PARTNERSHIPS PARTNERSHIP FORMATION

- “By the contract of partnership two or more - Valuation of partner’s contribution

persons bind themselves to contribute
money, property of industry to a common
fund, with the intentions of dividing the
profits among themselves.”
- Two or more persons may also form a
partnership for the exercise of a profession
- Governed by LAW
ACCOUNTING FOR PARTNERSHIP ENTITIES
- Transactions entered into by the partnership
1. FORMATION
2. OPERATIONS – alive and operational
business (P/L)
3. CHANGES IN AGREEMENT – resulting in
dissolution, changes in ownership (dagdag
or alis of owner)
4. LIQUIDATION
- “Like a sole proprietorship, but with multiple
capital accounts (each owner has 1)
- A=L+E
a. Recognition – “is there a recordable
transaction?”
b. Measurement – “if yes, how much?”
- Measurement if based on agreed values.
(Because partnership is still a contract)
ASSETS CONTRIBUTED
- Cash
a. Measurement will be face amount
- Non-cash
b. Measurement will be agreed values first,
then fair value or appraised value (must
always be subject to agreement of
owners)
EXAMPLE: Inventory – agreed value = P
50,000 | fair value = P 45,000
ANSWER: Agreed value must prevail but
you can encourage them to use the FV.
SERVICES CONTRIBUTED
- Agreed values must prevail.
- Usually is based on Fair Value.

LIABILITIES ASSUMED
Partner, Capital - Pinapasa yung liability from the partner to the
Investments partnership
Share in loss Share in Net Income
- All of these must be agreed upon by the
Permanent
partners.
Withdrawals
Cash 50 (25, 25)
Partner, Drawing Inventory 120 (120, 0)
Temporary Withdrawal A/R 30 (0, 30)
- Anticipation of A/P 10 (10, 0)
NI Partner 1, Capital 135
Partner 2, Capital 55

CREDITOR RELATIONSHIP
(Kung ano ang tigcontribute, yun ang credit ng
- Sometimes, partners can be CREDITORS. (The
partner).
partners will not view themselves as owners,
but creditors)
- Pwede si partner magpautang at mangutang
PARTNERS’ CAPITAL CREDIT
sa entity.
- If partner lends, the entity has an obligation to - Follow the agreement
pay. (Loan Payable to partner)
METHODS TO ACHIEVE AGREED CAPITAL CREDIT:
- If partner borrows, the entity has a receivable
from the partner. (Loan Receivable to partner) 1. Bonus Method
- Can impose interest. (Interest income, - reassignment of capital
interest expense) - one capital partner’s decreases, the other one
increases
- total partnership assets is the same, will not change
2. Investment/Withdrawal
- adjustment by net assets in order to achieve the OTHER STIPULATIONS
agreed capital 1. Salaries
Example: - Payment for the partner in exchange of
Partner 1: 135 -> 95 (withdraw 40) rendering services for the partnership
Partner 2: 55 -> 95 (invest 40) Ex: pinapasweldo si partner because manager
or industrial partner
- Basis could be annual, monthly (always
PARTNERSHIP OPERATIONS consider fractional years X/12)
- Designed to reward the industrial partner
- Revenues
- Expenses 2. Interest (on the capital of the partners)
- Income Summary - Partner’s Interest = pertains to agreed capital
- Designed to reward the capitalist partner
In terms of Revenues and Expenses, there is no - Basis for capital = beg, end, weighted average
distinction between the operations of partnership and - best agreement
of sole prop/corp.
COMPUTING FOR WEIGHTED AVERAGE
The difference is the distribution of income summary  Beg. capital balance of partner * (no. of
to the partners’ balance. months the capital is outstanding/12)
 Add: additional investments of partner *
DISTRIBUTING P/L TO THE PARTNERS (no. of months the investment is
outstanding/12)
- Follow the agreement. If no agreement,  Less: permanent withdrawals * (no. of
original capital contributions of each partner months remaining till the end of the
must be followed without prejudice with the year/12)
industrial partner. No individual partner must
be exempted in the agreement. 3. Bonus
- Only given if the conditions for bonus is met
Scenari (Good performance in terms of revenues or
Profits Losses What to do? good net income)
o
Follow the - Based on net income (Bonus only will be given
1 Agreed Agreed if NI is positive amount)
agreement
a. BEFORE: Salaries, Interest, Bonus (IGNORE
If profit, follow
the amounts)
agreement; if
Ex: 600,000 x 20% = 120,000
loss, follow
b. AFTER: Salaries, Interest, Bonus
distribution as
2 Agreed Silent (DEDUCTED from Net Income figure to get
if profit (except
the basis)
for industrial
Ex. 1: 600,000 – sal = basis x 20%
partner must
Ex. 2: 600,000 – sal – int – bonus =
be exempted)
basis x 20%
Agreement is
HOW TO COMPUTE?
void; follow
Given: NI = 600,000
original capital
Sal = 5,000
3 Silent Agreed contributions
Int = 10,000
(with respect to
Bonus = ?
the industrial
Rate = 20%
partner)
Follow original
Bonus = [ NI – S – I – B ] * 20%
capital
= [ 600K - 5K – 10K – B ] * 20%
contributions
4 Silent Silent = [ 585K – B ] * 20%
(with respect to
= 117K – 0.2B
the industrial
1B + 0.2B = 117K
partner)
Bonus = 97,500
 STEPS IN LIQUIDATION
1. Distribute P/L to all partners
2. Make a proper accounting of your assets,
PARTNERSHIP DISSOLUTION liabilities, and equity (updated capital
- Admission or retirement of partners balances)
- Use assets to pay liability and the remaining
a. Admission of new assets will be distributed to the partners
i. Incoming - If assets is not enough to pay the liabilities,
ii. Existing the bank can compel them to pay off their
debts
b. Retirement of existing
i. Outgoing STATEMENT OF REALIZATION AND LIQUIDATION
ii. Remaining/continuing

