CHAPTER 2 PARTNERSHIP: BASIC CONCEPTS AND FORMATION Learning Outcomes: Atthe end of this chapter, the student should be able to: a) Define partnership. b) Describe the nature and characteristics of a partnership. c) Cite the legal provisions of the New Civil Code of the Philippines governing partnerships. d) Compare a partnership against a sole proprietorshi and a partnership against a corporation. e) Apply the concepts relevant to partner’s equity. 1) Record transactions affecting partner's capital and drawing accounts. g) Apply the concepts relevant to partnership formation. h) Prepare entries to record partners’ contributions. i) Prepare a statement of financial position and a statemen of changes in partners’ equity. An individual who wants to do business may partner with another person and put up a partnership with a view of earning profit. A partnership requires a combination of: 1) capital resources or assets, and 2) managerial skills ard expertise valent in service shops and offices where two or more skilled workers or professionals join together in the practice of their skill or profession such as the audit firms of SYCIP, GORRES, VELAYO & Co; ISLA LIPANA & Co; REYES, TACANDONG & Co, or the law firms of ACCRALAW and CARPOLAW, to name a few Duly accredited accounting firms alone number more than 2,500 in the Philippines. Partnerships are more A partnership is a legal entity guided by the rules and regulations put up by each country orstate. In the Philippines, partnerships as well as corporations are governed by the New Civil Code of the Philippines, Articles 1767 to 1867. These articles will be discussed alongside the topics to which these are related to such as Partnership Formation in this chapter, Division of Profit and Loss, Dissolution and Liquidation in subsequent chapters. This will inform readers off the legal requirements which one must comply with when setting up and operating a partnership or a corporation. As partnerships and corporations are also taxable entities, mention will also be made of the tax provision based on the National Internal Revenue Code which describes the 4ifferent taxes to be paid by these organizations. PARTNERSHIP AS DEFINED IN THE CIVIL CODE OF THE PHILIPPINES ‘A parinership is an organization where two or more persons bind themselves tg contribute money, property, or industry into a common fund with the intention of dividing the Profits among themselves. (New Civil Code, Article 1767). 31FEATURES OF A PARTNERSHIP The following features of a partnership will make one understand the nature of its: existence: 4 1, Voluntary Association. Individuals, by their own free will, agree to join together and form a partnership. 2. Legal Entity. It has a juridical personality separate and distinct from the partners, (Articles 1768) It can acquire, sell or dispose properties, incur obligations and transact business in its name. 3. Co-ownership of Property. Partnership assets are jointly owned by the partners. Once — assets are invested and or acquired by the partnership, these cease to become personal properties and instead become joint property of all partners. Partners have a claim on all partnership assets based on their capital accounts and share in partnership earnings. 4. ‘Taxable Entity. The income of ordinary partnerships and corporations are taxed at 30% but was reduced to 20% effective 2021 for taxable income which is not more than P5,000,000, Exempted from tax is a general professional partnership which is formed for the sole purpose of exercising their common profession, such as accounting, tax, law, medicine, and engineering, (NIRC, Sec. 20 and 24). The professionals are taxed as individual taxpayers. 5. Mutual Agency. Each partner is a fully authorized agent of the partnership. Acts of the partners within the scope of the partnership are binding when transacting partnership | business. The partnership can be sued, together with the partners, by third parties when a partner commits a wrongful act or a breach of trust. (Article 1818). 6. Limited Life. Legally, a partnership can operate for an indefinite period of time. However, in practice, it can easily be dissolved or terminated with the mere withdrawal, incapacity or death of a partner. (Articles 1830-1831). 7. Unlimited Liability. Each partner is personally and individually liable for all partnership liabilities. In the event that cash flow problems occur and partnership assets are not | sufficient to liquidate partnership liabilities, the personal assets of the partners should be used to help settle the company’s obligations. (Articles 1791 and 1835). ! ELEMENTS OF A PARTNERSHIP. There must be a valid contract, whether oral or written. A Partnership must be put up by persons having legal capacity to contract. Their contributions must be in the form of money, property or service. 1 25 3. 4, The Purpose of the business is to divide the profit among them, _ With regards a written or oral contract, the aw does not provide a mandatory requirement for this, not unless the investment of the partner is in the form of immov Property, in which case a public instrument is necessary. (Article1667). ree tionally, Article 1772 provides: Every eontract of partnership having a capil three thousand pesos (P3,000) or more, in money or property, shall appear in a put Framument which must be reorded inthe office ofthe Securities & Exchange Commis r, failure to do so does not negat iti g ‘ut personality, gate the recognition of the partnership as a juridl ssROLE OF PARTNERS 1. The partners are co-owners of the partnership property. It means that when a partner invests his land or building, this ceases to be his personal tead, this becomes inv 7 property. Instead, this joint property of all the partners, ee a 2. The partners have unlimited lability. The partners become individually liable for all Partnership debts in the event that the partnership assets are not sufficient to cover up its liabilities. (Article 1791) This means that in the event partnership assets are inadequate to settle the claims of the partnership creditors, these creditors can seize the personal properties of anyone of the partners, 3. The partnership is bound by the acts of any of the partners since they are considered agents of the partnership for the purpose of carrying its activities, KINDS OF PARTNERSHIPS 1. Asto liability - A General Partnership is one where all partners are general partners with unlimited liability and are therefore liable to partnership creditors even up to the extent of their personal properties especially when partnership becomes insolvent. A Limited Partnership is composed of at least one general partner with the others as limited partners who are liable to partnership creditors only to the extent of their investment in the partnership. This type of partnership has two classes of partners: general and limited. (Articles 1816, 1843) 2. Asto property - A Universal Partnership of Property is one where all the partners contribute all their properties into a common fund. (Article 1778 of the New Civil Code). A Universal Partnership of Profits is one where the partners contribute all what they will receive as a result of their work or service rendered during the lifetime of the partnership. The partners retain ownership over their present or future property. (Article 1780). KINDS OF PARTNERS 1. A general partner is one who manages the partnership, contributes property or service and has unlimited liability assuming risk of loss of personal property in the event partnership becomes insolvent. A limited partner is one who invests cash or property, has no unlimited liability and has no active role in the management of the partnership. 