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PARTNERSHIP OPERATIONS AND FINANCIAL REPORTING Source: Partnership and Corporation, Ballada Prepared by Greg O. Saclot for ABM SHS/BSA 1st Year/BSBA 1st Year
REVIEW 1. In a partnership, 3 individuals with no business may form a partnership. A. True B. False
REVIEW 2. What do you call a person who takes active part in the business of the partnership but is not known as a partner? A. Dormant partner B. Secret partner C. Silent partner D. Nominal partner
REVIEW 3. When non-cash assets are contributed by a partner to the partnership, the basis of valuation is A. at fair market value at time of contribution. B. at fair market value a day after date of contribution. C. at agreed value at time of contribution. D. at carrying amount of the asset at time of contribution.
REVIEW 4. Which of the following statements is incorrect? A. The profits of a general professional partnership is subject to 30% income tax. B. SEC will not allow formation of professionals as a corporation. C. SEC will allow professionals to form a trading partnership. D. As trading partnership, the profits is taxed like a corporation at 30% of taxable income.
REVIEW 5. When sole proprietorship is contributed to the partnership, which of the following is correct? A. All assets and liabilities are revalued according to agreement. B. All assets and liabilities are revalued according to fair market values. C. Revaluation of assets and liabilities are adjusted to income summary account. D. Revaluation of assets and liabilities are adjusted to capital account.
REVIEW 6. In the case of liquidation and the partnership assets are insufficient to settle partnership liabilities, which of the following statements is correct? A. The personal assets before personal creditors of general partner may be used to settle unpaid partnership liabilities. B. The personal assets before personal creditors of limited partner may be used to settle unpaid partnership liabilities. C. The personal assets after personal creditors of general partner may be used to settle unpaid partnership liabilities. D. The personal assets after personal creditors of limited partner may be used to settle unpaid partnership liabilities.
REVIEW 7. A limited partnership is composed of A. all general partners. B. all limited partners. C. all general partners and at least one limited partner. D. all limited partner and at least one general partner.
REVIEW 8. A partnership with assets P20,000,000 before financing and has 120 employees is considered as A. micro enterprise. B. small enterprise. C. medium enterprise. D. large enterprise.
REVIEW 9. Which of the following will not be found in the articles of partnership? A. Partnership name B. Residences of the partners C. Birthdays of the partners D. The rights and duties of each partner.
REVIEW 10. The provisions governing partnership are in: A. Civil Code of the Philippines B. Revised Code of Corporation of the Philippines C. Department of Trade and Industry D. Securities and Exchange Commission
LEARNING OBJECTIVES 1. Contrast a partner’s equity in assets from share in profits or losses. 2. Summarize the rules for the distribution of profits or losses. 3. Explain prior period errors and interpret the effects on partners’ share in profits or losses. 4. Identify, describe and account for the different methods of dividing partnership profits or losses based on agreement. 5. Ascertain the effects of using original, beginning, ending and average capitals on the partners’ share in profits or losses. 6. Show the treatment of interest on capital, partners’ salaries and bonus in the distribution of profits or losses.
PARTNERS’ EQUITY IN ASSETS CONTRASTED WITH SHARE IN PROFITS OR LOSSES If “A is one-fourth partner,” does not always mean that A, who has one-fourth (1/4) equity in the net assets of the partnership, might have smaller or larger than 1/4 share in the partnership profits or losses. Or A, who shares 1/4 of partnership profits or losses, has more or less than one-fourth (1/4) equity in the net assets of the partnership.
PARTNERS’ EQUITY IN ASSETS CONTRASTED WITH SHARE IN PROFITS OR LOSSES Keep in mind, regardless of the capital contribution of partners, they may agree on a specific profit or loss sharing.
RULES FOR THE DISTRIBUTION OF PROFITS OR LOSSES Profits 1. The profits will be divided according to partners’ agreement. 2. If there is no agreement, a. As to capitalist partners, the profits shall be divided according to their capital contributions (according to the ratio of original capital investments or in its absence, the ratio of capital balances at the beginning of the year). b. As to industrial partners (if any) such share as may be just and equitable under circumstances, provided, that the industrial partner shall receive such share before the capitalist partners shall divide the profits.
RULES FOR THE DISTRIBUTION OF PROFITS OR LOSSES Losses 1. The losses will be divided according to partners’ agreement. 2. If there is no agreement as to distribution of losses, but there is an agreement to profits, the losses shall be distributed according to the profit sharing ratio. 3. In the absence of any agreement, a. As to capitalist partners, the losses shall be divided according to their capital contributions (according to the ratio of original capital investment or in its absence, the ratio of capital balances at the beginning of the year. b. As to purely industrial partners (if there’s any) shall not be liable for any losses.
