Acct102 Midterm Notes

MODULE 1: NATURE OF PARTNERSHIP
Brief History of Partnership

 In Ancient Rome at 2200 B.C, partnership was called societa.
 Before the effectivity of the new Civil Code on August 30, 1950, there are 2 types of
partnerships:
1. Commercial – governed by the Code of Commerce
2. Old Civil Code – governed by the civil or Non-Commercial Partnerships
Partnership
 As defined in the Article 1767 of the Civil Code of the Philippines, “two or more persons bind
themselves to contribute money, property, or industry to a common fund, with the intention
of dividing the profit among themselves.”
 According to Article 1768 of the Civil Code of the Philippines, “The partnership has a
juridical personality separate and distinct from that of each of the partners”
 Each owner of the partnership is called a partner.
 In order to form the partnership, partners have to invest in the entity. The investment may
be in the form of fixed assets which is taken in the partnership business at the value as
mutually decided among the partners. The investment may be in the form of cash as well.
Characteristics of a Partnership
1. Mutual Agency – Any partner may act as an agent of the partnership to bind the other
partners to a contract if he/she is acting within his/her express or implied authority.
2. Unlimited Liability – All partners (except limited partners) are personally liable for all the
debts incurred by the partnership. The person assets of any partner may be used to satisfy
the creditors’ claims of the partnership if the partnership’s assets are not enough to settle
the liabilities to outsiders upon liquidation.
3. Limited Life – A partnership may be dissolved at any time by the admission, death,
insolvency, incapability, withdrawal of a partner, or expiration of the term specified in the
partnership agreement.
4. Mutual Participation in Profits or Mutual Contribution – There cannot be a partnership
without contribution of money, property, or industry to a common fund. With this, a partner
has the right to share in partnership profits.
5. Legal Entity – A partnership has legal personality separate and distinct from that of each of
the partners.
6. Co-ownership of Contributed Assets – Property contributed to the partnership are owned
by the partnership by virtue of its separate and distinct juridical personality. All partners
jointly own an asset contributed by one partner into the business.
7. Income Tax – Partnerships are subject to tax at the rate of 30% per taxable income. This is
under R.A. 9337
8. Division of Profits or Losses – The essence of partnership is that each partner must share
in the profits or losses of the venture.
9. Partner’s Equity Accounts – Each partner has a capital account and a withdrawal account
that serves similar functions as the related accounts for sole proprietorships.
Advantages and Disadvantages of a Partnership

