CHAPTER 2 PARTNERSHIP: BASIC CONCEPTS AND FORMATION Learning Outcomes: Atthe end of this chapter, the student should be able to: 1a) 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 proprietorship, and a partnership against a corporation e) Apply the concepts relevant to partner’s equity, f) Record transactions affecting partner's capital and drawing accounts. 2) Apply the concepts relevant to partnership formation. h) Prepare entries to record partners’ contributions. i) Prepare a statement of finanéial position and a statemen of changes in partners’ equity. An individual who wants to do business may partner with another person and put up partnership with a view of earning profit. A partnership requires a combination of. 1) capital resources or assets, and 2) managerial skills and expertise. Partnerships are more prevalent 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. A partnership is a legal entity guided by the rules and regulations put up by each country orsstate. 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 of 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 different taxes to be paid by these organizations. PARTNERSHIP AS DEFINED IN THE CIVIL CODE OF THE PHILIPPINES A partnership is an organization where two or more persons bind themselves to 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 j existence: 4 1. Voluntary Association, Individuals, by their own free will, agree to join together ang form a partnership. Legal Entity. It has a juridical personality separate and distinct from the partner, (Articles 1768) It can acquire, sell or dispose properties, incur obligations and transac, 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 [iabilities. 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 Jegal capacity to contract, Their contributions must be in the form of money, property or service. The purpose of the business is to divide the profit among them. eS a written or oral contract, the law does not provide a mandatory With regards yovable requirement for this, not unless the investment of the partner is in the form of imm property, in which case a public instrument is necessary. (Article1667), Additionally, Article 1772 provides: Every contract of partnership having a capital three thousand pesos (P3,000) or more, in money or property, shall appear in a public instrument which must be recorded in the office of the Securities & Exchange Commission However, failure to do so does not negate the recognition of the partnership as a juridict! personality. | 32 Naa oe | of.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 property. Instead, this becomes joint property of all the partners. 2. The partners have unlimited liability. 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, th: i ize the personal properties of anyone of the partners. i Pieqecr suerte 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, As to 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. As to 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 partner, whereas a nominal partner is a partner in name only. 33Co a ears eae sre RCE MIEN * Tha 4. An ostensible partner is one who is known to the public that he is @ partner, whereas Secret partner js one who is not known as such to the public. tion extends to the entire business whereas, jon is limited to a unit or part of a business, S.A universal partner is one whose part Particular partner is one whose partici __ Take note that an industrial partner is also a general partner, with unlimited liabiliy and is not allowed to engage in any other kind of business unless expressly authorized by the other partners. (Article 1789) PARTNERSHIP CONTRACT. An agreement concerning formation, operation, dissolution, and liquidation of the Partnership is embodied in a contract called Articles of Co-Partnership. Although a verba, agreement is valid, it is advisable to put it in writing as conflicts and disagreements may easily arise because of the number of persons involved. The contract will act as a form of Bovernance of partnership activities and will clearly reflect the relationships of the partners among each other and with third parties. Article 1772 of the New Civil Code requires that contributions of partners in cash o | properties should be in a public instrument duly registered with the Securities and Exchange Commission if it amounts to three thousand pesos or more. The Securities and Exchange 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 a license 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 financial 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: 1, 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 . Arbitration of disputes $0. tego. So tn kbs Hho,An example of a Partnership contract follows: ARTICLES OF CO-PARTNERSHIP DIAMOND APPLIANCE CENTRE KNOW ALL MEN BY THESE PRESENTS: That we, the undersigned, of legal age, citi : rai ay ‘. ot ri 7 ige, citizens and residents of the Philippines, have this day voluntarily bind ourselves together for the purpose of forming a partnership, effective as af this date, under the terms and conditions herein after set forth, and subject to the requirements of existing laws of the Republic of the Philippines. 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. 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, m1 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 Currency for Miguel Bengzon and Three Hundred Thousand Pesos, P300,000, representing the net assets of Maharlika Appliance Center owned and operated by Michelle Marquez. y That the purpose or purposes shall be to engage in and carry on a general mercantile and trading business and to buy or acquire, hold, import, export, trade or otherwise dispose of any kind of goods, wares and merchandise such as but not limited to general electric and electronic materials and appliances and other articles of commerce without limit as to character or amount. vi That Michelle Marquez will serve as General Manager of the company with the right to overall supervision and the preparation and signing of contracts and agreements. Miguel Bengzon will serve as the Finance Officer whose duty is to act as financial resource custodian of the company and be responsible for the overall financial policy of the company. 