Ps ge wns intron fe ban, Parner aration 1 Chapter 1 Partnership Formation ‘earing Ofectvs Differentiate between the accounting for partnerships, sole propritorships and corporations. State the valsation of contributions of partners. Account forthe inital investments of the partners to the partnership, 4. State the pecllar accounts used ina partnership and identi | the transactions that affect these account. Introduction | partnership isan unincorporated association of two oF more Individuals to carry on, as coowners, a business, with the intention of dividing the profits among themes. The following distinguish a partnership from other types of entities 8. A purtnership is owned by two or more individual, while a sole proprirship is owned by only on individual b. A partnership is created by agreement between the partners ‘while a corporation oe capeative is created by the operation of law 6. A partnership ig formed for a business undertaking that is normally of continuing nature, while joint venture may be formed for a limited: purpose and ends when its goal is achieve. (Characteristics ofa partnership 1. Ens of frmation ~ as compare to corporations, the formation ofa partnership require les formality. b. Separate legal perionalty ~ the partnership has a juridical personality seperate and dliting from the partners. The partnership can transact and acquire properties ints name.Parte oration 3 _Matua agency ~ the partners are agents of the partnership for the purpose of is Business. As such a partner may legally bind the partnership toa contractor agreement that sin ine ‘with the partnership's operations CCouwnership of property ~ each partner is a co-owner of the ‘properties invested in the partnership and each has an equal Fight with his partners to posses specific partnership property for parinership purposes However, pariner has no right to postess partnership property for any other purpose without {he consent of his partners CCoctnership of profits ~ a partnership ie created aa business (@ profitorented ent), as such, each partner i entiled to Fis share in the partnership profi. A stipulation which excludes one or mote partners from any share in the profits or oases is vid Ae om ft Cit Cate be Pag Limite fea partnership is easly dissolved: i. by the express will of any partner, fi by the tenmination of a definite term stipulated in the iby 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 v. epulion, dest innuvency oF clei! interdiction of a patter. “Transfer of ounerhip ~ incase of dissolution the transfer of ‘ownership, whether #0 a new or existing partner, requires the approval of the remaining partners 1 Uninited labitty ~ each partner, including industrial ones, ‘may be held personally lable for partnership debt afterall partnership assets have been exhausted. If e partner is ersonally insolvent, his share in the partnership debt shall be sssumed by the other solvent partners >A partnership in which all partners are individually Hable Iscalled a general partnership. > A partnership in which at least one partner is personally liable i called a linia partnership. A Hmited partnership indudes at least one general partner who maintains ‘unlimited ibility, The thers, called limited partners, may Lint their ability wp to the exten oftheir cantrbutions the partnership. limited lability partnership usually has LLP" inits name. ‘Advantages and disadvantages of partnership ‘Adcantage Disadoanta 7 Ease of formation + Limited lie Easily dissed 7 Sharedesponsibily of |» Unlimited lability running the business 7 Flexibility in decision” | + Conflict among partners making + Greater capital compared to | + Lester capital compared [sole propritomhip corporation + Relative lackof regulation | +A partnership (oter than by the goverment as ‘general professional ‘compared to corporations | partnership) is taxed lke ‘Accounting for partnerships ‘The Conceptual Framework for Finecil Reporting andthe PERSs are applicable to all reporting entities regardless of the type of fotganization. This, most accounting procedures used for other types of business organizations are also applicable to [perinerships. The main distinction Hes on the accounting for‘ . oapert ‘equity. In addition, the accounting for partnerships should also ‘comply with relevant provisons of the Civil Code of the Papin The following. are the major considerations in. the accounting fr the equity ofa partnership: 2. Fomution — accounting, for inital investments 9 the partnership oe Operations ~ division of profits or losses {© Dissolution = admission of a new partner and withdrawal, retirement or death of a partner Ligation = windingzup of fairs Formation AA contract of partnarship is consensual. It is created by the agreement ofthe partners which may be constituted in any form, such as orl or writen However, Articles 1771 and 1772 ofthe Philippine Civil Code requte that a partnership agreement must be made in a public istrament and recorded withthe Securities and Exchange ‘Commission (SEC) when 2 immovcble property or real rights are contributed to the partnership (eg, PPE) or '. the partnership has capital of P5000 or more. At. 1773 further requires an inventory of any immovable property contribute to the partnership, signed bythe partes and attached to the public instrument, otherwise the partnership is ‘deemed void, 1A partnatship’s legal existence begine toon the execute ‘ofthe contract, sinles otherwise stipulate. ‘Valuation of contributions of partners [An 1787 of the Civil Code states that “when the capital or p ‘thereof which a partner is bound to contribute cones of ‘heir appraisal must be made in the manner prescribed in ‘eantrat of partnership, and in the absence of stipulation i sh emer oration 5 ‘be made by experts chosen by the partners, and according to current prices, the subsequent changes thereof being for the account ofthe partnership” ‘The term “appraisal” as used in the Civil Code suggests ‘valuation of capital eontsbutions at fair value. Moreover the provision of PERS 2 Shar-bued Payments hat equity instnonens issued for non-cash items shouldbe aed ‘he fir value ofthe non-cash ites received parallels that of Art in, Accordingly, all assets contributed to (and related labilities assumed by) the partnership are inially measured at fair value > An egy instrument is any contract that evidences a residual lnterest in the assets of an ety after deducting all of fs abit, > Fair luis “the price that would be received to sll an asset of Pid to transfer a lability in an orderly transaction between ‘market participant atthe measurement dat." (is) When measuring the contributions of partners, the following adaitional guidance from the PFRSs shall be ciserved: Type of contribution Measurement ‘Cash and cosh euialnts | Face amount nas [ireemary ‘Lower of Cost and Net realizable value fas, Each partner's capital account i credited forthe fae value (of his mat comirbtion (hay suet contebution ess any bay ‘sssumed by the partnership) No contribution shall be valued at fan amount that exceeds the contributions recoverable amount Each partners contribution shal be adjusted accordingly before recognition inthe partnership's books. > Recoerable amount ~s “the higher between an ase’ fas value ess cost to sll and value fn ue,” ssaape6 ptr cme oration z A partners subsequent share in profit (losses) shal also be credited (debited) 0 his capital account. Likewise, permanent withdrawals of apital ae debited to the parne’s capital account Temporary withdrawals may be debited tothe partner's drawings count The sum of the balances inthe partners’ individual capital ‘aecounts represents the total equity of the partnership. ‘The drawings sccount sa ominl acount that i closed to the related capital account at the end ofthe period. This accounts contra equity acount and basa normal debit balance The partner’ capital and drawings accounts are simula to the corporate pid in capital, retained exmings, and dividends Partners’ ledger accounts ‘The partners ledger accounts are a Gapital accounts Drawings accounts ‘¢_Receivable frony Payable to a pariner Receivable trom Payable to a partner ‘The partnership may enter ino 2 loan tansacion witha partner. ‘A loan extended by the partnership to partner is recorded as | rectivable from the partner, whle a loan obtained by the perinership from a partner i recorded asa payable tothe partner. Capital and Drawings