SOB - Financial Accounting and Reporting 2

Adaptive Community for the Continuity of Education and Student Services
National Teachers College
Financial Accounting and Reporting 2
Student Name: Degree Program:

Section: Module Number:
Professor Name: Email Address:
YOUR GOALS
This module allows you to learn how partnership is formed from two or more sole
proprietors and how profit or loss from the operation of the partnership is distributed
among the partners. At the end of this learning module, you are expected to
demonstrate the following competencies:
1. Close the books of the sole proprietors and open new set of books for the
partnership.
2. Distribute the results of the operation of the partnership among the partners.
3. Prepare the basic financial statements of a partnership.
YOUR PROJECT
When you have finished going through the reading resources contained in this
module, you will prepare a calculation based on the problems that are provided. Please
take note of the conditions and expectations that follow.
CHOOSE YOUR ADVENTURE! CHOOSE TO SOLVE WELL!
Level 1 – Solve only one out of The following will be the rubrics for assessing
three problems. Your highest your calculations:
possible grade is 30 points.
21-30 points: The calculations arrived at the
Level 2 – Solve two out of three correct answer for all the requirements on the
problems. Your highest possible problem.
grade is 60 points.
Level 3 – Solve all three given correct answer for the majority of the
problems. Your highest possible requirements on the problem.
grade
Case 1 is 90 points.
If you analyze at least two out of correct answer for few of the requirements in 1
Financial Accounting
three problems, youand Reporting II
automatically the problem.
School of Business, Second Semester, SY 2020-2021
get an addition of 10 points.
SOLVING CONDITIONS: Take note of the following in preparing your calculations.

1. Present the solutions on how you arrived at the answers required on the problems.
The reading materials presented in this module will help you to analyse the facts
of the problems and the manner on how to calculate the requirements.
2. You may supplement your calculations with other readings outside this module.
3. Double rule your final answers.
4. The calculations may be computer-generated or hand written on a short bond
paper using normal margins. Please ensure a single spacing format.
5. For the purpose of readability, electronic output should be encoded using
Century Gothic font size 12. Handwritten outputs should be rendered in print, not
in script.
6. Electronic outputs may be sent to the official email address for the class.
Meanwhile, handwritten outputs may be sent to the school via courier or be
dropped off at the specific collection area on campus.
7. All outputs in this module shall be considered the first of three assessment for the
semester.
YOUR EXPERIENCE
Be guided by the following schedule that you can follow in order to manage your
learning experience well:
WEEK TASK OUTPUT

1 1 Finalizing the balances in the books of the sole proprietors by
2 preparing adjusting entries. Closing the books of the sole
proprietors and opening the new set of books for the partnership.
3 2 Calculating the share of the partners in the result of the operation
4 3 Preparing the Basic Financial Statements of a Partnership
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4 Problem Solving (prelims)
6
There is one required reading resources for this module. You are allowed to look
for other related resources if you have the means to do so. Note that our school library
has online resources that you can access.
Read pages 6 to 14 of the book “Fundamentals of Accounting” by Patricia M. Empleo,

Nenita S. Robles, and Christopher I. German.
2
Financial Accounting and Reporting II
Take note of the following:
1. The manner of organizing a partnership can be made in different ways:
a) A partnership is formed by persons with no existing business at all

b) An existing sole proprietorship business is converted to a partnership:
i. A single proprietor and an individual (who has no existing business of his
own) forming a partnership.
ii. Two or more single proprietorships combining there businesses into a
partnership.
2. When noncash assets are contributed by a partner or partners, these assets are
recorded at values agreed upon by all partners which generally are the fair
values at the time of contribution.
3. Any liability by a partner assumed by the partnership is netted against the total
assets contributed by said partner to calculate the amount to be credited to the
capital account.
4. In a partnership, there are separate drawing and capital accounts for each
partner.
5. Admission of an industrial partner is recorded in the books of the partnership

through a memorandum entry.
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Fundamentals of Accounting by
Patricia M. Empleo, Nenita S. Robles, and Christopher I. German
12

