PARTNERSHIP FORMATION 1 PARTNERSHIP FORMATION PARTNERSHIP Definition: According to Article 1767 of the civil code, 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. A partnership is a legal relation based upon the expressed or implied agreement of two or more competent persons whereby they unite their property, labor or skill in carrying on some lawful business as principals for their joint profit. (Mechem, Elements of the law of partnership) CHARACTERISTICS AND ELEMENTS OF PARTNERSHIP 1. Mutual Contribution - by its definition, the partners must contribute money, property, and/or industry to the common business. Forms of Contribution A. Money-it must be a currency which is legal tender (money that the lawallows people to use for paying debts) in the Philippines. B. Property - The property contributed may be real property (immovable property) or personal property (movable), tangible or intangible properties. C. Industry-it means the work or services of the party associated, which may either be personal mutual efforts or intellectual, and for which he receives a share in the profits of the business. (11 Manresa) 2. Division of Profits and losses - this is the very reason of the partnership business, as a matter of fact, this element is what distinguishes the partnership contract from voluntazy religious or social organization. A stipulation (condition) which excludes one or more partners from any share in the profits or losses is void. (Article 1799) 3. Limited Life-A partnership has limited life because it can be easily dissohed by admission, death, incapacity, withdrawal of any partner or by expiration of the term specified in the agreement or contract. 4. Mutual Agency ~ Any partner can bind the other partners to contract if he is acting within the express or implied authority. (Article 1818) If the partners fail to designate who among them shall act as manager, all of them shall be considered managers and agents and whatever any one of them may do alone shall bind the partnership, unless the partner so acting has in fact.PARTNERSHIP FORMATION. 2 ho authority to act for the partnership in the particular matter, and the person with whom he is dealinghad knowledge of the fact that he has no such authority. Unlimited Liability - All partners (capitalist and industrial) are personally liable for all debts incurred by the partnership. ‘The partners are liable to the_extent of its personal assets if the partnership cannot settle its obligations to its creditors. Income Taxes- Partnership will be liable fora 20% or 25%% income tax because the partnership is treated as a corporation in the National Internal Revenue Code (Tax Code) However; General Professional Partnership is exempt from income tax. Co - Ownership of contributed Property - All the assets contributed in the partnership will be the assets of the partnership by virtue of its separate and distinct legal personality. Therefore the assets contributed by one partner will become joint assets of all partners. Legal entity — partnership has juridical personality separate and distinct from that of each partner. (Article 1772) As a juridical person, a partnership may acquire and possess property (real or personal), as well as incur obligations and bring civil or criminal actions in conformity with the laws and regulations of its organization. ADVANTAGES OF PARTNERSHIP It is easy to establish, as i persons. Unlimited liability of the partners makes it more attractive from the viewpoint of creditors. ‘The sharing of the skills and expertise of the partners in the business provides moral support and will allow for more creative brainstorming. Less expensive to organize than a corporation. With more than one owner, the ability to raise funds may be increased, both because two or more partners may be able to contribute more funds and because their borrowing capacity may be greater. is formed by mere agreement between two or more DISADVANTAGES OF PARTNERSHIP It is unstable because it is easy to dissolve. (Limited life) 2. Business partners are jointly and individually liable for the actions of the other partners. (Mutual agency}PARTNERSHIP FORMATION 3 3. The liability of the partnership will extend to the personal property of the partners. (Unlimited liability) 4. Since decisions are shared, disagreements can occur which may lead to dissolution. 5. The partner has toconsult other partner and negotiate more as you cannot make decisions by yourself. [NDS OF PARTNERSHIP A. As to extent of its subject matter 1. Universal Partnership a, Universal Partnership of all present property ~ The property which belonged to each of the partners at the time of the constitution of the partnership, becomes the common property of all partners, as well as the profits which they may acquire therewith. (Article 1779) “The asset contributed by any partner becomes the partnership assets as well its profits b. Universal Partnership of all profits - is one which comprises all the partners may acquire by their industry or work during the existence of the partnership. Movable and immovable property which each partner may possess at the time of the celebration of the contract shall continue to sively to each, only the usufruct passing to the partnership. Under Universal Partnership of all profits the partners still retain their ownership over their present and future property only the income or profits and the right to use (usufruct) the property passes to the partnership. 2. Particular Partnership ~ The object of the partnership is determinate. Its use or fruits or a specific undertaking, or exercise of profession or vocation. (Article 1783) B, As to liability of the partners 1. General Partnership -It is one consisting of general partners who are all liable to the extent of their separate properties for partnership debts. Limited Partnership - It is one formed by one or more general partners and one or more limited partners where the limited partners are not being personally liable for the obligations of the partnership. Ina limited partnership there should be at least one general partner.PARTNERSHIP FORMATION 4. C. As to Duration 1. Partnership at will-One in which no termis specified and is not formed for a particular undertaking or venture and which may be terminated anytime by mutual agreement of the partners. 2. Partnership with a fixed term - One in which the term for which the partnership is to exist is fixed or agreed upon or one formed fora particular undertaking. D. As to legality of Existence 1, De Jure partnership -One that complies with all the legal requirements for its establishment. 2. De Facto partnership - One which has failed to comply with all the legal requirements for its establishment. Legal Requirements The following are the legal requirements when the partnership capital is P3,000 or more in money or property: (Article 1772). a. The contract must appear in public instrument and ~b. Itmust be recorded or registered with the Securities and Exchange Commission. However, failure to comply with the above requirements does not prevent the formation of the partnership. (Article 1768). ‘Therefore, even if the partnership does not comply with the requirements it is still valid and therefore has legal personality. * The registration is necessary as “a condition for the issuance of licenses to engage in business or trade”. In this way, the tax liabilities of big partnerships cannot be evaded and the public can also determine more accurately their membership and capital before dealing with them.” (Dean Capistrano, Civil Code of the Phil., Vol. IV). But when immovable property, regardless of its value, is contributed by any of the partners, the failure to comply with the following requirements will render the partnership contract void i the contracting parties are concerned: (Artide 1773). The following are requirements if the contribution is immovable property a. The contract must appear in public instrument and b. An inventory of the property contributed must be made, signed by the parties, and attached to the public instrument. Note: If personal property is contributed the inventory need not be includedPARTNERSHIP FORMATION 5 The following requirements needed for SEC Registration 1, Name verification slip 2. Articles of Partnership 3. Joint affidavit of 2 partners undertaking to change partnership name, as provided in its article of partnership as amended thereafter, immediately upon receipt of notice or a directive from the SEC that that another corporation, partnershipor person has an acquired prior right to the use of that name or that name has been declared misleading, deceptive, confusingly, similar to a registered name, or contrary to public morals, good customs or public policy. 4. Registration Data Sheet 5. Clearance from other government agencies (if needed) 6. Articles of Partnership (For Limited Partnerships, this should be executed under oath only and not acknowledged before a notary public.) 7. If it’s a limited partnership, the word “Limited” or “Ltd.” should be added to the partnership name. ARTICLES OF PARTNERSHIP ‘partnership may be contracted orally, written, implied or express. The partnership agreements are integrated in the Article of Partnership. The following are provisions that may be included in an agreement: 1, The partnership name, nature, purpose and location 2. The names, address of the partners, classes of partners, stating whether the partners are general or limited; 3. The effective date of formation and the duration of the partnership contract; 4. The capital contribution of each partner, its agreed valuation and treatment of excess contribution (as capital or as a loan) and the penalties for a partner's failure to invest and maintain the agreed capital; 5. The authority, rights and duties of each partner; 6. The manner of keeping the book of accounts. 