PARTNERSHIP

FORMATION
Basic Consideration

Partnership is: A contract, which requires consent of the contracting parties, object certain which is the subject
matter of the contract and cause of the obligation which is the subject matter of the contract and cause of the
obligation which is established; Upon such contract, partners are bond to contribute money, property, or
industry to a common fund; With the intention of dividing the profit among themselves.

Article 1767
ARTICLE 1767. By the 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.

Two or more persons may also form a partnership for the exercise of a profession. (1665a)

Generally, partnership may be made in any form except where immovable property of real rights are
contributed thereto, in which case a public instrument shall be necessary and attached therein an inventory of
the said property.

Every contract of partnership having a capital of 3,000 pesos or more, in money or property, shall appear in
public instrument, which must be recorded in the Office of Securities and Exchange Commission. However,
failure to comply with this requirement does not prevent the formation of the partnership or affect its
liabilities and that of the partners to third persons.

A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated.

Unless there is a stipulation to the contrary, the partners shall contribute equal shares to the capital of the
partnership.

Every partnership shall operate under a firm name, which may or may not include the name of one or more of
the partners. Those who, not being members of the partnership, include their names in the firm name shall be
subject to the liability of a partner.

A partner could be a stock holder in a corporation but a corporation is not allowed by law to be a partner in a
partnership.

Characteristic elements of partnership.

1. Consensual, because it is perfected by mere consent, that is, upon the express or implied
agreement of two or more persons,
2. Nominate, because it has a special name or designation in our law;
3. Bilateral, because it is entered into two or more persons and the rights and obligations arising
therefrom are always reciprocal;
4. Onerous, because each of the parties aspires to procure for himself a benefit through the
giving of something;
5. Commutative, because the undertaking of each of the partner is considered as the equivalent
of that of the others;
6. Principal, because it does not depend for its existence or validity upon some other contract;
 7. Preparatory, because it is entered into as a means to an end, i.e., putting up a business in
preparations to gain profit.

Classifications of Partnership

1. According to subject matter

A. Universal Partnership of all present property. All contribution become part of the partnership.
B. Universal partnership of profits. All that the partners may acquire by the industry or work
during the existence of the partnership and the use of whatever the partners contributed from
the perfection of the contract.

2. According to Liability
A. General. All partners are liable to the extent of their personal or separate properties.
B. Limited. Limited partners are liable only to the extent of their contribution to the partnership.
In a limited partnership, it is mandated by law that there is one (1) general partner.

3. According to duration
A. Partnership with a fixed term or for a particular undertaking.
B. Partnership at will. One in which no time is specified and is not formed for any particular
undertaking.
4. According to legality of existence
A. De Jure partnership or one which has complied with all the legal requirements for its
establishment. It exist both in fact and in law.
B. De facto partnership or one which has failed to comply with all the legal requirements for its
establishment. It exists in fact but not in law. Like de jure it also has juridical personality.
5. According to representation
A. Ordinary or real partnership or one which actually exists among the partners and also as to
third persons.
B. Partnership by estoppel or ostensible partnership or one which reality is not a partnership,
but is considered a partnership only in relation to those who, by their actions, are precluded to
deny or disprove its existence.
6. According to purpose
A. Commercial or Trading partnership or one formed for the transaction of business.
B. Professional or non-trading partnership or one formed for the exercise of a profession.

Kinds of Partners

1. General partner liable to the extent of his separate property after all the partnership assets are
exhausted.
2. Limited partner liable only to the extent of his capital contribution.

The surname of a limited partner shall not appear in the partnership name unless it is also the surname of a
general partner, or before he entered the partnership the business had already been carried on under a name,
which his surname appeared. A limited partner violating this statement will be liable as a general partner to
partnership creditors. Of course, the limited partner will not be liable to third persons that have actual
knowledge that he is only limited partner.