accounts Separate capital and drawings accounts are established for each partner, eg, “Juan Bayan, Capital” and “Juan Bayan, Drawings ‘These ae equity accounts and are use to record thefllowing stration: Formation of partnership - Valuation of capital ‘Av and B formed a partnership. The ‘following are thei ‘entibutions eo ayn Capital Cam man ram Aecuntsrecivble 50000 5 nttnvestmen fe. invetny save - Rete SL nasal RE tae san Witdrewls capita investments puta __smg oes | ae Reemmee ae T Donut om a Swngtoooue Tot peste «aon ‘he porter’ capt acount 3 rl acount end has ae Ao mow pecaeeienant {Bepiat 170.000 Total 230,000 170,000 nen Bayon Drawings | _—__ato rt eS ‘Adina! inorton nee Be See Included in scours reccable an acount amounting 9 wt ung Sta P2000 winch is deemed ucalectie, wepeiod itty ep Te invertor as an stint sing price of 10200 ane + Tapeerids fod cots cl oF PI fattot ened ener rssumed «P1000 unpeld morgage onthe Stepemenn8 pte 1 The building is under-depreciated by P2500. 4 There is ari unpaid mortgage of 15,000 onthe bullding which B agreed to settle using his personal funds + Thernote payables stated at face amount. A proper valuation requires the recognition of P1000 discount on note payable + -Aoand B shall share in profits and losses on 3 600 ratio, respectively. Requirement (a: Compute for the adjusted balances of the partners capital acount, Sout Ss AB Parinership om Too 10,000" Accounts receivable @OK-20K) 30000 - 30.000 Inventory act thelversnoun) 80,000 0.00 Land soo 50000 Building nk 254) 95.000 95,000 Tot 7ggo0 145,900 355 000 Note payable, net K-15) (45000) (45,000) rigage payable land 20.90) 10.000) “Aajusted capital balances 165,000 135000 300,00} The unpaid morgage on the bldg isnot ineluded because ttn nud he prneshin Journal en aie] Cash Toa ‘Accounts receivable | so.000 Inventory ‘ono | tana 50,000 Bulling 500 | Discount on note payable 15,000 ‘Note payable eo Mortgage payable 1000 ‘Capi 165 B capital 1330 Requirement (Assume that a partner’ capital shall be increased accondingly by contebuting additonal cash to bring the partners «pital balances proportionate other profit an los aio. Which partner should provide additional cash and how much is the ‘ditional eash contribution? Salton Using A's capital first, let us determine B's capital contribution thas any defcency. Acapital 15000 Divideby: Profit (loss sharing ratio of A Total 77.00 Maliply by: Bs profit ss) sharing ratio 40% ‘Minimum capital required of B 70000 Becapital 135,000 Deficiency in B's capital contribution i 4 Conclusion B's contribution has 0 deficiency Now using 8's capital let us determine i A's capital contribution hasany deficiency. Bcapital 135000 Divide by: Protoss) sharing ratio of A 40% Tot 7300 Multiply by: A's profit los) sharing aio 6% Minimum capital required of A 2300 Ascopital 165,000 Depttency as captat contribution 37500 © Conclusion” Partner A shall contsbute additional cash of £37500 to make his contbtion proportionate to his prof Sharing ratio10 epee Reconciliation 2s contribution (65+ 375K addon anton) Bs contribution m0 > 397,500 60% = 202500 A's adjusted contusion > 337500 40%~ 135000 B's contbution Bonus on inital investments ‘An accounting problem exists when a partner's capital acount is credited for an amount greater than the fair value of Ns contributions 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 tan the fir valve of is contributions. In such case, the additional credit to the| partner’ capital (., the bom) is accounted fr as a deduction from the capital ofthe other partners. This accounting method is called the “Bonus” metho. Although, the cdi tothe partner's capital may vary du to 2bonus the corresponding dehit to the asset account must stil be equal to the fair value of the contbution. The difre between the amounts credited and debited is tented a adjustment tothe capital account ofthe other partners. lustration [and B agree to form a partnership. A contributed 0,00 while B contributed equipment with far value of PIL However, due to the expertce that A. wil be bringing to partnership, the partners agreed that they should initially have ‘ual interest in the partoership capital. Requirement: Provide the Journal entry