Partnership Formation Chapter 1 Partnership Formation Learning Objectives Differentiate between the accounting for partnerships, sole proprietorships and corporations. 2. State the valuation of contributions of partners. 3. Account for the initial investments of the partners to the | partnership. | 4, State the peculiar accounts used in a partnership and identify the transactions that affect these accounts. Introduction A partnership is an unincorporated association of two or more individuals to carry on, as co-owners, a business, with the intention of dividing the profits among themselves. The following distinguish a partnership from other types of entities: a. A partnership is owned by two or more individuals, while a sole proprietorship is owned by only one individual. b. A partnership is created by agreement between the partners, while a corporation or cooperative is created by the operation of law. c. A partnership is formed for a business undertaking that is tinuing nature, while a joint venture may be formed for a limited purpose and ends when its goal is achieved. Characteristics of a partnership a. Ease of formation - as compared to corporations, the formation of a partnership requires less formality. b. Separate legal personality — the partnership has a juridical personality separate and distinct from the partners. The partnership can transact and acquire properties in its name.Mutual agency ~ the partners are agents of the partnership for the purpose of its business. As such, a partner may legally bind the partnership to a contract or agreement that is in line with the partnership's operations. Co-ownership of property - each pariner is a co-owner of the properties invested in the partnership and each has an equal right with his partners to possess specific partnership property for partnership purposes. However, a partner has no right to possess a partnership property for any other purpose without the consent of his partners. Co-ownership of profits - a partnership is created as a business (a profit-oriented entity), as such, each partner is entitled to his share in the partnership profit. A stipulation which excludes one or more partners from any share in the profits or losses is void. (Art. 1799 of the Civil Code of the Philippines) Limited life - a partnership is easily dissolved: i. by the express will of any partner; ii. by the termination of a definite term stipulated in the contract; iii. by any event which makes it unlawful to carry out the partnership; iv. when a specific thing which a partner had promised to contribute to the partnership perishes before the delivery (Art, 1830(4)]; OT : v. expulsion, death, insolvency or civil interdiction of a partner. Transfer of ownership — in case of dissolution, the transfer of ownership, whether to a new or existing partner, requires the approval of the remaining partners.Partnership Formation 3 __ DATARS OT - h. Unilimiited liability — cach partner, including industrial ones, may be held personally liable for partnership debt after all partnership ,assets have been exhausted. If a partner is personally insolvent, his share in the partnership debt shall be assumed by the other solvent partners. > A partnership in which all partners are individually liable is called a general partnership. > A partnership in which at least one partner is personally liable is called a limited partnership. A limited partnership includes at least one general partner who maintains unlimited liability. The others, called limited pariners, may limit their liability up to the extent of their contributions to the partnership. A limited liability partnership usually has “LLP” in its name. Advantages and disadvantages of a partnership Advantage Disadvantage « Ease of formation ¢ Limited life/ Easily dissolved e Shared responsibility of « Unlimited liability running the business «Flexibility in decision Conflict among partners making, «Greater capital compared to | Lesser capital compared to sole proprietorshi: a corporation © Relative lack ofregulation |e Aparinership (other than a by the government as general professional compared to corporations partnership) is taxed like a corporation Accounting for partnerships The Conceptual Framework for Financial Reporting and the PFRSs are applicable to all reporting, entities regardless of the type of organization. Thus, most accounting procedures used for other types of business organizations are also applicable to, partnerships. The main. distinction lies on. the accounting, forequity. In addition, the accounting for partnerships should also comply with relevant provisions of the Civil Code of the Philippines. The following are the major conside accounting for the equity of a partnership: a. Formation - accounting for initial investor partnership ." Operations — division