Advantages Disadvantages
Easy and less expensive to organize. It is only Less stable because it is easily dissolved and
formed by a simple contract between two or thus unstable.
more persons.
The unlimited liability of the partners makes it There is constant likelihood of dissension and
reliable from the point of view of creditors. disagreement when each of the partners has
the same authority in the management of the
firm.
Combines special skills, expertise, and A partner may be subject to personal liability
experience of the partners. This brings greater for the wrongful acts or omissions of his
financial capability to the business. associates.
The participation in the business by more than There is a divided authority among the
one person makes possible a closer supervision partners.
of all its activities.
The direct gain to the partners is an incentive Mutual agency and unlimited liability may
to give close attention to the business. create personal obligations to partners.
Offers relative freedom and flexibility of action Less effective than a corporation in raising
in decision-making. large amounts of capital.
Classifications of Partnerships
1. According to Object:
a. Universal Partnership of all Present Property – All contributions of each partner
become a part of the partnership fund with an intention of dividing the profits the
partners may acquire therewith.
b. Universal Partnership of All Profit – All that the partners may acquire by their industry
or work during the existence of the partnership and the use of whatever the partners
contributed at the time of the institution of the contract belong to the partnership.
c. Particular Partnership – The object of the partnership is determinate. This includes it’s
use or fruit, specific undertaking, or the exercise of a profession or vocation.
2. According to Liability:
a. General Co-Partnership – All partners are liable prorata and to the extent of their
separate properties.
b. Limited – The limited partners are liable only to the extent of their personal
contributions. The law states that there shall be at least one general partner in a limited
partnership. The word “Limited” or acronym “LTD” is added to the name of the
partnership to inform the public that it is a limited partnership.
3. According to Duration:
a. Partnership at Will – One in which no term is specified and is not formed for any
particular undertaking or venture. This type of partnership may be terminated any time
by mutual agreement of the partners or the will of one alone.
b. Partnership with a Fixed Term – One in which the term or period for which the
partnership is to exist is agreed upon. It may also refer to a partnership formed for a
particular undertaking or venture.
4. According to Purpose:
a. Commercial or Trading Partnership – One formed for the transaction of business.
b. Professional or Non-Trading Partnership – One formed for the exercise of profession.
5. According to Legality of Existence:
a. De Jure Partnership – One which has complied with all the legal requirements for its
establishment.
b. De Facto Partnership – One which has failed to comply with all the legal requirements
for its establishment.
6. According to Representation to Others:
a. Ordinary Partnership – One which actually exists among the partners and also as to
third persons.
b. Partnership by Estoppel – One which in reality is not a partnership but is considered a
partnership only in relation to those who, by their conduct or omission, are precluded to
deny or disprove its existence.
7. According to Publicity:
a. Secret Partnership – One wherein the existence pf certain persons as partners are not
made known to the public by any one of the partners.
b. Open Partnership – One whose existence is made known to the public by the members
of the firm.
Classifications of Partners
1. According to Contribution:
a. Capitalist Partner – One who contributes money or property to the common fund of the
partnership.
b. Industrial Partner – One who contributes his knowledge or personal service to the
partnership.
c. Capitalist Industrial Partner – One who contributes money, property, knowledge, and
personal service to the partnership.
2. According to Liability:
a. Limited Partner – One who is liable only to the extent of his capital contribution.
b. General Partner – One who is liable to the extent of his separate property after all the
assets of the partnership are exhausted.
3. According to Management:
a. Managing Partner – One whom the partners had appointed as manager of the
partnership.
b. Nominal Partner – One who is not really a partner nor being a party to the partnership
agreement, but is made liable as a partner for the protection of innocent third persons.
c. Liquidating Partner – One who is designated to wind up or settle the affairs of the
partnership after dissolution.
d. Silent Partner – One who does not take part in the management of the partnership
affairs though may be known as a partner.
e. Dormant Partner – One who does not take part in the management of the partnership
affairs and is not known as a partner.
f. Ostensible Partner – One who takes active part and is known to the public as a partner
in the business.
g. Secret Partner – One who takes active part in the business but is not known to be a
partner by outside parties.
Articles of Partnership
 Partnership agreements are embodied in the Articles of Partnership.
 A partnership is created by:
1. Oral
2. Written Agreement – Required when immovable property or real rights are
contributed or when the partnership capital is 3,000 pesos or more, in money or in
property. The written agreement among the partners which governs the formation,
operation, and dissolution of the partnership and is required to be registered with the
Office of the Securities and Exchange Commission.
 The Articles of Partnership contains the following information:
1. The name of the partnership
2. The names and addresses of the partners along with their classes of partners stating
whether the partner is a general or a limited partner
3. The date of formation and the duration of the partnership
4. The purpose/s and principal office of the business
5. The capital contribution of the partnership stating the contributions of individual
partners, their description, and agreed values
6. The rights and duties of each partner
7. The method of dividing net income or loss among the partners
8. The accounting period to be adopted, the nature of accounting record, financial
statements, and audits by independent public accountants
9. The conditions under which the partners may withdraw money or other assets for
personal use, as well as the salaries allowed to partners
10.The provision for arbitration in settling disputes, dissolution, and liquidation
 A contract of partnership is void whenever immovable property or real rights are contributed
and a signed inventory of the said property is not made and attached to a public instrument.
SEC Registration
 The partnership’s capital is 3,000 pesos or more in money or in property, the public
instrument must be recorded with the Securities and Exchange Commission (SEC).
 According to Section 28 in the Philippine Accountancy Act of 2004, “the SEC shall not
register any corporation organized for the practice of public accountancy.”
 According to Dean Capistrano in IV Civil Code of the Philippines, “the purpose of the
registration is to set a condition for the issuance of the 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.”
 To register a partnership, you must submit the following documents:
1. Articles of Partnership
2. Verification Slip for the Business Name – the partnership shall bear the word
“Company” or “Co.”; or “Limited” or “Ltd.” If it’s a limited partnership.
3. Written undertaking to change business name if required
4. Tax identification number of each partner and/or that of the partnership
5. Registration data sheet for partnership duly accomplished in six copies.
6. Endorsement from other government agencies if the proposed partnership will engage
in any industry regulated by the government (if required)
7. SEC Form F-105, bank certificate on the capital contribution of partners, proof of
remittance of contribution of foreign partners (if partnership has foreign partners)
 The registration/filing and miscellaneous fees is equivalent to 1/5 of 1% of the partnership
but not less than 1,000 pesos and legal research fee which is 1% of the filing fee.
Accounting for Partnerships