2. A capitalist partner is one who contributes money or property into the partnership fund, Whereas an industrial partner is one who contributes industry or service only. 3. A real partner is one who is an actual pariner, whereas a nominal partner is a partner in name only. 335 one who is known to the public that he is a partner, whereas 9) yt known as such to the public. a nds to the entire business whereas nit or part of a business, 4. An ostensible partner is © secret partner is one who is nO ation exte whose yarticip: ? i is limited to au 5. A universal partner is on : Fiona sticipation i particular partner is one whose Pal partner, with unlimited liability rtner is also a general e less expressly authorized by the ‘Take note that an industrial partnet # g and Fen ane to engage in any other Kind of business" other partners, (Article 1789) PARTNERSHIP CONTRACT reement concerning formation, operation, dissolution, and liquidation of the ed in a contract called Articles of Co-Partnership. Although a verbal | is advisable to put it in writing as conflicts and disagreements may | the number of persons involved. The contract will act as a form of rnd will clearly reflect the relationships of the partner An agi partnership is embodi agreement is valid, it easily arise because o} governance of partnership activities a among each other and with third parties. contributions of partners in cash or Article 1772 of the New Civil Code requires that .d with the Securities and Exchange properties should be in a public instrument duly registere thousand pesos or more. The Securities and Exchange Commission if it amounts to three t! - Commission (SEC) is a government agency which supervises partnership and corporate forms of businesses. Registration with the SEC is necessary as a condition for the issuance of rorfeerse to engage in business or trade. In this way, tax liabilities of partnerships as well as corporate businesses cannot be evaded. The public can also determine more accurately the Fencial status of these businesses before dealing with them as these businesses are required to prepare periodic financial statements. | The following information are contained in the Articles of Co-Partnership: | Name of partnership . Principal place of business . Date of effectiveness and life of the partnership |. Purpose of the partnership Names, addresses and contributions of the partners . Manner of management of the partnership . Manner of dividing the profits among the partners Periodic withdrawals allowed for a partner. Manner of liquidating the partnership with the rights and duties of the partners SS 9 9 SP era Awe wD Arbitration of disputes‘An example of a partnership contract follows: ARTICLES OF CO-PARTNERSHIP DIAMOND APPLIANCE CENTRE KNOW ALL MEN BY THESE. PRESENTS: ‘That we, th i _ this day Siar TenI ee of legal age, citizens and residents of the Philippines, have effective as of this date, under sev cS fogether for the purpose of forming a partnership, e fe, under the terms and conditions herein after set forth, and subject to the requirements of existing laws of the Republic of the Phi ippines. AND WE HEREBY CERTIFY; I That the name of the partnership shall be called “Diamond Appliance Centre” and shall operate and transact business under said firm name. u That the principal office of this partnership shall be at 1780 Buendia Avenue, Makati, Metro Manila, Philippines, which office may be changed from time to time upon agreement of the partners. m That the names, surnames and postal addresses of the partners of this partnership are as follows: NAMES ADDRESS Michelle A. Marquez 123 Alabang Hills, Muntinglupa, M.M. Miguel S. Bengzon 145 Greenhills, San Juan, Metro Manila IV ‘That the capital of this partnership is Five Hundred Thousand Pesos (P500,000), which has been contributed as follows: in the amount of Two Hundred Thousand Pesos, P200,000, Philippine Curreney for Miguel Bengzon and Three Hundred Thousand Pesos, P300,000, representing the net assets of Maharlika Appliance Center owned and operated by Michelle Marquez. v be to engage in and carry on a general mercantile hold, import, export, trade or otherwise dispose of but not limited to general electric and ticles of commerce without limit as to ‘That the purpose or purposes shall and trading business and to buy or acquir®, . any kind of goods, wares and merchandise such electronic materials and appliances and other ar character or amount. vl il 1 Manager of the company with the right t ic 1ez will serve as General _ eel a reparation and signing of contracts and agreements. Miguel Piha beara + whose duty is to act as financial resource custodian * Finance Office Bengzon will serve 2 sible Tor the overall financial policy of the company, company an 35vil _ That the profits and losses shall be divided bétween Michelle Marquez and Mii ir capi ibuti ive in addition to their shares j Bengzon based on their capital contributions. They shall receive in a r in the rot, ‘a monthly salary of Fifteen Thousand Pesos (P15,000) each, until otherwise changed by the partners, IN WITNESS WHEREOF, we have hereunto set our hands, this January 3, 2021, at the | City of Makati, Philippines. MICHELLE MARQUEZ MIGUEL BENGZON Signed in the presence of: Witness Witness Acknowledgement NOTARY PUBLIC Figure 1 Articles of Co-Partnership COMPARISON OF BUSINESS ORGANIZATIONS 1. Similarities between a partnership and a sole proprietorship: Sole proprietors and partners have unlimited liability and an active role in managing the business. Both businesses have limited life because its continuity depends upon the decision of the proprietor or the partners. Likewise, death or incapacity of proprietor ot anyone of the partners may cause its termination. A partnership is a taxable entity. It is also a juridical or legal entity, and has a combination of capital resources and skills. Advantages of a partnership against a sole proprietorship: Partnership has a greater amount of capital because of the number of persons involved. There is therefore a greater opportunity to expand the business. Better management will result because of the shared managerial skills, efforts and experiences of the partners. Disadvantages of a partnership over a sole proprietorship: The number of persons involved may delay matters involving prompt and immediate attention. Conflicts and disagreements may easily arise which may adversely affect the operation of the business and may cause its downfall or, at worse, its termination. 2. Similarities between a Partnership and a corporation: Both x C it on ‘re taxable entities (except a general professional partnership) and legal entities. 36rene Diflerences between a partnership anda corporation: A corporation has partnership alicia cry existence based on the Revised Corporation Code. A unanimous consent of all cng nsetinite life it_may be dissolved/liquidated with the creditors except for what the nuet® Shareholders are free from liability to corporate properties. Managemen ey invested while partners are liable even up to their personal ati is ve ii all the partners may actively cmege oo in one or a few shareholders. One or 3) Advantages of a partnership over a co ‘one person corporation, still the partne . formation and legal requirements, also poration: Although a corporation may now be a ship has an edge over it in the following: ease in in active management. Disadvantages of a partnership over ownership as it requires unanimous transfer easily their shares to others, incapacity ot insolvency of anyon: shareholders, partners n unlimited liability. Acorporation: Difficult to transfer and or increase consent of all partners whereas sharcholders may It is easy to dissolve a partnership with the death, © partner, even if life is unlimited. Unlike the are personally liable to partnership creditors because of their RIGHTS OF A PARTNER 1. A partner has a right over specific partnership property. 2. A partner has a right to share in the profits resulting from business operation. 3. A partner has a right to share in the remaining assets upon partnership liquidation after the partnership creditors have been paid. 4, Apartner has a right to co-manage the partnership. 5. A partner has a right to ask that the books be Kept in the principal place of business subject to inspection at a reasonable time BUSINESS ENTITY CONCEPT The entity concept emphasizes the view that a business unit such as a partnership, sole proprietorship or a corporation should be treated as distinct and separate from the owner, ch, only transactions of the business are recorded in its books. disposes properties in its own name; it enters into contracts who are merely acting as its agents. The partnership cannot be held liable when a partner enters into a contract with a third party on activities not within the bounds of the partnership as provided it articles of co-partnership. Care therefore should be taken in recording its assets, liabilities, revenues and expenses ar that what is personal to the partners or not within the bounds of the activities of the partnership should be excluded from the partnership books. i i iew of the individual partners as the proprietary theory emphasizes the view of the cone of te a asoels Clr the business especially when salaries are given to them, or when obligati nership ereditors extend to their personal properties, or when the original pater arb ived and the consent of the parners are required in admiting a new partner, ACCOUNTING FOR A PARTNERSHIP - must have sufficient knowledge of the legal. provisions regarding a Ure would affect certain aspects of partnership accounting such as free of heparin, dissolution of the partnership, distribution of profit or loss to the stments 0 ; ‘ partners and liquidation of the partnership. * partners or shareholders. As su A partnership acquires, holds, with others through the partnersof Co-Partnership as a guide in recording In addition, the accountant uses the Articles distribution of profit or loss, transactions regarding the partners’ capital contributions, dissolution and liquidation. revenues and expenses (as discussed in ‘Accounting procedures for assets, liabilities, + (as Chapter 1) follow a normal standard whatever is the Tegal form of organization, The main difference lies in accounting for equity which in a partnership is called partners’ equity. The accounting equation is expressed thus: Assets = Liabilities + Partners’ Equity. ing is discussed in this chapter and the next th Partnership account hree chapters to cover: 1). Formation and the partners’ capital contributions. 