

• A stipulation which excludes one or more partners from any

share in the profits or losses is void (Art. 1799).
OTHER STIPULATIONS THAT AFFECT
DIVISION OF P/L
1. Salaries – normally, an industrial partner shall receive salary, in
addition to his share in the partnership’s profits, as compensation
for his services to the partnership.

2. Bonuses – the partnership agreement may stipulate a bonus to be

given to a managing partner to encourage excellent
management performance. Unlike for salaries though, a partner is
entitled to a bonus only if the partnership earns profit.

3. Interest on capital contributions – the partnership agreement may

stipulate that each partner may be entitled to a per annum
interest computed on his capital contributions.

The above-mentioned items are normally provided first to the

respective partners and any remaining amount of the profit or loss is
shared based on the stipulated profit or loss ratio.
 APPLICATION OF CONCEPT
PARTNERSHIP OPERATION

Reference: ACCOUNTING FOR SPECIAL TRANSACTIONS 2021 Edition (by: MILLAN)

PROBLEM 6 – 1: DIVISION OF PROFITS AND LOSSES

A, B and C’s partnership agreement stipulates the following:

• Annual salaries of P12,000 to A and P8,000 to C
• 10% bonus to A, based on profit after salaries but before deducting
the bonus
• 10% interest on the following capital contributions: A, P100,000; B,
P60,000; and C, P120,000
• Profit and loss ratio is 40:30:30

Requirement: Compute for the partners’ respective shares:

1) The partnership earns P100,000 in profit.
2) The partnership earns P10,000 in profit.
3) The partnership incurs loss of P20,000.
 A, B and C’s partnership agreement stipulates the following:
• Annual salaries of P12,000 to A and P8,000 to C
• 10% bonus to A, based on profit after salaries but before deducting the bonus
• 10% interest on the following capital contributions: A, P100,000; B, P60,000; and C,
P120,000
• Profit and loss ratio is 40:30:30

Requirement: Compute for the partners’ respective shares:

(1)

A B C Total
Amount being allocated (PROFIT) 100,000
Allocation:
1. Salaries 12,000 8,000 20,000
2. Bonus (100K - 20K) x 10% 8,000 8,000
3. Interest on cap.
(100K x 10%);(60K x 10%);(120K x 10%) 10,000 6,000 12,000 28,000
4. Allocation of remainder:
(100K - 20K - 8K - 28K) = 44K;
(44K x 40%); (44K x 30%); (44K x 30%) 17,600 13,200 13,200 44,000
As allocated 47,600 19,200 33,200 100,000
 A, B and C’s partnership agreement stipulates the following:
• Annual salaries of P12,000 to A and P8,000 to C
• 10% bonus to A, based on profit after salaries but before deducting the bonus
• 10% interest on the following capital contributions: A, P100,000; B, P60,000; and C,
P120,000
• Profit and loss ratio is 40:30:30

Requirement: Compute for the partners’ respective shares:

(2)

A B C Total
Amount being allocated (PROFIT) 10,000
Allocation:
1. Salaries 12,000 8,000 20,000
2. Bonus (N/A) - -
3. Interest on cap.
(100K x 10%);(60K x 10%);(120K x 10%) 10,000 6,000 12,000 28,000
4. Allocation of remainder
(10K - 20K - 28K) = -38K
(-38K x 40%); (-38K x 30%); (-38K x 30%) (15,200) (11,400) (11,400) (38,000)
As allocated 6,800 (5,400) 8,600 10,000
 A, B and C’s partnership agreement stipulates the following:
• Annual salaries of P12,000 to A and P8,000 to C
• 10% bonus to A, based on profit after salaries but before deducting the bonus
• 10% interest on the following capital contributions: A, P100,000; B, P60,000; and C,
P120,000
• Profit and loss ratio is 40:30:30

Requirement: Compute for the partners’ respective shares:

(3)

A B C Total
Amount being allocated (LOSS) (20,000)
Allocation:
1. Salaries 12,000 8,000 20,000
2. Bonus (N/A) - -
3. Interest on cap.
(100K x 10%);(60K x 10%);(120K x 10%) 10,000 6,000 12,000 28,000
4. Allocation of remainder
(-20K - 20K - 28K) = -68K
(-68K x 40%); (-68K x 30%); (-68K x 30%) (27,200) (20,400) (20,400) (68,000)
As allocated (5,200) (14,400) (400) (20,000)
PROBLEM 6 – 2: WEIGHTED AVERAGE CAPITAL

A and B’s partnership agreement stipulates the following:

• Monthly salary of P4,000 to A
• 20% bonus to A, based on profit after deductions for salaries and
bonus but before deduction for interest
• 12% interest on B’s weighted average capital balance. B initially
contributed P30,000. During the period, B contributed additional
P10,000 in July 1 and P6,000 in November 30, and withdrew P4,000
on October 1.
• The balances are shared equally.

