DEFINITION OF PARTNERSHIP

~ Contract whereby two or more person bind themselves to contribute money, property
or industry to a common fund, with intention of dividing profits.
~ two or more persons for the exercise of profession.

CHARACTERISTICS
Separate legal personality
Ease of formation
Co-ownership of CC
Mutual Agency
Unlimited liability
Limited Life
Income tax

STAGES OF PARTNERSHIP
1. Formation- first time creation
2. Operation- to operate and ear “profit”
3. Dissolution- changes in partnership agreement and reaction among partners
4. Liquidation- realization of assets and settlement of liability

PARTNERSHIP FORMATION
1. Valuation of asset
2. Re-alignment of contributed w/ agreement

VALUATION OF CONTRIBUTION
1. ASSETS- contributed asset valued in the following order of priority:
a. Agreed value (Art 1787 civil code)
b. Fair value (art 1787 & pars
c. Book values

2. LIABILITIES- recognized only to the extent that are “assumed” by partnership.

Liabilities assumed valued in the following order:
a. Agreed value (art 1787)
b. Fair value/ Present value- (art 1787 & PFRS)
c. Book values

CAPITAL CONTRIBUTION vs. CAPITAL CREDIT   

Cap. Contri.- “net assets invested by partner”    & Cap. Credit- “ agreed capital for
partner”
Accounting issue when two do not equal:

1. Bonus Method- increase/ (decrease) in partner’s capital    is treated as reduction/

addition to other’s cap. Contribution.
2. *Goodwill- increase any partners contribution cap. Treated as an “unindentifiable” not
allowed under PFRS
3. Revaluation- increase any partner’s contribution cap treated as “identifiable”
4. Additional Investments- increase any partners contribution cap. Results to “additional
investment”
4. Withdrawal- decrease partners CC

PARTNERSHIP OPERATION
1. Profit or loss allocation
2. Periodic adjustments of capital after operation

PROFIT DIVISION:
1. Loss sharing agreement
2. How profit is divided

ARBITARY ALLOCATION:

1. SALARY- compensation for services, regardless of the existence of profit. Provision

of services is independent from earning profit.
2. INTEREST- compensation for the use of partner’s capital, regardless of existing
profit. Partner’s capital is independent from earning profit.
3. BONUS- compensation of good performance, provided “only partnership has profit &
there is positive balance in net income after deducting salaries & interest”.

BONUS BASES:
a. Before bonus: Bonus rate x bonus factor
b. After bonus: Bonus rate x [bonus factor/ (100% + bonus rate)]

SPECIAL ALLOCATION
1. Distribution of profit in order of priority
2. Minimum profit sharing
3. Bonus, interest or salaries are regarded as “expenses”

STATEMENT OF PARTNERS CAPITAL

Beg. Or original Capital xx

(+) Additional Investment xx
(-) withdrawal               (xx)
(-) drawings               (xx)
(+) share in net income xx
(-) share in net loss               (xx)
END CAPITAL xx

PARTNERSHIP DISSOLUTION
~ change in relation of partners caused by disassociation or change in agreements of
partners.

1. Admission of new partner

2. Retirement of partners
3. Death of partner
4. Assignment of interest by partner
5. Incorporation of partnership

ADMISSION OF NEW PARTNER

1. Admission by purchase- personal transaction between new and existing partner(s)

Methods:
a. No adjustment or book value method- assets are not adjusted regardless of the
amount paid by new partner

b. With adjustments or revaluation method- assets of existing partnership are

adjusted based on amount paid by new partner.

2. Admission bu investments- transaction between new partner and the partnership

Methods:
a. Bonus method- bonus to old or new partner(s)
b. Revaluation- revaluation of existing partnership
c. Goodwill- goodwill to new to existing partners
d. Withdrawal- withdrawal of assets result of re-alignment
e. Additional investment- add’l investment result of re-alignmnet

RETIREMENT/ WITHDRAWAL

Procedures:
1. Adjust capital for share in P&L during period up to date of withdrawal/ retirement
2. Adjust capital for share in revaluation as date of withdrawal or retirement

Scenarios:
Retiring or withdrawing partner’s interest is sold to

1. One or more remaining partners

a. No adjustment of book value method- assets are not adjusted regardless of the
amount paid to retiring/ withdrawing partner.
b. W/ adjustment or revaluation- assets of the existing partnership are adjusted
based on amount paid t retiring/ withdrawing partners.

