Scribd Logo
Upload

Welcome to Scribd!

  • AST - Chapter 1

    Uploaded by

    Sha iyyaah
    108 views26 pages
    AST Chapter 1- Millan

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    AST Chapter 1- Millan

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    Download as pdf
    108 views26 pages

    AST - Chapter 1

    Uploaded by

    Sha iyyaah
    AST Chapter 1- Millan

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    Download as pdf
    of 26
    Chapter 1 Partnership Formation arning Objectives « . Differentiate between the accounting for partnerships, sole proprietorships and corporations. 2. State the valuation of contributions of partners. re 3, Account for the initial investments of the partners to the partnership. : . 4, State the peculiar accounts used in a partnership and identify the transactions that affect these accounts. ‘ Le 1 Introduction ' : A partnership is an unincorporated association of two or more individuals to carry on,,as co-owners, a’ business, with “the iniention of dividing the profits among themselves. The following distinguish a partnership from other types of entities: ; . : a.. A partnership is owned:by two or_more, individuals, while a sole proprietorship is owned by only one individual. b. “A partnership is created by agreement between the partners, while a corporation or cooperative is created by the operation, of law. c. “A partnership is formed for a business undertaking that is normally of continuing nature, while a joint venture may be formed for a limited purpose and ends when its goal is . achieved. 6 Characteristics of a partnership : a. “Ease of formation ~ as compared to corporations, the formation of a partnership requires less formality. . b. Separate legal’ personality - the ‘partnership has a juridical_ personality separate and distinct_from. n_the partners. The partnership can transact and acquire properties in its name. Scanned with CamScanner 2 Chapter 1 c. Mutual agency ~ the partners are agents of the partnership for the purpose of its ‘business. As such, a partner-may legally bind the partnership to a contract or agreement that is in line with the partnership's operations. d. Co-ownership of property — each partner is a co-owner of the ies invested in the partnership and each has _an equal _right with his partners to possess specific partnership property for partnership purposes. However, a partner has no right to . Co-ownership of profits - a partnership is created as a business: (a profit-oriented entity), as such, each partner is entitled to his share ‘in the partnership profit. A stipulation which excludes one or more partners from any share in the profits or losses is void. (Art. 1799 of the Ctwil Code of the Phitippines) _ Limited life - a partnership is easily dissolved: iv by the express will of any partner; ii, by the termination of a definite term stipulated in the “~~ contract; by any event which makes it unlawful to carry. out.the partnership; . iv. when a specific thing which a partner had promised to contribute to the partnership perishes before the delivery lart, 1830(4)]; OF v. expulsion, death, insolvency or civil interdiction of a partner. 8: Transfer of ownership — in case of dissolution, the transfer of ownership, whether to a new, or existing partner, requires the " approval of the remaining partners. Scanned with CamScanner h. ‘Unlimited liability — each partner, including industrial ones, may be held personally liable for partnership debt after all partnership assets have been exhausted. If a partner is personally insolveni, his share in the partnership debt shall be assumed by the other solvent partners. > A partnership in which all partners are individually liable * is called a general partnership: > A partnership in which at least one partner is personally liable is called a limited partnership. A limited partnership includes at least one general partner who maintains unlimited liability. The others, called limited partners, may limit their liability up to the extent of their contributions to the partnership. A limited liability partnership usually has “LLP” in its name. Advantages and disadvan! of a partnership _ Advantage Disadvantage ¢ — Ease of formation Limited life/ Easily dissolved ¢ Shared responsibility of Unlimited liability