 Certified Public Accountants (CPAs) engaged in the practice of public accountancy shall
register with the Professional Regulations Commission (PRC) and the Professional Regulatory
Board of Accountancy. According to Section 31 of the Philippine Accountancy Act of 2004,
the registration shall be renewed every 3 years.
 The recording of assets, liabilities, income, and expenses is consistent for both
proprietorships and partnerships.
 Since a partnership has two or more owners, separate capital and drawing accounts are
established for each partner. (example, if there are 3 partners in a partnership, there should
also be 3 capital accounts and 3 drawing accounts)
Owner’s Equity Account: Capital Account

 A partner’s capital account is credited for his initial and additional net investments (net
investments = assets contributed – liabilities assumed by the partnership), and credit
balance of the drawing account at the end of the period.
Partner’s Capital Account

Debit Credit
Permanent withdrawals. Original Investment.
Debit Balance of the drawing account at the Additional Investment.
end of the period. Credit Balance of the drawing account at the
end of the period.
 Wherein, permanent withdrawals are made with the intention of permanently decreasing the
partner’s capital.
Owner’s Equity Account: Drawing Account

 A partner’s drawing account is debited to reflect assets temporarily withdrawn by him from
the partnership.
Partner’s Drawing Account
Debit Credit
Temporary withdrawals. Share in profit (may also be credited directly to
Share in loss (may also be debited directly to Capital).
Capital).
 Wherein, temporary withdrawals are regular advances made by the partners in anticipation
of their share in profit.
Loans Receivable from or Payable to Partners

 If a partner withdraws a substantial amount of money with the intention of repaying it, the
debit should be to Loans Receivable – Partner account or Due from Partners instead of the
Partner’s Drawing Account. This account should be classified separately from the other
receivables of the partnership. This account is reported in the balance sheet as an asset.
 If a partner lends amounts to the partnership in excess of his intended permanent
investment. These advances should be credited to Loans Payable – Partner account or Due
to Partners and not to Partner’s Capital Account. This account is reported in the balance
sheet as a liability.
Opening Entries
 Partners may contribute cash, property, or industry to the partnership. Assets contributed
are debited to appropriate. Asset accounts and partner’s capital accounts are credited for the
total amount of contribution.
 If the asset contributed is cash, it is recorded in the partnership books at face value.
 If the asset contributed is in the form of property, it is recorded at agreed values, or in the
absence of agreement, at their fair market values.
 If an industry is contributed to the partnership, a memorandum entry is prepared.
MODULE 1: PARTNERSHIP FORMATION
Valuation of Investments by Partners

 The books of the partnership are opened with entries reflecting the net contributions of the
partners to the firm.
 Partners may invest cash or non-cash assets in the partnership. When a partner invests
non-cash assets, they are to be recorded at values agreed upon by the partners. In the
absence of any agreement, the contributions will be recognized at their fair market values at
the date of transfer to the partnership.
 The fair market value of an asset is the estimated amount that a willing seller would receive
from a financially capable buyer for the sale of the asset in a free market.
 As per International Financial Reporting Standards (IFRS) No. 3, fair value is the price at
which an asset or liability could be exchanged in a current transaction between
knowledgeable, unrelated willing parties.
Opening Entries of a Partnership Upon Formation

 A partnership may be formed in any of the following ways:
1. Individuals with no existing business.
2. Conversion of a sole proprietorship to a partnership.
a. Sole Proprietor + Individual without an existing business
b. Two or more Sole Proprietors
3. Admission or retirement of a partner
Individuals with No Existing Business

1. Cash Contribution only (Capitalist Partners)
 Jun and Jing agreed to form a partnership by contributing P50,000.00 cash each. The
entry to record the contributions in the partnership is:
Cash 100,000.00
Jun, Capital 50,000.00
Jing, Capital 50,000.00
2. Cash and Noncash Contributions (Capitalist Partners)

 Nikki and Vikki agreed to contribute the following for the formation of partnership.
Investment Nikki Vikki
Cash 100,000.00 20,000.00
Inventories 50,000.00
Equipment 80,000.00
 The entry to record the contributions of the partners follows:

Cash 150,000.00
Inventory 50,000.00
Equipment 80,000.00
Jun, Capital 150,000.00
Jing, Capital 100,000.00
3. Contributions in the form of Cash, Noncash Assets, and Industry (Capitalist and Industrial
Partners)
 Carol, Beth, and Louella formed a partnership. Carol contributed P100,000 cash; Beth
contributed P50,000 cash and P25,000 equipment; Louella is an industrial partner to
contribute her special skills and talents to the partnership. Profit or Loss is to be
shared equally among the partners.
 Louella is admitted into the partnership as an industrial partner to share one-third in
the partnership’s profit.
 The entry to record contributions of the partners Carol and Beth follows:
Cash 150,000.00
Equipment 25,000.00
Carol, Capital 150,000.00
Beth, Capital 75,000.00
Illustration. On July 1, 2019, Nilo Burgos and Helenita Ruiz agreed to form a partnership. The
partnership agreement specified that Burgos is to invest cash of P700,000 and Ruiz is to contribute
land with a fair market value of P1,300,000 with P300,000 mortgage to be assumed by the
partnership. The entries are as follows:
Cash 700,000.00
Land 1,300,000.00
Mortgage Payable 300,000.00
Nilo Burgos, Capital 700,000.00
Helenita Ruiz, Capital 1,000,000.00
To record the initial investments of Burgos and Ruiz.
After the formation, the statement of financial position of the partnership is:
Burgos and Ruiz Company

Statement of Financial Position
July 1, 2019
ASSETS
Cash 700,000.00
Land 1,300,000.00
Total Assets 2,000,000.00
LIABILITIES AND ONWERS’ EQUITY
Mortgage Payable 300,000.00
Burgos, Capital 700,000.00
Ruiz, Capital 1,000,000.00
Total Liabilities and Owners’ Equity 2,000,000.00
A Sole Proprietor and an Individual Without an Existing Business Form a Partnership
Illustration. The statement of financial position of Galicano Del Mundo on October 1, 2019 before
accepting Marissa Dimarucot as partner is shown as follows:
Galicano Del Mundo

October 1, 2019
ASSETS
Cash 60,000.00
Notes Receivable 30,000.00
Accounts Receivable 240,000.00
Less: Allowance for Uncollectible Accounts (10,000.00) 230,000.00
Merchandise Inventory 80,000.00
Furniture and Fixtures 60,000.00
Less: Accumulated Depreciation (6,000.00) 54,000.00
Total Assets 545,000.00
Notes Payable 40,000.00
Accounts Payable 100,000.00
Galicano Del Mundo, Capital 314,000.00
Total Liabilities and Owners’ Equity 454,000.00
Marissa Dimarucot offered to invest cash to get a capital equal to one-half of Galicano Del Mundo’s
capital after giving effect to the adjustment below. Del Mundo accepted the offer.
1. The merchandise is to be valued at P74,000.00
2. The accounts receivable is estimated to be 95% collectible.
3. Interest accrued on the note receivable will be recognized: P10,000.00, 12% dated July 1,
2019 and P20,000.00, 12% dated August 1, 2019.
4. Interest on notes payable to be accrued at 14% annually from April 1, 2019.
5. The furniture and fixtures are to be valued at P46,000.00
6. Office supplies on hand that have been charged to expense in the past amounted to
P4,000.00.
New books for the Partnership
Books of Galicano Del Mundo

Del Mundo, Capital 14,100.00
Office Supplies 4,000.00
Interest Receivable 700.00
Allowance for Uncollectible Accounts 2,000.00
Interest Payable 2,800.00
Accumulated Depreciation 8,000.00
To record adjustments to restate Del Mundo’s capital.

Cash 60,000.00
To close the books of Del Mundo.
Books of the Partnership

Cash 60,000.00
To record the investments made by Del Mundo.
Cash 149,950.00
Dimarucot, Capital 149,950.00
To record the investments made by Dimarucot.
After the formation, the statement of financial position of the newly formed partnership is:
Del Mundo and Dimarucot Company