7. The method of dividing net income or net loss among the partners, including salary allowance and interest on capital. 8. The drawings or salaries to be allowed to partners and the disposition of partner’s salary and drawing accounts, including the penalties, if any, for excessive withdrawals; and 9. The provisions for arbitration of settling disputes, causes of dissolution and liquidation.PARTNERSHIP FORMATION 6 E. As to Representation to Others Is Ordinary or real partnership - one who is actually cxists among partners and also to third persons. Ostensible partnership or partnership by estoppel - One which is in reality 's not a partnership, but is considered a partnership only in relation to those who, by their conduct or admission, are precluded to deny or disprove its existence. (Article 1825) F. As to Publicity 1 2. Secret Partnership — One wherein the existence of certain persons as partners is not made known to the public by any of the members of the firm. Open partnership - One whose existence is made known to the public by the members of the firm. G. As to Purpose 1. 2. Commercial or Trading partnership - One formed for the transaction of business. Professional or Non-Trading partnership - One formed for the exercise of profession (e.g. General Professional Partnership). KINDS OF PARTNERS 1 2. 3. 4. Capitalist Partner - One who contributes money or property to a common fund. Industrial Partner - One who contributes only his personal service in the business. Capitalist - Industrial - One who contributes both money or property and industry. General Partner — One whose liability to third persons extends to his separate property. Limited Partner - One whose liability to third persons is limited only to his capital contribution. Also known as special partner. A limited partner in a limited partnership, however, cannot contribute mere industry or services. (Article 1845) Managing Partner - One who manages the business of the partnership. Liquidating Partner - One who takes charge of the winding up (liquidation or termination) of partnership affairs upon dissolution. Ostensible Partner- One who takes active part in the management of the firm and is known to the public as a partner.PARTNERSHIP FORMATION. 7 9, Partner by estoppel (Nominal) - One who is not reallya partner, not being a party to a partnership agreement, but is liable as a partner for the protection of the innocent third person. 10. Continuing partner - One who continues the business of the partnership after is it has been dissolved by reason of the admission of a new partner, or the retirement, death, or expulsion of one or more partners. 11. Surviving partner -One who remains as a partner aftera partnership has been dissolved by the death of any partner. 12. Secret Partner - One who does take active participation in the business, but is not known as a partner by the public. 13. Silent Partner - One who does not take active participation in the business, although he may be known to be a partner. 14. Dormant Partner - One who does not take active participation in the business and not known as a partner. ACCOUNTING FOR PARTNERSHIP ‘The accounting for partnership differs from a sole proprietorship or a corporation with regards to maintenance of ledger accounts. Although it is possible to operate with one equity account for each partner, it is desirable that the following partner's account be maintained. 1. Capital Accounts 2. Drawing account or personal accounts 3. Accounts for loans to and from partners Capital Accounts ‘The initial investment of a partner is recorded by debiting the asset accounts and crediting any liabilities assumed by the partnership, and crediting the partner's capital at the agreed or fair value of the net assets contributed (Assets contributed - Liabilities assumed). Subsequent to the initial investment, capital account of the partners increases for any additional investments of cash or non-cash assets and by the share in the partnership profit. Partners’ capital account decreases for any cash withdrawals or non-cash assets and by the share in partnership losses. Capital Account Permanent withdrawals Original Investments Debit balance of the drawing account at the endof the period Additional Investment Partners share in net losses Partners share in profits (this may be debited to drawingaccount) (this may be credited to drawing accountPARTNERSHIP FORMATION 8 Drawing or Personal Accounts (Temporary) versus Capital withdrawals (Permanent) 1, Drawing or Personal Accounts (Temporary) - are initially recordedin the drawing account because it arises from salaries or regular advances made by the partners in anticipation of their share in the profits. 2. Capital withdrawals (Permanent) - this withdrawal directly affects the capital account balance because it arises from withdrawals of investments. ‘This drawing account, whether it is a temporary or permanent, should be close to the capital accounts at the end of each accounting period before a partnership balance sheet is prepared. Drawing Accounts ‘Temporary withdrawals Partners share in net losses Partners share in profits (this may be debited directly to capital - (this may be credited directly to capital account) account) Note: The profits and (losses) are credited (debited) to capital or drawing accounts. The choice will depend on the intention of the partners. If they want to maintain theircapital accounts for investments and permanent withdrawals, the profit or loss should be entered in the drawing account. But, if they want to make the profit or loss part of their capital, then the capital account should be used. Regardless of the case, the resulting partners’ ending capital will be the same because at the end of the year drawing accounts will be closed to capital. Loans to and from the partnership A withdrawal by a partner of substantial amount of cash or non-cash with the intention of its repayment to the firm may be debited to Loan to (Receivable from) partner rather than to partners’ drawing account. On the other hand a partner may lend money to the firm which is considered as a loan rather than an increase in capital account balance. These advances should be credited to Loan from (Payable to) partner and not to partner’s capital account classified as liabilities but separate from liabilities to outsiders. The partnership is obligated to pay interest on the loan unless the all partners agree not to pay such interest.PARTNERSHIP FORMATION 9 PARTNERSHIP FORMATION ‘The Partnership may be formed in several ways, namely: 1, Formation of the partnership for the first time. (Two or more persons with no existing business) 2. Conversion of sole proprietorship business to a partnership. a. A sole proprietor and another individual who has no business. b, ‘Two or more sole proprietors combining their businesses. 3. Admission of a new partner (chapter 4) Partners may invest cash, non-cash assets and/or services in the partnership. When partners’ invests it, the investment should be valued as follows: A. Cash - Face Value, if it is denominated in foreign currency, it should be converted first to peso using the current exchange rate. B, Non-Cash Assets ~ Agreed value, if the partners have no agreement, the contribution will be recognized at their fair market values at the date of transfer to the partnership. C. Services or Industry ~ Memorandum Entry is made for services made by the partner. Any liabilities assumed by the partnership should be valued at its present value (fair value) of the remaining cash flows. ‘Two or more persons forming partnership with no existing busine: Illustration 1: On January 2, 2020, A and 8 formed a partnership and agreed to share profits and losses equally. A contributed a parcel of land that cost him P 10,000,000. B contributed P15,000,000 cash. The land has a quoted price of P 16,000,000 on January 2, 2020 and subject toa mortgage of P2,000,000. The entry to record the investments would be: Case 1: If the mortgage is assumed by the partnership Cash 15,000,000 Land 16,000,060 Mortgage payable 2,000,000 A, capital 14,000,000 B, capital 15,000,000 To record the investment of A and BPARTNERSHIP FORMATION 10 Case 2: If the mortgage is not assumed by the partnership Cash 15,000,000 Land 16,000,000 A, capital 16,000,000 B, capital 15,000,000 To record the investment of A and B Note: if the property contributed has an existing liability and such liability will be assumed by the partnership, it will be deducted to his capital contribution. Illustration 2: On March 1, 2020, C and F formed a partnership which each contributing the following assets: Cc F Cash P30,000 P-70,000 Machinery 25,000 75,000 Building - 225,000 Furniture’s ~ 10,000 ‘The building is subject to mortgage loan of P 90,000 which is to be assumed by the partnership. The partnership agreement provides that C and F share profits and losses 30% and 70% respectively. A. Partners’ capital investment is equal to their capital Interest Case 1 Net Investment Method: Assuming the C and F agreed to receive a capital credit equal to the agreed value of their net assets invested: c E Cash 30,000 Cash 70,000 Machinery 28,000 Machinery 75,000 Furniture 10,000 Building 