Chapter 2

NATURE AND FORMATION OF PARTNERSHIP

PARTNERSHIP DEFINITION
The Philippine Civil Code defines partnership as “by contract of partnership, two or more
persons bind themselves to contribute money, property, or industry to a common fund, with the
intention of dividing the profits among themselves. Partnership contract maybe oral or written.
The written partnership contract is known as the Articles of Co-Partnershipand is required when
total partnership capital reaches P 3,000 in money or property. The contract includes the
following information:

1. The name of the partnership;

2. The names, addresses of the partners, classes of partners identified whether the
partner is a general or limited partner ;
3. The effective date of the contract;
4. The purpose and principal place of the business;
5. The capital of the partnership stating the contributions of each partner;
6. The rights and duties of each partner;
7. The profit or loss sharing among the partners;
8. The conditions regarding the partner’s withdrawals of assets;
9. The manner of keeping the books of accounts;
10. The causes of dissolution;
11. The provision for arbitration for settlement of disputes.

The partnership is required to register with the following government offices before it can
start its operation.

1. Securities and Exchange Commission–to secure the certificate in order to have the
license to operate a business.
2. Department of Trade and Industry – to register the partnership’s trade or business
name to ensure that the business name will not be used by others.
3. City or Municipal Mayor’s Office – to secure for mayor’s permit and license to
operate in the city or municipality and to ensure that the business is in compliance
with their ordinances and standards.
4. Bureau of Internal Revenue – to secure a BIR Certificate of Registration, a Tax
Identification Number, authorization to print official receipts, to register the
books of accounts and paying the national internal revenue taxes.
5. SSS, Philhealth and Pag-ibig Fund – to register the partnership as an employer and
for remitting the employees’ contribution together with the employer’s share.

NATURE AND FORMATION OF A PARTNERSHIP Page 37

CHARACTERISTICS OF A PARTNERSHIP

The characteristics of a partnership include the following:

1. Mutual agency – each partner is considered an agent and will act on behalf of the
partnership in conducting the affairs of the business. However, the partner must
perform his function within the limits of authority conferred on him.

2. Unlimited liability – like in a sole proprietorship, each partner has an unlimited

liability in the firm. If the assets of the business are insufficient to pay the firm’s
obligations and debts, the partner’s personal assets may be used for this purpose.

3. Profit and Loss Sharing – there is an agreement on how the partners will share in
the profits and losses of the partnership. As a general rule, the agreement must
be stated in the articles of co-partnership.

4. Limited Life – the life or existence of a partnership may be dissolved at any time by
action of the partners or by operation of law. Causes of dissolution include
admission of a new partner, death, withdrawal or death of a partner and
incorporation.

5. Co-ownership of partnership assets – property invested by a partner becomes the

property of the partnership and all the partners as co-owners.

6. Legal entity – a partnership has its own legal personality separate and distinct
from that of each of the partners.

7. Taxable – partnerships are subject to an annual income tax rate of 30% except
general professional partnerships.

ADVANTAGES OF A PARTNERSHIP

1. Easy Formation – a partnership may be created by a simple contract and has fewer
legal requirements.

2. Larger resources – due to the more number of partners, the partnership has larger
resources for its business operations compared to a sole proprietorship.

3. Better management – the partnership will be well managed by all the partners as
they take interest in the daily operations of the business because of ownership,
profit, and control.

4. Unlimited liability – considered as one of the characteristics of a partnership, this

makes it reliable from the point of view of creditors in their decision to grant credit
or not.

NATURE AND FORMATION OF A PARTNERSHIP Page 38

DISADVANTAGES OF A PARTNERSWHIP

1. Instability – as one of the characteristics of a partnership, it does not exist for an

indefinite period of time because it is easily dissolved.

2. Unlimited liability – this is also a disadvantage from the point of any of the partners
since their personal properties maybe called upon to pay the firm’s liabilities.

3. Lack of harmony – there may be incidence of differences and disagreements of

opinions among the partners in conducting the affairs of their business.

4. Transfer of ownership – it is not easy to transfer ownership in a partnership

because the consent of each partner is required.