October 1, 2019
ASSETS
Cash 209,950.00

Dimarucot, Capital 149,950.00
Two or more Sole Proprietors Form a Partnership
Illustration. On June 30, 2019, Deogracia Corpuz and Esterlina Gevera, friendly competitors in a
certain line of business, decided to combine their talents and capital to form a partnership. Their
statements of financial position are as follows:
Deogracia Corpuz
June 30, 2019
ASSETS
Cash 50,000.00
Furniture and Fixture 60,000.00
Corpuz, Capital 260,000.00
Esterlina Gevera
June 30, 2019
ASSETS
Cash 40,000.00
Delivery Equipment 90,000.00
Gevera, Capital 250,000.00
The conditions and adjustments agreed upon by the partners for purposes of determining their
interests in the partnership are:
1. Actual count and bank reconciliation on Corpuz proprietorship’s cash account revealed cash
short and unrecorded expenses of P3,500.00
2. Establishment of a 10% allowance for uncollectible accounts in each book.
3. The merchandise inventory of Gevera is to be increased by P10,000.00
4. The furniture and fixtures of Corpuz are to be depreciated by P6,000.00
5. The delivery equipment of Gevera is to be depreciated by P9,000.00
New Books for the Partnership
Books of Deogracia Corpuz

Cash 3,500.00
Allowance for Uncollectible Accounts 10.000.00
To record adjustments to restate Corpuz’s capital.

Deogracia, Capital 240,500.00
Cash 46,500.00
To close the books of Corpuz.
Books of Esterlina Gevera

Allowance for Uncollectible Accounts 8.000.00
To record adjustments to restate Gevera capital.

Cash 40,000.00
To close the books of Gevera.
Books of the Partnership

Cash 46,500.00
To record the investments made by Corpuz.
Cash 40,000.00
To record the investments made by Gevera.
After the formation, the statement of financial position of the newly formed partnership is:
Corpuz and Gevera Company

June 30, 2019
ASSETS
Cash 86,500.00

Reasons for Partnership Formation

 Larger amount of capital can be raised because more than one person invests in the
business
 It is very easy to form a partnership
 Partners contribute diverse skills, expertise, and ideas into the business.
 Workload is shared among partners.
Limited Liability Company (LLC)

 Hybrid form of business. It combines the best features of a partnership and corporation.
 It is a form of legal entity that provides limited liability to its owners.
 In 1988, the Internal Revenue Service (IRS) ruled that LLC may be treated as a partnership
for tax purposes subject to conditions.
 The owners of an LLC are called members. These owners may be individuals, partnerships,
corporations, and other entities.
MODULE 2: PARTNERSHIP OPERATIONS AND FINANCIAL REPORTING
Nature of Partnership Operation

 At the end of the accounting period, adjustments for merchandise inventory, accruals,
prepayments, provision for doubtful accounts, and provision for depreciation. Net income is
determined in the usual manner by matching periodic revenues and expenses.
 Special problems are encountered in accounting for partnership operations. These problems
include:
1. Closing Entries of a Partnership
2. Distribution of Profits and Losses
3. Preparation of a Work Sheet
4. Preparation of Financial statements
a. Income Statement
b. Statement of Changes in Partner’s Capital
c. Statement of Financial Position
Closing Entries of a Partnership

 Procedures for the preparation of closing entries
1. All revenue and nominal accounts with credit balances are debited; Income Summary
is credited.
2. Income Summary is debited; All expenses and nominal accounts with debit balances
are credited.
3. The balances of the Income Summary account, which represents the income or loss of
the partnership, is transferred either to the drawing accounts or capital accounts of
the partners.
4. The balance of the drawing account of each partner is transferred to the capital
account.
Distribution of Profits and Losses

 The following factors should be considered:
1. Services rendered by the partners to the partnership
2. Amount of capital contributed by the partners to the business
3. Entrepreneurial ability or managerial skill of the partners.
 The distribution of the profits and losses may be expressed in:
1. Percentage
2. Fraction
3. Decimal
 The basis on which profits or losses are shared is a matter of agreement among the partners
and may not necessarily be the same as their capital contribution ratio.
 Partners may agree on any type of profit and loss ratio regardless of the amount of their
respective capital account balances
Performance Method
 The allocation of profits to a partner on the basis of performance is referred to as bonus.
 Performance Criteria:
a. Chargeable hours – total number of hours that a partner incurred on client-related
assignments.
b. Total Billings – The total amount billed to clients for work performed and supervised
by a partner constitutes total billings.
c. Write-Offs – Consists of uncollectible billings.
d. Promotional and Civic Activities – some examples include the time devoted to
developing future businesses and enhancing the partnership name in the community.
e. Profits in Excess of Specified Levels – designated partners commonly receive a certain
percentage of profits in excess of a specified level of earning.
Rules for the Distribution of Profits or Losses