CASE 1: The partnership earned profit of P90,000 before salaries, bonus

and interest on capital for the year ended December 31, 2021.
Requirement: Provide the journal entry to close the income summary
account to the partner’s respective capital accounts.
 A and B’s partnership agreement stipulates the following:
• Monthly salary of P4,000 to A
• 20% bonus to A, based on profit after deductions for salaries and bonus but before deduction for
interest
• 12% interest on B’s weighted average capital balance. B initially contributed P30,000. During the
period, B contributed additional P10,000 in July 1 and P6,000 in November 30, and withdrew P4,000
on October 1.
• The balances are shared equally.
The partnership earned profit of P90,000 before salaries, bonus and interest on capital for the year
ended December 31, 2021.

A B Total
Amount being allocated (LOSS) 90,000
Allocation:
1. Salaries (4,000 x 12 months) 48,000 48,000
2. Bonus (90,000 – 48,000) = 42,000;
Bonus = 42,000 – (42,000 ÷ 120%) = 7,000 7,000 7,000
3. Interest on weighted cap.
(see next page) 4,140 4,140
4. Allocation of remainder
(90K – 48K - 7K – 4,140) = 30,860
(30,860 x 50%); (30,860 x 50%) 15,430 15,430 30,860
As allocated 70,430 19,570 90,000
Computing the interest based on weighted average capital:
Months
outstanding ÷ Total Weighted
Balances months in a year average
Beg. balance 30,000 12/12 30,000
July 1 additional investment 10,000 6/12 5,000
Oct. 1 withdrawal (4,000) 3/12 (1,000)
Nov. 30 additional investment 6,000 1/12 500
Weighted average capital balance 34,500
Multiply by: 12%
Interest on weighted average capital balance 4,140

A B Total
Amount being allocated (LOSS) 90,000
Allocation:
1. Salaries (4,000 x 12 months) 48,000 48,000
2. Bonus (90,000 – 48,000) = 42,000;
Bonus = 42,000 – (42,000 ÷ 120%) = 7,000 7,000 7,000
3. Interest on weighted cap.
(see next page) 4,140 4,140
4. Allocation of remainder
(90K – 48K - 7K – 4,140) = 30,860
(30,860 x 50%); (30,860 x 50%) 15,430 15,430 30,860
As allocated 70,430 19,570 90,000
 ENTRY AT YEAR-END:

Income summary 90,000

A, Capital 70,430
B, Capital 19,570

A B Total
Amount being allocated (LOSS) 90,000
Allocation:
1. Salaries (4,000 x 12 months) 48,000 48,000
2. Bonus (90,000 – 48,000) = 42,000;
Bonus = 42,000 – (42,000 ÷ 120%) = 7,000 7,000 7,000
3. Interest on weighted cap.
(see next page) 4,140 4,140
4. Allocation of remainder
(90K – 48K - 7K – 4,140) = 30,860
(30,860 x 50%); (30,860 x 50%) 15,430 15,430 30,860
As allocated 70,430 19,570 90,000
PROBLEM 6 – 2: WEIGHTED AVERAGE CAPITAL (8-MONTHS)

A and B’s partnership agreement stipulates the following:

• Monthly salary of P4,000 to A
• 20% bonus to A, based on profit after deductions for salaries and
bonus but before deduction for interest
• 12% interest on B’s weighted average capital balance. B initially
contributed P30,000. During the period, B contributed additional
P10,000 in July 1 and P6,000 in November 30, and withdrew P4,000
on October 1.
• The balances are shared equally.

CASE 2: The partnership earned profit of P90,000 before salaries, bonus

and interest on capital for the eight months ended December 31, 2021.
Requirement: Provide the journal entry to close the income summary
account to the partner’s respective capital accounts.
 A and B’s partnership agreement stipulates the following:
• Monthly salary of P4,000 to A
• 20% bonus to A, based on profit after deductions for salaries and bonus but before deduction for
interest
• 12% interest on B’s weighted average capital balance. B initially contributed P30,000. During the
period, B contributed additional P10,000 in July 1 and P6,000 in November 30, and withdrew P4,000
on October 1.
• The balances are shared equally.
The partnership earned profit of P90,000 before salaries, bonus and interest on capital for the 8-months
period ended December 31, 2021.

