Me guidelines are to be strictly folowed regarding formation: Individvol versus Individual Books of Individy Books N/A { | Parinership ‘Adjusting en’ Closing entnes (real accounts). “ll NIA Investments ...-- ++ oe { Yes Balance Sheet... = Yes Where: N/A - not ‘epplicable because there are no boTks of individual. individual versus Sole Proprietor (Old set of books ig used: retain books of Sole Proprietor) BooKs of “Books of Individval Sole 1 Proprietor] | Adjusting entries.....--++ N/A Yes Closing entries (real accounts). N/A No Investments. - Yes** Balance Sheet Yes * Partnership Books 2 cents of individual: additional investments oF withdrawals Individual versus Sole Proprietor (New set of books is used) _ of sole propnetor. Books of Books of *New Set.of Individual_|_ Sole Propretor Books ‘Adjusting entries chem NAS Yes Z Closing entries (real accounts)” N/A Yes Investments . . | Yes’* Balance Sheet. Yes * Partnership Books: . cee vorindividuol: additional investments or withdrawals of sole proprietor. Sole’ Proprietor versus Sole Proprietor (Old set of books Is used; refain books of one of the ‘Sole Proprietors) Books of “Books of : Sole Proprieior | Sole Proprietor ‘Adjusting eniies......--++ Yes Yes Closing entries (real accounts Yes No Investments. Yes** Balance Sheet. Yes + Partnership books «+ Additional investments or withdrawals of sole proprietors. Sole Proprietor versus Sole Proprietor (New set of books Is used) Books of Books of “New Set of Sole Sole Proprietor |" Books — Proprietor Rag en Yes Yes losing entries Cling ents (rel accounts). Yes Yes Balancé Shee! : Yest* += Partnership books Yes = ** Additional investments or withdrawals of sole proprietors. Scanned with CamScannerus Sole Proprietor (Old set of books is used: Partnership versus $ (Old set of books is Used: retain boo Oks of Parinership) | nooks of "Books of Proprietor roene Adjusting entries . . 7 ang + Closing entries (rec! accounts), : a Yes Investments. ° No Balance Sheet... pee a Partnership versus Sole Proprietor (New set of books is used) tes Books of Books of ot Sole Proprietor | Partnership ‘took i ‘Adjusting entries............ Yes Yes = Closing entries (real accounts}. Yes Yes Investments .... : Yes** Balance Sheet . i Yes * Portnership Books “* Additional investments or withdrawals of sole proprietor and partners Partnership versus Partnership (Old set of books is used: retain books of one of the Partnership) Books of “Book: of Partnership Partnership. ‘Adjusting entries ....... Yes Yes Closing entries {real accounts Yes No Investments . Yes** Balance Shee! | Yes * Pasinership Books ** Additional investments or withdrawals of partners. Partnership versus Partnership (New set of books is used). | | Books of Books of “Now Se of : Partnership Partnership Books | Adjusting entries ~f Yes Yes | | Closing enties (real accou Yes Yes . | Investments . 5 | ves \ Balance Sheet 28 + Porinership books * additional investments or withdrawals of partners Mustration 1-1: Individual vs. Individual a ilusttotive examples are presented below to appreciate the different vays .! forming a Partnership. The following items are being invested to form AB Partnership: Agree Valve Investment Inve: ment Accounts yy bs ' * 00,000 : 230.000 rl : 420,000 — 200.00 —. = % : : en oGe8 P 400,000 P70.050 | Mortsege ‘on building assumed by the partnership... al ana R00 Assumption 1: Assuming thai F and G aeree thar each partner is to . a equat fo the agreed values of the net assets cach o in rs ortner invesied: To record odjustmants: nothing to adjust since both of them have ne sel of bx Scanned with CamScannerTo close the books: nothing to close since hoth of them have no set of books. To record Investmenrs - Parthership books 100,000 Cash... oa i Inventory .... 