to record the ing investments ofthe partners. Solution Aetea contriations Honus method x 20000 (0000x505) 70,000 8 ooo 440000 50%) 70,000 Total 140,000 40000 Dae [Cah 30,000 Equipment 100000 ‘A, Capital 0000» 30 bor) 70.000 __8 Capital conan 20100 bors) __| m000| Note + The bonus given to A, Le, 30,00 (P7000 capital credit — 40,00 actual contribution) is tested. a8 a reduction to the capital credit of B. y 7 After applying the bonus method, the total capital of the partnership s sill equal to the fair value of the partners ‘contributions. The debits to “Cash” and “Equipment” are ‘equal to ther fair values Only the amounts credited to the partners‘ capital accounts have varied, © summa “Asset contbation | _Uabiity arumed "ofapartaer | by the partnership } Inially ecorded [> initallyrconded fer vale at fair value tira), 1b above fir value (bonus | erent or low fr value boras tothe ober patina2 oper ff piney Fartion 3 Variations tothe bonus method [A partnership agreement may stipulate a'certain mtio to be Requirement) ‘maintained by the partners representing their specific interest as the enity of the partnership. This stipulation may give nse to fl Sgr eT ET RT) fdjustments to the initial contributions of the partners. Since ff favipment 000 0 technically there is no “bonus” being given 1 a cerain pariner, fl Moray payable __ 2000) gn.0) any increase or decease to the capital credit ofa partner is not ff “Net coas enon aoe — 7.000 Toa Ae 2.000 deducted from his co-parters’ capital accounts, Instead, the capital adjustment is acounted fr a5 either: {Cash sttlement among the partners; of 1. Additional investment or withdrawal of lavestment of a partner Equal interests (10K) 70,000 70,000 74600 210,000 Tesh recvipt payment) 00,000) —_— 30000 © Ancor C sal recive P0,00 from . Requirement Oe “The following iustraons are saratons othe bors metho: ae | Cash pent Iastration i: Cash setlement between partners | Moriage payable [A.B and C formed a parnerfip. Ther cotbutons are as [Link] flows B capital 4 copia So aa — Equipment__s900_ 17 The cash settlement among ihe partner is not reconded in the eee partnerhip’s books because thi is ot «transaction of the partnership but rather ofthe partners among themselves, ‘© The partnership's capital of P210.00 remains the same aftr the cash setlement. Again what varied are only the credits to the partner’ capital accounts, Adon nfrmaton ‘The equipment has an unpaid mortgage of 720,000, which the partnership assumes to repay. 4+ The partners agreed. to equalise their interests. Cash settlements among the partners are to be made outside the HMM tiystation 2: Additions investment (Withdrawal of investment) erenersip ‘Aand ¥ agree to form a partnership. The partnership agreement ) iplates the folowing: Requirements: nial capital of 140,00. 14 Which partner(s) shall receive cash payment from the other HMMM» 4600 interest in the equity of the partnership: partner(9? 'b. Provide the entry to record the contributions ofthe partners contributed 100,000 cash while B contributed 40,00 cash, Solitons“ Cuaptert Requirement: Which partner shall provide edaltional investment (or withdraw part of his investment) in order to bring the partners’ capital credits qual their respective interests in the ‘ulty ofthe partnership? 1 Soation ‘Agreed inl capital 140000 2 ‘A's required capital balance 140K x60%) 84,000 3 Bs required capital balance (MOK-40%) 56.000 = a B_Toraie ff * “Actual contibations Too a0) a0.000 140,000 Required capital balances 184000 55000 140.00 ff § ‘Additional Withdrawal) (16000 16,000, z 4 Answer: A shall withdraw 16,00 from his ital contsibution] hile B shall make an addtional ivestment of P6000, { Chapter: Summary +The major considerations inthe accountng for the equity of partnerships are: (a) Fortin: (b) Operations; (c) Disaluton ‘nd () Ligation + The contributions of the partners t0 the patinership a Inally measured at far vale. + A-partner’s capital balance is normally credited forthe fai ‘value of his net contribution tothe partnership. If a partner’ ‘apital balance is crete for an amount greater th oF I ‘than the flr value of his net contribution, theres bows. + Under the bonis method, any increase (or decrease) in capital credit of » partner is deducted from (or added to) t capital credits of the other partners. The total partners capital remains equal to the fair value ofthe partners’ ‘antribution tothe partnership. 