CORRECTION OF PRIOR PERIOD ERRORS Per International Accounting Standards (IAS) No. 8, Accounting Policies, Changes in Accounting Estimates and Errors, prior period errors are omissions from and other misstatements of the entity’s financial statements for one or more prior periods that are discovered in the current period. Errors may occur as a result of mathematical mistakes, mistakes in applying accounting policies, misinterpretations of facts, fraud or oversights. Examples include errors in the estimation of depreciation, errors in inventory valuation and omission of accruals of revenue and expenses.
CORRECTION OF PRIOR PERIOD ERRORS Material prior periods must be restated to report financial position and results of operations as they would have been presented had the error never taken place. The amount of the correction of a prior period error that relates to prior periods should be reported by adjusting the opening balances of partners’ equity and afffected assets and liabilities. The correction of a prior period error is excluded from profit or loss for the period in which the error is discovered.
DISTRIBUTION OF PROFITS OR LOSSES BASED ON PARTNERS’ AGREEMENT 1. Equally or in other agreed ratio. 2. Based on partners’ capital contributions: a. ratio of original capital contributions b. ratio of capital balances at the beginning of the year c. ratio of capital balances at the end of the year d. Ratio of average capital balances 3. By allowing interest on partners’ capital and the balance in an agreed ratio. 4. By allowing salaries to partners and the balance in an agreed ratio. 5. By allowing bonus to the managing partner based on profit and the balance in an agreed ratio. 6. By allowing salaries, interest on partners’ capital, bonus to managing partner and the balance in an agreed ratio.
ILLUSTRATION Rod Ann Cabarles invested P400,000 on January 1, 2019 and an additional P100,000 on April 1. Dennis Valencia invested P800,000 on January 1 and withdrew P50,000 on July 1. For the year ended December 31, 2019, Cabarles and Valencia Company had a profit of P300,000. The partnership contract provided that each partner may withdraw P5,000 on the last day of each month, both partners did so during the year.
1. EQUALLY OR IN OTHER AGREED RATIO Entry: Income Summary 300,000 Cabarles, Capital 150,000 Valencia, Capital 150,000 To record the distribution of profits. Cabarles Valencia Share in profit - equally P150,000 P150,000 Total P150,000 P150,000
1. EQUALLY OR IN OTHER AGREED RATIO Effect on partners’ capital accounts: Cabarles Valencia Investments on January 1, 2019 P400,000 P800,000 Additional investment on April 1 100,000 Withdrawals on July 1 ( 50,000) Monthly drawings P5,000 each ( 60,000) ( 60,000) Share in the year-end profit 150,000 150,000 Balance at December 31, 2019 P590,000 P840,000
1. EQUALLY OR IN OTHER AGREED RATIO If the partnership incurred a P300,000 loss, the entry is: Cabarles, Capital 150,000 Valencia, Capital 150,000 Income Summary 300,000 To record the distribution of losses.
2A. RATIO OF ORIGINAL INVESTMENT Entry: Income Summary 300,000 Cabarles, Capital 100,000 Valencia, Capital 200,000 To record the distribution of profits. Cabarles Valencia Original Investment P400,000 P800,000 Share in the profit (computed as) P100,000 P300,000 x (400,000/P1,200,000) P200,000 P300,000 x (P800,000/P1,200,000)
2B. RATIO OF CAPITAL BALANCES AT THE BEGINNING OF THE YEAR Entry: Income Summary 300,000 Cabarles, Capital 100,000 Valencia, Capital 200,000 To record the distribution of profits. Cabarles Valencia Capital balance at Jan. 1, 2019 P400,000 P800,000 Share in the profit (computed as) P100,000 P300,000 x (400,000/P1,200,000) P200,000 P300,000 x (P800,000/P1,200,000)
2C. RATIO OF CAPITAL BALANCES AT THE END OF THE YEAR Entry: Income Summary 300,000 Cabarles, Capital 120,000 Valencia, Capital 180,000 To record the distribution of profits. Cabarles Valencia Capital balances at December 31, 2019 P500,000 P750,000 Share in the profit (computed as) P120,000 P300,000 x (500,000/P1,250,000) P180,000 P300,000 x (P750,000/P1,250,000)