100,000 Equipment... 200,000 F, capital , 400,000 Initial investment. Cash. 100,000 Lond . 200,000 Building . 400,000 Mortgage payable .. 200,000 G, copital....... : 500,000 Initiol investment. Assumption 2: Assuming that F and G agree that each partner is to receive an equal capital in “To record adjustments: nothing to adjust since both of them have no set of books. Ta close the books: nothing to close since both of them have no set of books. torecord Investments - Partnership books: Bonus Approach: Cash... Inventory . Equipment... . F, capital? initialinvestment. [ Cosh. Land.... Building. Mortgage payable G, capital... Initial investment. G, Capital. F, Capital Bonus to F 100,000 100,000 200,000 400,600, 50,000 50,000, Total agreed capital (P400,000 + P500,000) ‘Multiplied by: Copital interest (equal) .. Partner's individual capital interest Less: F's capital interest . . Bonus toF.., note: Under the bonus method, there is a c&pital interest transfer of PS0,000 fram G to F to equatize tne Spite! Balances. Such an entty is made if Partner G recognizes that Fis conmibuting something to the fm other than the tangible assets, but the Partners are reluctant to recagnize an intangible asset, 9" value fori cannot be determined objectively. Revaluation (Goodwill) Approach: Cash. : : Inventory . Equipment . F. copital. Initial investment. Cash. tond Building. .... Mortgage payable G, capital . intial investment. 400,000 100,000 200,000 400,000 200,000 500,000. Scanned with CamScannerAssels (or goodwill or intangible asset) E.GODHO 2 fs0c0ssssecenas Goodwil 10 F: [ Totaagreed capital (P500.0007.172] ~ Less: Toial contributed capital (P400,000 FP: Assets (or goodwill or intangible asset) mee SoS setae. Bego.ona | Note: Under thé revaluation (goodwill) approach, igiven 10 each partner F's capital is increased Scognizing an intangible asset of P100,000 It should be (ged 05 0 basis fo determine the total agreed copitel instead of tne ceo eS wet may not give rise 10 a positive revaluation of asset (goodwil). Iris therefore assumed Wat is contributing something of value to the partnership that is intangible in noha, ond whieh Could no! be specifically identified. Unless the intangible is specificaly identiteble, suche @ patent. it should not be probably recognized. mmuePise wep es 100,000 100,000 if equal capital int lerests were to by P100,000. This is accomplished ee Bonus of Revaluation Approach on Initial Investments, A volua portners agree on relative capital interests that are not oigned oath ‘nel iwestnents o Rentifable ossets. Both approaches are equally folerable in aligning the copital aecoun's with the agreement and are equitable in assigning capital interests to individual partners. ‘A decision to use one opproach over ihe other will depend on partners’ agreement teword recording the P100,000 adjustments in assets under the revaluation approach and 50,000 under the bonus approach. ° it there is no specification’ as to what approach may be used, the bonus approach would be prefered {refer to Chapter 3 on the justification of the usage of bonus approach over the revaluation approach.) Also, refer to Chapter 3 regarding goodwill in cases of admission of a partner. Illustration 1-2: Individual vs. Sole Proprietor Below is the balance sheet of H on November 30, 20x4 before accepting | as his partner-to. form HI Partnership: Itis agreed that for purposes of establishing H's i H Partnership Balance Sheet November 30, 20x4 Assets, Cash wees . neceenerseeneee neeeeee *P 100,000 | Accounts receivable.......+ ao | less: Atowance for doubtful accounts .