225,000 C, capital 65,000 Mortgage Payable 90,000 F, capital 280,000 To record the initial investment of C and F Note: if the problem will be silent regarding the capital interest of the partners, use the net investment method. B. Partners’ capital investment is not equal to their capital Interest A problem arises when the partners’ capital investment or contribution is not equal to its capital interestor agreed capital. The bonus or revaluation method may be applied to meet the condition or agreement.PARTNERSHIP FORMATION 1. Case 2 Bonus Method: Assuming that the partners agreed to bring their respective capital in proportion to their respective profit and loss ratio which is 30% and 70% respectively, the journal entries for their initial investment using the bonus method: ic E Cash 30,000 Cash 70,000 Machinery 25,000 Machinery 78,000 Fumiture 10,000 Building 225,000 C, capital 65,000 Mortgage Payable 90,000 F, capital 280,000 2. To record the bonus to C F, capital 38,500 C, capital 38,500 Computation: Total Capital Agreed Total Agreed Contribution Ratio Capital _ Difference c 65,000 30% 103,500 38,500 F 280,000 70% 241,500 (38,500) Total 345,00 * 345,000 Note: Under Bonus method, the total agreed capital of the partnership is equal to the total capital contribution of the partnership (TAC = TCC). In this method, there is a transfer of capital interest from one partner/s to another partner/s Case 3 Revaluation Method: Assuming that the partners agreed to bring their respective capital in proportion to their respective profit and loss ratio which is 30% and 70% respectively, the journal entries for their initial investment because the assets of the entity is undervalued. < E Cash 30,000 Cash 70,000 Machinery 28,000 Machinery 78,000 Fumiture 10,000 Building 225,000 C, capital 65,000 Mortgage Payable 90,000 F, capital : 280,000 2. To record the revaluation to C Asset 55,000 C, capital 55,000. Capital Agreed Agreed Contribution Ratio Capital Difference c 65,000 30% 120,000 55,000 F 280,000 10% 280,000 Total ———345,000-_ < __400,000__ 55,000PARTNERSHIP FORMATION 12. Total agreed capital = F capital contribution 280,000 + 70% = 400,000 Capital of C = 400,000 x 30% = 120,000 Capital of F = 400,000 x 70% = 280,000 Note: There are two types of revaluation (1) under revaluation (2) over revaluation method. In under (positive) revaluation (positive) method the total agreed capital of the partnership is greater than the total capital contribution of the partnership (TAC > TCC). Assets contributed by the partner will be revalued. In over (negative) revaluation method the total agreed capital of the partnership is less than the total capital contribution (TAC < TAC) Case 4 Investment or Withdrawal: Assuming that the partners agreed to bring their respective capital in proportion to their respective profit and loss ratio, and using F capital as a base, the journal entries to record the initial investment and additional cash to be invested by C: - c E Cash 30,000 Cash 70,000 Machinery 25,000 Machinery 75,000 Furniture 10,000 Building 225,000 C, capital 65,000 Mortgage Payable 90,000 F, capital 280,000 2. To record the additional investment of cash investment of C Cash 55,000 C, capital - 55,000 Computation of additional investment of C F, capital 280,000 Divide by: Interest of F 70% Total Partnership capital —400000— Multiply by: Interest of C 30% Agreed Capital of C 120,000 — Less: Capital Contribution of C 65,000 Cash Investment 55,000 A sole proprietor and another individual who has no business An individual without any existing business may join another individual who has already a business. Under this type of formation, the assets and liabilities contributed by the partners shall be transferred and recorded in the books of the partnership. However, the assets and liabilities contributed shall be adjusted first to a value agreed upon by the partners or its fair values. The journal entries to record this type of formation will depend upon the books to be used by the partnership, whether new sets of books will be opened or the books of the sole proprietorship will be retained.PARTNERSHIP FORMATION 13 The following are procedure in recording the contribution of the partners: New Sets of Books is opened 1. Adjust the books of the sole proprietor at its agreed or current Books of the Sole Proprietor are retained by the partnership 1. Adjust the books of the sole proprietor at its agreedor fair values current fair values 2, Closed the books of the sole 2, Record the investment of proprietor other partner/s. 3. Record the investment of the partners. 3._Consolidate the Investments 4, Consolidate the Investments Illustration 1: On January 2, 2020, Joven, who has his own business, and Paul decided to form a partnership wherein they will participate in the profits in the ratio of 40% and 60%, respectively. The balance sheet of Joven on this date is presented below. Assets Cash Accounts Receivables Less: Allowance for uncollectible accounts Merchandise inventory Furniture and Fixtures Less: Accumulated Depreciation Total Assets 16,000,000 1,600,000 5,000,000 1,000,000 Liabilities and Capital Accounts Payable Joven, capital 3,600,000 35,200,000 38,800,000 Total Liabilities and Capital Conditions agreed upon before the formation of the partnership: The accounts receivable of Joven is estimated to be realizable at 70% The furniture and fixtures of Joven is under-depreciated by P500,000. All the accounts payables are to be assumed by the partnership. Paul will contribute P30,000,000. BoopPARTNERSHP FORMATION 14 Books of the Sole Proprietor are retained by the partnership If the books of Joven are to be retained, the following journal entries are: 1, Adjustment of the books of Joven: Joven, Capital 3,700,000 Allowance for uncollectible accounts 3,200,000 Accumulated depreciation 500,000 To record adjustments of assets to restate Joven’s capital Note: All adjustments that reflect nominal accounts should be made directly to capital because all nominal accounts are already closed at the time of formation. Computation: Accounts receivable, per book 14,400,000 Accounts receivable, net agreed value (16,000,000 x 70%) 11,200,000 Increase in allowance 2. Record the investment of Paul Cash 30,000,000 Paul, capital 30,000,000 To record investment of Paul 3. Consolidate the investment of Joven and Paul After the formation the balance sheet of the newly formed partnership is: Assets Cash 30,400,000 Accounts Receivables 16,000,000 Less: Allowance uncollectible accounts 4,800,000 11,200,000 Merchandise inventory 20,000,000 Fumiture and Fixtures 5,000,000 Less: Accumulated Depreciation Total Assets Liabilities and Capital Accounts Payable 3,600,000 Joven, capital 31,500,000 Paul, capital 30,000,000 Total Liabilities and Capital 5,100,PARTNERSHIP. FORMATION 15 New Sets of books will be opened Under the procedures for new sets of books, the journal entries are 1, Adjustment of the books of Joven: Joven, Capital 3,700,000 Allowance for uncollectible accounts 3,200,000 Accumulated depreciation 500,000 To record adjustments of assets to restate Joven’s capital Computation: Accounts receivable, per book Accounts receivable, net agreed value (16,000,000 x 70%) Increase in allowance 2. Closed the books of Joven Allowance for uncollectible accounts 4,800,000 Accumulated Depreciation 1,500,000 Accounts Payable 3,600,000 Joven, Capital 31,500,000 Cash 400,000 Accounts Receivables 16,000,000 Merchandise inventory 20,000,000 Furniture and Fixtures 5,000,000 To close the books by closing all the adjusted balance of all accounts 3. Record the investment of Paul and Joven Cash 30,000,000 Paul, capital 30,000,000 Torecord investment of Paul Cash 400,000 Accounts Receivables 16,000,000 Merchandise inventory 20,000,000 Fumiture and Fixtures 3,500,000 Allowance uncollectible accounts 4,800,000 Accounts Payable 3,600,000 Joven, Capital 31,500,000 To record the investment of JovenPARTNERSHIP FORMATION 16 Note: The accumulated depreciation of the furniture and fixtures are not carried” forward to the newly formed partnership. The reason is that, the net amount (new cost) of the furniture which is P3,500,000 will be the basis of depreciation and it will be depreciated based on the remaining or revised useful life. However, the allowance for uncollectible accounts will still be carried forward because it has a possibility of collection. The P4,800,000 is only a provision for possible uncollectible receivables. 4. Consolidate the investment of Joven and Paul After the formation the balance sheet of the newly formed partnership i Assets Cash 30,400,000 Accounts Receivables 16,000,000 Less: Allowance for uncollectible accounts 4,800,000 11,200,000 Merchandise inventory 20,000,000 Furniture and Fixtures 3,500,000 Total Assets 65, 100,000 Liabilities and Capital Accounts Payable 3,600,000 Joven, capital 31,500,000 Paul, capital 30,000,000 Total Liabilities and Capital ~65,100,000__ Two or more sole proprietors combining their businesses The following are procedure in recording the contribution of the partners: Books of the Sole Proprietor are New Sets of Books is opened retained by the partnership T._ Adjust the books of the sole T. Adjust the books of the sole proprietor at its agreed or current proprietor at its agreed or fair values. current fair values. 2. Closed the books of the sole 2. Record the investment of other proprietor | __partner/s. 3. Record the investment of the partners. 