running the business e Flexibility in decision Conflict among partners making e Greater capital compa: ~Lesser-capital-eompared-to sole. i .acorporation “| e Relative lack of regulation ” A partnership (other than a by the government as general professional compared to corporations partnership) is taxed like a corporation Accounting for partnerships The Conceptual Framework for Financial Reporting and the PFRSs are applicable to all reporting entities regardless of the type of organization. Thus, most accounting procedures used’ for other types of business organizations are also applicable to partnerships. The main distinction lies on the accounting for Scanned with CamScanner 4 Spier & equity. In addition, the accounting for partnerships should also comply with relevant provisions ,of the Civil Code ‘of the Philippines. : The following are the major considerations in the accounting for the equity of a partnership: , a. Formation - accounting for initial investments to the partnership b. Operations - division of profits or losses ¢. Dissolution - admission of a new partner and withdrawal, retirement or death of a partner d. Liquidation — winding-up of affairs 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 require that.a partnership agreement must be made in a public instrument and recorded with the Securities and Exchange “Commission (SEC) when: : a. immovable property_or real rights are contributed ‘to the partnership (e.g., PPE); or b. the partnership has a capital of 3,000 or more. Art. 1773 further requires an inventory of any immovable property contributed to the partnership, signed by the parties and attached to the public instrument, otherwise the partnership is deemed void. A partnership’s legal existence begins from the execution of the contract, unless otherwise stipulated. Valuation of contributions of partners Art. 1787 of the Civil Code states that “when the 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 , Scanned with CamScanner Partnership Formation . 5 be made by experts chosen by the partners, and according to current prices, the subsequent changes thereof being for the ~ account of the partnership.” The term “appraisal” as used in the Civil Code suggests valuation of capital contributions at fair value. Moreover, the provision of PERS 2 Share-based Payments that equity instruments issued for non-cash items should be valiied at the fair value of the non-cash items received parallels that of Art. 1787. Accordingly, all assets contributed to (and related liabilities mee by) ‘the. partnership. are initially measured at fair value. > An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. > Fair value is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” (PFRS13) When measuring the contributions of partners, the following additional guidance from the PFRSs shall be observed: e of contribution Measurement Cash and cash equivalents | Face amount (PAS7) Inventory - | Lower of Cost and Net realizable value nas (PAS2) . Each partner's capital account is credited for the fair value of his net contribution (ie, asset contribution less any liability assumed by the partnership). No contribution shall be valued at an amount that exceeds the contribution’s recoverable amount. Each partner's contribution shall be adjusted accordingly before recognition in the partnership’s books. > Recoverable amount — is “the higher between an asset's fair value Jess cost to sell and value in use.” (PAS36.Appendix A) Scanned with CamScanner 6 : Chapter 1 A partner's subsequent share in profits (losses) ‘shall also be credited (debited) to his capital account. Likewise, permanent withdrawals of capital are debited to the partner's capital account. Temporary withdrawals may be debited to the partner's drawings account, The sum of the balances in the partners’ individual capital accounts represents the total equity of the partnership. Partners’ ledger accounts The partners’ ledger accounts are: a, Capital accounts ee b. Drawings accounts ~ c. Receivable from/ Payable to a partner ~ Capital and Drawings accounts Separate capital and drawings accounts are established for each Partner, e.g, “Juan Bayan, Capital” and “Juan Bayan, Drawings.” ‘These are equity accounts and are used to record the following: Juan Bayan, Capital © Initial investment * Additional investments Share in profits «Permanent withdrawals of capital * — Share in losses © Debit balance of drawings account eae The partner's capital accourit is a real account and has a normal credit balance. ~ . . ‘Juan Bayan, Drawin; * Temporary Recurring withdrawals during reimbursable costs the period paid by the partner * Temporary funds. held to be remitted to the partnership Scanned with CamScanner Partnership Formation 7 The drawings account is a nominal account that is closed to the related capital account at the end of the period. This account is a contra equity account and has a normal debit balance.” The partners’ capital and drawings accounts are similar to the corporate paid in capital, retained earnings, and dividends accounts. Receivable from/ Payable to a partner The partnership may enter into a loan transaction with a partner. A loan extended by the partnership to a partner is recorded as a receivable from the: partner, while a loan obtained by the partnership from a partner is recorded as a payable to the partner. Illustration: Formation of partnership - Valuation of capital” A and B formed a partnership. The _ following are their contributions: A _ i Cash _ 100,000 = - Accounts receivable 50,000- 22K - Inventory 80,000 a : land, . 50,000 To 1<. Total wn ees 230,000 170,000_ Note payable 60,000 A, capital _ 170,000 . B, capital : 170,000 ee ‘Total 230,000 __ 170,000 —lok Additional information: * Included in accounts receivable is an ‘account amounting to "920,000.which is deemed uncollectible. * The inventory has an estimated selling price of P100,000 and estimated costs to sell of P10,000. © The partnership assumed a P10,000 0 mortgage on the land. r Scanned with CamScanner 8 Chapter 1 e The building is under-depreciated by P25,000. e There is an unpaid mortgage of P15,000 on the building which B agreed to settle using his personal funds. © The note payable is stated at face amount. A proper valuation requires the recognition of a P15,000 discount on note payable. e A and B shall share in profits and losses on a 60:40 ratio, * respectively. Requirement (a): Compute for the adjusted balances of the partners’ capital accounts. Solution: 9 A B Partnershi; STS eet Cash . 100,000 - 100,000 Accounts receivable (50K - 20K) 30,000: - 30,000 Inventory (at cost, the loweramount) 80,000 _ 80,000 Land 50,000 50,000 Building (120K - 25K) 95,000 95,000 Total 210,000 145,000 355,000 Note payable, net (60K -15K) (45,000) (45,000) Mortgage payable-land _< . ~. * (10,000) (10,000) Adjusted capital balances 165,000 _ 135,000 300,000 The unpaid mortgage on the building is not included because it is not assumed by the partnership. Journal entry: Accounts receivable Inventory Land Building Discount on note payable Note payable 60,000 Mortgage payable 10,000 A, Capital 165,000 B, Capital Scanned with CamScanner Partnership Formation . 9 Requirement (b): Assume that a partner's capital shall be increased accordingly by contributing additional cash to bring the partners’ capital balances proportionate to their Profit and loss ratio. Which partner should provide additional cash and how much is the additional cash contribution? Solution: Using A’s capital first, let us determine if B’s capital contribution has any deficiency. ‘ A, capital . 165,000 Divide by: Profit (loss) sharing ratio of A 60% Total 7 275,000 Multiply by: B's profit (loss) sharing ratio 40% Minimum capital required of B 110,000 B's capital 135,000 Deficiency in B's capital contribution Conclusion: B’s contribution has no deficiency. Now using B's capital, let us determine if A’s capital contribution has any deficiency. . B, capital es 135,000 Divide by: Profit (loss) sharing ratio of A 40% Total 337,500 Multiply by: A's profit (loss) sharing ratio 60% -Minimum capital required of A 202,500 A's capital 165,000 Deficiency in A’s capital contribution 37,500 % Conclusion: Partner A shall contribute additional cash of 37,500 to make his contribution proportionate to his profit- sharing ratio. Scanned with CamScanner 10 Chapter 1 Reconciliation: A's contribution (165K + 37.5K additional contribution) 202,500 B's contribution 135,000 ‘Adjusted total contributions : 337,500, > 337,500 x 60% = 202,500 A's adjusted contribution >. 