of profits or losses ¢. Dissolution - admission of a new partner and withdrawal, retirement or death of a partner d. Liquidation - winding-up of affairs rations in the ents to the Formation A contract of partnership is consensual. It is created by the ree which may be constituted in any form, such ag@ral or writtel However, icles 1771 and 1772 of the Philippine Civil Code require that a parinership agreement must be made in a public instrument and recorded with the Securities and Exchange Commission (SEC) when: a. immovable property or real rights are contributed to the partnership (e.g., PPE); or b. the partnership has a capital of P3,000 or more. Art. 1773 further requires an inventory of any immovable property contributed to the partnership, signed by the parties and attached to the public instrument, otherwise the partnership is deemed void. A partnership’s legal existence begins from the execution of the contract, unless otherwise stipulated. Valuation of contributions of partners Art. 1787 of the Civil Code states that “when the capital or part thereof which a partner is bound to contribute consists of goods, their appraisal must be made in the manner prescribed in the contract of partnership, and in the absence of stipulation, it shall.Partnership Formation wu be made by experts chosen by the partners, and according to current prices, the subsequent changes thereof being for the account of the partnership.” The term “appraisal” as used in the Civil Code suggests valuation of capital contributions at fair value Moreover, the provision of PFRS 2 Share-based Payments that equity instruments issued for non-cash items should be valued at the fair value of the non-cash items received parallels that of Art. 1787. Accordingly, all assets contributed to (and related liabilities assumed by) the partnership are initially measured at fair value. >» An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting, all of its liabilities. > Fair value is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” (PFRS 13) When measuring the contributions of partners, the following additional guidance from the PERSs shall be observed: Type of contribution Measurement Cash and cash equivalents_| Face amount (PAS?) Inventory Lower of Cost and Net realizable value (PAS 2) Each partner's capital account is credited for the fair value of his net contribution (i.e., asset contribution less any liability assumed by the partnership). No contribution shall be valued at an amount that exceeds the contribution’s recoverable amount. Each partner's contribution shall be adjusted accordingly before recognition in the partnership’s books. >» Recoverable amount — is “the higher between an asset's fair value less cost to sell and value in use.” (PAs.36Appendia.a)Chapter 1 A partner’s subsequent share in profits (losses) shall also be credited (debited) to his capital account. Likewise, permanent withdrawals of capital are debited to the partner's capital account, Temporary withdrawals may be debited to the partner’s drawings account. The sum of the balances in the partners’ individual capital accounts represents the total equity of the partnership. Partners’ ledger accounts The partners’ ledger accounts are: a, Capital accounts b. Drawings accounts c. Receivable from/ Payable to a partner Capital and Drawings accounts Separate capital and drawings accounts are established for each partner, e.g., “Juan Bayan, Capital” and “Juan Bayan, Drawings.” These are equity accounts and are used to record the following: Juan Bayan, Capital * Initial investment ¢ Additional investments * Share in profits ¢ Permanent withdrawals of capital e Share in losses e Debit balance of drawings account The partner's capital account is a real account and has a normal credit balance. Juan Bayan, Drawings « Temporary withdrawals during the period Temporary funds held to be remitted to the partnership Recurring reimbursable costs paid by the partnerPartnership Formetion The drawings account is a nominal account that is closed to the related capital account at the end of the period. This account is a contra equity account and has a normal debit balance. The partners’ capital and drawings accounts are similar to the corporate paid in capital, retained earnings, and dividends accounts. Receivable from/ Payable to a partner The partnership may enter into a loan transaction with a partner. A loan extended by the partnership to a partner is recorded as a receivable from the partner, while a loan obtained by the partnership from a partner is recorded as a payable to the partner. Illustration: Formation of partnership - Valuation of capital A and B formed a partnership. The following are their contributions: A B Cash 100,000 = Accounts receivable 50,000 é Inventory 80,000 . Land 50,000 Total 230,000 170,000 Note payable 60,000 A, capital 170,000 B, capital 170,000 Total 230,000 170,000 Additional information: * Included in accounts receivable is an account amounting to P20,000 which is deemed uncollectible. The inventory has an estimated selling price of P100,000 and estimated costs to sell of P10,000. ‘The partnership assumed_a_P10,000 unpaid mortgage on the land.