3. Consolidate the Investments 4. Consolidate the Investments Ilustration 2: On June 1, 2015, A and V decided to pool their assets and form a partnership, to be known as AV Company. The balance sheets on June 1, 2015 before the formation were as follows:PARTNERSHIP FORMATION 17 A Vv Cash 198,000 316,800 ‘Accounts Receivable 7,296,000 7,440,000 [Allowance for doubtful 132,400) 136,000) accounts | Notes receivables 360,000 = Merchandise Inventory 115,200 108,000 Prepaid rent - 36,000 [Transportation 720,000 5 Equipment Accumulated depreciation 172,000) = Computer equipment , S 376,000 ‘Accumulated > 143.200) Depreciation Total Assets 2,584,800 2,397,600 ‘Accounts Payable ~ Trade 36,000 43,200 Notes payable 360,000 Capital 2.548,800 1,994,400 Total Liabilities and 2,584,800 397,600 Capital ‘The new partnership is to take over business and will assume liabilities of the partners. Capitals of the partners are to be based on net assets invested after the following adjustments: 1. 4% of the accounts receivable of A is.estimated to be uncollectible while the accounts receivable of V are estimated to be 98% realizable. Interest at 15% on notes receivable of A date April 2015 should be accrued ‘The merchandise inventory of A should be valued at P120,000, while P18,000 of the inventory of V is considered worthless 4/5 of the prepaid rent has expired ‘The transportation equipment of A is over-depreciated by P12,000 ‘The computer equipment of V is to be valued at P515,000 Interest at 10% on notes payable of V dated May 1, 2015 should be accrued V had office supplies on hand, which have been charged to expense amounting to P8, 000. These are still to be used by the partnership. 9. Accrued expenses of P6,000 is to be recognized in the books of A es eras ‘The partnership agreement provides that A and V shares profits and losses of 60% and 40% respectively. The partners further agreed to bring capital balances proportionate to their profit and loss ratio. The new capital of the partnership is basedon the adjusted capital of A, so that V may either withdrawor invest additional cash.PARTHERSHP FORMATION 1 Required: Assuming a new set of books is used by a new partnership, prepare: 1. Adjusting entries on the books of A and V 2. Closing entries on the books of A and V 3. Journal entries in the books of the partnership to record the investments of A and V and the withdrawal or additional investment of cash by V New Sets of Books is opened 1. To record adjustments of assets to restate A and V capital Books of A 1 A, capital 19,440 Allowance for doubtful accounts 19,440 2 Interest Relievable 9,000 ‘Acapital 9,000 3 Merchandise Inventory 4,800 A,capital 4,800 5 Accumulated depreciation - Transpo. Equip 12,000 Avapital 12,000 9 A. capital 6,000 ‘Accrued expenses 6,000 utat 1 Accounts Receivable, per book 1,263,600 ‘Accounts Receivable, net as agreed (1,296,000 x 94%) 1,244,160 Increase in Allowance 19,440 2. Interest Receivable 360,000 x 15% x 2/12 9,000 3 Merchandise Inventory, per book 115,200 Merchandise Inventory, as agreed Increase in inventory Books of V 1 Allowance for doubtful accounts 7,200 V,capital 7,200PARTNERSHIP FORMATION 19 3. V,capital Merchandise Inventory 4 V, Capital Prepaid Rent 6 Accumulated Depreciation - Comp. Equip V,capital Equipment 7 CV, capital Interest Payable 8 Office Supplies V,capital Computation: ‘Accounts Receivable, per book Accounts receivable, net as agreed (1,296,000 x 98%) Decrease in Allowance 4 Prepaid insurance 36,000 x 4/5 6 Computer equipment, per book Computer equipment, as agreed Decrease in computer equipment 7 Interest payable 360,000 x 10% x 1/12 2. Close the books of A and V Books of A Accounts Payable Allowance for doubtful accounts Accrued expense Accumulated Depreciation ~ Transpo. Equip A, capital Cash Accounts Receivable Notes Receivable Interest Receivable Merchandise inventory ‘Transportation equipment 18,000 18,000 28,800 28,800 43,200 17,800 61,000 3,000 3,000 8,000 : 8,000 1,404,000 1,411,200 (7,200) 28,800 532,500 515,000 17,500) 3,000 36,000 51,840 6,000 60,000 2,549,160 198,000 1,296,000 360,000 9,000 120,000 720,000PARTNERSHIP FORMATION 20 Books of V Allowance for doubtful accounts 28,800 Accounts Payable 43,200 Notes payable 360,000 Interest payable 3,000 V, capital 1,942,000 Cash 316,800 Accounts receivable 1,440,000 Merchandise Inventory 90,000 Prepaid Rent 7,200 Office supplies 8,000 Computer Equipment 515,000 3. To record the Investment of A and V Cash 198,000 Accounts Receivable 1,296,000 Notes Receivable 360,000 Interest Receivable 9,000 Merchandise inventory 120,000 ‘Transportation equipment 660,000 Accounts Payable 36,000 Allowance for doubtful accounts 51,840 Accrued expense “6,000 A, capital 2,549, 160 Cash 316,800 Accounts receivable 1,440,000 Merchandise Inventory 90,000 Prepaid Rent 7,200 Office supplies 8,000 Equipment 515,000 Allowance for doubtful accounts 28,800 Accounts Payable 43,200 Notes payable 360,000 Interest payable 3,000 V, capital “ 1,942,000 Cash Withdrawal of V V, capital ay 242,560 242,560Computation; Capital Investment of A Divide by interest of A Total Partnership capital Multiply by: Interest of V Capital of V Capital investment Withdrawal of cash 4, Consolidate the investment of A and V A and V Partnership PARTNERSHP FORMATION 21 2,549,160 Statement of Financial Position Assets Cash Accounts Receivable Less: Allowance for doubtful accounts Notes Receivable Interest Receivable Merchandise inventory Prepaid Rent Transportation equipment Computer Equipment Office supplies Total Assets Total Liabilities and Capital Accounts Payable Notes Payable Interest Payable Accrued expense Total Liabilities Capital A, capital V, capital Total Liabilities and Capital 272,240 2,736,000 80,640 2,655,360 —_ 360,000 9,000 210,000 2,549,160 1,699,440 4,696,800PARTNERSHIP FORMATION 22 EXERCISES Name: Date: Section: Score: True or False Write True if the statement is correct and False if the statement is wrong. 1. Contribution of personal property must be inventoried in order for the partnership contract to be valid. » Contribution of real property must be inventoried in order for the partnership contract to be valid. 3. A limited partner participates in the management of the businessof partnership. 4. A general partner may be either capitalist or industrial partner. 5. A limited partner may be either capitalist or industrial partner. 6. 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. 7. Alimited partnership must have at least one general partner. 8. A general partnership must have at least one limited partner. 9. A secret partneris one who does not take active part in the business, although he may be known to be a partner. 10. A dormant partner is one who does not take active part in the business and not known as a partner. 11, A partnership is always constituted in writing 12. A secret partner is one who does take active part in the business but is not known as a partner by outside parties 13. A dormant partner is one who does take active part in the business but is not known as a partner by outside parties. 14. A partnership is created by operation of the law, 15. A partnership is a separate legal entity, like a sole proprietorship.PARTNERSHIP FORMATION 23 18. 19. 20. ai. 22. 23. 24, 25. 26. 27. 88 31. . An ostensible partner is one who takes active part in the business and is known as a partner by outside parties. . Non-Cash investment in the partnership should be recorded at its carrying value. The entity theory of equity is based on the notion that a business entity is distinct from owners. Cash investment in the partnership should be recorded at face value. The assumption of a liability by the partnership with regard to a non-cash asset contributed to the partnership by a partner will affect the value assigned to the partner’s capital account. When the partnership capital is P3,000 or more, the public instrument must be recorded with the SEC A partnership with capital of less than P3,000 is valid even if it is unregistered with the SEC. When immovable property, regardless of its value, is contributed by any of the partners, the failure to comply with the following requirements will render the partnership contract void in so far as the contracting parties are concerned. A partnership with capital of P3, 000 or more is valid even if it is unregistered with the SEC. A partnership with capital of less than P3, 000 is void if it is unregistered with the SEC. A contribution of immovable property with a value of less than P3, 000 is still a valid contract even if it is not executed in public instruments and inventoried. Acontribution of immovable property with a value of more than P3, 000 is still a valid contract even if it is not executed in public instruments and inventoried. . A limited partner in a limited partnership may contribute cash, property or his industry. . The partnership agreements are integrated in the Article of Partnership. . A general partner in a limited partnership may contribute cash, property or his industry. A partnership may be formed for the exercise of profession.PARTNERSHIP FORMATION 24 3D, A partnership contract is consensual because it is formed by the agreement of two or more persons. 33. Sole Proprietorship and Partnership business are easy to be formed. 34. Only natural persons are required to be partners in a partnership business. 35. A partnership may be constituted in writing or orally. 36. Industrial partner is a limited partner. 37. Industrial partners are also liable like general partner for all the partnership obligations to the extent of their personal property, 38. An industrial partner could be a limited partner in the partnership. 