A limited partner should not be involved in the management of the partnership’s operation. If he does so, he
will be liable as a general partner.
3. Capitalist partner contributes money or property to the common fund of the partnership.
4. Industrial partner contributes his knowledge or personal service talent to the partnership.
5. Managing partner appointed by the other partners to be the manager of the partnership.
6. Liquidating partner designated to wind up or settle the affairs of the partnership after dissolution.
7. Dormant partner does not participate in the business and not known as a partner to the public.
8. Silent partner does not participate in the business but known as a partner to the public.
9. Secret partner participates in the business but not known as a partner to the public.
10. Ostensible partner participates in the business and known as a partner to the public.
11. Normal partner or partner by estoppel one who is not really a partner but who represents himself as
one.

Partnership distinguished from a corporation

1. Creation. Partnership is created by mere agreement of the partners while corporation is created by
operation of law.
2. Composition. Partnership may be formed by two or more persons. But in a corporation, it must be at
least five (5) persons, not exceeding fifteen (15).
3. Life. Partnership has no limitation upon its duration to perform its activities, on the other hand,
corporation should not exceed a life of fifty (50) years but can be subject to extension.
4. Extent of liability. Partners except a limited partner is liable to the extent of their interest or
investment in the corporation.
5. Management. Every partner is an agent of the partnership if the partners have no agreement of who
will be the managing partner, in a corporation, management is the responsibility of the board of
directors.
6. Right of succession. Partnership has no right of succession while in the corporation, it can exist
notwithstanding death, withdrawal, insolvency or incapacity of its directors or stockholders. Simply
stated, position as a partner in a partnership cannot be inherited while in corporation ownership can
be passed through an heir.
7. Effectivity of juridical existence. Partnership starts from the time the articles of partnership are
executed. Corporation commences its life upon the issuance by Securities and Exchange Commission
(SEC of certificate of incorporation.
8. Governing Law. Partnership is governed by Civil Law while corporation is governed by the corporation
Code of the Philippines.

ACCOUNTING FOR PARTNERSHIP

The only difference of partnership accounting with basic accounting is the treatment of capital and drawing
accounts. The focus of basic accounting is sole proprietorship or entity with a single owner. This time, instead
of having one capital account, we will create as many capital accounts in proportion to the number of partners.
So, if there are three (3) partners, there will be 3 capital accounts.

Thus, any other entries pertaining to assets, liabilities and income are treated the same.

The partner’s capital account is credited for his initial and additional net investments (assets contributed less
liabilities assumed by the partnership), and credit balance of the drawing account at the end of the period. It is
debited for his permanent withdrawals and debit balance of the drawing account at the end of the period.

Drawing are withdrawals by partners from the partnership operation. A drawing account is debited for assets
temporarily withdrawn by him from the partnership. The balances in the drawing accounts are closed to the
related capital accounts at the end of the period.
Investing of Capital by Patnners

Case 1 (Investing without liability): Jipay invested 30,000 cash, while Korby contributed furniture having a fair
value of 35,000. The entry for the capital contribution will be:
1st priority- Agreed Value
2nd priority-FMV
3rd priority-Carrying amount/Book value
4th priority-cost

Cash 30,000
Furniture and Fixtures 35,000
Jipay, Capital 30,000
Korby, Capital 35,000

Case 2 (Investing with liability): Jipay invested land worth 1 million with a mortgage payable of 30,000
assumed by the partnership; on the other hand Korby provided machineries and necessary equipment costing
500,000. The entry for the capital contribution will be:

Land 1,000,000
Machinery and Equipment 500,000
Mortgage Payable 30,000
Jipay, Capital 970,000
Korby, Capital 500,000

*The capital account of Jipay is reduced by the 30,000-mortgage payable assumed by the partnership.

Query: What will be the entry if the Mortgage payable is NOT assumed by the partnership.

