ACCOUNTING FOR SPECIAL TRANSACTIONS 1

TOPIC: PARTNERSHIP FORMATION LYNDON P. REGODON, CPA, MIA

PARTNERSHIP
By a contract of partnership, two or more persons bind themselves to contribute money,
property or industry to a common fund, with the intention of dividing the profits among
themselves. (ART 1767)

Accounting for Partnership

a. Formation
b. Operation
c. Dissolution
d. Liquidation

Partnership Formation
A contract of partnership is consensual. It is created by the agreement of the partners which may
be constituted in any form, such as oral or written.
However, Articles 1771 and 1772 of the Philippine Civil Code requires that a partnership
agreement be made in a public instrument and recorded in the office of the Securities and
Exchange Commission (SEC) when:
a. Immovable property or real rights are contributed to the partnership (ex. PPE), or
b. The partnership has a capital of three thousand pesos (P3,000) or more.
Art. 1773 of the Civil Code further requires that an inventory of any immovable property
contributed to the partnership should be signed by the parties, and attached to the public
instrument, otherwise the partnership shall be deemed void.

Valuation of contributions

Art. 1787 of the Civil Code states that “when a capital or part thereof which a partner is bound
to contribute consists of goods, their appraisal must be made in the manner prescribed in the
contract of partnership, and in the absence of stipulation, it shall be made by experts chosen by
the partners, and according to current prices, the subsequent changes thereof being for the
account of the partnership.

SIR DON, CPA

 ACCOUNTING FOR SPECIAL TRANSACTIONS 2

Sample Problems:
1. LEO and NANA decided to form a partnership on October 1, 2014. Their Statement of
financial position on this date were:

LEO NANA
Cash 65,000 165,000
Accounts receivable 1,450,000 890,000
Merchandise Inventory 875,000 880,000
Equipment 650,000 1,265,000
Total 3,040,000 3,200,000
Accounts payable 450,000 1,160,000
LEO, capital 2,590,000
NANA, capital 2,040,000
Total 3,040,000 3,200,000

They agreed the following adjustments shall be made:

▪ Equipment of LEO is under-depreciated by P85,000 and NANA is over-depreciated
by P130,000
▪ Allowance for doubtful accounts is to be set up amounting to P280,000 for LEO
and P190,000 for NANA.
▪ Inventories of P20,000 and P15,000 are worthless in the books of LEO and NANA
respectively.
▪ The partnership agreement provides for a profit and loss ratio of 70% to LEO and
30% to NANA.
A. Assuming the partners’ capital credit is equal to their contributions, compute the capital
for LEO and NANA, respectively in the new partnership.
LEO : ______________
NANA: ______________

B. According to a specified or agreed ratio.

1. Using the invest/withdraw method, if the partners agreed that LEO’s capital is 40%,
NANA will have to invest or withdraw an amount of? ___________

2. Assuming the use of transfer capital method, how much is the agreed capital of LEO to
bring the capital balances proportionate to their profit and loss ratio.

SIR DON, CPA