2) Operation with the distribution of profit or loss. 3) Dissolution and the changes in partners’ equity. 44) Liquidation or permanently closing the partnership PARTNERS’ EQUITY uusiness is called Partners” Equity 1ors over the net assets of the bi two accounts: Partner's Capital and Partner's ics ina sole proprictorship except that there are ¢ two or more partners involved. Thus, in a following partners’ equity: The rights of the partn Each partner's equity is represented by Drawing. This is the same rule that one app! more accounts in a partnership since there arc partnership of Abad and Basa, the general ledger will show the ‘Abad, Capital, Abad, Drawing: Basa, Capital: Basa, Drawing, PARTNER'S CAPITAL ACCOUNT The capital account represents ori fixed interest. This could change only if addi assets are revalued. The following transactions affect this account contribution made are credited to cach partner's capital nal invesiment which becomes its permanent or -nients are made or when non-current J. Investment account (0 increase the partner's equity and 2. Permanent Withdrawal ~ withdrawal of capital are debited to each partner's account to decrease the partner's equity capital afe on January 1, 2019 To illustrate, assume that Abad and Basa opened Sun Internet The following transactions took place January | Initial cash investments of P300,000 from each partner March 1 Abad made another cash investment of P150,000 Basa made a permanent cash withdrawal of P25,000, June 1 Entries in the partnership books will be as follows January 1 Cash 600,000 Abad, Capital Basa, Capital Iniual cash investments of Abad and Basa 300,000 300,000 38 saisMarch 1 Cash Abad, Capital 150,000 150,000 Additional investment of Abad. , June 1 Basa, Capital 25,000 Cash 25,000 Permanent cash withdrawal of Basa. At the end of the year, the capital accounts will appear in the general ledger as follows: Abad, Capital No. 301 Basa, Capital No. 302 Jan 130,000 June 1 __P25,000] Jan _ P300,000 Mar 1 150,000 __The balances of the capital accounts will be shown in the statement of financial position or balance sheet after the assets and liabilities as follows: Partners’ Equity: ‘Abad, Capital 450,000 Basa, Capital 275,000 Total P725,000 These balances should also be reflected in the Articles of Co Partnership as their permanent interest. Partners usually make investments only once or twice over the lifetime of the partnership. If additional investment is made which will affect the other provisions of the partnership contract, such as the agreement on profit distribution, there should have been a provision to this effect otherwise there will be a need to revise the Articles of Co-Partnership. PARTNER’S DRAWING ACCOUNT This is the account title used to reflect temporary interest of a partner. Ordinarily, there are two transactions affecting this account: |. Share in the net profit (the agreement as to the manner of distribution is provided in the Articles of Co-Partnership) is credited to the drawing account to increase the partner's equity and becomes a source of regular drawings by the partner, or share in net loss is debited to the drawing account to decrease the partner's equity as well as decrease the amount that a partner can withdraw 5 may be formal as provided in the Articles of Co-Partnership. These i but are in fact withdrawals of profit and are debited to the riner’s equity. Informal or irregular withdrawals may arises (made with the consent of all partners) and viewed as decreases in the overall equity 2. Personal drawing: are oftentimes called salaries drawing account to decrease the pa also be made by the partners when the need and are also debited to the drawing account or interest of the partner. ‘count is closed to the capital account. If the share of the his drawing account) is greater than the actual withdrawals ing account), the eredit balance of the drawing account is he total partner's equity. Balance of the drawing ac Partner in the profit (credited to made by him (debited to his draw: added to the capital account to arrive at tl 39Let us continue with the illustration in the preceding page. The partnership starteg operation on October | and at the end of cach month Abad, as managing partner, withdrew P10,000 cash as monthly salary starting October while Basa made a cash withdrawal only _ once for P10,000 at the end of December. A net profit of P150,000 was reported at the end gf | the year which was divided equally between them. Additional entries in the partnership books.» of Abad and Basa will appear thus: Oct. 31 Abad, Drawing 10,000 Cash 10,000 Salary drawing of Abad. Nov. 30 Abad, Drawing 10,000 Cash 10,000 Salary drawing of Abad Dec, 31 Abad, Drawing 10,000 Basa, Drawing 10,000 Cash 20,000 Drawings of Abad and Basa. Income and Expense summary 150,000 ‘Abad, Drawing 75,000 Basa, Drawing 75,000 Profit share of the partners. [tthe end of the year, the drawing accounts of the partners will appear in the general ledger as follows: ‘Abad, Drawing _No. 301-4 Basa, Drawing __No. 302 Oct 31. (10,000 Dec3! 75,000 “PeedT 10,000] Dec 31 — 75,000 Nov30 10,000 Dec 31 10,000 | Balance 45,000 Balance 65,000 | From the above entries and T accounts, on this page and in the preceding page, the partners’ equity will appear thus: Abad, Capital 450,000 Abad, Drawing 45,000 P495,000 Basa, Capital 275,000 65,000 P340,000 Basa, Drawing “The balances in the drawing accounts represent unwithdrawn profits. These bal pecially if partners int could be left open and brought forward next accounting period es : 19 the capital 2000 SGthdraw them as per agreement, Or these balances could be closed to th a s. The entry to close the drawing balances ® and made part of their permanent investments capital accounts will appear thus: 4Abad, Drawing 45,000 Basa, Drawing 65,000 Abad, Capital 45,000 Basa, Capital 65,000 ‘The general ledger will appear as follows: Abad, Capital No. 301 No. 301 Basa, Capital No. 302 Jan. 1 P300,000 June 1 P25,000] Jan. 1 300,000 Mar. 1 150,000 Dec. 31 65,000 Dec.31 45,000 Abad, Drawing Noo1-a Basa, Dra No. 302-A Oat. 1 —*(10,000] Dec3 75,000 Dee.31 10,000] pée. 31 75,000 Nov. 30 10,000 Dec.31 65,000 — Deo.31 10,000 Dec.31 45,000 75,000 25,000 5,000 75,000 The partners’ capital accounts, appearing in the Statement of Financial Position as Partners’ Equity, will show a credit balance of 495,000 for Abad and a credit balance of 340,000 for Basa. Note that whether or not the drawing balances are closed, the partners” equity will remain the same. STATEMENT OF CHANGES IN PARTNERS’ EQUITY The statement of financial position shows only the final balances of the capital accounts, 495,000 for Abad and P340,000 for Basa, Partners should be informed of the changes (transactions) that brought about the final balances requiring the accountant to prepare a statement of changes in partners’ equity which will appear as follows ‘Abad and Basa Partnership ‘Statement of Changes in Partners’ Equity For the Year ended December 31,2019 Abad Basa Total Capital, January 1 P 300,000 P-300,000 ~~ 600,000 Additional Investment 150,000 150,000 Permanent Withdrawal (25,000) Total 450,000 275,000 Share in Net Income 75,000 75,000 Personal Drawings (30,000) (10,000) (40,000) Capital, December 31 P 495,000 P 340,000 P§35,000 , The first line starts with the initial investments of the partners, the next two lines reflect changes posted in the capital accounts (investments and permanent withdrawals) while the last part of the statement reflects changes posted in the drawing accounts (profit share and Tegular drawings). 