2D. RATIO OF AVERAGE CAPITAL BALANCES Cabarles Valencia Original Investment P400,000 P800,000 Additional investment on April 1 100,000 Withdrawal on July 1 50,000 Capital balances at December 31, 2019 P500,000 P750,000 Average capital balances 400,000 x 12 = 4,800,000 100,000 x 9 = 900,000 Total 5,700,000 Average = 5,700,000 / 12 = 475,000 800,000 x 12 = 9,600,000 50,000 x 6 = ( 300,000) Total 9,300,000 Average = 9,300,000 / 12 = 775,000
2D. RATIO OF AVERAGE CAPITAL BALANCES Entry: Income Summary 300,000 Cabarles, Capital 114,000 Valencia, Capital 186,000 To record the distribution of profits. Cabarles Valencia Average capital balances P475,000 P775,000 Share in the profit (computed as) P114,000 P300,000 x (475,000/P1,250,000) P186,000 P300,000 x (P775,000/P1,250,000)
3. ALLOWING 15% INTEREST ON AVERAGE CAPITAL AND REMAINING PROFIT IS DISTRIBUTED EQUALLY Entry: Income Summary 300,000 Cabarles, Capital 127,500 Valencia, Capital 172,500 To record the distribution of profits. Share of Profit Cabarles Valencia 15% interest on capital P 71,250 P475,000 x 15% = P71,250 P116,250 P775,000 x 15% = P116,250 Remainder – equally P300,000 – P71,250 – P116,250 = P112,500 P 56,250 P112,500 / 2 = P56,250 P 56,250 P112,500 / 2 = P56,250 Total share in profit P127,500 P172,500
4. ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, ANY BALANCE EQUALLY Entry: Income Summary 300,000 Cabarles, Capital 160,000 Valencia, Capital 140,000 To record the distribution of profits. Share of Profit Cabarles Valencia Annual salary P 50,000 P 30,000 Remainder, equally P300,000 – P50,000 – P30,000 = P220,000 110,000 P220,000 / 2 = P110,000 110,000 P220,000 / 2= P110,000 Total share in profit P160,000 P140,000
5A. ALLOWING 25% BONUS BEFORE BONUS TO CABARLES AND ANY REMAINDER EQUALLY Entry: Income Summary 300,000 Cabarles, Capital 187,500 Valencia, Capital 112,500 To record the distribution of profits. Share of Profit Cabarles Valencia 25% Bonus before bonus P 75,000 P300,000 x 25% = P75,000 Remainder, equally P300,000 – P75,000 = P225,000 112,500 P225,000 / 2 = P112,500 112,500 P225,000 / 2= P112,500 Total share in profit P187,500 P112,500
5B. ALLOWING 25% BONUS AFTER BONUS TO CABARLES AND ANY REMAINDER EQUALLY Entry: Income Summary 300,000 Cabarles, Capital 180,000 Valencia, Capital 120,000 To record the distribution of profits. Share of Profit Cabarles Valencia 25% Bonus after bonus P 60,000 P300,000 / 1.25 x 25% = P60,000 Remainder, equally P300,000 – P60,000 = P240,000 120,000 P240,000 / 2 = P120,000 120,000 P240,000 / 2 = P120,000 Total share in profit P180,000 P120,000
6A. TOTAL PROFIT IS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, ALLOWING 25% BONUS BEFORE BONUS TO CABARLES AND ANY REMAINDER EQUALLY Entry: Income Summary 300,000 Cabarles, Capital 141,562.50 Valencia, Capital 158,437.50 To record the distribution of profits. Share of Profit Cabarles Valencia 15% interest on capital P 71,250.00 P116,250.00 Annual Salary 50,000.00 30,000.00 25% bonus before bonus 8,125.00 Balance, equally 12,187.50 12,187.50 Total share in profit P141,562.50 P158,437.50
6B. TOTAL PROFIT IS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING 25% BONUS BEFORE BONUS TO CABARLES, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, AND ANY REMAINDER EQUALLY Entry: Income Summary 300,000 Cabarles, Capital 151,562.50 Valencia, Capital 148,437.50 To record the distribution of profits. Share of Profit Cabarles Valencia 15% interest on capital P 71,250.00 P116,250.00 25% bonus before bonus 28,125.00 Annual salary 50,000.00 30,000.00 Balance, equally 2,187.50 2,187.50 Total share in profit P151,562.50 P148,437.50
6C. TOTAL PROFIT IS P300,000. ALLOWING 25% BONUS BEFORE BONUS TO CABARLES, ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, AND ANY REMAINDER EQUALLY Entry: Income Summary 300,000 Cabarles, Capital 175,000 Valencia, Capital 125,000 To record the distribution of profits. Share of Profit Cabarles Valencia 25% bonus before bonus P 75,000.00 15% interest on average capital 71,250.00 P116,250.00 Annual salary 50,000.00 30,000.00 Balance, equally ( 21,250.00) ( 21,250.00) Total share in profit P175,000.00 P125,000.00
