BCACCTG2 – ACCOUNTING FOR PARTNERSHIP

AND CORPORATION

MODULE NUMBER: 1

MODULE TITLE: PARTNERSHIP FORMATION

TOPIC 1: Introduction to Partnership

TOPIC 2: Partnership Accounting
TOPIC 3: Partnership Formation

WRITER: ATTY. JULIE KHRISTINE C. PANGANIBAN, CPA

UNIVERSITY PRAYER
Lord, in our weakness and vulnerability, bless us with your grace to soar beyond
limits. Enlighten our vision and guide our mission that we may clearly see and fully
realize our quest. Keep our passion for the truth burning and our compassion for
humanity bright that we may live truly and lovingly.

Keep us in harmony with the universe that we may be joyfully one with your creation.
Yet above and before all, Lord, grant us the grace to love you with all our mind and
soul and with all our heart and strength that we may praise, bless, and preach according
to your will.

Make us, Legazpi Thomasians, whole as a person and as a community in your

wondrous name, this we ask and pray with a happy and grateful memory. Amen.

MODULE INTRODUCTION

Introduction
Partnerships are a popular form of business because they are easy to form and they
allow several individuals to combine their talents and skills in a particular business
venture. In addition, partnerships provide a means of obtaining more equity capital than
a single individual can obtain and allow a sharing of risks rapidly growing businesses.
Partnerships are fairly common in the service of professions including law, medicine,
and accounting. Historically, these professions have generally not adopted the
 BCACCTG2 – ACCOUNTING FOR PARTNERSHIP
AND CORPORATION

corporate form of business because of their long-standing tradition of close professional

association with clients and the total commitment of the professional business and
personal assets to the propriety of the advice and service to clients.

This module demonstrates an understanding of accounting for the equity of partnership

formation. At the end of this module, the learners will be able to account for the
accounting for a partnership that must comply with the relevant provisions of the Civil
Code of the Philippines.

GENERAL INSTRUCTIONS:
1. Join the BCACCTG2 – Accounting for Partnership and Corporation group chat
via messenger.
2. Enroll yourself to the BCACCTG2 – Accounting for Partnership and
Corporation classroom.google.com: https://meet.google.com/rsa-ecvb-dmp
with class code: ssaxg7q.
3. Firm observance of the netiquette during synchronous modality via zoom and
google meet, as scheduled, should be followed.
4. Study the Learning module in BCACCTG2 – Accounting for Partnership and
Corporation.
5. Open the indicated websites, if any. Explore.
6. Take down notes and copy some important links so that you could go
back whenever you need information given in that site.
7. Go beyond the procedure given in the net. Explore more.
8. Review videos and articles as many times as needed. Download the video
and slide presentations for study, review and file purposes.
9. Secure and compile your individual activities, exercises, and pre and post
assessment in one (1) document. Schedule of submission is within a week
after receipt of this BCACCTG2 – Accounting for Partnership and Corporation
module.
10. For the submission of prelim output, rename the file using this format:
Module 1 (BCACCTG2 – J. DELA CRUZ).
 BCACCTG2 – ACCOUNTING FOR PARTNERSHIP
AND CORPORATION

TOPIC 3 – PARTNERSHIP FORMATION

The formation of a partnership presents relatively few difficult accounting problems.

Accounting entries to record the formation will depend upon how the partnership is
formed. A partnership may be formed in several ways, namely:
1. Formation of a partnership for the first time.
2. Conversion of a sole proprietorship to a partnership.
a. A sole proprietor allows another individual, who has no business of his own to
join his business.
b. Two or more sole proprietors form a partnership.
3. Conversion of an old partnership to a new partnership
a. Partnership versus sole proprietor
b. Partnership vs partnership
4. Admission of a new partner (to be discussed in Changes in Ownership/Partnership
Dissolution).

1. PARTNERSHIP FORMATION FOR THE FIRST TIME INITIAL INVESTMENTS

Cash Investments

Initial cash investments in a partnership are recorded in the capital accounts maintained
for each partner. Cash investments in accordance with the current standards being a
financial asset are recorded at fair value most often known as face value as for as cash
valuation is concerned, which is the amount payable on demand or to be collected at the
balance sheet date. Cash denominated in foreign currency is valued at the current
exchange rate, while cash in bank under receivership should be shown at its estimated
recoverable amount.