¢. The building is under-depreciated by P25,000. * There is an unpaid mortgage of P15,000 on the B agreed to settle using his personal funds. ¢ The note payable is stated at face amount. A pro) requires the recognition of a 15,000 discount on note payable. e Aand B shall share in profits and losses on 2 60:40 ratio, respectively. building which per valuation Requirement (a): Compute for the adjusted balances of the partners’ capital accounts. Solution: A B Partnership Cash ' 100,000 = 100,000 Accounts receivable (50K - 20K) 30,000, - 30,000, Inventory (at cost, the lower amount) 80,000, 80,000 Land 50,000 50,000 Building (120K - 25K) 95,000 95,000, Total 210,000 145,000 355,000 Note payable, net (60K - 15k) (45,000) (45,000) Mortgage payable - land (10,000) (10,000) Adjusted capital balances 165,000 135,000 300,000 The unpaid mortgage on the building is not included because it is not assumed by the partnership. Journal entry: Date | Cash 100,000 Accounts receivable 30,000 Inventory 80,000 Land 50,000 Building 95,000 Discount on note payable 15,000 Note payable 60,000 Mortgage payable 10,000 | A, Capital | | _B, Capital NT@TMeTEIS) CePartnership Formation 9 Requirement (b): Assume that a partner's capital shall be increased accordingly by contributing additional cash to bring the partners’ capital balances proportionate to their profit and loss ratio. Which partner should provide additional cash and how much is the additional cash contribution? Solution: Using A’s capital first, let us determine if B's capital contribution has any deficiency. A, capital 165,000 Divide by: Profit (loss) sharing ratio of A 60% Total 275,000 Multiply by: B's profit (loss) sharing ratio 40% Minimum capital required of B 110,000 B's capital 135,000 Deficiency in B's capital contribution “ Conclusion: B’s contribution has no deficiency. Now using B’s capital, let us determine if A’s capital contribution has any deficiency. B, capital 135,000 Divide by: Profit (loss) sharing ratio of A 40% Total 337,500 Multiply by: A's profit (loss) sharing ratio 60% Minimum capital required of A 202,500 A's capital 165,000 Deficiency in A’s capital contribution 37,500 “ Conclusion: Partner A shall contribute additional cash of 37,500 to make his contribution proportionate to his profit- sharing ratio.10 Chapter} Reconciliation: A's contribution (165K + 37.5K additional contribution) B's contribution ‘Adjusted total contributions > 337,500 x 60% = 202,500 A’s adjusted contribution > 337,500 x 40% = 135,000 B’s contribution Bonus on initial investments An accounting problem exists when a partner's capital account is credited for an amount greater than the fair value of his contributions. e For instance, a partnership agreement may allow a certain partner who is bringing in expertise or special skill to the partnership to have a capital credit greater than the fair value of his contributions.-In such case, the additional credit to the partner's capital (i.e., the ‘bonus’) is accounted for. as a deduction from the capital of the other partners. This accounting method is called the “bonus” method. Although, the credit to the partner's capital may vary due toa ‘bonus/ the corresponding debit to the asset account must still be equal to the fair value of the contribution. The difference between the amounts credited and debited is treated as adjustment to the capital accounts of the other partners. Illustration: : A and B agreed to form a partnership. A contributed P40,000 cash while B contributed equipment with fair value of 100,000. However, due to the expertise that A will be bringing to the partnership, the partners agreed that they should initially have an equal interest in the partnership capital. Requirement: Provide the journal entry to record the initial investments of the partners. Solution:Partnership Formation Actual contributions 11 __ Bonus method A 40,000 (140,000 x 50%) 70,000 B 100,000 (140,000.x 50%) 70,000 Total 140,000 ; 140,000 Date | Cash ~~ | 40,000 Equipment 100,000 | A, Capital (40,000 + 30,000 bonus) | | 70,000 | B, Capital (100,000-30,000 bonus) | | 70,000 © Notes: * The bonus given to A, i.c., 30,000 (P70,000 capital credit — (2 Summa ‘40,000 actual contribution) is treated as a reduction to the capital credit of B. ’ After applying the bonus method, the total capital of the partnership is still equal to the fair value of the partners’ contributions. The debits to “Cash” and “Equipment” are equal to their fair values, Only