Continue Formation of partnership: Presenting Non-cash Shares

In some cases, the partner presents his share in the capital of a partnership in a form non cash
shares (in-kind shares) whether presenting some assets, or assets and liabilities (i.e., net asset) or
all assets and liabilities of his sole-enterprise (i.e., converting his sole-enterprise to a partnership).

1/1-The Case of payment the non-cash shares by presenting the Fixed assets (F.A):
1) Record the Assets received in the Dr. side.
2) Record the Capital of the partner in the Cr. side.
3) If there is difference between the Value of the Assets & his Share in capital, It should
be settled by Cash whether in Dr. Side or Cr. Side.

So the General Journal Entry will be as follows:

Assets   Xx
Cash   Xx
Capital   Xx or
Cash   Xx

Record Assets by it’s Fair Market Value, but if it’s not given, use Book Value (Cost – Accumulated
Depreciation).

Example (1):

Yasser and Yasmin agreed to form a partnership with Total capital $150,000. Yasser’s share in
capital is $50,000 and he paid it in Cash. But Yasmin presented the following assets as a payment
for her share; knowing that the difference between Yasmin’s contribution and her share in
the capital should be settled in Cash:
Asset Fair Market Value Book Value
Building 40,000 45,000
(-) Accumulated Depreciation (30,000)

Cars 20,000 30,000

(-) Accumulated Depreciation (5,000)

Required:

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 1) Prepare the Journal Entries to record the formation of the partnership.
2) Prepare the Opening Balance Sheet of the partnership at the formation date.

Solution:

1- The Journal entries:

Total Capital

Partner Yasser Partner Yasmin

His Share = 50,000 (Given) Her Share = 150,000 – 50,000 = 100,000

Cash  50,000 Building  40,000

Capital (Yasser) 50,000 Cars  20,000

Cash (Complementary) 40,000

Capital (Yasmin)  100,000

2- Opening Balance Sheet:

Assets Liabilities & O.E
Cash [50,000 + 40,000] 90,000 Yasser Capital 50,000
Building 40,000 Yasmin Capital 100,000
Cars 20,000
Total Assets 150,000 Total Liabilities & OE 150,000

1/2 - The Case of payment the non-cash shares by presenting Current Assets:
A- The account receivable (A/R):is recorded by its Book value (B.V) and the differences
between the B.V and market value (M.V) is recorded as allowances for doubtful account
(AFDA). However; If the Market Value is not given, we should use the Old AFDA.
B- The Notes receivable (N.R) ): is treated exactly as Accounts Receivable but instead of
using AFDA we use another account called Allowance For Discounting Note (AFDN )

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Example (2):

Partner Ahmed's capital share is $8.000. He presented the Book Value of Accounts Receivable as
follows:
AR 10.000
(-) AFDA (2.000)
Book Value 8.000

Required: Prepare the Journal Entries to record the formation of the partnership if:
1- The partners agreed that the Market Value of AR is $7,000
2- The partners didn't agree on any Market Value for AR.

Solution

1- Market value = $7000:

New AFDA = Book Value - Market Value = 10.000-7000=3000

AR 10.000
AFDA 3000
Ahmed's Capital 7000

2- Market value not given:

Use old AFDA= 2000 (Given)

AR 10.000
AFDA 2000
Ahmed's Capital 8000

1/3 - The Case of payment the non-cash shares by presenting net asset (A-L)
Example (3):

Partners (A & B) agreed to form a partnership with Total capital $200,000. A’s share in capital is
$
20,000 to be paid in Cash. B’s share in capital is $180,000 to be paid by presenting his Building,
which he had purchased with a Cost of $100,000 and Net Book Value of $90,000, knowing that its
Market Value is $120,000 & this building is subject to Mortgage payable of $10,000.

If the partners agreed, that Partner B has to pay any difference between his share in capital & his
contributed building in Cash on the same date.

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 Required:

1) Prepare the Journal Entries to record the formation of the partnership.

2) Prepare the Opening Balance Sheet of the partnership at the formation date.
Solution:

Total Capital
200,000
$

Partner (A) Partner (B)

His Share = 20,000 (Given) His Share = 200,000 – 20,000 = 180,000

Cash  20,000 Building  120,000

Capital (A)  20,000 Cash (Complementary) 70,000

Mortgage Payable  10,000

Capital (B)  180,000

Opening Balance Sheet

Assets Liabilities & O.E
Cash [20,000 + 70,000] 90,000 Mortgage Payable 10,000
Building 120,000
A Capital 20,000
B Capital 180,000
Total Assets 210,000 Total Liabilities & OE 210,000

Example (4) :
Mostafa & Mohamed agreed to form a partnership with Total Capital $200,000 to be divided
Equally by presenting the following assets:

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 Mostafa Mohamed
Asset Book Value Market Value Asset Book Value Market Value
Building 100,000 48,000 Cars 40,000 Not Available
(-) Acc. Dep. (20,000) (-) Acc. Dep. (10,000)

AR 50,000 Not Available AR 65,000 60,000

(-) AFDA (10,000) (-) AFDA (10,000)

NR 30,000 25,000

If you know that:

1) The building of Mostafa is obligated by Mortgage payable (Liability) of $10,000 which is
assumed by the company (The liability will be transferred to the Company).
2) The partners agree to pay or withdraw any difference in Cash.
Required: Prepare the Journal Entries to record the formation of the partnership.

Solution:

Total Capital
200,000
$

Partner (Mostafa) Partner (Mohamed)

His Share = 200,000 x ½ = 100,000 His Share = 200,000 x ½ = 100,000 (Given)

Building  48,000
AR  50,000 Cars  30,000
NR  30,000
AR  65,000
AFDA (Old AFDA) 10,000
Cash (Complementary) 10,000
AFDN (New = 30,000 –
5,000
25,000)
AFDA (65,000 – 60,000) 5,000
Mortgage Payable 10,000
Capital (Mohamed) 100,000
Capital (Mostafa)  100,000 

Cash (Complementary) 3,000