337,500 x 40% = 135,000 B’s contribution ‘Bonus on initial investments An accounfing problem exists when a partner's capital account is credited for an amount greater than the fair value of his ‘contributions. For instance, a partnership agreement may allow a certain partner who is bringing in expertise or special skill to the partnership to have a capital credit greater than the fair value of his contributions. In such case, the additional credit to the partner's capital (i.e., the ‘bonus’) is accounted for as a deduction from the capital of the other partners. This accounting method is called the “bonus” method. . Although, the credit to the partner's capital may vary due to a ‘bonus,’ the corresponding debit to the asset account must still be equal to the fair value of the contribution. The difference between the amounts credited and debited is treated as adjustment to the capital accounts of the other partners. Mlustration: . A and B agreed to form a partnership. A contributed ‘40,000 cash while B contributed equipment with fair value of P100,000. However, dué 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. Requirement: Provide the journal entry to record the initial investments of the partners. Scanned with CamScanner Partnership Formation i Solution: Actual contributions :_.Bonus-‘method A 40,000 (140,000x 50%) 70,000 B 100,000 (140,000 x 50%) 70,000 « Total 140,000 140,000 Date Cash 7 40,000 Equipment 100,000 A, Capital (40,000 + 30,000 bonus) . | 70,000 B, Capital (100,000 - 30,000 bonus) 70,000 & Notes: = The bonus given to A, i.e. P30,000 (P70,000 capital credit — 40,000 actual contribution) is treated as ‘a reduction to ‘the capital credit of B. @ After applying the bonus method, the total capital of the - partnership is still equal to the fair value of the partners’ contributions. The debits to “Cash” and “Equipment” are equal to their fair’ values. Only the amounts credited to the | partners’ capital accounts have varied. @ Summary: Asset contribution “of a partner » Initially recorded | > Initially recorded | > Either at: at fair value’ | at fair value a. fair value (no bonus); b, above fair value (bonus to the partner); or : below fair value (bonus to the other’ Scanned with CamScanner 12 Chapter 1 Variations to the bonus method A partnership agreement may stipulate a certain ratio to be maintained by the partners representing their specific interests. in the equity of the. partnership. This stipulation may give rise to adjustments to the initial contributions of the partners. Since technically there is no “bonus” being given to a certain partner, any increase or decrease to ‘the capital credit of a partner is not deducted from his co-partners’ capital accounts. : Instead, the capital adjustment is accounted for as either: a. Cash settlement among the partners; or b. Additional investment: or withdrawal -of investment of a partner The following illustrations are variations to the bonus method: Tilustration 1: Cash settlement between partners ; A, B and C formed a partnership. Their contributions are as follows: i A B “Cc —_—_ Cash 40,000 10,000 — 100,000 Equipment 80,000 Totals 40,000 __90,000__ 100,000 Additional information: e The equipment has an unpaid mortgage of P20,000, which the partnership assumes to repay. e The partners agreed to equalize their interests. Cash settlements among the partners are to. be made outside the partnership. Requirements: a. Which partner(s) shall receive cash payment from the other partner(s)? b. - Provide the entry to record the contributions of the partners. Scanned with CamScanner Partnership Formation 13 Solutions: Requirement (a): A B C___Partnershi Cash 40,000 10,000 100,000 150,000 Equipment ~ 80,000 80,000 Mortgage payable (20,000) (20,000) Net contribution 40,000 70,000 + 100,000 210,000 Equal interests (210K +3) "70,000 70,000 70,000___ 210,000 Cash receipt (payment) _(30,000) —_ > Answer: C shall receive P30,000 from A. ‘ Requirement (b): . Date | Cash ° ~~ | 150,000 Equipment _ © | 80,000 Mortgage payable 20,000 | , ‘A, Capital 70,000 | B, Capital ‘ | 70,000 i C, Capital 70,000 { |. & Notes: @ The cash settlement among the partners is not recorded in the partnership's books because this is not a transaction of the partnership but rather of the partners among themselves. © The partnership's capital of P210,000 remains the same