41OTHER TRANSACTIONS AFFECTING PARTNER’S CAPITAL ‘A variation in the investment of a partner may be made as described in the foll transactions: June 10 A partnership note payable to the bank in the amount of P5,000 fell due and jt was paid by Abad out of his own personal cash. July 5A personal receivable of Basa in the amount of P6,000 was collected anj_ : retained by the partnership. ] Sept. 15 A personal note of Basa payable to Filinvest in the amount of P3,500 was paig out of the partnership cash. | Nov. 10 A partnership receivable in the amount of P2,000 was collected and retained by Abad. Anal Journal Entries June 10 Since partnership liability is Notes Payable 5,000 paid, record a decrease in its Abad, Capital 5,000 liability; and since it was Abad who paid this out of his personal cash, his interest in the partnership should increase, July Since the partnership made the Cash 6,000 collection, increase its cash; Basa, Capital 6,000 since what was collected was @ personal asset of Basa, record an increase in his equity. Sept. 15 Since cash was paid by the partnership, record a decrease in cash; since this is a personal liability of Basa, this in effect decreases his equity. 3,500 3,500 Nov. 10 Since the partnership receivable Abad, Capital 2,000 was collected, record a decrease Accounts Receivable 2,000 in its asset; and since the cash was retained by Abad, record a decrease in his equity. Note that the capital account is increased or de it iti | ‘creased to represent investment or a permanent withdrawal. The alter a aletane it ‘mative will be to treat these transactions as either | a Toan payable to or loan receivable from a partner depending on partners? agreement * 7 j LOAN PAYABLE TO OR RECEIVABLE FROM A PARTNER In the course of the operation of the business, the out through a partner’s personal cash. Or the partn 42jd back to him after three months, The entry i i i i ~ try in the partnership books will be a credit to a payable to Abad account rather than Abad, Capital. Or suppose Abad extended a P15,000 (0 the partnership on July 15 id att 10 reco! h joan to the partners uly 15 to be paid 1 t rd the casi M Jed will give rise to a liability to pu pi i i ler one year? The entry to recor july 15 Cash 15,000 y Loan Payable to Abad , 15,000 Cash borrowed from Abad. In like manner, the partnership may loan cash to a partner which will give rise to a receivable account. For Instance, assume that on July 31 the partnership lent partner Basa 20,000 cash to be repaid after sixty days, The entry for this is: july31 Loan Receivable from Basa 20,000 Cash 20,000 Cash loan extended to Basa. It is emphasized at this point that Loan Payable to a partner is a liability and Loan Receivable from a partner is an asset and therefore are not to be considered in determining partners” equity. OPENING THE BOOKS OF THE PARTNERSHIP. The first entries in the partnership books pertain to the contributions made by the partners. The contribution may be in the form of cash, property, services or an already existing business. If the contribution is in the form of cash or property, the pro-forma entry is: Cash (or merchandise or building) XX Partner, Capital xx A contribution in the form of property should be recorded, as of investment date, at current fair market value or appraised value. Pair market value is the amount for which an asset efuld be exchanged between two knowledgeable and willing parties in an arm’s length transaction, Again, this is in support of the Exchange Price or Cost Principle as stated in IAS 16. Additionally, fair treatment requires that the properties be valued at its current fair market value or appraised value since these will become business properties; and that subsequently any gain or loss from its sale will be shared by all the partners according to their profit and loss agreement. Liabilities attached to invested properties may be assumed by the partnership in which case the capital of the partner will be credited only for the net amount of the asset contribution, : If the contribution is in the form of service, a memorandum entry should be prepared as follows: Jan. 2 Admitted Joshua Artuz to act as general manager for a 20% share in the profit. CASE] CONTRIBUTION IN THE FORM OF CASH, PROPERTY AND INDUSTRY Santos, Ambros, and Carlos formed a partnership on August 1, 2021, Investments are 8 follows: Cash of P30,000 from Santos, merchandise from Ambros which she bought last Year for PS0,000 but which has a current fair value of 80% of its cost. Carlos is to be Admitted as Sales Manager for a 10% share in the profits. 4it is to be admitted ag for P50,000 but which has a current fair value of 80% of its cost. Carlos is to be admitted for P50, i Sales Manager for a 10% share to the profits. a Aug. 1 Cash | 56,000 - Santos, Capital Cash investment of Santos. 000 Merchandise Inventory 40, so000 ‘Ambros, Capital Merchandise investment of Ambros. " Admitted Carlos as sales manager for a 10% share in the profits of the partnership. Postings of these entries in T accounts will appear as follows: Santos, Capital Ambros, Capital 72010 2010 i ‘Aug. | 50,000 vet 400 Carlos, Capital ‘Aug. | Admitted as sales manager for a 10% share in the profits. CASE 2 CONTRIBUTION OF PROPERTY WITH AN ATTACHED LIABILITY Aug. 2. Ambros decided to invest also her land, which cost her P100,000 when she bought this in 2010 but which current appraised value is P500,000. However, this land has a mortgage balance of P50,000 and the partners agreed that this be assumed by the partnership. The entry will appear, thus: Land 500,000 Mortgage Payable 50,000 Ambros, Capital 450,000 Land investment with an assumed mortgage balance. A liability called mortgage payable w. there was no agreement for the partnership appear thus: ‘as set up decreasing the capital by P50,000. If {0 assume the mortgage balance, the entry will, 500,000 ] 500,000 Account was recorded and Ambros was credited for oth cases, the land should always be recorded at Land Ambros, Capital Note that this time no liability gross investment of P500,000. In bo appraised value.INVESTMENT OF AN ALREADY EXISTING BUSINESS invest vsti ns eee aaa as ey existing business into the partnership is more complicated . ~ the i i ein. The lowing arte cng can se Yl of 1. Present for review the asset; i S and liabi ietorship busi partners for adjustment ae liabilities of the sole proprietorship business to the other revaluation, 2. In the books of the sole proprietorship business: a) Update the assets and liabilities for any adjustment/revaluation agreed upon by the Pariners. Since this business is not going to operate anymore, no revenue or expense accounts should be used. Any revaluation ot adjustment is coursed through the sole Proprietor’s capital account. The assets and liabilities of this business represent the Partner's capital contribution, thus any adjustment or revaluation passes through the capital account. b) Close the books at the adjusted amounts, 3. Record the assets and liabilities or partner's contribution in the books of the partnership as well as the contribution(s) of the other Partners(s) at the revalued or adjusted amounts. If the partners agree to continue using the sole proprietor’s books as the partnership books, Step 2b) will change: record the investment of the other partner(s). Omit Step 3. CASE3 INVESTMENT OF AN ALREADY EXISTING BUSINESS WITH THE OLD BOOKS CLOSED AND NEW PARTNERSHIP BOOKS OPENED Peter has a bookstore along Taft Avenue called Peter Pan’s Bookstore which has been operating for five years. On March 1, 2019, Pilar Garces invites him to put up a partnership within the university belt of Mendiols. Peter agrees to close his business and invests his net assets in the partnership. Pilar agrees to put up cash equal to half of the contribution of Peter. The following are the assets and liabilities of the bookstore on March 1,2019: Debit Credit Cash P12,000 Accounts Receivable 50,000 Allowance for Bad Debts P 5,500 Merchandise Inventory 25,000 Furniture & Fixtures 10,000 Accumulated Depreciation 2,000 Accounts Payable prea Bete aed P9700 ——-P97,000 The articles of co-partnership was drawn after considering the following: |. The allowance for bad debts should be adjusted to 15% of the accounts receivable, 2. The furniture & fixtures should be 25% depreciated. 3. Obsolete merchandise amounting to P3,000 be written off / / 4. Both partners will act as managing partners and share profits and losses according to their capital contributions. 45ANALYSIS RIES IN PAN’S BOOK: Pan, Capital® 2.000 a) Required allowance for bad ‘Allowance for Bad Debts debts (15% of PS0,000) P 7,500 Per books 5,500 ‘Adjust the allowance to Increase allowance by PL2,000 _15%% of the accounts receivable. 