Documentos de Académico
Documentos de Profesional
Documentos de Cultura
DEFINITION OF PARTNERSHIP
-A contract where two or more persons bind themselves to contribute money, property or industry to a common fund with the intention of
dividing profits among themselves. Two or more persons may also form a partnership for the practice of profession or what we call GENERAL
PROFESSIONAL PARTNERSHIP (Art. 1767, Civil Code of the Philippines)
CHARACTERISTICS OF A PARTNERSHIP
Some characteristics of a partnership that distinguish it from other forms of business organization (Sole and Corporation) are the following:
Voluntary Association
A partnership is created by voluntary agreement of individual rather than operation of law.
Limited life
Partnership is created by a contract and anything that ends the contract of the partnership dissolves it (admission of new partner,
withdrawal, death/retirement, liquidation).
Unlimited Liability
A partner’s liability extends beyond his/her capital contribution (except limited partners).
Mutual Agency
Each partner is an agent of the partnership within the scope of the business.
KINDS OF PARTNERS
1. General partner
2. Limited Partner
3. Capitalist
4. Industrial
5. Managing partner
6. Liquidating
7. Dormant
8. Silent
9. Secret
10. Nominal or partner by estoffel
1. ENTITY THEORY holds that the business is separate and distinct from the owners of the business. The business is the entity.
2. PROPRIETARY THEORY holds that the owners are the entity
PROPRIETARY ENTITY
The entity is viewed as the individual owners The business unit is separate and distinct from its
owners
Salaries to partners are distributions of income Partnership enters contracts in its own name
(not expenses)
Unlimited liability extends to personal assets of Partnership give up title to their contribution
owners
Original partnership is dissolved with the
admission or withdrawal of a partner
ACCOUNTING FORMATION
VALUATION OF INVETSMENTS
1. Bonus approach – retains historical cost
2. Revaluation approach – depart from HC, non-GAAP believed not in accordance with substance over form
(GW Method)
On July 1 2016, Pholdz and JC agreed to form a partnership. The partnership agreement specified that Pholdz is to invest cash of
50,000 and JC is to contribute land with FMV of P100,000 with 20,000 mortgage liability in the bank to be assumed by the
partnership.
Assume that AA and BS form a partnership. AA has been operating a business that is to be carried on by the new partnership. B is to invest cash of P250,000 and
equipment with a fair value of 125,000 encumbered by a mortgage note payable of P25,000. Just before the partnership is formed, a statement of financial
position is drawn up for AA’s business as follows:
AA
Statement of Financial Position
As of January 31, 2016
RULE 2: IN SOME CASES WHERE PARTNERS MAY AGREE TO HAVE A CAPITAL CREDIT DIFFERENT FROM THEIR NET ASSETS CONTRIBUTIONS, GOODWILL OR
BONUS METHOD WILL BE USED.
EXERCISES:
PROBLEM 1:
On July 1, 2013, HB and KM decided to form a partnership. The firm is to take over business assets and assume liabilities, and
capitals are to be based on net assets transferred after the following adjustments:
Balance sheet for HB and KM on July 1 before adjustments are given below:
HB KM
Cash 31,000 50,000
AR 26,000 20,000
Inventory 32,000 24,000
Supplies 5,000
Equipment 20,000 24,000
Accum. Depr’n. (9,000) (3,000)
PREPAID RENT
Total Assets 100,000 120,000
AP 28,000 20,000
Capital 72,000 100,000
Total liabilities and 100,000 120,000
Capital
Problem 2: On December 1, 2011, Arjay and Homarr formed a partnership with each contributing the following assets at fair
market values:
Arjay Homarr
Cash 9,000 18,000
Machinery 13,500 -----
Land ------ 90,000
Building ------ 27,000
Office Furniture 13,500 ------
The land and building are subject to a mortgage loan of P54,000 that the partnership will assume. The partnership agreement
provides that Arjay and Homarr share profits and losses, 40% and 60% respectively and partners agreed to bring their capital
balances in proportion to the profit and loss ratio and using capital balance of Homarr as the basis. The additional cash
investment made by Arjay should be .
Problem 3: JR and BS are joining their separate business to form a partnership. Cash and non-cash assets are to be contributed
for a total capital of 300,000. The non-cash assets to be contributed and liabilities to be assumed are:
JR BS
BV FV BV FV
AR 22,500 22,500
Inventory 22,500 33,750 60,000 67,500
Equipment 37,500 30,000 67,500 71,250
The partner’s capital accounts are to be equal after all contributions of assets and assumptions of liabilities.
Problem 4: On April 30, 2012, XX, YY and ZZ formed a partnership by combining their separate business proprietorships. XX
contributed cash f 75,000. YY contributed property with a 54,000 carrying amount, a 60,000 original cost and 120,000 fair value.
The partnership accepted responsibility for the 52,500 mortgage attached to the property. ZZ contributed equipment with a
45,000 carrying amount, a 112,500 originalcost and 82,500 fair value. The partnership agreement specifies that profits and
losses are to be shared equally but is silent regarding capital contributions. Which partner has the largest April 30, 2012 capital
balance?