KINDS OF PARTNERSHIPS

Partnership is a form of business organization where two or more people share

ownership and responsibility in managing the business. Partners share not only profits, but also
costs, risks and responsibilities involved in operating their business. A partnership is classified
according to the following:

1. According to activities
a. Service- main activity is rendering of services to customers/clients
b. Merchandising or Trading – main activity is the purchase and sale of goods
or products
c. Manufacturing – main activity is the production of goods or products

2. According to liability
a. General – one wherein all partners are general partners and are liable to
partnership debts to the extent of their personal property after all
partnership assets have been exhausted.
b. Limited – one consisting of one or more general partners and one or more
limited partners, who is being a limited partner, is liable only up to the
extent of his capital interest in the partnership.

3. According to object
1. Universal Partnership
a. Universal partnership of all present property –one in which the partners
contribute all the property which actually belongs to them to a common
fund, with the intention of dividing the same among themselves, as well as
the profits which they may acquire therewith.
All assets contributed by the partners to the partnership and subsequent
acquisitions become the common partnership assets.

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 b. Universal partnership of profits – one which comprises all that the partners
may acquire by their industry or work during the existence of the
partnership and the usufruct of movable or immovable property which each
of the partners may possess at the time of the institution of the contract.

The original movable or immovable property contributed do not become

common partnership assets.
2. Particular partnership – one that has for its objects determinate things, their
use or fruits, or a specific undertaking, or the exercise of a profession or
vocation.

4. According to duration of partnership existence

a. Partnership at will – one where no period is fixed by the partners for its
duration; hence may be terminated at will or at any time by mutual
agreement or the will of one alone.
b. Partnership with a fixed term – one in which the term or period for the
partnership existence is agreed upon by the partners.

5. According to representation to others

a. Ordinary partnership – one which actually exists among the partners as well
as to third persons.
b. Partnership by estoppel – one which in realty is not a partnership but is
considered as one with respect to those who, by reason of their conduct or
admission, are precluded from denying its existence.

6. According to publicity
a. Secret partnership – one wherein the existence of certain persons as
partners is not made known to the public by any of the partners.
b. Open partnership – one whose existence is made known to the public by
the members of the firm.

7. 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

CLASSESOF PARTNERS

1. As to contribution
a. Capitalist partner – contributes money or property to the partnership.
b. Industrial partner – contributes only his skills, industry, labor or services to
the partnership.
c. Capitalist-industrial partner – contributes money, property and industry to
the partnership.

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 2. As to liability to third persons
a. General partner – one whose liability to third persons extends to his
separate properties.
b. Limited partner – one whose liability for partnership obligation is limited to
his capital contribution.

3. As to management participation
a. Managing partner – one who is appointed by the partners to take charge of
the partnership business
b. Silent partner – one who has no active part in the management of the
partnership but is known to be a partner

4. Other Classes of Partners

a. Secret partner – one who takes active part in management affairs but is not
known to be a partner.
b. Dormant partner – one who has no active part in management affairs and is
not known to be a partner; he is both a secret and a silent partner.
c. Nominal or Ostensible partner – one who is a partner in name only by
allowing the use of his name either for accommodation or for consideration;
subject to liability as a partner for the protection of innocent third persons.
d. Liquidating partner – one who takes charge of the winding up of partnership
affairs upon dissolution.

ACCOUNTING FOR PARTNERSHIP FORMATION

The accounting for partnership is basically the same as is applied for a sole proprietorship
except that there are more owners. Each partner should have a separate capital account and
drawing account to show the effects of the transactions affecting the partner’s accounts as
illustrated below:
PARTNER’S CAPITAL
1. Permanent withdrawals 1. Initial investment
2. Share in partnership loss from 2. Additional investment
operations
3. Closing entry for the drawing account 3. Share in partnership profit from
operations

PARTNER’S DRAWING
1. Regular withdrawals 1. Share in partnership profit from
operations
2. Share in partnership loss from (maybe directly credited to partner’s
operations (maybe directly debited to capital )
partner’s capital)
2. Closing entry to the capital account

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A partnership maybe organized in any of the following ways:

A. Partnership is formed for the first time. The partners are new in the business.

In the definition of the partnership, a partner may contribute money, property, or his
special skill or talent. Cash contributed by a partner is recorded at face value. Non-cash
asset or property contributed must be recorded at its value agreed upon by all of the
partners, or in the absence of an agreement, must be recorded at fair value at the date it
was invested by the partner. A partner who contributed his industry or special skill is
recorded as a memorandum entry.