For example, Abad and Besa each invests P100,000 cash in a new partnership. The entry
to record the investments would be:
Cash 200,000
Abad, Capital 100,000
Besa, Capital 100,000

Noncash Investments

When property other than cash is invested in a partnership, the noncash property is
recorded at the current fair value of the property at the time of the investment.
Theoretically, independent appraisals should be made to determine the fair value. Despite
the theoretical soundness of the independent appraisal procedure, the fair value on
 BCACCTG2 – ACCOUNTING FOR PARTNERSHIP
AND CORPORATION

noncash asset is determined by agreement of the partners. The amounts involved should
be specified in the written partnership agreement.

It should be noted that in case there is a conflict between agreed value and fair value,
agreed value prevails.

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 assumed by the partnership should be valued at the present value (fair value)
of the remaining cash flows.

Illustration – Noncash investments

Assume that Pedro and Jose form a partnership for the first time. Their investments are
as follows:

Pedro Jose
(Fair Value) (Fair Value)
Cash P 70,000
Merchandise inventory (cost, P10,000) P 20,000
Equipment (cost, P50,000) 30,000
Total P 70,000 P 50,000

The journal entries to record the investments are as follows:

Cash 70,000
Pedro, Capital 70,000

Merchandise inventory 20,000

Equipment 30,000
Jose, Capital 50,000

Recording partners' noncash investments at their current fair value ensures that any gains
or losses on the subsequent sale of the property will be equitably distributed in
accordance with the partnership agreement.

Bonus or Goodwill on Initial Investments

Valuation problem arises when partners agree on capital interests that are not equal to
their net assets invested. For example, in the above illustration, the partners agree that
each partner is to receive equal interest, even though Pedro invested P70,000 and Jose
contributed P50,000 in identifiable net assets. To meet this condition, the capital accounts
of Pedro and Jose should be adjusted using two methods — the bonus method or the
goodwill method.

Under the bonus method no assets is recorded in the partnership books. To equalize
 BCACCTG2 – ACCOUNTING FOR PARTNERSHIP
AND CORPORATION

capital balances to P60,000, capital transfer of P10,000 from Pedro to Jose is made. The
only entry necessary after initial investment is as follows:
Pedro, Capital 10,000
Jose, Capital 10,000

The bonus method assumes that Jose's business connections does not constitute a
recordable asset with a measurable cost. Hence, this approach recognizes only the
assets that are physically contributed to the business (such as cash, inventory,
equipment). Although these contributions determine total partnership capital, the
recognition of specific capital balances is viewed as an independent process based solely
on the partners' agreement. Because the initial capital balances result from negotiation,
they do not need to correspond directly with the individual investments.

When the goodwill method is used, the equalization of capital interests is accomplished
by recording goodwill of P20,000 with a corresponding increase in the capital account of
Jose. The entry is:
Goodwill 20,000
Jose, Capital 20,000

The goodwill method is based on the assumption that an implied value can be estimated
mathematically and recorded for any intangible contribution made by a partner. In the
above illustration, Jose invested P20,000 less cash than Pedro's investment but receives
an equal amount of capital according to the partners' agreement. Proponents of the
method argue that Jose's business has an apparent value of P20,000, a figure that should
be included as part of this partner's capital investment. If not recorded, Jose's primary
contribution to the business is ignored completely accounting records.

Although partnership accounting does not prohibit the use of either technique, the
recognition of goodwill method poses definite theoretical problems. In the discussions of
business combination, goodwill was recognized but only as a result of an acquisition
made by the reporting entity. Consequently, this asset had a historical cost in the
traditional accounting sense. Partnership goodwill has no such cost; the business
recognizes an asset even though no funds have been spent. A decision to use one
method over the other will be on the partner's agreement. In the absence of any
agreement, bonus method is preferable over the goodwill method.