1. Article 1767 of the New Civil Code of the Philippines provide the following rules in
the distribution of profit or losses.
Division of Profits
a) Profits of the partnership shall be divided among the partners in accordance
with the profit sharing agreement;
b) In the absence of a profit sharing agreement, profits shall be divided among
the partners in proportion to their respective capital contribution;
c) If there is an industrial partner, he gets a just and equitable share, and the
balance of the profits to be divided among the capitalist partners in
proportions to their capital contributions; and
d) If there is a capitalist industrialist partner, he gets one just and equitable share
as an industrial partner, and another share as a capitalist partner according
to his capital contribution.
Division of Losses
a) Loss of the partnership shall be divided among the partners in accordance
with the loss sharing agreement;
b) In the absence of a loss sharing agreement, loss shall be apportioned among
the partners in accordance with their profit sharing ratio;
c) In the absence of any loss sharing and profit sharing ratios, loss shall be divided
among the capitalist partners in accordance with their capital contributions;
and
d) If there is no loss or profit sharing ratios and there is an industrial partner, he is
totally exempt from sharing in the loss.
e) However, it must be carefully noted that with respect to an industrial partner,
if there is no loss sharing agreement but there is a profit sharing agreement in
which the industrial partner is entitled to a profit ratio, then he becomes liable
for the losses of the partnership in the same proportion as his profit sharing ratio.
2. Profits and losses may be allocated to the partners in a manner as they wish,
therefore, profits and losses can be shared in a variety of ways.
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Read pages 50 to 51 of the book “.
1. After the distribution of profits or loss among the partners, the partnership should
prepare financial statements:
a) Statement of Financial Position

b) Statement of Income
c) Statement of Changes in Partner’s Equity
2. The profit or loss to be distributed among the partners is the profit or loss in the
Statement of Income
3. The profit of loss distributed among the partners is added or deducted from the
beginning partners’ capital balances to arrive at the ending partner’s capital
accounts in the Statement of Changes in Partner’s Equity.
4. The adjusted or ending partners’ capital balances in the Statement of Changes

in Partner’s Equity ties up with the Total Partners’ Equity in the Statement of
Financial Position.
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Fundamentals of Accounting
by Patricia M. Empleo, Nenita S. Robles, and Christopher I. German
27
Case 1
Below is the adjusted trial balance for the partnership of J, K and L, group of CPA’s in
the practice of their profession.
JKL Partnership
Adjusted Trial Balance
Year Ended December 31, 2019
Cash 95,980
Accounts Receivable 167,850
Allowance for Doubtful Accounts 10,240
Supplies 24,120
Prepaid Insurance 18,090
Furniture and Equipment 788,650
Accumulated Depreciation – F&E 70,600
Accounts Payable 19,460
Salaries Payable 11,150
Utilities Payable 12,700
J. Capital 350,000
K. Capital 350,000
L. Capital 200,000
J. Drawing 52,000
K. Drawing 50,000
L. Drawing 30,000
Professional Service Fees 736,700
Salaries Expense 353,470
Rent Expense 98,000
Utilities Expense 76,140
Miscellaneous Expense 8,270
Interest Income 7,440
Interest Expense 5,720
Total 1,768,290 1,768,290
Additional Information:
The profit and loss agreement of the partners is as follows:
i. Interest of 10% is to be paid on their beginning capital balances;

ii. The partners are entitled to salary allowances of 25,000, 20,000 and 20,000,
respectively;
iii. Remaining balance is to be divided 4:3:3
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Required:
Prepare the following financial statements:
1. Statement of Income, with a schedule showing distribution of profits