Illustration 1: Art and Ton formed a partnership and invested cash of P 60,000 and P 90,000,
respectively.

The entry to record the investments of the partners is:

Cash 150,000
Art, Capital 60,000
Ton, Capital 90,000

Illustration 2: Stephen and Curry formed a partnership and invested the following:

Stephen Curry
Cash P 100,000 P 125,000
Inventory 275,000
Equipment 200,000
Furniture 40,000 50,000

The entry to record the investments of Stephen and Curry is:

Cash 225,000
Inventory 275,000
Equipment 200,000
Furniture 90,000
Stephen, Capital 415,000
Curry, Capital 375,000

Illustration 3: James, Kevin and Thomas formed a partnership and contributed the following:

Kevin Thomas
Cash P 70,000 P 130,000
Automobile 900,000
Equipment 250,000
Furniture 60,000 40,000

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 The automobile is mortgaged at a bank with an outstanding balance of P 200,000
and is to be assumed by the partnership.

James is an industrial partner with a 25% share in the profits, the balance to be
divided equally between Kevin and Thomas.

The entry to record the investments of Kevin and Thomas is:

Cash 200,000
Automobile 900,000
Equipment 250,000
Furniture 100,000
Mortgage payable 200,000
Kevin, Capital 830,000
Curry, Capital 420,000

The memorandum entry to record the contribution of James is:

James is admitted as an industrial partner to the partnership with a

25% share in the partnership profit.

B. Partnership is formed by a former sole proprietor and an individual.

The sole proprietor may change his organization into a partnership with an agreement
with an individual not engaged in any business. The sole proprietor will transfer his net
assets as his investment to the partnership at agreed values or in the absence of agreed
values, at its fair market value. There are two assumptions to record the investments of
the partners: 1) the partnership will use the books of accounts of the sole proprietor, or 2)
the partnership will use new set of books of accounts. The usual practice, however, is to
use new set of books of accounts.

Any adjustments on the value of an asset or liability will be recorded through the capital
account of the partner affected by such adjustments on his books of accounts. Any
increases in the value of an asset account and decreases in a contra asset account and a
liability account will be debited and a corresponding credit to the capital account, while
decreases in the value of an asset account and increases in a contra asset account and a
liability account will be debited and credited to the capital account.

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Illustrative Problem
The statement of financial position of Jordan Company on January 1, 2020 is presented
below:

ASSETS LAIBILITIES AND CAPITAL

Cash P 50,000 Accounts Payable P 130,000
Accounts Receivable 80,000
Merchandise Inventory 125,000
Equipment 200,000
Accumulated Depreciation (15,000) Jordan, Capital 310,000
Total P 440,000 Total P 440,000

Jordan invited Axel to form a partnership on January 1, 2020. Axel agreed to invest cash
to have 25% interest in the partnership. Jordan will transfer the assets of his business and the
liabilities are to be assumed by the partnership subject to the following adjustments as agreed
upon by Jordan and Axel.

a. An allowance for bad debts of 10% of the accounts receivable is to be recognized.

b. Prepaid expenses of P 18,000 are to be recognized.
c. Accrued expenses of P 10,000 are also to be recognized.
d. Merchandise inventory is to be valued at P 140,000.
e. The Equipment is to be depreciated by 20%.

The capital of Jordan will be equivalent to the amount equal to his net assets contributed
which is to be 75% interest of the total partnership capital.

Assumption 1: Books of the sole proprietor will be used by the partnership

Step 1: Prepare the journal entries to record the adjustments:

a. Jordan, Capital 8000

Allowance for Bad Debts 8,000
10% x P 80,000

b. Prepaid Expenses 18,000

Jordan, Capital 18,000

c. Jordan, Capital 10,000

Accrued Expenses 10,000

d. Merchandise Inventory 15,000

Jordan, Capital 15,000
140,000 – 125,000

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 e. Accumulated Depreciation 15,000
Jordan, Capital 25,000
Equipment 40,000
200,000 x 20%

After posting the adjustments, the adjusted capital balance of Jordan will be:

Jordan, Capital
a) 8,000 Bal 310,000
c) 10,000 b) 18,000
e) 25,000 d) 15,000
300,000

Step 2: Prepare the journal entry to record the investment of Axel, the other partner:

Cash 100,000
Axel, Capital 100,000

Cash investment of Axel is computed as follows:

Required total partnership capital using adjusted P 400,000

Jordan, Capital as the base: ( P 300,000/75% )
Axel share is 25% ( P 400,000 x 25% ) P 100,000

Assumption 2: New set of books will be used by the partnership

Prepare the journal entries to record the investments of the partners:

Cash 50,000
Accounts receivable 80,000
Merchandise Inventory 140,000
Prepaid Expenses 18,000
Equipment 160,000
Allowance for Bad Debts 8,000
Accounts payable 130,000
Accrued Expenses 10,000
Jordan, Capital 300,000

Cash 100,000
Axel, Capital 100,000

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 The adjusting entries for the assets and liabilities affected will be recorded on the books
of the partner with existing business. A closing entry will also be prepared to formally close the
books of the sole proprietor.

Using the above illustration, the following are the journal entries on the books of Jordan:

a. Jordan, Capital 8000

Allowance for Bad Debts 8,000
10% x P 80,000

b. Prepaid Expenses 18,000

Jordan, Capital 18,000

c. Jordan, Capital 10,000

Accrued Expenses 10,000

d. Merchandise Inventory 15,000

Jordan, Capital 15,000
140,000 – 125,000

e. Accumulated Depreciation 15,000

Jordan, Capital 25,000
Equipment 40,000
200,000 x 20%

To record the closing entry:

Allowance for bad Debts 8,000

Accounts Payable 130,000
Accrued Expenses 10,000
Jordan, Capital 300,000
Cash 50,000
Accounts Receivable 80,000
Merchandise Inventory 140,000
Prepaid Expenses 18,000
Equipment 160,000

NATURE AND FORMATION OF A PARTNERSHIP Page 46

 The Statement of Financial Position of Jordan and Axel will be presented as follows, see
next page

JORDAN AND AXEL

STATEMENT OF FINANCIAL POSITION
JANUARY N1, 2020

ASSETS LIABILITIES AND CAPITAL

Cash P 150,000 Accounts Payable P 130,000
Accounts Receivable P 80,000 Accrued Expenses 10,000
Less Allowance for Bad Debts 8,000 72,000
Merchandise Inventory 140,000
Prepaid Expenses 18,000 Jordan, Capital 300,000
Equipment 160,000 Axel, Capital 100,000
Total Assets P 540,000 Total Liabilities and Capital P 540,000

The Accumulated Depreciation account from the books of the sole proprietor is not carried
on the books of the partnership. Fixed assets transferred to the partnership books are recorded
net of depreciation or its carrying value. The carrying value of the Fixed Asset will be the basis
for future recording of depreciation by the partnership. The Allowance for Bad Debts, however,
is recorded on the books of the partnership because of the possibility that it might still be
collected.

C. Partnership is formed by combining the businesses of two or more sole proprietors.

When two or more sole proprietors decided to combine their businesses and form a
partnership, they may agree to transfer their net assets to the partnership at values
agreed upon or at fair market values. The partnership may either: 1) use the books of
accounts of one of the sole proprietors, or 2) use new set of books of accounts. As
mentioned earlier, it is a common practice to use new set of books of accounts.

Illustrative Problem

On March 1, 2020, Carl and Melo decided to combine their businesses to form a
partnership. Statement of Financial Position on March 1, 2020, before the formation, showed the
following:
CARL CO. MELO CO.
Cash P 45,000 P 18,750
Accounts Receivable 92,500 67,500
Merchandise Inventory 150,000 97,500
Prepaid Expenses 31,875 15,000
Office Furniture (net) 175,000 55,000
Accumulated Depreciation (25,000) (10,000)
Office Equipment (net) 80,000 20,000
Accumulated Depreciation (22,500) (6,250)
Total P 526,875 P 257,500

NATURE AND FORMATION OF A PARTNERSHIP Page 47

 Accounts Payable P 228,750 P 90,000
Capital 298,125 167,500
Total P 526,875 P 257,500

They agreed to the following adjustments before the formation:

a. Each partner will provide allowance for bad debts equal to 5% of the outstanding
accounts receivable.
b. Carl’s office furniture should be valued at P 155,000, while Melo’s office equipment
is under depreciated by P 1,250.
c. Rent expense incurred previously by Carl was not recorded and paid amounting to P
5,000 while Salary expense incurred by Melo was also not recorded and paid
amounting to P 4,000.
d. The fair value of the merchandise inventory amounted to P 147,500 for Carl and P
105,000 for Melo.
e. Melo will contribute sufficient cash to make his capital interest equal to 40% in the
new firm.