2. a. SOLE PROPRIETOR AND ANOTHER INDIVIDUAL FORM A PARTNERSHIP

An individual has no business of his own may join another individual who is already his
own business. Under this type of formation, both the assets and liabilities of the sole
proprietor are transferred to the newly formed partnership. Normally, the partners agree
on the revaluation of some of the assets before the transfer. The journal entries to record
this type of formation will depend on whether the books of the sole proprietorship are to
be used for the newly formed partnership or new books are to be opened.
 BCACCTG2 – ACCOUNTING FOR PARTNERSHIP
AND CORPORATION

Illustration
Assume that Jose has been operating a retail store for a number of years. A statement of
financial position on July 1, 2020 is prepared for Jose Company as follows:

Jose Company
Statement of Financial Position
As of July 1, 2020
Assets
Cash P 60,000.00
Accounts Receivable 50,000.00
Inventory 70,000.00
Equipment P 40,000.00
Less: Accumulated Depreciation 4,000.00 36,000.00
Total Assets P 216,000.00

Liabilities and Equity

Accounts payable P 86,000.00
Jose, Capital 130,000.00
Total liabilities and equity P 216,000.00

Jose needs additional capital to meet the increasing sales and offers Pedro an interest in
the business. Jose and Pedro agree to form a partnership to be known as JP Partnership;
Jose's business is audited and its net assets are appraised. The audit and appraisal show
the following:
1. Allowance for bad debts of P5,000 is to be provided.
2. Inventory is to be recorded at its market value of P80,000.
3. The equipment has a fair value of P35,000
4. P2,000 of accounts payable has not been recorded.

Jose and Pedro prepare and sign articles of co-partnership that include all significant
operating policies. On July 1, 2020 Pedro contribute P100,000 cash for a one-third capital
interest. The JP Partnership is to acquire all of Jose's business and assume its liabilities.

Case 1. Sole Proprietorship 's Books are Retained for the Partnerships
If the books of Jose are to be retained, the following accounting procedures are used to
record the formation of the partnership:
1. Adjust the assets and liabilities of Jose to their fair market values as agreed by the
partners. Adjustments are to be made to his capital account.
2. Record the investment of Pedro.

Using the procedures, the journal entries to the formation of the partnership are:
 BCACCTG2 – ACCOUNTING FOR PARTNERSHIP
AND CORPORATION

Books of Jose (now the partnership books)

Inventory 10,000
Accumulated Depreciation
-Equipment 4,000
Equipment 5,000
Allowance for bad debts 5,000
Accounts payable 2,000
Jose, Capital 2,000

Cash 100,000
Pedro, Capital 100,000

After the formation the statement of financial position of the newly formed partnership is:

JP Partnership
Statement of Financial Position
As of July 1, 2020
Assets
Cash P 160,000.00
Accounts Receivable P 50,000.00
Less: Allowance for bad debts 5,000.00 45,000.00
Inventory 80,000.00
Equipment 35,000.00
Total Assets P 320,000.00

Liabilities and Equity

Accounts payable P 88,000.00
Jose, Capital 132,000.00
Pedro, Capital 100,000.00
Total liabilities and equity P 320,000.00

Case 2. New Books are Opened for the Partnership

If new books are to be used for the partnership, the following accounting procedures may
be used to record the formation of the partnership:

Books of Jose:
1. Adjust the assets and liabilities of Jose according to the agreement. Adjustments
are made to his capital account.
2. Close the books.

New Books of the Partnership

1. Record the investments of Jose. His assets and liabilities.
2. Record the cash investment of Pedro.
 BCACCTG2 – ACCOUNTING FOR PARTNERSHIP
AND CORPORATION

Using the procedures, the journal entries to record the formation of the partnership are:

Books of Jose (Sole Proprietorship):

Inventory 10,000
Accumulated Depreciation-
Equipment 4,000
Equipment 5,000
Allowance for bad debts 5,000
Accounts payable 2,000
Jose, Capital 2,000

Accounts payable 88,000

Allowance for bad debts 5,000
Jose, Capital 132,000
Cash 60,000
Accounts receivable 50,000
Inventory 80,000
Equipment 35,000

New Books of the Partnership:

Cash 60,000
Accounts Receivable 50,000
Inventory 80,000
Equipment 35,000
Accounts payable 88,000
Allowance for bad debts 5,000
Jose, Capital 132,000

Cash 100,000
Pedro, Capital 100,000

2. b. TWO PROPRIETORS FORM A PARTNERSHIP

The accounting procedures described in the preceding section are also applicable when
two or more proprietorships join together to form a partnership. There should be an
agreement on the determination of the partners' interest in the new partnership. It is also
important that the partners agree on the values of the assets to be assigned and liabilities
to be assumed by the partnership. Books of one of the sole proprietorship may be used
for the newly formed partnership or a new set of partnership books may be used.

