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June 6, 2020

Partnership - I

Module Chapters:
1. Chapter 1 Partnership Formation

*Partnership Operation will be uploaded tomorrow morning, 8am. :)

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 Advanced Financial Accounting & Reporting

Non-profit organization
BRIEF SUMMARY | PARTNESHIP may not be partnership.

Partnership Association of two or more persons to carry as co-owner’ engaged in

a business for profit

Characteristics (see Module for study guide)

1. Separate legal personality No limit to liability as well as to
2. Ease of formation the exposure of the personal
3. Co-owner of partnership property and profits assets.
4. Limited Life 1. General Partnership – all
Each partner is a 5. Mutual Agency partners are individually liable.
principal as well as 6. Transfer of ownership
2. Limited Partnership – at least
agent of 7. Unlimited Liability one general partner who
partnership maintains unlimited liability.
Usually has “LLP” in the name.

Complementary - see Chapter 1 Module for notes on the following:

1. Coverage of the Partnership agreement

2. “Similarities and Differences of Sole Proprietorship and Partnership”
3. “Advantages and Disadvantage of Partnership”

For advance reading, you may look up the definition of formation, fair value,
bonus and goodwill in the “References” Menu in the site.

TOPIC 1 | Accounting for partnership – Formation

Major Considerations in accounting for the equity of a partnership

1. Formation
2. Operations Partnership, as generally a consensual contract,
3. Dissolution is perfected by mere consent of the partners.
4. Liquidation

Formation Accounting for initial investments to the partnership

Agreement In any form - oral or written

Exceptions
Partnership is void if:
In public instrument in any of the ff.: - inventory of the immovable is not
1. Immovable property is contributed made, signed by the parties, and
2. Real right is contributed attached to the public instrument

3. Capital is P3,000 or more (and must be recorded in the SEC)

Note for No. 3:
The partnership still has juridical personality even if it fails
In money or property to register with the SEC. The partnership and its members
are still liable to third parties. (Art. 1772 Civil Code)

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Contributions

Forms

1. Cash - measured at face value

2. Property
3. Services
The partnership agreement or
contract operates as a law between
Measurement of Property/Services
the partners as contracting parties.
For inventories, at
cost or net realizable 1. At agreed value:
value, whichever is ➢ Usually equal to fair market value
lower, if FMV is not ➢ If not equal to fair market value - agreed value prevails
available
2. At fair market value - if no agreed value
3. At carrying value - if no fair market value (n/a to services)

Review Questions for Brief Summary and Topic 1

1. Partnership agreement is an express contract among the partners (the owners of the
business). Such an agreement generally does not include:

A. The rights and duties of the partners.

B. A limitation on a partner’s liability to creditors.
C. The rights and duties of the partners in the event of partnership dissolution.
D. The allocation of income between the partners.

A, C and D – discussed and presented in the partnership agreement (see Module for study guide)
B - correct answer.

2. A partnership records a partner’s investment of noncash assets in the business at:

A. A special value set by the partners.

B. The market value of the assets invested.
C. The partner’s book value of the assets invested.
D. Any of the above, depending upon the partnership agreement.

D - correct answer. First priority in measurement is the partnership’s agreed value.

3. When property other than cash is invested in a partnership, at what amount should the
noncash property be credited to the contributing partner’s capital account?

A. Contributing partner’s original cost.

B. Fair value at the date of recognition.
C. Assessed valuation for property tax purposes.
D. Contributing partner’s tax basis.

B - correct answer. Again, the noncash asset (or service) is valued at the partner’s agreed
valuation. In its absence, the capital contribution introduced in noncash form, is brought into
the partnership at fair value at the date of contribution/recognition.

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4. Partner D contributed inventory costing P300 and with a net realizable value of P200 to a
partnership. A payable related to this account costing P50 will be assumed by the partnership.
Capital account to be credited to Partner D is P150.

A. True
B. False

A - correct answer. There is no agreed value and fair market value for the inventory. Thus it
is measured at Net Realizable Value (estimated selling price less costs to sell), or cost,
whichever is lower. In this case, NRV is lower: P150 (P200 – P50 payable).

5. On December 1, 2020, A and B formed a partnership, with A contributing cash and

inventories. A and B mutually agreed that the inventories of A shall be taken to the
partnership at a value of P50,000. On this date, the selling price of the inventories in the
market is P55,000. At December 31, 2020, the inventories remained unsold and their net
realizable value is P53,000.

At what amount shall the capital of partner A be credited for the inventories upon formation?

A. P50,000 C. P53,000
B. P55,000 D. P54,000

6. At what amount shall the inventories be measured at December 31, 2020?

A. P50,000 C. P53,000
B. P55,000 D. P54,000

By virtue of the partnership agreement, the inventories shall be recorded at P50,000, the
agreed value, with a corresponding credit to A’s capital account for the same amount. 5-A.
Upon initial recognition, the P50,000 shall now become the cost of the inventories to the
partnership.

