‘Sil S 121 B/s 715 AM 1%. € Accounting fors.. [9 @& : Parterstip Formation Chapter 1 Partnership Formation ‘Learning Objectives 77 1. Differentiate between the accounting for partnerships, sole proprietorships and corporations 2. State the valuation of contributions of partners 3. Account for the inital investments of the partners to the | partnership. 4. State the peculiar accounts used in a partnership and identify the transactions that affect these accounts. Introduction ‘A partnership is an unincorporated association of two or more individuals to camy on, as co-owners, a business, with the intention of dividing the profits among themselves. ‘The following distinguish a partnership from other types of entities fa. 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. cA 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, Characteristics of a partnership ‘a. Ease of formation ~ as compared to corporations, the formation of a partnership requires less formality. Separate legal personality ~ the partnership has a juridical personality separate and distinct from the partners. The partnership can transact and acqiite properties in itsiname:/ 2 Chapter is A, Mutual agency the partners are agents of the partnership for s an einenn ins weak a mariner may legally ‘Scanned with CamScannerformed for a limited purpose and ends when its goal is achieved. Characteristics of a partnership ‘8. Ease of formation ~ as compared to corporations, the formation of a partnership requires less formality. . Separate legal personality ~ the partnership has a juridical personality separate and distinct from the partners. The partnership can transact and acquire properties in its name: Chapter aoe 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. 4. Co-ownership of property - each partner is a co-owner of the properties 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 possess a partnership property for any other purpose without the consent of his partners. e. Co-ownership of profits ~a partnership is created as a business (@ 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 inthe profits or losses is void, (At 1798 he Cl Cle of he Pippin) f Limited life~ a partnership is easily dissolved: i. by the express will of any partner, fi, 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 an. 1880; OF v. expulsion, death, insolvency or civil interdiction of a partner. 1g. 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, Pertarip Formation ; Unlimited liability - each partner, including, industrial ones, ‘may be held personally liable for partnership debt after alll partnership .assets have been exhausted. If a partner is personally insolvent, his share in the partnership debt shall be assumed by the other solvent partners, A nartnorchin in which all nartnors are individually Hable ‘Scanned with CamScannercontribute fo ihe partnersiitp perishes before the delivery art 18308; oF v. expulsion, death, insolvency or civil interdiction of a partner. ‘g 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, Partersip Formation 4 hh. 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 insolvent, 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 lability up to the extent of their contributions to the partnership. A limited liability partnership usually has “LLP” in its name. ‘Advantages and disadvantages of a partnershi ‘Advantage Disadvantage ‘Ease of formation ‘Limited life Easily dissolved 7 Shared responsibility of [+ Unlimited liability running the business + Flexibility in decision = Conflict among partners making >Greater capital compared to | Lesser capital compared 10 sole proprietorship |__acorporation ~ Relative lack of regulation [+ A partnership (other than a by the government 26 ‘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 onthe accounting, for 4 fs ting for partnerships should also lity. In addition, the accor ann sof the Civil Code of the comply with relevant provi Philippines ‘The following are the major considerations in the accounting forthe equity ofa partnership: ote ‘Scanned with CamScanneried sole proprietorship __|_ corporation. 7 Relative lack of regulation [A partnership (other than a by the government a, genera professional compared to corporations | partnership) taxed ikea | __ 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 ‘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 forthe equity of a partnership: a. Formation - accounting for initial investments {0 the partnership . Operations ~ division of profits or losses ¢. Dissolution ~ admission of a new partner and withdrawal, 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, suchas 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 bb. the partnership has a capital of P3,000 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 partnerships legal existence begins from the execution of the contract unless otherwise stipulated Valuation of contributions of partners At. 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 shal. be made by experts chosen by current prices, the subseque ‘Scanned with CamScannerdeemed void. ‘A partnership's legal existence begins from the execution of the contract, unless otherwise stipulated. Valuation of contributions of partners. Ast. 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. Partnership Formation 5 be made by experts chosen by the partners, and according to current prices, the subsequent changes thervof 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-base! Payments that equity instruments issued for non-cash items should he valued at the fair value of the non-cash items received parallels that of Art 1787. Accordingly, all assets contributed to (and related liabilities assumed 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 valueis “the price that would be received to sellan asset or paid to transfer a liability in an orderly transaction between ‘market participants at the measurement date.” (PFS 13) When measuring the contributions of partners, the following additional guidance from the PFRSs shall be observed: ‘Type of contribution Measurement ‘Cash and cash equivalents_| Face amount (Pas?) Thentory Lower of Cost and Net realizable value (easy Each partner's capital account is credited for the fair value Of his net contribution (i.e, 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 less cost to sell and value in use,” (rAS35,ppein i shall also subsequent share in profits (1osses) ions jecount. Likewise, permanent the partner's capital account 1d to the partner's drawings rtners’ individual capital ‘Scanned with CamScanner A partner's be credited (debited) to his capital ‘withdrawals of capital are debited to ‘Temporary withdrawals may be debites ‘account. The susm ofthe balances in the PareT Oe ee ee 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 inthe partnership's books. > Recoverable amount ~ is “the higher between an asset's fair value Tess cost to sell and value in use,” (rasnppuin ‘A partner's subsequent share in profits (losses) shall also be credited (debited) to his capital account. Likewise, Prrmetent withdrawals of capital ae debited tothe partner's capiti! scout ‘Temporary withdrawals may be debited to the partner's drains ‘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 'b, Drawings accounts Receivable from/ Payable to a partner Capital and Drawings accounts Separate capital and drawings accounts are established for each partner, eg,, “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 The partner's capital account is a real account and, has a normal credit balance. Juan Bayan, Drawi Cr. ax Recurring. reimbursable costs by the partner + Temporary withdrawals during the period + Temporary funds held to be remitted to the partnership Partnership Formation The drawings account is a nominal account that is closed to the related capital account atthe end of the period. This account is a contra equity account and has a normal debt balance The partners’ capital and drawings accounts are similar to the corporate paid in capital, retnined earnings, and dividends accounts. ‘Scanned with CamScannerae reimbursable costs aid by the partner withdrawals during the period ‘+ Temporary funds ~ held to be remitted to the partnership Partnership Formation ‘The drawings account is a nominal account that is closed to the related capital account at the end of the period. This account is contra equity account and has a normal debit balance The partners’ capital and drawings accounts 3 the corporate pid in capital, retained earnings, a accounts e similar to, dividends 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 2 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 B Cash 100,000 ‘Accounts receivable 30,000 : Inventory 80,000 - Land 30,000 Building 120,000 Total 30,000 170,000 Note payable 60,000 A capital 170,000 B capital 170.000 Toval 230,000 170,000 Additional information: + Included in accounts receivable is an account amounting to 720,000 which is deemed uncollectible. ‘The inventory has an estimated selling price of *100,000 and estimated costs to sell of P10,000, * The partnership assumed a P10,000, unpaid. morigage:on the land Chapter 1 8 Sel ll © Thebuilding is under-depreciated by 925,000. There isan unpaid mortgage of P1500 on the building which Bagreed to settle using his personal funds. + The note payable i stated at face amount. A proper valuation requires the recognition of a P15,000 discount on note payable 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. | ‘Scanned with CamScannerpe ges lal Toe B, capital 170,000 Total 230,000_ 170,000 ‘Additional information: * Included in accounts receivable is an account amounting to 20,000 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.10,000, unpaid. mortgage onthe land. Chapter t Bo ee ‘The building is under-depreciated by #25000. ‘There is an fap mortgage of P1,000 onthe building which Baagreed to settle using his personal funds. ; © Thenote payable is stated at face amount. A proper valuation requires the recognition of a P15,000 discount on note payable. © 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 Solutions a B__ Parinershi Cash * 100,000 - 100,000 ‘Accounts receivable (50K-206) 30,000 - 30,000 Inventory atom thelower amount) 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 (0K-15K) (45,000) (45,000) Mortgage payable — land (10,000) (10,000) ‘Aadjusted 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: Date | Cash 700,000 Accounts receivable 30,000 Inventory i000 Tong 50,000 Building eth, Discount on note payable 15,000 Note payable | Mortgage payable oa A, Capital lero ___B,Capital S ia mata 9 Requirement (): Assume that a partner’ 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 widitinnal each cewteibusion? ‘Scanned with CamScannerLand Building Discount on note payable ‘Note payable Mortgage payable A, Capital 8, Capital Saver Requirement (6): 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 firs, let us determine if B's capital contribution has any deficiency. A capital 165,000 Divide by: Profit (loss) sharing ratio of A 0% Total 275.000 “Multiply by: B's profit (loss) sharing ratio 40% ‘Minimum capital required of B 710000 Bis 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 135,000 Divide by: Profit (loss) sharing rato of A 40% Total 357,500 Multiply by: A's profit (oss) sharing ratio 60% Minimum capital required of A 202,500 * A's capital 165,000 Deficiency in A’s capital contribution 37500 & Conclusion: Partner A shall contribute additional cash of 737,500 to make his contribution proportionate to his profit- sharing ratio. Reconciliation: ‘N's contribution (49k+173K dans cmibtion) 207-598 B's contribution ee, ‘Adjusted total contributions ae > 397,500 x 60% = 202,500 A’s adjusted contribution > 337,500 x 40% = 135,000 B's contribution ‘Scanned with CamScannerTotal — Multiply by: A's profit los) sharing ratio Minimum capital required of A A's capital Deficiency in A’s capital contribution 4 Conclusion’ Partner A shall contribute additional cash of 737,500 to make his contribution proportionate to his profit- sharing ratio. 10 Og Se oo er Reconciliation {A's contribution (6Sk +375K additonal contibaion) 202.590 B's contribution ee “Adjusted total contributions ae > 337,500 x 60% = 202,500 As adjusted contribution > 337,500 x 40% = 135,000 B's contribution Bonus on initial investments ‘An accounting problem exists when a partner's capital account is credited for an amount greater than the fair value of his contributions. 7 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 hhis contributions. In such case, the additional credit to the partner's capital (ie, 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 toa ‘bonus, the corresponding debit to the asset account must still bbe 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. Ilusteation: : = Aaand B agreed to form a partnership. A contributed 40,000 cash while B contributed equipment with fair value of P100,000. However, due to the expertise that A will be bringing to the partnership, the partners agreed that they should initially have an ‘equal interest inthe partnership capital. Requirement: Provide the journal entry to record the initial investments of the partners. Solution Actual contributions Bonus method 40,000 (140,000%50%) 70,000 100,000 -(190,000.x50%) 70,000 ‘Scanned with CamScannerIllustration: « + A.and B agreed to form a partnership. A contributed 40,000 cash while B contributed equipment with fair value of P100,000. However, due to the expertise that A will be bringing to the partnership, the partners agreed that they should initially have an equal interest inthe partnership capital. Requirement: Provide the journal entry to record the initial investments of the partners. Solution. Partnership Formation n Actual co Bonus method a 40,000 (140,000.50 70,000 B 100,000 (140,000 x 50% 70,000 Total 140,000 140,000 Date] Cash ~ T 40,000 Equipment 100,000 | ‘A, Capital (40,000 + 30,000 bens) 70,000 B, Capital 100.000-30000 bonus) _ | 70,000 § Notes: ‘© The bonus given to A, i.e,, #30,000 (P70,000 capital credit ~ 140,000 actual contribution) is treated as a reduction to the capital credit of B © After applying the bonus method, the total capital of the Parinership is still equal to the fair value of the pertners! contributions. The debits to “Cash” and “Equipment” are equal to their fair values. Only the amounts credited to the partners capital accounts have varied Dsunmary ‘Asset contribution | Liability assumed] Credit partner's ofapartner | bythe partnership | capital account > Initially recorded |> Initially recorded | > Eitherat at fairoalue at fair value fair value (no tons); b. above fair value (bonus tothe partes) below fair value (bonus to the other 2 partner(s)) ‘ ote 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 ‘Scanned with CamScannerbonus); B. above fair value (bonus tothe partner); or © below fair value (bonus A, B and C formed a partnership. Their contributions are as follows: A B a Cash 40000 10,000 100,000 yuipment 80,000 Totals 40,000 90.000 100,000 Additional information: The equipment has an unpaid mortgage of 20,000, which the partnership assumes to repay. + The partners agreed to equalize their interests. Cash settlements among the partners are to be made outside the partnership. 2 Chops 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: Mlustration 1: Cash settlement between partners | | | | j | Requirements a. Which partners) shall receive cash payment from the other partnen(s?” b._ Provide the entry to record the contibutions of the partners. Solutions: | Partnership Formation I Requirement A Partners on 40000 10,000 100,000 150,000 ‘Scanned with CamScanner‘settlements among te 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. Solutions Partnership Formation Requirement (a): A B Partnership Cah 30,000 To,400 100,000 150,000 Equipment 80,000 80,000 Mortgage payable ___20,0) —20,000)_ Net contribution 40,000 70,000 100,000 210,000 Equal interests 210K +3) 70,000 70,000 70,000 210,000 receipt payment) 30,000) 30,000 Answer: Cshall recive P30,000 from A. Requirement @): Due | Cash 150,000 Equipment 80,000 Mortgage payable 20,00 A,Capital, 70,000 B,Capital, 70,000 .Cepital 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. ‘Mlustration 2: Additional investment (Withdrawal of investment) ‘A and B agreed to form a partnership. The partnership agreement stipulates the following ‘Initial capital of P140,000. ‘© A.60:40 interest in the equity of the partnership. Acontributed 100,000 cash while B contributed 40,000 cash. Chapters “4 Poe Min toe ee gt ite adatiocal rvesten Reyuironet: Which partner shall provide ad iso: tha (or withdraw par of his investment) in onder to Bring the partners capital credits equal to their respective in equity ofthe parnership? Solution: san.o00 ! ‘Scanned with CamSeamner| 148 B/s 716 AM eu Accounting_forsS.. [Q @& : Accontributed 100,000 cash while B contributed P40,000 cash. 4 Requirement: Which partner shall provide additional investment (or withdraw part of his investment) partners’ capital credits equal to their res equity of the partnership? | in order to bring the pective interests in the Solution: ‘Agreed inal capital 140,00 A's required capital balance (140K x 60%) 84,000 B's required capital balance (140K x 40%) 56,000 ee a et 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 = 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 considérations in the accounting for the equity of pastnerships are: (a) Formation; &) Operations; (6) 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 fait value of his net contribution to the partnership. If a Capital balance i credited for an amount pesos thce oe fae than the fair value of his net contribution, there is bonus. Under the bonus method, any inerease (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 partnershij | | a 2 Partnership Formation 1B PROBLEMS ‘Scanned with CamScanner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 preven _connbutons othe panty Parnes Partnership Formation 5 PROBLEMS PROBLEM 1: TRUE OR FALSE 1, The accounting for the assets and liabilities of a partnership business is different from that of a sole proprietorship or a corporation. 2. A partnership is relatively easy to form but also easy to dissolve. 3. -Mr. A contributed land with historical cost of PIM and fair value of P2M to a partnership business. Mr. A’s contribution shall be valued at PIM in the partnership books. 4. A bonus given to a partner is treated as a reduction to the capital account(s) of the other partner(s) 5. Ms. B contributed equipment with carrying amount of P100 and fair value of 200 to a partnership. No bonus is given to any partner. In the partnership's books, equipment is debited for P200 but B's capital account is credited for P100. 6. Mr. C contributed land with fair value of PIM to a partnership, The land has an unpaid mortgage of 2M which the partnership agreed to assume, The valuation of Mr. C’s net contribution is P1.2M. Fact pattern: Mr. D and Ms. E formed a partnership. D contributed #200, while E contributed P100, The partners’ respective interests in the partnership are 60% and 40%. The initial credits to the partners! capital accounts are to be adjusted using the bonus method to reflect the partners’ respective interests, 7. ‘The balance of D's capital acount after the formation is P180. 8. The bonus given to E is P40. Fact patter Piw and Pie agreed to form a partnership. Pw contributed cash of 200 while Pie will be contributing her expertise. The partnership agreement stipulates that Piw and Fie shall have equal interest 16 ip and in subsequent both the initial capital of the partnershi partnership profits and losses, “9, The cash contribution of Piw shall be debited for F200 but the net credit to Piw’s capital account shall be P100. 10, Immediately after partnership formation, the balance of Pie's capital account is zero. ‘Scanned with CamScannerCe ee eee eee reflect the partners’ respective interests 7. The balance of D's capital account after the formation is P180 8. The bonus given to E is P40. Fact pattern: iw and Pie agreed to form a partnership. Piw contributed cash of 200 while Pie will be contributing her expertise. The partnership 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 F200 but the net credit to Piw’s capital account shall be P100. 10. Immediately after partnership formation, the balance of Pie's capital account is zero. PROBLEM 2: MULTIPLE CHOICE - THEORY x 1, The asset contributions of partners to a partnership are initially measured at a. fair value «tax basis. 'b. original cast to the partner. d. any of these 2..Mr. I and Mr. M formed a partnership business. Mr. T contributed equipment with fair value of P2M. However, the partners agreed that Mr. I's capital account should be credited for P22M. Which of the following statements is correct? a. The P.2M excess credit is treated as a bonus to Mr.M. b. Mr. M is probably bringing in expertise or special skill to the business Mr. M’s capital account will be debited for P2M. d. This is unacceptable. Mr. Is capital credit should be P2M. | 3. Under the bonus method, any increase or decrease in the capital credit of a partner is a. deducted from or added to the capital credits of the other partners. ». recognized as goodwill recognized as expense, 4, deferred and amortized to profit ot loss 4. Under the bonus method, the asset contributed by a partner receiving a bonusis a. debited at an amount greater than the asset’ fair value. b. debited at an amount jess thanthe assets far vale: Partnership Formation 7 debited at an amount equal to the asset's fair value d, either aorb 5, Mr. X and Mr. Y agreed to form a partnership. The fair values of the partners’ net contributions vary; however, the partners ‘Scanned with CamScannerae ee b. « 4. ‘deducted from or added to the capital credits of the other partners. recognized as goodwill recognized as expense. deferred and amortized to profit or loss. 4, Under the bonus method, the asset contributed by a partner receiving a bonus is b. debited at an amount greater than the asset's fair value. debited at an amount ess thanthe assets fair value: debited at an amount equal to the asset's fair value d. either aorb Mr. X and Mr. Y agreed to form a partnership. The fair values of the partners’ net contributions vary; however, the partners agreed to have equal capital credits. Cash settlement shall be ‘made between them for the difference. Which of the following statements is correct? a. The asset contributions of the partners shall be debited for equal amounts. b. The cash settlement between the partners will either inrease or decrease the total partnership capital The cash settlement between the partners will not be recorded in the partnership books. d. Mr. X shall pay Mr. ¥ to have their capital balances equal. PROBLEM 3: EXERCISES 1, Sunny and Gloomy contributed the following in the formation of a partnership business: Gloom, Cash 180,000 - Accounts receivable 100,000 - Inventory 160,000 : Land (at historical cost) 340,000 Total 440,000__ 340,000 ‘Additional information: * Only 60% of the accounts receivable is recoverable. * ‘The net realizable value of the inventory is P120,000. Sunny acquired the inventory on account; the partnership will assume the unpaid balance of P60,000. ‘+The land has a fair value of 600,000. Requirement: Provide the journal entry, Chapter Fe 2. Use the information in praben 1. Sunny and Gloomy 9Breed to share in profits and losses based on a 30:70 ratio. A Pa with deficient contribution shall provide additional cash in order for his capital balance to reflect his profit and loss ‘Scanned with CamScanner——————— Total 440,000__ 340,000, Additonal information: Only 60% of the accounts receivable is recoverable, ‘The net realizable value of the inventory is P120,000. Sunny ‘acquired the inventory on account; the partnership will assume the unpaid balance of P60,000. ‘The land has a fair value of P600,000. Requirement: Provide the journal entry. Cater el 2. Use the information in problem 1. Sunny and Gloomy agreed to share in profits and losses based on a 30:70 ratio. A partner with deficient contribution shall provide additional cash in order for his capital balance to reflect his profit and loss sharing ratio. ‘Requirement: Provide the entry to record the additional investment of the partner with deficient contribution. 3. Use the information in problem 1. Sunny and Gloomy agreed to have equal credits to their capital accounts. The bonus method shall be used. Requirements: a. Provide the compound journal entry. b, Provide the simple journal entries. 4. Use the information in problem 1. Sunny and Gloomy agreed to brave equal credits to their capital accounts. Cash settlement is to be made between the partners for the adjustments on their capital balances. Requirement: Describe how the cash settlement should be made and how it would be accounted for in the partnership books. 5. _Use the information in problem 1. Sunny and Gloomy agreed to have equal credits to their capital accounts, Additional investment or partial withdrawal shall be made by a partner from the partnership for any adjustment to his capital balance. Requirement: Which partner should make an additional investment and which partner should make a withdrawal? Porterstip 9 PROBLEM 4: MULTIPLE CHOICE - COMPUTATIONAL 1. Twinkle, Sheep and Bus formed a partnership. Twinkle contributed cash of PRION hoon enntribuited eauinment ‘Scanned with CamScannerhave equal credits to their capital accounts. Additional investment or partial withdrawal shall be made by ; ade by a partner from the partnership for any adjustment to his capital balance. ‘Requirement: Which partner should make an additional investment and which partner should make a withdrawal? - Pertnersip Formation 9 PROBLEM 4: MULTIPLE CHOICE - COMPUTATIONAL 1. Twinkle, Sheep and Bus formed a partnership. Twinkle contributed cash of 80,000. Sheep contributed equipment with historical cost of P700,000, carrying amount of P180,000, and fair value of 90,000. Bus contributed building with historical cost of P1,000,000, carrying amount of P480,000, and fair value of 690,000. The partnership will assume the unpaid mortgage of P580,000 on the building. Which partner has the largest capital account balance on partnership formation? a. Twinkle © Bus b. Sheep . None, all are equal 2. Hammer and Nail formed a partnership. Hammer contributed equipment with original cost of 370,000 and fair value of £300,000 while Nail contributed cash of P180,000. Hammer and Nail agreed to have a 60:40 interest in the partnership and that their initial capital credits should reflect this fact. A partner's capital account should be increased accordingly by way of additional cash investment. Which of the partners should make an additional investment and by how much? a. Hammer, P20,000 Hammer, 70,000 b. Nail, P20,000 4. Nail, P70,000 3. Mike and Mario agreed to form a partnership. Mike contributed equipment with carrying amount of 100,000 and fair value of P70,000, while Mario contributed cash of 1P200,000. The partners agreed to have a profit sharing ratio of 2:1, respectively. The initial credits to the partners’ capital ‘accounts shall reflect this fact. Under the bonus method, how much is the balance of the capital account of Mario immediately after the partnership formation? a. 90,000 ©. 135,000 b. 200,000 70,000 4. Abel and Carr formed a partnership and agreed to divide initial capital equally, even though Abel contributed 100,000 ple assets. Under the onus approach to adjust the capital accounts, Carr's ‘unidentifiable asset should be debited for a. 46,000 8,000 b. 16,000 ao and Carr contributed 84,000 in identifial ‘Scanned with CamScanneree ee ee oe 1P200,000. The partners agreed to have a profit sharing ratio of 2:1, respectively. The initial credits to the partners’ capital accounts shall reflect this fact. Under the bonus method, how much is the balance of the capital account of Mario immediately after the partnership formation? a. 90,000 135,000 . 200,000 4.70000 [Abel and Carr formed a partnership and agreed to divide initial capital equally, even though Abel contributed 100,000 Chapter mo iy Dole assets. Under the ‘and Carr contributed 84,000 in identifiat ie bonus approach to adjust the capital ‘unidentifiable asset should be debited for a. 46,000 8,000 b. 16,000 ao carceay 5. A and B agreed to form a parmership. The partnership agreement stipulates the following: ‘© Initial capital of 300,000. + 425:75 interest in the equity ofthe partnership. ‘A contributed P100,000 cash, while B contributed P200,000 cash. Which partner should 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? ‘a. A shall provide additional capital of P25,000. b, B shall withdraw capital of P25,000, B shall make an additional investment of P25,000. d. No additional contribution or withdrawal shall be made. PROBLEM 5: CLASSROOM ACTIVITY INSTRUCTIONS: 1, Finda study partner. 2. Imagine that you and your study partner are entrepreneu and have agreed to form abusiness partnership. 7 3, Read the facts below and answer the succeeding requirements ‘Your contributions are as follows Partner Partner? Cash Accounts receivable Land Partnership Formation Building, Accounts payable Notes payable Capital 250,00 1,900,000 430,000 1/900,000 1.250.000, 21 2,000,000 330000 400,000 50,000 300,000 1,900,000 ‘Scanned with CamScanner‘and have agreed to form a business partnership, 3. Read the facts below and answer the succeeding requirements. ‘Your contributions are as follows: <->. $$ fain Partner? sccuns res ace aananl ccounts rece on pogoeo = 1,250,000, [ ; Partnership Formation 2 Building 2.000.000 ‘Accounts payable sano 400,000 Notes payable 540,000 Capital 3,600,000 1,900,000 ‘Additional information: ‘The cash contribution of Partner 1 as listed above is the peso equivalent of 6250 foreign currency units (FCU). The current exchange rate is P45: FCUL. # Partner 2's account receivable should be written down by 200,000 + Theland has an appraised value of P1,500,000 ‘The building has an appraised value ofPI40,000. ‘Attached to the building is an unpaid mortgage of 800,000. Partner 1 agrees to settle this mortgage immediately using hishher personal funds. + There is a pending lawsuit over Partner 1's contributed properties ~ a claim by a third party. A discussion with Partner 1's legal counsel reveals that it is probable that the plaintiff will accept an out of court setlement of not less than 'P300,000, The partnership shall assume the obligation of paying the plaintif. + There are unpaid real property taxes on the properties contributed by Partner 1 amounting to 40,000. The partners agreed that the partnership shall assume those obligations. +The notes payable is stated at face amount. An inspection of the related promissory note reveals that the note is a S-year noninterest bearing note issued 2 years ago and requires a ump sum payment at maturity date. The current rate is 10%, Requirements: a. Compute for adjusted balances of your capital accounts. b. Provide the entry to record your contributions in the Partnership books. vv uyeray nt canton avn fe et agate) Variation #1: ‘You and your partner agree that one of you is significantly cuter than the other. You determined that that cuteness will bring, good ‘you decided to have your feng shui to the business. Accordingly, ae ‘capital accounts credited at equal amounts. No cash additional investments will be made. ‘Scanned with CamScannerthe related promissory note reveals that the note is a 5-year nor-interest bearing note issued 2 years ago and requires a ump sum payment at maturity date. The current rate is 10%. Requirements: a. Compute for adjusted balances of your capital accounts. b. Provide the entry to record your contributions in the partnership books. Ya mayer may ms ston anf hemes eee) Variation #1: is significantly cuter ‘You and your partner agree that one of you is signi 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 cash settlements or additional investments will be made. Requirements: a, How much is the bonus? (do not omit ceniaves) b. Which partner receives the bonus (i.e. the cuter partnes)? Explain briefly how the bonus will be accounted for in the partnership books. d. Provide the entry to record your contributions in the partnership books. Variation #2: ‘You and your partner agreed that one of you is significantly hotter than the other. However, you determined that that hotness will not bring any good to the business. Accordingly, you decided to equalize your interest and make cash settlement for the difference among yourselves. No additional investment or withdrawal of investment shall be made. Requirements a. Which partner shall receive cash payment from the other partner? (do not omit centavos) b. Explain briefly how the cash receipt/ cash payment will be accounted for in the partnership books. ¢. Provide the entry to record your contributions in the partnership books. Variation #3: You and your partner agreed that both of you are equally beautiful and that your respective interests in the partnership must be equal. You agreed that a partner’s capital shall be Partnership Formation increased accordingly by contributi both your capital balances proporti Requirement: Which partner shall make the additional cash ‘Scanned with CamScannera ¢. Provide the entry to record your contributions in the partnership books. Variation #3: You and your partner agreed that both of you are equally beautiful and that your respective interests in the partnershiP rust be equal. You agreed that 2 parter's capital shall be 37/611 Partnership Formation increased accordingly by contributing additional cash o bring bboth your capital balances proportionate to your equity interest Requirement: Which partner shall make the contribution and by how much? Variation £4: ‘You and your partner agreed that both of you are equally ‘gorgeous and that your respective interests in the partnership ‘must be equal. You agreed that the initial capital of the business should be equal to the fair value of your net asset contributions. You further agreed that a partner should provide additional investment (or withdraw part of his investment) in order to bring, both of your capital credits equal to your respective interests in the equity of the partnership. Requirement: Which partner(s) should provide additional investment (or withdraw part of his/her investment) in order to bring both your capital credits equal to your respective interests in the equity of the partnership? (do not omit centavos) PROBLEM 6: FOR CLASSROOM DISCUSSION Valuation of contributions of partners 1. Ms. Sun and Ms. Moon formed a partnership. Their contributions are as follows: ‘Mr. Sun Ms. Moon Cah 400,000 - Accounts receivable 250,000 : Land, 750,000 Equipment 180,000 Total 650,000 __ 1,130,000 ‘Additonal information: ‘+ Only 80% of the accouits feceivable is dened collectible: ‘+ The land is stated at original cost. The fair value is F1,000,000, ‘The partnership assumes a P250,000 unpaid mortgage on the land. '* Ms. Moon acquired the equipment on a long-term financing basis. Ms. Moon promised to pay the unpaid principal balance of P80,000 using her personal funds. The equipment is under. ‘Scanned with CamScannerPROBLEM 6: FOR CLASSROOM DISCUSSION Valuation of contributions of partners 1. Mr, Sun and Ms. Moon formed a partnership. Their contributions are as follows: ‘Mr. Sun Ms. Moon Cash 400,000 - Accounts receivable 250,000 : Land 750,000 quipment 180,000 Total 650,000__ 1,130,000 Additional information: + Only 80% of the accouftsveesivables deemed collectible ‘© The land is stated at original cost. The fair value is P1,000,000, ‘The partnership assumes a 250,000 unpaid mortgage on the land. ‘+ Ms. Moon acquired the equipment on a long-term financing basis, Ms. Moon promised to pay the unpaid principal balance (of P80,000 using her personal funds. The equipment is under- depreciated by P30,000. Requirement: Provide the journal entry to record the partner's ‘contributions. 2, Use the information in problem ‘I’. The partners agreed to share in profits and losses equally. A partner should make an ‘additional contribution in order for the partners’ capital balances to reflect the partners’ equal interests in the partnership. Requirement: Which partner should make an additional contribution and by how much? Bonus on initial investments 3 Use the information in problem “I”. However, assume that the partners agreed to have equal interests in the partnership's equity and profit and losses. The partners’ initial capital credits should reflect this agreement using the bonus method. Requirement: Provide the journal entry to record the partner's contributions. Variation to bonus method ~ cash settlement between partners 4. Use the information in problem “V’. However, assume that the partners agreed to have ther capital accounts initially credited at equal amounts. Cash settlement shall be made between the partners. Partnrsp ‘Scanned with CamScannerDartnership Formation _ —— EE contributions. Variation to bonus method - cash settlement between partners 4. Use the information in problem "Y. However, assume thet the partners agreed to have ther capital accounts initially credited at equal amounts. Cash settlement shall be made becsrcen the partners 39/611 Requirements: b Provide the compound journal entry to record the partner's contributions, Provide the simple journal entries to record the partner's contributions. ‘Variation to bonus method ~ additional invest ment/withdrawal 5 Use the information in problem ‘1’. However, assume that the partners agreed to have their capital accounts initially credited at equal amounts. A partner shall provide additional investment (or withdraw part of his investment) in order to ‘equalize the balances of the partners’ capital accounts. Requirement: Which partner shall make an additional investment and which partner shall withdraw part of his/her investment? r upter2 pe a PON aes ee, Chapter 2 Partnership Operations a> ‘Scanned with CamScanner