INTEGRATED REVIEW II: ADVANCED FINANCIAL ACCOUNTING AND REPORTING

MODULE 1: PARTNERSHIP FORMATION

I. NOTES

1. A Partnership may be formed orally or in writing. However, in order to have definite agreement partnership
agreements are embodied in the Articles of Partnership. Among the important provisions in the partnership are
the capital contributions of each partner and the profit and loss sharing agreement among the partners. These
will be the primary basis for the capital account balances for each partner.
2. When a partner invests non-cash assets to the partnership, it will be recorded in the amount agreed by the
partners. In absence of such agreement, the basis will be the fair market value at the date of transfer of
assets to the partnership.
3. Among the usual procedure in recording partnership formation is to adjust the amounts to the agreed amounts
or at its fair value from its initial costs. A suggested approach is to use the accounting equation to reflect the
effects of adjustments to the elements of the financial statements, mainly assets, liabilities and equity.
4. There are two main situations in recording the partnership formation that involve contribution of non-cash
assets: First, the net assets contributed by the partner will be based on the fair value of assets and liabilities.
Second, the net assets contributed by each partner will be further be adjusted in accordance to agreement as to
capital ratio. The latter give rise to the bonus approach and to the revaluation or goodwill approach.
5. Bonus approach is based on the assumption that pursuant to the agreement as to the arbitrary capital ratio, each
of the partners will credited more and the other partner will be credited less than its actual contributions. In this
case there will be transfer of bonus capital from one partner to another. This method is also used when an
intangible contribution of a partner (ex. Artistic abilities) does not constitute a recordable partnership asset with a
measurable cost. It recognizes only the assets that are physically transferred to the business (such as cash,
inventory, patents)
6. Goodwill approach is based on the assumption that the partners are not amenable to be credited less than their
actual capital contributions to the partnership. Instead, they will either revalue their assets or recognize goodwill
as an intangible asset. It also assumes that any intangible contribution of a partner can be measured impliedly.
7. Revaluation of assets is accepted under GAAP. Recognition of goodwill in partnership formation is not accepted
under GAAP as it is not similar to business combination. However, due to business practice and invaluable service
and expertise of one of the partners goodwill is recognized.

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

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II. STRAIGHT PROBLEMS

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)

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)

III. MULTIPLE CHOICE QUESTIONS

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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. Kern and Pate are partners with capital balances of P60,000 and P20,000, respectively. Profits and losses are
divided in the ratio of 60:40. Kern and Pate decided to form a new partnership with Grant, who invested land
valued at P15,000 for a 20% capital interest in the new partnership. Grant’s cost of the land was P12,000. The
partnership elected to use the bonus method to record the admission of Grant into the partnership. Grant’s
capital account should be credited for 60 + 20 + 15 = 95 x 20%
a. P12,000 b. P15,000 c. P16,000 d. P19,000
3. 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 Adj Cap. 837,000 (half) - 585,000 (cash palang so para mailabas yung machinery
Furniture and fixtures 402,000 i-less) = 252,000

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
4. On April 30, year 1, Algee, Belger, and Ceda formed a partnership by combining their separate business
proprietorships. Algee contributed cash of P50,000. Belger contributed property with a P36,000 carrying amount,
a P40,000 original cost, and P80,000 fair value. The partnership accepted responsibility for the P35,000 mortgage
attached to the property. Ceda contributed equipment with a P30,000 carrying amount, a P75,000 original cost,
and P55,000 fair value. The partnership agreement specifies that profits and losses are to be shared equally but
is silent regarding capital contributions. Which partner has the largest April 30, year 1 capital account balance?
a. Algee b. Belger c. Ceda d. All capital account balances are equal

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 5. Abel and Carr formed a partnership and agreed to divide initial capital equally, even though Abel contributed
P100,000 and Carr contributed P84,000 in identifiable assets. Under the bonus approach to adjust the capital
accounts, Carr’s unidentifiable asset should be debited for
a. P46,000 b. P16,000 c. P8,000 d. P 0

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

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.
6. 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

7. Biil 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
50,000 / 40% = 125,000 - 65,000 = 60,000 -
Land P10,000 P20,000
50,000 = 10,000
Building P100,000 P60,000 65k
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

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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.
8. 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
9. 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

END

40,500 / 40% = 101,250 x 60% = 60,750

60,750 - 43,500 = 17,250