The inventories shall be measured at the lower of cost and NRV at December 31, 2020 (PAS
2). The cost of the inventories is the value upon initial recognition by the partnership:
P50,000. Since it is lower than the yearend NRV of P53,000, the inventories are measured at
their cost. 6-A

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TOPIC 2 | Accounting for partnership – Formation

Illustrative Problem:

N and R formed a partnership with the following contributions:

N R
Cash P 150,000 P 20,000
Accounts Receivable 20,000
Inventories 120,000
Land 120,000
Building 180,000
Total P 290,000 P 320,000

Note Payable P 50,000

N, Capital 240,000
R, Capital P 320,000
Total P 290,000 P 320,000

Additional information:

✓ Accounts receivable included P10,000 which is deemed worthless.

✓ Inventory has an estimated selling price of P150,000 and estimated cost to sell of
P40,000.
✓ Building is under-depreciated by P35,000.
✓ The building has also unpaid mortgage of P20,000 but this is not assumed by the
partnership.
✓ Note payable is stated at face amount. A proper valuation requires the recognition of
P15,000 discount on note payable.
✓ N and R shall share profits and losses equally.

1. Compute for the adjusted balances of each partner.

N R Partnership
Cash P 150,000 P 20,000 P 170,000
Accounts Receivable (20,000 – 10,000) 10,000 10,000
Inventories (whichever is lower)
NRV (150,000 – 40,000) 110,000 110,000 110,000
Cost 120,000
Land 120,000 120,000
Building (180,000 – 35,000) 145,000 145,000
Total P 270,000 P 285,000 P 555,000
Notes payable, net (50,000 – 15,000) ( 35,000) ( 35,000)
Adjusted Capital Balances P 235,000 P 285,000 P 520,000

The unpaid mortgage on the building is not included because it is not assumed by the
partnership.

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Journal Entry:

Cash P 170,000
Account Receivable 10,000
Inventories 110,000
Land 120,000
Building 145,000
Discount on note payable 15,000
Notes Payable P 50,000
N, Capital 235,000
R, Capital 285,000

2. Which partner should invest additional cash and how much if we assume that the partners’
capital shall be increased accordingly to bring the capital balances proportionately to their
profit and loss?

Let’s use N’s Capital first to determine if R’s capital contribution is sufficient.

N, Capital 235,000
Divide by profit and loss ratio of N 50%
Total 470,000
Multiply by R’s profit and loss ratio 50%
Minimum capital requirement 235,000
R’s Capital 285,000
Deficiency on R’s capital contribution -

R’s contribution is sufficient. None, since the result is an “excess”

Now let’s use R’s Capital to determine if N’s capital contribution is sufficient.

R, Capital 285,000
Divide by profit and loss ratio of R 50%
Total 570,000
Multiply by N’s profit and loss ratio 50%
Minimum capital requirement 285,000
N’s Capital 235,000
Deficiency on N’s capital contribution 50,000

N should provide additional cash of P50,000 to make his contribution proportionate to his
profit or loss ratio.

3. Using bonus method, how much will be the capital balance of each partners assuming
both have equal interest?

Actual Contributions Bonus Method

N P 235,000
Equal sharing of capital = (520,000/2)
R 285,000
Total P 520,000 = P260,000

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Adjusted Balance of N is P260,000 with P25,000 bonus (P260,000 – P235,000).

The bonus given to N is treated as a reduction to the capital credit of R.

Journal Entry: Bonus method requires transfer of capital

Cash P 170,000
Account Receivable 10,000
Inventories 110,000
Land 120,000
Building 145,000
Discount on note payable 15,000
Notes Payable P 50,000
N, Capital (235,000 + 25,000) 260,000
R, Capital (285,000 – 25,000) 260,000

In “Bonus Method”, a partnership agreement may allow a certain party who is bringing in expertise
or special skill to the partner to have a capital credit greater than the fair value of his contributions.

4. Using variations to the bonus method, how much is the cash settlement between partners
and which partner shall receive cash payment from the other partner?

N R Partnership
Adjusted Capital Balances P 235,000 P 285,000 P 520,000
Equal interest (520,000/2) 260,000 260,000 520,000
Cash receipts (payment) ( 25,000) 25,000 -

R will received P25,000 from N

Journal Entry:

Cash P 170,000
Account Receivable 10,000 Note that there is still
Inventories 110,000 transfer of capital, but the
Land 120,000 partners will have
settlement between
Building 145,000
themselves.
Discount on note payable 15,000
Notes Payable P 50,000
N, Capital (235,000 + 25,000) 260,000
R, Capital (285,000 – 25,000) 260,000

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5. Using variations to bonus method, how much is the additional investment (or withdrawal of
part of investment) in order to bring the partners’ capital credit equal to 40:60 - N and R,
respectively - interest in the equity of the partnership?