Land 1,000,000
Machinery and Equipment 500,000
Jipay, Capital 1,000,000
Korby, Capital 500,000

Partner’s drawing
The Jipay and Korby partnership paid Jipay’s personal water bill amounting 1,500 and Korby’s personal electric
bill of 2,500. The entry in the partnership books wil be:
Jipay, Drawings 1,500
Korby, Drawings 2,500
Cash 4,000

The logic why the drawing account was made is to avoid mixing the partner’s personal expenses with the
partnership’s business expenses, making the partnership’s presentation of financial position more objective.

The partner’s share in the partnership profits or losses is usually closed temporarily to the partner’s drawing
account that shall be closed finally to the capital accounts. For convenience, in subsequent topics, profits and
losses can be directly charged to the partner’s capital accounts. The result for computation purposes will be
the same.
The balance sheet of the partnership should present only the capital account which means net of drawings.
Loans receivable from partners and Loans payable to partners

Loans receivable from, also termed “due from partner” is an asset account in the partnership books. It is a
substantial amount of withdrawal of a partner with the intention of repaying it. This account is separately
classified form the other receivables of the partnership.

Loans payable to, also termed “loans to partner” is a liability account in the partnership books. This account
represents substantial amounts lent to the partnership by the partner, which the partnership is obliged to pay.

These accounts are significant during liquidation. Loans payable to partner must be settled after the outside
creditors have been paid in full but with priority over the partner’s equity.

ILLUSTRATION
Partnership Jipay and Korby have loans to partner-Jipay amounting 5,000 and due from partner-Korby
amounting 15,000. Jipay and Korby have a capital of 20,000 and 30,000 respectively.
1. To record loan payable to A and loan receivable to from B
Cash 5,000
Loans payable Jipay 5,000

Loans Receivable Korby 15,000

Cash 15,000

If Jipay and Korby decided to liquidate the partnership, the priority of payment will be:
1. Outside creditors – 10,000
2. Loans payable Jipay – 5,000
3. Partner’s capital balances: Jipay – 20,000 and Korby – 15,000*
* Korby’s capital balance: 30,000 – 15,000 = 15,000

Notice that Loans payable to Jipay has priority over the partner’s capital balances. Korby’s capital is offset by
Loans receivable from Korby. This will be discussed further in detail on chapter about partnership liquidation.

Partnership formation
A partnership can be created in any of the following ways:

1. Individual Individual; Individuals with no existing business from a partnership

Procedure: 1. Record the investment of partners

2. Change from sole proprietorship to a partnership

A. Sole proprietorship Individual; Sole proprietorship and an individual without a business form a
partnership
Procedure:
1. Adjust the books of the sole
2. Close the books of the sole
3. Record the investment of the sole to the partnership book
4. Record the investment of the individual to the partnership book

B. Sole proprietorship Sole proprietorship; Two or more proprietors form a partnership.

 Procedure:
1. Adjust the books of the sole (all partners)
2. Close the books of the sole (all partners)
3. Record the investment of the sole to the partnership book (all partners)

3. Admission or Retirement of a partner (to be discussed in Partnership dissolution)

Any contribution by the partners will be recorded in the amount according to their agreement (agreed value).

In the absence of the any agreement, contributions are to be recorded at their fair market value (FMV), which
means the estimated amount that a willing seller would receive from a financial capable buyer for the sale of
the asset in a free market. Based on PFRS 3, fair market value is the price at which an asset or liability could be
exchanged in a current transaction between knowledgeable, unrelated willing parties.

In case one of the partners is an industrial partner or one who contributes his knowledge or personal service to
the partnership only a memorandum entry in the general journal is prepared.

The National Internal Revenue Code provided that upon formation of the partnership a new set of books for
the partnership shall be made. Thus, the books of the sole proprietorship will follow these accounting
procedures:

1. Assets and liabilities need adjustments to reflect the current fair market values of each account in the
absence of any agreement.
2. Close the books

After closing the books of the sole proprietor, the partnership books will be opened with corresponding entries
of the partner’s initial investments.