8-MONTH PERIOD A B Total

Amount being allocated (LOSS) 90,000.00
Allocation:
1. Salaries (4,000 x 8 months) 32,000.00 32,000.00
2. Bonus (90,000 – 32,000) = 58,000;
Bonus = 58,000 – (58,000 ÷ 120%) = 9,667 9,667.00 9,667.00
3. Interest on weighted cap.
(see next page) 2,940.00 2,940.00
4. Allocation of remainder
(90K – 32K – 9,667 – 2,940) = 30,860
(30,860 x 50%); (30,860 x 50%) 22,696.50 22,696.50 45,393.00
As allocated 64,363.50 25,636.50 90,000.00
Computing the interest based on weighted average capital:
Months
outstanding ÷ Total Weighted
Balances months in a year average
Beg. balance 30,000 8/12 20,000
July 1 additional investment 10,000 6/12 5,000
Oct. 1 withdrawal (4,000) 3/12 (1,000)
Nov. 30 additional investment 6,000 1/12 500
Weighted average capital balance 24,500
Multiply by: 12%
Interest on weighted average capital balance 2,940

8-MONTH PERIOD A B Total

Amount being allocated (LOSS) 90,000.00
Allocation:
1. Salaries (4,000 x 8 months) 32,000.00 32,000.00
2. Bonus (90,000 – 32,000) = 58,000;
Bonus = 58,000 – (58,000 ÷ 120%) = 9,667 9,667.00 9,667.00
3. Interest on weighted cap.
(see next page) 2,940.00 2,940.00
4. Allocation of remainder
(90K – 32K – 9,667 – 2,940) = 30,860
(30,860 x 50%); (30,860 x 50%) 22,696.50 22,696.50 45,393.00
As allocated 64,363.50 25,636.50 90,000.00
 ENTRY AT YEAR-END:

Income summary 90,000.00

A, Capital 64,363.50
B, Capital 25,636.50

8-MONTH PERIOD A B Total

Amount being allocated (LOSS) 90,000.00
Allocation:
1. Salaries (4,000 x 8 months) 32,000.00 32,000.00
2. Bonus (90,000 – 32,000) = 58,000;
Bonus = 58,000 – (58,000 ÷ 120%) = 9,667 9,667.00 9,667.00
3. Interest on weighted cap.
(see next page) 2,940.00 2,940.00
4. Allocation of remainder
(90K – 32K – 9,667 – 2,940) = 30,860
(30,860 x 50%); (30,860 x 50%) 22,696.50 22,696.50 45,393.00
As allocated 64,363.50 25,636.50 90,000.00
PROBLEM 6 – 3: RECONSTRUCTION OF INFORMATION

A and B’s partnership agreement stipulates the following:

• Annual salary of P20,000 to A
• 10% bonus to A, based on profit after salaries and bonus
• The balances are shared on 60:40 ratio.

Requirement: If B’s share in the partnership profit for the year is P32,000,
how much is the partnership profit before salary and bonus?
PROBLEM 6 – 3: RECONSTRUCTION OF INFORMATION

A and B’s partnership agreement stipulates the following:

• Annual salary of P20,000 to A
• 10% bonus to A, based on profit after salaries and bonus
• The balances are shared on 60:40 ratio.

Requirement: If B’s share in the partnership profit for the year is P32,000, how much is
the partnership profit before salary and bonus?

A B Total
Amount being allocated ?
Allocation:
1. Salaries 20,000 - 20,000
2. Bonus ? - ?
3. Allocation of remaining profit ? 32,000 ?
As allocated ? 32,000 ?

10 minute seat work

PROBLEM 6 – 3: RECONSTRUCTION OF INFORMATION

A and B’s partnership agreement stipulates the following:

• Annual salary of P20,000 to A
• 10% bonus to A, based on profit after salaries and bonus
• The balances are shared on 60:40 ratio.

Requirement: If B’s share in the partnership profit for the year is P32,000, how much is
the partnership profit before salary and bonus?

A B Total
Amount being allocated 7
Allocation:
1. Salaries 20,000 - 20,000
2. Bonus 2 - 4
3. Allocation of remaining profit 1 32,000 5
As allocated 3 32,000 6

10 minute seat work