1 _ Differentiate ; r - proprietorships and corporations, State the valuation of contributions of partners. - Account for the initial investments of the partners | partnership, ss the transactions that affect these accounts, Introduction A partnership is an unincorporated association of two or more individuals to carry on, as co-owners, a business, with the intention of dividing the profits among themselves. The following distinguish a partnership from other types of entities: a. A partnership is owned by two or more individuals, while a sole proprietorship is owned by only one individual. A partnership is created by agreement between the partners, while a corporation or cooperative is created by the operation of law. © A partnership is formed for a business undertaking that is Normally of continuing nature, while a joint venture may be formed for a limited purpose and ends when its goal is achieved, b. Gharacteristics of a partnership se of formation = as compared to corporations, the of @ partnership requires less formality. Separate legal personality - the partnership has ty separate and distinct from the P can transact and acquire properPEH,000 In identifiable assets. Unga 1 adjust the capital accounte ct "asset should be debited for Ne Clee <6,000 ao SA and’ B agreed to, form. a pastnershi, “Agreement stipulates the following: ‘+ Anitial capital 0 *300,000. | * -AB-Binterest in the equity of the partnership. Pp: The partnership A contributed *190,000 cash, while Which porter should provide . qithiraww part of his investment) in order to bring the Spital credits equal to their respective interests i the partnership? 8. Asshall provide sdeitional capita Be Bshall withdraw capital of 25,000 © Behallmake an additional investment of P @- Nosadditional contribution or witha raw B contributed #2 00,000 as additional a (or Partners * equity of be made. PROBLEM 5: CLASSROOM Activity INSTRUCTIONS: 2 Find a study partner. 2 Imagine that you and. ee your study, Hzteed to form a busine: 9. Reed the facts below and answer thy Partner aré entrepreneurs partnership. ie sticceed ing: requirements. Building ‘Accounts payable Notes payable Capital Additional information 3 “The eash contribution of Partner 1 a5 listed above ir the peas ‘equivalent of 6,250 foreign currency units (FCU), The cumrent exchange rate is 45; FCUL Partner 2's account receivable should be written’ down By. $200,000, Tand ha ani appraise value of 1,500,600. The building has an appraised value of 1-400,000, Attached to the building is an unpaid mortgage-of PROOO Partner 1 agrees to settle this mortgage immediately, using; hivher personal funds. pending lawsuit over Partner 1's: contnbuted a daim by a third party, A discussion with counsel reveals that itis probable that the itf will accept cof court settlement of not fess than 300,000. partnership. shall assume the obligation of paying th There aré unpaid real property taxes on the properties contributed by Partner 1 amounting to 40,000, The partners reed that che partnership shall assume those obligations: The notes payable is stated at face amount, An inspection of the related promissory note reveals that the note is a S-year non-interest bearing note issued 2 years ago and requires ump sum payment at maturity date. The current rate {5 10%, Requirements a. Compute for adjusted balances of your capital ecounts: b. Provide the entry to record your contributions: in the partnership books. crim meyer my mitstesratanon act rie ste peif you Is significantly ey cuteness will by cordingly, you decided to have rene al amourts. No cash settlem il be made, se yes the bonus (ie, the cuter partner)? ‘the bonus will be accounted for in the hi to record yc i 5 sy your contributions in’ the F partner agreed that one of you is significantly hotter "However, you determined that that hotness will ppoed to the business. Accordingly, you decided to lrinterest and make cash settlement for the difference #5 No additional investment or withdrawal of Ibe made. shall receive cash payment from the other not omit centroos) prey the cash receipt/ cash payment will be the partnership books. enlty to record your contributions in the d that both of you are’ equally