35VIL Michelle Marquez and Migue} ‘That the profits and losses shall be divided between VN i Bengzon based ate capital contributions. They shall receive Se e San the profit, a monthly salary of Fifteen Thousand Pesos (P15) changed by the partners. IN WITNESS WHEREOF, we have hereunto set our hands, this January 3, 2021, at the City of Makati, Philippines. ees IGUEL BENGZON MICHELLE MARQUEZ MI Signed in the presence of: Wisse elppmpene te Wes Witness Acknowledgement NOTARY PUBLIC Figure 1 Articles of ‘Co-Partnership COMPARISON OF BUSINESS ORGANIZATIONS 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 or anyone of the partners may cause its termination. ‘A partnership is a taxable entity. It is also a juridical or legal entity, and has @ 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. . Similarities between a partnership and a corporation: Both are taxable entities (except a general professional partnership) and legal entities.Differences between a partnership and a corporation: At peerPetual existence based on the Revised Corporation Code. A partnership although it has an indefinite life it may be dissolved/liquidated with the Pee oa _ all partners, Shareholders are free from liability to corporate a erice, Menace nat they invested while partners are liable even up to their personal Properties, Management in a corporation is vested in one or a few shareholders. One or all the partners may actively manage the busines. 3) sere eee nttship over a corporation: Although a corporation may now be & Prion and eal sew, cu the partnership has an edge over it in the following: ease in . formation legal requirements, also in active management. psc cneer ce Partnership over a corporation: Difficult to transfer and or increase eatiToali te ce unanimous consent of all partners whereas shareholders may incapacity or insolvency spo: It is easy to dissolve a partnership with the death, shareholders, partners aoe nett2O8® Partner, even if life is unlimited, Unlike. the unlimited liability. PMY liable to partnership creditors because of their RIGHTS OF A PARTNER 1, A partner has a right over specific Partnership property, 2, Appartner 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, A partner has a Tight 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, partners or shareholders. As such, only transactions of the business are recorded in its books. A partnership acquires, holds, disposes properties in its own name; it enters into contracts with others through the partners 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 in its articles of co-partnership. Care therefore should be taken in recording its assets, liabilities, revenues and expenses art 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. In contrast, the proprietary theory emphasizes the view of the individual partners as ‘owners of the net assets of the business especially when salaries are given to them, or when obligation to partnership creditors extend to their personal properties, or when the original partnership is dissolved and the consent of the partners are required in admitting a new partner, ACCOUNTING FOR A PARTNERSHIP The accountant must have sufficient knowledge of the legal provisions regarding a partnership as these would affect certain aspects of partnership accounting such as investments of the partners, dissolution of the partnership, distribution of profit or loss to the partners and liquidation of the partnership. i Bee toesiges.oe AS In addition, the accountant uses the Articles of Co-Partnership as & guide in recording ransactions regarding the partners’ capital contributions, distribution of profit or Jog. dissolution and liquidation. Accounting procedures for assets, liabilities, revenues and expenses (as discussed j, Chapter: 1) follow a normal standard whatever is the legal form of organization. The main difference lies in accounting for equity which in a partnership is called partners’ equity, 7), accounting equation is expressed thus: Assets = Liabilities + Partners’ Equity. Partnership accounting is discussed in this chapter and the next three chapters to cover, 1) Formation and the partners’ capital ccintributions. 2) Operation with the distribution of profit or loss. 3) Dissolution and the changes in partners’ equity. 4) Liquidation or permanently closing the partnership PARTNERS’ EQUITY The rights of the partners over the net assets of the business is called Partners’ Equity, Each partner's equity is represented by two accounts: Partner’s Capital and Partner's Drawing. This is the same rule that one applies in a sole proprietorship except that there are more accounts in a partnership since there are two or more partners involved. Thus, in a partnership of Abad and Basa, the general ledger will show the following partners’ equity Abad, Capital; Abad, Drawing: Basa, Capital; Basa, Drawing PARTNER’S CAPITAL ACCOUNT The capital account represents original investment which becomes its permanent or fixed interest. This could change only if additional investments are made or when non-current assets are revalued. The following transactions affect this account 1. Investment — contribution made are credited to cach partner's capital account to increase the partner's equity and 2. Permanent Withdrawal ~ withdrawal of capital are debited to cach partner's capital account to decrease the partner's equity. To illustrate, assume that Abad and Basa opened Sun Internet Cafe on January 1, 2019. The following transactions took place: January 1 _ 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 300,000 Basa, Capital 300,000 Initial cash investments of Abad and Basa, 38enue Gol 150,000 ‘Abad, Capital © 180,000" Additional investment of Abad. June 1 Basa, Capital Pee, Cash ane 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 1” P300,000 June 1 __P25,000] Jan P300,000 Mer 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 1. 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. 