39. A general partnership is composed of a general and limited partner. 40. All partnerships should have at least one general partner. 41. A partnership may be a stockholder of a corporation. 42. Partnership is perfected by mere agreement of the parties. 43. All partners are personally liable when the obligations to third parties cannot be paid by the partnership. 44. An oral agreement is sufficient to form a partnership. 45. All partner is assumed as an agent of the partnership. 46. A partnership can be organized without complying with all legal requirements for its existence. 47. Each partner in the partnership has its own capital and drawing accounts. 48. Partner's capital account is debited whenever the partner loan substantial amount in the partnership. 49. Contributed service is recorded using memorandum entry. 50. Cash provided by the partner in the partnership as a loan shall be recorded as credit to capital account. 51. When a partner contributes non cash assets, it shall be recorded based on the fair market value of the non-cash assets.52. 53. 54. 55. 56. 57. 58. PARTHERSHIP FORMATION 25 Using the net investment method, the amount of capital credit of a partner is equal to his capital contributions. The investment of a partner in the partnership increases his capital account. Drawing account represents the partner's share in the net assets of the partnership. Due from partners has a normal credit balance. Loan to partners has a normal credit balance. Due to partners has a normal debit balance. The partner’s drawing account has a normal debit balance.PARTHERSHP FORMATION 26 ‘Name: Date: ‘Section: Score: True or False Write True if the statement is correct and False if the statement is wrong. - 1, Ownership is easily transferred in a partnership. 2. Alimited partnership must have at least one general partner. 3. Bankruptcy of a partner will dissolve the partnership. 4. There is no income tax imposed on a partnership. 5. A partnership involves mutual agency, unlimited liability for general partners and limited life. 6. All partners in a general partnership are personally liable for all debts incurred by the partnership. 7. Apartnership must always have at least two owners. 8. A partnership has a juridical personality separate and distinct from that of each the partners. 9. A partnership cannot be established for religious purposes. 10. A partnership may be created orally. 11. A written partnership contract is required to be prepared whenever a partnership is formed. 12. A partnershipis a legal entity separate and distinct from the individual partners. 13. Individual partners are jointly liable for the debts and obligation of a partnership. 14. One advantage of a partnership over a corporation is that it has limited life. 15. The property invested in the partnership will become the property of the partnership. 16. A partnership may or may not open a new set of books. 17. A corporation may be formed as a partnership.PARTNERSHIP FORMATION 27 18. 19, 20. 21. 22. 23. 24. 25. 26. 27. 28. 29, 31. 32, 33. 34, 35. 36. 37. Not for profit organization can be formed as a partnership. A partnership is an accounting entity. Mutual agency is not a characteristic of a partnership. A general professional partnership is subject to income tax. A partner’s drawing account is an expense account. Each partner generally has the authority to enter into contracts which are binding upon the partnership. - All partners in a general partnership are liable to the extent of their separate personal properties Ina limited partnership, all partners are liable only to the extent of their capital contribution. A de facto partnership is one that complies with all legal requirements for its establishment. ‘The limited partners are liable to the extent only of their capital contribution. A general partner is liable to the extent only of his capital contribution. A partnership must always have at least two partners. . A partnership may be established for charity. The drawing account is credited with the partner’s withdrawals of cash or other assets during the period. A nominal partner is the one who takes charge of the winding up of partnership affairs. An industrial partner is the one who contributes industry in the partnership. A particular partnership is one which has for its object determinate things, their use or fruits or a specific undertaking or the exercise of a profession or vocation. A partner's capital is debited for permanent withdrawals made by a partner. Non cash assets invested in the partnership are recorded at book value. A partnership capital with a capital of less than P3,000 is valid even if it is not in writing41. 42, 43. 45. 47. 48. PARTNERSHIP FORMATION 28 "No public Instrument is executed if the immovable property contributed is less than P3,000. ). A dormant partner is one who does not take active part in the partnership business and not known as a partner. |. A partners’ drawing account is a contra capital account All partnerships are subject to income tax. A silent partner takes active part in the business of the partnership and is not known by outsiders to be a partner A partner by estoppel is one who is actually not a partner but who represents himself as one. }. The unlimited liability of the partners for the partnership debts makes the partnership more reliable from the point of view of creditors. Ina limited partnership, none of the partners have unlimited liability for the business debts. . Manny a billionaire in the Philippines is a-partner in ABC Company. The stipulation in the Articles of Partnership that the partner shall be excluded Manny from sharing in the profits in the partnership is void. A sole proprietorship has limited life whereas a partnership has an unlimited life. Limited partners are also called special partner. . A partnership is created by mere agreement of the partners. Services may be contributed in the partnership by any partner.PARTNERSHP FORMATION 29 ‘Name: Date: Section: Score Multiple Choice: Encircle the letter of your final answer Problem 1: The following are disadvantages of partnership, except: a. Limited life b. Partners are jointly liable for the action taken by the other partner c. Unlimited liability from the point of view of creditors d. Unlimited liability from the point of view of the partners. Problem 2: A general partner may contribute a. Service c. Non-cash assets b. Money d, All of the above Problem 3: Kind of partnerships where the object is determinate. Its use or fruits or a specific undertaking, or exercise of profession or vocation. a. Universal partnership of all profits b. Universal partnership of all present property c. Partnership by estoppel d._ Particular partnership Problem 4: The following are characteristics of the partnership, except: a. Mutual Contribution c. Limited liability b. “Mutual agency d. Limited life Problem 5: One who is not really a partner, not being a party to a partnership agreement, but is liable as a partner for the protection of the innocent third person. a. Limited partner c. Partner by estoppel b. Managing partner d. Liquidating partner Problem 6: A limited partner may contribute all of the following, except: a. Service c. Non-cash assets b. Money d. All of the above Problem 7: Kind of partnerships were only the income or profits and the right touse the property passes to the firm. a. Universal partnership of all profits b. Universal partnership of all present property c. Partnership by estoppel d. Particular partnership Problem 8: The following are essential provisions in the articles of partnership, except: a. Profit sharing arrangements c. Rights and duties of partnersPARTNERSHIP FORMATION 30 b._ Provision for dissolution ‘d. The extent of liability of each partner Problem 9: A partnership may be formed by: a. Orally c. Express e. All of the above b. Written d. Implied Problem 10: A special partner is also known as: a. Limited partner . Liquidating partner b. General partner d. Ostensible partner Problem 11: A partnership in which no time is specified and is not formed for particular undertaking and which may be terminated anytime by mutual agreement of the partners. a. Partnership at will c. Limited partnership b. Partnership with fixed term d. Universal partnership of all profits Problem 12: Which of the following characteristics does not apply to a general partnership? a. Unlimited liability c. Unlimited life b. Mutual agency d. No business income tax Problem 13: Which of the followingis a characteristic of most partnerships? a. Limited liability c. Division of profits only b. Mutual contribution d. Unlimited life Problem 14: The feature of unlimited liability covers al! partners, except: a. General partner c. Capitalist partner b. Industrial partner 4. Limited partner Problem 15: One who has taken active part in the business but is not known as a. partner by outside parties. a. Secret partner c. Ostensible partner b. Silent partner d. Dormant partner Problem 16: All of the following affect partners’ capital, except a. Temporary Drawing c. Share in net loss b. Permanent Drawing d. None of the choices Problem 17: It is the principle in accounting which states that the partnership is separate and distinct from the partners. a. Prudence c. Entity concept b. Going Concern d. Materiality Problem 18: The following affects the capital accounts of a partner, except a. Original investment c. Share in net loss b. Temporary drawings d. None of the choicesPARTNERSHIP FORMATION 