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Acct102 Module 1 With Sample Problems and Solutions
Acct102 Module 1 With Sample Problems and Solutions
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.
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.
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
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:
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
Illustration. The statement of financial position of Galicano Del Mundo on October 1, 2019 before
accepting Marissa Dimarucot as partner is shown as follows:
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
LIABILITIES AND ONWERS’ EQUITY
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
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:
ASSETS
Cash 209,950.00
Notes Receivable 30,000.00
Accounts Receivable 240,000.00
Less: Allowance for Uncollectible Accounts (12,000.00) 228,000.00
Interest Receivable 700.00
Merchandise Inventory 74,000.00
Office Supplies 4,000.00
Furniture and Fixtures 46,000.00
Total Assets 592,650.00
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
Statement of Financial Position
June 30, 2019
ASSETS
Cash 50,000.00
Accounts Receivable 100,000.00
Merchandise Inventory 80,000.00
Furniture and Fixture 60,000.00
Total Assets 290,000.00
LIABILITIES AND ONWERS’ EQUITY
Accounts Payable 30,000.00
Corpuz, Capital 260,000.00
Total Liabilities and Owners’ Equity 290,000.00
Esterlina Gevera
Statement of Financial Position
June 30, 2019
ASSETS
Cash 40,000.00
Accounts Receivable 80,000.00
Merchandise Inventory 100,000.00
Delivery Equipment 90,000.00
Total Assets 310,000.00
LIABILITIES AND ONWERS’ EQUITY
Accounts Payable 60,000.00
Gevera, Capital 250,000.00
Total Liabilities and Owners’ Equity 310,000.00
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
Cash 40,000.00
Accounts Receivable 80,000.00
Merchandise Inventory 110,000.00
Delivery Equipment 81,000.00
Accounts Payable 60,000.00
Allowance for Uncollectible Accounts 8,000.00
Gevera, Capital 243,000.00
To record the investments made by Gevera.
After the formation, the statement of financial position of the newly formed partnership is:
ASSETS
Cash 86,500.00
Accounts Receivable 180,000.00
Less: Allowance for Uncollectible Accounts (18,000.00) 162,000.00
Merchandise Inventory 190,000.00
Furniture and Fixtures 54,000.00
Delivery Equipment 81,000.00
Total Assets 573,500.00
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.
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
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?
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
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
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.
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.
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.
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.
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.
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