Assumption 1: Books of the sole proprietor will be used by the partnership

The steps to be followed under this assumption are similar to the procedures as discussed
in Formation B Assumption 1. Assuming the books of Carl Co. will be used by the partnership, the
following are the steps to be followed:

Step 1: Prepare the journal entries to record the adjustments of Carl Co.:

a. Carl, Capital 4,625

Allowance for Bad Debts 4,625
5% x P 92,500

b. Accumulated Depreciation 25,000

Carl, Capital 5,000
Office Equipment 20,000

c. Carl, Capital 5,000

Accrued Expenses 5,000

d. Carl, Capital 2,500

Merchandise Inventory 2,500

NATURE AND FORMATION OF A PARTNERSHIP Page 48

Step 2: Prepare the journal entries to record the investment of Melo Co.:

Cash 46,375
Accounts receivable 67,500
Merchandise Inventory 105,000
Prepaid Expenses 15,000
Office Furniture 45,000
Office Equipment 12,500
Allowance for Bad Debts 3,375
Accounts payable 90,000
Accrued Expenses 4,000
Melo, Capital 194,000

The books of Carl Co. will not be closed since it will be used by the new partnership. The
adjustments on the affected accounts of Melo Co. will not be taken up in the books of Carl. The
following journal entries to record the adjustments and closing entry on the books of Melo Co. are
as follows:

a. Melo, Capital 3,375

Allowance for Bad Debts 3,375
5% x P 67,500

b. Accumulated Depreciation 6,250

Melo, Capital 1,250
Office Equipment 7,500

c. Melo, Capital 4,000

Accrued Expenses 4,000

d. Merchandise Inventory 7,500

Melo, Capital 7,500
105,000 – 97,500

e. Cash 27,625
Melo, Capital 27,625

NATURE AND FORMATION OF A PARTNERSHIP Page 49

The journal entry to close the books of Melo Co is:

Allowance for bad Debts 3,375

Accounts Payable 90,000
Accrued Expenses 4,000
Melo, Capital 194,000
Cash 46,375
Accounts Receivable 67,500
Merchandise Inventory 105,000
Prepaid Expenses 15,000
Office Furniture 45,000
Office Equipment 12,500

The computation for the adjusted capital of Carl and Melo and his additional cash
investment is presented as follows:
Carl, Capital
a) 4,625 Bal 296,125
c) 5,000 b) 5,000
d) 2,500
291,000

Melo, Capital
a) 3,375 Bal 167,500
b) 1,250 d) 7,500
c) 4,000 e) 27,625*
194,000

Required total partnership capital using adjusted Carl, Capital as the

base: ( P 291,000/60% ) P 485,000
Melo share is 40% ( P 485,000 x 40%) P 194,000
Less Melo, Capital before additional cash investment
(167,500 – 3,375 – 1,250 – 4,000 + 7,500) 166,375
*Additional cash investment of Melo P 27,625
=======

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Assumption 2: New set of books will be used by the partnership

Prepare the journal entries to record the investments of the partners:

Cash 45,000
Accounts receivable 92,500
Merchandise Inventory 147,500
Prepaid Expenses 31,875
Office Furniture 155,000
Office Equipment 57,500
Allowance for Bad Debts 4,625
Accounts payable 228,750
Accrued Expenses 5,000
Carl, Capital 291,000
To record the investment of Carl.

Cash 46,375
Accounts receivable 67,500
Merchandise Inventory 105,000
Prepaid Expenses 15,000
Office Furniture 45,000
Office Equipment 12,500
Allowance for Bad Debts 3,375
Accounts payable 90,000
Accrued Expenses 4,000
Melo, Capital 194,000
To record the investment of Melo.