2. Personal drawings may be formal as provided in the Articles of Co-Partnership. These are oftentimes called salaries but are in fact withdrawals of profit and are debited to the drawing account to decrease the partner's cquity. Informal or irregular withdrawals may also be made by the partners when the need arises (made with the consent of all partners) | and are also debited to the drawing account and viewed as decreases in the overall equity | or interest of the partner. | Balance of the drawing account is closed to the capital account. If the share of the partner in the profit (credited to his drawing account) is greater than the actual withdrawals made by him (debited to his drawing account), the credit balance of the drawing account is added to the capital account to arrive at the total partner's equity. | 39we _ Let us continue with the illustration in the preceding page. The partnership Startey ‘peration on October | and at the end of each month Abad, as managing partner, withdrey 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 o¢ the year which was divided equally between them, Additional entries in the partnership boo}, of Abad and Basa will appear thus: Oct. 31 Abad, Drawing 10,000 Cash 10,000 Salary dravsing 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 Drawings of Abad and Basa Income and Expense summary 150,000 Abad, Drawing 75,000 Basa, Drawing 75,000 Profit share of the partners 20,000 At the end of the year, the drawing accounts of the partners will appear in the general ledger as follows: Abad, Drawing No. 301-A Basa, Drawing __No. 302-A Oct 31 10,000] Dec31 75,000 Dec31 10,000] Dec 31 75,000 Nov30 10,000 Dec31 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 45,000 495,000 Basa, Capital 275,000 Basa, Drawing 65,000 — P340,000 The balances in the drawing accounts represent unwithdrawn profits. These balances could be left open and brought forward next accounting period especially if parmers intend to withdraw them as per agreement. Or these balances could be closed to the capital accounts and made part of their permanent investments. The entry to close the drawing balances to the capital accounts will appear thus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 Dee. 31 65,000 Dec. 31 45,000 Abad, Drawing 6301-4 Basa, Dra’ No. 302-A Oct. 1 10,000 | Dec 3” 75,000 Dec. 31 10,000 | pee 31 75,000 Nov. 30 10,000 Dec.31 65,000 eres Dec. 31 10,000 Dec.31 45,000 73,000 7,000 7,000 000 The partners’ capital accounts, appearing in the Statement of Financial Position as Partners’ Equity, will show a credit balance of P495,000 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 saine. 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 ——_P600,000 Additional Investment 150,000 150,000 Permanent Withdrawal (28,000) (25,000) Total 450,000, 275,000 725,000 Share in Net Income 75,000 75,000 150,000 Personal Drawings (30,000) (10,000) (40,000) Capital, December 31 P 495,000 P340,000 ~——P 835,000 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 regular drawings). 41 Bas.OTHER TRANSACTIONS AFFECTING PARTNER'S CAPITAL A variation in the investment of a partner may be made as described in the follow transactions: pera Ere aa June 10. A partnership note payable to the bank in the amount of P5,000 fell due ang , was paid by Abad out of his own personal cash. July SA personal receivable of Basa in the amount ‘of P6,000 was collected ang 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 p, Abad. Analysis 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, JulyS Since the partnership made the Cash 6,000 collection, increase its cash; Basa, Capital 6,000 since what was collected was.a personal asset of Basa, record an increase in his equity. Sept. 15 Since cash was paid by the Basa, Capital 3,500 partnership, record a decrease in Cash 3,500 cash; since this is a personal liability of Basa, this in effect decreases his equity. Nov. 10 Since the partnership receivable Abad, Capital 2,000 ‘Accounts Receivable 2,000 was collected, record a decrease 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 decreased to represent either as an additional investment or a permanent withdrawal. The alternative will be to treat these transactions as either loan payable to or loan receivable from a partner depending on partners’ agreement. LOAN PAYABLE TO OR RECEIVABLE FROM A PARTNER In the course of the operation of the business, the partnership obligations may be paid out through a partner’s personal cash. Or the partnership may borrow cash from the partne. In both cases, the amount paid by the partner or borrowed by the partnership from the partne? will represent a liability. For instance, assume that in the July 10 transaction described in the preceding page Abad paid for the note of the business for P10,000 with the condition that it 42| | | | bbe paid back to him after three months. The entry in the partnership books will be a credit to a Payable to Abad account rather than Abad, Copia Dee hed extended a P15,000 loan to the partnership on July 15 to be paid after one year? The entry to record the cash received will give rise to a liability to pay Abad: July 15 Cash Loan Payable to Abad Cash borrowed from Abad. _In like manner, the partnership may loan cash to a partner which will give rise to @ 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: July 31 Loan Receivable from Basa 20,00 Cash ie 15,000 13,000 20, Cash loan extended to Basa. oe 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 js in the form of cash or property, the pro-forma entry is: Cash (or merchandise or building) xXx 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, Fair market value is the amount for which an asset cfuld 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 JAS 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 1 CONTRIBUTION IN THE FORM OF CASH, PROPERTY AND INDUSTRY Santos, Ambros, and Carlos formed a partnership on August 1, 2021. Investments are as follows: Cash of P50,000 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. 