ADMISSION
A = L + E
rd
1. Purchase of interest Cash NCA 3 party liab Cap 1 Cap 2
- No equivalent investment from the incoming
partner because he will only buy from the  Before any cash to partner, pay off all
existing partnership liabilities.
- Personal transaction between partners,
partnership is not involved in actual price Partnership & partner loans:

2. Investment of partnership ASSET LIABILITY

- Full equivalent of formation Receivable from partner Payable to partner
- The incoming partner will contribute personal Loan to partner Loan from partner
assets in the partnership (assets of Due from partner Due to partner
partnership will increase)

STEPS TO FOLLOW IN ADMITTING NEW PARTNER: PROCEDURES:

1. Distribute P/L to existing partners 1. Update partner’s capital balances
- To avoid giving to new partners 2. Sell NCA = gain or loss
2. Old partnership’s net assets is revalued 3. Pay liabilities in full
- At fair value 4. Additional Contributions
- Will probably have gain or loss due to 5. Distribute remaining cash to partners
revaluation, which will be distributed to old
partners only by their P/L agreement TOOLS FOR INSTALLMENT LIQUIDATION:
3. Admit new partner I. Schedule of Safe Payments
1. Compute total partner interest
RETIREMENT = Capital ± loan
1. Purchased by remaining partners 2. Maximum possible loss
- No decrease in the partnership assets, just = Unsold non-cash assets + cash withheld
redistribution of capital 3. Deficiency (as if insolvent, absorbed by other
- Purchased by the personal assets of partners partners)
4. Distribute to partners (to partner/s with
2. Purchased by partnership itself positive balance)
- Partnership assets will decrease
II. Cash Priority Program
PARTNERSHIP LIQUIDATION 1. Total Partner Interest
- Dissolution vs. liquidation = in dissolution, the 2. Loss Absorption Balance
business continues, the number of partners is = Total Partnership Interest / P/L
only changing. In liquidation, there is sale of 3. Compute Priorities
assets, payment of liabilities and distribute 4. Distribute to Partners
equity
- Full termination of the business of the
partnership
 iii. Settle partially secured liabilities
iv. Settle the unsecured liabilities w/o
CORPORATE LIQUIDATION priority
4. Distribute remaining assets (cash) to
i. Formation – Incorporation shareholders
ii. Operations
a. subsequent issuance STATEMENT OF AFFAIRS
b. repurchase of shares - Presents the assets and liabilities in their
c. dividends – declaration, record, proper classification and updated
payment measurement bases
d. share dividends, share splits ASSETS = NRV
e. reorganization LIAB = Maturity Value (Principle debt +
iii. Liquidation Interest)
- winding-up of business - Computes the estimated deficiency (Assets
- realization of assets to settle liabilities less Liab); estate deficit (shareholder’s equity)
- return of investment back to owners
(shareholders)
- applicability of PFRS & GAAP (Going concern) ASSETS
- corporation as a legal person (vs Sole
Proprietor & Partnership) A1. Pledged to Fully Secured Creditors
- applicability of insolvency law
- NRV of Asset > Liability
PARTNERSHIP CORPORATION - It means, the asset is enough to pay the full
Liability of amount of liability
Unlimited Limited
owners
A2. Pledged to Partially Secured Creditors
FV/net
Measuremen FV/net realizable
realizable - NRV of Asset < Liability
t basis value
value - It means, the liability can only recover a
Statement of portion of its amount because the asset is not
Statement of
Financial Realization enough
Realization and
report and
Liquidation
Liquidation A3. Free Assets – assets in the corporation not
Payment to pledged to specific liabilities
creditors
Payment to LIABILITIES
a. Statement
Computation partners
of Affairs
focus a. CPP L1. Fully-secured Liability (FSL)
b. Est.
b. SoSP
