--- PARTNERSHIP FORMATION ---

CASH INVESTMENTS
- are recorded at fair value most often known as face value as far as cash valuation is concerned
- cash dominated in foreign currency is valued at the current exchange rate

NONCASH INVESTMENTS
- it's recorded at the agreed value which is normally the fair value of the property at the time of investment.
- In case of conflict between agreed value and fair value agreed value prevails.

SERVICES
- Once services are contributed to the partnership, a memorandum entry is essential if it were no value agreed upon,
otherwise a journal entry would be required.

LIABILITIES
- Liabilities assumed by the partnership should be valued at the present value (fair value) of the remaining cash
flow.

Partnership may be formed in any of the following ways:

1. Individuals with no existing business formed a partnership
2. a sole proprietor and an individual without existing business form a partnership
3. two or more sole proprietorship formed a partnership
4. admission or retirement of a partner

 Individuals with NO existing business formed a partnership:

On July 1, 2019, Jerry Fernando and Joanne Java agreed to form a partnership. The partnership agreed specify that
Fernando is to invest cash of P700,000 and Java is to contribute land with a fair market value of P1,300,000 with
P300,000 mortgage to be assumed by the partnership.

Required: prepared journal entries to record the formation of the partnership.

Books of proprietor
(1) adjust the assets and liabilities
(2) close the books
Books of partnership
(1) open the books of the partnership

Cash 700k
G. Fernando, Capital 700k

Land 1.3M
Mortgage Payable 300K
J. Java, Capital 1M

 Sole proprietor and an individual without existing business form a partnership:

The statement of financial position of Leopoldo Medina on October 1, 2019, before accepting Challoner Matero as
partners is shown below:

Leopoldo Medina
Statement of Financial Position
October 1, 2019
Assets Liabilities and Equity
Cash 60k Notes payable 40K
 Notes receivable 30K Accounts payable 100K
Accounts receivable 240K Leopoldo Medina, capital 314K
Allowance for uncollectible accounts (10K)
Merchandise inventory 80K
Furniture and fixtures 60K
Accumulated depreciation (6K)
Total assets P 454K Total liabilities and equity P 454K

Challoner Matero offered to invest cash to get the capital credit equal to 1/2 of the Leopoldo medina's capital after giving
effect to the adjustment below Medina accepted the offer.

Adjustment Entries:
1. Merchandise inventory is to be valued at 74,000.
Medina, Capital 6K
Inventory (80k - 74K) 6K

2. The accounts receivable is 95% collectible. (The 5% of A/R is uncollectible)

(AFUA) Allowance for Uncollectible account 5% x 240k =12k
AFUA per BS 10k
Adjustment 2k

Medina, Capital 2k
AFUA 2k

3. Interest accrued on the notes receivable will be recognized: 10,000, 12% dated July 1, 2019, and 20,000, 12%
dated August 1, 2019.
Interest (10k x 12% x 3/12) = 300
July 1- oct 1= 3 months
(20k x 12% x 2/12) = 400
Aug 1 - oct 1 = 2 months

Interest receivable (300+400) 700

Medina, Capital 700

4. Interest on notes payable to be accrued at 14% annually from April 1, 2019.

Interest (40k x 14% x 6/12) = 2.8k
April 1- oct 1 = 6 months

Medina, Capital 2.8k

Interest Payable 2.8k

5. The furniture and fixtures are to be valued at 46,000.

Carrying amount of f & f = 60k - 6k = 54k
Value agreed 46k
Adjustment 8k

Medina, Capital 8k
Accumulated depreciation - f & f 8k

6. Office supplies on hand that have been charged to expense in the past amounted to 4,000. These will be used by
partnership. (ibig sabihin gagamitin palang sa partnership, so di pa sya expense)

Office Supplies 4k
Medina, Capital 4k

Books of proprietor
(1) adjust the assets and liabilities
 (2) close the books
Books of partnership
(2) open the books of the partnership

Gains, losses, income, and expenses adjustment will be respected directly to “CAPITAL” account. (Any temporary
accounts are to be recorded to capital account of the proprietor.)