PARTNERSHIP OPERATIONS
PARTNER’S LEDGER
1. Capital Accounts
2. Drawings Account
3. Account for loans to or from partner
CAPITAL ACCOUNT DRAWINGS
1. Equally
2. In an arbitrary or agreed ratio
3. In the ratio of partners’ capital
a. Original capital
b. Beginning of the year capital
c. End of the year capital
d. Simple average during the year
e. Weighted average during the year
4. Interest, salaries and bonus are to be allowed, the balance to be divided based on some arbitrary basis as agreed upon.
EQUALLY
Assume that A, B, C are partners in ABC partnership. Profit for the period is P120,000.
Entry:
Assume that the ABC partnership was organized two years ago with each partner contributing the following:
A- P180, 000
B- 120,000
C- 300,000
Transactions between the partners and the partnership during the current year are as follows:
PARTNER A:
January 1 Balance 200,000
March 1 Additional Investment 50,000
June 30 Withdrawal 30,000
October 31 Additional Investment 20,000
December 31 Balance (before division of income) 240,000
PARTNER B:
January 1 Balance 150,000
August 1 Additional Investment 20,000
November 1 Additional Investment 70,000
December 31 Balance (before division of income) 200,000
PARTNER C:
January 1 Balance 400,000
February 1 additional Investment 50,000
May 31 Additional investment 60,000
October 31 Additional investment 20,000
December 31 Balance (before division of income) 530,000
Assume that the profit for the period is P120,000
Assume that AA and BS are partners in a travel agency, Their capital account balances on January 1, 2010 are 40,000 and 20,000 respectively. They agree that
partnership are to be distributed as follows:
AA BS
Salary 3,000 9,000
Interest on beginning capital 5% 5%
Bonus 25% of NI after -0-
Salaries and bonus
But before interest
Residual Profit or loss 70% 30%
Calculate the distribution of profits if the partnership net income before salary, interest and bonus is 60,000.
AA BB TOTAL
SALARY
INTEREST
BONUS*
TOTAL
RESIDUAL PROFIT
TOTAL
EXERCISES 401-2
PROBLEM 1-A: Medina and Detoya Partnership which had a profit of 300,000 for the year ended December 31, 2013, the first year of
operations. The partnership contract provided that each partner may withdraw 5,000 on the last day of each month; both partners did so
during the year. The drawings are recorded by debits to the partner’s drawing accounts and shall not be considered in the division of profits
and losses. It is the intention of the partners that each partner’s share in the profit or loss be either credited or debited to the drawing
account.
Medina invested 400,000 on January 1, 2013 and an additional 100,000 on April 1. Detoya invested P800,000 on Jan. 1 and withdrew 50,000
on July 1.
PROBLEM 1-B: Assume that the profit for the year is 400,000 and partnership agreement is to give (1) bonus to medina of 25% of profit after
salaries and interest but before bonus; (2) Annual salaries of 100,000 to Medina and 60,000 to Detoya; (3) Interest on average capital balances
of P71,250 and 116,250 to medina and Detoya, respectively; (4) Balance to be divided in a ratio of 40:60.
PARTNERSHIP DISSOLUTION
DISSOLUTION refers to the change in the relation of the partners. It does not necessarily mean termination of the business. After dissolution of
old partnership, a new partnership may be forged or the business may cease to operate. The winding up or terminating partnership affairs is
known in accounting as LIQUIDATION.
CAUSES OF DISSOLUTION
-Admission of new partner
-Withdrawal of partner
-Death or incapacity
-Incorporation
ILLUSTRATIONS
Problem 1:
The percentage in the parentheses after the partner’s capital balances represents their respective interest in the
profits and losses. The partners agree to admit ZZ as a member of the firm.
Required:Prepare the required entries on the partnership books to record the admission of ZZ under each of the
following assumptions:
Situation 1: ZZ purchases a ¼ interest in the firm. One-fourth of each partner’s capital is to be transferred to the new
partner. ZZ pays the partners Php15,000 which is divided between them in the proportion to the equities given up.
Situation 2:ZZ invests Php20,000 in the cash for ¼ ownership interest. The money goes to the original partners.
1. The entry to admit ZZ as a new partner should be if the book value method (no adjustments/ no revaluation)
is used:
2. Using the same information in No. 1 the capital balances of XX, YY, and ZZ after the admission should be:
3. Using the same information in No. 1 compute the partnership gain (or gain to be recognized in partnership
books).
4. Using the same information in No. 1, compute the gain to be recognized by XX, and YY.
5. If revaluation/ adjustments in assets are recognized, the entry to admit ZZ should be:
6. Using the same information in the No. 5, the capital balances of XX, YY, and ZZ after the admission should be:
Situation 3: ZZ purchases a ¼ interest in the firm. One-fourth of each partner’s capital is to be transferred to the new
partner. ZZ pays partners Php12,000, which is divided between them in proportion to the equities given up.
1. The entry to admit ZZ as a new partner should be if book value method (no adjustments/ no revaluation) is
used:
2. Using the same information in No. 1the capital balances of XX, YY, and ZZ after the admission should be:
3. Using the same information in No. 1, compute the partnership loss (for loss to be recognized in partnership
books).
4. Using the same information in No. 1, compute the loss to be recognized by XX, and YY.
5. If revaluation/ adjustments in assets are recognized, the entry to admit ZZ should be:
6. Using the same information No. 5, the capital balances of XX, YY, and ZZ after the admission should be:
Situation 4: ZZ invest Php25,000 for a ¼ interest in the firm. The total agreed capital is Php85,000.
Situation 5: New partner ZZ conveyed a tangible assets with a fair value of Php32,000 with and assumed mortgage of
Php5,000 in exchange for a 35% interest in capital, keeping in mind that ZZ would be acquiring a ¼ interest in profits.
Situation 8: ZZ invests Php40,000 in the firm, Php10,000 is considered a bonus to Partners XX and YY.
Situation 9: ZZ invests Php40,000 in the firm and is allowed a credit of Php12,000 for goodwill upon admission.
Situation 10: ZZ invest Php30,000 for a 37.5% interest in the firm . the total firm capital is to be Php80,000 and
partners agreed that their capital balances should made to equal to their new profit and loss ratio.
ILLUSTRATION 2:
In the AD partnership, Allen’s capital is Php140,000 and Daniel’s is Php40,000 and they share income in a 3:1 ratio,
respectively. They decide to admit David to the partnership. Each of the following questions is independent of the
others.
1. David directly purchases a one-fifth interest by paying Allen Php34,000 and Daniel Php10,000. The land
account is increased before David is admitted. By what amount is the land account increased?
2. Allen and Daniel agree that some of the inventory is obsolete. The inventory account is decreased before
David is admitter. David invests Php40,000 for one-fifth interest. What is the amount of inventory written
down?
ILLUSTRATION 3:
DD, EE and FF are partners sharing profits and losses of 50%, 30% and 20%, respectively. The December 31, 2011
balance sheet of the partnership before any profit allocation was summarized as follows
On January 1, 2011, FF has decided to retire from the partnership and by mutual agreement among partnerships; the
following have been arrived at:
It was agreed that the partnership will pay FF for this interest in the partnership inclusive of loan balance.
1. The entity to record the allocation of net income on December 31, 2010 should be:
2. The entry to record the adjustments on assets on January 1, 2010 should be:
3. The entry to close the drawing and loan accounts:
4. Considering Question Nos. 1, 2, and 3 above the interest of FF immediately before his retirement amounted
to:
5. Considering Question No. 4 and FF retires by receiving Php72,000 cash (payment at book value), the entry to
record withdrawal of FF should be:
6. Considering Question Nos. 4 & 5, the capital balances of DD and EE after the retirement of EE:
7. Considering Question No. 4 and FF retires by receiving Php76,000 cash (payment at more than book value),
using bonus method, the entity to record the withdrawal of FF should be:
8. Considering Question Nos. 4 and 7, the capital balances of DD and EE after the retirement of FF:
9. Considering Question No. 4 and FF retires by receiving Php76,000 cash (payment at more than book value),
using partial goodwill method , the entry to record the withdrawal of FF should be:
10. Considering Question Nos. 4 and 9, the capital balances of DD and EE after the retirement of EE:
11. Considering Question No. 4 and FF retires by receiving Php76,000 cash (payment at more than book value),
using total (implied) goodwill method, the entry to record the withdrawal of FF should be:
12. Considering Question Nos. 4 and 11, the capital balances of DD and EE after the retirement of FF:
13. Considering Question No. 4 and FF retires by receiving Php69,000 cash (pay at less than book value), using
bonus method , the entry to record the withdrawal of FF should be:
14. Considering Question Nos. 4 & 13, the capital balances of DD and EE after the retirement of FF:
15. Considering Question No. 4 and FF retires by receiving Php69,000 cash (payment at less than the book
value), using specific adjustment in assets, the entry to record the withdrawal of FF should be:
16. Considering Question Nos. 4 and 15, the capital balances of DD and EE after retirement of FF:
17. Considering Question No. 4 and FF retires by receiving Php69,000 cash (payment at less than book value),
using asset write-down traceable to the entry, the entry to record the withdrawal of FF should be:
18. Considering Question Nos. 4 & 17, the capital balances of DD and EE after the retirement of FF:
Sometimes, God breaks our spirit to save our soul
Sometimes, He breaks our heart to make us whole
Sometimes He sends us pain so we can be stronger
Sometimes, He sends us failure so we can be humble
Sometimes He sends us illness so we can take better care of ourselves
Sometimes He takes everything away from us so we can learn the value of everything we have.
--Prepared by: Keisha D. Morales, CPA, FRIAcc, MPA©