 The profits or losses shall be distributed in conformity with the agreement.
 The share of each partner in profits or losses shall be in proportion to what he may have
contributed.
1. Profits
 Divided according to partner’s agreement
 In the absence of agreement, according to the capital contributions
 Industrial partners shall receive share before the capitalist partners shall divide
the profits.
2. Losses
 Divided according to partner’s agreement
 If there is no agreement, according to the profit-sharing ratio
 In the absence of agreement, capitalist partners shall divide the losses
according to capital contributions
 Industrial partners shall not be liable for any losses for he cannot withdraw the
work or labor already done by him.
Illustration. Black and Pink are partners sharing profits and losses based on their capital
contributions of P40,000.00 and P60,000.00 respectively.
By Percentage:
Black (40,000 / 100,000) x 100 40%
Pink (60,000 / 100,000) x 100 60%
By Decimal
Black (40,000 / 100,000) 0.40
Pink (60,000 / 100,000) 0.60
By Fraction
Black 4/10
Pink 6/10
By Ratio
Black 4:6
Pink 2:6
Methods of Distributing Profits Based on Partner’s Agreement

1. Equally – doesn’t give due recognition on the disparity of capital contribution nor recognize the
time and effort that a partner may devote in running the firm’s business.
2. Arbitrary Ratio
3. Capital Ratio – recognizes the differences in the capital contributions but doesn’t take account
the time and effort that a partner may devote in running the firm’s business.
4. Interest on Capital and the Balance on Agreed Ratio – Interest as agreed by partners shall
be allowed in proportion to the period such capital was actually used, whether the income is
sufficient or insufficient or there is net loss, unless otherwise agreed upon by the partners.
5. Salary Allowances to Partners and the Balance on Agreed Ratio – Salaries as agreed by
partners shall be allowed in proportion to the period the partners actually rendered services to
the firm. Such salaries shall be provided, whether the income is sufficient or not or there is a
net loss, unless otherwise agreed upon by the partners.
6. Bonus to Managing partner and the Balance on Agreed Ratio – Allows bonus to the
managing partner as an incentive which is usually based on the net income.
7. Interest on Capital, Salaries to Partners, Bonus to Managing partner, and the Balance on
Agreed Ratio
Illustration. Ables and Galang divide partnership profits and losses solely on the basis of their
average capital balances. Ables has P275,000.00 invested during all of 2019; Galang had
P200,000.00 invested from January 1 to August 31, and he invested another P75,000.00 on
September 1. If the profit was P800,000.00 during 2019, how much should each partner receive?
Name of Partner Ratio Share of Partner

Ables (275,000.00 / 500,000.00) x 100 = 55% P440,000.00
Galang (225,000.00 / 500,000.00) x 100 = 45% P360,000.00
Galang:
P200,000.00 x 8 months = P1,600,000.00 + (P275,000 x 4 months) = ?
P1,600,000.00 + P1,100,000.00 = P2,700,000.00
P2,700,000 / 12 months = P22,500.00 per month
Ables’ Share = P800,000.00 x 55% = P440,000.00

Galang’s Share = P800,000.00 x 45% = P360,000.00
MODULE 3: DISSOLUTION OF PARTNERSHIP
Dissolution of a Partnership
 According to Article 1828 of the Civil Code of the Philippines, the dissolution of a partnership
refers to “the change in the relation of the partners caused by any partner ceasing to be
associated in the carrying on as distinguished from the winding up of the business of the
partnership.”
 On dissolution, the partnership is not terminated but continues until the winding up of
partnership affairs is completed, according to Article 1829. Winding up is the process of
settling the business or partnership affairs after dissolution
 Dissolution of the partnership doesn’t necessarily imply that business operations will come
to an end.
 Dissolution should be distinguished from liquidation of a partnership. A partnership is said
to be liquidated when the business is terminated; a partnership may be dissolved without
being terminated but liquidation is always preceded by dissolution. Liquidation refers to the
termination of the business activities carried on by the partnership and the winding up of
partnership affairs preparatory to going out of business.
Causes of Dissolution
 Partnership dissolution due to changes in ownership occurs for varying reasons and the
following are the more prevalent:
1. Admission of a partner
2. Withdrawal or retirement of a partner
3. Death of a partner
4. Incorporation of the partnership
Admission of a New Partner