after the cash settlement. Again, what varied are only the credits to the partners’ capital accounts. | Illustration 2: ‘Additional investment (Withdrawal of investment) A and B agreed to forma partnership, The partnership agreement ", “stipulates the following: y * Initial capital of 140,000. * A 60:40 interest in the equity of the partnership, A contributed P100,000 cash while B contributed P40,000 cash. Scanned with CamScanner 14 Chapter 1 Requirement: 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? . Solution: Agreed initial capital : 140,000 A's required capital balance (140K x 60%) ° 84,000 B's required capital balance (140K x 40%) 56,000 A B Totals ‘Actual contributions 100,000. 40,000", 140,000 Required capital balances 84,000 56,000 ~_ 140,000 Additional (Withdrawal) (16,000) 16,000 : 4 Answer: A shall withdraw P16,000 from his initial contribution while B shall make an additional investment of P16,000. Chapter 1: Summary . The major considerations in the accounting for the equity of partnerships are: (a) Formation; (b) Operations; (c) Dissolution; and (d) Liquidation. : The contributions of the partners, to the partnership are initially measured at fair value. « A partner's capital balance is normally credited for the fair value of his net contribution to the partnership. Ifa partner's capital balance is credited for an amount greater than or less than the fair value of his net contribution, there is bonus. * Under the bonus method, any increase (or decrease) in the capital credit of a partner is. deducted from (or added to) the capital credits of the other partners. The total partnership capital remains equal to the fair value of the partners’ net contributions to the partnership. Scanned with CamScanner Partnership Formation 15 PROBLEMS PROBLEM 1; TRUE OR PALSE 1, The accounting for partnerships differs from the accounting for sole Proptietorships, corporations and cooperatives in regard to the accounting for equity but not for assets and liabilities, 2. A partnership is relatively easy to form but also easy to dissolve, . 3. Ms. A contributed equipment with carrying amount of P100 and fair value of P200 to a partnership. If no bonus is given to any partner, Ms. A’s capital account should be credited for P200. Fact pattern: aon Mr. Debinsky contributed inventory with purchase cost of P300 and net realizable value of P350 to a partnership. Mr. Debinsky acquired the inventory -on account and the partnership will assume the unpaid balance of P80. 4. The partnership will record the inventory at P350. 5." Mr. Debinsky’s capital account in the partnership books will be credited for P270.” Fact pattern: * Mr. B and Ms. C formed a partnership. The partners have equal interests in the partnership and their respective contributions shall reflect this fact, The agreed initial partnership capital is P300. Mr. B contributed P100, while C contributed P150. 6. Mr.B should contribute additional P50. 7. Ms. C should withdraw P50. 8. Ms. D and Mr. E formed a partnership, each contributing P50. Because Ms. D will be bringing special skill to the business, the partners agreed that Ms. D’s capital account should be credited for P70. Mr. E’s capital balance after the partnership formation is P30. Scanned with CamScanner 16 Chapter 1 Fact pattern: Piw and Pie agreed to form a partnership. Piw contributed cash of £200 while Pie will be contributing her expertise, The parinership agreement stipulates that Piw and Pie shall have equal interests:in both the initial capital of the partnership and in subsequent partnership profits and losses. 9, The cash contribution of Piw shall be debited for P200 but the net credit to Piw's capital account shall be P100. 