Illustration
Assume that on June 30, 2020, Gerry and Henry, in business, decide to consolidate their
business to form a partnership to be called GH Partnership. The statement of financial
 BCACCTG2 – ACCOUNTING FOR PARTNERSHIP
AND CORPORATION

position of Gerry and Henry on this date are presented below.

Gerry Company
Statement of Financial Position
As of June 30, 2020
Assets
Cash P 5,000.00
Accounts Receivable 10,000.00
Inventory 8,000.00
Furnitures and fixtures 6,000.00
Total Assets P 29,000.00

Liabilities and Equity

Accounts payable P 3,000.00
Gerry, Capital 26,000.00
Total liabilities and equity P 29,000.00

Henry Company
Statement of Financial Position
As of June 30, 2020
Assets
Cash P 4,000.00
Accounts Receivable 8,000.00
Inventory 10,000.00
Furnitures and fixtures 9,000.00
Total Assets P 31,000.00

Liabilities and Equity

Accounts payable P 6,000.00
Henry, Capital 25,000.00
Total liabilities and equity P 31,000.00

The conditions agreed by the partners for purposes of determining their interests in the
partnership are presented below:
1. 10% of accounts receivable is to be set up as uncollectible in each book.
2. Merchandise inventory of Henry is to be increased by P1,000.
3. The furniture and fixtures of Gerry and Henry are to be depreciated by P600 and
P900, respectively.

Case 1. Books of Henry are used as the Partnership Books

If the books of Henry are to be used as the partnership books, the accounting procedures
to record the formation of the partnership are:

Books of Gerry
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AND CORPORATION

1. Adjust the accounts of Gerry as agreed. Adjustments are made to his capital
account.
2. Close the books.
Books of Henry (now the partnership books)
1. Adjust the accounts of Henry as agreed. Adjustments are made to his capital
account.
2. Record the investment of Gerry, his adjusted assets and liabilities.

The journal entries to record the formation of the partnership, using the above accounting
procedures are:

Books of Gerry
Gerry, Capital 1,600
Allowance for bad debts 1,000
Accumulated dep. –
furniture and fixtures 600

Accounts payable 3,000

Allowance for bad debts 1,000
Accumulated dep. –
furniture and fixtures 600
Gerry, Capital 24,400
Cash 5,000
Accounts receivable 10,000
Inventory 8,000
Furniture and fixture 6,000

Books of Henry (now the partnership books)

Inventory 1,000
Henry, Capital 700
Allowance for bad debts 800
Accumulated dep. –
furniture and fixtures 900

Cash 5,000
Accounts receivable 10,000
Inventory 8,000
Furniture and fixture 5,400
Accounts payable 3,000
Allowance for bad debts 1,000
Gerry, Capital 24,400
 BCACCTG2 – ACCOUNTING FOR PARTNERSHIP
AND CORPORATION

Case 2. New Partnership Books will be used

If new books are to be opened for the partnership, the following accounting procedures
may used to record the formation of the partnership.

Books of Gerry and Henry

1. Adjust the accounts of Gerry and Henry according to their agreement. Adjustments
are to made to their capital accounts.
2. Close the books.

New Book of the Partnership

1. Record the investments of Gerry, his adjusted assets and liabilities.
2. Record the investments of Henry, his adjusted assets and liabilities.

The journal entries to record the formation of the partnership, using the above accounting
procedures are:

Books of Gerry
Gerry, Capital 1,600
Allowance for bad debts 1,000
Accumulated dep. –
furniture and fixtures 600

Accounts payable 3,000

Allowance for bad debts 1,000
Accumulated dep. –
furniture and fixtures 600
Gerry, Capital 24,400
Cash 5,000
Accounts receivable 10,000
Inventory 8,000
Furniture and fixture 6,000

Books of Henry
Inventory 1,000
Henry, Capital 700
Allowance for bad debts 800
Accumulated dep. –
furniture and fixtures 900

Accounts payable 6,000

Allowance for bad debts 800
Accumulated dep. –
furniture and fixtures 900
Henry, Capital 24,300
 BCACCTG2 – ACCOUNTING FOR PARTNERSHIP
AND CORPORATION

Cash 4,000
Accounts receivable 8,000
Inventory 11,000
Furniture and fixtures 9,000