Illustration 1 (Individual-Individual)
On May 23, 2006, Dom and Ciel decided to engage themselves in an Internet café business. Dom, whose family
is a dealer of personal computers, contributed 20 computers which cost him 300,000 and cash of 150,000.
Computer’s fair value is 500,000. Ciel agreed to provide her land as a business site located in Pioneer Avenue.
The land has a fair value of 1,000,000 but Dom and Ciel agreed to record it at 1,200,000. The land with a
mortgage amounting 150,000 is assumed by the partnership.

1. To record the investment of Dom and Ciel to the partnership

Cash 150,000
Computer Equipments 500,000
Land 1,200,000
Mortgage payable 150,000
Dom, Capital 650,000
Ciel, Capital 1,050,000

Observe that the land is recorded at the agreed value. Computer equipment on the other hand are recorded at
fair value since there was no agreed value provided. Instances may give no agreed value of fair value, use cost
or book value.

The Formation of partnership will create an entity with the following balance sheet:

Dom and Ciel

 Balance sheet
As of May 23, 2006

ASSETS
Cash 150,000
Computer Equipments 500,000
Land 1,200,000
Total Assets 1,850,000

LIABILITIES AND OWNER’S EQUITY

Mortgage payable 150,000
Dom, Capital 650,000
Ciel, Capital 1,050,000
Total liabilities and Owner’s Equity 1,850,000

Illustration 2 (Sole proprietor – Individual)

On April 2, 2006, Rai a sole proprietor contracted to for a partnership with Jim who agreed to invest 75% of
Rai’s adjusted net assets through cash. Rai’s balance sheet on April 2, 2006 before adjustments are given
below:

Cash 90,000
Accounts receivable 216,000
Rent Receivable(C) 24,000
Prepaid Taxes(G) 3,200
Allowance for doubtful accounts(B) (4,800)+(6,000)=(10,800)
Merchandise Inventory (A) 192,000-12,000=180,000
Office supplies(D) 32,400-8,400=24,000
Equipment 120,000
Accumulated Depreciation- (54,000)+(6,000)=(60,000)
Equipment(E)
Total Assets 591,600

Accounts payable 159,600

Notes payable 60,000
Interest payable(F) 1,800
Rai, Capital 372,000-12,000-6,000+24,000-8,400-6,000-1,800+3,200=365,000
Total liabilities and 591,600
capital

The firm will take into custody business assets and assume liabilities, and capital are to be based on net assets
transferred after the following adjustments on Rai’s books:

a. Merchandise inventory amounting to 12,000 is worthless

Rai, Capital 12,000
Merchandise inventory 12,000

Loss on inventory Write Down 12,000

Merchandise inventory 12,000
Income Summary 12,000
Loss on inventory write down 12,000

Rai, Capital 12,000

Income Summary 12,000

b. An allowance for doubtful accounts of 5% is to be established on the accounts receivable.

AFDA (216,000x5%) 10,800-4,800= 6,000

Rai, Capital 6,000

AFDA 6,000

Doubtful accounts expense 6,000

AFDA 6,000
Income Summary 6,000
Doubtful Accounts Expense 6,000
Rai, Capital 6,000
Income Summary 6,000

c. Accrued rent income of P24,000 should be recognized

Rent Receivable 24,000
Rai, Capital 24,000

Rent Receivable 24,000

Rent Income 24,000
Rent income 24,000
Income summary 24,000
Income summary 24,000
Rai, Capital 24,000

d. The office supplies unused amounted to 24,000

Rai, Capital 8,400
Office supplies (32,400-24,000) 8,400

Supplies Expense 8,400

Office Supplies 8,400
Income summary 8,400
Supplies Expense 8,400
Rai, Capital 8,400
Income Summary 8,400

e. Equipment’s agreed value amounted to 60,000

Cost -100,000
Acc. Dep-10,000+5,000=15,000
CA-90,000
AM-85,000

Rai, Capital 6,000

Acc. Depreciation 6,000
 f. Interest at 12% on Notes payable dated January 2, 2006 should be accrued
60,000x12%x3/12=1,800
Rai, Capital 1,800
Interest payable 1,800

