Partnership formation - For managing partner

- Investments shall be recorded at FV or - Considered temporary drawing (Dr.

market price. Drawing; Cr. Cash), close the drawing
- Mortgage: if silent, not assumed by the account to capital @ yr end
partnership. - Allowed even losses (if silent), unless
- Bonus: Does not increase the total stated.
contributed capital.
- If Net income < Salaries, use pro-rata
Interest 50% 25% 25% Total capital
Contributed cap. 135,000 28,000 68,500 231,500 basis based on the amount of
Bonus (19,250) 29,875 (10,625) 0 salaries/interest that is intended to
Agreed cap. 115,750 57,875 57,875 231,500 receive.
Distribute the Agreed Capital. D. Bonus- to managing partner
a. Net income b4 sal., int., & bonus
- Goodwill: the total invt. of each partner
B= NI x bonus rate
shall be divided to their agreed interest,
b. Net income b4 sal., int., but after
the highest amount shall be the basis of
bonus
their partnership capital and no
goodwill shall be distributed to the B= (NI-B) x Br
partner (used as a basis of agreed c. Net income after sal., and int. but
capital). b4 bonus
Interest 50% 25% 25% Total capital B= (NI-S-I) x Br
Contributed cap. 135,000 28,000 68,500 231,500 d. Net income after sal, int., and
Goodwill 2,000 40,500 0 42,500
bonus
Agreed cap. 137,000 68,500 68,500 274,000
CC divide interest 270,000 122,000 274,000 Goodwill inc.
B= [(NI-S-I-B) x Br
(use highest CC E. Changes in the P/L ratio and prior
amount) period errors.
- The ratio should be used is the ratio
Journal entries: Formation when the transaction occurred.
Adj. entries Use capital accnt. for the adj of real
accnts. - The ratio should be used in the adj. of
To close the books Dr. capital, liabilities, and conta- the capital accnt. cause by errors is the
accnts(AFDA, Acc. Dep’n) ratio when the errors occurred.
Cr. All assets
Record the invt. of each Dr. Assets and contra-accnts, Cr. DISSOLUTION
partner Liabilities and capital.
-Two partners with existing business: - Original association for purpose of
a. If sole proprietor wants to admit as carrying activities has ended. Due to
partner to another sole proprietor, changes in ownership interest.
his books will be adjusted and A. Admission of a partner
closed. Adjustments only to the sole 1. Admission by purchase – no
proprietor who accepts the increase in the capital balance of
admission. v the partnership. Purchase only the
b. If two sole proprietor wants to capital of the existing partners.
create a new business partnership, 2. Admission by investment- increases
both their accounts shall be the capital balance of the
adjusted and closed in order to partnership.
create new business. a. Bonus – contributed capital =
PARTNERSHIP OPERATIONS total agreed capital. Either
increase/decrease on the
A. Distribution of profits capital balances of the old
- Equally partner or the incoming
- Arbitrary ratio partner.
- Original capital balances b. Goodwill- Contributed capital <
- Beg. Capital balances agreed capital cause by
- End. Capital balances goodwill, goodwill shall be
- Average capital balances contributed to new or old
a. Simple – add beg & end then divide partner.
to two. c. Asset revaluation – adj. to the
b. Pero-Month method- Capital capital balance of the old partn
ers due to inc/dec in the FV of
balance X no. of months B4 changes
the assets.
and divide to 12 months.
B. Withdrawal/retirement of a partner
B. Interest on partner’s capital
Adjustments to capital b4
- Must be enforce even net loss retirement:
C. Salaries  distribute using P/L to partners
  adj. inc./dec. in the value of
assets
 Close the capital account of the
retiring partner.
If the cash received by the retiring
partner is > the capital accnt, use
either goodwill(partial or full)/
bonus method on the excess.
C. Death of a partner – estate of the
deceased partner will be established.
Same process with retirement but the
adj. and closing of capital accnt is made
not @ the date of death.
D. Incorporation of the partnership
Steps if partnership books retained:
 Adjustments
 Closing capital accnts to Share
capital & share premium
Steps if new books opened for the
Corp.:
 Adjustments
 Close the books and capital
accnt are close to Stocks of
Corp. accnt.
 Open the books and use share
capital and premium accnt.
Partnership Liquidation
Liquidation- winding up
- B4 liquidation, all accounts must be
adjusted and closed, any income or loss
shall be transferred to capital accnts.
- Examine the personal assets of the
partners (solvent/insolvent)
- Expenses of liquidation – incurred
during liquidation (lega & accounting
exp.) are allocated to partners accnt.
1. Cash distribution rule
a. First, outside creditors
b. 2nd, partners loan accnt.
-right of offset- partner with Dr.
capital bal. can offset it using his
loan accnt.
c. 3rd, capital accnts.
2. Liquidation procedures (steps)
a. Realization and distribution of
gain/loss to capital accnt. (P/L
ratio).
b. Payment of exp.
c. Payment of liabilities
d. Elimination of capital deficiencies
(Dr. bal. on capital accnt)
-With loan balance (offset)
-If no loan and solvent, additional
investment of him
- if insolvent, let other partners
absorb his deficiency (capital accnt).
- If silent, deficient partner is
insolvent.
e. Payment to partner (order of
priority)
- loan accnts
-capital accnts.
Notes:
- Partnership is insolvent and partners
are personally insolvent: according to
partnership code, personal asset of the
partner must pay first their personal
liabilities before the liabilities of the
partnership (same with on the part of
the partnership). Check the personal
asset and liabilities of the partner if
he/she is capable of paying or offsetting
the liabilities and Dr. capital balances of
his co-partner. At the extent only of his
remaining personal asset.
- Partnership is insolvent but partners or
some partners are personally solvent:
make additional investment to pay the
debt of the partnership and Dr.
balances on the capital accnt. of his/her
co-partner.
