INTEGRATED REVIEW II: ADVANCED FINANCIAL ACCOUNTING AND REPORTING

MODULE 1: PARTNERSHIP FORMATION

PART I. NOTES

Definition of Partnership

By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among themselves. Two or more persons may also form a
partnership for the exercise of a profession. (Art. 1767, Civil Code)

An association of two or more persons to carry on, as co-owners, a business for profit (Uniform Partnership Act, Section
6)

A primary advantage of the partnership form of entity is ease of formation. The agreement to form a partnership may be
as informal as a handshake or as formal as a many-paged partnership agreement.

Classification of Partners

General partner. One who is liable to the extent of his separate property after all the assets of the partnership are
exhausted.

Limited partner. One who is liable only to the extent of his capital contribution. He is not allowed to contribute services of
industry only.

Capitalist partner. One who contributes money and property to the common fund of the partnership

Industrial partner. One who contributes his knowledge or personal service to the partnership

Managing partner. One whom the partners has appointed as the manager of the partnership

Partnership Formation

A partnership may be constituted orally or in writing. In case of the latter, partnership agreement are embodied in the
articles of partnership.

A contract of partnership is void whenever immovable property or real rights are contributed and a signed inventory of
the said property is not made and attached to a public instrument.

When the partnership capital is P3,000 or more, in money or property, the public instrument must be recorded with the
Securities and Exchange Commission (SEC). Even if it not registered, the partnership having a capital of P3,000 or more
is still valid and therefore has legal personality. The SEC shall not register any corporation organized for the practice of
public accountancy.

What may be contributed to the partnership?

Cash – at face value

Non-cash – the measurement in order of priority

1. Agreed amount – need adjustment to the existing balance
2. Fair marker value
3. Carrying amount
4. Cost

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Liabilities – if the problem is silent, it is assumed by the partnership

Contributions by industrial partner may be recorded in the fair value of such service can be measured, otherwise it is
recorded via memo entry

Ownership/Capital Interest of Partners

In order to comply with agreed capital/ownership interest, there may be adjustment in the existing capital contributions of
the partners. This give rise to ff approaches:

Net investment approach

Capital contribution and interest of partners are the same. No further adjustments are made

Investment/Withdrawal
Any excess initial contribution may be withdrawn. Any deficiency in initial contribution must be met with additional
investment

Bonus approach
Bonus capital will be transferred to the partnership who incur deficiency in the initial contribution at the expense of another
partner.

Asset Revaluation/Goodwill
There will be no deduction or withdrawal to initial contribution of a partner. Instead, the partnership will recognize
undervalued asset or goodwill

Note: Goodwill method is not in accordance with PFRS as goodwill is only recognized in a business combination (PFRS 3),
thus if the problem is silent use bonus method.

Difference of sole proprietorship, partnership and corporation accounting

Partnership Sole Proprietor Corporation

Ownership Two or more owners A single owner (account 1 or more owner (account
(account used: Owners used: Owners capital, used: contributed capital,
capital, withdrawals for each withdrawals) retained earnings)
partner)
Profits or losses Profits are divided according All profits go to sole owner Profits are retained by the
to agreement (closed to each (closed to owner’s capital) corporation and only
partner’s capital) distributed as dividends upon
declaration of board of
directors (closed to retained
earnings)
Investment A partner may contribute An owner may invest cash A shareholder may contribute
cash, non-cash assets and and non-cash assets but not cash, non-cash assets and
his own services (industry) his own services his own services (industry)
Withdrawals Has withdrawal accounts Has withdrawal account No withdrawal account

PART II. STRAIGHT PROBLEMS

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PROBLEM 1 (Adjustments of Assets to Fair Value). The balance sheet of A on November 30, 20x4 before accepting B as
his partner to form AB Partnership is presented below:

Assets Liabilities and Capital

Cash P120,000 Accounts payable P12,000
Accounts receivable P48,000 Notes payable 60,000
Less: Allowance for bad debts P3,000 45,000 A, Capital 246,000
Notes receivable 60,000
Merchandise inventory 27,000
Equipment P72,000
Less: Accumulated depreciation 6,000
Total assets P318,000 Total liabilities and capital P318,000

It is agreed that for purposes of establishing A’s interest the following adjustments shall be made:
a. The accounts receivable is estimated to be 90% realizable
b. Interest at 8% on notes receivable dated March 1, 20x4 is to be accrued.
c. The merchandise inventory is to be valued at P21,000
d. The equipment is under-depreciated by P4,800
e. Prepaid expenses of P2,400 and accrued expenses of P7,200 are to be recognized.

