DE LA SALLE LIPA

College of Business, Economics, Accountancy and Management

Accountancy and Accounting Information Systems Department

LECTURE NOTES
Module 1: Partnership, Corporate Liquidation, and Joint Arrangements

Partnership Operation

In addition to profit or loss sharing, the partnership agreement may also stipulate any of the
following:
1. Salaries – normally, an industrial partner receives salary in addition to his share in the
partnership’s profits as compensation for his services to the partnership.
2. Bonuses – the managing partner may be entitled to a bonus for excellent management
performance. Unlike for salaries, a partner is entitled to a bonus only if the partnership
earns profit. The partner is not entitled to any bonus if the partnership incurs loss.
3. Interest on capital contributions – the partnership agreement may stipulate that capitalist
partners are entitled to an annual interest on their capital contributions.

These items are normally provided first to the respective partners and any remaining amount
of the profit or loss is shared among the partners based on their stipulated profit or loss ratio.

COMPUTATION OF A PARTNER’S SHARE IN THE PROFIT OR LOSS

The partners share in partnership profits or losses in accordance with their partnership
agreement.

Profit or Loss Sharing Rules under Art. 1797 of the Civil Code:

1. 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.
2. 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. As for the profits, the industrial partner shall receive such share as may be
just and equitable under the circumstances. If besides his services he has contributed
capital, he shall also receive a share in the profits in proportion to his capital.

Note: “A stipulation which excludes one or more partners from any share in the profits or losses
is void.” (Civil Code, Art. 1799)

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Practice Problems:

1. JJ and KK are partners who share profits and losses in the ratio of 60%: 40%, respectively. JJ's
salary is P60,000 and P30,000 for KK. The partners are also paid interest on their average capital
balances. In 2019, JJ received P30,000 of interest and KK, P12,000. The profit and loss allocation
is determined after deductions for the salary and interest payments. If KK's share in the residual
income (income after deducting salaries and interest) was P60,000 in 2019, what was the total
partnership income?

2. HH, MM, and AA formed a partnership on January 1, 2020, and contributed P150,000, P200,000,
and P250,000, respectively.Their articles of co-partnership provide that the operating income be
shared among the partners as follows: salary, P24,000 for HH, P18,000 for MM, and P12,000 for
AA; interest of 12% on the average capital during 2020 of the three partners; and the remainder in
the ratio of 2:4:4, respectively.

The operating income for the year ending December 31, 2020 amounted to P176,000. HH
contributed additional capital of P30,000 on July 1 and made a drawing of P10,000 on October1;
MM contributed additional capital of P20,000 on August 1 and made a drawing of P10,000 on
October 1; and AA made a drawing of P30,000 on November 1.

The partners' capital balances on December 31, 2020 are:

3. On January 2, 2020, Berlin and Oslo formed a partnership. Berlin contributed capital of P175,000
and Oslo, P25,000. They agreed to share profits and losses 80% and 20%, respectively. Oslo is
the general manager and works in the partnership full time and is given a salary of P5,000 a month;
an interest of 5% of the beginning capital (of both partner) and a bonus of 15% of net income before
the salary, interest and the bonus.

The profit and loss statement of the partnership for the year ended December 31, 2020 is
as follows:

Net Sales 875,000.00

Cost of goods sold - 700,000.00
Gross profit 175,000.00
Expenses (including the salary, interest and the
bonus) - 143,000.00
Net Income 32,000.00

The amount of bonus to Oslo in 2020 amounted to:

4. Ay, Bee, and Ci are partners in an accounting firm. Their capital account balances at year-end
were Ay P90,000; Bee P110,000; and Ci P50,000. They share profits and losses on a 4:4:2 ratio,
after the following special terms:

1. Partner Ci is to receive a bonus of 10% of net income after the bonus.

2. Interests of 10% shall be paid on that portion of a partner's capital in excess of
P100,000.
3. Salaries of P10,000 and P12,000 shall be paid to partners Ay & Ci respectively.
Assuming a net income of P44,000 for the year, the total profit share of Partner Ci
was:

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References:
 CIVIL CODE, art. 1767, 1771, 1772, 1773, 1787, 1797, 1799, Rep. Act 386, as amended.
 Millan, Z. (2018). Accounting for Special Transactions (Advanced Accounting 1). (2018 Edition).
Baguio City, Philippines: Bandolin Enterprise.
 Guererro, P., Peralta, J. F. (2017). Advanced Accounting Volume I and II
 Philippine Financial Reporting Standards

--o0o--
“Commit to the Lord whatever you do, and your plans will succeed.”
– Proverbs 16:3

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