4 b) Required lated Pan, Capital* 500 » Gepreciation (3% ‘Accumulated Depreciation sod fe x10,000) 2,500 To adjust accumulated 2,000 roa 7 Increase accumulated by p_500 depreciation to 25% of cost. ©) Merchandise per books 25,000 Pan, Capital® 3,000 Should be 22,000 Merchandise Inventory 3,000 Write off P_3,000 To write off obsolete At this point, the capital of Pan merchandise. will be: Per books 62,500 Less above adjustments 5,500 Adjusted Capital 57,000 ebited instead of bad debts, depreciation expense, and loss on * Note that Pan Capital was d 2 a) described in the preceding page. obsolete stock. This is an application of procedure no. &) Close the assets, liabilities and ‘Accounts payable 27,000 capital accounts atthe adjusted ‘Allowance for Bad Debts 7:50 amounts. In bold figures are ‘Accumulated Depreciation 2,500 the adjusted amounts. Pan, Capital 57,000 12,000 50,000 22,000 10,000 To close the net assets of the business. PARTNERSHIP BOOKS a) The assets, liabilities and capital accounts of Pan are Cash now brovfght forward to the Accounts Receivable partnership books. Note that Merchandise Inventory the funiture is recorded at the Furniture & Fixture adjusted book value which is Allowance for Bad Debts 7,500 its current fair value. The Accounts Payable 27,000 accounts receivable and the Pan, Capital 57,000 allowance are still carried To record Peter Pan's | forward, investment, : b) The agreement calls for Garces Cash 28,500 ! investing cash equal to %3 of Garces, Capital meth Peter’s investment. To record cash investment of Pilar Garces. | Note: Instead of two entries, a compound entry may be iting i i s prepared debiting immediately the cash at P40,500 (12,000 + 28,500) and crediting Pan for P57,000 and Garces £0 P28,500 each. , 46cASE4 aoe PARTNERS INVESTED THEIR CURRENT BUSINESSES WITH BOOKS SET UP FOR THE PARINEReInD James Laredo and Jim 1 and another in Cubao. After a store. The following are their -2Pe2, sole proprietor, operate a novelty shop one in Manila ¥20F of operation, James invited Jim to form the Lalo Novelty statements of financial position as at January 2 2019: JAMES NOVELTY STORE Statement of Financial Position AS of January 2, 2019 ASSE’ = LIABILITIES & CAPITAL Cosh P13,000 Accounts Payabl > P12,500 Accounts Receivable 10°00 ayable : Merchandise Inventory 20°000 Laredo, Capital 35,500 Furniture & Fixtures 5,000 Total 48,000 Total Pag,000 JIM NOVELTY STORE Statement of Financial Position As of January 2, 2019 ASSETS LIABILITIES & CAPITAL Cash P 15,000 Accounts Payable —-P._15,000 Accounts Receivable 40,000 Notes Payable 20,000 Allowance for Bad Debts (_4,000) 36,000 Lopez, Capital 79,500 Merchandise Inventory 50,000 Furniture & Fixtures 15,000 Accumulated Depreciation (_1,500) __13.500 Total P114,500 Total 114,500 The following provisions were agreed upon by James and Jim: 1. James will invest his business subject to the following conditions: a) That P2,000 of the accounts receivable be written off. b) The furniture be adjusted to its fair market value of P4,000. ©) Accrued expenses of P2,500 be recognized. 2. Jim’s net contribution should be adjusted subjeet tothe following: eivable is estimated to be uncollectible. b) Furniture and fixtures should have a net book value of P12,000 ames’ and Jim’s interest should be the same as their profit and f them must make additional investment to conform to the pened for the partnership. a) 15% of the accounts rec It was further agreed that J loss ratio of 1:1 so that one of agreed interest, New books should be oI 47A table to analyze and adjust partners’ capital contributions may be prepared in this manner: Unadjusted capital per books a) Write off of bad accounts Additional provision for doubtful accounts b) Downward adjustment or impairment of furniture and fixtures c) Accrued expenses 4) Adjusted capital or net contribution ANALYSIS a) Decrease accounts receivable for the write off b) Cost of furniture 5,000 Fair market value 4,000 Decrease by P1,000 Laredo Lopez 35,500 P79,500 ( 2,000) ( 2,000) (1,000) ( 1,500) 2,500) 30,000 © -PZ6,000 ENTRIES IN JAMES BOOKS Laredo, Capital 2,000 Accounts Receivable P2,000 Laredo, Capital P1,000 Furniture & Fixtures 1,000 \Write-off in (a) should be adjusted through the allowance for bad debts, if there is one. In (b) adjust cost to fair value using the accumulated depreciation account, if there is one. Otherwise, adjust through the principal accounts. ) Increase liability by recording accrued expenses. 4) Close all assets, liabilities and capital at the adjusted amounts. ANALYSIS 2) Required allowancel5% x P40.000) Per books Increase allowance by b) Book value of furniture Agreed value Increase accumulated by ¢) Close all assets, liabilities and and capital at the adjusted amounts: 48 P 6.000 4,000 P_2,000 13,500 2.000 P1500 Laredo, Capital P2,500 Accrued Expenses Accounts payable 12,500 Accrued expense 2,500 Leredo, Capital 30,000 Cash Accounts Receivable Merchandise Inventory Fumiture & Fixtures ENTRIES IN JIM’S BOOKS. Lopez, Capital 2,000 Allowance for Bad Debts Lopez, Capital 1,500 Accumulated Depreciation Accounts Payable 15,000, Notes Payable 20,000 Accumulated Depreciation 3,000 Allowance for Bad Debts 6,000 Lopez Capital 76,000 Cash . Accounts Receivable Merchandise Inventory Furiture & Fixtures 2,50 13,000 8,000 20,000 4,000 2,000 1,500 15,000 40,000 50,000 15,000pARTNERSHIP BOOKs; ay Transfer the asses and iabilites oF Laredy, Refer Cash P59,000* 10 tis Lert ped 4). Since Lopez Capital is Accounts Receivable 8,000 76,000, f e '0'S net contribution is only Merchandise Inventory 20,000 30,000 there should be “additional cash Furniture & Fixtures 4,000 investment of P46,000 to make total cash 59.000 Accounts Payable P12,500 and his capital be P76,000 also, Accrued Expenses 2,500 Laredo, Capital | 76,000* b) Transfer the assets and liabilities of Loper Cas, a P: 0 Accounts Receivable aoa Merchandise Inventot 50,000 Furniture & Fixtures 15,000 Accounts Payable P15,000 Accrued Expenses / 20,000 Lopez, Capital 76,000 BONUS OR GOODWILL RECOGNITION Contributions of a partner may 80 beyond actual assets invested due to the following reasons: a partner has special talents needed by the Partnership or has a large base of clients/customers or if a business being transferred to the Partnership promises exceptional ally important as the actual investments made passed the medical board examination wants a known surgeon and medical practitioner, to Join him. Dr. Gil agrees to contribute P500,000 while Dr. Casey agrees to contribute P300,000 only. They further agree on an equal sharing ratio on the assets and the profits. In recording their contributions, there are two options: Bonus or Goodwill, Bonus method. Under this method, the skill and experience of Dr. Casey cannot be Tevognized as asset specially since there is no reliable measurement basis for this. Only the actual investments of P500,000 and P300,000 or a total of P800,000 can be recognized as &ssels, The partners may agree to adjust their capital amounts to reflect an equal sharing by transfering interest fom Dr. Gil to Dr. Casey. Dr, Casey's capital will be eredited for 400,000 without making additional investment and Dr. Gil will also be credited for 400,000 although his actual investment is P500,000, The transfer of eapital of P100,000 received by Dr. Casey from Dr. Gil is called bonus capital. Total actual contributions stands at P800,000. In table format, it will appear as follows: Gil Casey Total it 400,000 400,000 P800,000* Agreed Capital y Actual contributions 00.000 300,000 00,000 Bonus (P100,000)P100,000 * Note that total agreed capital is equal to total actual contributions. Using agreed capital, o Compute for a 50% interest for cach partners. Jo ae "nal entry will be: — Cash soneoo Gil, Capital 400,000 Casey, Capital 49ributions are made by Dr. Casey: cash of ‘What is goodwill? Goodwill is an s more than what is normal or ful surgeon), or a good location, Goodwill Method. Under this method, two cont 300,000 and an intangible asset in the form of goodwill. intangible asset representing ability to generate earings expected. Factors such as a good reputation (such as a ski . wee Senice or product may bring in more customers and therefore more earnin& for he busines Wha are the effects on the accounting values if goodwill is recognized? Assets increase (debit goodwill) and the partner's equity will also increase (creit partner, capita). How Tmuch is the goodwill? Since the agreement calls for equal sharin, the intangible aise ine ts to 200,000 plus his actual investment of P300,000 the capita) credit for Dr. Casey Will become P500,000 the same as that of Dr. Gil who invested cash of P500,000. In table format it will appear as follows: Gil Casey Total Agreed capital 500,000 500,000 P1,000,000° Actual contributions 500,000 300,000 800,000 Goodwill 0 —P200,000 P_200,000 *Note that under the