- 2 oo | Notes receivable ci 22500 Merchandise inventory . P 60,000 Equpment......e.ee n= 5.000 55,000 Less: Accumulated depreciation . a P a 000 [Tolol ossets ec cveseeeeesereseseteies Uabilties and Capital P 10,000 [Accounts payable. Toes weaseeee 50,000 Notes poyable...... , ere 705,000 Hcopital... anne ae “£255,000 Total fabities ond copitol ove. seseesnenees . s a is est 10% realizable. ©. The accounts receivable is estimated to be 90% recliee b. Interest at 8% on notes receivable dated March 1, 20x4 is to be accrued. 7 The merchandise inventory is to be valved at 17,500. |. The equipment is under-depreciated by P4.000. © Prepaid expenses of io o90 and accrued expenses of P6,000 are to be recognized. ' ir . + Sto invest cash to obtain a one-third interest in the partnership. ASLUMpIION 1: Old sut of books. Assuming the books of H Is fo be retained by the new partnership: tne folowir NO Procedures are to be foliowed: Scanned with CamScanner interest the following adjustments shall be made:individued Sole N/A Yes NIA No Yest - Yes * Books of H: Partnership books investments of incividuat adcitiona! investments or withdrawals of sole proptetr Books of Sole Proprietor (H): To record adjustments: a. H, capital. . eveeeeee penne 1,500 ‘Allowance for doubtful accounts. . : 1,500- Additional provision computed as follows: - Required atowance: 10% x P40,000 P 4,000 | Less: Previous boiGnce ...... 6.6 eee 2.500 Additionai provision . : . Interest receivable or accrued interest income . 3.000 H, capita! . . . eens 3,000 Interest income for nine months Computed as follows: 50,000 x 8% x 9/12 = P3.000. ¢.H. capital -, $000 Merciiandise inventory - 5,000 Deciine in the value of merchandise. 22,500 - P17.500 = P5,000. dH. capital... ‘4,000 ‘Accumulated depreciation . 4,000 Under depreciation. ©. Prepaid expenses 2,000 H, capitol . - 2,000 |_expenses paid in advance. fH. copital........ Accrued expenses. 6.000 unrecorded expenses. ote: Al ogiustment inot rellecT nominc! accaunis should be Coused through the Copital account. becouse af nominal accounts ore akeady closed at tne time of formation. To close the books: nothing to ciose since the books of H will be retained. To record Investment: Cash 96,750 L capital. 96,750 Initial investment computed as follows: . Unadjusted capital of H.... 205,000 Add (deduct): adjustments: 9. Doubtful acco! (1,500) b. interest income .. .... 3,000 * ¢. Dectine in the value of merchandise........ (5,000), 4d. Under-depreciation . = & 4,000 +e. Prepaid expenses 2,000 Accrued expenses... ---s = £6,000) Adjusted capite! balonce of H 193,500 Givided by. Copitol interest of H 223 Total agreed capita! . 290,250 Muitipfied by: Copitot interest of 1. 3 Investinent of; Mole: The pio! investment of H & oieady recarded in ai ich as TE books ore OFSOdy retained. No further entry # required because there are ne odcitiona! investments or withcrawob made by H. Scanned with CamScannertion 2: New set of Books. The following pr Assi ual vs. sole Proprietor Individual Books of Books of] { Individual Sole Deel o _ Proprietor Fgusiing enties NIA Yes Closing entries (rea! accounts). N/A Yes investments aolonce sheet... + Partnership books ** Investments of incividvat: aditional investments or withcrawol of sole proprietor. Books of Sole Proprietor (H): To record adjustments: a.H. capital... . 7 Allowance for doubtful accounts. Additional provision computed as foilows: Required allowance: 10% x P40,009..... P-4,000 Less: Previous balance . . Adqitional provision ... ‘ocedures.cre to be followed: Yes** Yes 1,500 1,500 b. Interest receivable or accrued interest income ............ 