ye interests: in the partnership partner's capital shall be “invcroased ace “poth your capital Requirement: Which partner: shall n ‘contribution and by how ouch? Variation #4: 2 You and your partner agreed that both of you us and that your respective interests in @ aeyet be equal. You ageeed that the inital capital of Hh Thould be oqual to the fair vale of your et asset conte You further agroed that a parmer should provide adil jnvestment (ot withdrave part of his investment) in order Ping) tboih of your eapital credits equal to your Fespective kmerests Ee the equity of the partnership. Requiremien: Which partner(s), should provide additional investment (oF withdraw part of his/her investment) in 6rder 60 bring both your capital eredits equal to your respective inlaresisan the equity of the partnership? (alo mgt omit cents) 3 | mia] =| PROBLEM 6: FOR CLASSROOM DISCUS ION, ‘Valuation of contributions of partners 1. Mr. Sun ond Ms. Moon formed a partnership, contributions are as follows: Cash Accounts teceivable 250,00 Lan 750,000 ee a ‘Toiat 650,000 Fel Adiitional information: + Only 80% of the accounts receivable isGivil Code provides the ot loss sharing of partners: ‘in the profits has been agreed ‘losses shall be in the same the share of each partner in the im proportion to what he may have Partner shall not be lable for industrial partner shall and equitable under the Bonuses — the managing. Cee ine excellent management performance. Unlike for sal partner is entitled to a bonus only if the Profit. The partner is not entitled to any partnership incurs loss. Interest on capital contributions — the partnership. may stipulate that capitalist partners are entitled interest on their capital contributions. The items above are normally provided fir respective partners and any remaining amount of the: is shared among the partners based on their stipulated: Toss ratio. Mlustration 1: Salaries A and BYs partnership agreement provides for allowances of 50,000 for A and allowances are to be withdrawn throughout ‘be debited to the pariners' respective drEE © Allscation: 1. Bonus to iat 10K: (0K « 10%) 10,000 10.0 ‘Ger OOK: [280K- 100K) x | 36,000 36,000 2 Bonus to.8 on remaining profit RIK 10K -S6K-10) x5 4200 4,200 “3. Allocation of remaining profit 2 114,900 11 229800 Mlustration 22: Bonus ~ choice of profit sharing scherne Me: A, a partner in ABC Co, is deciding on whether to accept a solary of 8,000 0% a salary of 9,000 plus a bonus of 10% of profit “afier deducting salaries and. bonus, The salaries of the other ‘Partners amount to P20,000, Requirement: At what amount of profit would Mr. A be indifferent between the choices? 7 Partnership Operations sae ‘An algebraic equation is developed from the two ¢ La: X = profit after salaries and bonis 10% = bonus after bonus Choice #1 Choice #8 3,000 salary = 5000 salary + 10%X 2X is computed from the equation above as follows; 8,000 = 5,000 + 10% 10%X =8,000-5000 3,000 /'10% 20 Profit after salaries and bonus (X) Multiply by: Bonus rate Boni Profit'a st salaries and bonus Add back: Salaries (ik ioMr. A +20K to other partner) ack: Bonus Profit before salaries and bonus If the partnership's profit is 58,000, it does not matter ether Mr. A chooses to receive a’salary of P8000 or a salary of 5,000 plus a 10% bonus because he will receive the same amount, Checking: Choice tt Chinice #2 8.000 slay = = ————5,.000)salary + bors” * Profit before salaries and bonus Salaries (9k + 2080 Profit after salaries but before booiss ka Ty Br 833,000 [59,000 (1 «10%)) = 2.000 hice 81 aie #2 Boer 8,000 salary = S000 salary + 3,000 bormus i “ =jie problem js #et of the monthly salaries thay e Werniced the gross amount which i allocation. This is computed as follows of monthly salaries) 21 sales (Kx 10 08) (10K x mony faa es fAmouint to be allocated) 330,000" 5 ; The Bonus and the imterest on capital are not yet deuce he profit igure’ given in the problem. Unlike for monthly Which are withdrawn periodically (ie., monthly basis), abd benuses are normally computed only at yearecy He carol Validly assume that these items were already Mie profit before salaries, interest and toms is alloc 20,000 100,000 20,000 55,000 55,000 10,000 r