Formation of partnership: Presenting a Sole Enterprise:
If a partner provided his own business (a Sole Enterprise) as a contribution in his share of capital
in the partnership, the assets and liabilities provided should be transferred to the new partnership
and recorded by its Market Value (or Book Value if the Market Value is unknown). In this case
the following steps should be followed:
1. Cross out items that will not be transferred from the sole enterprise to the new partnership, it
includes:
• Old owner equity accounts: such as; capital, retained earnings, net income, and
reserves.
• Un transferred assets or liabilities: any assets or liabilities mentioned in the agreement
not to be transferred.
• Non-Real Asset (for example: Prepaid Advertising): Because it does not have any
benefits to the new company
2. Determine contribution of partner in Capital.
3. Determine fair value of net assets transferred by partner:
Net Assets = Assets by fair value - Liabilities by fair value
Remember:
- Record the Receivables transferred by its Face Value (F.V) in Dr. side of the Journal
Entry
- Record the Allowances transferred in Cr. side of the Journal Entry by the difference
between F.V & M.V.
4. Compare contribution in capital with net assets
5. Record the complementary:
• Cash in Dr. or Cr. side if there is a cash agreement
• Goodwill in the Dr. side if there is no cash agreement.
• Revaluation Reserve in the Cr. side if there is no cash agreement. It is an owner's
equity account used to cover losses from future sales of assets of partnership.
Therefore, the Journal Entry should be as follows:
Assets XX
AR or NR XX
Cash or Goodwill XX
AFDA or AFDN XX
or Liabilities XX
Capital XX
Cash or Revaluation Reserve XX
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Example (1):
$
On January 1, A & B decided to establish AB Partnership with total capital 300,000 by the
following conditions:
1. Partner A contributed his share in Cash of $100,000.
2. Partner B contributed his share by presenting the assets & liabilities of his sole enterprise
EXCEPT Cash as a settlement of his contribution in the capital of the new partnership.
The balance sheet of the sole enterprise was as follows:
Assets Liabilities & O.E
Building 50,000 Capital 160,000
Furniture 45,000
× Cash in Bank 20,000 AP 10,000
Inventory 30,000
AR 25,000
Total Assets 170,000 Total Liabilities & OE 170,000
3. If you know that the market value of Assets & Liabilities were as follows:
Building 60,000 Furniture 50,000 Inventory 28,000
AR 23,000 AP 12,000
Required: Prepare the Journal Entries to record the formation of the partnership.
Solution
Total Capital
$
300,000
Partner (A) Partner (B)
His Share = 100,000 (Given) His Share = 300,000 – 100,000 = 200,000
Cash 100,000 Building 60,000
Capital (A) 100,000 Furniture 50,000
163,000
Inventory 28,000
AR 25,000
Goodwill 51,000
AFDA 2,000
AP 214,000 12,000
Capital (B) 200,000
2
Opening Balance Sheet
Assets Liabilities & O.E
Cash 100,000 AP 12,000
Building (net) 60,000
Furniture (net) 50,000
Inventory 28,000
AR 25,000 Owner’s Equity:
(-) AFDA (2,000) 23,000 Capital (A) 100,000
Goodwill 51,000 Capital (B) 200,000
Total Assets 312,000 Total Liabilities & OE 312,000
Example (2)
Assume in the Previous Exercise (1), that the agreement mentioned that the difference between
the value of net assets contributed & share in Capital should be settled in Cash.
Required:
1- Prepare the Journal Entries to record the formation of the partnership.
2- Prepare the opening balance sheet at the formation date of the partnership
Solution
Total Capital
$
300,000
Partner (A) Partner (B)
His Share = 100,000 (Given) His Share = 300,000 – 100,000 = 200,000
Cash 100,000 Building 60,000
Capital (A) 100,000 Furniture 50,000
163,000
Inventory 28,000
AR 25,000
Cash 51,000
AFDA 2,000
AP 214,000 12,000
Capital (B) 200,000
3
Opening Balance Sheet
Assets Liabilities & O.E
Cash (100,000 + 51,000) 151,000 AP 12,000
Building 60,000
Furniture 50,000
Inventory 28,000 Owner’s Equity:
AR 25,000 Capital (A) 100,000
(-) AFDA (2,000) 23,000 Capital (B) 200,000
Total Assets 312,000 Total Liabilities & OE 312,000
Example (3):
Partners (A & B) started their business on 1/7/2020 with Total Capital $300,000 divided between
them at ratio 1:2. The agreement between them stated the following:
- Partner (A) presented his share by Cash on the formation date.