Recovery L2. Partially-secured Liability (PSL)
Percentage
Classification Cash vs. L3. Unsecured Liability with Priority (USL w/)
Pledged vs Free
of ASSETS Noncash
a. Administration and Liquidation
Secured vs
Expenses
Classification Unsecured
3rd parties b. Salaries and wages of covered
of LIABILITIES With vs Without
Priority employees
Classification Total shareholder’s c. Taxes
Per partner d. Customer deposits
of EQUITY equity
L4. Unsecured Liability without Priority (USL w/o)
The Liquidation Process: ESTIMATED RECOVERY PERCENTAGE
1. Close the accounts - Represents the expected amount that can be
2. Prepare the statement of affairs; classify A&L received per peso of unsecured liability w/o
3. Realize the noncash assets, pay liabilities: priority (USL w/o)
i. Settle the liabilities w/ priority - Creditors want a high ERP
ii. Settle the fully secured liabilities
ERP
= A3 + (A1 - L1) – L3 * Total Free Assets

L4 + (L2 - A2)
= Free assets + (FSC – FSL) – USL w/
USL w/o + (PSL – PSC)

= Net Free Assets

Total USL w/o priority
PAYMENTS TO CREDITORS AS TO PRIORITY:

i. USL w/ priority
= in full (100% of Liability)

ii. Fully Secured Liability

= in full (100% of Liability)

iii. Partially Secured Liability

= A2 + [(L2 – A2) x ERP]

iv. USL w/o priority

= L4 x ERP

TOTAL: NRV of Assets


PFRS 15 – REVENUE FROM
CONTRACTS WITH CUSTOMERS
Long-term Construction Contracts
- More comprehensive; for all industries i.e.
goods, services, mix, other complex business
models
5 STEP MODEL
i. Identify the contract with the customer
ii. Identify the performance obligations
iii. Determine the transaction price
iv. Allocate the transaction price to the
performance obligation
v. Recognize revenue when (or as) a
performance obligation is satisfied
1st step – THE CONTRACT AND THE CUSTOMER
- Contract must have 5 elements:
a. Agreement
b. Enforceable rights and obligations
c. Payment terms
d. Commercial substance
e. Probable collection of payment
 if 1 element is missing, there is no
contract
 contract can be written, oral, or implied
- Customer
a. Purchaser of goods/services
b. Output of business activities
c. Consideration
2nd step – THE PERFORMANCE OBLIGATIONS
- Construction of an asset(s) that are closely
interrelated or interdependent in terms of
their design, technology, function, or their
ultimate purpose
- To transfer goods/services to the customer
- Performance obligation is the basic unit of
account. Examples:
a. Sale of goods
b. Provision of services
c. Creating an asset
d. Granting rights to use or access
intangibles (Franchise Revenue)
 For contracts with Multiple performance
obligations, assess:
a. Are the performance obligations
DISTINCT*?
DISTINCT
I. Customer can benefit from the G/S on
its own, or together with other
resources readily available to the
customer (Can stand alone)
II. Separately identifiable in the contract
(not an input, not highly
interdependent, does not modify
another G/S)
3rd step – THE TRANSACTION PRICE
i. Fixed Price Contracts
- Contracts that are immediately given
ii. Cost plus Contracts
- Contracts negotiated by 2 types:
a. Fixed fee (Cost of Construction + Fixed fee
charged by the contractor)
b. Variable fee
Other issues that may affect the transaction price:
- Variations in work
- Incentives & penalties
- Reimbursable costs
 They must be probable to collect and
could be measured reliably in order to
consider these 3.
4th step – ALLOCATION
5th step – REVENUE RECOGNITION
 Revenue over time if any are met:
a. Receipt and consumption
b. Create/enhance an asset controlled
by customer
c. Asset with no alternative use and
right to payment
 Measure of progress
a. Output
o Surveys of work
o Contractor estimates
o Units produced
b. Input
 o Cost incurred (most common Example:
measure)
o Resources expended Costs incurred:
o Hours expended Construction Asset xx
Cash xx
Payable xx