- A/R, Invty, and other assets shall be
collected and sold, any differences are
considered gain/loss
- Any receivable of the partnership from
a partner will be closed to his own
capital accnt.
Partnership liquidation (INSTALLMENT)
A. Procedures
1. Sell assets and distribute the
realized gain/loss
2. Pay liquidation exp. and unrecorded
liabilities using the capital accounts
of the partners.
3. Pay liabilities to outsiders
4. Distribute cash to the partners after
possible losses have been
apportioned using schedule of safe
payments or in accordance with a
cash disbursement program.
B. Schedule of Safe Payments
- It is a monthly schedule that identifies
who among the partners will receive
and what amount of cash distribution
after the sale of assets.
- Formula:
A B
Capital bal. Xx Xx
Add: Loans Xx xx
Total interest XX XX
Less: Possible loss* (xx) (xx)
Balances XX (XX)
Less: Add’l possible loss to A** (xx) xx
Payment to partners XX XX
*Possible loss= Total/remaining unsold assets +
Cash withheld(current month). (Distribute using
P/L ratio)
**Add’l possible loss- the negative balance of
the partner will be eliminated using the another
partner with a positive balance.
- Cash withheld- the amount restricted/
intended for the payment of expenses and
unrecorded liabilities.
C. Cash distribution program
 - Permits the partners to determine how distributed to the unsecured
cash should be safety distributed if and creditors
when it becomes available. b. Pledged to partially secured
- Formula creditors- Asset < Liability,
Balances Cash payments partial payment only/ @ the
A B C A B C Total extent of asset’s value.
Partner’s 40 45 54
c. Free assets- not pledged as
interest
(capital + security, the excess of assets
loan) after payment of fully and
Divide: P/L 40% 30% 30% partially secured creditors.
ratio Intended for the unsecured
Loss 100 150 180
liabilities.
absorption
balances 2. Liabilities
Priority I - C (30) 9 9 a. Unsecured with priority- order
Balances 100 150 150 of priority: Administrative
Priority II – (50) (50) 15 15 30 expenses, unpaid employees,
B&C and taxes.
Balances 100 100 100 15 24 30 b. Fully secured creditors-
Liability<Asset
- Therefore, when cash is available for c. Partially secured creditors-
payment to partner, the 1st priority is liability>asset, any excess shall
partner C with the amount of 9K, if the fall to unsecured portion.
cash is not enough, then the remainder d. Unsecured creditors- paid by
shall be paid at time when cash are the use of free assets.
available. - Accounting and reporting of for
trustee/receiver
CORPORATION IN FINANCIAL DIFICULTY  Open a new book then change
(INSOLVENT) the SHE to Estate equity
- According to Section 1045 of Insolvency account
act, its fin’l condition is such that the  Use the estate equity accnt in
sum of all its debts is greater than all of adj. to FV or the difference
its assets @FV. when collection and sales are
- Distinction between Liquidation & made
Reorganization and Debt restructuring B. Reorganization and Debt restructuring
Liquidation Reorganization and Debt restr. 1. Reorganization
Sold the assets of the Creditors must be convinced -negative balance in the retained
company and the proceeds that a greater return will be earnings.
will be distributed to the achieved by helping to * use add’l paid in capital and gain
creditors. rehabilitate the debtor. on debt discharge in adj. of debts.
Discontinuance of the Continue to operate but under The last adj. shall be the R/E
operation. the new management due to (deficit) which shall be closed to the
rehabilitation ordered of the APIC and total gain on debt
court/SEC. restructuring.
A. Corporate liquidation 2. Debt restructuring – modification of
- Requirements: debt terms to alleviate the short
 Filing a voluntary petition with term cash needs of the debtor
the SEC. Given 3 yrs from date (lowering the interest, forgive some
of approval to wind up. accrued interest).
 SEC will appoint a
receiver/trustee following the INSTALLMENT SALES
filling of petition for Cost recovery method
bankruptcy. - Interest and principal received should
- Financial report: be applied first to the cost of the
 Statement of affairs- report property. When the cost is totally
shows the available asset and recovered, the remaining collection are
debts of the corp. considered as profit.
 Statement of realization and Gross profit realization
liquidation reported by the - The opposite of cost recovery in which
receiver. the collections are treated first as gross
- Statement Affairs profit until fully recognized.
1. Assets- adj. @ their FV Installment method
a. Pledged to fully secured - Part of collections are treated as gross
creditors- Asset > Liabilities profit using the gross profit rate.
secured. The excess shall be
Date of sale:
Cash (downpayment)
Installment contracts rec.
Installment sales
Cost of installment sales
Merchandise invty.
Date of collection:
Cash
Installment contracts rec.
Interest income (if any)
Year end:
Installment sales
Cost of installment sales
Deferred gross profit
-The deferred gross profit shall be debited when
collections are made.
When earned:
Deferred gross profit
Realized gross profit (gross profit rate)
-Interest collected are not included in the
computation of Realized gross profit. Principal
only since it represents the total receivable.
Defaults and repossession
Repossessed merchandise (FMV)
Deferred gross profit
Loss on repossession
Installment contracts rec.
Trade-ins
Merchandise invty.- Trade-in(use *NRV amount)
Cash (down payment)
Over allowance on trade-in
Installment contracts rec.
Installment sales
Under allowance on trade-in
Value of trade in value xx
Less: NRV of trade-in
Estimated resale value xx
Less: Reconditioning cost (xx)
Normal profit margin (xx) *xx
Over/under allowance xx

Construction contracts
- If total cost of construction > Contract
price, such total loss shall immediately
recognize regardless of what method
used. Either cost recovery method or
percentage of completion method.