B is to invests cash to obtain one-third interest in the partnership

Required:
1. Prepare the following entries in the books of A, as to:
a. Adjustments
b. Closing
c. Investments
2. Prepare the balance sheet after the formation of the partnership.

PROBLEM 2 (Capital Interest Under Three Approaches ). The following items are being invested by A and B to form AB
Partnership:
Particulars Agreed values
Accounts Investment by A Investment by B
Cash P120,000 P120,000
Inventory 120,000 --
Land -- 240,000
Building -- 480,000
Equipment 240,000
Totals P480,000 P840,000
Mortgage on building (assumed by partnership) -- 240,000
Totals P480,000 P600,000

Required:
1. Prepare entries to record the formation of partnership assuming A and B agree that each partner is to receive a capital
credit equal to agreed values of net assets each partner invested. (Net Assets Approach)

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2. Prepare entries to record the formation of partnership assuming that A and B agree that each partner is to receive an
equal capital interest. (Bonus and Asset Revaluation/Goodwill Approach)

PART III. MULTIPLE CHOICE QUESTIONS

1. Roberts and Smith drafted a partnership agreement that lists the following assets contributed at the partnership’s
formation:
Contributions by: Roberts Smith
Cash P20,000 P30,000
Inventory P15,000
Building P40,000
Furniture & equipment 15,000
The building is subject to a mortgage of P10,000, which the partnership has assumed. The partnership
agreement also specifies that profits and losses are to be distributed evenly. What amounts should be recorded
as capital for Roberts and
Smith at the formation of the partnership
Roberts Smith Roberts Smith
a. P35,000 P85,000 c. P55,000 P55,000
b. P35,000 P75,000 d. P60,000 P60,000
2. In 2011, Jessie and Anne agreed to contribute equal amounts into a new partnership for a 50% interest in profit
(loss) and in capital to each of them. Their respective contributions will come from old proprietorships they
owned and will both be dissolved. Jessie contributed the following items and amounts:
Cash P585,000
Machineries (at book value per her proprietorship records) P400,000
Anne contributed the following items at their carrying amounts in the proprietorship records:
Accounts receivable P75,000
Inventory 210,000
Furniture and fixtures 402,000
Intangibles 172,500
All non cash contributions are not property valued. The two partners have agreed that (a) P6,000 of the accounts
receivable are uncollectible; (b) the inventories are overstated by P15,000; (c) the furniture and fixtures are
understated by P9,000; and the intangibles includes a patent with a carrying value of P10,500, which must now
be derecognized due to the result of unsuccessful litigation promulgated by the court just before the partnership
formation.
What is the fair value of the machineries invested by Jessie into the partnership?
a. P336,000 b. P252,000 c. P390,000 d. P350,000

On March 1, 20x4, Evan and Helen decide to combine their business and form a partnership. The balance sheets of Evan
and Helen on March 1, 20x4 before adjustments

Accounts Evan Helen

Cash P9,000 P3,750
Accounts receivable 18,500 13,500
Inventories 30,000 19,500
Furniture and Fixtures (net) 30,000 9,000
Office equipment (net) 11,500 2,750
Prepaid expenses 6,375 3,000
Total P105,375 P51,500

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Accounts payable P45,750 P18,000
Evan, Capital 59,625
Helen, Capital 33,500
Total P105,375 P105,375
They agree to provide 3% for allowance for doubtful accounts of their accounts receivable and found Helen’s furniture
and fixtures to be under-depreciated by P900.
3. If each partner’s share in equity is equal to the net assets invested, the capital accounts of Evan and Helen would
be
a. P58,170 and P33,095, respectively c. P59,070 and P32,195, respectively
b. P58,320 and P32,495, respectively d. P104,820 and P50,195, respectively

4. Bill and Ken enter into partnership agreement in which Biil is to have a 60% interest in capital and profits and
Ken is to have a 40% interest in capital and profits. Biil contributes the following:
Particulars Cost Fair value
Land P10,000 P20,000
Building P100,000 P60,000
Equipment P20,000 P15,000
There is a P30,000 mortgage on the building that the partnership agrees to assume. Ken contributes p50,000
cash to the partnership. Bill and Ken agree that Ken’s capital account should equal Ken’s P50,000 cash
contribution and that goodwill (revaluation of asset) should be recorded. Goodwill (revaluation of asset) should
be recorded in the amount of
a. P10,000 b. P15,000 c. P16,667 d. P20,000

Use the following information for question 8 and 9

As of July 1, 20x4, FF and GG decided to form a partnership. Their balance sheets on this date:
Particulars FF GG
Cash P1,500 P3,750
Accounts receivable 54,000 22,500
Merchandise inventory - 20,250
Machinery and equipment 15,000 27,000
Total P70,500 P73,500
Accounts payable P13,500 P24,000
FF, capital 57,000
GG, capital 49,500
Total P70,500 P73,500
The partners agreed that the machinery and equipment of FF is under depreciated by P1,500 and that of GG by P4,500.
Allowance for doubtful accounts is to be set up amounting to P12,000 for FF and P4,500 for GG.
5. If the capital contribution of each partner is the net amount of his assets and liabilities taken over by the
partnership, the capital accounts of FF and GG would be:
a. P43,500 and P40,500 c. P57,000 and P49,500
b. P46,500 and P49,500 d. None of the above
6. Assume that the partnership agreement provides for profit and loss sharing of 60% to FF and 40% to GG, and
that the new capital of the partnership is to be based on the adjusted capital of GG. How much additional cash
must be invested by FF in order to bring the partner’s capital balances proportionate to the profit and loss ratio?
a. P14,250 b. P5,250 c. P17,250 d. None of the choices

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On July 1, 2019, XX and YY decided to form a partnership. The firm is to take over business assets and assume liabilities
and capitals are to be based on the net assets transferred after the following adjustments:
• XX and YY's inventory is to be valued at P31,000 and P22,000 respectively
• Accounts receivable of P2,000 in XX's books and P1,000 in YY's books are uncollectible
• Accrued salaries of P4,000 to XX and P5,000 for YY are still to be recognized in the books
• Unused office supplies of XX amounted to P5,000, while that of YY amounted to P1,500
• Unrecorded patent of P7,000 and prepaid rent of P4,500 are to be recognized in the books of XX and YY,
respectively
• XX is to invest or withdrew cash necessary to have a 40% interest in the firm
Balance sheets for XX and YY on July 1 before the adjustments are given below:
XX YY
Cash 31,000 50,000
Accounts receivable 26,000 20,000
Inventory 32,000 24,000
Office supplies -- 5,000
Equipment 20,000 24,000
Accumulated depreciation (9,000) (3,000)
Total assets 100,000 120,000

Accounts payable 28,000 20,000

Owner’s capital 72,000 100,000
Total liabilities and capital 100,000 120,000

Determine:
7. The net adjustments - capital in the books of XX and YY
a. XX, P7,000 net debit; YY, P2,000 net credit
b. XX, P5,000 net debit; YY, P7,000 net credit
c. XX, P7,000 net credit; YY, P2,000 net debit
d. XX, P5,000 net credit; YY, P7,000 net debit
8. The adjusted capital of XX and YY in their respective books
a. XX - P65,000, YY - P102,000
b. XX - P63,000, YY - P107,000
c. XX - P77,000, YY - P98,000
d. XX - P77,000, YY - P93,000
9. The additional investment (withdrawal) made by XX
a. (P15,000)
b. (P6,666.50)
c. P3,000.00
d. P8,377.50
10. The total assets of the partnership after formation
a. P235,333.50
b. P230,000.00
c. P220,333.50
d. P212,000.00
11. The total liabilities of the partnership after formation
a. P57,000

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 b. P48,000
c. P54,000
d. P51,000
12. The total capital of the partnership after formation
a. P180,000.00
b. P178,333.50
c. P163,333.50
d. P155,000.00
13. The capital balances of XX and YY in the combined balance sheet
a. XX, P81,250; YY, P72,000
b. XX, P81,250; YY, P75,000
c. XX, P100,000; YY, P75,000
d. XX, P62,000; YY, P93,000

END