THE PARTNERSHIP OPERATIONS…

1. Closing entries of a partnership2. Distribution of profit or losses3. Preparation of work sheet4. Preparation of financial statements

a. Income Statementb. Statement of Financial Positionc. Statement of changes in partner’s equity

CLOSING ENTRIES…

THE FOLLOWING ARE THE BALANCES OF THE ACCOUNTS OF MM PARTNERSHIP AT THE END OF ACCOUNTING PERIOD:

Service income P1,450,000 Interest income 34,560

Salaries expense 438,900

Rent expense 216,500

Advertising expense 123,560 Utilites expense 87,660 Miscellaneous expense 17,940

DISTRIBUTION OF PROFITS AND LOSESSTHE FOLLOWING FACTORS SHOULD BE CONSIDERED:

a. Services rendered by the partners.b. Amount of capital contributed by the partners to the business.c. Entrepreneurial ability or managerial skills of the partners.

1. By percentage (60% and 40%)2. By fraction (2/5 and 3/5)3. By decimals (0.25 and 0.75)4. By ratio ( 2:5 respectively)

The distribution of profits and losses may be expressed in several ways as follows:

RULES IN DIVING PROFITS AND LOSSES:1. As to capitalist partners:a.Division of profits

1. In accordance with agreement.2. In absence of agreement, division of

profit is in accordance with capital contributions.

b. Division of losses:

1. In accordance with agreements2. If only division of profit is agreed upon, the division of losses will be the same as the agreement on the division of profits.3. In absence of an agreement, division of losses is in accordance with capital contributions.

2. As to industrial partners

a. Division of profits1. In accordance with agreement.2. in absence of an agreement, the industrial partner shall receive a just

and equitable share of the profits and the capitalist partners shall receive profits in accordance with their capital contributions.

METHODS OF DISTRIBUTING PROFITS BASED ON PARTNERS AGREEMENT:a. Equallyb. Arbitrary ratio (percentage, decimals, fractions and ratio)c. Capital ratio (original, beginning, ending or average)d. Interest on capital and balance on agreed ratioe. Salary allowances to partners and the balance on agreed ratio

f. Bonus to managing partner (partners) and balance on agreed ratio

a. bonus is based on profit before deducting bonus and income tax.b. bonus is based on profit after deducting

bonus but before deducting income taxc. bonus is based on profit after deducting

income tax but before deducting bonus.d. bonus is based on profit after deducting

both bonus and income taxg. Interest on capital, salaries to partners, bonus and balance on agreed ratio

ILLUSTRATIVE CASES:The following data are available in the books of Mysti and Mercedes in MM Partnership for the year 2013:

Mysti, capitalMay 1 P100,000 Jan. 1 P2,500,000 Apr. 1 250,000 Oct. 1 500,000

Mercedes, CapitalJune 1 P150,000 Jan. 1 P 1,500,000Dec. 1 50,000 Sept. 1 500,000

Mysti, DrawingJan1 - Dec 31. P300,000

Mercedes, DrawingJan1 - Dec 31. P225,0000

Income summary Dec 31 P 600,000

CASE 1: PROFIT IS DIVIDED EQUALLYEntry is:

CASE 2: PROFIT IS DIVIDED ¾ AND ¼ TO MYSTI AND MERCEDES RESPECTIVELY.Entry is:

CASE 3: PROFIT IS DIVIDED 1:2 TO MYSTI AND MERCEDES RESPECTIVELY.Entry is:

CASE 4: PROFIT IS DIVIDED 20% TO MYSTI AND 80% MERCEDES RESPECTIVELY.

Entry is:

CASE 5: PROFIT IS ALLOCATED BASED ON BEGINNING CAPITAL RATIOEntry is:

CASE 6: PROFIT IS ALLOCATED BASED ON ENDING CAPITAL RATIOEntry is:

CASE 7: PROFIT IS ALLOCATED BASED ON AVERAGE CAPITAL RATIO

Compute for average capital:

Entry is:

EXERCISES….Hooray for today

PROBLEM #1:

The partnership contract of the Lily and Mely Partnership, a general partnership, provided for annual salaries of P80,000 and P100,000 to Lily and Mely, respectively with remainder to be divided equally. Profit before salaries for the year ended June 30, 2014 was P150,000.

Entry to record the division of profit with the partners.

PROBLEM #2Amir and Benz formed a partnership on January 1, 2014. On this date, Amir contributed capital of P600,000. On the other hand, Benz contributed no capital because he will manage the firm full time. The partnership agreement provides for the following:• Capital accounts are to be credited annually with interest at

5% of beginning capital.• Benz is to be paid a salary of P5,000 per month.• Benz is to receive a bonus of 20% of income before interest,

salaries and bonus.• Remaining profits are to be divided between Amir and Benz in

the ratio of 7:3.• Net income reported for the period is P480,000.

How much is the share of Amir and Benz in the profit? Entry to record the distribution of profit.

PROBLEM #3

Nice Tanbengco is trying to decide whether to accept a salary of P60,000 or a salary of P25,000 plus a bonus of 20% of net income after bonus as a means of allocating profit among the partners. What amount of net income would be necessary so that Nice would consider the choices to be equal?

PROBLEM # 4On January 2, 2013, Ian and Sanchi formed a partnership, Ian contributed capital ofP175,000 and Sanchi P25,000. They agreed to share profits and losses 80% and 20%, respectively. Sanchi is the general manager and works in the partnership in full time. Sanchi is given a salary ofP5,000 a month; an interest of 5% of the starting capital (of both partners) and a bonus of 15% of net profit before salary, interest and bonus. The following information are available for the year ended December 31, 2013:

The bonus of Sanchi in 2013 is?:

Net Sales P875,000

Cost of sales

700,000

Gross profit

P175,000 Expenses (including salary, interest and bonus)

(143,000)

Net profit

P32,000