6D. TOTAL LOSS IS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, ALLOWING 25% BONUS BEFORE BONUS TO CABARLES AND ANY REMAINDER EQUALLY Entry: Cabarles, Capital 162,500 Valencia, Capital 137,500 Income Summary 300,000 To record the distribution of loss. Share of Profit Cabarles Valencia 15% interest on capital P 71,250.00 P116,250.00 Annual Salary 50,000.00 30,000.00 25% bonus before bonus 0.00 Balance, equally (283,750.00) (283,750.00) Total share in profit (P162,500.00) (P137,500.00)
6E. TOTAL LOSS IS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, ALLOWING 25% BONUS BEFORE BONUS TO CABARLES AND ANY REMAINDER IN THE RATIO 1:4 Entry: Valencia, Capital 307,750 Cabarles, Capital 7,750 Income Summary 300,000 To record the distribution of loss. Share of Profit Cabarles Valencia 15% interest on capital P 71,250.00 P116,250.00 Annual Salary 50,000.00 30,000.00 25% bonus before bonus 0.00 Balance, average capital (113,500.00) (454,000.00) Total share in profit P 7,750.00 (P307,750.00)
7A. TOTAL PROFIT IS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, ALLOWING 25% BONUS AFTER BONUS TO CABARLES AND ANY REMAINDER EQUALLY Entry: Income Summary 300,000 Cabarles, Capital 140,750 Valencia, Capital 159,250 To record the distribution of profits. Share of Profit Cabarles Valencia 15% interest on capital P 71,250.00 P116,250.00 Annual Salary 50,000.00 30,000.00 25% bonus after bonus 6,500.00 Balance, equally 13,000.00 13,000.00 Total share in profit P 140,750.00 P 159,250.00
7B. TOTAL PROFIT IS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING 25% BONUS AFTER BONUS TO CABARLES, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, AND ANY REMAINDER EQUALLY Entry: Income Summary 300,000 Cabarles, Capital 148,750 Valencia, Capital 151,250 To record the distribution of profits. Share of Profit Cabarles Valencia 15% interest on capital P 71,250.00 P116,250.00 25% bonus after bonus 22,500.00 Annual salary 50,000.00 30,000.00 Balance, equally 5,000.00 5,000.00 Total share in profit P148,750.00 P151,250.00
7C. TOTAL PROFIT IS P300,000. ALLOWING 25% BONUS AFTER BONUS TO CABARLES, ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, AND ANY REMAINDER EQUALLY Entry: Income Summary 300,000 Cabarles, Capital 167,500 Valencia, Capital 132,500 To record the distribution of profits. Share of Profit Cabarles Valencia 25% bonus after bonus P 60,000.00 15% interest on average capital 71,250.00 P116,250.00 Annual salary 50,000.00 30,000.00 Balance, equally ( 13,750.00) ( 13,750.00) Total share in profit P167,500.00 P132,500.00
7D. TOTAL LOSS IS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, ALLOWING 25% BONUS BEFORE BONUS TO CABARLES AND ANY REMAINDER EQUALLY Entry: Cabarles, Capital 162,500 Valencia, Capital 137,500 Income Summary 300,000 To record the distribution of loss. Share of Profit Cabarles Valencia 15% interest on capital P 71,250.00 P116,250.00 Annual Salary 50,000.00 30,000.00 25% bonus after bonus 0.00 Balance, equally (283,750.00) (283,750.00) Total share in profit (loss) (P162,500.00) (P137,500.00)
7E. TOTAL LOSS IS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, ALLOWING 25% BONUS AFTER BONUS TO CABARLES AND ANY REMAINDER IN THE RATIO 1:4 Entry: Valencia, Capital 307,750 Cabarles, Capital 7,750 Income Summary 300,000 To record the distribution of loss. Share of Profit Cabarles Valencia 15% interest on capital P 71,250.00 P116,250.00 Annual Salary 50,000.00 30,000.00 25% bonus before bonus Balance, ratio 1:4 (113,500.00) (454,000.00) Total share in profit (loss) P 7,750.00 (P307,750.00)
What do you think is the purpose of providing (1) interest on capital investments, (2) salaries to partners, and (3) bonus to managing partner?
Topic for next meeting: Dissolution
Thank you!

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2. Partnership Operations and Financial Reporting.pptx

  • 1.
    PARTNERSHIP OPERATIONS AND FINANCIAL REPORTING Source:Partnership and Corporation, Ballada Prepared by Greg O. Saclot for ABM SHS/BSA 1st Year/BSBA 1st Year
  • 2.
    REVIEW 1. In apartnership, 3 individuals with no business may form a partnership. A. True B. False
  • 3.
    REVIEW 2. What doyou call a person who takes active part in the business of the partnership but is not known as a partner? A. Dormant partner B. Secret partner C. Silent partner D. Nominal partner
  • 4.