New Books of the Partnership

Cash 5,000
Accounts receivable 10,000
Inventory 8,000
Furniture and fixture 5,400
Accounts payable 3,000
Allowance for bad debts 1,000
Gerry, Capital 24,400

Cash 4,000
Accounts receivable 8,000
Inventory 11,000
Furniture and fixture 8,100
Accounts payable 6,000
Allowance for bad debts 800
Henry, Capital 24,300

The statement of financial position of the partnership after the formation is as follows:

GH Partnership
Statement of Financial Position
As of June 30, 2020
Assets
Cash P 9,000.00
Accounts Receivable P 18,000.00
Less: Allowance for bad debts 1,800.00 16,200.00
Inventory 19,000.00
Furnitures and fixtures 13,500.00
Total Assets P 57,700.00

Liabilities and Equity

Accounts payable P 9,000.00
Gerry, Capital 24,400.00
Henry, Capital 24,300.00
Total liabilities and equity P 57,700.00
 BCACCTG2 – ACCOUNTING FOR PARTNERSHIP
AND CORPORATION

END-OF-TOPIC EXERCISES:

Answer Exercise 1-2 on the google classroom.

Exercise 1-3:
Answer the following exercise. Please provide your solutions and submit in the google
classroom:

1. On July 1, 2020, Arnold Quinto and Lovilet Ruiz agreed to form a partnership. The
partnership agreement specified that Quinto is to invest cash of P700,000 and Ruiz is
to contribute land with a fair market value of P1,300,000 with P300,000 mortgage to
be assumed by the partnership.
a. What is the journal entry for the formation of the partnership?
b. Prepare the statement of financial position after the formation of the partnership.

2. A and B agreed to form a partnership. A contributed P40,000 cash while B contributed

equipment with air value of P100,000. However, due to the expertise that A will be
bringing to the partnership, the partners agreed that they should initially have an equal
interest in the partnership capital. Provide the journal entry to record the initial
investments of the partners.

3. A, B and C formed a partnership. Their contributions are as follows:

A B C
Cash P 40,000.00 P 10,000.00 P 100,00.00
Equipment 80,000.00
Total P 40,000.00 P 90,000.00 P 100,00.00

Additional information:
• The equipment has an unpaid mortgage of P20,000 which the partnership assumes
to repay.
• The partners agreed to equalize their interests. Cash settlements among partners
are to be made outside the partnership.

Requirements:
a. Which partner(s) shall receive a cash payment from the other partner(s)?
b. Provide the entry to record the contributions of the partners.

4. A and B agreed to form a partnership. The partnership agreement stipulates the

 BCACCTG2 – ACCOUNTING FOR PARTNERSHIP
AND CORPORATION

following:
• Initial investment of P140,000
• A 60:40 interest in the equity of the partnership
• A contributed P100,000 cash while B contributed P40,000 cash.

Which partner shall provide additional investment (or withdraw part of his investment) in
order to bring the partners’ capital credits equal to their respective interests in the equity
of the partnership?

5. Juan contributed the following to JM Partnership:

Book Value Agreed Value

Equipment P 900,000.00 P 400,000.00
Accumulated Depreciation 620,000
Accounts Receivable 360,000.00 85% realizable

Prepare the journal entry to record Juan’s investment in the partnership.

REFERENCES:

Dayag, A. (2018) Advanced Accounting Volume 1, Millennium Books, Inc.

Guerrero, P. P. (2017) Advanced Accounting: Principles and Procedural Approach,

Volume 1. Manila: GIC Enterprise.

Ballada, W., Ballada, S.,(2019), Partnership and Corporation “Made Easy” (21st Edition).
Dome Dane Publishers. Sampaloc, Manila.

Tolentino-Baysa G. and Lupisan, MC.,(2018), Accounting for Partnership and

Corporation (2018 Edition). Millennium Books Inc. Shaw Boulevard, Mandaluyong City.

Domingo, A.,(2019) Partnership, Revised Corporation, Cooperative Law – Laws,

Principles, and Jurisprudence (2019 Edition).Coaching For Results Publishing. Itogon,
Benguet.

Empleo, Robles and German, Fundamentals of Accounting Volume 2 - 2021 Edition.

BCACCTG2 – ACCOUNTING FOR PARTNERSHIP
AND CORPORATION