PARTNERSHIP C.

Admission of a new partner/two proprietors form a partnership

Governing authority: Partnership Law
Definition: “by the contract of partnership, 2 or more persons bind themselves to FIRST TIME FORMATION
contribute money, property or industry to a common fund, with the - Cash investment - face value
intention of dividing the profits among themselves” - Noncash investment - fair value – via independent appraisals or agreement of
Factors: -2 or more persons the partners
-to carry on as co-owners - Bonus or Goodwill – agreed interest that vary to the net assets invested
-business for profit: non-profit org. may not be partnership Initial Investment: Pedro – 70,000 and Jose – 50,000
Characteristics: o Bonus method: capital transfer/adjustments based on the agreed
1. Separate legal personality – juridical personality (Art. 1768) interest (if 50-50)
2. Ease of formation – oral, written, or implied (inferences) Pedro, Capital 10,000
3. Co-ownership of partnership property and profits – all assets of partners Jose, Capital 10,000
become property of partnership (except: limited partnership) Total capital after formation: Addition of the 2 capitals
4. Limited life – any change in agreement terminates the partnership o Goodwill method: addition of capital to equalize the agreed interest (if
5. Mutual Agency – equal rights of partners to act for the partnership 50-50)
6. Unlimited Liability – all properties may be used for settlement of liabilities Goodwill 20,000
(except: limited partnership) Jose, Capital 20,000
Total capital after formation: Highest capital x 2
PERSONAL AND THE BUSINESS *In the absence of method agreement: Bonus method
Proprietorship: In practice – treated as separate entities PROPRIETOR AND INDIVIDUAL
In theory – treated as one - If agreed, the assets contributed will undergo revaluation
Small partnerships: In practice – treated as one in case of 2 partners - The entry to transfer the assets to the partnership will based on the books of
Partnerships: In general – treated as separate entities each proprietor
Ideal ledger accounts to be maintained in partnership TWO PROPRIETORS FORM A PARTNERSHIP
a. Capital Accounts - First: agreement on the partner’s interest
CR: Original & additional investment, partner’s profit - Second: agreement regarding the values of the assets to be assigned and
DR: Permanent Withdrawal, drawing, end, partner’s loss liabilities to be assumed
b. Drawing or personal accounts NOTE:
CR: Partnership obligations, claims of partner, salaries - per capital interest recorded may vary with per capital contribution, as per
DR: Withdrawal, personal indebtedness, claims of partnership agreement
c. Account for loans to or from partners
DR: Receivable from partner: a withdrawal by a partner with intention of
repayment to the firm
CR: Loans/Notes Payable: an advance given by partner to the firm, with the
intention of repayment by the firm
NOTE:
Advances from: Partner’s liability
Advances to: Partnership’s liability
FORMATION
A. First time formation
B. Proprietor and Individual
PARTNERSHIP OPERATIONS -
Not treated as expense in the determination of net income
-
In the absence of agreement: Salaries are automatically allowed even when
AREA TO DISCUSS losses are incurred
a. Determine the distribution of profit & losses - Parties may allow salaries on a pro-rata basis if earnings are lower than the
b. Preparation of FS total salaries.
c. Changes in profit and loss ratios Bonus as: Expense Not
d. Correction of net income of prior years Expense
Based on NI before S, I, B x
A. DISTRIBUTION OF PROFIT & LOSSES Based on NI before S, I, but after bonus x
- Division is based with the agreement - If bonus is allowed to the managing partner as per agreement, it must specify
- No agreement: division is based with the original contribution the basis of the bonus.
- if profit agreement only: loss will be based on profit agreement - Even with agreement, the provision for bonus if net loss, is disregarded
- if loss agreement only: profit will be based on original contribution CHANGES IN PROFIT AND LOSS

Summary of Possible Methods of Distribution of Net Income BONUS (B) Bonus = NI before S, I, B
1. Equally Bonus = NI after S, I, B B = rate x NI
2. Ratio B = r x [NI – S – I – (rate x B)] Bonus = NI before S, I, after B
3. Ratio of capital balances on a particular date or Bonus = NI after S, I, before B B = r x (NI – B)
B = r x (NI – S – I)
Ratio of average capital balances during the year
4. Interest on capital balances and dividing the remaining net income
in a specified ratio OLD: X = 10% ; Y=90% NEW: X= 25% ; Y=75%
5. Salaries and dividing the remaining net income in a specified ratio Difference: 15%
6. Bonus to managing partner based on net income 2 Approaches for a fair valuation
*if income is to be divided based on capital balances and no agreement as to 1. Adjust and record all assets and liabilities that are unadjusted and unrecorded to
computation: Average capital balances should be used. If not original capital reflect their fair values and close it with the capital account using old profit and loss
balances ratio.
Dr: Land = 300,000
Division of Profits Entry Cr: X, Capital = 30,000, Y Capital = 270,000
Income Summary xx 2. Adjust only the capital account for the net effect of these adjustments using old
X, Capital xx profit and loss ratio. (300,000 x 15%)
Y, Capital xx Dr: X, Capital 45,000
Cr: Y, Capital 45,000
Interest Allowed on Partner’s Capital
- Interest allowances for encouragement of capital investments
- Interest rate should base on the agreement
- Not an expense of the partnership, therefore, it has no effect on net income
computation
- If the agreement provides to allow interest on capital balances even if net loss,
the provision for interest must be enforced.

Salary and Bonus Allowances

CORRECTION OF PARTNERSHIP NET INCOME OF PRIOR PERIOD
- Error in computing depreciation
- Error in inventory evaluation
- Omission of accrued expenses

Procedures for Correction

1. Determine the correct net profit of the prior period
2. Compute the proper share of each partner using the p&l ratio in the year in which
the error occurred
3. Compute the share received and share that would have received.
4. Adjust the capital from no. 3