43i TEE lle aN for PS0,000 but which has a current fir value of 80% of its cost. Carlos is to be admiteg Sales Manager for a'10% share to the profits. Aug. 1 Cash 50,000 Santos, Capital 20.000, Cash investment of Santos. Merchandise Inventory 40,000 Ambros, Capital 000 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 2010 2010 Aug. 1 50,000 Aug. 1 40,000 ‘Aug, 1 Admitted as sales manager for a 10% share in the profits. CASE2 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 PS0,000 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 was set up decreasing the capital by P50,000. I there was no agreement for the partnership to assume the mortgage balance, the entry will appear thus: Land 500,000 Ambros, Capital 500,000 Note that this time no liability account was recorded and Ambros was credited for the gross investment of P500,000. In both cases, the land should always be recorded at the appraised value.INVESTMENT OF AN ALREADY EXISTING BUSINESS An investment of an already existing business into the partnership is more complicated since two books will be affected - the sole proprietorship books and the new books of the nrey The following are the accounting procedures: |. Present for review the assets and liabilities of the sole proprietorship business to the other partners for adjustment or revaluation. 2. Inthe books of the sole proprietorship business: a) Update the assets and liabilities for any adjustment/revaluation agreed upon by the partners. Since this business is not going to operate anymore, no revenue or expense accounts should be used. Any revaluation or 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 2 b) will change: record the investment of the other partner(s). Omit Step 3. CASE 3 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 Mendiola. 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 27,000 Pan, Capital 62.500 Totals P97,000 97,000 The articles of co-partnership was drawn after considering the following: 1. 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 ) Required allowance for bad debts (15% of P50,000) er books Increase allowance by b) Required accumulated depreciation (25% x10,000) Per books Increase accumulated by ©) Merchandise per books Should be Write off At this point, the capital of Pan will be: Per books Less above adjustments Adjusted Capital * Note that Pan Capital was debited instead of bad del obsolete stock. This is an application of procedure no. 4) Close the assets, liabilities and capital accounts at the adjusted amounts. In bold figures are the adjusted amounts. a) The assets, liabilities and capital accounts of Pan are now brought forward to the partnership books. Note that the furniture is recorded at the adjusted book value which is its current fair value. The accounts receivable and the allowance are still carried forward. b) The agreement calls for Garces i cash equal to 14 of Peter's investment. P. 7,500 5.500 P.2,000 P2,500 2,000 P_s00 25,000 22,000 P3000 62,500 5.500 PS2.000 ENTRIES INPAN’S BOOKS 2.000 Pan, Capital* ‘Allowance for Bad pes ‘Adjust the allowance 15% of the accounts receivable. an, Capital* i ‘Accumulated Depreciation To adjust accumulated depreciation to 25% of cost. Pan, Capital* Merchandise Inventory To write off obsolete ‘merchandise. 2,00 500 50, 3,000 3,00 bts, depreciation expense, and loss on 2) described in the preceding page, 27,000 7,500 2,500 57,000 ‘Accounts payable ‘Allowance for Bad Debts ‘Accumulated Depreciation Pan, Capital Cash Accounts Receivable Merchandise Inventory Furiture & Fixture To close the net assets of the business. 12,000 50,000 22,000 10,000 PARTNERSHIP BOOKS 12,000 50,000 22,000 7,500 P 7,500 27,000 57,000 Cash Accounts Receivable Merchandise Inventory Furniture & Fixture Allowance for Bad Debts ‘Accounts Payable Pan, Capital To record Peter Pan's investment. Cash Garces, Capital To record cash investment of Pilar Garces, 28,500 28,500 Note: Instead of two entries, a compound entry may be prepared debiting immediately the cash at P40,500 (12,000 + 28,500) and crediting Pan for P57,000 hil Gee for P28,500 each.CASE4 BOTH PARTNERS INVESTED THEIR CURRENT BUSINESSES WITH NEW BOOKS SET UP FOR THE PARTNERSHIP. James Laredo and Jim Lopez, sole proprietors, operate a novelty shop one in Manila and another in Cubao, After a year of operation, James invited Jim to form the Lalo Novelty Store. The following are their statements of financial position as at January 2 2019 JAMES NOVELTY STORE Statement of Financial Position As of January 2, 2019 ASSETS LIABILITIES & CAPITAL Cash P13,000 ‘Accounts Payable P12,500 Accounts Receivable 10,000 Laredo, Capital 35,500 Merchandise Inventory 20,000 Furniture & Fixtures 5,000 Total 48,000 Total 48,000 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 PL14,500 ‘The following provisions were agreed upon by James and Jim: 1. James will invest his business subject to the following conditions: 1a) That P2,000 of the accounts receivable be written off. b) The furniture be adjusted to its fair market value of P4,000. c) Accrued expenses of P2,500 be recognized. 2. Jim’s net contribution should be adjusted subject to the following: a) 15% of the accounts receivable is estimated to be uncollectible. b) Furniture and fixtures should have a net book value of P12,000 It was further agreed that James’ and Jim’s interest should be the same as their profit and loss ratio of 1:1 so that one of them must make additional investment to conform to the agreed interest. New books should be opened for the partnership. 47in this manner; A table to analyze and adjust partners’ capital contributions may be prepared Laredo Lopez 500 —-~P79,500 Unadjusted capital per books a i) a) Write off of bad accounts F ( 2,000) Additional provision for doubtful accounts (1,000) (1,500) b) Downward adjustment or impairment of furniture and fixtures 7¢0 ©) Accrued expenses 730,000 76,000 4) Adjusted capital or net contribution : ANALYSIS. ENTRIES IN J a ee a) Decrease accounts Laredo, Capital "—P2,000 receivable forthe write off ‘Accounts Receivable 4 ) Cost of furniture 5,000 Bi aoe Fair market value 4,000 Laredo, Capital * PI, Decrease by 1.000 Furniture & Fixtures pa00 bad debts, if there is one. In Writ in should ij the allowance for E rite-off in (a) should be adjusted through the allo Oe ee (b) adjust cost to fair value using the accumulated deprecii Otherwise, adjust through the principal accounts. ©) Increase liability by Laredo, Capital F 2-400 recording accrued