 Two or more sole proprietorship form a partnership:

On October 1, 2021, Eren and floch decided to pull their assets and form a partnership. if they allocate profit and loss in
the ratio of 44:56 for Eren and floch, respectively.

Balance sheets for Eren and floch on October 1, 2021, before adjustments are given below:

Eren Floch
Cash 90k 54k
accounts receivable 216k 180k
allowance for doubtful accounts (4.8k) (6k)
notes receivable 60k
merchandise inventory 192k 144k
office supplies 32.4k
equipment 120k
Accum. Depreciation - equipment (54k)
furniture and fixtures 144k
Accum. Depreciation - furniture and fixture (24k)
Total Assets 591.6 552k

accounts payable 159.6k 120k

notes payable 60k
capitals 372k 432k
Total liabilities and capital 591.6 552k

The firm is to take over business assets and assume business liabilities, and capitals are to be based on net assets after the
following adjustments:

a. Eren's inventory amounting to 12,000 is worthless, while floch agreed value of inventory amounted to 150,000.
(nabawasan ng 12k si eren kasi worthless; kulang ng 6k so need dagdagan para maging 150k)
b. Uncollectible accounts of 7,200 for Eren is to be provided; a 5% allowance is to be recognized in the books of
floch. (AFDA should be 5% x 180k = 9k )
AFDU, recorded 6k
3k
c. accrued rent income of 12,000 on Eren, and accrued salaries of 9,600 on floch should be recognized on their
respective books.
d. Interest at 16% of notes receivable dated August 17, 2021, should be accrued.
(prt = 60k x 16% x 45/360 = 1.2k)
Aug 17- oct 1= 45 days
e. the office supplies unused amounted to 24,000. (24k - 32.4 = 8.4k)
f. the equipment's agreed value amounted to 60,000. (120k - 54k = 66k -> carrying amount; 66k - 60k = 6k)
g. the furniture and fixtures has a fair value of 108,000. (144k - 24k = 120k -> carrying amount; so 120k - 108k =
12k)

h. interest at 12% on notes payable dated July 1, 2021, should be accrued.

(60k x 12% x 92/360 = 1.84k)
July 1 - Oct 1 = 30 +31+30+1 = 92 days
i. Floch has an unrecovered patent amounting to 48,000 and is to invest the additional cash necessary to have a 60%
interest in the new firm.
 In cases, wherein these are considered, use 360 days as the basis.

-Books
-Books of Eren-
of Eren- -Books of Floch-
a. Eren,
a. Eren, Capital
Capital 12k 12k a. Merchandise Inventory 6k
Merchandise
Merchandise Inventory
Inventory 12k 12k Floch, Capital 6k

b. Eren,
b. Eren, Capital
Capital 7.2k 7.2k b. Floch, Capital 3k
Allowance
Allowance for doubtful
for doubtful accounts
accounts 7.2k 7.k Allowance for doubtful account 3k

c. Rent
c. Rent receivable
receivable 12k 12k c. Floch, Capital 9.6k
Eren,Eren, Capital
Capital 12k 12k Salaries payable 9.6k

e. Eren,
e. Eren, Capital
Capital 8.4k 8.4k d. Interest receivable 1.2k
Office
Office Supplies
Supplies 8.4k 8.4 Floch, Capital 1.2k

f. Eren,
f. Eren, Capital
Capital 6k 6k g. Floch, Capital 12k
Accum.
Accum. Depreciation
Depreciation - Equipment
- Equipment 6k 6k Accum. Depreciation - f & f 12k

h. Eren,
h. Eren, Capital
Capital 1.84k1.84k i.Patent 48k
Interest
Interest payable
payable 1.84k1.8 Floch, Capital 48k

Adjusted balance sheet of Eren:

Cash 90k = 90k AP 159.6k =159.6k

AR 216k = 216k NP 60k = 60k
AFDA (4.8k) + (7.2k) =(12k) Int. P = 1.84k
M.I. 192k - 12k =180k
O. Supplies 32.4k - 8.4k = 24k
Equip. 120k =120k
Accum. Dep. (54k) + (6k) = (60k) Capital 372k -12k - 7.2k + 12k - 8.4k
- 6k - 1.84k = 348,560
Rent Rec. = 12k .