Cost-to-cost method of measuring progress Transferred to customer:

PoC = Costs incurred to date
Total Cost @ Completion Cash xx
A/R xx
= Cost, year + Cost, year + Cost, year… Revenue xx
(Cost, year + Cost, year…) + Cost to Complete
Cost of Construction xx
*Accumulated Actual Costs Construction Asset xx
*Same with the numerator
*Estimate/Intended for the future
CIP
Revenue, to Date = Contract Price x PoC Construction in Progress (equiv. to Contract Asset)
Revenue, for the year = RTD, current – RTD, prior
- A measure of the entity’s performance
Costs Incurred to Date = Cost, current + Cost, prior - Composed of costs incurred to date and the
Cost incurred for the year = Costs as incurred cumulative recognized of profits/losses
 Components are: - Dumping ground account for costs and
- DM used (DM purchased, no alternative use) earning revenue
- DL
- OH CIP = CITD + GPTD
- Cost of moving materials to and from contract = Rev, to date
site
- Costs reimbursable from the customer Shortcut:
- Depreciation of PPE used in construction  Contract price x PoC
 (Contract price x PoC) – [LTD x (1 – PoC)]
Gross Profit, to date = Estimated Profit x PoC or TC@C c PoC – LTD
*Contract Price – TC@C
= Revenue, to Date – Cost incurred to date
PB
Loss, to Date = Contract Price – TC@C Progress Billings (equiv. to Contract Liability)
 Recognized in FULL and not subject to PoC - Represent dealings accdg to the agreement
- Comprised of amounts billed for work done
Gross Profit, for the year = GPTD, current – GPTD,
prior If: CIP > PB ; there is contract asset
= Revenue, for the year – Cost incurred, for the year CIP < PB ; there is contract liability

*What if progress can’t be measured? PB = CP x PoC

- Recognized revenue to the extent of
recoverable costs incurred Journal Entries:
- Zero profit method because: *Costs incurred for construction:
Cost, for the year = Revenue, for the year
CIP xx
* What if the revenue of the contract doesn’t qualify RM inv xx
as revenue over time? Salaries Payable xx
- As if “sale” OH xx
- Use the default treatment of revenue which is Payables xx
at a point in time (recognized upon transfer of Cash xx
asset to customer)
*Customer billed for work done:
A/R xx
PB xx

*Recognize revenue, costs, and profit for the period:

Costs of construction xx (expensed for the period)
CIP xx (Gross Profit)
Revenue xx (earned for the
period)
*Collection of cash for work billed:
Cash xx
A/R xx

*Collection of cash as advance from customer:

Cash xx
Advances from customer/Contract Liability
xx

*Transfer of constructed asset to customer:

PB xx
CIP xx

*Doing it at year end, closing entry to recognize

contract asset/liability:

PB xx
Contract Asset xx
CIP xx
Contract Liability xx

*Upon completion of construction, then:

PB = CIP = Revenue = Contract Price

 These 4 accounts must be equal