expenses. ‘Accrued Expenses P2500 4) Close all assets, liabilities ‘Accounts payable 12,500 and capital atthe adjusted Accrued expense 2,500 amounts. Laredo, Capital 30,000 can 13,000 Accounts Receivable 8,000 Merchandise Inventory 20,000 Furniture & Fixtures 4,000 ANALYSIS ENTRIES IN JIM’S BOOKS a) Required allowance!5% x P40.000) —P. 6.000 Lopez, Capital 2,000 Per books 4,000 Allowance for Bad Debts 2,000 Increase allowance by 2,000 ) Book value of furniture 12000 L2pe2, Capital 1500 Agreed value Accumulated Depreciation ”—41,500 Increase accumulated by Paso ey : 6) Close all assets, liabilities and Accounts Payable 15,000 and capital atthe adjusted Notes Payable 20,000 amounts: Accumulated Depreciation 3,000 Allowance for Bad Debts 5,000 | Lopez Capital 76,000 Cash 15,000 | Accounts Receivable 40,000 | Merchandise Inventory 50,000 Furniture & Fixtures 15,000 48a ee EAT TE eee eee eT PARTNERSHIP BOOKS: a) Transfer the assets and liabilities of Laredo. Refer Cash Ps9,000* to his books, entry d). Since Lopez Capital is Accounts Receivable 8,000 176,000, bat Laredlo’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 P59,000 Accounts Payable 12,500 ‘and his capital be P76,000 also, Accrued Expenses 2/600 » Laredo, Capital 1 76,000' Cas. 15,000 Accounts Receivable 40,000 Merchandise Inventor 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 go 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 future earnings. These factors will surely be equally important as the actual investments made by a partner. For example, Dr. Gil who recently passed the medical board examination wants to put up a medical clinic and invites Dr. Casey, a known surgeon and medical practitioner, to join him. Dr. Gil agrees to contribute P500,000 while Dr. Casey agrees to contribute 300,000 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 recognized 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 assets. The partners may agree to adjust their capital amounts to reflect an equal sharing by transferring interest from Dr. Gil to Dr. Casey. Dr. Casey's capital will be credited 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 capital 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 Agreed Capital 400,000 400,000 — P800,000* Actual contributions 500,000 300,000 800,000 Bonus (P100,000) P100,000 ___o * Note that total agreed capital is equal to total actual contributions, Using agreed capital, compute for a 50% interest for cach partners. Journal entry will be: Cash 800,000 Gil, Capital 400,000 Casey, Capital 400,000 49pr. Casey: cash of Goodwill Method. Under this method, two contributions 11° made Bill? Goodwill is an 300,000 and an intangible asset inthe form of goodwill. What iS tat is normal or intangible asset representing ability to generate eamings more oy ot 8 location, expected, Factors such as a good reputation (such as @ skilful peel gate for the business, service or product may bring in more customers and therefore more ov)? Assets Will increase What are the effects on the accounting values if goodwill is bey art partner, capital). How (debit goodwill) and the partner's equity will also increase (cre i the intangible asset much is the goodwill? Since the agreement calls for equal SRANTE Jit for Dr. Casey amounts to P200,000 plus his actual investment of P300,000 the a 500,000. will become P500,000 the same as that of Dr, Gi il who invested cash © In table format it will appear as follows: real 1 Gil Casey 000* Agreed capital 500,000 500,000 rp 000 Actual contributions 00,000 300,000 300-000 Goodwill o P200,000 P, Note thar underoath egrend capitals caus! t,tal seta ae But under the goodwill method, total agreed capital is greater than total a Se GR ae How was total agreed-capital computed? It was based on Gil’s actual fe ae oat 500,000 divided by his interest of 50% = P1,000,000. Since agreement °2'® fr equi sharing, Casey should also be credited for P500,000. Journal entry will be: Cash 800,000 Goodwill 200,000 Gil, Capital 500,000 Casey, Capital 500,000 PAS 38 recognizes goodwill only 2s a result of an acquisition of a business. Partnership goodwill has no related acquisition cost sine no funds have been spent to acquire the goodwill Partnership goodwill is rare in actual practice. The bonus capital is the preferable method. XISTING BUSINESS WITH CASES INVESTMENT OF AN ALREADY E. BOOKS ARE SET UP FOR THE RECOGNITION OF BONUS AND NEW PARTNERSHIP The following is the statement of financial position of Jazz Grocery as at December 31, 2019: LIABILITIES AND CAPITAL ASSETS Cash P 34,500 Notes Payable P 12,500 Accounts Receivable 55,000 Accounts Payable 40,000 Notes Receivable 21,000 Jasmin, Capital 474,500 Inventories 57,500 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0 Jasmin and Cory agree to form a partnership and call it the Jascor Grocery. Jasmin will invest her grocery while Cory will invest i 000. The ion sion nt ato agua genty tegen es Om 1 Se eat nie ETS’ Accounts receivable as doubtful after writing off PS,000 Inventories should be adjusted to 85% of i Ct ij 4 of its book value. Equipment {Rou be adjusted to its fair market value of P20,000. + Kand should be recorded a its appraised value of P150,125. ‘ikerued expenses should be set up in the amount of P2,500, Jasmin will be credited for a 60% equity in the partnership, ANALYSIS 1) 5,000 worthless accounts written off. aasoy ENTRIES IN JASMIN’S BOOKS Jasmin, Capital 5,000 Accounts Receivable 5,000 Set up Allowance for bad Jasmi , n, Capital 5,000 debts : 10% x P50,000 Allowance for Bad Debts 5,000 2) Inventory recorded as P 57,500 in, Capital Should be 85% of P57,500 a8'875, ntentores Ses seas Decrease by P 8623 3) Book value of equipment —P 24,000 _Jasmin, Capital 4,000. o99 Fair value 20,000 Accumulated Depreciation i Increase accumulated P 4, 4) Appraised value of land 150,125 Per books 120,000 Land ‘ 30,125 50,125 friceate ty P30,D5 Jasmin, Capital . 