- Partner (B) provided his share by transferring the assets & liabilities of his Sole
Enterprise which had the following the Balance Sheet:
Assets Liabilities & O.E
Building 300,000 Capital 100,000
(-) Accum. Dep. (120,000) 180,000 RE (Reserve) 200,000
Furniture 150,000
(-) Accum. Dep. (80,000) 70,000
AR 20,000 AP 80,000
(-) AFDA (5,000) 15,000 Expense Payable 20,000
Inventory 25,000
Cash in Bank 25,000
Note Receivable 50,000
Investment 35,000
Total Assets 400,000 Total Liabilities & OE 400,000
The revaluation of Assets revealed that the Market Value of the assets are equal to their Book
Value except the following:
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Building 300,000 AR 7,000 Investment 30,000
Present Value of NR 45,000
Required:
1- Prepare the Journal Entries to record the formation of the partnership.
2- Prepare the opening balance sheet at the formation date of the partnership.
Solution
Total Capital
$
300,000
Partner (A) Partner (B)
His Share = 300,000 x 1/3 100,000 His Share = 300,000 x 2/3 200,000
Cash 100,000 Building 300,000
Capital (A) 100,000 Furniture 70,000
AR 20,000
Inventory 520,000 25,000
Cash 25,000
NR 50,000
Investment 30,000
AFDA (20,000 – 7,000) 13,000
AFDN (50,000 – 45,000) 5,000
AP 318,000 80,000
Expense Payable 20,000
Capital (B) 200,000
Revaluation Reserve 202,000
5
Opening Balance Sheet
Assets Liabilities & O.E
Cash (100,000 + 25,000) 125,000 AP 80,000
Building 300,000 Expense Payable 20,000
Furniture 70,000
Inventory 25,000 Owner’s Equity:
Investment 30,000 Capital (A) 100,000
AR 20,000 Capital (B) 200,000
(-) AFDA (13,000) 7,000 Revaluation Reserve 202,000
NR 50,000
(-) AFDN (5,000) 45,000
Total Assets 602,000 Total Liabilities & OE 602,000
Example (4):
On 1/1/2022, Ahmed, Aly & Bakr agreed to form a partnership with Total capital $100,000.
Ahmed’ share in capital is $30,000, while Aly’s share is $20,000, & the remaining capital is
assigned to Bakr. The partners agreed that:
1- Ahmed & Aly contributed their shares in Cash once at the formation date.
2- Bakr contributed his share by transferring the assets and liabilities of his sole enterprise which
had the following Balance Sheet at the formation date:
Assets Liabilities & O.E
Cash 10,000 Capital 33,000
AR 5,000 Net Income 7,000
Building 100,000
(-) Accum. Dep. (60,000) 40,000 Accounts Payable 20,000
Prepaid Advertising 5,000
Total Assets 60,000 Total Liabilities & OE 60,000
3- The market value of Building is $50,000 and the agreed net realizable value of AR is $4,000.
Bakr has to pay or receive the difference between his capital and net assets contributed in Cash.
Required:
1- Prepare the Journal Entries to record the formation of the partnership.
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2- Prepare the opening balance sheet at the formation date of the partnership.
Solution
Total Capital
$
100,000
Partner (Ahmed) Partner (Bakr)
His Share = 30,000 His Share = 100,000 – 30,000 – 20,000 = 50,000
Cash 30,000 Cash 16,000
Capital (Ahmed) 30,000 AR 5,000
55,000
Building 50,000
Partner (Aly) AFDA 1,000
His Share = 20,000 AP 71,000 20,000
Bakr Capital 50,000
Cash 20,000
Capital (Aly) 20,000
Opening Balance Sheet
Assets Liabilities & O.E
Cash (20,000 + 30,000 + 16,000) 66,000 AP 20,000
AR 5,000
(-) AFDA (1,000) 4,000 Owner’s Equity:
Capital (Ahmed) 30,000
Building 50,000 Capital (Aly) 20,000
Capital (Bakr) 50,000
Total Assets 120,000 Total Liabilities & OE 120,000