31. Problem 19: Which of the following statements Is Incorrect: a. Temporary drawing has no effect on the computation of ending capital b. Permanent drawing reduces the balance of capital cc, Partners share in profits reduces the drawing nce d. Partners share in net loss increases the drawing account. Problem 20: Which of the following is not a characteristic of a busin partnership? a. Based on agreement c. Co ownership b. Ease of formation d. Unlimited life Problem 21: All of the following are true for both general and limited partnerships except: a, Both must have at least one general partner All partners are liable for all debts of the firm b. c. Allpartners have the right to participate in the profits of the business d. Both are easily dissolved Problem 22: Which of the following statements is incorrect: Loan to partners is a liability account Due to partner is a liability account Due from partner is an asset account Receivable from partner is an asset account. BOR Problem 23: Non-cash assets is valued at: a. Book value c. Zonal value b. Historical cost d. Agreed value Problem 24: This is a requirement fora partnership to be in writing and be attached to the public instrument. a. Contribution of real property b. Contribution of personal property c. Ifcontributed capital exceeds P3,000 d. Allof the above Problem 25: Which of the following statements is incorrect? a. The property invested by a partner will become the property of the partnership b. A general professional partnership is exempt from income tax c. Non-profit Organization may form partnership. d. Marriage between two persons is not a partnership Problem 26: Which of the followingis incorrect? The capital account i Credited for additional investments Debited for permanent drawings Credited for debit balance of the drawing account at the end of the period Credited for credit balance of the drawing account at the end of the period BeopPARTNERSHIP FORMATION 32 Problem 27: A partnership which comprises all the profits that the partners may acquire by their work or industry during the existence of the partnership is called: a. Universal partnership of profits b. Universal partnership of all present property ¢. Particular partnership 4. De jure partnership Problem 28: Which of the following does not include in the provisions of article of partnership? a. The date of formation and duration of partnership b. The rights and duties of each partner c. The accounting period to be adopted d. The allocation of liabilities to partners Problem 29: The following statements are correct for both general and limited partnerships, except: a. Both are casy to organize b. Both are easyto dissolve c. Both have at least one general partner d. Allpartners are liable for all the debts of the company. Problem 30: Which of the followings not an advantage of a business partnership? a. Ease of formation b. Less expensive to organize compared to a corporation c. Itallows more creative brainstorming in making decision d. Jointly liable for the actions of the other partners Problem 31: One who takes active part in the business, but is not known to be a partner a. Secret partner ¢. Silent partner b. Managing partner d. Dormant partner Problem 32: The following are characteristic of a partnership. Which of these is not applicable to a general professional partnership? a. Mutual agency c. Limited life b. Unlimited liability d. Subject to income tax Problem 33: On July 1, RR and TT formed a partnership, agreeing to share profits and losses in the ratio of 4:6, respectively. RR contributed a parcel of land that cost her P75,000. TT contributed P150,000 cash. The land was sold for P150,000 on July 1, four hours after the formation of the partnership. How much should be recorded in RR ‘s capital account on the partnership formation? a. P30,000 c. P75,000 b. 60,000 d. 150,000PARTNERSHIP FORMATION 33 Problem 34: Stein admits Mendes as a partner in business. Accounts in the ledger for Stein on November 30,20x4, just before the admission of Mendes, show the following balances: Cash 6,800 Accounts receivable 14,200 Merchandise inventory 20,000 Accounts payable 8,000 Stein, capital 33,000 It is agreed that for purposes of establishing Stein’s interest the following adjustments shall be made: a. An allowance for doubtful accounts of 3% of accounts receivable is to be established. b. The merchandise inventory is to be valued at P23,000. c. Prepaid salary expenses of P600 and accrued rent expense of P800 are to be recognized. Req. 1: Mendes is to invest sufficientcash to obtaina 1/3 interest in the partnership. Stein’s adjusted capital before the admission of Mendes: a. P28,174 c. P35,374 b. P35,347 d. P36,374 Req. 2: The amount of cash investment by Mendes: a. P11,971 c. P17,687 b. P14,087 d. P18,487 Problem 35: A, B and C are forming a partnership. The appraised value of assets contributed is P120,000, P160,000 and P200,000, respectively. In addition, A and C agreed that B’s experience is worth P60,000. The partners desire to apply the bonus method where applicable. What is the total capital recorded at the'date of formation? a. 480,000 c. P420,000 b. P540,000 . P360,000 Problem 36: G and C executed a partnership agreement that lists the following assets contributed: G c Cash 20,000 30,000 Inventory 15,000 [Building SSSCSC~sSC“‘;SC*Y:~—~«0;«000_—| Furniture and fixture 15,000 The building is subject to a mortgage of P10,000, which the partnership has assumed. The partnership agreement also specified that profits and losses are to be distributed equally. Req. 1: What amounts should be recorded as capital for G and C in the formation of partnership, respectively?PARTNERSHP FORMATION 34 ‘a. 35,000; 85,000 ‘©. 60,000; 60,000 b. 35,000; 75,000 . 55,000; 55,000 Req. 2: Using the information above, Assuming the partnership did not assume the mortgage, the capital of G and C, respectively? a. 35,000; 85,000 c. 60,000; 60,000 b. 35,000; 75,000 . 58,000; 55,000 Reg. 3: Using the information above, Assuming the partners agree that their capital after formation should be equal to their profit and loss ratio, the capital of G and C, respectively, after formation? a. 35,000; 85,000 . 60,000; 60,000 b. 35,000; 75,000 d. 55,000; 55,000 Problem 37: Emma, Betty and Carol formed ABC Partnership on January 1, 20x1. Their capital contributions are: Emma _—Betty Carol Cash 100,000 120,000 300,000 Inventory 20,000 Equipment 50,000 The partners agree to share profit and loss on a ratio of 30:30:40 to Emma, Betty and Carol, respectively. + Although Carol contributed the biggest cash contribution, she did not have the entire amount and was required to borrow P150,000 from the bank. * The equipment contributed by Betty has unpaid liability of P20,000 which was assumed by the partnership .* The partners agree to have equal capital interest in the partnership. Acash settlement was made by the partners outside partnership. Which of the following statement is correct? a. The journal entry in the books of the partnership to record the interest of Emma is credit P120,000 b. Betty should pay Carol P70,000 c. Carol should receive cash of P110,000 d. Emma will pay P20,000 cash to Betty and Carol Problem 38: On May 1, 2020, P and G formed a partnership and agreed to share profits and losses in the ratio of 3:7, respectively. P contributed a parcel of land that cost P10, 000. G contributed P40, 000 cash. The land was sold for P18, 000 on May 1, 2020, immediately after the formation of the partnership. What amount should be recorded in P’s capital account on formation of the partnership? a. P10,000 c. P17,400 b. P18,000 d. P15,000PARTNERSHIP FORMATION 35 Problem 39: As of May 1, 2020, FF and GG decided to form a partnership. Their balance sheets on this date are: FF GG Cash 45,000 114000 Accounts Receivable 1,620,000 675,000 Merchandise Inventory 606,000 Machineries & Equipment 450,000 810,000 2,115,000 2,205,000 Accounts Payable 405,000 720,000 Capital 1,710,000 1,485,000 The partners agreed that the machinery and equipment of FF are under depreciated by P45, 000 and that of GG is over depreciated by 135,000. Allowance for doubtful accounts is to be setup amounting to P360, 000 for FF and P110, 000 for GG. The partnership agreement provides for a profit and loss ratio and capital interest of 60% to FF and 40% to GG. How much cash must FF invest to bring the partner’s capital balances proportionate to their profit and loss ratio? a. P427,500 .P555,000 b. P960,000 4.P307,500 Problem 40: X and Y entered into the partnership on February 1,2013 by investing the following assets: x EZ Cash +} 40,000 Tnventory t 90,000 Land 130,000 [Equipment] 30,000 Fixtures 200,000 The agreement between X and Y provides that profits and losses are to be divided 60% and 40%, respectively, and that the partnership is to assume the 100,000 mortgage on land. IfY is to receive a capital credit equal to his profit and loss ratio, the bonus upon partnership formation is: a. P6,000 toX c. P10,000 to X b. P6,000 toY d. P10,000 to Y Problem 41: On Feb, 1, 2020, SS and QQ formed a partnership with each contributing the following assets: QQ Cash 30,000 70,000 Machinery 25,000 75,000 Building - 225,000 Furniture and fixtures 10,000 :PARTNERSHIP FORMATION 36 The building is subject to a mortgage loan of P90,000, which is to be assumed by the partnership agreement provides that SS and QQ share profits and losses 30 percent and 70 percent, respectively. Req. 1: On Feb. 1, 2020, the capital account of QQ would showa balance of: a. P280,000 c. P314,000 