The Statement of Financial Position of Carl and Melo immediately after the formation of
the partnership is presented as follows:

CARL AND MELO

Statement of Financial Position
March 1, 2020

ASSETS
Cash P 91,375
Accounts Receivable P 160,000
Less allowance for bad Debts 8,000 152,000
Merchandise Inventory 252,500
Prepaid Expenses 46,875
Office Furniture 200,000
Office Equipment 70,000
Total Assets P 812,750

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 LIABILITIES AND CAPITAL

Accounts Payable P 318,750

Accrued Expenses 9,000
Carl, Capital 291,000
Melo, Capital 194,000
Total Liabilities and Capital P 812,750

The percentage capital share of each partner is the amount of equity that each partner
will have in the net assets of the new partnership. The capital contribution of the partner is
generally equal to his capital share. However, there are cases where partners may agree to a
capital share equity which is not equal to his capital contribution. This situation will give rise to
bonus on the initial investments of the partners.

Example :Billy and Joel agreed to form a partnership by investing P 130,000 and P 85,000
respectively. Profits and losses are shared 65% and 35% respectively.

1. Capital accounts of the partners are equal to the amount of contribution.

Cash 215,000
Billy, Capital 130,000
Joel, Capital 85,000

2. Partners agreed to have equal capital interest in the partnership. Implied bonus
will be given to Joel since he has a lesser amount of contribution.

Cash 215,000
Billy, Capital 107,500
Joel, Capital 107,500
P 215,000/2

3. Partners agreed to have their respective capital interest in proportion to their profit
and loss agreement in the partnership. Implied bonus is given to Billy.

Cash 215,000
Billy, Capital 139,750
Joel, Capital 75,250
215,000 x 65% = 139,750
215,000 x 35% = 75,250

NATURE AND FORMATION OF A PARTNERSHIP Page 52

 EXERCISES
2-1 James joined a partnership by contributing the following: cash, P 20,000; accounts
receivable, P 4,000; land P 240,000 cost, P 400,000 fair value; and accounts payable, P
16,000.
What will be the initial amount recorded in James’ capital account? Give the entry to
record the investment of James.

2-2 Prepare the journal entry to record the investment of Jake Gonzales in the new
partnership assuming the following independent cases:
a. Merchandise inventory with a cost of P 200,000 with an agreed value equal to 70%
of its cost.
b. Cash of P 800,000.
c. Accounts receivable of P 430,000 with an estimated uncollectible accounts of
P50,000.
d. Office equipment with a cost of P 800,000 with an accumulated depreciation of
P200,000 after 5 years of use with no residual value. The office equipment was
accepted to have an agreed 10 year useful life.

2-3 The following data as of May 1, 2020 were taken from the records of Jack and Jill:
Jack Jill
Cash P 11,000 P 22,354
Accounts receivable 234,536 567,890
Inventories 120,035 260,102
Land 603,000
Building 428,267
Furniture & Fixtures 50,345 34,789
Other Assets 2,000 3,600
________ _________
Total Assets P1,020,916 P1,317,002
========= =========

Accounts Payable P 178,940 P 243,650

Notes Payable 200,000 345,000
Andre, Capital 641,976
Andy, Capital ________ 728,352

Total Liabilities and Capital P1,020,916 P1,317,002

========= =========

Jack and Jill agreed to form a partnership by contributing their respective assets and
equities subject to the following adjustments:
a) Inventories of P 5,500 and P 6,700 are worthless in Jack’s and Jill’s respective
books.
b) Accounts receivable of P 20,000 in Jack’s book and P 35,000 in Jill’s book

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 areuncollectible.
c) Other assets of P 2,000 and P 3,600 in Jack’s and Jill’s respective books are to be
written off.

1) Assuming the partnership will use the books of Jack, give the entries to adjust the account
balances of Jack and to record the investment of Jill.

2) Give the entries to adjust and close the books of Jill.

3) Assuming the partnership will use new set of books, give the entries to record the
investment of Jack and Jill.

4) Prepare the statement of financial position of the new partnership.

