100 Partnership

PARTNERSHIP

Partnership- a contract whereby two or more person bind themselves to

contribute money, property or industry to a common fund, with the intention
of dividing the profit among themselves.

CHARACTERISTICS OF A PARTNERSHIP
1. Mutual agency- that any partner may act as an agent of the partnership in
conducting the affairs.
2. Unlimited liability- that the personal assets of any partner may be used to
satisfy the creditor’s equities of the partnership if the partnership assets
are not enough to settle the liabilities to outsiders.
3. Limited life- a partnership may be dissolved at any time by motion of the
partners or by operation of law.
4. Mutual participation in profits- a partner has the right to share in
partnership or by operation of law.
5. Co-ownership of contributed assets- properties contributed to the
partnership are owned by the partnership by virtue of its separate legal
personality.

RECORDING CONTRIBUTION OF PARTNERS

1. Partners are credited for total assets contributed and if such assets are
subject to liabilities which are to be assumed by the partnership, then the
partners are to be credited for net assets contributed (total assets minus
total liabilities assumed by the partnership).
2. If non-cash assets are to be contributed, such assets are to be recorded at
fair market value.
3. Accounts receivable transferred to the partnership are to be recorded at
gross accompanied by the corresponding allowance for doubtful accounts.
4. Fixed tangible assets transferred to the partnership are to be recorded at
book value (cost less accumulated depreciation).

METHODS OF DIVIDING PROFITS/LOSSES IN GENERAL

1. In accordance with the agreement among the partners.
a. Equally
b. Arbitrary ratio
c. Capital ratio
d. Interest on capital and balance on agreed ratio
1. Original capital
2. Capital at the beginning of the current period
3. Capital at the end of the period
101 Practical Accounting 2

4. Average capital
e. Salary allowances to partners and balance on agreed ratio
f. Bonus to managing partner and balance on an agree ratio
g. Combination of interest on capital, salaries to partners, bonus to
managing partners and balance on agreed ratio.
2. In the absence of an agreement among partners, each partner shall share in
the profits in proportion to his capital contribution.

CONDITIONS RESULTING TO PARTNERSHIP DISSOLUTION

1. Admission of a new partner
2. Withdrawal of a partner
3. Death or incapacity of a partner
4. Incorporation of a partnership
5. Liquidation

TYPES OF ADMISSION OF A NEW PARTNER

1. Purchase of interest from one or more of the original partners.
a. Recognized as personal transaction between the selling partner(s) and
the incoming partner.
b. No increase in the partnership assets but a change in the capital
structure will result because of the transfer of the interest acquired by
the new partner.
2. By investment
a. Transaction is between the original firm and the incoming partner.
b. Assets of the partnership will increase as a result of the contribution of
a new partner with a consequential increase in capital.

ACCOUNTING FOR ADMISSION BY PURCHASE OF INTEREST

1. At book value- when the actual amount paid to the selling partner equals
the interest acquired in the firm.
2. At more than book value- when the actual amount paid by the incoming
partner to the selling partner(s) is more than the interest acquired in the
firm.
3. At less than book value- when the actual amount paid by the incoming
partner to the selling partner(s) is less than the interest acquired in the
firm.

ACCOUNTING FOR ADMISSION BY INVESTMENT

Chapter 4- Partnership 102
1. At book value- when the actual amount invested by the incoming partner
equals the interest acquired in the partnership without any benefit accruing
to the old partners due to the admission.
2. Total amount agreed as capital greater than total amount contributed.
1. Goodwill
2. Understatement of certain assets
3. Total amount agreed as capital less than total amount contributed.
1. Cash withdrawal by old partners
2. Negative goodwill
3. Overstatement of certain assets

DETERMINATION OF GOODWILL
Agreed capital xxxxx
Less: Contributed capital xxxxx
Difference- Goodwill xxxxx

Ownership of goodwill
Capital credit of new partner
(Int. of new partner x total agreed capital) xxxxx
Less: Capital contributed by new partner xxxxx
Difference xxxxx

If there is no difference between capital credit of the new partner and capital
contributed, the goodwill belongs to the old partner, if the difference is equal
to the goodwill computed, the goodwill belongs to the new partner and if the
difference is less than the goodwill computed, the goodwill belongs to the old
and new partners.

DETERMINATION OF BONUS
If there is no goodwill, there may b e an existence of bonus which may be
computed by the following formula:
Capital credit to new partner
(Int. of new partner x total agreed capital) xxxxx
Capital contributed by new partner xxxxx
Difference xxxxx

If the difference is a positive figure, the bonus belongs to the new partner. On
the other hand, if the difference is a negative figure, the bonus belongs to the
old partners.

EFFECTS OF WITHDRAWAL OF A PARTNER

103 Practical Accounting 2

1. It may terminate the business and result to liquidation.

2. The business may continue after a partner’s withdrawal in which case
interest may be settled by
a. Purchase of his interest by the remaining partner.
b. Payment of cash or transfer of non-cash assets in settlement of the
retiring partner’s interest, or the recognition of a liability for the full or
balance of the unpaid interest of the retiring partner.

COMPUTATION OF GOODWILL OR BONUS

1. Compare the book value of interest of withdrawing partner with total
amount of consideration to be paid to withdrawing partner.
2. If book value of interest is greater than amount of consideration, then it is
considered as bonus to remaining partners.
3. If amount of consideration is greater than book value of interest
a. Bonus to withdrawing partner
b. Goodwill
1. to withdrawing partner only
2. to all partners (withdrawing and remaining)

LIQUIDATION- the process of winding up a business, converting the assets into

cash, settlement of liabilities and distributing the remaining cash among the
partners.

TYPES OF LIQUIDATION
1. By totals (lump sum)- a process of liquidation whereby the distribution of
cash to the partners is done only when all the non-cash assets has been
realized and the full loss or gain on realization is known.
2. By installment- a process of liquidation whereby cash may be distributed to
the partners as it becomes available even though there are still some non-
cash assets not yet realized or converted into cash.

STEPS FOR LIQUIDATION

1. Realization of assets and distribution of loss or gain to the capital accounts
on the basis of the profit and loss sharing ratios.
2. Payment for expenses of liquidation, if any, and distribution of such
expenses as loss to the partners in their profit and loss ratios.
3. Payment of liabilities.
4. Exercising the right of offset, when necessary.
5. Elimination of capital deficiency.
a. Recording the settlement of the deficiency if the partner is solvent
(total personal assets greater than total personal liabilities).
Chapter 4- Partnership 104
b. Absorption of the capital deficiency by the remaining partners with
credit balances on the basis of the P/L ratios among themselves if the
deficient partner is insolvent (total personal assets less than total
personal liabilities).
6. Payment of partners’ loans, of any.
7. Payment of partners’ capital balances.
105 Practical Accounting 2