a Son of reslning prot oN BK 120K 5-1) eee? 72500 7250 000, Tastes 250022500 ses 00 ©The onus fer Fors” is computed as follows tie po 1+Br B=930000- (330,000 (1 29%) = ss.040 ‘The ending bs ouing poe 9F the partners’ capital accounts are ‘Capial, beg, "100,000 Additional investrient 20,000, Share in profit 102.500 2750 Drawings (monthly solaries) 420,000) (100,000), Capital, end. 202,500 307500 Illustration 4.2: Reconstruction of information Partner A has a 25% participation in the profits of a partnership. During the year, A’s capital account had a net increase of 10,000, Fartner A mde contributions of 40,000 and capital withdrawals of 60,000 during: the year rement: How much profit did the partnership dann during the | 40000 Additional investment | 30,000 A's share in profit (squeeze) 10,000 A's share in profit Divide by: A's P/L tatio Partnership's profit Ilustration 4.3: Reconstruction of information ~Required profit A.B, Cand D's partnership agreement stipulates the following: ‘A and B shall receive salaries of £20,000 and 10,000, respectively, and 10% interest on their capital contritnitions of 100,000 and 60,000, respectively, Balance és divided on a 4:4 1:1 basis However, C and D are guaranteed minimsim shares of P5,000 each,4 housing loan which hy share from the partnership prog, ‘of P42,000, Partners A. wants tp el of partnership profit that could sectirg “inclusive of salaries, interest and share in o-forms allocation table. AWS) BO) Cir0%) 20,000 10,000. = 10,000, 6,000 = - : ; aor Si" — ER) Tao kom) =a Ai eed Sheen pach poi dimmu shire for A's share in the allocation of balance. AWS) BG%) — CH0% 20000 ——10,000 10000 6,000 eze’ for the total remaining profit for allocation. AU) BG) Caos) Dc0%) Toul 200 i000 ~ 30000 Top 600 ~ 16000 ao? 2 > 3n00 42,000 z 5,000 5,000. zs ep 5: Adjust the shares of C and D to their guaranteed amounts, tw rt ‘Step 4: Allocate the: f AGI) Sane 2000 Toerestson expla! © 10000. _Alloston ol itnace 1200, “Asal. 42000 UK < he LEDER x1 = 5, OK KIO = 30) Aum) Buck) Coon Dae 201000 10,060 inom 6000 1 rem 12000 300 300 She Adjust 2.000 As alleat. 75a Answer: In order for Partner A to secure a 942,000 share, the hip profit must be at least P80,000. ‘Chapter 2: Summary partners share in partnership profits and losses based ont thefr agreement If only the share in profits has been agreed \pon, the share in losses shall be in the sane proportion If no. profit sharing has been agreed Upon, the partners shall share int proportion to- their contributions. However, an | industrial partner shall not be liable for losses. Profit oF loss is allocated as follows: (2) Salaries, Bors (allocated ondy if there ts profit) and Interest on capital, if these are stiputated: and las \ay remaining amount is allocated based on the PAL ratio, |PROBLEM 1: TRUE OR FALSE 1. According to the law, ifno profit or loss sharing ratio has been agreed upon, the partners shall share equally. 2. Mr, And Ms B formed a partnership. Mr. A contributed Py Gash, while Ms, B will contribute her services. Mr. A ig g capitalist partner, while Ms, B is an industrial partner. Fact pattern: ‘You and I are partners. We share in profits equally. Because Lam the managing partner, 1 arn entitled to a 20% bonus computed on Profit before deducting:the bonus. 3 four parinership earns profit of PIM (before deducting my bonus), your share would be 500,000, 4° Wf our partnership incurs loss of PIM, your share would be ‘egative #800, 000. 5. Normally, partners are entitled to salaries for the services they have rendered to the partnership business only if the business eams profit Fact pattern: He and She are partners, with 60% and 40% interests in Parlnership profit, respectively. He is entitled to P2M annual salary, 6. If the Partnership eams M12M Profit before deducting He's salary, She’s share would be P4M 7 It the partnership incurs PSM loss before deducting He's salary, She's share would be negative P4M. Fact pattern: A and B formed a partnership. The partnership agreement ‘stipulates the following: Anaual salary allowances of P50 for A and P30:for B, ‘Any remaining, amount of profit or loss shall be divided equally, 8. During the period the partnership earned profit of PL00 before salary allowances, A's share in the partnership profit is PIO, 9. During the period the partnership incurred loss of F100 before salary allowances, A’s share in the partnership loss is -P40. 