 A new partner can only be admitted into a partnership with the consent of all the continuing
partners. This is based on the principle of delectus personae.
 By admission of a new partner, the old partnership has been dissolved and it is important
that a new agreement be formulated to govern the continuing business operations.
 A person may become a partner in an existing partnership by either:
1. Purchase of an investment from one or more of the existing partners
2. Investment of assets in the partnership by the new partner
 The admission of a new partner gives rise to the following accounting problems:
1. Determination of the profit or loss from the beginning of the accounting period to the
date of admission of a new partner and the distribution of such profit or loss.
2. Closing of the partnership books.
3. Correction of accounting errors in prior periods like overstatement or understatement
of inventories, excessive depreciation charges, and failure to provide adequately for
doubtful accounts.
4. Revaluation of accounts
Admission by Purchase of an Interest from Existing Partners

 Payment is made personally to the partner from whom the interest is obtained resulting to
mere transfers among capital accounts.
 Result to a debit to the capital account of the selling partner for the interest sold; credit to
the capital account of the buying partner for the interest purchased.
Seller, Capital xxx
Buyer, Capital xxx
To record the purchase of Seller’s interests.
Illustration. Froilan Labausa and Reynaldo San Mateo are partners with capital balances of
P400,000.00 and P200,000.00 respectively. They share profits in the ratio of 3:1. Their business
has been very successful. All indications show that it will continue to be.
Case 1: Payment to old Partner is equal to interest purchased. Partners Froilan Labausa and
Reynaldo San Mateo received an offer from Janet Matuguinas to purchase directly one-fourth of
each of their interest in the partnership for P150,000.00. The partners agreed to admit Janet
Matuguinas into the firm.
Froilan Labausa P400,000.00 x ¼ P100,000.00

Reynaldo San Mateo P200,000.00 x ½ P50,000.00
Janet Matuguinas P150,000.00
Labausa, Capital P100,000.00
San Mateo, Capital 50,000.00
Matuguinas, Capital P150,000.00
To record admission of Matuguinas to the partnership.
Case 2: Payment to old partners is less than the interest purchased. Assume that Janet
Matuguinas directly purchased one-third of each partner’s interest in the business. Matuguinas
paid P160,000.00 for one-third of each partner’s capital.
Froilan Labausa P400,000.00 x 1/3 P133,333.00

Reynaldo San Mateo P200,000.00 x 1/3 P66,667.00

Case 3: Payment to old partners is more than the interest purchased. Partners Froilan Labausa and
Reynaldo San Mateo received an offer from Janet Matuguinas to purchased directly 30% of each of
their interest in the partnership for P200,000.00. The partners agreed to admit Janet Matuguinas
as a member of the firm.
Froilan Labausa P400,000.00 x 30% P120,000.00

Reynaldo San Mateo P200,000.00 x 30% P60,000.00

Three Possible Methods of Recording an Admission

1. Goodwill Method
2. Bonus Method
3. Asset Revaluation Method
Goodwill
 An intangible advantage that increases earnings over what is normal.
 Summation of all the good attributes of a person or a company that enables that person or
company to earn more than what is normal.
 It is reported in the balance sheet as an intangible asset
Illustration. Lhod and Alice are partners with Capital balances of P100,000.00 and P50,000.00.
They share profits and losses equally. Con is a new partner. Con pays P40,000.00 for a 1/5 interest
from the old partners.
Agreed Capital Goodwill

New Partnership Capital P200,000.00
Old Partnership Capital 150,000.00 P50,000.00
Total P50,000.00
Goodwill P50,000.00
Lhod, Capital P25,000.00
Alice, Capital 25,000.00
To record admission of Con to the partnership with Goodwill implied.
Lhod Alice Total

Capital balances before admission P100,000.00 P50,000.00 P150,000.00
of Con
Goodwill credited to old partners 25,000.00 25,000.00 50,000.00
Capital balances after recognition of 125,000.00 75,000.00 200,000.00
goodwill
Fraction sold to Con 1/5 1/5 1/5
Interest transferred to Con 25,000.00 15,000.00 P40,000.00
Lhod’s share: P125,000.00 x 1/5 = P25,000.00
Alice’s share: P 75,000.00 x 1/5 = 15,000.00
Lhod, Capital P25,000.00

Alice, Capital 15,000.00
Con, Capital P40,000.00
To record admission of Con to the partnership.
Admission by Investment of Asset in a Partnership