bonus method, total agreed capital is equal t0 total actual contributions Bat ander the goodwill method, total agreed capital is greater than total actual contributions. j aareed capital computed? It was based on Gil's actual contribution of How was 500,000 divided by his interest of 30% = P1,000,000. Since agreement calls for equal sharing, Casey should also be credited for P500,000. Journal entry will be: Cash 800,000 Goodwill 200,000 Gil, Capital 500,009 Casey, Capital 000 PAS 38 recognizes goodwill only as a result of an acquisition of a business. Partnership goodwill has no related acquisition cost since no funds have been spent to acquire the goodwill. Partnership goodwill is rare in actual practice. The bonus capital is the preferable method. CASES INVESTMENT OF AN ALREADY EXISTING BUSINESS WITH RECOGNITION OF BONUS AND NEW BOOKS ARE SET UP FOR THE PARTNERSHIP The following is the statement of financial position of Jazz. Grocery as at December 31, 2019: ASSETS LIABILITIES AND CAPITAL Cash P 34,500 Notes Payable 5 . ; s Paya P 12,500 Accounts Receivable 55,000 Accounts Payable 40,000 21,000 Jasmin, Capit ates Re auace asmin, Capital 474,500 Land 120,000 Equipment P 80,000 Accumulated Depreciation (_$6,000) 24,000 Building 245,000 ‘Accumulated Depreciation (_30,000) —_215,00¢ Total P527,000 Total 527,000 50jasmin and Cory agree to ngree 10 form a . vest het grocery While Cory wilt hmreetSip and call it the Jascor Grocery. Jasmin will est 3 ce ving provisions were also agreed following Agreed upon by the partners: 1, Set up 10% of customers® acco automated equipment worth P300,000. The worthless accounts, "ints receivable as doubtful after writing off P5,000 Inventories should be adjusted to ai sted to 85% Paulprment atonal be adjusted tite fine atlas Land should be recorded at its appraised value of na aa Acerued expenses should be set up in the ameunt ot og Jasmin will be credited fora 60% equity in the parershin. ANALYSIS ENTRIES IN JASMIN’S BOOKS 1) P5,000 worthless accounts written off, Jasmin, Capital 5,000 an forks Accounts Receivable Set up Allowance for bad ; , + 10% x P5001 jasmin, Capital 5,000 cca : mn Allowance for Bad Debts 9) Inventory recorded as i Should be 85% of P57,500 jasmin, Capital 8,625 Decrease by 3) Book value of equipment Jasmin, Capital 4,000 Falgvalue Accumulated Depreciation Increase accumulated 4) Appraised value of land Per books Land 30,125 Increase by P30,125 Jasmin, Capital 5) Set up accrued expenses Teo a Accrued Expenses In T account, the Capital of Jasmin will appear as follows. Jasmin, Capital 1 3,000] Per books 474,500 5,000 4) 30,125 2) 8,625 3) 4,000 5) 2;500 Adjusted 479,500 §) Close all the assets, Allowance for bad debts 5,000 liabiliti : ‘Accum. Depn. Equipment 60,000 pes oud conial ‘Accum. Depn. -Building 30,000 Seounts of Jazz Grocery ‘Accounts Payable 40,000 atthe adjusted amounts. Notes Payable 12/500 Accrued Expenses 2°30 Jasmin, Capital 479,500 Cash 34,500 ‘Accounts Receivable 50,000 Notes Receivable 21,000 Inventories 48\875 Land 150,125 Equipment 80,000 Building 245,000 5,000 5,000 8,625 *,000 30,125 2,500 51i .n no. 3). First get the book value ‘000. Then compare it with the To decrease the book value mulated depreciation is now ¢ will become P20,000, Take note on how the equipment was adjusted i (P80,000 cost less P56,000 accumulated depreciation) = p24, market value of P20,000. The book value is more by P4,000. increase the accumulated depreciation by P4,000. The accu P60,000. If this is deducted from cost of P80,000 its new book valu shich i its market value. which is now equal to its market val RSHIP BOOKS ENTRIES IN THE PARTNE! ANALYSIS Gan 34,500 1) Record the investm: a casahie 30,000 Jasmin. Refer to cl Accounts Cae le 21,000 no. 6. Note how the equipment Notes Recei 48875 ‘and building are recorded at the Inventories 150.125 adjusted book values with the Land ‘i 20°000 accumulated depreciation Eauipmen 215,000 5 Si Se ae te ‘Allowance for bad debts ean Building: P245,000 - P30,000 ere a Dstt i 0 - P60,000 lotes Pa , Equipment: P 80,000 - peso a m 2) Total Actual Contributions is = Jasmin, Capital c equal to Total Agreed Equity: a Agreed Total Equity 779,500 Equipment 300,006 ia 40% equity for Cory 311,800 Cory, Capital ,000 ‘Actual contribution made 300,000 ; Bonus from Jasmin P_11,800 Jasmin, Capital 11,800 Cory, Capital 11,800 In tabular form, the bonus table will appear thus: Jasmin Cory Total Agreed Equity (60%) P 467,700 (40%) P 311,800 P779,500 ‘Actual Contributions 479,500 300,000 779,500 Bonus P11,800) P_L1,800 0 ! Note that in Bonus there is only'a transfer of interest. Total Agreed Equity and Total Actual — Contributions must be of the same amount. CASH METHOD If expressly agreed, deficient partner may be required to contribute cash to comply with the equity requirement. eee Pro! pl -quirement. Thus, based on the table, Cory should make a cash contribution of Jasmin Cor Agreed Equity (60%) P-479.501 ry Total ‘Actual Contributions asa COMP 39.687“ P799,167 ‘Additional investment. =P pepoo0 779.500 of P_19,667 Total Agreed Equity is computed based on Jasmi tal Agr Jeumli’s exams This is higher that Total Actual Contributions, Compare fea a 6% P799,167. means additional contribution should be made by Pie the actual against the agreed, it | eee aa we deficient partner, Cory. Last entry: 4 Cash 19.667 i Cory, Capital P319,66° 667 5220. a. 2, 23, |. Unlimited liability is a characteristic . A partner extended a loan to the part |. What is the reason for distinguishing a capital account |. A sensible partner will opt to have a REVIEW QUESTIONS _ Define a partnership, Give reasons why one would ‘want to than be a sole proprietor ora shane arte® With another in operating a business rather ; der. Give the disadvantages of - Be @ partnership over a sole Proprietorship and over a corporation. Title present in both a sole propristrship and a ¢ a disadvantage from the viewpoint of the owner but of a creditor. partnership. Explain why this may an advantage from the viewpoint .. Differentiate a general partnership from a limited partnership. | Give the differen eae . a es and similarities of a capitalist partner and an industrial partner. , What are the forms of contributions of a partner? . Why is an Articles of Co- : if of Co-Partnership necessary? Enumerate the information contained herein. Flora isa talented artist. He Would like to be a partner of Aba and Ruray Partnership ut he has no money. Would it still be possible for him to become a partner? How? ). Jay wants to invest in the partnership of Good Health Company but he does not like the idea of his personal properties being taken over by the partnership's creditors in case the partnership becomes insolvent. Will it still be possible for him to join the partnership? |. STP Limited is a partnership that is liable only up to the partnership assets. Is the statement correct? . Why is an industria! partner also a general partner? . What two accounts represent a partner’s equity? |. Give the transactions affecting the capital account and the drawing account of a partner. nership. This was credited to the partner's capital account, Explain why this is not correct. from a drawing account? written agreement rather than oral, Why? his affect the assets and the partners’ equity? . What is bonus capital and how will t . What is the difference in journalizing the investment of a capitalist partner from the investment of an industrial partner? ; ; na investing her land costing P50,000 but with ership with A Ana and Bella formed a parinehe t's at amount will you reeord her investment? a current fair market value of P8 Cite the GAAP and explain. ; , ; What : te a hy assets and liabilities of a sole proprietorship must be adjusted is the 'r by the partnership? - a these oe taken es affect the assets and the partners’ equity? iat is goodwil er goodwil recording capital beyond actual d oodwill in recording capit Explain why bonus !s favored © contribution made by a partner: 532, Andy and Amy agree to form a partr EXERCISES a business selling pastries and Nina and Nona, best friends, agreed to invest cash to put up . doughnuts. They agreed to share profits based on the legal provision. The following are the ledger postings for the last quarter of 2021: Nina, Capital Nona, Capital oo rt Oct. 2 300,000 Oect.2 500,000 : . Oct.4 — 200,000 ‘Nona, Drawing ___Nina, Drawing____ 1 100, Oct. 31 10,000 | Dec. 31 100,000 Sa31 10,000 | Dee. 3 ,000 Nov. 30 10,000 Nov. 30 10,000 Dec. 28 10,000 Dec. 28 10,000 . Nona Income Summary 200,000 | Dee. 31 200,000 Loans Dec. 15 50,000 Dec. 31 Direction: a) In chronological order, deseribe the transactions b) From the above postings, determine the agr Partnership regarding required contribution o and profit-sharing ratio. ©). Give the last entry to close the drawin d)_ Prepare a statement of partners’ equity f nership with Amy in that took place. cents contained in the Articles of Co- f each partner, allowable withdrawals, counts the last quarter of 2021. ing the following: Cost Market Value Land P 1,500,000 3,500,000 Building 5,000,00 00,000 Accumulated Depreciation PCL Andy will invest cash equal to half of Amy’s investment. Direction: Give one journal entry to record the investments of the partners. 