the amounts credited to the partners’ capital accounts have varied. Asset contribution Liability assumed Credit to partner's of a partner by the partnership capital account & Initially recorded | > Initially recorded | > Either at: at fair value at fair value a. fair value (no bonus); b. above fair value (bonus to the partner); or c. below fair value (bonus to the other artner(s))12 _Shapiee Variations to the bonus method A partnership agreement may stipula' maintained by the partners representing # 4 2 the equity of the partnership. This stipulation may give TIS bo adjustments to the initial contributions of the partners. Since technically there is no “bonus” being given to a certain partner, any increase or decrease to the capital credit of a partner is not deducted from his co-partners’ capital accounts. Instead, the capital adjustment is accounted for as either: a. Cash settlement among the partners; or b. Additional investment or withdrawal of investment of a partner te a certain ratio to be heir specific interests in The following illustrations are variations to the bonus method: ‘ Illustration 1: Cash settlement between partners A, B and C formed a partnership. Their contributions are as follows: A B & Cash 40,000 10,000 100,000 Equipment 80,000 Totals 40,000 90,000___ 100,000 Additional information: « The equipment has an unpaid mortgage of ?20,000, which the partnership assumes to repay. . * The partners agreed to equalize their interests. Cash settlements among the partners are to be made outside the partnership. Requirements a. Which partner(s) shall receive cash payment from the other partner(s)? b. Provide the entry to record the contributions of the partners. Solutions:Partnership Formation Requirement (a): : A B C Partnership Cash 40,000 10,000. 100,000 150,000, Equipment 80,000, 80,000 Mortgage payable (20,000) (20,000) Net contribution 40,000 70,000 100,000 270,000 Equal interests (210K = 3) 70,000 70,000, 70,000 210,000 Cash receipt (payment) 30,000) : 30,000 a & Answer: C shall receive 30,000 from A. Requirement (b): Date | Cash 150,000 Equipment 80,000 Mortgage payable 20,000 A, Capital 70,000 B, Capital 70,000 + C Capital 70,000 & Notes: eo The cash settlement among the partners is not recorded in the partnership's books because this is not a transaction of the partnership but rather of the partners among themselves. The partnership’s capital of P210,000 remains the same after the cash settlement. Again, what varied are only the credits to the partners’ capital accounts. Illustration 2: Additional investment (Withdrawal of investment) A and B agreed to form a partnership. The partnership agreement stipulates the following: * Initial capital of P140,000. *® A 60:40 interest in the equity of the partnership. A contributed 100,000 cash while B contributed P40,000 cash.4 a Sabie rovide additional investment ent) in order to bring the ir respective interests in the Requirement: Which partner shall pi (or withdraw part of his investm partners’ capital credits equal to the! equity of the partnership? Solution: Agreed initial capital __140,000__ A's required capital balance (140K x 60%) 84,000 B's required capital balance (140K x 40%) 56,000 A B Totals Actual contributions 700,000 40,000 += 140,000 _Required capital balances 84,000 56,000 _ 140,000 Additional (Withdrawal) (16,000) _16,000 - “@ Answer: A shall withdraw P16,000 from his initial contribution while B shall make an additional investment of P16,000. Chapter 1: Summary + The major considérations in the accounting for the equity of partnerships are: (a) Formation; (6) Operations; (c) Dissolution; and (d) Liquidation. * The contributions of the partners to the partnership are initially measured at fair value. ° A partner's capital balance is normally credited for the fair value of his net contribution to the partnership. If a partner's capital balance is credited for an amount greater than ot less than the fair value of his net contribution, there is bonus, ® Under the bonus method, any increase (or decrease) in the capital credit of a partner is deducted from (or added to) the capital credits of the other partners. The total partnership capital remains equal to the fair value of the partners’ net contributions to the partnership.Partnership Formation 15 PROBLEMS PROBLEM 1: TRUE OR FALSE 1, The accounting for the assets and liabilities of a partnership business is different from that of a sole proprietorship or a corporation, 2. A partnership is relatively easy to form but also easy to dissolve. 3. Mr. A contributed land with historical cost of PIM and fair value of P2M to a partnership business. Mr. A’s contribution shall be valued at PIM in the partnership books. 4, A bonus given to a partner is treated as a reduction to the capital account(s) of the other partner(s). 