ACCOUNTING TUTORIAL

Friday, May 23, 2014

Partnership accounting - part III

In a sense averaging of capital is simply  determining the average capital of a partner
during the year because there are  additional capital or withdrawal during year and that
must be considered  to get the real or  effective   capital status of a partner.  To simplify, 
supposing ,  the beginnng capital is the basis for profit distribution .   Supposing , during 
the year June 1  and additional capital of 10,000 was made and it remained uncheanged
until dec 31, .  The beginning capital is 5,000.00  last Jan 1.  If you compute the  profit
share , 5,000  capital is the basis . ,  however if  the average method is used,  the capital 
base is  10,833.00 .  this 10,833.00 is somewhat far from the 5,000.00 beginning capital
hence the adoption of averaging..

the 3rd method is   GIVING INTEREST AMOUNT USING A RATE  BASED ON CAPITAL
BALANCES, ( beg., end, averaging)  AND THE REMAINDER of profit after deducting interest
given IS ARBITRARY distributed..

  This method implies that the partners will receive an amount  called INTEREST on the
basis of their capital. This amount is an initial share of the partner to the profit of the
partnership.  Most probably , this interest to be given to partners is small and there is a
tendency that  there will an excess of profit ater this interest is deducted   and remaining
profit  will be shared arbitrarily.

In this method the following  is to be agreed upon.

1.  an agreement should provide for the amount or rate of interest. 
2,  the amount of capital  either initial , beginning,  average,  ending  which shall be the
bases of the interest computation .
3.  the procedure when a loss instead of profit  has occurred .
4. or when the computed interest exceeds the income.

EXAMPLE:  the profit to be shared is 20,000.00.  PETE  is  entitled to 12 %, interest, TONY
10%. Their profit sharing is 60% Pete,  40% Tony.   Say  average capital is ,  PETE  80,000.  
TONY   50,000
                                      
                                                           pete               tony              
interest ( 12% x  80,000   )                9600      
interest  (10% x 50,000 )                                          5,000
remainder 60%x 5,400                      3,240
remainder 40%x 5,400 )                                           2160
total                                                  12,840             7160          20,000    

the 4th method  is GIVING SALARY TO PARTNERS.

OR  a  combination of interest, salaries are also being practiced.

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LET ME SHIFT TO ANOTHER TYPE OF  BENEFITS ACCORDED TO A PARTNER USING THE NET
PROFIT AS THE BASIS  AND THIS IS THE GIVING OF BONUS TO A PARTNER.
The  bonus is either treated as an ordinary expense,  or is treated as a distribution of 
profit to partners.
If it is treated as EXPENSE , the bonus is computed based on net profit after deducting
that bonus or even after deducting interest and salary allowance..
If it is treated as DISTRIBUTION OF PROFITS then the bonus is computed based on net
profit  after deducting interest and  salary.

The computation of bonus especially  based on net profit after deducting that bonus or
even after deducting interest and salaries, may to some, is a little bit  difficult.  So allow
me to simply the algebraic expression being used by some teachers into a mathematical
computation.

It is said that the bonus rate is to be multiplied to the NET PROFIT   after DEDUCTING that
bonus, sounds confusing.
 HERE IS HOW:

  If a certain percentage (bonus rate) is to be multiplied to NET INCOME after bonus , that
NET INCOME  after bonus is said or considered to be at 100% since it is on this 100% that
the bonus rate will be multiplied .  NOW , since this 100% is arrived at because the bonus 
was deducted from the NET PROFIT before bonus ,  therefore using work back
approached , that is,  NET INCOME AFTER BONUS is 100% , add the bonus rate, will equal
the equivalent PERCENTAGE of the NET INCOME BEFORE BONUS.

REMEMBER THIS PRINCIPLE  :   ANY AMOUNT  DIVIDED BY  A PERCENT IT REPRESENTS THE
ANSWER IS THE AMOUNT IN ITS 100%.

IN THIS BONUS COMPUTATION, THE BONUS RATE IS TO BE MULTIPLIED TO ITS BASE

AMOUNT AND THIS AMOUNT IS REPRESENTED BY 100%.  NOW SINCE THIS 100% WAS ARRIVED
BECAUSE A BONUS RATE WAS DEDUCTED  FROM THE NET INCOME BEFORE  
BONUS, THEN THAT MEANS THE NET PROFIT BEFORE BONUS IS BY WAY OF WORK BACK IS .
100% PLUS BONUS  RATE EQUALS THE PERCENT EQUIVALENT OF NET PROFIT BEFORE
BONUS.

Now  since we know the equivalent or representative percentage of the NET PROFIT
BEFORE BONUS, you just simple divide the NET PROFIT BEFORE BONUS to its equivalent
percentage , THEN YOU ARRIVE THE AMOUNT OF NET PROFIT AFTER BONUS , which is the
100%.  So, you multiply now the rate of bonus to the NET PROFIT AFTER BONUS  to get the
BONUS AMOUNT  to be given to the partner.

EXAMPLE.   

BONUS IS 20% ,  NET PROFIT  IS  200,000,

NET PROFIT                                            200,000   120%

less:  bonus                                                      ?
__________________________________________20%_____________ 
NET PROFIT AFTER BONUS                      ?         100%
 X                                                                                20% 
Now  dividing 200,000 net profit by its equivalent percentage, of 120%, the answer is
166,666.66 which is the 100%  representing the  NET PROFIT AFTER BONUS, multiply this
by 20% , you get 33,333.33 as bonus.  TO PROVE:

NET PROFIT                                        200,000.0O    120%

BONUS                                                  33,333.33       20%
NET PROFIT AFTER BONUS            166,666.67     100%
X  20%                                                    33,333.33      20%

of course, the 120% was arrived at by adding the 100% plus 20% equals 120%. hence 120%
profit before bonus , less  bonus of 20%  equals 100%, where you now multiply the bonus
rate.

a test or quiz or board exam might appear that the bonus amount  and rate of bonus is
given  but the net profit is unknown.  To solve it is:   bonus divide 20% = profit after bonus
PLUS BONUS AMOUNT = net profit before bonus.

Or the net profit after bonus is given and the rate of bonus,  how much is the net profit.   

There is another bonus computation that is also complicated to some. And this is the
bonus is computed on net profit after bonus, after interest.

EXAMPLE : BONUS IS 20% FOR PETE, , INTEREST IS 10,000 PETE,,  TONY 5,000
                         NET PROFIT IS 200,000.00

Computation:

net profit                                           200,000

less interest                                         15,000
net profit after interest                       185,000
less: bonus                                                       ( 20%)
__________________________________________________________________ 
net profit after bonus and interest                      100%  which will be basis of the bonus
rate.
 x                              20%

Now considering that the  net  profit  after bonus and interest  became 100%  where it
became 100% because a 20% bonus is deducted from the net profit after interest,
therefore the 185,000  is represented by 120% ( 100% add 20%) . Dividing 185,000 by 120% ,
gives you  154,166.66 as the NET PROFIT AFTER BONUS AFTER INTEREST   which will serve
as basis of the 20% bonus of 30,833.33.

to prove:
net profit after interest                        185,000
Less:    bonus                                      30,833.33
net profit after interest/bonus              154,166.67   x  20%   =  30,833.33

Now , the same formula if the salary allowance is also included. All you have to do is
deduct the salary allowance to arrive at the NET PROFIT AFTER INTEREST AFTER  SALARY
ALLOWANCE.  This net profit just mentioned will now be the amount that will be divided
on a percentage arrived in adding 100% plus bonus rate. So if the bonus rate is 5%, the
divisor would be 105%, if 30%, 130% so on so forth.