N R Partnership
Adjusted Capital Balances P 235,000 P 285,000 P 520,000
N’s required capital balance (520,000 x 40%) 208,000
520,000
R’s required capital balance (520,000 x 60%) 312,000
Additional (withdrawal) (P 27,000) P 27,000 -

N shall withdraw P27,000 from initial investments and R shall make an additional
contribution of P27,000.

“Variation to the Bonus Method” is used when a partnership agreement stipulates a certain ratio to
be maintained by the partners representing their specific interests in the equity of the partnership.
This may give rise to adjustments to the initial contributions of the partner.
(See modules for further discussion)

Review Questions for Topic 2

On January 1, 2020, Peter and Jordan both sole proprietors decided to form a partnership to
expand both of their businesses. According to their agreement, they will split profits and losses
25:75 and their initial capital will also reflect that ratio.

The following are their Statements of Financial Position:

Peter Proprietor
Statement of Financial Position
December 31, 2019

ASSETS LIABILITIES AND EQUITY

Cash P 70,000 Accounts Payable P 85,000
Accounts Receivable 120,000 Accrued Expenses 75,000
Inventories 95,000 Notes Payable 100,000
Equipment 270,000 Peter, Capital 90,000
Accum – Dep – Equipment ( 205,000)
TOTAL P 350,000 P 350,000

Jordan Proprietor
Statement of Financial Position
December 31, 2019

ASSETS LIABILITIES AND EQUITY

Cash P 50,000 Accounts Payable P 95,000
Accounts Receivable 130,000 Accrued Expenses 110,000
Inventories 105,000 Notes Payable 120,000
Equipment 320,000 Jordan, Capital 160,000
Accum. Dep’n. – Equipment ( 120,000)
TOTAL P 485,000 P 485,000

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The values reflected in the Statement of Financial Position are already at fair values, except
for the following accounts:
✓ Peter’s accounts receivable is now P40,000 less than what is stated in his Statement
of Financial Position.
✓ Both inventories of Peter and Jordan are now P110,000 and P90,000 respectively.
✓ Additional accrued expenses are to be established in the amount of P30,000 for
Jordan and P25,000 for Peter.
✓ It is also agreed that all liabilities will be assumed by the partnership, except for the
notes payable of Jordan which will be personally paid by him.
1. How much is the adjusted capital balance of Jordan upon formation?

A. P235,000
B. P115,000
C. P310,000
D. P190,000

A – Correct Answer

2. How much is the adjusted capital balance of Peter upon formation?

A. P25,000
B. P40,000
C. P90,000
D. P50,000

B – Correct Answer

3. How much should Peter invest as additional cash to be in conformity with their initial capital
agreement?

A. Peter’s contribution is sufficient.

B. P40,000
C. P38,333
D. P50,000

C – Correct Answer

Peter Jordan Partnership

Cash P 70,000 P 50,000 P 120,000
Accounts Receivable (120,000 – 40,000) 80,000 130,000 210,000
Inventories 110,000 90,000 200,000
Equipment 270,000 320,000 590,000
Accumulated Depreciation ( 205,000) ( 120,000) ( 325,000)
Total P 325,000 P 470,000 P 795,000
Accounts Payable ( 85,000) ( 95,000) ( 180,000)
Peter Accrued Expenses (75,000 +25,000) ( 100,000) ( 100,000)
Jordan Accrued Expenses (110,000 +30,000) ( 140,000) ( 140,000)
Notes Payable ( 100,000) ( 100,000)
Adjusted Capital Balances P 40,000 P 235,000 P 275,000

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Let’s try to use Peter’s capital contribution first as a basis to check if Jordan has deficiency.

Peter, Capital P 40,000

Divide by profit and loss ratio of Peter 25%
Total 160,000
Multiply by Peter’s profit and loss ration 75%
Minimum capital requirement for Jordan 120,000
Jordan’s Capital 235,000
Deficiency on Jordan’s capital contribution -

Thus, we will not use this basis. Again, none, since the result is an excess.

Now, let’s use Jordan’s capital contribution as a basis to check if Peter has deficiency.

Jordan, Capital P 235,000

Divide by profit and loss ratio of Jordan 75%
Total 313,333
Multiply by Peter’s profit and loss ratio 25%
Minimum capital requirement for Peter 78,333
Peter’s Capital 40,000
Deficiency on Peter’s capital contribution P 38,333

Thus, we will use this as a basis for Peter’s additional investment.

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