10. Immediately after partnership formation, the balance of Pie’s capital account in the partnership books is zero. PROBLEM 2: MULTIPLE CHOICE - THEORY : 1. Assets contributed by the partners to a partnership business should be initially measured in the partnership books at * a, the carrying amount to the contetbuting partner. b. fair value. ~ ¢. current selling price. d. whatever amount the contributing partner can think of. 2. Mr. X and Ms. Y formed a partnership, each'contributing PIM in cash. The partners agreed that Mr. X’s capital account is to be credited for P.8M. Which of the following: statements” is correct? : ‘The credit to Ms. Y’s capital account is P1.2M. Mr. X is given a bonus of P.2M. The stipulation is void. : Mr. X must be ugly, while Ms. Y is beautiful. aoe 3. You and I ‘formed a partnership. The fair value of my contribution is 100,000 while, the fair value of your contribution is 50,000. However, since you will be contributing an expertise to the partnership, we have agreed to value that expertise. Accordirigly, we have agreed that our Scanned with CamScanner Partnership Formation v respective capital accounts will be credi Which of the following statements is = . oe a. Our agreement results to a bonus of P25,000 which relates to the valuation’ of your expertise. Accordingly, we will record a goodwill of P25,000. b Our agreement results toa bonus of P25,000. In accordance with our agreement, I shall pay you P25,000. Our asset contributions will be debited at their fair values of P100,000 and P50,000, respectively. c, Our agreement results to a bonus of P25,000 which is treated as a capital adjustment - an increase to your capital account and a decrease to my capital account. My asset contribution will be debited at P75,000 while your asset contribution will be debited at P75,000. a. Our agreement results to a bonus of P25,000 which is treated as a capital adjustment - an increase to your capital account anda decrease to my capital account. Our asset contributions will be debited at their fair values of 100,000 and P50,000, respectively. 4, Under the bonus method, a. total partnership capital is equal to the fair value of the partners’ net contributions to the partnership. ‘ b. total partnership capital is less than the fair value of the partners’ net contributions to the partnership. c. total partnership capital is greater than the fair value of partners’ the net contributions to the partnership. d. total partnership ‘capital is less than the fair value of the partners’ net contributions to the partnership, if the bonus is given to the incoming partner. 5. Transactions between and among the partners are a. recorded in the partnership books. b. not recorded in the partnership books, c. either aorb ; d. neither anorb Scanned with CamScanner 18 ee pier Requi ci : Provide thee try to record the’additional investment ‘defi tribution.” a roblem't. Day and. ight agen to have equal « credits to their aoe ‘4ctounts: The bonus method shall beused. vo . i Requirements: . wet thas Scanned with CamScanner Partnership Formation 19. 4) Use'the information in problem 1. Day and Night agreed to have equal credits to their capital accounts. Cash settlement is to be. © made between the ariners for the adjustments on their ae balances, OMT Requirement: Describe how’ the ‘cash’ settlémerit acnid be made and how would tbe aooaunted for in the Partnership books. : 5, Use the information i in problen 1, Day and Night agreed to Have ‘equal credits to their capital's ‘account ditional investment’ , or partial withdrawal’ shall ‘be made, by a-partner. from the” partnership for one iohiet tal pateatoey Requirement: Which'p tier should inka an additional investment and oe: Darter shal make a withdrawal? OOS PROBLEM4: MULTIPLE CHOICE - COMPUTATIONAL’ e 1., Triangle, Square and Rourid formed a’ partnership! ‘Triangle ~ contributed cash’ of. P80,000. Square contributed ‘equipment - with historical cost of ?700,000, carrying amount. of P180,000, and fair value of 90,000. Round Contributed sets with a spar ‘ mortgage of 1P590,000 oft the biiilding" Which partner has the least capital account Daliatice' on'paririetship formation?’ » K »+@} Round? ‘+: d.'None,‘all are equal 2 On January 1,:20x1, Mr: Ann and Ms. Buoy agréed to form a partnership: The partners’ contributions are listed below: -: Mr. Ann _ Ms, Buot Cash TTT TTT 50,000 “120,000 Accounts receivable |” “|” "360,000 "1,080,000 - Inventories 216,000 "360,000 Land 1,080,000 Scanned with CamScanner Chapter 1 Building 900,000 Equipment. . ! 90,000 90,000 Accounts payable ts 336,000 450,000 Capital . 1,460,000 2,100,000 ‘The partners agreed to the following: a, The recoverable amounts of the Partners’ respective accounts receivable are P300,000 for Mr. Ann and ELA for Ms. Buoy. b.. The inventory contributed by Ms, Buoy includes obsolete items with a recorded cost of P20,000, c. The land has‘an attached mortgage of P180,000, which -the Partnership will assume. d. The. equipment contributed by! Ms. Buoy has a’fair value of __. P130,000.. > Sane B e. Mr. Ann has an unrecorded accounts payable of P100,000. The Partnership assumes Ue Se of bere that account. <0 1,920,000 4. 