15 PROBLEMS. PROBLEM 1: TRUE OR FALSE ‘The accountng for the assets and Habilites of a partnership business is diferent from that of sole proprietorship or 3 conporation. ‘A partnership is relatively easy to form but also easy to distolve, Mr. A contributed land with historical cost of PIM and fair value of P2M toa partnership business. Mr. As contribution shall be valued at PIM inthe partnership books. ‘A bonus given to a partner is teated as a reduction to the capital accounts) of the other partners) Ms. B contributed equipment with carving amount of F100 and fair value of P200 toa parnership. No borus is given to ny paring. In the partnership's books, equipment debited for #200 but B's capital account i credited fr 100. Mr. C contnbuted land with fair value of PIM to a partnership. The land has an unpaid mortgage of P2M which ‘he partnership agreed to assume, The valuation of Mr, Cnet contribution is PL.2M, Fact pater Mg. D and Ms. E formed & partnership. D contributed 200, while 1 contributed PI00. The partners’ respective interests in the pertnership are 60% and 40%. The inital credis tothe partners feaptal accounts are to be adjusted using the bonus method to rifle: the partner respective interests, 7, Thebalance of D's capital account after the formation is P18 & Thebonus given to iP. Bact pattern: Jw and Pre agree to form a partnership. Pw contributed cash of while Pie willbe contributing her experts. The partnership nt stipulates that Ph and Pl shal have equal interests in16 both the intial capital of the partnership and in subsequent partnership profits and losses, 9. ‘The cash contribution of Pi shall be debited for P200 but the 10, Immediately after partership formation, the balance of Pie's PROBLEM 2: MULTIPLE CHOICE -THEORY oaptert f_Forinei Fomatin * © debited at an amount equal fo the asset's fir value ether aorb Mr. Xand Mr. Y agreed to form a partnership. The fai values ofthe partners’ net contributions vary however the partners agreed to have equal capital credits, Cash setiement call be ‘ade between them forthe diference, Which ofthe following Statements is correct? The asset contributions ofthe partners shall be debited for qual amounts ‘The cash settlement between the partners will either Increase or decrease the total partnership capt © The cash settlement between the partners will not be "ecorded inthe partnership books, <4 -Me-X shall pay Mr, ¥to have their capital balance qual net credit to i's capital account shall be PI, ‘pital acount i ze, The asset contributions of parners to partnership ace Initially measured at a. fair value taxbasis ». orginal costfothe panier. anya these Mr. I and Mc. M formed a partnership busines Me 1 ‘contributed equipment with fir value of P2M" However, the Partners agreed that Mr. I's capital account should be credited {for P22M. Which ofthe folowing statements is correc? 2. The P2M excess eet is treated asa bonus to MM, b. Mr. M is probably bringing in expertise or special sill the busines. & Mr. M capital account wil be debited for P2M. 4. Thisis unacceptable. Me. I's capital credit shouldbe P2M. PROBLEM 3: EXERCISES 1. Sunny and Gloomy conte the lowing in the formation faparnerhip business, Suny — Gloom ito Accounts reevable ——19)000 Inventory 169000 ‘and at histraeon) 10200 Under the bonus method, any increase or decrease in t Total 200 340,00, capital credit ofa partner is RT a eaererccal ‘deducted rom or aed to the capital credits of the OMA imation Only 60% ofthe ansounte receivable is ecuverable The net realrable valu of the inventory is P1200, Sunny fcquired the inventory on account; the partnership. wil ‘assume the unpaid balance of PO, 000, The land has fair value of P0000. rocognised ss goodwill, recognized as expense 44 deferred and amortized to profit or loss. Under the bonus method, the asset contributed by a par receiving abonusis 8 debited at an amount greater ha the assets fur vale. 2. debited at an amount les ha the assets far value irement: Provide the journal entry.