    REVIEW 3. When non-cashassets are contributed by a partner to the partnership, the basis of valuation is A. at fair market value at time of contribution. B. at fair market value a day after date of contribution. C. at agreed value at time of contribution. D. at carrying amount of the asset at time of contribution.
  • 5.
    REVIEW 4. Which ofthe following statements is incorrect? A. The profits of a general professional partnership is subject to 30% income tax. B. SEC will not allow formation of professionals as a corporation. C. SEC will allow professionals to form a trading partnership. D. As trading partnership, the profits is taxed like a corporation at 30% of taxable income.
  • 6.
    REVIEW 5. When soleproprietorship is contributed to the partnership, which of the following is correct? A. All assets and liabilities are revalued according to agreement. B. All assets and liabilities are revalued according to fair market values. C. Revaluation of assets and liabilities are adjusted to income summary account. D. Revaluation of assets and liabilities are adjusted to capital account.
  • 7.
    REVIEW 6. In thecase of liquidation and the partnership assets are insufficient to settle partnership liabilities, which of the following statements is correct? A. The personal assets before personal creditors of general partner may be used to settle unpaid partnership liabilities. B. The personal assets before personal creditors of limited partner may be used to settle unpaid partnership liabilities. C. The personal assets after personal creditors of general partner may be used to settle unpaid partnership liabilities. D. The personal assets after personal creditors of limited partner may be used to settle unpaid partnership liabilities.
  • 8.
    REVIEW 7. A limitedpartnership is composed of A. all general partners. B. all limited partners. C. all general partners and at least one limited partner. D. all limited partner and at least one general partner.
  • 9.
    REVIEW 8. A partnershipwith assets P20,000,000 before financing and has 120 employees is considered as A. micro enterprise. B. small enterprise. C. medium enterprise. D. large enterprise.
  • 10.
    REVIEW 9. Which ofthe following will not be found in the articles of partnership? A. Partnership name B. Residences of the partners C. Birthdays of the partners D. The rights and duties of each partner.
  • 11.
    REVIEW 10. The provisionsgoverning partnership are in: A. Civil Code of the Philippines B. Revised Code of Corporation of the Philippines C. Department of Trade and Industry D. Securities and Exchange Commission
  • 12.
    LEARNING OBJECTIVES 1. Contrasta partner’s equity in assets from share in profits or losses. 2. Summarize the rules for the distribution of profits or losses. 3. Explain prior period errors and interpret the effects on partners’ share in profits or losses. 4. Identify, describe and account for the different methods of dividing partnership profits or losses based on agreement. 5. Ascertain the effects of using original, beginning, ending and average capitals on the partners’ share in profits or losses. 6. Show the treatment of interest on capital, partners’ salaries and bonus in the distribution of profits or losses.
  • 13.
    PARTNERS’ EQUITY INASSETS CONTRASTED WITH SHARE IN PROFITS OR LOSSES If “A is one-fourth partner,” does not always mean that A, who has one-fourth (1/4) equity in the net assets of the partnership, might have smaller or larger than 1/4 share in the partnership profits or losses. Or A, who shares 1/4 of partnership profits or losses, has more or less than one-fourth (1/4) equity in the net assets of the partnership.
  • 14.
    PARTNERS’ EQUITY INASSETS CONTRASTED WITH SHARE IN PROFITS OR LOSSES Keep in mind, regardless of the capital contribution of partners, they may agree on a specific profit or loss sharing.
  • 15.
    RULES FOR THEDISTRIBUTION OF PROFITS OR LOSSES Profits 1. The profits will be divided according to partners’ agreement. 2. If there is no agreement, a. As to capitalist partners, the profits shall be divided according to their capital contributions (according to the ratio of original capital investments or in its absence, the ratio of capital balances at the beginning of the year). b. As to industrial partners (if any) such share as may be just and equitable under circumstances, provided, that the industrial partner shall receive such share before the capitalist partners shall divide the profits.
  • 16.
    RULES FOR THEDISTRIBUTION OF PROFITS OR LOSSES Losses 1. The losses will be divided according to partners’ agreement. 2. If there is no agreement as to distribution of losses, but there is an agreement to profits, the losses shall be distributed according to the profit sharing ratio. 3. In the absence of any agreement, a. As to capitalist partners, the losses shall be divided according to their capital contributions (according to the ratio of original capital investment or in its absence, the ratio of capital balances at the beginning of the year. b. As to purely industrial partners (if there’s any) shall not be liable for any losses.
  • 17.