2. Statement of Changes in Partner’s Equity
3. Statement of Financial Position
Read selected paragraphs and/or pages from the book “Fundamentals of Accounting”
by Patricia M. Empleo, Nenita S. Robles, and Christopher I. German, and “Accounting
for Partnership and Corporation” by Carlito V. Reyes.
Watch the discussion on Partnership Dissolution by Laudeline Guevarra on Youtube -

https://www.youtube.com/channel/UCgFs4L-GiWIADXe2RlDgZfg
1. The change in partnership ownership may be caused by a variety of reasons.
2. Any change in partnership ownership results in Partnership Dissolution as the

original relationship between the partners is terminated, without regard as to
whether or not the partnership will continue operations.
3. Dissolution and Liquidation should not be misunderstood to have the same

meaning.
Partnership Dissolution is the change in the original relationship of the partners

caused by any partner ceasing to be associated in the partnership.
Partnership Liquidation is the process of winding up the affairs of the partnership

and affects the interest of third parties.
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YouTube Discussion on Partnership Dissolution

https://www.youtube.com/watch?v=-ewfB-mnqhM&t=3s
33
by Patricia M. Empleo, Nenita S. Robles, and Christopher I. German, and “Accounting
for Partnership and Corporation” by Carlito V. Reyes.
3. The admission of a new partner may be necessitate by:
a) Additional capital requirements necessary for expansion of business

operations;
b) Required technical knowledge that can be provided by an incoming
partner;
c) Business advantage that can be contributed by an incoming partner on
account of the degree of his personal influence in the business environment
in which the partnership operates
4. A new partner can be admitted into the partnership by:
a) Purchasing Interest; or
b) Investing into the Partnership
5. Before recording the admission of an incoming partner, the books of a partnership

must first be adjusted and closed. Assets and liabilities, ideally, should be brought
to their fair values to determine a fair valuation for the equities of the old partners.
6. The only entry required in the books of the partnership in accounting for purchase
of interest from an existing partner is the transfer of equity of the selling partner to
the incoming partner.
The records of the partnership do not recognize the amount of payment made
by the incoming partner to the selling partner or partners, whether the transaction
results in personal gain or loss to the selling partner or partners.
7. When a new partner is admitted into the partnership through investment, the new
partner is investing his assets directly to the firm. The new partner will bring more
assets to the partnership, thereby increasing the firm’s total assets and total
partners’ equity.
8. Below procedures may be employed in the process of recording the admission of

a new partner by investment:
a) Record the assets invested (Actual Investment) by the new partner
34
b) Determine the amount of the new partner’s equity (Capital Credit) after his
admission
c) Determine transfer of equity (Bonus). If the amount credited to the new

partner’s capital account does not equal the partner’s actual contribution,
there is a transfer of equity either from the old partners to the new partner
or from the new partner to the old partners.
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1. The accounting procedures for the admission of a partner are also applied upon
the death or withdrawal of a partner.
The books of the partnership, at the date of the retirement or death of a partner,
should be adjusted to determine partnership profit or loss during the reporting
period up to the date of death or retirement of the partner.
2. The equity of the retiring or deceased partner should be settled. Depending on

what has been agreed upon, the amount of settlement may either be:
a) At carrying amount;
b) More than carrying amount; or
c) Less than the carrying amount
3. When settlement is below carrying amount and there is existing Goodwill, the
Goodwill should be tested for impairment and may be partially or fully written off.
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CASE 2
On February 14, 2020, A is retiring from the partnership of A, B & C. The partners share
profits and losses in the ration 1:2:1, respectively. On that date, a trial balance was
prepared as follows:
ABC Partnership
Trial Balance
For the period ended February 14, 2020
Cash 488,000
Accounts Receivable 250,000
Allowance for Bad Debts 12,500
Merchandise Inventory 550,000
Equipment 180,000
Accumulated Depreciation 72,000
Land 150,000
Accounts Payable 368,000
Salaries Payable 55,500
A, Capital 240,000
B, Capital 420,000
C, Capital 300,000
Sales 850,000
Cost of Sales 510,000
Operating Expenses 190,000
Totals 2,318,000 2,318,000
After closing the nominal accounts, the following asset revaluations were agreed upon
by the partners:
1) The allowance for bad debts should be increased to equal 8% of the accounts
receivables
2) The FMV of the merchandise is 29,500 higher than its book value
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3) The accumulated depreciation should be increased by 12,000