BUT SUPPOSING  THE TOTAL  OF BONUS, INTEREST , SALARIES IS BIGGER THAN THE NET
PROFIT, WHAT WILL BE THE PROCEDURE.

In the preceeding example , supposing the profit  is  only 20,000.00.  How is the
distribution of profit if profit sharing is 60% pete,  40%  tony.  Bonus is 5%. 

                                                     PETE                    TONY
INTEREST                                 10,000                      5,000             15,000
SALARIES                                   3,000                      8,000             11,000
bonus                                              833.33                                            833.33 
 TOTAL.                                    13,833.33                 13,000             26,833.33
distribution of loss                       ( 4,100.00 )        (         2,733.33)   (   6,833.33)
NET INTAKE                              9,733.33                 10,266.6          20,000

In this example , the loss after giving interest, salary and bonus shall likewise be
distributed in accordance with their sharing ratio.
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ANOTHER TYPE OF PROFIT DISTRIBUTION  IS  THE GIVING  MINIMUM GUARANTEED  SHARE IN
PROFITS TO  PARTNER.

This system entitled a partner a minimum share of profits including interest  , salaries,
bonus . that means he is assured to received that minimum amount , whether the profit is
not sufficient to pay the other partner, in which case the other partner has to reduced
their share on the profits.

 REMEMBER  FOR YOU TO BE ABLE TO  VIEW OR TO GRASP THE OVERALL PICTURE OF THE
PROFIT DISTRIBUTION FOR EASY ANALYSIS , YOU HAVE TO DRAW THE FORMAT OF THE
PROFIT DISTRIBUTION AS SHOWN BY THE SUCCEEDING ILLUSTRATION.

this is about a partner being given a MINIMUM GUARRANTEED SHARE ON THE PROFITS.
EXAMPLE.

A, B C, partners,  with profit sharing ratio of  5: 2: 3: respectively . A to receive  interest

1,000, B,   2,000  C,  2000.
A receives salary   3,000 .   B  to receive a minimum share of the profit of 10,000.00. the
profit is 15,000.00

                                                     A                        B                        C          TOTAL

INTEREST                              1000                     2,000                 2000          5000
SALARY                                 3000                                                                 3000
______________________________________8000__________________8000___________
                                                4,000                   10000                   2000       16000
PROFIT                                                                                                           15,000
REMAIN (SHORTAGE)           (625)                                              (  375)      (1000)
final shareSHARE                     3375                      10,000                  1625     15,000

What maybe the issue here is how to compute for the  share of A , C   on the lacking of
profit  as a result of the minimum of 10000 of B.
Take note that the profit is only 15,000 and the initial fixed share of A , C  is  6000 ( A
4000 , C 2000)  plus the minimum share of B of 10,000 or a total of 16,000, which is short
of 1,000 , which shall be divided between A, C.  .  B is not subject to share because he is
assured of the 10,000 therefore A C  HAS to absorb the shortage.

Now  since A , C   has a   50%  share ,  C has a 30% on the profit sharing ratio.  their total
contribution as to sharing is 80%, so their effective share without B is as ff:

                           A  50%  DIVIDE 80% IS  62.5%

                           c   30% DIVIDE 80% IS   37.5%

How do you compute for the equivalent percent when what is given is in terms of  whole
number and not in percentage.  like  5: 3: 2  -= 10

simply   add the total of all numbers then , now to get their individual percentage ratio is
DIVIDE their number by the TOTAL OF THE ALL THE NUMBERS.  5/10     3/10     2/10 
___________________________________________________________________________

Being the accountant of the partnership, you must pre compute the needed profit so that
the minimum guarranted share of the partner and the interest and salaries ONLY of the
other partner can be met.
IN THIS WAY , by mere seeing the actual profit  you would know whether the partner can
have a share on the remaining profits .  In the above example , it is  16,000.00 .

You must also TO PRE COMPUTE ,  THE needed partnership profit  where  the other
partner not receiving minimum share can still share on the remaining profits, that means
by simply getting the difference between the 16,000 and this pre computed profit, the
partners not receiving a minimum guarranteed share will likewise received his share on
the remaining profit.

HOW DO YOU DETERMINE THAT PROFIT  ON THAT CONDITION.

This profit pre determination  presupposes that the one receiving the minimum has also
have the share on the remaining profit,  that means , HIS GUARRANTEED SHARE LESS HIS
INTEREST , SALARIES  is presumed  his share on the profits,  THIS SHARE  is of course
represented by his profit sharing ratio,  THAT MEANS DIVIDING THIS SHARE ON THE PROFIT
BY HIS SHARING RATIO IS EQUAL TO THE  REMAINING PROFIT AFTER THE INTEREST ,
SALARIES OF ALL THE PARTNERS. THAT MEANS THIS REMAINING PROFIT PLUS INTEREST/
SALARIES IS EQUAL TO THE  pre computed  PROFIT  ,  SO THAT THE ONE RECEIVING A
MINIMUM, AND THOSE NOT ENTITLED TO THE MINIMUM CAN ALSO SHARE ON THE
REMAINING.

 THIS PRE COMPUTED PROFIT  IS A CONDITION WHERE ALL OF THE PARTNERS HAVE A
CORRESPONDING SHARE ON THE REMAINING PROFIT.

THAT MEANS the profit IN EXCESS OF THIS PRE COMPUTED PROFIT , SHALL BE SHARED BY
ALL OF THE PARTNERS BASED ON THEIR PROFIT AND LOSS SHARING RATIO.    

 THIS IS THE ILLUSTRATION:

____

DISTRIBUTION OF PROFITS AS FF:

                                                  A                            B                    C          TOT

INTEREST                               1000                   2000               2000         5000
SALARY                                  3000                                                           3000
 TO complete B min share                                     8000                                8000
-----------------------------------------------------------------------------------
TOTAL                                   4000                      10000          2000           16000
SHARE on remaining PROFIT 20000                                       12000         32000
------------------------------------------------------------------------------------- 
PRE COMPUTED PROFIT   24000                   10000          14000          48000

THAT means if the partnership attains 48,000 profit, automatically  , the above is their
distribution.
this profit of 48,000 is the minimum profit so that the 8000 of B is really a representative
of  his 20% share in the profit  because  if 8000 is 20%  therefore it came from a 40,000

Since , as explained, the 8000 pesos is presumed to be the share of B in the remaining
profit   having minimum share on the remaining profit , therefore dividing 8000 by 20%
equals 40,000, hence this is the amount where A share ratio of 50% is multiplied which is
equal to 20,000,  C  share ratio of 30% will equal to 12,000.00 .

so if you total the interest , salary  which is 8000 plus the 40,000 supposed remaining
profit would equal to 48,000.00 as the PRE COMPUTED PROFIT.