5) Set up accrued expenses. Jadbait Caper wat Accrued Expenses a In T account, the Capital of Jasmin will appear as follows: Jasmin, Capital 74500 5,000] 4) 30,125 2) 8,625 3) 4,000 3) 2,500 Adjusted 479,500 6) Close all the assets, Allowance for bad debts 5,000 liabilities and capital ae Den, peeuinpient oe accounts of Jazz Grocery cum. Depn, Building , ‘Accounts Payable 40,000 at the adjusted amounts. eet sot ‘Accrued Expenses 2,500 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 SlTake note on how the equipment was adjusted in no, 3). First Ea ae (P80,000 cost less P56,000 accumulated depreciation) = 24,000. Then ‘dio book valle market value of P20,000. The book value is more by P4,000. To decreas’ Ti. U inerease the accumulated depreciation by P4,000, The accumulated dere" Toh ot 60,000, If this is deducted from cost of P80,000 its new book value 1 ON which is now equal to its market value. ARTNERSHIP BOOKS ANALYSIS ENTRIES IN THE P» 1) Record the investment of Cash ae Jasmin. Refer to closing entry Accounts Receivable 21,000 no. 6. Note how the equipment Notes Receivable ioe and building are recorded at the Inventories 50.125 adjusted book values with the Land een accumulated depreciation Equipment 15-000 immediately deducted from the Building fs cost: Allowance for bad debts 5,000 Building: P245,000 - P30,000 Accounts Payable Pot Equipment; P 80,000 - P60,000 Notes Payable an ‘Accrued Expenses 2,500 2) Total Actual Contributions is = Jasmin, Capital 479,500 equal to Total Agreed Equity: Agreed Total Equity P779,500 Equipment 300,006 40% equity for Cory 311,800 Cory, Capital 300,000 Actual contribution made 300,000 Bonus from Jasmin P_1J,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 P(11,800) P_11,800 a 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. Thus, based on the table, Cory should make a cash contribution of P19,667: Jasmin Cory Total Agreed Equity (60%) P 479,500 (40%) P 319,667 P 799,167 Actual Contributions 479,500 300,000 719,500 Additional investment P P__19,667 P_19,667 Total Agreed Equity is computed based on Jasmin’s contribution 479,500/60%= P799, 167. This is higher that Total Actual Contributions. Compare the actual against the agreed, i means additional contribution should be made by the deficient partner, Cory. Last entry: Equipment 300,000 Cash 19,667 Cory, Capital 319,667 52en ay 21. 22. 23. REVIEW QUESTIONS Define a partnership. Give reasons why one would want to Partner with another in operating a business rather than be a sole proprietor or a shareholder. Give the disadvantages of a partnership over a sole proprietorship and over a corporation. Unlimited liability is a characteristic present in both a sole proprietorship and a partnership. Explain why this may be a disadvantage from the viewpoint of the owner but an advantage from the viewpoint of a creditor. Differentiate a general partnership from a limited partnership. . Give the differences 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-Partnership necessary? Enumerate the information contained herein. Florante is a talented artist. He would like to be a partner of Aba and Ruray Partnership but 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 industrial 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. . A partner extended a loan to the partnership. This was credited to the partner’s capital account. Explain why this is not correct. . What is the reason for distinguishing a capital account from a drawing account? A sensible partner will opt to have a written agreement rather than oral. Why? |. What is bonus capital and how will this affect the assets and the partners’ equity? |. What is the difference in journalizing the investment of a capitalist partner from the investment of an industrial partner? |. Ana and Bella formed a partnership with Ana investing her land costing P50,000 but with a current fair market value of P80,000, At what amount will you record her investment? Cite the GAAP and explain. What is the reason why assets and liabilities of a sole proprietorship must be adjusted before these are to be taken over by the partnership? What is goodwill and how will this affect the assets and the partners’ equity? Explain why bonus is favored over goodwill in recording capital beyond actual contribution made by a partner.is EXERCISES jness selling pastries and oa The following are the Ni sh to put ian Noun ea en eben Inv a doughnuts. They agreed to share profits based on the legal ledger postings for the last quarter of 2021: Nona, Capital Nina, Capital ‘at. 2 300,000 Oct.2 500,000 Oct. 4 200,000 Nina, Drawing Nona, Drawing Get. 31 10,000 | Dec. 31 100,000 Oan31 10,000 | Dee: 31 100,000 Nov. 30 10,000 Noy. 30 10,000 Dec. 28 10,000 Dec. 28 10,000. Loans Payable, Nona Income Summary Dec. 15 50,000 Dec. 31 200,000 | Dec. 31 200,000 Direction. a) In chronological order, describe the transactions that took place. : b) From the above postings, determine the agreements contained in the Articles of Co- Partnership regarding required contribution of each partner, allowable withdrawals, and profit-sharing ratio. ©). Give the last entry to close the drawing accounts, d) Prepare a statement of partners” equity for the last quarter of 2021. Andy and Amy agree to form a partnership with Amy investing the following: t Cost Market Value Land P 1,500,000 3,500,000 Building 5,000,00 2,500,000 Accumulated Depreciation _P( 1,500,000) ‘Andy will invest cash equal to half of Amy’s investment, Direction: Give one journal entry to record the investments of the partners. On January 1, 2019 Elmer and Edam formed a partnership with Elmer contributing P900,000 cash and Edam contributing land valued at P300,000 and a building valued at 500,000. The partnership will assume Edam's P200,000, long-term note payable associated with the land and building. The partners agree to share income on a 3: 2 basis, respectively. Before the year ended, Elmer and Edam withdrew cash of P30,000 and P25,000, respectively. At the end of the year, total revenues amounted to P375,000 and total operating expenses amounted to P125,000. Direction: a. Prepare journal entries to record the partners’ (1) initial capital invest withdrawals, and 3) determine net income and record their a ieee oe b. Prepare a statement of partners’ equity for the year just ended, : Clara and Eba agree to form a partnership on July 1 with Eba contributi i dered orn Lon enaGloanancicctowned misiastee, ting the followingMerchandise Inventory ~ cost of P120,000; current fair value of P100,000 Equipment ~ cost of P500,000; book value of P450,000, current fair value of P400,000 6% one-year note issued for the equipment on May 1 for P150,000, will assumed by the firm. Clara agreed to contribute furniture and fixtures which was purchased two years ago for P500,000 less accumulated depreciation of P200,000. Current market vaiue is 80% of book value, The partners further agreed that the contribution of Eba be 50% of total equity and Clara should still invest cash to make her equity also equal to 50%. Direction: Give two entries to record the investments of the partners. 