3.000 H, capital... : Bocce bdaseen 2.000 Interest income for nine months computed as follows: 50.000 x 8% x 9/12 = P3,000. c.H, capitol..... Merchandise inventory . . Decline in the value of merchandise. P22,500 - P17.500 = P5,000. @.H, capital... Accumulated depreciation . Under depreciatior e. Prepaid expenses H, capital. . pa000 . Expenses paid in advance. f. H, capital... Accrued expenses Unrecorded expenses. Note: Air agjustment that Teflecis nominal uccounts should be coursed through the capital account, since all ngminal accounts are already closed at the tv.1e of formation. To close the books: | Allowance for doubiful accounts Accumulated depreciation Accrued expenses : Accounts payable Notes payable H, capital Cash... ; Notes receivable .. . Interest receivable Accounts receivable Merchandise inventory Prepaid expenses . Equipment . . Closing'‘of real accounts. £000 4,000 4,000 2,000 2,00u | 6,000 6.000 4,000 9.000 6,000 10,000 50,000 193,500 100,000 40,000 3,000 $0,009 17,500 2.000 60,000 Scanned with CamScannerNew Set of Books (Partnership Books): To record investments: « Ta000 Cosh... oa Notes receivable 3.000 Interest receivable , Accounts receivable 40,000 Merchandise ipventory . . 17,500 Prepaid expenses . 2,000 Equipment . 51.000 Allowance for doubtful accounts . 4,000 /Accrued expenses . 6,000 Accounts payable . 10,000 Notes payable. . 50,000 H, capital..... 6.6. 193,500 Initial investment. Cash........ 96,750 L capital. 96,750 - Initial investment. Note: : 1. No further entries are required because there ore no additional investments or withdrawals made by H, : 2. It should be recognized that accumulated depreciation is not carried forward fo the newly formed partnership in the some fashion with business combination . The reason is that the net amount will be depreciated based on the remaining or revised life of the depreciable asset. The balance sheet.for both cases presented above is as follows. HI Partnership: Balance Sheet November 30, 20x4.. Assets COSN ween sees a j 196,750 Accounts receivables... 3 oe P 40,000. Less: Alowance for doubtful accounts . "4,000 36,000 Notes receivable . 50,000 Interest receivable 3,000 Merchandise Inventory . 17/500 7 2,000 P'60,000 —2000 __$1,000 P.356.250 J P 6,000 10,000 50,000 P 6,000 P 193,500 Total abilities Gnd Capitol. £290,250 Mustration 1-3: Sole Proprietor vs. Sole Proprietor On October 1, 20x4, Jand K Drofit and loss in the rato of ‘ond assume business liabilities ‘adjustments: ~B.356.250 | decided to pool their assets ii 4 a assets and form a partnership. They alloc “ ES 5 for teen, Tespectively. The firm is to take over business as# ‘Apitals are to be based on net assets transferred after Scanned with CamScanner@. J's inventory amounting to P10,000 is worthless, while Kk" amounted to P125,000. b. Uncollectible accounts of P6.000 for J is to be recognized in the books of K. Accrued rent income of P10,000 on J, and ‘accrued salari recognized on their respective books. aries of 8.000 on K should be, Interest at 16% on Notes Receivable dated August 17, 20x4 shoul The office supplies unused amounted to P20,000. eet The equipment's agreed value amounted to P50,000. The fumiture and fixtures has a fair market Value of P90,000, Interest at 12% on Notes Payable dated July 1, 20x4 should be accrued. Use 340 days a year. K has an unrecorded patent amounting to P40,000 and is to invest the addi necessary to have a 60% interest in the new firm ot 'S agréed valve of inventory Provided; a 5% allowance is,to be FO-9a 9 lance sheets for J and K on October 1, 20x4 before adjustments are given below: Cc ‘Accounts a a K Cash. : Accounts Receivable | hie * soon Aowance for doubt accu tooo | (S00) Notes Receivable 50,000 Merchandise Inventory. Office Supplies "37000 nm Equipment 5 100,000 Accumulated depreciation - equipment... -.-ssssv+.- (45,000) Furiture ond Fixtures... 120.000 Accumulated depreciation - fumiture and fixtures {20,900} Total Assets... ae P_ava.o00 | e_440.000 Accounts Payable . 133,000 | P 100,000 Notes Payable 50,000 0- Capitals eeeet 310,000" 360,000 Total Liabilities ond Capital e p.493.000 |. 