Interest Expense 1,800

Interest payable 1,800
IS 1,800
Interest Exp 1,800
Rai, Capital 1,800
IS 1,800
g. Prepaid taxes of P3,200 were to be recognized.
Prepaid taxes 3,200
Rai, Capital 3,200

The following entries will be made,

1.To record adjusting entries on Rai’s books:

a. Rai, Capital 12,000

Merchandise Inventory 12,000

b. Rai, Capital 6,000

Allowance for doubtful accounts 6,000

c. Rent receivable 24,000

Rai, Capital 24,000

d. Rai, Capital 8,400

Office Supplies 8,400

e. Rai, Capital 6,000

Accumulated depreciation-Equipment 6,000

Accounting standard states that an item of property plant and equipment that qualifies as an asset shall be
measured at cost. Cost is the amount of cash or cash equivalent paid to acquire the asset. Thus, it is
inappropriate to credit the equipment account to decrease its value it will be against the accounting standard.
The appropriate adjusting entry to decrease the value of the equipment is debiting depreciation expense and
crediting accumulated depreciation.

f. Rai, Capital 1,800

Interest payable 1,800
g. Prepaid taxes 3,200
Rai, Capital 3,200

Observe that the adjusting entries are different from your basic accounting problems. Here, all nominal
accounts are directly substitute by the capital account. Instead of debiting Supplies Expense and crediting
Supplies the debit is automatically made through the capital account.
Actually, there is a slight difference but has the same effect. Remember that all the nominal accounts are close
to the Income Summary account. After posting the balance of the Income Summary account, it is then close to
the capital account. The effect would still be the same. This is done for convenience. If asked what is the
correct adjusting entry, follow basic accounting learning.

For visual presentation take the adjusting entry from letter (d) of this illustration.

Office Supplies at the beginning amounted 32,400. Then the unused portion is 2,400. So, the expense to be
recorded will be 32,400 less 2,400, that is 8,400.

The correct adjusting entry will be:

Office Supplies Expense 8,400
Office Supplies 8,400

To close the nominal account, the entry will be:

Income Summary 8,400
Office Supplies Expense 8,400

To close the Income Summary account to the capital account:

Rai, Capital 8,400
Income Summary 8,400

Since in a partnership formation, the focus is how much the partners can invest. Capital balances should be
dealt directly. Instead of undergoing three entries, one will suffice; given that the effect on their capital will be
similar in both cases.

2.To Close Rai’s book

Rai, Capital 365,000
Allowance for doubtful accounts 10,800
Accumulated Depreciation 60,000
Accounts payable 159,600
Interest payable 1,800
Notes payable 60,000
Cash 90,000
Accounts receivable 216,000
Rent receivable 24,000
Merchandise Inventory 180,000
Office Supplies 24,000
Prepaid taxes 3,200
Equipment 120,000

3.To record investment of Rai and Jim on the partnership

Cash 90,000
Accounts receivable 216,000
Rent receivable 24,000
Merchandise Inventory 180,000
Office Supplies 24,000
Prepaid taxes 3,200
Equipment 60,000
Allowance for doubtful accounts 10,800
 Accounts payable 159,600
Interest payable 1,800
Notes payable 60,000
Rai, Capital 365,000

Cash 273,750
Jim, Capital (365,000x75%) 273,750

Examine that Jim contributed 75% of Rai’s adjusted capital through cash. That is 365,000 multiplied by 75%
equals 273,750. If compound entry was made, partnership’s total cash will reflect 363,750.

