NATURE AND FORMATION OF A PARTNERSHIP

AL F. BERBANO

ACCOUNTING TERMINOLOGIES:

Articles of Partnership – a written agreement among the partners which

governs the formation, operation, and dissolution of the partnership.

Capitalist partner – a partner who contributes capital in the form of money or

property.

Capitalist Industrial partner – a partner who contributes capital in the form

of money or property and industry.

Industrial partner – a partner who contributes industry, labor, skill, talent or

service in the partnership.

Partnership – a contract whereby two or more persons bind themselves to

contribute money, property or industry into a common fund with the intention
of dividing the profits among themselves.

PROBLEM EXERCISES:

P1 Give the entry to record the investment of Anthony into the partnership
under each of the following independent assumptions:
a. Cash of P400,000.
b. Accounts receivable of P500,000 with an allowance for uncollectible
accounts of P50,000.
c. Inventories that cost P300,000 using the moving average method
accepted by the partnership at its net realizable value of 80% of
average cost.
d. Equipment that cost P900,000 with a book value of P300,000 after four
years of use without salvage value. The Equipment should have been
depreciated over a 10-year useful life.

P2 Arnel and Boyet have decided to form a partnership. Arnel invests the
assets presented below at their agreed valuation, and also transfers his
liabilities to the new firm.

Ledger Balances Agreed Valuation

Cash 450,000 450,000
Accounts receivable 180,000 180,000
Allowance for doubtful accounts 15,000 10,000
Merchandise inventory 300,000 270,000
Equipment 180,000 125,000
Accumulated depreciation 30,000 -0-
Accounts payable 105,000 105,000
Notes payable 90,000 90,000

Boyet agrees to invest cash for a one-third interest in the firm.

Requirements:
1. Prepare the entries to record the investments of Arnel and Boyet in the
partnership’s new set of books.
2. Prepare entries to adjust and close the balances of accounts in the
books of Arnel.
P3 Carlo admits Dante to a partnership interest in his business. Accounts
in the ledger of Carlo on January 1, 2019, before the admission of Dante,
show the following:

Debit Credit
Cash 208,000
Accounts receivable 460,000
Merchandise inventory 1,440,000
Accounts payable 496,000
Carlo, capital 1,612,000

It is agreed that for the purpose of establishing the interest of Carlo, the
following adjustments shall be made:

1. An allowance for uncollectible accounts of P25,000 is to be

established.
2. The merchandise is to be valued at P1,600,000.
3. Prepaid expenses of P72,000 and unrecorded liability of P102,000 are
to be recognized.

Dante is to invest sufficient cash for an equal interest in the partnership.

Requirements:
1. Assuming the new partnership will use the books of Carlo, give the
entries to adjust the account balances of Carlo and to record the
investment of Dante.
2. Assuming the new partnership will open new set of books, give entries
to record the investment of Carlo and Dante.
3. Prepare a statement of financial position for the new partnership.

P4 Frank and Gerry have decided to form a partnership. Frank

contributes cash of P1,000,000 and Gerry contributes Land with a fair market
value of P800,000 and a Building with a fair market value of P1,900,000.
Gerry purchased the Land and Building five (5) years ago for P750,000.
Gerry’s book value of the Land is P175,000 and the book value of the
Building is P600,000. The P1,500,000 mortgage on the Land and Building is
to be assumed by the partnership. The partners agree to share profits and
losses in the ratio of 3:2, respectively.

Requirements:
Prepare the journal entries to record the formation of the partnership
under each of the following assumptions:
1. Each partner is credited for the full amount of net assets invested.
2. Each partner initially is to have equal interest in partnership capital.

P5 The statement of financial position of Harry as of December 1, 2019 is as

follows:

Harry Company
Statement of Financial Position
December 1, 2019
Assets
Cash 600,000
Notes receivable 375,000
Accounts receivable 2,250,000
Less: Allowance for doubtful accounts 150,000 2,100,000
Merchandise inventory 600,000
Furniture and equipment 1,800,000
Less: Accumulated depreciation 450,000 1,350,000
TOTAL ASSETS 5,025,000
Liabilities and Capital
Notes payable 750,000
Accounts payable 1,575,000
Harry, capital 2,700,000
TOTAL LIABILITIES and CAPITAL 5,025,000
Kirby offers to invest cash to give him an equity credit equal to one-half of the
equity of Harry after adjustments for the items below. Harry accepted the
offer.
a. The merchandise is to be valued at P650,000.
b. The allowance for doubtful accounts is P225,000.
c. Interest accrued on notes receivable should be reflected. The note is
dated September 30, 2019 and bears interest at 6%.
d. Interest accrued on notes payable for the period September 1 to
December 1, 2019 should be recognized. The interest rate on the note
is 10%.
e. The furniture and equipment are one-third depreciated.
f. Office supplies on hand, which have been charged to expense,
amounted to P15,000. These supplies will be used by the new
partnership.
Requirements:
1. Prepare journal entries on the books of Harry to give effect to the
partnership formation.
2. Prepare the statement of financial position for the new partnership.

P6 On October 1, 2019, Leandro and Marco decided to pool their assets and
form a partnership. The firm is to take over business assets and assume
business liabilities, equities are to be based on net assets transferred after
the following adjustments:
a. Marco’s inventory is to be valued at P350,000.
b. An allowance for uncollectible accounts of P9,000 and P7,500,
respectively should be set-up.
c. Accrued expenses of P21,000 are to be recognized on Leandro’s
books.
d. Marco is to contribute sufficient cash to give him a 60% interest in the
new firm.
Statements of financial position for Leandro and Marco on October 1 before
adjustments are presented below:

Leandro Marco
Cash 187,500 112,500
Accounts receivable 450,000 375,000
Merchandise inventory 400,000 300,000
Equipment 250,000 300,000
Accumulated depreciation (112,500) (37,500)
Total Assets 1,175,000 1,050,000

Accounts payable 345,000 250,000

Capital 830,000 800,000
Total Liabilities and 1,175,000 1,050,000

Requirements:
1. Give the entries to adjust and close the books of Leandro.
2. Give the entries required on the books of Marco upon the formation of
the partnership Leandro and Marco.
P7 Partners Malou and Norma agreed to combine their businesses into a
partnership. The statement of financial position accounts of Malou and
Norma are shown below:

MALOU NORMA
Book Agreed Book Agreed
Value Value Value Value
Cash 50,000 50,000 70,000 70,000
Accounts receivable 460,000 460,000 490,000 490,000
Allowance for bad debts 30,000 40,000 40,000 50,000
Merchandise inventory 900,000 950,000 720,000 700,000
Equipment 180,000 120,000 90,000 70,000
Accumulated depreciation 36,000 -0- 9,000 -0-
Furniture and Fixtures 120,000 90,000 -0- -0-
Accumulated depreciation 24,000 -0- -0- -0-
Accounts payable 540,000 540,000 360,000 360,000

Instructions: Give the journal entries to record the partnership

formation under each of the following independent assumptions:
1. A new set of books are opened for the partnership.
2. The books of Malou are to be used by the partnership.

P8 On January 1, 2019, James, Davis and Kuzma decided to form a

partnership. James, a sole proprietor, will transfer to the partnership his net
assets, excluding cash. Davis will contribute cash in an amount equal to one
and a half times the investment of James. Kuzma will contribute a piece of
land with an agreed value of P1,800,000 subject to a mortgage of P300,000
to be assumed by the partnership. The statement of financial position of
James is shown below.

James Company
Statement of Financial Position
January 1, 2019

ASSETS
Cash P360,000
Accounts receivable P840,000
Less: Allowance for doubtful accounts 90,000 750,000
Merchandise inventory 1,200,000
Furniture and equipment 1,050,000
Less: Accumulated depreciation 210,000 840,000
TOTAL ASSETS P3,150,000
LIABILITIES and CAPITAL
Accounts payable P450,000
James, capital 2,700,000
TOTAL LIABILITIES and CAPITAL P3,150,000

The Articles of Co-partnership executed for the purpose calls for adjustments
to the assets, as follows:
a. The allowance for doubtful accounts should be increased by P150,000.
b. The inventories should be valued at P1,000,000 only.
c. The furniture and equipment are underdepreciated by P240,000.
d. The new partnership is to credit James with a capital of P2,000,000.
The excess capital credit over the fair value of the net assets
transferred is to be recognized as goodwill.
Instructions: Prepare the entries to record the partnership formation
assuming:
1. The books of James are to be used by the partnership.
2. New set of books are to be opened for the partnership.