b. P305,000 d. P370,000 Req. 2: Assuming that the partners agreed to bring their respective capital in proportion to their respective profit and loss ratio, and using QQ's capital as the base, how much cash is to be invested by SS? a. P19,000 c. P40,000 b. P30,000 d. P55,000 Problem 42: On April 1, 2020, Jollibee and McDo formed a partnership with each contributing the following assets: Jollibee McDo Cash 120,000 80,000 Machinery 100,000 300,000 Building 900,000 Furiture and Fixtures _ 40,000 The building is subject to a mortgage loan of P320, 000, which is not assumed by the partnership. Jollibee and McDo share profits and losses 60% and 40% respectively. How much is the capital of Jollibee? a. P260,000 ¢., P220,000 b. P1,280,000 d. P960,000 Problem 43: ABC partnershipwas formed on Oct. 1, 2020. At that date the following assets were contributed: Jollibee McDO Cash 600,000 280,000 Machinery 440,000 Building 800,000 Furniture and Fixtures 120,000 The building is subject to mortgage loan of P320,000 which is not assumed by the partnership. The partnership agreement provides that Jollibee and McDO share income and loss of 25% and 75%, respectively. Assumingthe partnership agreement provides that the partners initially should have and equal interest in the partnership capital. McDO capital account should be: a. P960,000 . P720,000 b. P1,120,000 d. P1,200,000PARTNERSHIP FORMATION 37 Problem 44: On April 1, 2020, Kris and Chen pooled their assets to form a partnership, with the firm to take over their business assets and assume the liabilities. Partners’ capitals are to be based on net assets transferred after the following adjustments: Chen inventory is to be increased by P6,000 ; an allowance for doubtful accounts of P2,000 and P2,500 are to be set up in book of Kris and Chen, respectively; and accounts payable of P8,000 is to be recognized on Kris’ books. The individual trial balances on April 1, 2020, before adjustments follow: Kris Chen Assets 150,000 226,000 Liabilities 10,000 69,000 Capital 140,000 _157,000 How much is the capital of Kris after the above adjustments to his books? a. P140,000 c. P137,000 b. P130,000 d. P132,000 Problem 45: D and L formed a partnership on April 1 and contributed the following assets: Cash 150,000 50,000 Land 310,000 The land was subject to a mortgage of P30,000, which was assumed by the partnership. Under the partnership agreement, D and L will; share profit and loss in the ratio of one third and two thirds, respectively. L’s capital account at April 1 should be a. P330,000 c. P300,000 b. P360,000 d. P340,000 Problem 46: Irish, Ivan and Irvin decided to engage in a real estate business as a partnership. Irish invested P280,000 cash and Ivan provided an office equipment valued at P440,000. There is a P120,000 note payable remaining on the equipment to be assumed by the partnership. Although Irvin has no assets to invest, both Irish and Ivan believe that Irvin's expert salesmanship provides an adequate investment. ‘The partners agree to receive an equal capital interest in the partnership. Using the bonus method, what is the capital balance of Irvin? a. P200,000 c. P100,000 b.” PO d. P280,000 Problem 47: The financial position as of April 1, 2020 for the business owned by Ivonne shows the following assets and liabilities:PARTNERSHIP FORMATION 3.8, Cash Accounts Receivable 20,000 Inventory 30,000 Fixtures Accounts Payable Itis estimated that 5% of the receivables may prove uncollectible. Inventory includes obsolete items costing P10,000 of which P4,000 might still be realized. Depreciation has never been reco:ded: the fixtures are two years old, have an estimated useful life of 10 years, and would cost P20,000 if currently purchased. Iram is to be admitted as a partner upon his investment of P40,000 cash and P20,000 worth of inventory. What are the total assets of the partnership? a. P141,000 c. P128,000 b. P96,000 d. 135,000 Problem 48: As of August 1, 2020, Zoe and Angel decided to form a partnership. Their balance sheets on this date are Zoe Angel Cash 3,000 7,500 Accounts Receivable 108,000 Inventory Fixtures 30,000 Total 141,000 Accounts payable 27,000 48,000 Zoe, capital 114,000 Angel , capital Total ‘The partners agreed that the fixtures of Zoe is under-depreciated by P3,000 and that of Angel by P9,000. Allowance for doubtful accounts is to be set up amounting to 24,000 for Zoe and P9,000 for Angel. The partnership agreement provides for profit and loss ratio and capital interest of 60% to Zoe and 40% to Angel: How much cash must Zoe invest to bring the partner’s capital balances proportionate to their profit and loss ratio? a. P28,500 c. P10,500 b. 34,500 d. P20,500 Problem 49: Cortez admits David for a partnership interest in his business. The balance sheet accounts of Cortez on November 30, 2020 prior to the adjustments of David are as follows: Debit Credit Cash P? Accounts receivable 192,000 Merchandise inventory 288,000 Accounts payable 99,200 Cortez, capital >PARTNERSHIP FORMATION 39 hing Cortez’s Interest, the following agreed that for purposes of establ adjustments should be made: a. An allowance for doubtful accounts of 2% of accounts receivable is to be established. b. The merchandise inventory is to be valued at P320,000. c. Prepaid expenses of 10,400 and accrued expenses of P 6,400 are to be recognized. David invested cash of P227,280 to give him a one-third interest in the total capital of the firm. What is the capital balance of Cortez before the admission of David? a, P454,560 c. P422,400 b. P460,240 d. 501,000 Problem 50: Norin and Jen entered into a partnership on August 20, 2020 by investing the following assets: ~ Norin Jen Cash 120,000 Inventory 270,000 Land 390,000 Equipment » 90,000 Fixtures 600,000 The agreement between Norin and Jen provides that profits and losses are to be divided 60% and 40%, respectively, and that the partnership is to assume the 300,000 mortgage on the land. If Jen is to receive capital credit equal to the full amount of his net assets invested, how much is her capital balance upon formation of partnership? : a. 450,000 c. P30,000 b. P1,200,000 » d. P480,000 Assuming that the capital of the partners is proportionate to their profit and loss ratio, the bonus upon formation is: a. Bonus to Jen P18,000 c. Bonus to Norin P6,000 b. Bonus to Norin P18,000 d. Bonus to Jen P6,000 ‘The capital balance of the Norin, respectively after formation, using the bonus method. a. P702,000 ¢. P450,000 b. P720,000 d. P468,000 Problem 51: Earl and Rico entered into a partnership agreement in which Earl is to have 55% interest in the partnership and 35% in the profit and loss and Rico will have 45% interest in the partnership and 65% in the profit and loss.PARTHERSHIP. FORMATION 40 Bail contributed the following: Cost Fair Value Building 235,000 255,000 Equipment 168,000 156,000 Land 500,000 525,000 The building and the equipment had a mortgage of P50,000 and P35,000, respectively. Rico is ‘o contribute P150,000 cash and an equipment. The partners agreed that only the ouilding mortgage will be assumed by the partnership. Req. 1: What is the fair value of the equipment which Rico contributed? a. P615,818 c. P546,273 b. P989,143 d, P574,909 Req. 2: What is the amount of total assets of the partnership upon formation? a. P1,892,143 c. P1,660,909 b. P1,701,818 d. P1,632,273 Problem 52: On January 1, 20x1, Rody and Noy formed a partnership. Rody and Noy contributed the following assets at formation: Rody Noy is Cash 25,000 37,500 Inventory 18,750 Building 50,000 Equipment 18,750 ‘The building is subject to a P12,500 mortgage, which was assumed by the partnership. They share profit and loss in the ratio of 60:40. Req. 1: What amount should be recorded as capital of Rody and Noy at the formation of the partnership, respectively? a. P43,750; P106,250 ¢, P43,750; P93,750 b. P90,000; P60,000 d. P82,500; PS5,000 Req. 2: Assuming Rody will invest (withdraw) cash so that his capital’ balance will equal to his profit and loss ratio, what is the total asset of the partnership after formation? a. P150,000 ¢. P137,500 b. 234,375 d. P246,875 Problem 53: A and B is combining their separate business to form a partnership. Cash and non-cash assets are to be contributed for a total capital of P1,200,000. The non-cash assets to be contributed and the liabilities to be assumed are as follows:PARTNERSHIP FORMATION 42. B BV TMV, BV FMV ‘Accounts Receivables | 80,000 | 80,000 Tnventory 120,000 |~200,000_|~ 80, T00,000_| Equipment 240,000 | 180,000 | 160,000 | 200,000 ‘Accounts Payable 60,000 | 60,000 | 40,000 | 40,000 ‘The partners agreed that equipment contributed by A is worth P200,000 while of B is worth 300,000. The partners’ capital accounts are to be equal after all the contributions of assets and the assumption of liabilities. Req. 1: The amount of cash to be contributed by A is a. P180,000 c. P80,000 b. 600,000 d. P400,000 - Req. 2: The total non- cash asset of the partnership is: a. P1,300,000 c. P680,000 b. P1,100,000 d. P880,000 Problem 54: A, B and C formed a partnership on February 1, 2020, with the following assets contributed: A B c Cash “300,000, 360,000, ‘900,000 Fixtures 255,000 [Equipment 840,000 Machinery 753,000 Land and Bldg | 4,500,000 Furniture 105,000 75,000 Although C has contributed the most cash to the partnership, C did not have the full amount of P900,000 available and was forced to borrow personally P600,000. The land and building contributed by A has a mortgage of P2,700,000 and the partnershipis to assume the responsibility forthe