3. On January 1, 2019 Elmer and Edam formed a partnership with Elmer contributing 54 sd 000 aa and Edam contributing land valued at P300,000 and a building valued at seen te partnership will assume Edam’s P200,000 long-term note payable een the land and building. The partners agree to share income on a 3: 2 basis, respective ae nel ended, Elmer and Edam withdrew cash of P30,000 and ,000, respectively. At the end of the year, total revenue ed to P375, total operating expenses amounted to PIs 000 amounted fo 375,000 i Direction: ~ a. Cee ie eu a partners” (1) initial capital investments, (2) cast 5, et income and record their share in the profit. ; b. Prepare a statement of partners’ equity for the year just ended se Clara and Eba agree to form a pa i c ! partnership on July 1 wit contril i iene comin fror her solecoronniGior“airosd iss fee ps conriowing the folletMerchandise Inventory ~ cost of 129, equipment ~ cost of P500,000; ,000; current fair value of PI 00,000 a Dovyenr aiteisvoed: re book value ‘of P450,000, current fair value of P400,000 ° quipment on May 1 for 150,000, will assumed by the firm. for P500,000 less accumulat Ate of book value. The parners depreciation of P200,000. Current market value is . ther agreed that th i f total equity and Clara should still invest cash to make hee See ° Direction: Give two entries to record the investments of the partners, From the following balances found in the ledger of R-WE Toy Company, reconstruct the 5 . investment entries recorded by the bookkeeper: Debit Cash 200, 000 Csi Inventory 125,000 Equipment 230,000 Furniture & Fixtures 150,000 Notes Payable , P100,000 Rubio, Capital 350,000 Winston, Capital 125,000 Enriquez, Capital 30,000 Totals P 705,000 6, Blanco and Delrio co-founded a management consultant firm. At the end of the year, Delrio was surprised to lear that her capital was lesser than that of Blanco despite that she invested more and her profit share is also higher at 60%, Blanco, Capital, January | P 800,000 Delrio, Capital, January 1 900,000 Blanco, Drawing 200,000 Delrio, Drawing 280,000 Additional investment by Blanco on June 30 150,000 | Consultancy Fees Revenues 600,000 Operating Expenses 200,000 Direction: a, Prepare a statement of partners’ equity and explain what caused her capital to be lesser than that of Blanco at the end of the year. b, Both partners are guilty of eroding their investments, Explain what tis means. 1. The following transactions of Best Pizza, owned by Rt from March | to May 31, 2019: 4 ek ot ORC sce cream parlor, invested cash of P80,000. an March 1 Reyes, who owns at oo ut with a fair value of P70,000. Customers’ merchandise costing Oe also taken over by the partnership at its realizable acco Ot exhale mallowance for doubtful accounts for 20% of cost, value of 80%. Ontiz invested cash of P40,000 and pie the partners agree to be 50% depres ‘eyes, Ortiz and Flores, took place es of furniture costing P150,000 which .d to arrive at its current fair value 55 rer ermine56 4 i king equipm May 1 Flores, an expert in pizza making, invested imported So ip ne a " costing 350,000 but which fair valuc dropped by fore Hey issued a note fel | ‘a down payment of P200,000 when this was Purchase pat the liability will be the balance half of which is still unpaid . Partners agi assumed by the partnership. ‘hat all partners will i s be made sot cash investment: ae May 31 Partners agree that additional eas invests ofthe have an equal sharing on the ee i ues, contributed by cach paral column, list down the assets and liabilities, at fair valu panne and determine each partner's comune? b) Who should make additional cash investment an¢ ae Sn partner ¢) Prepare three separate entries to record the contribu chico and Ted Baylon to be his partners on June 1,2019 ‘Anthony Taverna invited Jose El "tthe following balances: to set up an advertising company. His ae ee Cash P 20,000 ‘Accounts Receivable 80,000 » 2000 Allowance for bad Debts . Merchandise Inventory 120,000 Furniture & Equipment 90,000 Allowance for Depreciation 18,000 Accounts Payable 40,000 Taverna, Capital 0,000 Totals P310,000 Taverna will invest only the non- cash assets as well as the liabilities of his sole proprietor owned business for a 60% share in partners’ equity, the other two partners contributing cash equally for the remaining interest. They agree to consider the following adjustments for Taverna’s contribution: 1, The accounts receivable has a realizable value of 70,000, 2. Merchandise inventory should be decreased by 10%, 3. Furniture and equipment are only worth 75% of its cost. Direction: a) Compute for the adjusted capital of Taverna. Adjust and close his books. b) How much will be the cash investment of Jose and Ted’? ¢) Give one investment entry to open the books of the partnership. . Gilmore agree to join with Ray Invests of he att Raymond and set up an intemet café. The following are tH 1. Gilmore will invest ten sets ee 12) Ses of computers and a printer unit with a total list price of fixtures with a cost aie arPsh a P260,000. He will also invest furniture mnarkat value ofthis ony Pag ea” HSS aeeummulated deprecation of P8,000. Fal 2. Raymond will put up enough 3. They further agree to reco interest over the partnership cash to make the total nize bonus so that PS00,000. , both partners will have an equtl10. i. pirection: Record the actual contribution . ; f Gil cecord the inv of Gilmore, a pament of Raymond 'ncluding the bonus transfer from Gilmore. May Gonzales, sole proprictor ofa hardware busi Ned Espiritu. May's accounts are iness, decides to form a partnership with 8 follows: Cash Book Value Market Value . P 34,000 P 34,000 Accounts Receivable (net) 9999 76,000 Inventory 112,000 125,000 Lan 200,000 300,000 Building (net) 300,000 340,000 Accounts Payable 25,000 25,000 Mortgage Payable 175,000 175,000 Ned agrees to contribute P200,000 cash for a 25% interest Direction: . a) Record May's investment and b) 1. Record Ned's investment under the bonus method where total contributions of the partners is also the total agreed equity, 1, Record Ned's investment. Using revaluation method compare total agreed equity (computed based on Neds investment) against total actual contributions. It is agreed that Land should further be revalued, Entry to change May’s investment, Alice and Alex decide to merge their proprictorships into a partnership called AA Partners. Financial records showed the following: Alice Alex Cash 25,000 Accounts Receivable 32,000 Less: Allowance for impairment 2.400 P29,600 Inventory 30,000 Equipment 40,000 Less: Accumulated depreciation 14,000 26,400 The partners agree that the net realizable value of the receivables is P25,000 and that the fair valve “ofthe equipment is P22,000. Obsolete stock of P10,000 should be written off. Direction: : a) Two ivestnent entries supported by a table for adjusted and agreed capital based on the following independent situations: 1) Cash Method. Equal interest over i sment. 0, agi it Fee retro lex investment represents 40% of total agreed equity. The aaa aieirealsiie is due 10 her strong connection in the electronic industry ess capital ‘ 7 hi ase for the partnership. . 