Total 591.6k =570k 591.6k =570k

Adjusted balance sheet of Floch:

Cash 54k = 54k AP 120k =120k

AR 180k = 180k
AFDA (6k) + (3k) =(9k) Sal. P 9.6k = 9.6k
NR = 60k
M.I. 144k + 6k =150k
F&F 144k =144k
Accum. Dep. (24k)+ (12k) = (36k) Capital 432k + 6k - 3k - 9.6k +1.2k - 12k + 48k =462.6k
Interest Rec. = 1.2k
Patent =48k .

Total 552k =532.2k 552k =592.2k

 Closing entries: Books of Eren Closing entries: Books of Floch:

Accounts payable 159.6k Accounts payable 120k

Notes payable 60k Salaries payable 9.6k
Interest payable 1.84k Floch, Capital 462.6k
Eren, Capital 348.56k AFDA 9k
AFDA 12k Accum. Dep. 36k
Accum. Dep. 60k Cash 54k
Cash 90k Accounts receivable 180k
Accounts receivable 216k Notes Receivable 60k
Merchandise Inventory 180k Merchandise Inventory 150k
Office supplies 24k Furniture & fixtures 144k
Equipment 120k Interest Receivable 1.2k
Rent receivable 12k Patent 48k

Record of Partnership: Record of Partnership:

To record Eren’s investment To record Floch’s investment
Cash 90k Cash 54k
Accounts receivable 216k Accounts receivable 180k
Merchandise Inventory 180k Notes Receivable 60k
Office supplies 24k Merchandise Inventory 150k
Equipment 60k Furniture & fixtures 108k
(Special consideration PPE: record (Special consideration PPE: record
at net amount = 120k-60k) at net amount = 144k-36k)
Rent receivable 12k Interest Receivable 1.2k
Accounts payable 159.6k Patent 48k
Notes payable 60k Accounts payable 120k
Interest payable 1.84k Salaries payable 9.6k
AFDA 12k AFDA 9k
Eren, Capital 348.56k Floch, Capital 462.6k

“Floch has an unrecovered patent amounting to 48,000 and is to invest the additional cash necessary to have a 60%
interest in the new firm.”

Eren, Capital 348,560 43%

Floch, Capital 462,600 57%
Total Capital 811,160 100%

Eren, Capital 348,560 40%

Floch, Capital 522,840 60%
Total Capital 871,400 100% = 348,560 / 40%

Cash (522, 840 - 462,600) 60,240

Floch, Capital 60,240
 Eren & Floch
Balance Sheet
Oct. 1, 2021

Current Assets: Current Liabilities

Cash 804,240 Account payable 279,600
AR 396,000 Notes payable 60,000
AFDA (21,000) Interest payable 1,840
NR 601,000 Salaries payable9,600
Interest R. 1,200 Total current liabilities 351,040
Rent R . 12,000
MI 330,000
Office S. 24,000
Total Current assets 1,006,440

Non-current Assets:
Equipment 60,000
F&f 108,000 Eren, Capital 348,560
Patent 48,000 Floch, Capital 522,840
Total Current assets 216,000 Total Equity 871,400
TOTAL ASSETS 1,222,440 TOTAL LIAB & EQUITY 1,222,440

PARTNERSHIP FORMATION: contributions / investments

CASH ----- > Face value
NONCASH ----- > Agreed value
LIABILITIES -----> Fair value
SERVICES ----- > Agreed value

PAERTNERSHIP FORMATION: Guidelines

1. Adjust
2. Close
3. Investment
4. Balance sheet

 Admission or retirement of a partner: (partnership dissolution)