5. From the following balances found inthe edger of R-WE Toy Company, reconstruct the investment entries recorded by the bodldkoante he lebit Credit Cash P200, 000 Inventory 125,000 Equipment 230,000 Fumiture & Fixtures 150,000 Notes Payable P100,000 Rubio, Capital 350,000 Winston, Capital 125,000 Enriquez, Capital 130,000 Totals 705,000 PZ05,000 6. Blanco and Delrio co-founded a management consultant firm. At the’end of the year, Delrio was surprised to learn 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 1 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 this means, 1. The following transactions of Best Pizza, owned by Reyes, Ortiz and Flores, took place from March I to May 31, 2019: March 1 Reyes, who owns an ice cream parlor, invested cash of P80,000 and merchandise costing P120,000 but with a fair value of P70,000. Customers’ accounts of P50,000 were also taken over by the partnership at its realizable value of 80%, (Recognize an allowance for doubtful accounts for 20% of cost), Ortiz invested cash of P40,000 and pieces of furniture costing P150,000 which the partners agree to be 50% depreciated to arrive at its current fair value 5S2 56 May Flores, an expert in pizza making, invested impor en ae me costing P350,000 but which fair value dropped by 4026 0! BY oo a note for a down payment of P200,000 when this was purchased ane Mii the balance half of which is still unpaid . Partners agree that assumed by the partnership. May 31 Partners agree that additional cash investments be made so that all partners wil} have an equal sharing on the assets and profits of the business. Direction: b ) In parallel column, list down the assets and liabilities, at fair values, contributed by each Partner and determine each partner’s contribution. b) Who should make additional cash investment and at what amount? ¢) Prepare three separate entries to record the contribution of each partner. Anthony Taverna invited Jose Elchico and Ted Baylon to be his partners on June 1, 2019 to set up an advertising company. His business showed the following balances: Debit Credit Cash P 20,000 Accounts Receivable 80,000 Allowance for bad Debts P 2,000 Merchandise Inventory 120,000 Fumiture & Equipment 90,000 Allowance for Depreciation 18,000 Accounts Payable 40,000 Taverna, Capital 250,000 Totals 310,000 310,000 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 Tavea’s contribution 1. ‘The accounts receivable has a realizable value of P70,000. 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 Raymond and set up an internet café. The following are the investments of the partners: 1. Gilmore will invest ten sets of computers and a printer unit with a total list price of 275,000 but the cash price is only P260,000. He will also invest furniture and fixtures with a cost price of P58,000 less accumulated depreciation of P8,000. Fair market value of this is only P40,000. 3 2. Raymond will put up enough cash to make the total assets P500,000, 3. They further agree to recognize bonus so that both partne1 interest over the partnership BRIE Well aave an‘eqelDirection: a, Record the actual contribution of Gilmore, b, Record the investment of Raymond including the bonus transfer from Gilmore. 10, May Gonzales, sole proprietor ofa hardware business, decides to form a partnership with ‘Ned Espiritu. May's accounts are as follows: Book Value Market Value Cash : P 34,000 P 34,000 Accounts Receivable (net) 82,000 76,000 Inventory 112,000 125,000 Land | 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. |. Record Ned’s investment. Using revaluation methed compare total agreed equity (computed based on’Ned’s investment) against total actual contributions. It is agreed that Land should further be revalued. Entry to change May’s investment. M1, Alice and Alex decide to merge their proprietorships into, a partnership called AA Partners. Financial records showed the following: Alice Alex Cash P25,000 Accounts Receivable 32,000 Less: Allowance for impairment 2,400 29,600 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 value of the equipment is P22,000. Obsolete stock of P10,000 should be written off. Direction: 4) Two investment entries supported by a table for adjusted and agreed capital based on the following independent situations: 1) Cash Method. Equal interest over the assets with additional investment required to meet this agreement. 2) Goodwill Method. Alex investment represents 40% of total agreed equity. The ‘excess capital for Alice is due to her strong connection in the electronic industry . which will ensure a large client base for the partnership, 3) Bonus Method. Equal interest over the partnership with no additional adjustment on the assets, Make a third entry for the bonus capital. 