3) oo Me faas est oer the parinersip ith no additional adjustment onus Method. ital. : for the bonus capi on the assets. Male a thie 19 yestment represents 50% of total agreed equity, 9 Revaluation Method. lesser than foal seal eoiibtons. They agreed ha ‘otal agreed capital further be reduced. ‘ } should fur ae » ral investment in eal Position under each ofthe above situations. ‘Sent the statemet the assets with additional investment required to 5?4 . He wants ty, 12. Max Solis has successfully operated Star News for a number of years ants expand the newspaper publishing business but he would need more aaa Mary Pricto to join him on July 1. A post closing trial balance of his bu: the following: Debit Credit Cash. P 170,000 Accounts Receivable 500,000 Supplies Inventory 75,000 Prepaid Insurance 10,000 Fumiture & Fixtures 35,000 Pan ‘Accumulated Depreciation Printing Equipment 509,000 120,000 Accumulated Depreciation La Accounts Payable aoe Solis, Capital — 815,000 1,290,000 It was agreed that the above assets and liabilities be adjusted as follows: 1. The allowance for bad debts should be 15% of the accounts receivable after writing off bad accounts of P50,000. ‘The market value of the supplies is only 80% of its cost. ‘The market value of the furniture and fixtures is P25,000. Accrued taxes of P5,000 should be recognized. The printing equipment is estimated to have a market value lower by P80,00" a aBeN The partnership will be called the Philippine Star Balita with Pricto investing cash to make the agreed capital P 1,000,000. It was further agreed that Prieta will be given a 40% interest in the firm, Direction: a) Prepare a journal entry to record in the partnership books Solis” adjusted assets and liability contributions ») Determine Prieto’s actual cash investment and her agreed capital credit ©) Prepare a journal entry in the partnership books to record the cash investment of Prieto including the bonus capital for Solis. 13. Marlo operates a sole pr Pratt opretorship business which on September 1, 2019 had the Cash c - 10,000 counts receivable 40,000 Allowance for doubtful debts , 2, Inventory 50,000 sae Plant and equipment 30,000 Accumulated depreciation _ Accounts payable on Marlo, Capital Be 10,0 130,000 an 581. September 1, Marlo and Bello ax 0,000 cash as capital Theatre to form a partnership with Bello contributing jabiltes of Marlo’s business be wane SNP Awteement indicates that all assets and tattgn off PI,O00, inventory pe oust OVE a fair vals, accounts rvsvable to be vaners also agreed that Marlo's nn and plaat and equipment at U3 of its cost. The Petneshi asses and profits, pital contribution will represent a 40% interest over Direction: how the general journal entries . a Sl Be Journal entries to record the contribution of each partner, Goodwill method to be used to comply with ! . ° y partners” agreed c: i base Marlo's contribution and ort Partners” agreed capitalization computed based on b. Prepare a statement of fin; formation of the partnershiy ‘ancial position of Marlo and Bello immediately after the iP at the end of September. steve owns a store selling health products : nd Guy owns a beauty salon, They agreed to combine their businesses and call it Health and Beauty Shop. Prior to the combination, they agreed to review the assets and liabilities and make some necessary adjustments. The following accounts are found in their statements of financial position Guy Beauty Cash Pp T1000 Accounts Receivable 25,000 Merchandise Inventory 80,000 Supplies Inventory 25,000 Fumiture and Equipment 85,000 Total P121,000 Accounts Payable P 20,000 P 5,000 30,000 116,000 P 121,000 ‘The partners agreed to the following, conditions a. P3,000 doubtful accounts should be recognized. te b. Fumiture and Equipment should be at the market value of P35,000 for the health store and P70,000 for the beauty salon, ©. P10,000 obsolete goods should be written off 4. Beauty supplies unused should only be P15,000. ©. Accrued interest should be recognized for P2,500. Direction: 2) List down the adjusted assets and liabil » Tea ith an agreed equity of P100,000 foreach partner, show the atonal wit cash to be invested or cash to be withheld by a partner h a / ‘epare two entries to record the investments the partners in the partnership books. 4) Prepare a statement of financial position just after formation of cach partner to determine partner's 594 c) Change the agreement listed in b) if instead of cash method, they agreed to use the bonus method to comply with the required P100,000 equity for each partner. Prepare the third entry to record the bonus capital. 15, The following information were taken from the records of Dan and Jude, two Propritors; Dan — ie Pan ___ = Dean Credit. «Debit Credit Cash P 19,500 P econ Accounts Receivable 15,000 soo x Pact Allowance for doubtful accounts P 2, re x Inventory 28,000 30,000 Equipment 50,000 ar x 108 Accumulated Depreciation- equipment 24.000 ag Accounts payable 45,000 , Dan, Capital x sa Jude, Capital ____ ve 100 pii2,500 Pi12,500 86,000 Dan and Jude decide to form a partnership “Sparkling Waters” withthe following agreed upon valuations for non-cash assets: Dan Jude Net realizable value of Accounts Receivable P11,500 P18,000 Inventory 32,000 15,000 Equipment 31,000 19,000 ‘All cash will be transferred to the partnership, and the partnership will assume all the liabilities of the two proprietors. Direction: a) Prepare two separate journal entries to record the transfer of each proprietor’s assets and liabilities to the partnership. b) They further agree that Dan's investment represents a 62.50% interest in the new business. Prepare the additional cash investment or cash withdrawal entry to comply with this agreement Ignore b). They further agree that equity is P80,000 with Dan’s investment representing 60%, Interest in the partnership. Prepare the additional entry to comply with this agreement 9) 16. Veejay Lee is the owner of VJ's Internet Cafe. She has to expand her business so she invited a partner, Jackie Lou on August 1, 2018 and the latter accepted. In the books of Lee, just before the partnership formation, are the following accounts and their balances: Cash P Accounts Receivable ag.o00 Allowance for Bad Debts 3,500 Notes Receivable 50,000 Merchandise Inventory 180,000 Store Furniture and Equipment 300,000 ‘Accumulated Depreciation 11,000 ‘Accounts Payable 50,000 60i \ amount of the Allowance for Bad debts b. The ae a dated March 31 and is due on September | at 12% interest e Market value of the merchandise is Pigs oxy oa i Los will ce cash fora 50% interest in an agreed total equity of P800,000. + ee wl i miture and equipment's value to come up with an equal f, New books will be used by the partnership. Direction: a) List the assets and liabilities of i is Hl : ich, isher adjusted capital ° Lee at the adjusted amounts. How mu: b) Compare the adjusted capital against the agreed capital, How much is the evaluation for the store equipment? ©) Make three sets of entries to: 1) adjust and close Lee’s books, 2) record Lee’s investment in the partnership books and 3) [Link]’s investment Using Exercise 16. Assume there is no furniture revaluation. Instead, Lou will invest enough cash to come up with an agreed equity of P800,000. It was further agreed that bonus should be recognized so that each capital will represent a 50% interest in the partnership equity. Direction: 1) Entry to record investment of Lee in the partnership books. 2) Record investment of Lou including the effect of the bonus. LEGAL and ETHICAL ISSUES A,Band C formed a universal partnership of property contributing the following: A: 5 cars B: a lot for 500 square meters C:alot with a 3-storey building lot and lease the second and third Partners agreed to put up a car rental agency, a parking floors ofthe building After a year, total profit realized amounted to P2,500,000 Questions: 1, To whom will the properties belong? 2. To whom will the profits belong? ETHICAL ISSUES in 2018, On its third year of operation, surprise that the A,B and C formed a partnership ure y* iolindiinys bomninarC own as expected in spite that the industry is booming, Fa ese is oes of the partnership. A, as managing partner, would not ant ooon the beck ot vecords invoking confidentiality of contracts embodied hercin ¢ bool Questions: 1. Is there a legal issue violated? Explain ; 2.1s there an ethical issue violated? Explain. 61ACCOUNTING ISSUES invested his lot which he Jim Fernandez invites his two cousins to form a partnership. ue eee pick bought three years ago at a cost of P300,000 but was appraise ea ers historical i agree to an equal profit sharing ratio. The accountant recorded the lot Cost, f ; A month after, the partnership sold the lot for P650,000 and a gain on sale of land wag recorded. Required: a) Give the entry to record the investment of the lot. b) Give the entry to record the sale ofthe lot. c) Compute for the equity of Fernandez over the investment and subsequently from the sale of the lot. 2. Refer to No. | but this time the accountant recorded the lot at its appraised value. Answer the same requirements. 3. Comparing the equity accounts in Ie and 2c which approach is more fair and equitable? Give the accounting principle that supports this. What is the logic behind this principle? TAX ISSUE ‘The Elmundo partnership has three partners. Eli, Mumar, Nedo sharing profits in the ratio of 2:1:1, respectively. It reported a net income for its first year of operation in the amount of P150,000 before tax. How much will be the share of each partner if the partnership isa: a) Medical equipment store b) Professional partnership made up of doctors. Refer to page 64,