    CORRECTION OF PRIORPERIOD ERRORS Per International Accounting Standards (IAS) No. 8, Accounting Policies, Changes in Accounting Estimates and Errors, prior period errors are omissions from and other misstatements of the entity’s financial statements for one or more prior periods that are discovered in the current period. Errors may occur as a result of mathematical mistakes, mistakes in applying accounting policies, misinterpretations of facts, fraud or oversights. Examples include errors in the estimation of depreciation, errors in inventory valuation and omission of accruals of revenue and expenses.
  • 18.
    CORRECTION OF PRIORPERIOD ERRORS Material prior periods must be restated to report financial position and results of operations as they would have been presented had the error never taken place. The amount of the correction of a prior period error that relates to prior periods should be reported by adjusting the opening balances of partners’ equity and afffected assets and liabilities. The correction of a prior period error is excluded from profit or loss for the period in which the error is discovered.
  • 19.
    DISTRIBUTION OF PROFITSOR LOSSES BASED ON PARTNERS’ AGREEMENT 1. Equally or in other agreed ratio. 2. Based on partners’ capital contributions: a. ratio of original capital contributions b. ratio of capital balances at the beginning of the year c. ratio of capital balances at the end of the year d. Ratio of average capital balances 3. By allowing interest on partners’ capital and the balance in an agreed ratio. 4. By allowing salaries to partners and the balance in an agreed ratio. 5. By allowing bonus to the managing partner based on profit and the balance in an agreed ratio. 6. By allowing salaries, interest on partners’ capital, bonus to managing partner and the balance in an agreed ratio.
  • 20.
    ILLUSTRATION Rod Ann Cabarlesinvested P400,000 on January 1, 2019 and an additional P100,000 on April 1. Dennis Valencia invested P800,000 on January 1 and withdrew P50,000 on July 1. For the year ended December 31, 2019, Cabarles and Valencia Company had a profit of P300,000. The partnership contract provided that each partner may withdraw P5,000 on the last day of each month, both partners did so during the year.
  • 21.
    1. EQUALLY ORIN OTHER AGREED RATIO Entry: Income Summary 300,000 Cabarles, Capital 150,000 Valencia, Capital 150,000 To record the distribution of profits. Cabarles Valencia Share in profit - equally P150,000 P150,000 Total P150,000 P150,000
  • 22.
    1. EQUALLY ORIN OTHER AGREED RATIO Effect on partners’ capital accounts: Cabarles Valencia Investments on January 1, 2019 P400,000 P800,000 Additional investment on April 1 100,000 Withdrawals on July 1 ( 50,000) Monthly drawings P5,000 each ( 60,000) ( 60,000) Share in the year-end profit 150,000 150,000 Balance at December 31, 2019 P590,000 P840,000
  • 23.
    1. EQUALLY ORIN OTHER AGREED RATIO If the partnership incurred a P300,000 loss, the entry is: Cabarles, Capital 150,000 Valencia, Capital 150,000 Income Summary 300,000 To record the distribution of losses.
  • 24.
    2A. RATIO OFORIGINAL INVESTMENT Entry: Income Summary 300,000 Cabarles, Capital 100,000 Valencia, Capital 200,000 To record the distribution of profits. Cabarles Valencia Original Investment P400,000 P800,000 Share in the profit (computed as) P100,000 P300,000 x (400,000/P1,200,000) P200,000 P300,000 x (P800,000/P1,200,000)
  • 25.
    2B. RATIO OFCAPITAL BALANCES AT THE BEGINNING OF THE YEAR Entry: Income Summary 300,000 Cabarles, Capital 100,000 Valencia, Capital 200,000 To record the distribution of profits. Cabarles Valencia Capital balance at Jan. 1, 2019 P400,000 P800,000 Share in the profit (computed as) P100,000 P300,000 x (400,000/P1,200,000) P200,000 P300,000 x (P800,000/P1,200,000)
  • 26.
    2C. RATIO OFCAPITAL BALANCES AT THE END OF THE YEAR Entry: Income Summary 300,000 Cabarles, Capital 120,000 Valencia, Capital 180,000 To record the distribution of profits. Cabarles Valencia Capital balances at December 31, 2019 P500,000 P750,000 Share in the profit (computed as) P120,000 P300,000 x (500,000/P1,250,000) P180,000 P300,000 x (P750,000/P1,250,000)
  • 27.
    2D. RATIO OFAVERAGE CAPITAL BALANCES Cabarles Valencia Original Investment P400,000 P800,000 Additional investment on April 1 100,000 Withdrawal on July 1 50,000 Capital balances at December 31, 2019 P500,000 P750,000 Average capital balances 400,000 x 12 = 4,800,000 100,000 x 9 = 900,000 Total 5,700,000 Average = 5,700,000 / 12 = 475,000 800,000 x 12 = 9,600,000 50,000 x 6 = ( 300,000) Total 9,300,000 Average = 9,300,000 / 12 = 775,000
  • 28.