5. Ms. B contributed equipment with carrying amount of P100 and fair value of P200 to a partnership. No bonus is given to any partner. In the partnership's books, equipment is debited for P200 but B’s capital account is credited for P100. 6. Mr. C contributed land with fair value of PIM to a partnership. The land has an unpaid mortgage of P.2M which the partnership agreed to assume. The valuation of Mr. C’s net contribution is P1.2M. Fact pattern: Mr. D and Ms. E formed a partnership. D contributed 200, while E contributed P100. The partners’ respective interests in the partnership are 60% and 40%. The initial credits to the partners’ capital accounts are to be adjusted using the bonus method to teflect the partners’ respective interests. 7. The balance of D's capital account after the formation is P180. 8. The bonus given to E is P40. , Fact pattern: Piw and Pie agreed to form a partnership. Piw contributed cash of ?200 while Pie will be contributing her expertise. The partnership agreement stipulates that Piw and Pie shall have equal interests in16 both the initial capital of the partnership and Chapter 1 in subsequent partnership profits and losses. eo, 10. Immediately after partnership formation, ‘The cash contribution of Piw shall be debited for P200 but the net credit to Piw’s capital account shall be P100. the balance of Pie‘s capital account is zero. PROBLEM 2: MULTIPLE CHOICE - THEORY 4, The asset contributions of partners to a partnership are initially measured at a. fair value. c. tax basis. b. original cost to the partner. d. any of these _Mr, I and Mr. M formed a partnership business. Mr. I contributed equipment with fair value of P2M. However, the partners agreed that Mr. I’s capital account should be credited for P2.2M. Which of the following statements is correct? a. The P.2M excess credit is treated as a bonus to Mr.™M. b. Mr. M is probably bringing in expertise or special skill to the business. c. Mr. M’s capital account will be debited for P.2M. d. This is unacceptable. Mr. I's capital credit should be P2M. Under the bonus method, any increase or decrease in the capital credit of a partner is a. deducted from or added to the capital credits of the other partners. recognized as goodwill, c, recognized as expense. d. deferred and amortized to profit or loss, Under the bonus method, the asset contributed by a partner receiving a bonus is a. debited at an amount greater than the asset’ b. debited at an amountJess-thanthevasset’ s fair value. s fair value.Partnership Formation wo g c. debited at an amount equal to the asset's fair value. d. either aorb Mr. X and Mr. Y agreed to form a partnership. The fair values of the partners’ net contributions vary; however, the partners agreed to have equal capital credits. Cash settlement shall be made between them for the difference. Which of the following statements is correct? a. The asset contributions of the partners shall be debited for equal amounts. b. The cash settlement between the partners will either increase or decrease the total partnership capital. c. The cash settlement between the partners will not be recorded in the partnership books. d. Mr. X shall pay Mr. Y to have their capital balances equal. PROBLEM 3: EXERCISES L. Sunny and Gloomy contributed the following in the formation of a partnership business: Sumy Gloomy Cash 180,000 = Accounts receivable 100,000 e Inventory 160,000 “ Land (athistorical cost) 340,000 Total 440,000____ 340,000 Additional information: Only 60% of the accounts receivable is recoverable. The net realizable value of the inventory is P120,000. Sunny acquired the inventory on account; the partnership will assume the unpaid balance of P60,000. ‘The land has a fair value of 600,000. Requirement: Provide the journal entry.7 Chapter} 2. Use the information in problem 1. Sunny and Gloomy ieee to share in profits and losses based on a 30:70 ralloe pa er with deficient contribution shall provide additional cash in order for his capital balance to reflect his profit and loss sharing ratio. Requirement: Provide the entry to record the additional investment of the partner with deficient contribution. 3. Use the information in problem 1. Sunny and Gloomy agreed to have equal ‘credits to their capital accounts. The bonus method shall be used. Requirements: a. Provide the compound journal entry. b. Provide the simple journal entries. 4, Use the information in problem 1. Sunny and Gloomy agreed to have equal credits to their capital accounts. Cash settlement is to be made between the partners for the adjustments on their capital balances. Requirement: Describe how the cash settlement should be made and how it would be accounted for in the partnership books. 