 A person may be admitted into a partnership by investing cash or other assets in the
business. The assets are invested into the partnership and not given to the individual
partners. The investment will increase the total assets and the total partner’s equity.
 Terms:
a. Total Contributed Capital – sum of the capital balances of the old partners and the
actual investment of the new partner
b. Total Agreed Capital – total capital of the partnership after considering the capital
credits given to each of the partners. Under the bonus method, the total agreed capital
is equal to the total contributed capital though the capital credits to each partner may
be equal to, greater than, or less than his capital contributions.
c. Bonus – amount of capital or equity transferred by one partner to another partner.
d. Capital Credit – Equity of a partner in the new partnership and is obtained by
multiplying the total agreed capital by the applicable percentage interest of the
partner.
Illustration. Rebecca Miranda and Kareen Leon are partners with capital balances of P400,000.00
and P200,000.00, respectively. They share profits in the ratio of 3:1. The partners agreed to admit
Gualberto Magdaraog, Jr. as a new member of the firm.
Case 1: Total agreed capital is stated. Assume that Gualberto Magdaraog, Jr. invested P250,000.00
for a one-fourth interest in the business. The partners decided not the revalue the assets of the
partnership and that the total agreed capital is P850,000.00
CC AC Bonus
Rebecca Miranda P400,000.00 P428,125.00 P28,125.00
Kareen Leon 200,000.00 209,375.00 9,375.00
Total P600,000.00 P637,500.00 37,500.00
Gualberto Magdaraog, Jr. 250,000.00 212,500.00 37,500.00
Total P850,000.00 P850,000.00
Distribution of bonus:
Miranda: P37,500.00 x ¾ = P28,125.00
Leon: 37,500.00 x ¼ = 9,375.00
Case 2: Total agreed capital is not explicitly stated. Assume that Gualberto Magdaraog, Jr. invested
P400,000.00 in the business. Out of the total cash investment, P100,000.00 is considered as a
bonus to partners Rebecca Miranda and Kareen Leon. The investment of Magdaraog resulted to a
bonus as stated. Under the bonus method, the total contributed capital is equal to the total agreed
capital. It is also clearly specified that the old partners will receive the bonus.
CC AC Bonus
Rebecca Miranda P400,000.00 P475,000.00 P75,000.00
Kareen Leon 200,000.00 225,000.00 25,000.00
Total P600,000.00 P700,000.00 100,000.00
Gualberto Magdaraog, Jr. 400,000.00 300,000.00 100,000.00
Total P1,000,000.00 P1,000,00.00
Distribution of Bonus:
Miranda: P100,000.00 x ¾ = P75,000.00
Leon: 100,000.00 x ¼ = 25,000.00

Acct102 Midterm Notes

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Acct102 Midterm Notes

Uploaded by

Copyright:

Available Formats

MODULE 1: NATURE OF PARTNERSHIP

Brief History of Partnership

Advantages and Disadvantages of a Partnership

Accounting for Partnerships

Owner’s Equity Account: Capital Account

Partner’s Capital Account

Owner’s Equity Account: Drawing Account

Loans Receivable from or Payable to Partners

Valuation of Investments by Partners

Opening Entries of a Partnership Upon Formation

Individuals with No Existing Business

2. Cash and Noncash Contributions (Capitalist Partners)

 The entry to record the contributions of the partners follows:

Burgos and Ruiz Company

A Sole Proprietor and an Individual Without an Existing Business Form a Partnership

Galicano Del Mundo

Books of Galicano Del Mundo

Notes Payable 40,000.00

Books of the Partnership

Del Mundo and Dimarucot Company

LIABILITIES AND ONWERS’ EQUITY

Two or more Sole Proprietors Form a Partnership

Books of Deogracia Corpuz

Accounts Payable 30,000.00

Books of Esterlina Gevera

Accounts Payable 60,000.00

Books of the Partnership

Corpuz and Gevera Company

LIABILITIES AND ONWERS’ EQUITY

Reasons for Partnership Formation

Limited Liability Company (LLC)

Nature of Partnership Operation

Closing Entries of a Partnership

Distribution of Profits and Losses

Rules for the Distribution of Profits or Losses

Methods of Distributing Profits Based on Partner’s Agreement

Name of Partner Ratio Share of Partner

Ables’ Share = P800,000.00 x 55% = P440,000.00

Admission of a New Partner

Admission by Purchase of an Interest from Existing Partners

Froilan Labausa P400,000.00 x ¼ P100,000.00

Froilan Labausa P400,000.00 x 1/3 P133,333.00

Labausa, Capital P133,333.00

Froilan Labausa P400,000.00 x 30% P120,000.00

Labausa, Capital P120,000.00

Three Possible Methods of Recording an Admission

Agreed Capital Goodwill

Lhod Alice Total

Lhod, Capital P25,000.00

Admission by Investment of Asset in a Partnership

You might also like