    2D. RATIO OFAVERAGE CAPITAL BALANCES Entry: Income Summary 300,000 Cabarles, Capital 114,000 Valencia, Capital 186,000 To record the distribution of profits. Cabarles Valencia Average capital balances P475,000 P775,000 Share in the profit (computed as) P114,000 P300,000 x (475,000/P1,250,000) P186,000 P300,000 x (P775,000/P1,250,000)
  • 29.
    3. ALLOWING 15%INTEREST ON AVERAGE CAPITAL AND REMAINING PROFIT IS DISTRIBUTED EQUALLY Entry: Income Summary 300,000 Cabarles, Capital 127,500 Valencia, Capital 172,500 To record the distribution of profits. Share of Profit Cabarles Valencia 15% interest on capital P 71,250 P475,000 x 15% = P71,250 P116,250 P775,000 x 15% = P116,250 Remainder – equally P300,000 – P71,250 – P116,250 = P112,500 P 56,250 P112,500 / 2 = P56,250 P 56,250 P112,500 / 2 = P56,250 Total share in profit P127,500 P172,500
  • 30.
    4. ALLOWING ANNUALSALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, ANY BALANCE EQUALLY Entry: Income Summary 300,000 Cabarles, Capital 160,000 Valencia, Capital 140,000 To record the distribution of profits. Share of Profit Cabarles Valencia Annual salary P 50,000 P 30,000 Remainder, equally P300,000 – P50,000 – P30,000 = P220,000 110,000 P220,000 / 2 = P110,000 110,000 P220,000 / 2= P110,000 Total share in profit P160,000 P140,000
  • 31.
    5A. ALLOWING 25%BONUS BEFORE BONUS TO CABARLES AND ANY REMAINDER EQUALLY Entry: Income Summary 300,000 Cabarles, Capital 187,500 Valencia, Capital 112,500 To record the distribution of profits. Share of Profit Cabarles Valencia 25% Bonus before bonus P 75,000 P300,000 x 25% = P75,000 Remainder, equally P300,000 – P75,000 = P225,000 112,500 P225,000 / 2 = P112,500 112,500 P225,000 / 2= P112,500 Total share in profit P187,500 P112,500
  • 32.
    5B. ALLOWING 25%BONUS AFTER BONUS TO CABARLES AND ANY REMAINDER EQUALLY Entry: Income Summary 300,000 Cabarles, Capital 180,000 Valencia, Capital 120,000 To record the distribution of profits. Share of Profit Cabarles Valencia 25% Bonus after bonus P 60,000 P300,000 / 1.25 x 25% = P60,000 Remainder, equally P300,000 – P60,000 = P240,000 120,000 P240,000 / 2 = P120,000 120,000 P240,000 / 2 = P120,000 Total share in profit P180,000 P120,000
  • 33.
    6A. TOTAL PROFITIS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, ALLOWING 25% BONUS BEFORE BONUS TO CABARLES AND ANY REMAINDER EQUALLY Entry: Income Summary 300,000 Cabarles, Capital 141,562.50 Valencia, Capital 158,437.50 To record the distribution of profits. Share of Profit Cabarles Valencia 15% interest on capital P 71,250.00 P116,250.00 Annual Salary 50,000.00 30,000.00 25% bonus before bonus 8,125.00 Balance, equally 12,187.50 12,187.50 Total share in profit P141,562.50 P158,437.50
  • 34.
    6B. TOTAL PROFITIS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING 25% BONUS BEFORE BONUS TO CABARLES, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, AND ANY REMAINDER EQUALLY Entry: Income Summary 300,000 Cabarles, Capital 151,562.50 Valencia, Capital 148,437.50 To record the distribution of profits. Share of Profit Cabarles Valencia 15% interest on capital P 71,250.00 P116,250.00 25% bonus before bonus 28,125.00 Annual salary 50,000.00 30,000.00 Balance, equally 2,187.50 2,187.50 Total share in profit P151,562.50 P148,437.50
  • 35.
    6C. TOTAL PROFITIS P300,000. ALLOWING 25% BONUS BEFORE BONUS TO CABARLES, ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, AND ANY REMAINDER EQUALLY Entry: Income Summary 300,000 Cabarles, Capital 175,000 Valencia, Capital 125,000 To record the distribution of profits. Share of Profit Cabarles Valencia 25% bonus before bonus P 75,000.00 15% interest on average capital 71,250.00 P116,250.00 Annual salary 50,000.00 30,000.00 Balance, equally ( 21,250.00) ( 21,250.00) Total share in profit P175,000.00 P125,000.00
  • 36.