Illustration 3 (Sole proprietor – Sole proprietor)

On November 21, 2006, Cyd and Drex decide to pool their assets and form a partnership. After the formation,
the partners will participate in the profit and loss ratio of 60% and 40% for Cyd and Drex, respectively. The
balance sheet on November 21, 2006 before the adjustments were as follows:

Cyd Drex
Cash 33,000 52,800
Accounts receivable 216,000 240,000
Allowance for doubtful accounts (5,400) (6,000)
Note receivable 60,000 -
Inventories 19,200 18,000
Prepaid Insurance - 6,000
Machinery 120,000 -
Accumulated Depreciation (12,000) -
Furniture and Fixtures - 96,000
Accumulated depreciation (7,200)
Total Assets 430,800 399,600

Accounts payable 6,000 7,200

Notes payable - 60,000
Capital 424,800 332,400
Total liabilities and Owner’s Equity 430,800 399,600

The firm is to take over business assets and assume business liabilities. Capital are to be used on net asset after
the following adjustments:

a. The accounts receivable of Cyd and Drex are estimated to be 4% doubtful.

b. Interest at 12% on notes receivable dated October 27, 2006 should be accrued (assume 360 days)
c. The inventory of Cyd should be valued at 18,00, while 2,000 of the inventory of Drex are
considered worthless
d. The prepaid insurance of Drex still amounted to 1,200
e. The machinery should be depreciated by 2,800 more
f. The furniture and fixtures is under depreciated by 1,600
g. Interest at 15% on notes payable dated September 27, 2006 should be accrued *assume 360 days)
h. Accrued rent receivable of 3,600 is to be recognized in the books of Drex.

After formation, the new capital of the partnership is based on the adjusted capital balance of Cyd, so that
Drex may withdraw or invest additional cash to make the partner’s balance proportionate to their profits and
losses ratio.
Required: Assume the use of new set of books, prepare:
1. Adjusting entries on books of Cyd and on the books of Drex
2. Closing entries in the books of Cyd and Drex
3. Journal entries to record the investment of Cyd and Drex, under the”

a. Net Investment method or the adjusted capital balance of each partner. After adjusting, the
adjusted capital balances of the partner will be reflected to the partnership books.
b. Original assumption as stated above
c. Bonus method is an approach where total contributed capital should equal to agreed capital.
There is bonus to a partner when his capital credit is more than his actual contributed capital
as a result of a decrease in the capital balance of another partner. This method does not
record intangible asset in the partnership books at the formation of the partnership.
d. Goodwill method is an approach where total agreed capital exceeds total contributed capital.
This method record intangible asset on the partnership books at the formation of the
partnership.

The adjusting entries for the books of Cyd and Drex before formation will be:

Cyd’s Book Drex’s Book

a. Cyd, Capital 3,240 a. Drex, Capital 3,600
Allowance for doubtful accounts 3,240 Allowance for doubtful accounts 3,600
b. Interest receivable 500
Cyd, capital 500
---------------------
(60,000x12%x25/360);25 days is derived from oct.
27 to Nov. 21
c. Cyd, Capital 1,200 c. Drex, capital 2,000
Inventories 1,200 Inventories 2,000
d. Drex, capital 4,800
--------------------- Prepaid insurance 4,800
(6,000-1,200=4,800)
e. Cy, capital 2,800 f. Drex, capital 1,600
Accumulated depreciation 2,800 Accumulated Depreciation 1,600
g. Drex, Capital 1,375
Interest payable 1,375
---------------------
(60,000x15%x55/360); 55 days is derived from Sep.
27 to Nov. 21
h. Rent receivable 3,600
---------------------
Drex, capital 3,600

The closing entry for the book of Cyd will be:

Cyd, Capital 418,060
Allowance for Doubtful accounts 8,640
Accumulated Depreciation 14,800
Accounts Payable 6,000
Cash 33,000
Notes Receivable 60,000
Accounts receivable 216,000
Interest receivable 500
 Inventories 18,000
Machinery 120,000

The closing entry for the book of Drex will be:

Drex, Capital 322,625
Allowance for Doubtful accounts 9,600
Accumulated Depreciation 8,800
Notes Payable 7,200
Accounts Payable 60,000
Interest payable 1,375
Cash 52,800
Accounts receivable 240,000
Rent Receivable 3,600
Inventories 16,000
Prepaid Insurance 1,200
Furniture and Fixtures 96,000