--- PARTNERSHIP OPERATIONS & FINANCIAL REPORTING ---

Division of Profits to Partners
DIVISION OF PROFIT AND LOSSES
 The partnership law provides that profits and losses are to be divided in accordance with the partners
agreement.
 if no agreement is made between and among the partners, profits and losses are to be divided according to their
original capital contributions.
 should the partners agree to the divide the profits only, losses, if any are to be divided in the same manner as that
of dividing the profits.
 should the partners agreed to divide the losses only, profits, if any shall be divided by the partners according to
their original capital contributions.
 industrial partners shall not be liable for losses because he cannot withdraw the work or labor already done by
him unlike the capitalist partner who can withdraw their capital.
POSSIBLE METHOD OF DIVIDING NET INCOME/LOSS:
1. Equally
2. In an Unequal / Arbitrary ratio
3. In the Ration of Capital Balances:
a. Original capital balances
b. Beginning \
c. Ending ------Capital Balances
d. Average /
4. Allowing Interest on capital balances & dividing the remaining income/loss
5. Allowing Salaries to partners & dividing the remaining income/loss
6. Bonus to managing partner

Example:
Assume that on January 1, 2018, Siy and Tiu formed a partnership with an investment of 30,000 by Siy and 60,000 by
Tiu. on December 31, 2019, after closing all income and expense accounts, the income summary account shows a credit
balance of 60,000, representing profit for the year 2019. Changes in the capital accounts during 2019 are summarized as
follows:

Siy Tiu
Capital balances, January 1, 2019 40k 60k
Additional investment, March 1 20k 50k
Additional investments, August 1 20k 40k
Withdrawal, October 1 (20k)
Withdrawal, November 1 (50k)
Capital balances, December 31, 2019 60k 100k

Prepare journal and treat the record division of net income for 2019 under the following independent cases.
1. The partnership agreement is to divide profit and losses equally.
2. The partnership agreement is to divide profit and loss in an arbitrary (unequal) ratio. Agreed to divide profits
and losses in the ratio of 60% to Siy and 40% to Tiu.
3. The partnership agreement is to divide profit and losses based on the ratio of original capital contributions.

Net income/profit = 60k

Siy Tiu
Original capital balances, Jan 1, 2018 30k 60k

Capital balances, January 1, 2019 40k 60k

Additional investment, March 1 20k 50k
Additional investments, August 1 20k 40k
Withdrawal, October 1 (20k)
Withdrawal, November 1 . (50k)
Capital balances, December 31, 2019 60k 100k

1. The partnership agreement is to divide profit and losses equally:

Net income = 60k / 2 = 30k
Siy = 30k
Tui = 30k

Income summary 60k

Siy, Drawing 30k
Tui, Drawing 30k

2. Unequal / Arbitrary ration: Siy = 60% ; Tiu= 40%

Siy = 60k x 60% = 36k
 Tiu = 60k x 40% = 24k

Income summary 60k

Siy, Drawing 36k
Tiu, Drawing 24k

3. Ratio of original capital contributions:

Ratio of orig. capital contri. (30k:60k)
30k + 60k = 90k
Siy = 30k / 90k = 1/3 or 0.33333 x 60k = 20k
Tui = 60 / 90k = 2/3 or 0.66667 x 60k = 40k

Income summary 60k

Siy, drawing 20k
Tui, Drawing 40k

4. Ratio of beginning capital balances:

Ratio of beg. Capital balance (40k:60k)
Siy = 60k x 40k/100k = 24k
Tiu = 60k x 60k / 100k = 36k

Income summary 60k

Siy, Drawing 24k
Tiu, Drawing 36k

5. Ratio of ending capital balance:

Ratio of end. Capital balance (60k:100k)
Siy = 60k x 60k/160k = 22,500
Tiu = 60k x 100k/160k = 37,500

Income summary 60k

Siy, Drawing 22.5k
Tiu, Drawing 37.5k
6. Ration of average capital balance: (peso-month / peso-day)
Ratio (60k:110k)
Siy= 60 x 60k / 170k = 21,176.47
Tiu =60k x 110k / 170k = 38,823.53

Income summary 60k

Siy, Drawing 21,176
Tiu, Drawing 38,824

7. Ration of average capital balance (simple average) = beg. Capital + end. Capital / 2
Siy = 40k + 60k = 100k / 2 = 50k
Tiu= 60k + 100k = 160k / 2 = 80k
Ration (50k:80k)
Siy = 60k x 50k / 130k = 23,076.92
Tiu = 60k x 80k / 130k = 36,923.07