2-4 On July 1, 2020. Jhing and Jhong agreed to invest equal amounts and share profits and
losses equally in a partnership with Jhing investing P 110,000 cash and merchandise valued
at P 140,000. Jhong will also invest a total of P 250,000, including cash, and the agreed
values of various items as shown below:
INVESTMENT BY JHONG
BOOK VALUE FAIR MARKET
VALUE
Accounts Receivable P 195,000 P 195,000
Allowance for Bad Debts 8,750 12,500
Merchandise Inventory 23,250 26,250
Equipment, net 30,000 20,000
Accounts Payable 75,000 75,000

1. What amount of cash should Jhong invest upon the formation of the partnership?
2. Give the required entries assuming the partnership will use new set of books.

2-5 Jojo invites Jam to join him in his business. Jam agreed to join Jojo provided that the
following adjustments are taken up in the books of Jojo:
 Prepaid expenses of P 10,000 and accrued expenses of P 6,000 are to be
recognized.
 Accumulated Depreciation on Jojo’s equipment will be increased by P 10,000.
Jojo’s capital before adjustment for the above items wasp 405,000. Jam will invest enough
cash to make his interest equal to 40%.
1) How much is Jojo’s adjusted capital balance?
2) How much should Jam invest to give him a 40% equity in the firm?

NATURE AND FORMATION OF A PARTNERSHIP Page 54

2-6 On June 1, 2020, Karl and Kent formed a partnership with each contributing the following
assets:

KARL KENT
Merchandise Inventory P 500,000 P 900,000
Building - 2,450,000
Machinery and Equipment 450,000 950,000
Furniture and Fixtures 300,000

The building is subject to a mortgage loan of P 1,300,000, which is to be assumed by the

partnership. The partnership agreement provides that Karl and Kent share profits and
losses 40% and 60%, respectively.

1) What is the adjusted capital of each partner on June 1, 2020?

2) Assuming that the partners agreed to bring their respective capital in proportion to their
respective profit and loss ratio, and using Kent’s capital as the base, how much cash is to
be invested by Karl?

2-7 Jolo and Joko entered into a partnership on August 1, 2020 by investing the following
assets:
Jolo Joko
Cash P 400,000 ---
Merchandise inventory --- P 500,000
Land --- 1,150,000
Building --- 750,000
Equipment 650,000 ---

The agreement between Jolo and Joko provides that profits and losses are to be divided
into 30% (to Jolo) and 70% (to Joko), and that the partnership is to assume the P 350,000
mortgage loan on the building.

1) If Joko is to receive a capital credit equal to his profit and loss ratio, how much cash must
he invest?
2) Assuming that Joko invests P 600,000 cash and each partner is to be credited for the full
amount of the net assets invested, how much is the total capital of the partnership?
3) Using the data in number 2, how much is the total assets of the partnership?

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2-8 Jerry and Jason are combining their businesses to form a partnership. Cash and non-cash
assets are to be contributed. The non-cash assets to be contributed and the liabilities to
be assumed are:

JERRY JASON
Book Fair Value Book Fair Value
Value Value
Accounts Receivable, net P 50,000 P 40,000 P 100,000 P 90,000
Merchandise Inventory 200,000 240,000 160,000 150,000
Property and Equipment, net 400,000 320,000
Accounts payable 280,000 280,000 40,000 40,000

After the above adjustments, Jerry and Jason are to contribute or to withdraw cash to
bring their respective capital to P 350,000 each. Based on the above information, answer
the following:

1) How much is the capital of Jason after giving effect to the above adjustments but before
the cash investment or withdrawal as the case may be?
2) How much is the capital of Jerry after giving effect to the above adjustments but before
the cash investment or withdrawal as the case may be?
3) How much is the cash investment or withdrawal of Jerry? Indicate whether investments or
withdrawal
4) How much is the cash investment or withdrawal of Jason? Indicate whether investments
or withdrawal
5) How much is the total currents assets of the partnership immediately after its formation?
6) How much is the total assets of the partnership immediately after its formation?

2-9 John invested in a partnership a parcel of land which cost his father P 2,000,000. The land
had a market value of P 3,000,000 when John inherited it three years ago. Currently, the
land is independently appraised at P 5,000,000 even though John insisted that he “would
not take P 9,000,000 for it.”

What is the amount that should be recorded in the accounts of the partnership for the
parcel of Land?

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