4) The FMV of the land is twice as much as its book value
The operating expenses consist of all expenses incurred from the last Statement of
Financial Position date (December 31, 2019) to the date of retirement (February 14,
2020) including adjustment for bad debts expense and depreciation expense for the
period. The partners did not make any drawings during the period.
Required:
1. Prepare entries to close the nominal accounts and to adjust the records to
reflect the assets’ fair market values.
2. Prepare a Statement of Financial Position
3. Prepare entries to record the retirement of partner A, assuming:
a) A is paid 317,500
b) A is paid 287,500
c) A is paid 332,500
TASK 1: Read selected paragraphs and/or pages from the book “Fundamentals of
Accounting” by Patricia M. Empleo, Nenita S. Robles, and Christopher I. German, and
“Accounting for Partnership and Corporation” by Carlito V. Reyes.
Watch the discussion on Partnership Liquidation by Laudeline Guevarra on Youtube -

https://www.youtube.com/watch?v=39gU5z7To2c&t
1. A partnership may be liquidated for a number of possible reasons:
a) Financial distress
b) Expiration of the term as stated in the Articles of Partnership
c) The particular undertaking or purpose of the partnership has been
accomplished
d) Mutual agreement and decision of the partners
2. Before the start of the liquidation process, only real accounts should be left open.
To do this:
a) Adjusting and closing entries must be prepared at the end of the final
operation period
b) Post closing trial balance should be prepared
c) Drawings if any, should be closed to the partners’ capital account
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d) Loan to a partner - a partnership receivable, should be subtracted from the

partners’ capital account
e) Goodwill if any, should be closed or charged to the partners’ capital
accounts insofar as it does not usually possess any liquidation value
3. The partners may agree on a special liquidation profit and loss sharing ratio to be
used in lieu of the profit or loss sharing ratio.
4. There are two types of partnership liquidation:
a) Lump sum. The liquidation is completed within a reasonably short period of

time such that all the noncash assets are immediately realized and cash is
immediately distributed to creditors and partners.
b) Installment. The liquidation process extends over a considerable period of

time because of the difficulty of converting the noncash assets into cash.
Cash is distributed to creditors and partners as it becomes available.
5. This Module discusses lump sump liquidation.
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YouTube Discussion on Partnership Dissolution

https://www.youtube.com/watch?v=39gU5z7To2c&t
by Patricia M. Empleo, Nenita S. Robles, and Christopher I. German.
1. The liquidation process involves the following steps:
i. Realization or sale of noncash assets and distribution of gain or loss on

realization allocated to the partners based on their profit and loss sharing
ratio.
ii. Payments of liquidation expenses, also to be allocated based on their profit

and loss sharing ratio.
iii. Payments should be made on liabilities to outside creditors.
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iv. Capital deficiencies, if any should be eliminated. If after the distribution of

loss on realization and liquidation expenses, a debit balance in a partner’s
capital account occurs (i.e., partner’s share on realization loss and
liquidation expenses is greater than his capital credit), this deficiency must
be eliminated by applying the following steps, in the order of priority:
a) If the deficient partner has a loan balance, exercise his right of offset
to the extent of his capital deficiency.
b) If the deficient partner is solvent, he should make additional

investment to eliminate his capital deficiency.
c) If the deficient partner is insolvent, the other partners should absorb

his capital deficiency.
v. Remaining cash should be use in final payment to partners, also in the order
of priority:
a) Partners’ loan balances
b) Partners’ capital balances
2. Each step must be recorded by a journal entry.
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Read selected paragraphs and/or pages from the book “Accounting for Partnership
and Corporation” by Carlito V. Reyes.
1. A Statement of Partnership Liquidation is also called a Statement of Realization

and Liquidation.
2. The Statement of Partnership Liquidation contains the information from each step
of the liquidation process – from conversion to cash of noncash assets and
settlement to partners.
3. The statement reflects the actual transactions that have occurred during the
liquidation period up to the date of the final settlement.
4. The statement is somehow a summary of cash inflows and outflows during the
liquidation process.
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CASE 3
Partners I, J and K share profits and losses equally. On March 31, 2020, the partners voted
to liquidate the partnership when its assets, liabilities, and capital were as follows:
Cash 77,000 Liabilities 440,000