460,000 1: Old sét of books. Assuming the books of K Is to be retained by the new ip. the following procedures are to be followed: - Proprietor vs. Sole Proprietor 5 (GQ) Books of || (K) *Books of Sole Proprietor_| Sole Proprietor ‘Adjusting enties...... SEsesSesaSREDOeEeCCS Yes Yes Closing entries (teal accounts) ....- veveseeef YO No Investments. sees . . . Yes** Balance Sheet. Yes * Partnership books ** Additional investments or withdrawals of sole proprietors. of Sole Proprietor. - record adjustments: _ a Books of J Books of ] a. J, copital...... ve eses+ 10,000 (a, Merchandise inventory 5.000 Merchandise Inventory . . . 10,000 K, capital . 5,000 Worthiess inventory. Upward revaluation B.d,copital........-- 6,000 b.K,capifol........ 2.500 Allowance for doubtful * “Allowance for doubtful Account: paens 6,000 | Accounts...... . 2,500 Additional provision Additional provision Required allowance’ 9% x?150,000 P75 Less: Previous Balonce P 5000 Ailing Prowipon P2500 iia Scanned with CamScanner{ c.Rent receivable . \ fares 10,000 c. K. capital... |. capitol . . 10,000 Salaries payable. 8.000 |___ Income eomed. Unpaid salaries. d. interest receivable K, capital. . . 1,000 Interest income from August 17 t0 October 1. 50,000 x 16% x 45/360. e. J, capital... Office supoties. 7,000 Expired office supplies. ¥. J. copitol A ‘Accumviated depreciation - equipment 5,000 Under-depreciated. 9. K, capital + 10,000 Accumulated depreciation- furniture and fixtures, 10,000 Under-depreciated. : 4. J, capital 1,500 Interest payable. 1,500 Interest expense from July 1 to October ? 50,000 x 12% x, i, Patent. . K, capital .. 40.000 Unecorded patent. Unadjusted capital ot J P 310,000 Unadjusted capital of K . P 360,000 Add(deduct): adjustmen” Add(deduct): adjustments: @. Worthless merchand'se- { 10,000) a. Meteandise revaluation. . 5.000 b. Doubtful accounis ... (6,000) b! Dowsttul account: (2,500) c.Rentincome....... 10,000 c.Salares. (8,000) ©. Office supplies exouns (7,000) d. Interest income. 1,000 t. Additional depreci: Hie g. Additional — ion. Reco 10,000) h. interest expense ‘scPatent Adjusted capital of J e- cme 220,500 djusted capital of K PRT 385,500 - Books of K “Allowance for doubt. Not apolicabie. accounts 10,000 7 | Accumulated deoreciation- fn |, equipment - 50,000 1 | Accounts payabie 133,900 | Notes payabie . 50,000 | Interest payable 1,500 { | J, capita! 290,500 j Cash. 75,000 Accounts receivatie. 180,000 Merchancise inventory . 150,000 Office suppiies 20,000 Equipment . 100,000 Reni receivabie 10,000 Close the books of 4 Scanned with CamScannerof K- To record Investments: Books ‘Books of J Not applicable. The following observations should be noted! lL Books of K Cash. Accounts receivable Merchandise inventory... Office supplies... 20) Equipment (ne!) 50.000 Rent receivable... 10,000 Allowance for doubttul accounts... ‘Accounts payable Notes payable . oon -50,000 Interest payable . et 1,500 J. capitol... 290,500 Investment of K. 10,000 133,000 Accounts receivable is normally recorded at gross amount less allowance. The reason for such pracuce is that the new partnership seldom changes the percent of doubtful accounts, usually they based it on the original estimate wherein the gross amount is the basis. 2.. Assets that are based on depreciation (and amortization) is recorded at net amount because the fife of such assets are usually revised by the new partneiship. The estimated life of such a.sets may change overtime because they are based either on functional or physical factors. Assumption 2: New set of books. The following procedures are to be followed: Sole Proprietor vs. Sole Proprietor (J) Books of (K) Books of New Set of Sole Proprietor Sole Proprietor Books “Adjusting entries Yes Yes Closing entries (real accounts) Yes Yes . Investments yes Balance Sheet es Books of Sole Propriefor Torecord adjustments: — a. J, capital... . 