5. Use the information in problem 1. Sunny and Gloomy agreed to have equal credits to their capital accounts, Additional investment or partial withdrawal shell be made by a partner from the partnership for any adjustment to his capital balance. Requirement: Which partner should make an additional investment and which partner should make a withdrawal?Partnership Formation 19 PROBLEM 4: MULTIPLE CHOICE - COMPUTATIONAL 1. Twinkle, Sheep and Bus formed a partnership. Twinkle contributed cash of P80,000. Sheep contributed equipment with historical cost of P700,000, carrying amount of P180,000, and fair value of P90,000. Bus contributed building with historical cost of 1,000,000, carrying amount of P480,000, and fair value of P690,000. The partnership will assume the unpaid mortgage of P580,000 on the building. Which partner has the largest capital account balance on partnership formation? a. Twinkle c. Bus. b. Sheep d. None, all are equal 2, Hammer and Nail formed a partnership. Hammer contributed equipment with original cost of P370,000 and fair value of 300,000 while Nail contributed cash of P180,000. Hammer and Nail agreed to have a 60:40 interest in the partnership and that their initial capital credits should reflect this fact. A partner's capital account should be increased accordingly by way of additional cash investment. Which of the partners should make an additional investment and by how much? a. Hammer, P20,000 c. Hammer, ?70,000 b. Nail, P20,000 d. Nail, P70,000 3. Mike and Mario agreed to form a partnership. Mike contributed equipment with carrying amount of P100,000 and fair value of ?70,000, while Mario contributed cash of 200,000. The partners agreed to have a profit sharing ratio of 2:1, respectively. The initial credits to the partners’ capital accounts shall reflect this fact. Under the bonus method, how much is the balance of the capital account of Mario immediately after the partnership formation? a. 90,000 c. 135,000 b. 200,000 d. 70,000 4. Abel and Carr formed a partnership and agreed to divide initial capital equally, eyen though Abel contributed P100,000Chapter | 20 Pega aa a EL and Carr contributed P84,000 in identifiable assets. ee the bonus approach to adjust the capital accounts, Carr's | unidentifiable asset should be debited for a, 46,000 ¢. 8,000 b. 16,000 d.0 (AICPA) 5. A and B agreed to form a partnership. The partnership agreement stipulates the following: ¢ Initial capital of ?300,000. « A.25:75 interest in the equity of the partnership. A contributed P100,000 cash, while B contributed 200,000 cash. Which partner should provide additional investment (or withdraw part of his investment) in order to bring the partners’ capital credits equal to their respective interests in the equity of the partnership? a. Ashall provide additional capital of P25,000. b. Bshall withdraw capital of P25,000. c. Bshall make an additional investment of P25,000. d. No additional contribution or withdrawal shall be made. PROBLEM 5: CLASSROOM ACTIVITY INSTRUCTIONS: 1, Find a study partner. 2, Imagine that you and your study partner are entrepreneurs and have agreed to form a business partnership. 3. Read the facts below and answer the succeeding requirements. Your contributions are as follows: Partner 1 Partner2 Cash 250,000 1,800,000 Accounts receivable 430,000 1'000,000 Land 1,250,000Partnership Formation 2 Building 2,000,000 Accounts payable 330,000 400,000 Notes payable 500,000 Capital 3,600,000 1,900,000 Additional information: . The cash contribution of Partner 1 as listed above is the peso equivalent of 6,250 foreign currency units (FCU). The current exchange rate is P45: FCU1. Partner 2’s account receivable should be written down by 200,000. The land has an appraised value of P1,500,000. The building has an appraised value of P1,400,000. Attached to the building is an unpaid mortgage of P800,000. Partner 1 agrees to settle this mortgage immediately using his/her personal funds. There is a pending lawsuit over Partner 1’s contributed properties — a claim by a third party. A discussion with Partner 1’s legal counsel reveals that it is probable that the plaintiff will accept an out of court settlement of not less than ?300,000. The partnership shall assume the obligation of paying the plaintiff There are unpaid real property taxes on the properties contributed by Partner 1 amounting to P40,000. The partners agreed that the partnership shall assume those obligations. The notes payable is stated at face amount. An inspection of the related promissory note reveals that the note is a 5-year non-interest bearing note issued 2 years ago and requires a lump sum payment at maturity date. The current rate is 10%. Requirements: a. b. Compute for adjusted balances of your capital accounts. Provide the entry to record your contributions in the partnership books. (vou may or may not use a veluation uccoum! for the notes payable.)22 Variation #1: : You and your partner agree that one of you is significan than the other. You determined that that cuteness will bring good feng shui to the business. Accordingly, you decided to have your capital accounts credited at equal amounts. No cash settlements or additional investments will be made. gnificantly cuter Requirements: a. How much is the bonus? (do not omit centavos) b. Which partner receives the bonus (i.e., the cuter partner)? c. Explain briefly how the bonus will be accounted for in the partnership books. d. Provide the entry to record your contributions in the partnership books. Variation #2: You and your partner agreed that one of you is significantly hotter than the other. However, you determined that that hotness will not bring any good to the business. Accordingly, you decided to equalize your interest and make cash settlement for the difference among yourselves. No additional investment or withdrawal of investment shall be made. Requirements: a, Which partner shall receive cash payment from the other partner? (do not omit centavos) b. Explain briefly how the cash receipt/ cash payment will be accounted for in the partnership books. c. Provide the entry to record your contributions in the partnership books. Variation #3: You and your partner agreed that both of you are equally beautiful and that your respective interests in the partnership must be equal. You agreed that a partner's capital shall bePartnership Formation 3 increased accordingly by contributing additional cash to bring both your capital balances proportionate to your equity interests Requirement: Which partner shall make the additional cash contribution and by how much? Variation #4: You and your partner agreed that both of you are equally gorgeous and that your respective interests in the partnership must be equal. You agreed that the initial capital of the business should be equal to the fair value of your net asset contributions. You further agreed that a partner should provide additional investment (or withdraw part of his investment) in order to bring both of your capital credits equal to your respective interests in the equity of the partnership. Requirement: Which partner(s) should provide additional investment (or withdraw part of his/her investment) in order to bring both your capital credits equal to your respective interests in the equity of the partnership? (do not omit centavos) PROBLEM 6: FOR CLASSROOM DISCUSSION Valuation of contributions of partners 1. Mr. Sun and Ms. Moon formed a partnership. Their contributions are as follows: Mr. Sun___Ms. Moon Cash 400,000 - Accounts receivable 250,000 : Land 750,000 Equipment 180,000 Total 650,000 __ 1,130,000 i: i Additional information: * Only 80% of the accounts receivable is deemed collectible.24 Chapter se pace mentee © The land is stated at original cost. The fair value is P 1,000,000, The partnership assumes a P250,000 unpaid mortgage on the land. * Ms. Moon acquired the equipment on a long-term financing basis. Ms. Moon promised to pay the unpaid principal balance of 80,000 using her personal funds. The equipment is under- depreciated by P30,000. Requirement: Provide the journal entry to record the partner's contributions, 2. Use the information in problem ‘1’. The partners agreed to share in profits and losses equally. A partner should make an additional contribution in order for the partners’ capital balances to reflect the partners’ equal interests in the partnership. Requirement: Which partner should make an additional contribution and by how much? Bonus on initial investments 3. Use the information in problem ‘1’. However, assume that the partners agreed to have equal interests in the partnership's equity and profit and losses. The partners’ initial capital credits should reflect this agreement using the bonus method. Requirement: Provide the journal entry to record the partner's contributions. Variation to bonus method - cash settlement betwe 4, Use the information in problem ‘1’, partners agreed to hav: at equal amounts. Cas! partners. en partners le However, assume that the e their capital accounts initially credited h settlement shall be made between thePartnership Formation Requirements: a. Provide the compound journal entry to record the partner’s contributions, b. Provide the simple journal entries to record the partner's contributions. Variation to bonus method — additional investment/withdrawal 5. Use the information in problem ‘1’, However, assume that the partners agreed to have their capital accounts initially credited at equal amounts. A partner shall provide additional investment (or withdraw part of his investment) in order to equalize the balances of the partners’ capital accounts. Requirement: Which partner shall make an additional investment and which partner shall withdraw part of his/her investment?