A QUIZ MAY APPEAR THAT SAY 53,000  IS THE SUPPOSED PROFIT THAT SHOULD BE ATTAIN
SO THAT ALL THE PARTNERS HAVE A SHARE ON REMAINING PROFITS  ON THE BASIS OF THE
MINIMUM SHARE OF THE PARTNER WITH  GUARANTEED SHARE OF 8,000, ASSUMING 5,000 IS
HIS CORRESPONDING SHARE ON THE PROFIT TO SUFFICE HIS MINIMUM AND HAS A 10%
SHARING RATIO.  HOW MUCH IS THE REMAINING PROFIT TO BE SHARED BY THE PARTNERS.  
ANS.  5,000 DIVIDE 10% .
   

 Any profit below 48,000 pesos but not less than 16,000 , the remaining profit shall be
shared  by A , C  at   5/8  = 62.5% for A,     3/8 =   37.5%  for C.

 NOW , ANY PROFIT IN EXCESS OF 48,000. that excess, shall be divided among the partners
based on their sharing ratio, the partner with minimum share shall again receive on this
excess.

EXAMPLE:   THE PROFIT  IS  58,000.00

                                                                   A                            B                     C      

TOTAL
INTEREST                                             1000                        2000       2000          5000
SALARY                                               3000                                                          3000
MINIMUM B                                                                        8000                          8000
BASIC share                                        20,000                                     12000         32000
0------------------------------------------------------------------------------------------ 
  sub total                                             24,000                    10,000      14,000        48,000
excess of 10000 (48,000- 58000)          5000                        3000        2000         10000
--------------------------------------------------------------------------------------------- 
total   sharing                                        29,000                     13000      16000         58000
--------------------------------------------------------------------------------------------- 
  
                

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A QUESTION MAY ARISE WHEN , IT IS BEING ASKED HOW MUCH PROFIT IS NEEDED SO THAT
B  CAN HAVE A MINIMUM SHARE OF 10,000

Let me show the picture:

                                                  A                           B                   C           TOTAL

interest                                   1000                       2000             2000         5000
salary                                     3000                                                             3000
subtotal                                                                                                       8000
balnce for B                                                          8000                              8000
PROFIT NEEDED                                             10,000                           16000

That means 16,000 is the needed profit  so that B  is assured of 10,000 minimum share.
take note that A , C  have no share on  the remaining profit of 8,000 because that
remaining profit is for A alone to satisfy his minimum share. 

the difference between these two pre computed profit , 16,000 and 48,000 , which is
32,000 shall be shared by A, B, C  based on their sharing ratio.  TAKE NOTE  8000 OF B
10,000 IS CONSIDERED HIS SHARE ON THE REMAINING PROFITS FOR PURPOSES OF
DETERMINING THE PRE COMPUTED PROFIT WHERE ALL CAN HAVE ITS OWN SHARE ON THE
REMAINING PROFITS. 
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______________________________________________________________________________ 

                       
 ANOTHER ISSUE IS SUPPOSING  AT THE SAME TIME  C  WILL HAVE AN AGGREGATE AMOUNT
TO BE RECEIVED SAY 20,000, HOW MUCH PROFIT THE PARTNERSHIP MUST REGISTER. THIS
WILL CHANGE THE PRE COMPUTED PROFIT AS EXPLAINED ABOVE DUE TO THE
INTRODUCTION OF THIS AGGREGATE SHARE , WHERE THE PRE COMPUTED IS 48,000.  
                                                                              with min        with aggre
                                                                A                   B                   C              TOTAL
INTEREST                                          1,000             2000             2,000            5000
SALARY                                             3,000                                                       3000
GUARANTEED                                                        8000                                  8000
SHARE ON THE REMAINDER       30000                                 18,000          48,000
DESIRED PROFIT                            34,000           10000           20,000          64,000

64,000 IS NOW THE PRE COMPUTED  IF C MUST RECEIVE 20,000 AGGREGATE and that A will
have also a share..

Explanation:
Since C has already a 2000 interest , so he needs only 18,000 to reach an aggregate of
20,000, and B  has already received his minimum share of 10,000 .  Since the 18,000 of C 
is his share on the remaining profit and since A , C  combined share ratio is 80%,  ( 50%
plus 30%)  the 18,000 of C  represents 37.5% ( 30% divide 80%) therefore dividing 18,000 by
37.5% equals 48000 where the share of A of 62.5% ( 50%DIVIDE 80%) will be multiplied
( 48,000 x  62.5% = 30,000

the problem in this scheme is IF  THE NET PROFIT FALLS BELOW 64,000, would C to receive
the aggregate of  20,000 .  let us say the net profit is 60,000.  Does C would still have the
20,000 and therefore A will shoulder the difference .  No. , the  profit deficiency is to be
shared by A, and  C. in accordance to the ratio of its share using the total of their share
ratio. as explained above.  C  37.5%, A  62.5%.

THE PARTNER THAT IS ENTITLED TO AN AGGREGATE AMOUNT WOULD NOT RECEIVED SUCH
AMOUNT IF AND WHEN THE PROFIT FALLS BELOW 64,000.  EXAMPLE  SUPPOSE THE PROFIT
IS 20,000

                                                        A                    B                        C
interest                                          1000                  2,000               2000
salary                                            3000
minimum                                                                  8000
  sub total                                     4000                  10,000             2000    16,000
remainder profit                            2500                                         1500       4000
total sharing                                  6500                  10000             3500     20,000

C  did not receive the aggregate of 20,000. though B receive the minimum guarranteed
10000.

HOW ABOUT  WHEN THE PROFIT IS MORE THAN THE 64,000 PRE COMPUTED PROFIT, SAY
84,000. HOW IS THE PROFIT DISTRIBUTED.

                                                       A                        B               C            TOTAL
interest                                       1000                  2000        2000               5,000
salary                                         3000                                                         3000
minimum                                                               8000                               8000
----------------------------------------------------------------------------------- 
subtotal                                      4000                 10000       2000               16000
basic share                                20000                                 12000             32000
----------------------------------------------------------------------------------- 
 sub total                                   24000                 10000      14000             48000  
share on residual                       18000                   7200       10800             36000
----------------------------------------------------------------------------------- 
TOTAL SHARE                       42,000                17200       24800            84000
-------------------------------------------------------------------------------------------------------
In the event that the profit is more than the pre computed profit which is 64,000, and the
actual is 84,000.   the aggregate of C  is disregard , instead , A,  C  will have an initial or
basic share , 50%, and 30% respectively  on the 40,000.  THIS  40000 is arrived by dividing
8000 of B\ share  by his profit share OF  20%.,   A  share is 50% x 40,000= 20,000 ,  C  30% x
40000 =12000,    After that , any residual profit  which is 36,000 (  48,000 minus 84000)
shall be divided to themselves  ,  A  , 50% X 36000, = 18,000   B    20% X 36.000, =7200  C , 
30% X 36,000 =10800

basic share( 8000 divide 20%=40000)    A   40000 X 50%  =20,000,  C  30% X 40,000 = 12,000.
share on residual (48000 less 84,000= 36,000)
    A    36,000 X  50% =  18,000,    B   .20% X 36000_ 7200,    C  36000 X  30%=10800
==================================================================== 

NEXT TOPIC IS ABOUT   FINANCIAL STATEMENT OF PARTNERSHIP

1.   the salary allowances and the interest on capital as part of the sharing of profits are
generally recognized as PROFIT DISTRIBUTION and NOT  RECORDED AS EXPENSES IN THE
PROFIT AND LOSS.
2.   if the event that a partner extend loan to the partnership, the interest on such loans is
considered at INTEREST EXPENSE..

ON THE BALANCE SHEET.

1.  a partner  can extend a loan to the partnership and this is recorded as LOANS PAYABLE
any interest to paid by the partnership for that loan shall be recorded as interest expense.
2.  a partner can borrow money from the partnership  and recorded as LOANS
RECEIVABLE.  any interest collected from him shall be recorded as interest income.
---------------------------------------------------------------------------------------------
THE JOURNALIZATION PROCESS:

the following transactions affecting capital accounts and drawing accounts are recorded as
ff:

WHAT TRANSACTIONS  ARE DEBITED TO THE CAPITAL ACCOUNTS

       1.  PERMANENT WITHDRAWAL OF INVESTMENT OR CAPITAL
     2.    CREDIT BALANCE OF DRAWING ACCOUNTS

WHAT ARE TRANSACTIONS CREDITED TO CAPITAL ACCOUNTS

    1.  THE ORIGINAL INVESTMENTS
   2.  SUBSEQUENT INVESTMENT
   3.  DEBIT BALANCE OF DRAWING ACCOUNTS.
   4. IF INTEREST , SALARY ARE TREATED AS  EXPENSE.

WHAT TRANSACTIONS ARE DEBITED TO DRAWING ACCOUNTS

1.  CASH,  MERCHANDISE ,OTHER ASSETS DELIVERED TO THE PARTNER FOR PERSONAL USE. 
THIS IS CREDITED TO THE CORRESPONDING ASSETS.
2. PAYMENTS MADE BY THE PARTNERSHIP  TO PAY THE PERSONAL LIABILITIES OFTHE
PARTNER.  THIS IS CREDITED TO CASH
3. ANY RECEIVABLE OF THE PARTNERSHIP THAT WAS COLLECTED BUT  RECEIVED BY THE
PARTNER IN PRIVATE CAPACITY.  CREDITED TO RECEIVABLE ACCOUNT
4. PARTNERS SHARE ON THE LOSS OF THE FIRM.

DRAWING ACCOUNTS ARE CREDITED AS FF:

1.  SALARY, INTEREST, TO THE PARTNERS.

2. PAYMENT OF PARTNERS USING HIS OWN MONEY TO PAY THE LIABILITIES OF THE
PARNERSHIP.    DEBITED TO THE APPROPRIATE  ANY LIABILITY ACCOUNT 
3.  A PERSONAL RECEIVABLE OF THE PARTNERS BUT THE MONEY WAS  DEPOSITED BY THE
PARTNERSHIP.  DEBITED TO CASH.
4.  PARTNERS SHARE ON THE   PROFITS

On profit distribution.

1. Interest and salaries as part of the distribution scheme of  profits can be treated as
expenses instead of profit distribution. the entry is:

  SALARIES                 XXX
INTEREST                   XXX
      CAPITAL                           XXX
 in this is treated as expense, it is credited to capital instead of drawing account.

if treated as distribution of profits, the debit to income exp summary should include the
distribution of remaining profit after salary and interest.

     INCOME EXP SUMMARY                 XXX

          DRAWING....................................              XXX

2. salaries , interest  are treated as expense,  the distribution of the remaining  profits
after the distribution of salaries and interest is recorded as ff:

          INCOME AND EXPENSE SUMMARY         XXX

                           DRAWING  ACCOUNTS.................................XXX
take note that it is now credited to the drawing accounts.
3.  since drawing account is temporary accounts , this is closed to the capital accounts

                drawing.....................xxxxx
                      capital............................xxxxx
00-------------------------------------------------------------------------------------------------------
 ADJUSTMENTS OF NET INCOME OF PRIOR YEARS.

There are errors in the recording or even underrecording or overrecording or misrecording

or non recording of  financial transaction more particularly affecting profit and loss
accounts in the past years which were  uncover during the current year.  Since the net
income or net loss during those years were not accurate , the capital accounts are likewise
not accurate HENCE  a correction has to be made.

the correction of net income of priors is only made when the  nominal or the profit and
loss statement is affected. 

What are the example of these errors.

1.  an inventory valuation is erronenous,  in quantity and costing

2.  some unrecognized revenues,  unrecorded expenditure or any  expenses incurred but
not recorded.
 3.  unrecorded sales revenue, unrecorded purchases.
Of course there are errors that only affected  ASSETS  vs.  LIABILITIES ACCOUNT , which
did not affect  the profit and loss accounts  and finally did not affect the capital accounts,
though this should also be adjusted but may not part of the correction of prior years  
the correction of these errors shall be effected to the CAPITAL ACCOUNTS , since the
profit of the partnership is not accumulated to the RETAINED EARNING ACCOUNT  but to
the capital accounts. 

When an inventory was overvalued at the end of the year, that means the inventory
account was overdebited  and the  cost of sales was over credited, in this case the net
profit is overstated because the cost of sales becomes smaller than it should be.
Similarly when the inventory was understated, the cost of sales is overdebited thereby
decreasing the net profit.

When  a  sales was made but no entry to record the receivable and sales account, the
profit and loss decreases.

and there are many more  cases of errors of prior years that  affects the profit  and loss,
that need to be adjusted .

What is difficult here is how  the inventory errors are to be corrected .  there are two
types of inventory recording ,  ONE IS THE PERPETUAL INVENTORY METHOD  and  THE
PERIODIC INVENTORY METHOD.

The periodic inventory method  is where an actual count is taken  and the proper costing
is done.  This actual inventory count shall be the basis in the recording of the INVENTORY
TO BE REFLECTED ON THE BALANCE SHEET , ANY ERRORS  IN THE  INVENTORY OF LAST
YEAR SHALL BE AUTOMATICALLY ADJUSTED  because the actual count and the actual cost
shall be used to value the ending inventory.

 let me cite an example.

Last year the inventory was counted and  there are 4 units at  3.00 per unit or total cost of
12.00 . Unfortunately  22.00 was actually recorded as the inventory amount ., therefore
last year, the inventory is overstated by 10.00 therefore the cost of sales is understated by
10.00  making the profit bigger than it should be.

 This  year let us say, there is transaction,  just to simply the matter,  but  again an
inventory was counted and the count is expectedly to be 4 units at 3.00 per unit. or a
total value of 12.00   Of course , since we are using the PERPETUAL INVENTORY METHOD, 
the actual inventory value should appear on the balance sheet,  since the present balance
of the inventory in the balance sheet  is 22.00 ( since no purchase no sales was made ) this
22.00 should be adjusted to make it 12.00 because 12.00 is the actual inventory. So that
this year , the cost of sales is overstated by 10.00, because when you CLOSE  the existing
22.00 pesos BEGININNING INVENTORY  , you credit inventory account 22.00 and debit cost
of sales 22.00  and then you debit inventory account 12.00 and credit cost of sales 12.00
to set up the INVENTORY END.   So the last year UNDERSTATEMENT OF COST OF SALES
( which is erroneous) is now offset by the OVERSTATEMENT this year.

that is why if it was said that the last year inventory is overstated or understand , there is
no need to adjust the inventory of last year and the capital of the partners, because, the
inventory was automatically adjusted anyway because of the perpetual system.  
THE  perpetual inventory method is where the THEORETICAL INVENTORY ACCOUNT 
remains to be the INVENTORY REFLECTED ON THE BALANCE SHEET, no actual inventory is
taken and therefore the book balance remains to be the  INVENTORY ON THE BALANCE
SHEET. 

However, when the periodic inventory method is being used, where the actual inventory is
not  being used to adjust the theoretical balance, any  shortage, overage, wrong costing in
the actual inventory cost remains uncorrected, therefore year by year the book balance of
the INVENTORY ACCOUNT  remains uncorrected, therefore , when periodic inventory
method is used , and suddenly when an actual count is conducted on the inventory at the
end of the year after the books are closed, then a correcting entry has to be made TO
ADJUST THE  CAPITAL OF EACH PARTNER AND TO CORRECT THE INVENTORY ACCOUNT .   
AS A RESULT OF THE ERROR IN INVENTORY VALUE THE PROFIT ALSO IS ERRONEOUS 
BECAUSE OF THE WRONG INVENTORY VALUE.

ANY OTHER ERROR IN THE PREVIOUS YEARS , SAY  OVER/ UNDER RECORDING OF EXPENSES
AND OR REVENUES,  SAY , ACCRUAL OF EXPENSES, PREPAID EXPENSES, UNRECORDED
SALES , SHOULD NOT BE AUTOMATICALLY ADJUSTED.  It must be first check whether those
errors in previous years were not corrected the following year , if it is already adjusted
the following year , there is no need to adjust.

-----------------------------------------------------------------------------------------------------------
THE  ARRANGEMENT OF PARTNERS TO BRING THEIR CAPITAL TO CONFORM WITH THEIR
PROFIT AND LOSS SHARING RATIO

The profit and loss sharing ratio is not automatically mean that  this ratio is the ratio of
their capital to the total capital of the firm  because that is not the only basis in
determining their sharing ratio.

There are three system that would bring their capital balance to their sharing ratio

1.  if after the establishment of the supposed capital to conform with sharing ratio,
partners should pay from their own money  the partner whose revised capital increases. 
an entry has to be made to effect this changes in capital.
2. whoever has the  original capital THAT  when divided by his ratio will produce the
highest supposed capital SHALL MAINTAIN HIS ORIGINAL CAPITAL.  the firm shall pay the
partners.
 .
3. any partner whose original capital when divided by his share result to the lowest
supposed TOTAL  CAPITAL OF THE FIRM  will have to maintain his original capital.  the rest
of the partners will have a lower desired capital.   THE FIRM  shall  pay the partner whose
capital did not changed and charged or debited to the capital account of the other
partners.

EXAMPLE:

A, B , C   has a sharing ratio of    45%,  30%, 25%,  their capital   are 30,000 , 25,000,  5000
a total of 60,000.00.

ISSUE:

1.  what would be the SUPPOSED TOTAL OF  CAPITAL  of  each partner to attain the profit
sharing ratio
2. how much would be the SUPPOSED TOTAL CAPITAL  if any partner capital when divided
by his ratio will produced the  highest  SUPPOSED CAPITAL OF THE FIRM.
3. how much would be the DESIRED CAPITAL if any partners capital divided by his ratio will
produce the lowest total capital of the firm.

solution for no. 1.

Since their present capital does not conform with their present ratio,  SAY,  A  share ratio
si 45% but his capital divide 60 is 50%.  all you have to do is multiply their ratio to the
present total capitalization to arrive at their supposed capital.

A    45%  X    60,000 =    27,000   45%  supposed capital   (to pay C  3,000
B     30%  X  60,000    =  18,000   30%    supposed capital  (to pay C   7,000
C   25%     X  60,000   =  15,000   25%  to receive money or equivalent from A , B, total
10,000.

  journal entry:

          CAPITAL   A       3,000

                             B        7000
                        CAPITAL  C      10,000
SOLUTION NO. for  2.

Since,  B  when dividing his capital to his ratio of 30%  result to the highest supposed total
capital of 83,333.33  his capital should remain the same

                                   A                           B                        C                TOTAL

CAPITAL               30,000                    25,000                 5000             60000
desired capital         37,500                    25,000                20,833.33       83,333.33  
cash investment          7500                                               15,833.33       23,333.33

 A   and C  now should put up additional investment to bring their capital  to 45%,  25%
respectivelly

  cash                  23,333.33
         A   CAP                               7500
          C   CAP                             15,333.33

SOLUTION NO.for  3.

this is the reverse of  no. 2.  what is being determined here is whose capital when divided
by its ratio will produce the lowest  DESIRED CAPITAL, since , C dividing 5000 by 25% result
to 20,000 which is the lowest supposed capital., his original capital should remain the
same.  

AS A REVIEW LET ME GIVE  SOME  TEST.

PARTNERSHIP FORMATION:

CASE NO. 1

X, AND A  form a partnership and agree to share profit and loss in the ratio of 64.7%,  
35.3% respectively. they have both owners of their own business and they have had the
following balance sheets.

                                                      PER BOOKS                 MARKET VALUE.

                                        A                            B                      A                            B
 CASH                            30,000          20,000                 30,000                     20,000
 INVENTORY                20,000          30,000                 30,000                     35,000
 PAYABLE                        5,000          25,000                   5,000                     25,000

the  capital  is not given.

  make the opening entry int he new partnership under the following assumptions.

1. partners agreed to use net investment method.

2. partners agree to share capital equally but not bonus and goodwill.
3. partners agreed that the capital  of B should be  50,000  AND no goodwill is to be
recorded 
4. agreed to recognize goodwil of 5,000  to be credited to capital of the partners in
amount that will maintain their balances equal to ther profit and loss ratio.

Reminder.
1   net investment method is whatever they brought to the firm is their investment/
2. when   capital must be equal ,  and no bonus nor goodwill given then , an additional
investment is needed.
3. when they want to bring their capital equal OR EVEN UNEQUAL  but no investment to be
made by other partner then a bonus is expected.
4.  when no bonus but the capital of the partner will equal or went up then a goodwill is
recognized OR WHEN  A GOODWILL WILL BE RECOGNIZED FOR BOTH PARTNERS , THAT
MEANS THE TOTAL CAPITALIZATION WILL INCREASE BY THE TOTAL GOODWILL.

ANOTHER TEST CASE.

A, B partners  with the following  capital movement during the year.

                                 debit                credit
A   Jan  1                                      30,000
     april 1                  2,000
     july                                            4000

B  JAN                                         15000
    marc   1                                      3000
   sept   1                   1,000

they agreed to divide profit according to  capital balances.

a. interest of 16% is allowed on average capital
b. salaries are allowed to B  8,000 and a  5,000
C. bonus of 15% given to A.

REQUIRED:
1.  compute the average capital
2. compute the interest
3. net income is 55,000  and that bonus is treated as expense , make a distribution sched.
5. net income is  30,000 and bonus treated as distribution of profit, make sched.

I repeat,  when bonus is treated as expense the , the bonus is computed based on net
income before bonus. If bonus is treated as distribtution of profit then bonus computed
based on net income after bonus.

Remember in computing the base amount of the bonus rate of 15% which is the net income
after bonus . you have to to determine the equivalent percentage of the 30,000  by
worked back approach, remember the 30,000 is not the 100% because it is not the base
amount to multiply the 15% bonus.

again in making the entry on bonus  treated as expense , it is credited to CAPITAL

account.

ANOTHER TEST CASE.

        A, B, C , D  firm formed last July 1,  their capital  were:
 A.         100,000   ,  B,   50,000,,   C      50,000      D,   40,000

Each partner to receive 5% interest  based their capital contribution. A  to receive salary
of 10,000  and B  6,000  chargeable to expense.

C  to receive minimum of 5,000 ,  D to receive minimum of 12,000 .  the remaining

balance after this interest, salaries minimum shall be shared  30.%,  30%, 20%, 20%  
respectively..

Required .

1.  calculate the amount of profit , in order that A,  may received an aggregate of 25,000 ,
that 25,000 , the interest , the salaries , share of profit is already there.

2,  suppose the profit is 35,000 , what would the distribution of profit.

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

                                CHANGES IN OWNERSHIP OF THE FIRM

IF  AN ADDITIONAL OR NEW PARTNER IS ADDED,  OR AN EXISTING PARTNER WITHDRAW OR

DIES AND THE REMAINING PARTNERS CONTINUE , A NEW PARTNERSHIP
WILL BE CREATED , IN SUCH  A CASE  a  dissolution will OCCUR.

A partnership is dissolved in the following scenario

1.  admission of a new partner

2. withdrawal and death of existing partner
3.  selling of the partnership
4. conversion into a  corporation.
5. liquidation of the business.

in case of admission of new partner and a withdrawal , death, a new articles of a

partnership is prepared.

ADMISSION OF A NEW PARTNER.

 The new partner  may purchase a portion or the whole interest of an old partner and this
called PURCHASE OF AN EXISTING INTEREST.

THREE TYPES OF PURCHASE MODE.

1. purchase AT book value.  the purchase price is equal to the book value of equity, that
means the amount to be paid by the incoming partner is exactly equivalent to the share he
wants to acquire..
          a. purchase of interest from one partner. -  the payment is made directly to the
selling partner .

2. purchase above book value =  the payment to be made by the buying partner is more
than the value of the equity to be sold.   it may be on the following manner.

             a.  bonus method =  the difference between the cash payment and the value of
the equity is considered bonus to the existing partners.
             b.  revaluation of assets method  = that means the existing assets will be
overvalued in such a way that an assets will increase and therefore the capital accounts of
the existing partners will increase in accordance with their sharing ratio.  the amount of
increase of the assets is computed based on the following principle. WHEN A NEW
PARTNER INDICATES THAT HE WANTS TO PURCHASE THE EQUITY OF THE EXISTING
PARTNERS BY INDICATING HIS DESIRED RATIO ON THE TOTAL NEW CAPITAL , THE
TENDENCY IS IF YOU DIVIDE THE AMOUNT HE WANTS TO PAY BYHIS DESIRED SHARE RATIO,
THE RESULTING ANSWER IS THE NEW ASSETS TOTAL WHICH IS BIGGER THAN THE
ORIGINAL , THAT DIFFERENCE SHALL BE CREDITED TO THE CAPITAL OF THE EXISTING
PARTNERS AND DEBITED TO THE AFFECTED ASSETS.
            C.   goodwill method  =  that means the existing partner argues that they have
develop a goodwill on their business and therefore   a  goodwill value will be credited first
to their account. 
 ======================================================================

3. PURCHASE BELOW BOOK VALUE =   

--------------------------------------------------------------------------------------------------------
          a.  PURCHASE BELOW BOOK VALUE BY WAY OF BONUS, IN THIS SYSTEM IT IS THE
PURCHASE WHO WILL RECEIVE THE BONUS.
          b.   purchase below book value by way of revaluation of assets.- that means the
value of the existing assets of the partnership shall be downgraded, and that equivalent
reduction of assets is credited to the incoming partner.

        IN PURCHASE BELOW BOOK VALUE , THERE IS NO GOODWILL ACCORDED TO THE NEW
PARTNER.
======================================================================
                  

            EXAMPLE :

A. PURCHASE OF BOOK VALUE.

     A,  B,   are partners  ,sharing 60%,  40%, the following are their balance sheet.

       ASSETS                        500,000                     CAPITAL A            300,000

                                                                                                B            200,000

 Mr. X , wants to purchase 20% of the share of the A,  B  at  100,00.
the entry is :
                   CAPITAL A              60,000
                                    B              40,000
                                  CAPITAL  X             100,000

the 60,000 is arrived by  60% share of A    x   100,000=  60000,   40% x   100,000=  40,000

Why debited to capital of A, B , because they sell their part of their capital.

B  PURCHASE ABOVE BOOK VALUE BY WAY OF BONUS.

Mr. X  agrees to purchase 30%  at  175,000 .  Since 30% of 500,000 is 150,000 only but X is
willing to pay 175,000,  that means A , B  will divide the 25,000 among themselves 
privately . that means the 25,000 will not go the firm.
.
entry is

               A CAPITAL             90000

               B CAPITAL             60000
                       X CAP                           150000

C.. PURCHASE ABOVE BOOK VALUE  BUT  BY WAY OF REVALUATION OF ASSETS.

IN THIS REVALUATION OF ASSETS, YOU SHOULD ASSUME THAT  AUTOMATICALLY THE NEW
PARTNERS CAPITAL WILL BE THAT AGREED SHARE AMOUNT DIVIDE THE AGREED SHARE
RATIO FOR HIS CAPITAL, then you get the new capital . IN THIS ASSUMPTION THE
TENDENCY IS TO HAVE A BIGGER TOTAL NEW CAPITAL OR A BIGGER TOTAL ASSETS , THAT
INCREASE OF THE TOTAL ASSETS SHALL BE CREDITED TO THE EXISTING PARTNER.
AFTERWHICH THE CAPITAL OF THE EXISTING PARTNER WILL BE REDUCED AS A RESULT OF
THE PURCHASE OF THE NEW PARTNER.   

Mr X  agrees to by  20% of the share of the partnership  at  200,000. .  That means , his
share must be equivalent to 20% of the total capital, therefore the supposed capital of the
new partnership must be 1,000,000,     200,000 divide 20% =1000000

Now since the agreement is a REVALUATION OF ASSETS, THE PRESENT ASSETS OF 
500.000 must be made to become 1000000, therefore an assets shall be debited to
increase the total assets by 500,000 to make it 1,000,000.  If assuming the LAND was the
one revalued then it is debited to LAND ACCOUNT.

LAND                           500,000
              A CAPITAL                     300,000    500000 x 60%
               B  CAP                            200,000    500,000 x 40%
to credit the account of A, B  AS a result of increase in assets.

A CAPITAL              120,000       200,000 x 60%

B   CAP                      80,000        200000 x 40%
       X CAP                             200,000
to record the investment of X , and reducing the A, B capital due to the sales of their
equity .
      
the capital  transactions would appear as ff

                                   A                            B                   X               total
original                     300000                 200000                              500000
assets revaluation     300000                 200000                              500000
Selling                      120,000                  80,000          200,000         -
 total                        480000                 320000          200000      1000000

D.. purchase above book value but by  BY WAY OF GOODWILL.

        THIS IS basically the same with REVALUATION except that the assets will not be
revalued but the existing partner would argue that their business has accumulated some
goodwill, therefore their capitalization must increase out of this goodwill.  So the
GOODWILL ACOUNT  will be debited and credited to the CAPITAL ACCOUNTS OF EXISTING
PARTNER.

========================================================================
3.   PURCHASE BELOW BOOK VALUE BY WAY OF BONUS.=  in this agreement , the
INCOMING PARTNER  will be credited with a bigger amount compared with the amount he
will pay the existing partner.

Example:

MR. X  wants to purchase 30% of partners capital but by paying 130,000.  30% of 500,000 is
150,000 as his capital credit but he will only pay the partners 130000 , that means he will
receive a bonus of 20,000.00

A CAPITAL       90,000    150,000 x 60%                      

B                        60,000     150,000 x 40%
             X                                           150,000

 to record  purchase of A , B CAPITAL By mr. X  at 150,000 but paying only 120,000

 PURCHASE BELOW BOOK VALUE BY WAY OF REVALUATION OF ASSETS.  iN THIS METHOD, 

THE ASSETS OF THE FIRM WILL BECOME SMALLER

EXAMPLE.

mR x TO PURCHASE EQUITY OF  A,  B  at 135,000 to represent a share of 30%., that means
dividing 135,000 by 30%, = 450,000 which will be the value of the existing assets of
500,000.00 or a decrease of 50,000, this 50,000 shall be debited to the account of the
existing partner and credited to the appropriate asset account.

entry:

    A  CAP                    30,000
    B CA P                     20,000
                 ASSET ACCOUNT              50,000
 TO reduce the capital of A, B , to reflect the revaluation of assets and the reduction of
assets due to revaluation..

A CAP                           81000
B  CAP                          54000
           X CAPITAL                       135000 

to reflect the purchase of A, B  EQUITY   BY X

=========================================================================

ADMISSION OF NEW PARTNER BY WAY OF INVESTMENTS OF A NEW PARTNER.

SIMILARLY IT HAS THE SAME METHOD   OF  VALUING THE INVESTMENT OF THE INCOMING
PARTNER.

1.  INVESTMENT AT BOOK VALUE  -   this is where the amount of investment when added to
the existing capital of the old partner equals an AMOUNT, when multiplied to the agreed
share ratio of the new partner will equal to his investment . or when the agreed capital
multiply by  the share ratio of the new partner equals the amount invested by the new
partner.no more no less.

example: 

EXISTING CAPITAL                      600.000

NEW PARTNER INVESTMENT    200,000
TOTAL AGREED                            800,000     X     25% SHARE of new = 200,000, his actual
cash invested. 

2.  INVESTMENT ABOVE BOOK VALUE.,  there are 2 approaches

               a.   BONUS METHOD  -  this is situation where the amount you put  in the
partnership  is more than what you will be credited to your capital account.  , that
means , that excess shall be credited to the old partner as A BONUS that the new partner
will give to the old partner. Of course this is a precomputed thing, they agreed that 
capital of the old partner will increase by a certain amount represented by a bonus, that
amount now will be added to the agreed share of the new partner and that amount will be
the cash outlay of the new partner.

If  the equivalent share ratio  of the new partner  multiplied by the  FINAL CAPITAL , is
said to be your capital credit,,  IF  THE AMOUNT OF YOUR ACTUAL MONEY INVESTED IS
MORE THEN THERE IS A BONUS TO THE OLD PARTNER.  

                 EXAMPLE:

       AMOUNT OF INVESTMENT NEW PARTNER               300,000

        the agreement is new partner will be credited only b              225,000  25% OF
900,000
          BONUS YOU GIVE TO THE OLD PARTNERS               75,000  to be credited to their
account
     
      EXISTING CAPITAL                                                                                       600,000
      BONUS TO BE ADDED TO CAPITAL OF OLD                                               75000
      NEW PARTNER CREDITED                                                                           225,000
     AGREED  CAPITAL                                                                                          900,000

     the agreement will specify the would be share ratio of the new partner against the 
would be CAPITAL OR THE AGREED CAPITAL,  IN THIS CASE, 25%  IS share ratio of new
partner to the 900,000 which is exactly 225,000.  But since the incoming partner cash
outlay is 300,000 that means the excess of 75,000 shall be credited to the old partner
based on their existing  sharing ratio, courtesy of new partner.

b.  GOODWILL METHOD  - this time the  investment amount of new partner and the
amount to be credited to him is the same unlike in bonus method..  the agreed total
capital  minus the capital credit of the new partner would equal to the new capital of the
old partner, where this new capital is more than their original capital , because the old
partner argued that they have established or develop a business  GOODWILL  THEY
IMPUTED ON THEIR BUSINESS, that goodwill be credited to the old partner capital, based
on sharing ratio. THAT MEANS IN GOODWILL, THE EXACT AMOUNT OF  INVESTMENT OF NEW
PARTNER IS SURELY CREDITED TO HIS ACCOUNT, UNLIKE IN BONUS THE AMOUNT GIVEN IS
NOT THE AMOUNT CREDITED.

EXAMPLE:

 the new partner will contribute 130,000 and this amount is EXACTLY  162/3 % of the
agreed capital  780,000 ( 130,000 divide 16.2/3% =780,000) deducting 130,000 from
780,000 is 650,000 which is the total adjusted capital of the old partner but since their
original capital is 600,000 , therefore a GOODWILL OF 50,000 WILL BE CREDITED TO THEIR
ACCOUNT BASED ON THEIR SHARING RATIO.

if the problem says  16 2/3% share of new partner and the agreed capital is 780,000, to
get the amount to be contributed by new partner , simply multiply 16 2/3 by 780,000.00 .

 PRESENTATION:

                                                                 A                       B          NEW            TOTAL

   CAPITAL OLD PARTNER               420,000           180,000                          600000
NEW PARTNER                                                                            130000         130000
-------------------------------------------------------------------------------------------
 CONTRIBUTED CAP                     420000          180,000      130000          730,000 
FINAL CAPITAL   AGREED CAP                                                                 780,000
GOODWILL                                     35000               15000                             50,000

3.   INVESTMENT BELOW BOOK VALUE.

        BONUS METHOD.=   it is just reverse of the bonus under investment above book
value.
        

       GOODWILL-

=======================================================================

There is a situation wherein  BOTH BONUS AND GOODWILL  ARE GIVEN TO THE OLD
PARTNERS..

How is this  explained.

Example:

 a new partner will contribute say 150,000, BUT it says his new share ratio is 16 2/3% of
the  the  AGREED CAPITAL of 840,000. .

SINCE THIS 16 2/3% OF THE AGREED CAPITAL IS ONLY 140,000, BUT HE PAYS 150,000 THAT
MEANS THE NEW PARTNER WILL ONLY BE CREDITED UP TO 140,000  BUT THE NEW PARTNER
WILL INVEST 150,000 therefore there is an  EXCESS OF 10,000 WHICH will be credited to
the account of the existing partner.
Now after  the 140,000 and the 10,000 was credited to their individual capital, the total
capital is only  750,000, but the agreed capital should be 840,000, therefore , the old
partner will received a GOODWILL OF 90,000.

PRESENTATION:
                                                                                A              B                     C      TOTAL
 OLD PARTNER EXISTING CAP                420,000      180,000                         600000
NEW PARTNER ACTUAL CASH                                                      150,000   150000  
BONUS                                                            7000            3000       (   10000)       0     

   SUB TOTAL                                              427000         183000         140,.000   750,000

SUPPOSED CAPITAL                                  490,000        210000       140000        840,000  
100%
 GOODWILL                                                  63000          27000                            90,000

ANOTHER EXAMPLE:
   THIS TIME BONUS TO NEW PARTNER. THIS IS REVERSE OF THE BONUS TO OLD PARTNER.

NEW PARTNER TO INVEST   120,000 BUT  WITH 20% SHARE ON THE NEW CAPITAL OF
720,000.

Here 20% of of the final capital is 144,000, but the new partner invest only 120,000, 
therefore a bonus is given to the new partner because he contributes only 120,000 but his
capital account was credited of 144,000 , the 24,000 will be debited to the capital
account of the old partner.
 -------------------------------------------------------------------------------------------------
GOODWILL TO THE NEW PARTNER

EXAMPLE:

NEW PARTNER TO INVEST  300,000 BUT  40% SHARE ON THE FINAL CAPITAL OF 1,000,000.

The new partner should have invested 400,000  , 40% of 1,000,000 but he invested only
300,000 , therefore he was given bonus by the old partner, so the 100,000 shall be debited
to the account of the old partner.

--------------------------------------------------------------------------------------------------------

GOODWILL AND BONUS TO THE NEW PARTNER

Example.  new partner invest 160,000  but  his share ratios 25%  of  final capital of
780,000.00 .   If you multiply 25% of 780,000 ,  the new partner will be credited 195,000. 
Since goodwill is computed as ff:\\
AGREED CAPITAL                             780,000
CONTRIBUTED CAP                          760,000
       GOODWILL                                    20,000

The bonus is computed as Ff:

Actual cash invested by new partner                                160,000

plus the goodwill credited to him                                        20,000
-------------------------------------------------------------------- 
 total  initial credit to his account                                       180,000
AMOUNT TO FINALLY FOR HIS CREDIT                195,000
-------------------------------------------------------------------- 
  LACKING  SO BONUS IS GIVEN                             15,000

THIS IS QUITE DIFFERENT COMPARED TO  BONUS GIVEN TO OLD PARTNER.  IN THE BONUS
GIVEN TO OLD PARTNER THIS IS THE COMPUTATION

amount to be credited to new partner ...................    140,000.

less:  actual cash invested......................................     150.000
  bonus                                                                        10000

BUT IN GIVING BONUS TO NEW , BESIDES THE ACTUAL CASH INVESTMENT ,  THE GOODWILL
IS ADDED TO ARRIVE AT THE TOTAL CREDIT GIVEN TO THE NEW PARTNER AS SHOWN
ABOVE.
PRESENTATION
                                                                                                                NEW     TOTAL
EXISTING CAPITAL                               420,000             180,000                       600000
NEW PARTNER                                                                                    160000    160000
  TOTAL CONTRIBUTED CAP                                                                            760,000
bonus                                                         (  10500                4500 )       15000        -0 
  agreed captial                                                                                                        
780,000
       goodwill                                                                                             20,000     
20,000

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

THERE ARE TIMES WHEN, THE BONUS OR THE GOODWILL is given to new partner but  IS
NOT  EXPRESS BUT ARE IMPLIED.

EXAMPLE.  A,   B   C  partner   with   10,000,   20,000   40,000 capital  or total of

70,000.00.   D is accepted to the partnership giving 14,000.00  for a 20% share on the
capital.   the intended capital was not mentioned.  .
AS BONUS"

When a bonus is being given to the new partner , the amount contributed is lesser than
what is to be credited to him as capital. in this case what should be done in such a way
that his capital credit is more than his amount of contribution.  the best way is to consider
the contributed capital as the agreed capital where the percent share is to be multiplied 
to arrive at the amount to be credited to the new partner. Like this:

20%  x  84,000 =  16800.00 as the capital credited 

amount invested     14,000.00\
  bonus                    2,800.00

entry:
   DEBIT ,  A B, C CAPITAL       2800
                       D  CAP                                2800

AS GOODWILL

When a goodwill is given to a new partner . similarly his actual contribution is lesser than
the amount to be credited to him,  but the CAPITAL OF THE OLD PARTNER WILL NOT
CHANGED OR REDUCED, UNLIKE IN bonus.

If this is the case , that the old partners capital will not change , therefore , their capital
will the basis in computing the final capital  and since new partner share is 20% , the old
partner has 80%, therefore:

70,000 divide  80%=   87,500.00 as the final capital

less:   old capital           70,000.00 ORIGINAL CAPITAL 
credited to  D               17,500.00    TO BE CREDITED TO D 
LESS: contributed        14,000.00  CASH CONTRIBUTED BY D 
GOODWILL                 3,500.00  GOODWILL GIVEN TO HIM

JOURNAL  entry

goodwill                  3,500.00
      D CAPITAL                     3,500.00

Pete Del Rosario at 1:38 AM

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