    6D. TOTAL LOSSIS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, ALLOWING 25% BONUS BEFORE BONUS TO CABARLES AND ANY REMAINDER EQUALLY Entry: Cabarles, Capital 162,500 Valencia, Capital 137,500 Income Summary 300,000 To record the distribution of loss. Share of Profit Cabarles Valencia 15% interest on capital P 71,250.00 P116,250.00 Annual Salary 50,000.00 30,000.00 25% bonus before bonus 0.00 Balance, equally (283,750.00) (283,750.00) Total share in profit (P162,500.00) (P137,500.00)
  • 37.
    6E. TOTAL LOSSIS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, ALLOWING 25% BONUS BEFORE BONUS TO CABARLES AND ANY REMAINDER IN THE RATIO 1:4 Entry: Valencia, Capital 307,750 Cabarles, Capital 7,750 Income Summary 300,000 To record the distribution of loss. Share of Profit Cabarles Valencia 15% interest on capital P 71,250.00 P116,250.00 Annual Salary 50,000.00 30,000.00 25% bonus before bonus 0.00 Balance, average capital (113,500.00) (454,000.00) Total share in profit P 7,750.00 (P307,750.00)
  • 38.
    7A. TOTAL PROFITIS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, ALLOWING 25% BONUS AFTER BONUS TO CABARLES AND ANY REMAINDER EQUALLY Entry: Income Summary 300,000 Cabarles, Capital 140,750 Valencia, Capital 159,250 To record the distribution of profits. Share of Profit Cabarles Valencia 15% interest on capital P 71,250.00 P116,250.00 Annual Salary 50,000.00 30,000.00 25% bonus after bonus 6,500.00 Balance, equally 13,000.00 13,000.00 Total share in profit P 140,750.00 P 159,250.00
  • 39.
    7B. TOTAL PROFITIS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING 25% BONUS AFTER BONUS TO CABARLES, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, AND ANY REMAINDER EQUALLY Entry: Income Summary 300,000 Cabarles, Capital 148,750 Valencia, Capital 151,250 To record the distribution of profits. Share of Profit Cabarles Valencia 15% interest on capital P 71,250.00 P116,250.00 25% bonus after bonus 22,500.00 Annual salary 50,000.00 30,000.00 Balance, equally 5,000.00 5,000.00 Total share in profit P148,750.00 P151,250.00
  • 40.
    7C. TOTAL PROFITIS P300,000. ALLOWING 25% BONUS AFTER BONUS TO CABARLES, ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, AND ANY REMAINDER EQUALLY Entry: Income Summary 300,000 Cabarles, Capital 167,500 Valencia, Capital 132,500 To record the distribution of profits. Share of Profit Cabarles Valencia 25% bonus after bonus P 60,000.00 15% interest on average capital 71,250.00 P116,250.00 Annual salary 50,000.00 30,000.00 Balance, equally ( 13,750.00) ( 13,750.00) Total share in profit P167,500.00 P132,500.00
  • 41.
    7D. TOTAL LOSSIS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, ALLOWING 25% BONUS BEFORE BONUS TO CABARLES AND ANY REMAINDER EQUALLY Entry: Cabarles, Capital 162,500 Valencia, Capital 137,500 Income Summary 300,000 To record the distribution of loss. Share of Profit Cabarles Valencia 15% interest on capital P 71,250.00 P116,250.00 Annual Salary 50,000.00 30,000.00 25% bonus after bonus 0.00 Balance, equally (283,750.00) (283,750.00) Total share in profit (loss) (P162,500.00) (P137,500.00)
  • 42.
    7E. TOTAL LOSSIS P300,000. ALLOWING 15% INTEREST ON AVERAGE CAPITAL, ALLOWING ANNUAL SALARY P50,000 TO CABARLES AND P30,000 TO VALENCIA, ALLOWING 25% BONUS AFTER BONUS TO CABARLES AND ANY REMAINDER IN THE RATIO 1:4 Entry: Valencia, Capital 307,750 Cabarles, Capital 7,750 Income Summary 300,000 To record the distribution of loss. Share of Profit Cabarles Valencia 15% interest on capital P 71,250.00 P116,250.00 Annual Salary 50,000.00 30,000.00 25% bonus before bonus Balance, ratio 1:4 (113,500.00) (454,000.00) Total share in profit (loss) P 7,750.00 (P307,750.00)
  • 43.
    What do youthink is the purpose of providing (1) interest on capital investments, (2) salaries to partners, and (3) bonus to managing partner?
  • 44.
    Topic for nextmeeting: Dissolution
  • 45.