2,920,000 3... On January 1, 20x1, Mr, Angot and Ms. Banglo agreed to form -a partnership and share. Profits. and losses. in the ratio of 3:7, respectively. Mr. Angot contributed. a | ‘parcel of land, that cost him P10,000. Ms; Banglo contributed: P40,000 cash. The land was sold for P18,000 on January 1, 20x1, immediately after formation. of the partnership, How much is the capital balance of Mr. Angot? 810,006.20, Lens 29,000 b. 18,000 ; 4, 40,000 Use the following information ‘for the next two questions: Mr. A and Ms. B formed a partnership and agreed to divide the initial capital equally even though Mr. A contributed P100,000 and Ms. B contributed P84,000 in identifiable assets. (AICPA) ‘ ic Scanned with CamScanner Partnership Formation 21 4, The partners agreed. that the difference in the amount: of contribution andthe amount of credit to the partner’s capital shall. be treated. as compensation. for! the: expertise that the partner will be bringing to the partnership. How much is the initial capital balance of Ms. B? p .a. 84,000 -¢. 100,000 b. 92,000 Fe vo 302300 * 5." The partners. sagriad that) .the: difference in -the amount of contribution and the amount of credit to the. partner’s capital shall be, treated as cash ‘settlement: between. the. Pee Which of the following is correct?, a. ~A pays B P 16,000; b.. Bpays.A-P16,000 iS ci: A pays B P8,000. 10940 5 d,; The:cash settlement between the pares is} hot recorded Ba petty boa: iivinigiee MP Ain Bo “ ‘PROBLEM, CLASSROOM acriviry. INSTRUCTIONS: ; 1, Finda study partner. 25 Imagine that you and. your study partner are entrepreneurs” and have agreed to form a business partnership. 3.. Read the facts below and answer the succeeding requirements. Your contributions are as follows: Partner1 Partner 2 Cash 250,000 1,800,000 Accounts receivable : 430,000 1,000,000 Land 4 1,250,000, : ° Building 2,000,000 Accounts payable ‘ 330,000 400,000 Notes payable 500,000 Capital } 3,600,000 1,900,000 Scanned with CamScanner 22 ' ‘ Chapter 1 Additional information: °°'\\» i } © The cash contribution of Partner 1 as listed above is the peso equivalent of 6,250 foreign’ cmenencya ants CU). ‘The current exchange 'rate ig P45: FOUL © Partner 2’s account ‘receivable should ‘be written down by 200,000. i e The land has an appraleed value of P1,500,000. © The building has an appraised value of P 1,400,000. © Attached’ to! ‘the building is-an‘unpaid mortgage of P800,000. +~-Partner ‘I-agrees*to* settle sine ‘mortgage lenmnedisely using z ~y his/her personal finds,’ "9! e There is a’ pending lawsuit ‘over’ ‘Partner 1's ‘contributed properties '— a. claim by a third: party.’ 'A ‘discussion ‘with -Partner-1‘s-légal-counsel-reveals that: it‘is'probable' that the plaintiff will ‘accept an out of court settlement of not less'than 300,000.: The ‘partnership’ shall ‘assume: te obiigation of paying the plaintiff. i © - There~ are“unpaid: real property + taxes on the properties “contributed by Partner 1 amounting to P40,000. The partners -agreed.that the partnérship shall assume thése obligations. The notes: payable is stated at face amount. An inspection of the related promissory note reveals that the note isa 'S-year non-interest ‘bearing’ note issued’ 2 years ago and requires a ™ Fat t maturity date. The current rate is 10%. 4 “Requirements: a, Compute for adjusted balances of your capital accounts: _b. -Proyide ‘the. entry..to record’ your contributions ‘in. the pattnership books. (vou mayor may wot use a valuation account for Ue notes paysble) Scanned with CamScanner Partnership Formation Variation 41: } You and your partner agree that one of you is significantly. ‘cuter ’ than the other, You determined that that cuteness will bring good feng shui to the business. Accordingly, you decided to have your capital accounts credited at equal amounts,’No ¢ash,settlements.or additional investments will be made, Requirements:, bog i \ Explain briefly :how, the: bonus will: be accounted for. in: the se o'partnership books. = ge tort

    You might also like