Note receivable from K 60,500 Loans:
Other noncash assets 660,000 I 22,000
J 88,000
Capital
I 82,500
J 82,500
K 82,500
797,500 797,500
Assume the following:
a) All the noncash assets of P660,000 were sold for P297,000

b) K instructed the partnership to write off the P60,500 he borrowed from the
partnership
c) All partners could eliminate any deficits in their capital accounts through offset or
contribution, or both
d) All cash was distributed to outside creditors and partners
Required:
1. Prepare a Statement of Partnership Liquidation
2. Prepare the journal entries to record the liquidation of the partnership
79

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Adaptive Community for the Continuity of Education and Student Services

National Teachers College

Financial Accounting and Reporting 2

Student Name: Degree Program:

SOLVING CONDITIONS: Take note of the following in preparing your calculations.

WEEK TASK OUTPUT

Read pages 6 to 14 of the book “Fundamentals of Accounting” by Patricia M. Empleo,

Take note of the following:

1. The manner of organizing a partnership can be made in different ways:

a) A partnership is formed by persons with no existing business at all

5. Admission of an industrial partner is recorded in the books of the partnership

Read pages 36 to 46 of the book “Fundamentals of Accounting” by Patricia M. Empleo,

Take note of the following:

Read pages 50 to 51 of the book “.

Take note of the following:

a) Statement of Financial Position

4. The adjusted or ending partners’ capital balances in the Statement of Changes

The profit and loss agreement of the partners is as follows:

i. Interest of 10% is to be paid on their beginning capital balances;

Prepare the following financial statements:

1. Statement of Income, with a schedule showing distribution of profits

Watch the discussion on Partnership Dissolution by Laudeline Guevarra on Youtube -

Take note of the following:

1. The change in partnership ownership may be caused by a variety of reasons.

2. Any change in partnership ownership results in Partnership Dissolution as the

3. Dissolution and Liquidation should not be misunderstood to have the same

Partnership Dissolution is the change in the original relationship of the partners

Partnership Liquidation is the process of winding up the affairs of the partnership

YouTube Discussion on Partnership Dissolution

Take note of the following:

3. The admission of a new partner may be necessitate by:

a) Additional capital requirements necessary for expansion of business

4. A new partner can be admitted into the partnership by:

5. Before recording the admission of an incoming partner, the books of a partnership

8. Below procedures may be employed in the process of recording the admission of

a) Record the assets invested (Actual Investment) by the new partner

c) Determine transfer of equity (Bonus). If the amount credited to the new

Read pages 84 to 88 of the book “Fundamentals of Accounting” by Patricia M. Empleo,

Take note of the following:

2. The equity of the retiring or deceased partner should be settled. Depending on

3) The accumulated depreciation should be increased by 12,000

Watch the discussion on Partnership Liquidation by Laudeline Guevarra on Youtube -

Take note of the following:

1. A partnership may be liquidated for a number of possible reasons:

d) Loan to a partner - a partnership receivable, should be subtracted from the

4. There are two types of partnership liquidation:

a) Lump sum. The liquidation is completed within a reasonably short period of

b) Installment. The liquidation process extends over a considerable period of

5. This Module discusses lump sump liquidation.

YouTube Discussion on Partnership Dissolution

Take note of the following:

1. The liquidation process involves the following steps:

i. Realization or sale of noncash assets and distribution of gain or loss on

ii. Payments of liquidation expenses, also to be allocated based on their profit

iii. Payments should be made on liabilities to outside creditors.

iv. Capital deficiencies, if any should be eliminated. If after the distribution of

b) If the deficient partner is solvent, he should make additional

c) If the deficient partner is insolvent, the other partners should absorb

a) Partners’ loan balances

b) Partners’ capital balances

2. Each step must be recorded by a journal entry.

Take note of the following: