Chapter 1 Partnership Formation

Partnership

– Unincorporated association of two or more individuals to carry on, as co-owners, a business,

with the intention of dividing the profits among themselves.
– Owned by 2 or more individuals
– Created by agreement between the partners
– Formed for a business undertaking that is normally continuing nature.

CHARACTERISTICS OF A PARTNERSHIP

1. Ease of Formation – requires less formality; perfected by mere consent

2. Separate legal entity
3. Mutual agency
4. Co-ownership of property
5. Co-ownership of profit – dividing the profits among themselves
6. Limited life – easily dissolved
7. Transfer of ownership – not easy to transfer because it need consent of the partners.
8. Unlimited liability – this applicable to general partnership.

Note: A stipulation which excludes one or more partners from any share in the profits or losses is
void.

General partnership – all partners are general partners.

Limited partnership – at least one general partner and at least one limited partner.

ACCOUNTING FOR PARTNERSHIP

 The conceptual framework for financial reporting and the PFRSs are applicable to all reporting
entities regardless of the type of the organization.
 Most accounting procedures used for the other types of business organizations are also
applicable to partnership.
 The accounting for partnership should also comply with relevant provision of the civil code of
the Philippines.

MAJOR CONSIDERATION IN THE ACCOUNTING FOR THE EQUITY OF A PARTNERSHIP:

1. Formation – accounting for initial investments to the partnership

2. Operations – division of profits or losses
3. Dissolution – admission of a new partner and withdrawing, retirement or death of a partner
4. 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.

VALUATION OF CONTRIBUTIONS OF PARTNERS

– All assets contributed to ( and related liabilities assumed by) the partnership shall measured at
fair value

If non cash assets are invested

1. Agreed value of the property at the time of investment

2. Fair market value of the property at the time of investment
3. Book value or carrying value in case no available fair market value
4. Cost of the property

Cash and cash equivalents – measured at face amount

Inventory – measured at lower of cost and net realizable value (LCNRV)

PARTNERS’ LEDGER ACCOUNTS

1. Capital account
2. Drawings accounts
3. Receivable from / Payable to a partner

Capital (T -accounts)

Credit side

– Initial investments
– Additional investment
– Share in profit

Debit side

– Permanent withdrawal of Capital

– Share in losses
– Debit balance of drawing account

CAPITAL AND DRAWING ACCOUNTS

 – Separate capital and drawings accounts are established for each partner.

DRAWING ACCOUNTS

– Nominal account that is closed to related capital account At the end of the period
– This account is a contra equity account and has a normal debit balance.

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 alone obtained by the partnership from a partner is recorded as a payable to the partner.

BONUS AN INITIAL INVESTMENT

– A bonus exist when the capital account of a partner is created for an amount greater than or
less than the fair value of his contributions.
– The bonus is treated as a adjustment to the capital accounts of the other partners.

VARIATIONS TO THE BONUS METHOD

– Technically, no bonus
1. Cash settlement among the partners
2. Additional investment or withdrawal of investment of partners

Sample problem

VALUATION OF CONTRIBUTIONS OF PARTNERS

Mr. Sun and Ms. Moon formed a partnership. Their contribution are as follows:

Mr. Sun (50%) Ms. Moon (50%)

Cash 400,000
Accounts Receivable 250,000
Land 750,000
Equipment 180,000
Total 650,000 1,130,000

Additional information:

 Only 80% of the accounts receivable is deemed collectible.

 The land is stated at original cost. The fair value is P1,000,000. The partnership assumes a
P250,000 unpaid mortgage on the land
  Ms. Moon acquire the equipment on a long-term financing basis. Ms. Moon promised to pay the
unpaid principal balance of P80,000 using her personal fund. The equipment is under-
depreciated by P30,00
 The partners agreed to share in profits and losses equally. A partner should make an additional
contribution in order for the partner's capital balances to reflect the partners’ equal interest in
the partnership.
 Assume that the partners agreed to have equal interest in the partnership equity and profit and
losses. The partners initial capital credit should reflect this agreement using the bonus method.
 Assume that the partners agreed to have their capital accounts initially credited at equal
amounts. Cash settlement shall be made between the partners.
 Assume that the partners agreed to have their capital accounts initially credited at equal
amounts. A partnership provide additional investment ( or withdraw part of his investment) in
order to equalize the balances of the partners capital accounts.

Requirement:

1. Provide the journal entry to record the partners’ contributions.

2. Which partner should make an additional contribution and by how much?
3. Provide the journal entry today for the partner’s contributions.
4. Provide the compound journal entry to record the partner’s contributions.
5. Provide the simple journal entries to record the partner’s contributions.
6. Which partner should make an additional investment in which partner shall withdraw part
of his or her investment?

Computation:

 Provide the journal entry to record the partners’ contributions.

Mr. Sun = 400,000 + 200,000 =600,000

Ms. Moon= 1,000,000 -250,000 +150,000 = 900,000
200,000 = nakuha dahil minultiply yung 250,000 sa 80%
1,000,000 – land’s fair value
250,000 – unpaid mortgage of the land
150,000 - 180,000 – 30,000 ( subtract the under depreciated na 30,000 sa equipment)

Journal Entry

Cash 400,000
A/R 200,000
Land 1,000,000
Equipment 150,000
Mortgage payable 250,000
 Sun, Capital 600,000
Moon, Capital 900,000

 Which partner should make an additional contribution and by how much?

Using Mr. Sun’s Capital

600,000 ÷ 50% = 1,200,000 × 50% = 600,000

Ms. Moon’s actual contribution – 900,000

Conclusion: Ms. Moon’s actual contribution is not deficient.

Using Ms. Moon’s Capital

900,000 ÷ 50% = 1,800,000 × 50% = 900,000

Mr sun’s actual contribution – 600,000

Conclusion: Mr. Sun’s actual contribution is deficient by 300,000

Answer: Mr. Sun should make an additional contribution of P300,000.

 Provide the journal entry today for the partner’s contributions

Cash 400,000

A/R 200,000

Land 1,000,000

Equipment 150,000

Mortgage payable 250,000

Sun’s capital 750,000
Moon, Capital 750,000

Supporting computation: 1,500,000 × 50% = 750,000

1,500,000 × 50% = 750,000

 Provide the compound journal entry to record the partner’s contributions.

a. Compound entry
 Cash 400,000
A/R 200,000
Land 1,000,000
Equipment 150,000
Mortgage payable 250,000
Sun, Capital 750,000
Moon, Capital 750,000

Mr. Sun Ms. Moon

Actual Contribution 600,000 900,000
Capital credits 750,000 750,000
Reciept (Payment) (150,000) 150,000
Mr. Sun pays Ms. Moon P150,000

 Provide the simple journal entries to record the partner’s contributions.

b. Simple entries

Cash 400,000

A/R 200,000

Sun, Capital 600,000

Land 1,000,000

Equipment 150,000

Mortgage payable 250,000

Moon, Capital 900,000

Moon, Capital 150,000

Sun, capital 150,000

 Which partner should make an additional investment in which partner shall withdraw part of
his or her investment?

Mr. Sun Ms. Moon

Actual Contribution 600,000 900,000
 Capital credits 750,000 750,000
(Additional investment) (150,000) 150,000
withdrawal
Mr. Sun shall invest an additional P150,000 while Ms. Moon shall withdraw P150,000.