Income summary 60k

Siy, Drawing 23,077
Tiu, Drawing 36,923

PESO-MONTH / PESO-DAY METHOD (guidelines)

 1. What withdrawals or drawings are to be encouraged?
2. only withdrawals above a certain limit are to be viewed as reduction against capital balances.
Permanent withdrawals - made with the intention of permanently decreasing the capital.
Temporary withdrawals - regular advances made by the partners in anticipation of their share in profit.
3. what withdrawals or drawings are to be recognized?
- permanent withdrawals
- temporary withdrawals in excess of allowable amount.

When BEGINNING CAPITAL are used: additional investments during the year are discouraged because making such
investments are not compensated in the division of prof its until next year.
When ENDING CAPITAL are used: year-end investments are encouraged.

1. Example:
Siy Tiu
Original capital balances, Jan 1, 2018 30k 60k

Capital balances, January 1, 2019 40k 60k

Additional investment, March 1 20k 50k
Additional investments, August 1 20k 40k
Withdrawal, October 1 (20k)
Withdrawal, November 1 . (50k)
Capital balances, December 31, 2019 60k 100k

Net income/profit = 60k

SIY
Date Investment Withdrawals Balances Months unchanged
Jan.1 40k x 2 80k
Mar. 1 20k 60k x 5 300k
Aug. 1 20k 80k x 2 160k
Oct. 1 20k 60k x 3 180k
Dec. 31 60k x 0 0 .
12 months / 720k = 60k
(average capital of SIY)
TIU
Date Investment Withdrawals Balances Months unchanged
Jan. 1 60k x 2 120k
Mar. 1 50k 110k x 5 550k
Aug. 1 40k 150k x 3 450k
Nov. 1 50k 100k x 2 200k
Dec. 31 100k x 0 0 .
12 months / 1,320,000 = 110k
(average capital of TIU)

2. If the partnership agreement provides for an annual salary of 30,000 to Siy and 20,000 to Tiu, with that result and
net income or loss to be divided equally.

Net income = 60k

Siy Tiu Total
Salaries 30k 20k 50k
Balances (50:50) 5k 5k 10k
Totals 35k 25k 60k

Income summary 60k

Siy, drawing 35k
Tiu, drawing 25k
SALARY ALLOWANCES:
- to achieve fair division of income based on the time and talent devoted to business.
- salaries are not expenses in determination of net income.
- salary allocation must be made even though profit is inadequate/is there is a loss.

3. Assume that the partnership operation results at a loss of 20,000. the partnership agreement provides for an annual
salary of 30,000 to Siy and 20,000 to Tiu, with the resultant net income or loss to be divided equally.
Net loss = 20k
Siy Tiu Total
Salary 20k 30k 50k
Balances (50:50) (35k) (35k) (70k)
Totals 5k 15k (20k)

Siy, drawing 5k
Tiu, drawing 15k
Income summary 20k

4. Assume that the partnership operation results at a profit of 30,000. the partnership agreement provides that
salaries are allowed to the extent of earnings only, they know salaries are allowed when a loss occurs. the
partnership agreement provides for an annual salary of 24,000 to Siy and 36,000 to Tiu.
Net income = 30k
Siy - 24k
Tiu - 36k
Total = 60k ( di enough/inadequate yung 30k net income para maprovide yung salaries in full amount; to provide this
salaries at least 60k+ ang net income)
Pro- rated:
Siy = 30k x 24k/60k = 12k
Tiu = 30k x 36k/60k = 18k
Net income 30k
Income summary 30k
Siy, drawings 12k
Tiu, drawings 18k

5. Assume that the partnership of Siy and Tiu has a net income of 190,200 before salaries, interest, and bonus to
partners. The partnership contract provides the following:
a. Salaries to Siy and Tiu, 30,000 each.
b. Interest on capital balances: Siy, 7,000; Tiu, 3,200.
c. Bonus to Siy, 20% of net income, bonus is based on net income before (before deduction) allowances for
salaries, interest, and bonus.
d. Remaining profit or losses after salaries, interest, and bonus, equally.
Net income = 190,200
Siy Tiu Total
Salaries 30k 30k 60k
Interest 7k 3.2k 10.2k
Bonus 38.04k 38.04k
Balance (50:50) 40.98k 40.98k 81.96k
Totals 116.02k74.18k 190.2k
Income summary 190.2k
Siy, Drawing 116.02k
Tiu. Drawing 74.18k

Bonus = % x basis
Basis = net income before salaries, interest, and bonus
Basis= 190.2k
Bonus = 20% x 190.2k = 38,040
N/I
N/I“before”
“before”salaries,
salaries,interest,
interest,and
andbonus
bonus==190,200
190,200
N/I
N/I “before” salaries, interest, but “after”bonus
“before” salaries, interest, but “after” bonus==19,200
19,200--bonus
bonus==31,700
31,700
N/I
N/I“after”
“after”salaries,
salaries,interest,
interest,but
but“before”
“before”bonus
bonus==190,200
190,200--salaries
salaries--interest
interest==24k
24k
N/I “after” salaries, interest, and bonus = 190,200 - salaries - interest - bonus
N/I “after” salaries, interest, and bonus = 190,200 - salaries - interest - bonus = 20k

BONUSES:
- Additional compensation to partners who have provided services to the partnership.
- Bonus should not be charged to an expense account.
- Not applicable to a net loss.

6. Assume information on question #5, except that is bonus based on net income before allowance of salaries and
interest but after deduction of bonus.
Net income = 190,200
Siy Tiu Total
Salaries 30k 30k 60k
Interest 7k 3.2k 10.2k
Bonus 31.7k 31.7k
Balance (50:50) 44.15k 44.15k 88.3k
Totals 112.85k77.35k 190.2k
N/I “before” salaries, interest, but “after” bonus = 190,200 - bonus
B = 20% x (190,200 - b)
= 38,040 - .20B
= B + .20B = 38,040
= 1.20B = 38,040
= 1.20B / 1.20 = 38,040 / 1.20 (divide both sides to 1.20)
= B = 31,700

7. assumed information on number 5, except the bonus is based on net income after allowance of salaries and
interest but before bonus.
Net income = 190,200
Siy Tiu Total
Salaries 30k 30k 60k
Interest 7k 3.2k 10.2k
Bonus 24k 24k
Balance (50:50) 48k 48k 96k
Totals 109k 81.2k 190.2k
B = % x basis
= 20% x (190.2k - S. - I.)
=20% x (190.2k - 60k - 10.2k)
=20% x 120k
= 24k

8. assume information and question #5, except that bonus is based on net income after allowance for salaries
interest and bonus.
Net income = 190,200
Siy Tiu Total
Salaries 30k 30k 60k
Interest 7k 3.2k 10.2k
Bonus 20k 20k
Balance (50:50) 50k 50k 100k
Totals 107k 83.2k 190.2k
B = % x basis
B= 20% x (190.2k - S - I - B)
 B= 20% x (190.2k - 60k - 10.2k - B+
B = 20% x 120k - B
B = 24k - 0.20B
1.20B = 24k
1.20B / 1.20 = 24k / 1.20
B = 20k

Bonus method - agreed capital should be equal to their contributed capital.

--- PARTNERSHIP DISSOLUTION---

PARTNERSHIP DISSOLUTION
The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated
in the carrying on as distinguished from the winding up of the business of the partnership.

Any change in the membership of partnership will result to dissolution.

This solution should be distinguished from liquidation of the partnership. A partnership is said to be liquidated when the
business is terminated; a partnership may be dissolved without being terminated.

When partnership dissolution occurs, a new accounting entity is formed. The old partnership should adjust its books so all
that all accounts are properly stated at the date of dissolution.

Partnership dissolution due to change in ownership interest occurs for a variety of reasons. this can be summarized as
follows:
1. admission of a partner
2. retirement of a partner
3. death of a partner
4. incorporation of a partnership

ADMISSION OF A NEW PARTNER

The admission of a new partner may occur in either of two ways, namely:
1. purchase of all or part of the interest of one or more of the existing partners.
2. investment in assets in a partnership by the incoming partner.

Purchase of interest from one or more partners

When an incoming partner purchases a portion of all the interests of one or more of the original partners, the partnership
assets remain unchanged.

This transaction is recorded by opening a new capital account for the new partner and decreasing the capital accounts of
the selling partners by the same amount.

The cash paid by the new partner is not recorded in the books of the partnership for this is a personal transaction
between the selling partners and the new partner.

Illustrative problem:
O is admitted into the partnership of a 50% interest in the profits and losses of the partnership. The old partners L, M, and
N are to retain their original capital and profit-sharing relationships to each other and are to transfer sufficient amount
(50%) of their own capital accounts to O to accomplish his admission as planned. O agreed to pay 50,000 to L, M, N.

The capital balances of L, M, and N before O admission are 20,000, 20,000 and 30,000 respectively. P/L ratios of L, M,
and N are 20:30:50 respectively.

Required:
1. prepared journal entry necessary the record this transaction.
 2. how should the 50,000 cash be divided to L, M and N?

Partners Capital Bal. Interest paid by O (50%)

L 20k 10k
M 20k 10k
N 30k 15k
70k 35k

L, Capital 10k
M, Capital 10k
N, Capital 15k
O, Capital 35k

L (20%) M (30%) N (50%) Total

Interest acquired by O 10k 10k 15k 35k
Excess to P/L 3k 4.5k 7.5k 15k
Distribution by partners 13k 14.5k 22.5k 50k

New Partner Invests in Partnership

In this case, the partnership receives cash or other assets, thereby increasing its total assets as well as the total capital.

Three cases may exist when a new partner invests in a partnership:

Case 1. the new partner’s investment (contributed capital) equals the new partners proportion of the
partnership’s book value.

Case 2. the new partner’s investment (contributed capital) is more than the new partners agreed capital.

Case 3. the new partner’s investment (contributed capital) is less than the new partners agreed capital.

The following steps may be used in determining how to account for the admission of a new partner (BONUS method).
1. Compute the new partners proportion of the partnership’s book value (agreed capital).

Agreed capital = (total prior capital of old partners + investment of new partner) x % of capital to new partner

2. Compare the new partner’s contributed capital with his or her agreed capital.
If investment cost > Agreed capital, assign bonus to old partners
If investment cost < Agreed capital, assign bonus to new partner

Illustrative problem:
PARTNERSHIP DISSOLUTION - ADMISSION BY INVESTMENT
Assume the following data for GH Partnership has the following condensed balance sheet:

Assets Liabilities and Capital

Cash 3,000 Liabilities 9,000
Noncash assets 39,000 G, Capital (60%) 24,000
G, loan 3,000 H, Capital (40%) 12,000
Total 45,000 Total 45,000

The percentages in parenthesis after the partner’s capital balances represent the respective interests in profits and losses.
The partners agreed to admit J as a member of the firm.

Required:
a. Jay invests 12,000 for a 35% interest in the firm. The total agreed capital is 48,000.
Contributed |Bonus| Agreed
Capital | | Capital (AC) Cash 12k
J, Capital 12k

G, Capital 2.88k
 G, Capital 24k - 2.88k 21.12k
H, Capital 12k - 1.92k 10.08k
Total 36k - 4.8k 31.2k
J, Capital 12k 4.8k 16.8k
Total 48k 48k

Agreed capital = (48k x 35%) =16.8k

Inv > AC, bonus to old
Inv < AC, bonus to new
12k < 16.8k then bonus to new

Bonus:
G = 4.8k x 60% = 2.88k
H = 4.8k x 40% = 1.92k

b. J conveyed a tangible asset with a fair value of 30,000 with an assumed mortgage of 6,000 in exchange for a 30%
interest in the capital with bonus being to be recognized.
Contributed |Bonus| Agreed
Capital | | Capital (AC) Noncash 30k
G, Capital 24k 3.6k 27.6k Liability 6k
H, Capital 12k 2.4k 14.4k J, Capital 24k
Total 36k 6k 42k
J, Capital 24k -6k 18k J, Capital 6k
Total 60k 60k G, Capital 3.6k
H, Capital 2.4k
30k - 6k = 24k