10, Mr. C. the managing partner in ABC Co. is entitled tora 20% bonus on profit after partners’ salaries and bonus ABC Co, ied profit of #360 after deccting the partners” salaries fore deducting Mr. C’s bonus. Mr. C’s bonis is PB0, PROBLEM 2: MULTIPLE CHOICE - THEORY hould the partners in a business partnership share in hip? 1 How 3 3. Eval b A hacwer ts of lien tt the dmg | dBase winner takes all on” rock, paper, scissors 2 According to the Philippine Civil Code, if only the share of each pariner in the profits has been agresd upon the share of ; ‘each in the losses shall be & tnequal amounts. b. inequal amounts, but excluding the industeial partner. €. inproportion to the partners’ contributions. ._ the same as the sharing in profits According to the Philippine Civil Codg, in the absence of a stipulation on the sharing of profits or losses, partnership. profits and losses shall be shared by the partners: a. equally. B22 ee xpetioruball not bé liable for the bee , he following is not 8 component of the formulg ‘partnership profits to the partners? to those partners working. tera ‘ther allocation, the remainder divided scco tothe profitand foss sharing ratio, Interest on the average capital investments. & net ‘on notes to partners, ding 3 ea allocating 4 partnership loss to the partners which of following items is provided frst? | salaries bonuses to partners © inlereston the capital contribution of an industrial partner all ofthese PROBLEM 3: EXERCISES © Fartners A and B share in profits and losses equally after Salaries: of P100,000 for A and 60,000 for B. The business ‘Samed profit of 200,000 before deduction for the salaries. Ginter pars respective shares in the profit Provide the journal entries (the salaries are withdrawn ). Bs Partnership agreement provides for annual salary F160,000 for A and) P80,000 for B. Profits: are While losses on a 60:40 ratio, The partnership. eee north peel Requirement: Compt for te the profit. A anid B's partnership ajgreement states the fo -Annwal salaries of 96,000 for A arsd P#0,000 for 10% bonus to A, based on profit after salaries and} PIL ratio of 40. The partnership camed' profit of 7200,000 before salarkes and: onus i Requirement: Compute forthe respective shares of the Parmer in) the profit 7 4. A and B's partnership agreement provides for an- annual slaty allowance of 100,000 for A and 19% interest on the: weighted average capital balance of B, The remainder fs shared on 9 60:40 ratio, respectively, During the period, the partnership eamed profit of 200,000. B’s capital account had: 1 beginning balance of 120000, B made additonal, ments of 40,000: on. April 1, 0,000 om Sept 30, and 000 on Des. 31, and made drawings of P60,000 en fuly dle Requirement: Compute for the respective shares of the partners in the profit A&B Co. started operations on April, 201. Mr. A-a partner in A&B Co, is entitled to 12% interest om the weighted: average balance of his capital account Mr. A's ledger shows: the following: —s Sra TARA pak aayge capital investments of the partners during the yege 00 for A, #50,000 for B, and 730,000 for C Thy. eumed profit of #100000 during the period, Hoy, ‘was A’sshare? ©, 29,800 , $1,600 2600 Ate AP and B's partnership agreement stipulates the following: © Ansual salary allowance of 100,000 for A. © © Bonus to of 10% of the: profit afte Doncs. @ The pattiers share in profits and losses on a 60:40 partner's salaries and The Partnership incurred loss of 40,000 | Selities: How much is the change in A's % 56,000 decrease Be 15,000 decrease before deduction for pital accoun €. 16,000 increase 9,000 increase % Toile fret year of operations, A and B's parinershi ip Business amed profit oF F2.500,000. 