10,000 a. ‘Merchandise inventory. ‘Merchandise Inventory « -- 10.000 Kapital 5,000 Worthiess inventory. Upward reveivation, = tol $000 DK, COpMG.ss..ssessssse) 2500 * ntowonce toy doubttl Allowance fer doubtful Accouns 6,000 ‘Accounts... 2,500 Addition ' an Additional provision. Prows Required allowance: 5% x P150,000. .. P7500 Less: Previous Boronce....... £090 Adkitionet Provision, 22.500 TIT T8000 SOK COpIGL. ce eeet esses 8,000 10,000, Salaries payabie........+ 8,000 Unpaid solaris. ; | diinteresi receivable ........ 1,000 K. copital. a 1,000 inieres! income tom August 17 to October i. | 50,000 x 16% x 45/360 Scanned with CamScannerScanned with CamScanner 5,000 furniture and fixtures... . 10,000 - Under-depreciated. h.J, capital. . Interest payable. 1,500 Interest expense from July Ito October 1 P 50,000 x 12% x 3/12 in 7. Patent 40,000 a K, capital . 40.000 Unrecorded patent. Unadjusted capital of J. P-310,000 | Unadjusted capital of K P 360,000 Add(deduct): adjustments: ‘Add(deduct): adjustment 2. Worthless merchandise (10,000) ‘a. Merchandise revaluation. , 5,000 b. Doubtful accounts . (6,000) b. Doubttul accounts . . () Zs00) c. Rent income : 40,000 ¢. Salaries... . . {_ 8.000) e. Office supplies expense .. (_ 7,000) d. Interest incame. . 1,000: . Additional depreciation (5.000) g. Additional depreciation .. 10,000). h. Interest expense . £1,500) fH, Patent 2 we. + 40000 | Adjusted capital of Js. P290.500 | Adjusted capital of K .. P3855 | - To close the books: . Books of J E Rooks of K Allowance for doubtful “Allowance fer doubtful ‘accounts... 10,000 accounts. -+ 7.500 Accumulated depreciation Accunjstated depreciation— equipment .. «$0,000 fumiture’s Gnd fixtures... 30,000 Accountsiayable . 133,000 ‘Accounts payable ..; 100,000 Notes payable 50,000 Salaries payable 8,000 » Interest payable . 1,500, K, capital . 385,500 J.copital.... 290,500 Cash. 45,000 Cash. 75,009 | Accounts receivable . 150,000 Accounts receivable . 180,000 . Notes receivable . 50,000 Merchandise inventory . . 150,000 Interest receivable . 1,000 Office supplies 20,000,.} Merchandise inventory . 125,000 Equipment .... 100,000 Fumiture and fixtures . 120,000 Rent receivable 19,000 Patent. ... 40,000 Close the books of J Close the books of K. - New Set of Books - To record investments: Cash. ; Accounts receivable ...., Hs Merchandise inventory . ” §0,000 Office supplies .... 20.000 Equipment (net) 50,000 Rent Receivable . eee 10,000 Allowance for doubtful accounts... 10,000 Accounts payable 33,000 Notes payable 50,000 Interest payable . i J. Capital. 1.500 390,500 Investments of J. ‘ MaCash . ... Accounts receivable . Notes receivable . .. Interest receivable ... Merchandise inventory . 125,000 Fumiture and fixtures (net) . 90,000 Patent................ ete eens 40,000 Allowance for doubtful accounts . 7,500 Accounts payable ........... 100,000 Salaries payable . 8,000 K, capital 385,500 Investments of K. : ye balance sheet after formation is as follows: Jand K Partnership Balance Sheet October 1, 20x4 1 P 120,000 -312,500 Notes receivable . . 50,000 Interest réteivable . 1,000 Rent receivable ... 10,000 Merchandise Inventory 275,000 Office supplies . . 20,000 Equipment (net) . 50,000 Furniture and fixtures (net) . 90,000 Patent... 40,000 Total Assets . * B.968.500 Uabilities and Capital Liabilities : Salaries payable . P 8,000 Accounts payable . 133,000 Notes payable . 50,000 Interest payable —1,500 Total Liabilities . .. P 192,500 Capital J, capital P 390,500 K, capital 385,500 Total Capital P.776,000 Total Liabilities and Capital 968,500 Scanned with CamScanner