4) Revaluation Method. Alex investment represents 50% of total agreed equity. Total agreed capitalization is lesser than total actual contributions. They agreed that the investment in equipment should further be reduced. b) Present the statement of financial position under each of the above situations,12. Max Solis has successfully operated Star News for a umber of years. He wants 1, esd more capital, so he invite expand the newspaper publishing business but he would 4 Mary Prieto to join ised July . ‘A post closing trial balance of his business showed th. following: 1a Debit Cash P_ 170,000 Accounts Receivable 500,000 Supplies Inventory 75,000 Prepaid Insurance 10,000 Furniture & Fixtures 35,000 Accumulated Depreciation 000, Printing Equipment 500,000 Accumulated Depreciation 120,000 Accounts Payable 350,000 Solis, Capital 815,000 P1,290,000 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". The partnership will be called the Philippine Star Balita with Prieto investing cash to make the agreed capital P1,000,000. It was further agreed that Prieto will be given a 40% interest in the firm. wawr Direction: a) Prepare a journal entry to record in the partnership books Solis’ adjusted assets and liability contributions. b) Determine Pricto’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 proprietorship business which on September 1, 2019 had the following assets and liabilities; Cash 10,000 Accounts receivable 40,000 Allowance for doubtful debts 2,000 Inventory 50,000 Plant and equipment 30,000 Accumulated depreciation 18,000 Accounts payable 20,000 Marlo, Capital 90,000Ga ee On September 1, Marlo and Bello agreed to form a pata partnership with Bello contri 1s P 100,000 cat as capital. The partnership agreement. indicates that all assets and liabilities of o's business be taken over at fair values: accounts receivable to be written af en fevertory BS1,000 and plant and equipment at 1/3 of its cost. The yartners: larlo’s capital i es P ip assets and profits *Pa! contribution will represent a 40 Direction. a, Show the general journal entries to record the contribution of each partner. Goodwill method to be used to comply with a: ic ad Marlo’s contribution and interest Partners’ agreed capitalization computed based b. Prepare a statement of financial ts formation ofthe partnership at the ead of Sepa se meee anes Steve owns a store selling health products and Gu reed t iy 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 Steve Guy Cash Health Store Beauty Salon P 25,000 P 11,000 Accounts Receivable 25,000 Merchandise Inventory 80,000 Supplies Inventory 15,000 25,000 Furniture and Equipment 50,000 85,000 Total P 195,000 P121,000 Accounts Payable P 20,000 P 5,000 Notes Payable 30,000 Capital 145,000 116,000 Total 195,000 121,000 The partners agreed to the following conditions: a. P5,000 doubtful accounts should be recognized. b. Fumiture and Equipment should be at the market value’ of P35,000 for the health store and P70,000 for the beauty salon. c. P10,000 obsolete goods should be written off. d. Beauty supplies unused should only be P15,000. ©. Accrued interest should be recognized for P2,500, Direction: a) List down the adjusted assets and liabilities of each partner to determine partner's ital, Te. comply with an agreed equity of P100,000 for each partner, show the additional cash to be invested or cash to be withheld by a partner. c) Prepare two entries to record the investments of the partners in the partnership books 4) Prepare a statement of financial position just after formation b) 59they agreed £0 use the ©) Change the agreement listed in b) if instead of cash method, Paks Pies bonus method to comply with the required P100,000 equity for each P the third entry to record the bonus capital. two proprietor The following information were taken from the records of Dan and Jude wo PrVtT tors er oe Debit Credit Cash P 19,500 a Accounts Receivable 15,000 . P 4,000 Allowance for doubtful accounts Beano 17,000 ‘ Inventory 28,000 30,000 Equipment 50,000 ‘ 13,000 Accumulated Depreciation- equipment 24,000 37,000 ‘Accounts payable A ; Dan, Capital a, 2, Jude, Capital a P2500 112,500 P 86,000 P.86,000 Dan and Jude decide to form a partnership “Sparkling Waters” with the following agreed upon valuations for non-cash assets Dan Jude Net realizable value of Accounts Receivable P1500 —-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. c) 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. Vecjay Lee is the owner of VJ’s Internet Cafe. She has to ex invited a partner, Jackie Lou on August 1, 2018 and the latter et busines 2a Lee, just before the partnership formation, are the following accounts and their belences Cash P 17,500 Accounts Receivable 40,000 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a. 5,000 should be the full amount of the Allowance for Bad debts, b, Thenote is dated March 31 and is due on September | at 12% interest. c. Market value of the merchandise is P145,000. 4, Lou will invest cash for a 50% interest in an agreed total equity of P800,000. e, Lee will adjust the store furniture and equipment’s value to come up with an equal sharing with Lou. £, New books will be used by the partnership, Direction: a) List the assets and liabilities of Lee at the adjusted amounts. How much is her adjusted capital? Compare the adjusted capital against the agreed capital. How much is the revaluation 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) record Lou’s investment b) 17. 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: Scars B: a lot for S00 square meters C: a lot with a 3-storey building Partners agreed to put up a car rental agency, a parking lot and lease the second and third floors of the 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 A, B and C formed a partnership in 2018, On its third year of operation, surprise that the resources of the business has not grown as expected in spite that the industry is booming, C wants to go over the financial records of the partnership. A, as managing partner, would not want to open the books of records invoking confidentiality of contracts embodied herein, Questions: 1, Is there a legal issue violated? Explain 2.Is there an ethical issue violated? Explain. 61ACCOUNTING ISSUES ted shic |, Jim Femandez invites his two cousins to form a partnership. He inves hee phe bought three years ago at a cost of P300,000 but was appraised at Ee We historteallCost, agree to an equal profit sharing ratio, The accountant recorded the lot on sale of land was A month after, the partnership sold the lot for 650,000 and a gain recorded. Required: a) Give the entry to record the investment of the lot. b) Give the entry to record the sale ofthe lot. ©) Compute for the equity of Fernandez over the investment and subsequently from the sale of the lot. 2. Refer to No. 1 but this time the accountant recorded the lot at its appraised value. Answer the same requirements. Comparing the equity accounts in 1¢ 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, 62