1t was Agieed that A is to have an aioe! lary allowance of 100,000 and’ a 200% bonus based Henke, wit deducting the salary and the bonus, tlowever, there has been no stipulation on how the De-shared between 4 (220,00 220000) G20) & How mich additional contributions shall be made by the partners in order to settle all of the partnership liabilities? fy Determine the amounts of cash distributed to the partiiers in the final settlement of their capital accounts, Solutions: Requirement (a): Cash 20,000 Proceeds 40,000 Payment fr liabilities me Aitditional contributions necesito settle abilities sceeitina contributions neededto settle liabilities 46,000) (0,000) P Web us determine which partners are solvent 3 insolvent using the rales of ‘marshallin, z Ai 300,00 260,000, 200,000 (220,000), (2 320,000) eee (220,000) | F partnership creditors 80,000 40,000 ea Moc c aild Bate solvent tp to P80,000 and 40,000, respectively While Cis insofvent a 22 ti ‘3000 33.950) — a0) NO Coenen sey 8 x25) A) “tis soni ao Fee al jaerantins by ene eee a Ty ilizin of cena Notes: Since C is personally insolvent, his capital deficiency is allocated to the other partners with positive capital balances. (b) A and B are solvent. Therefore, they are required to provide additional contributions necessary to caver their capital deficiencies B is solvent only up to P0,000, he only up to that amount of Wis allocated to A. @ ired to provide additional contribution necessary 10) he capital deficiency of B is required t (0) The remain Notice that the total additional contributions of the Partners are equal to the amount computed in ‘Requirement. (0)! 1st additional contribution by A 46.000 Additional contribution by 8 400) onl contusion A= ET Total additional contributions 0,00ae Factpatienn, = APPIlcation of the basieaccounting equation On. I Gane 2 Cash before settlenient of abilities fe gO A, Hand © decided to Uuidale mete ey ere eerlkbp tics teee ies ae Ra oe a balances eres ; the parties ject and © (50%), papn cay STE A 2}, P100,000; By, 170005 Vsce ship has liabilities of P20, cone (Cinersas = : ccrmine how the partners captal accounts ave Case 1: Cash after settiement of liabilities — (edema 2 Al the parinerstip asses wore tome ing ste Sash and afte, z ailable to ye Partners. Only A’and B are solvent. a iar see Pariners’ capital Retuirenent: Delermine:how the partners’ capita scouts git soo = 0 sae Settled. be cash Solution: (tee lies = Using the basic accounting “Assets-» 1 We “Gach available for disteibuti 1 sales determined asf : “Total partn —— Asets = Fiabitities — —— = Loss talencingFgwre im act, uct Cask = = ie 56,000 é Notice that the equation does tot balance 3 iam: the Tass, which shall be closed to the pactien’ eapitd Balances: The loss is squeezed as follows Cash 56,000 san Total partners’ equity cax «70% ~200x) % Bete tesinnes a Loss 200) Payments the 2400 F The distribution to owners is computed asf ACO) 8 00%) Case 3: Zero remaining assets eee “Gpitaibalcss roach as All the part assets were realizes ba es ee ates of oss | Settling the liabilities, except one for | whic | ee een eae), ey unpaid. B and C are solvent, but A is insolvent Total. 56, 00 Allocation ofenpital deficiency TRL aS) & 00550%) (4.300) Lament tthe partners 14100 41,500 oohravings account of C jg Added t0 is capital balance besa: 7 thas a credit ‘balance. “a tal deticleney is allpeated an agent of the partnership. Partners. had the following — Solution Cash receipts ownage Cash disbursements. — 200) 23,000), _(150,000) Excess reeeipt (Excess disbursement) 25,000 (@0,600) use the pariners transact on behelf of the partnership, ees Irigy ape be remitted to the partnership. {4 revitable by the partnership from him), while any excess eash isturiment must be reimbursed by the partnership (a payable by the Partpership to im), Temporary receivables and payables may. be dosed fo the drawings account Of the partners jn decmign ar ¥oemen: ear sect _—_ oS Unadjusted capit, al balances 100,600 150,000 250,000 (Receivab! (25,000) 30,000 5,000. Adjusted capi nes 75,000 180,000 255,000 Allocation of loss 35k weamucewsy (4,000) ($1,000) (135,000), Ants. received by the partners 21,000 __ 99,000 120,000 Waikavalahiccen ‘adjasted capital) 1a oon law Non-cash asset used as Payment for claim Ila creditor or a-pariner agrees to Teceive non-cash assets as claim, the non-cash asset is considered sold at the 0 be debited to the creditor's or partner's la difference between the carrying amount of the non-cash