The Journal entries to record investments of Cyd and Drex will be:

a. Net Investment Method

To record Cyd’s Investment to the partnership books:

Cash 33,000
Notes Receivable 60,000
Accounts receivable 216,000
Interest receivable 500
Inventories 18,000
Machinery 105,200
Allowance for Doubtful accounts 8,640
Accounts Payable 6,000
Cyd, Capital 418,060

To record Drex’s Investment to the partnership books:

Cash 52,800
Accounts receivable 240,000
Rent Receivable 3,600
Inventories 16,000
Prepaid Insurance 1,200
Furniture and Fixtures 87,200
Allowance for Doubtful accounts 9,600
Accumulated Depreciation 8,800
Notes Payable 7,200
Accounts Payable 60,000
Interest payable 1,375
Drex, Capital 322,625

b. Assumption provided in the problem:

“The new capital of the partnership is based on the adjusted capital balance of Cyd, so that Drex may withdraw
or invest additional cash to make the partners′ balances in proportionate to their profits and losses ratio.”

The problem states that the adjusted capital of Cyd will be the basis. That means that the capital of Cyd which
amounts to 418,060 is already her contribution, which is equal to 60% of the total needed contribution as
agreed upon on their profit/loss ratio. So the needed contribution will be 418,060/. 60 = 697,767.

Adjusted Capital Agreed Capital Investment/

Balance Balance (Withdrawal) needed
CYD 418,060 418,060 --------------
60%
DREX 322,625 278,707 43,918
40%
TOTAL 740,685 696,767 43,918

The 40% of 696,767. Drex contributed more than the agreed/needed capital balance. So, Drex will withdraw
43,918 cash.

The entry for Cyd′s investment and the initial entry for Drex′s investment will still be the same with the
adjusted capital balance method.

Additional entry to record Drex’s withdrawal of cash will be:

Drex, Capital 43,918

Cash 43,918

After the withdrawal of cash, Drex’s capital will be 278,707, that is 322,625 less 43,918.

c. Bonus Method: Bonus assumes that the total contribution/adjusted capital is equal to total agreed capital.

Adjusted Capital Agreed Capital Investment/

Balance Balance (Withdrawal) needed
CYD 418,060 444,411* 26,351
60%
DREX 322,625 296,274* (26,351)
40%
TOTAL 740,685 740,685 0
*A: 740,685 x 60% = 444,411 *B: 740,685 x 40% = 296,274

The initial entries for both Cyd and Drex will be the same with the adjusted balance method.

To record Cyd’s additional investment:

Cash 26,351

Cyd, Capital 26,351

After investing, Cyd’s capital will be 444,411 that is 418,060 plus 26,351.
To record Drex’s cash withdrawal:

Drex, Capital 26,351

Cash 26,351

Afte the withdrawal of cash, Drex’s capital will be 296,274 that is 322,625 less 26,351.

d. Good will Method: This method assumes total agreed capital exceeds total contributed capital and
intangible asset will be recorded.

Adjusted Capital Agreed Capital Investment/

Balance Balance (Withdawal) needed
CYD 418,060 483,938 65,878
60%
DREX 322,625 322,625 ------------
40%
TOTAL 740,685 806,563 65,878

The total agreed capital is taken by dividing 322,625 by 40%, which is 806,563. It is the appropriate total
agreed capital balance to be used since it exceeds the total contributed capital.

If Cyd’s adjusted capital balance is used as the basis, the total agreed capital balance will be
418,060/60%=696,767. This will be no longer fir to be used for a goodwill method in view of the fact that it
does not follow that total agreed capital should exceed total contributed capital.

The initial entries for both Cyd and Drex will be the same with the adjusted balance method.

To record the goodwill:

Goodwill 65,878
Cyd, Capital 65,878

After recording goodwill to Cyd, Cyd’s capital will be 483,938.