Agreed capital = (60k x 30%) =18k

Inv > AC, bonus to old
Inv < AC, bonus to new
24k < 18k then bonus to old

Bonus:
G = 6k x 60% = 3.6k
H = 6k x 40% = 2.4k

--- PARTNERSHIP LIQUIDATION---

The liquidation of a partnership is winding up (terminate the business) its business activities characterized by sale of
all non-cash assets, settlement of all liabilities, and distribution of the remaining cash to the partners.

The conversion of non-cash assets into cash is referred to us realization. This may resort to a gain or loss on
realization and shall be divided in the profit and loss ratio of the partners.

In some cases, a substantial loss and realization may yield for a partner a capital deficiency, which is the excess of a
partner share in losses over the capital credit balance.

METHOD OF PARTNERSHIP LIQUIDATION:

1. Lump sum method - under this method, all non-cash assets are realized and the related gains or losses distributed
and all liabilities are paid before a single final cash distribution is made to the partners.
2. installment method - the realization of non-cash assets is accomplished over an extended period of time. When
cash is available, creditors may be partially or fully paid. Any excess may be distributed to the partners in
accordance with the program of safe payments or a cash priority program.

LUMP-SUM LIQUIDATION
The procedures below may be followed in lump-sum liquidation:
 1. Realization of non-cash assets and distribution of gain and loss on realization among the partners based on their
profit and loss ratio.
2. Payment of liquidation expenses, if any.
3. Payment of liabilities to third parties.
4. Elimination of partner’s capital deficiencies. Deficiency must be eliminated by using one of the following
methods, in order of priority:
a. if the deficient partner has a loan balance, then exercise right of offset.
b. if the deficient partner is solvent, then he should invest cash to eliminate his deficiency.
c. if the deficient partner is insolvent, then the other partners should absorb his deficiency.
5. Payments to partners, in order of priority:
a. Loan accounts
b. Capital accounts.

Illustrative problem:
Christopher Malaya, Nilo Burgos, and Nick Marasigan are partners in a public relations firm and share profits in the
ratio of 2: 2: 1, respectively.

They decided to liquidate their business on December 31, 2019. the following is to condensed statement of financial
position prepared prior to liquidation:

Malaya, Burgos, Marasigan Prepare a statement of partnership liquidation and the

Statement of financial position entries:
December 31, 2019 a. Loss on realization fully absorbed by the partners’
capital balances. assume that the non-cash assets
Assets are sold at 2.5 M.
Cash 200k
b. Boston realization resulting to a capital deficiency
Noncash assets 3.4M
Total assets 3.6M with right of offset. assume that the non-cash
assets are sold at 1.8 M.
Liabilities and Capital c. Loss on the realization resulting to a capital
Liabilities 1.12M deficiency to personally solvent partner. assume
Burgos, loan 50k that the non-cash assets are sold at 1.7 M.
Marasigan, Loan 80k d. Loss on realization resulting to a capital deficiency
Malaya, Capital 950k
Burgos, Capital 600k to a
Marasigan, Capital 800k
Total Liabilities and Capital 3.6M

First is C:
Malaya, Burgos, Marasigan
Statement of Partnership Liquidation
December 31, 2019

Cash Noncash Liability Burgos, Marasigan, 2: 2: 1

Loan Loan Malaya, Burgos, Marasigan,
Capital Capital Capital
Balances 200k 3.4m 1.120m 50k 80k 950k 600k 800k
before
liquidation
Realization 1.7m (3.4m) (680k) (680k) (340k)
Balance 1.9m 0 1.120m 50k 80k 270k (80k) 460k
Payment of (1.120m) 1.120m
liabilities
Balance 780k 0 50k 80k 270k (80k) 460k