loan. If the profit and loss sharing agreement is 2:2:1, respectively, for A, Band C. What is the capital balance for each partner at the start of the business? A B 6 2,355,000 P1,458,000 — P375,000 P2,355,000 P1,458,000 — P975,000 P3,975,000 — P378,000 P435,000 P5,055,000 —P1,458,000 — P975,000 Boop Problem 55: Paul, DJ and Anton are to form a partnership. Paul is to contribute cash of P262,500 and his equipment originally bought at P280,000 but has a second hand value of P175,000. DJ is to contribute cash of P350,000 and tables and chairs worth 70,000 but acquired by DJ for only P63,000. Anton, whose family is sellingPARTNERSHIP FORMATION 42 Computers, is to contribute cash of P140,000 and a brand newcomputer plus printer with regular price at P280,000 but which cost their family’s computer dealership 245,000. Partners agree to share profits 3:2:3. The capital balances of Paul, DJ and Anton, respectively, upon formation are: a. P542,500; P413,000; P385,000 b. P479,065.50; P318,375; P479,065.50 c. 437,500; P420,000; P420,000 d. 502,687.50; P335,125; P502,687.50 Problem 56: Moses and Joshua decided to combine their business to form partnership on October 1, 20x1. They agreed to divide profit and loss at a ratio of 55:45 for Moses and Joshua, respectively. The balance sheet for Moses and Joshua on September 30, 20x1 are presented below: Accounts Moses Joshua Cash 112,500 67,500 Accounts Receivable 270,000 225,000 Allowance for doubtful accounts (6,000) (7,500) Notes Receivable 75,000 Merchandise Inventory 240,000 180,000 Office supplies 40,500 Equipment 150,000 Accumulated Depreciation - equipment (67,500) Furniture 180,000 Accumulated depreciation - furniture (30,000) Total Assets _ Accounts Payable Notes Payable Capital Total Liabilities and Capital Moses and Joshua contributed their business to the partnership with the following adjustments: 1. Uncollectible accounts of P9,000 for Moses is to be provided and a 5% allowance is to be recognized in the books of Joshua 2. Moses’s inventory amounting to P15,000 is considered worthless and Joshua’s agree to value its inventory to P187,500. Prepaid asset of P15,000 on Moses books and Rent payable of P12,000 on the books of Joshua should be recognized.- Interest of 15% on the notes receivable dated August 1, 20x1 should be accrued. The unused office supplies amounted to P30,000 ‘The equipment has an agreed value of 75,000 ‘The furniture has a market value of P135,000 Interest of 10% on notes payable dated July 1, 20x1 should be accrued. Joshua has unrecorded patent of 60,000 to be recognized in Joshua’s books. ° penaw *PARTNERSHIP FORMATION 43 Joshua will invest cash necessary to have 60% interestin the partnership. What is the amount of additional cash investment of Joshua? a. P75,562.50 c. P77,437.50 b, P69,937.50 d. P6,187.50 Problem 57: Marie, Paz and DJ formed a partnership. Marie contributed cash of P450,000; Paz contributed an equipment with carrying amount of P250,000, fair value of P240,000 and agreed value of P280,000; and’ DJ contributed inventories with cost of P100,000 and agreed value of 120,000. Partners also agreed for a profit and loss ratio of 40:35:25 ratio, respectively. Assuming the entity use the revaluation method and the partners agree with capital interest ratio of 50%; 25% and 25% to Marie, Paz and DJ, respectively, what is the capital of Marie after formation of partnership? a. " P480,000 c. P450,000 b. P560,000 d. P240,000 Problem 58: Paul, Alger and Rod decided to form partnership. It was agreed that Paul will contribute a merchandise inventory with cost of P420,000 and fair value of P400,000 and an equipment with cost of P500,000 and accumulated depreciation of P100,000, the equipment has an assessed value of P420,000. A day after the partnership formation, the equipment was sold for P450,000. The partners agreed that Paul will have 20% capital interest in the partnership Alger will contribute a land and building with book value of P1,200,000 and 1,500,000, respectively with agreed value of P1,250,000 and P1,300,000, respectively. The land and building is subject to a mortgage of 250,000 which is assumed by the partnership. Rod will contribute cash and equipment with book value of P300,000 and fair value of 200,000. What is the total cash contribution of Rod? a. 650,000 . P900,000 b. P780,000 d. P1,100,000 What is the total asset after the formation of partnership? a. 3,600,000 c. 4,250,000 b. 4,500,000 d. P4,350,000 Problem 59: A and B agreed to form a partnership and they made the following contributions: A B Cash 50,000 75,000 inventory 37,500 Building 100,000 Equipment 37,500PARTNERSHP FORMATION 44 The building is subject to a mortgage of P25,000, which the partnership has assumed. The partnership agreement also specified that profits and losses are to be distributed equally. What amount should be recorded as capital interest of both partners at the formation of partnership? A B 87,500 212,500 a. b. c. 137,500 137,500 d. 150,000 150,000 Problem 60: A and B formed a partnership on January 25, 20x2 by investing the following assets: x B Cash 272,000 - Accounts receivable 612,000 Inventory 884,000 Land and Building 204,000 Equipment 1,360,000 A and B agreed for a profit and loss ratio of 6:4, respectively, and that the partnership is to assume the P680,000 mortgage on the land. Assuming the capital interest of the partners is proportionate to their profit and loss ratio, the bonus upon formation is: a. P40,800 toB ¢. P60,800 to B b. P40,800 toA d. P60,800 to APARTNERSHIP FORMATION 45 STRAIGHT PROBLEMS Problem 1: OO and PP formed a new partnership. 00 invests P900,000 in cash. PP contributes land that has an original cost of P120,000 and a fair market value of P210,000, and a building that has a tax basis of P150,000 and a fair value of P270,000. The building is subject to a P120,000 mortgage that the partnership will assume. Profit and loss ratio is 60:40 to OO and PP respectively. Required: Prepare the journal entries to record the partners’ investments. Problem 2: Val, Migs, and Diaw are to form a partnership. Val is to contribute cash of P500,000; Migs, P50,000; and Diaw PS00,000. Val and Diaw will not actively participate in the management of the business, but will refer customers, while Migs will manage it. Migs has given up his job which gives him an annual income of P600,000. Partners agree to share profits and losses equally. _ Required: Prepare the journal entries to record to record the partners’ investments Problem 3: Angie and Beth has the following agreement upon formation of the partnership Angie Beth Cash 100,000 150,000 Inventory 75,000 Building 200,000 Equipment _75,000 ‘The building is subject to a P50,000 mortgage, which the partnership has assumed. Required: 1. Prepare entries to record the formation of the partnership assuming that A and B agree that each partneris to receive a capital credit equal to the agreed value of the net assets invested. 2. Prepare the entries, assuming the mortgage is not assumed by the partnership. 3. Prepare entries to record the formation of partnership assuming that A and B agree that each partner is to receive an equal capital interest. Problem 4: Allan, Lydia and Bruce formed a new partnership. Partner Allan invested P50,000 in cash. Partner Lydia instead a property which cost her P100,000 and has a market value of P75,000. Partner Bruce contributed cash amounting to P80,000. The partnership agreement provided that Allan, Lydia and Bruce share profits and losses in a ratio of 50:25:25, respectively.PARTNERSHIP FORMATION 46 Required: Compute the capital of each partner upon formation of the partnership under the following assumptions: 1. Using Net Investment Method. 2. Assuming the partners agreed to bring their respective capital in proportion to their respective profit and loss ratio. The capital balances of each partner a. Using Bonus Method. b. Using Positive Revaluation Method c. Using Negative Revaluation Method 3. Using the capital of Lydia as a basis, How much will be the additional investment (withdrawal) of Allan and Bruce? Problem 5: On July 1, 2023, Solisa, Estrada and Kasan formed a business partnership to be operated as an advertising agency. Solisa contributed P10 million cash while Estrada shall have a capital credit of P6 million upon receipt of bonus of P1 million from Solisa based on the provision in the Articles of Co-Partnership. The terms of the agreement provided that Solisa and Estrada shall have combined 40% capital interest in the newly formed partnership. Required: How much is the capital contribution made by Kasan to the partnership? Problem 6: On December 1, 2025, Leo invited John to join him in his business. John agreed provided that Leo will adjust the accumulated depreciation of his Equipment account to a certain amount, and will recognize additional accrued expenses of P10,000: After that, John is to invest additional pieces of equipment to make her interest equal to 45%. If the capital balances of Leo before and after adjustment were P139,000 and P121,000 respectively, what is the effect on the * carrying value of the equipment as a result of the admission of John? Problem 7: The financial position of Anton Company on October 31, 2020 before admitting Gerald as his partner to AG Partnership is presented below: Assets Cash 540,000 Accounts Receivable 216,000 Less: Allowance for doubtful accounts 13,500 202,500 Notes Receivable 270,000 Inventories 121,500 Equipment 324,000 Less: Accumulated Depreciation 27,000 __ 297,000 Total Assets 1,431,000