2. Outside party (w/ the consent of all partners)

a. No adjustment or BV method- assets are not adjusted regardless of the amount
paid to retiring/ withdrawing partner
b. With adjustments or revaluation- assets of existing partnership are adjusted
based on amount paid to retiring/ withdrawing partner.

3. Partnership
a. Settlement > net interest
 1. Bonus to retiring partner
2. Goodwill to retiring partner
a. Total goodwill approach
b. Partial goodwill approach
3. Revaluation (upwards) of the partnership

b. Settlement < net interest

1. Bonus to remaining partners
2. Revaluation (downward) or write -down of assets

c. Settlement = net interest

* the death of partner results in automatic dissolution of partnership at the point of

death.

Procedures:
1. Adjust capital of deceased partner for share in p&l during period up too date of
death
2. Adjust capital for share in revaluation (if any) at date of death
3. Adjusted capital of deceased partner shall be transferred to liability account
4. Interest payable to estate is real expense on the book of continuing partners.

INCORPORATION

Procedure:
1. Adjust capital the partners for share in p&l during the period up to date of
incorporation
2. Adjust capital the partners or share in revaluation ( if any) as at the date of
incorporation
3. Adjusted capital shall be    transferred to share capital. Excess of aggregate
capital account over par value/ stated value of shares of stock issued treated as share
premium.

ASSIGNMENT OF INTEREST

1. Partnership- rules of retirement applies

2. Other partners- reclassification of capital
3. Third party
a. W/ consent of other partners- rule of formation apply
b. W/o consent of other partners- no accounting issue

PARTNERSHIP LIQUIDATION- winding up business involves:

1. Converting non-cash assets into cash ( realization)

2. Settlement of liabilities- (liquidation)
3. Distribution of any remaining amount to the partners
BASIC CONCEPT OF LIQUIDATION

1. Unlimited liability- external creditor can run after their separate personal property in
case of partnership assets is “insufficient”. Personal debtor is preferred over
partnership creditor in respect to personal assets. Partner impersonally insolvent and
have capital deficiency, other solvent partners absorbs capital deficiency.

2. Right of offset- to set-off his loans against his capital deficiency

METHODS OF PARTNERSHIP LIQUIDATION- liquidated by sale of assets

A. Lump sum liquidation/ total liquidation/ single distribution

~ all NCA are realized into cash & one-time distribution
a. Realization of assets & distribution of gain/ loss on realization based on
P&L ration
b. Payment of liquidation expenses
c. Payment of liability
d. Elimination of partner’s capital deficiencies. After distribution of loss on
realization. Partner’s incur capital deficiency eliminate using one of these methods:
i. Deficient partner has loan bal., exercise right of offset
ii. Deficient partner is solvent, make add’l investment
iii. Deficient partner is insolvent, other partners absorb his deficiency

B. INSTALLMENT LIQUIDATION- cash distribution are made once cash becomes

available from realization of NCA
a. Record realization of assets & distribute the realized gain/ loss using P&L ratio
b. Pay liquidation expenses & unrecorded liability if any & distribute using P&L
ratio
c. Pay all outside creditor
d. Distribute cash to partners

METHODS OF INSTALLMENT LIQUIDATION

1. Safe payment schedule

i. Shows how much cash can be “safely” distributed to partners. Determining
amount of loss required to eliminate each partner’s capital account. Any positive
balance represents “safe payments”

* Theoretical loss or assumed loss

a. All meaning NCA
b. Cash withheld for contingent expense (future liquidation exp. & possible
unrecorded liabilities)

2. Csh priority Program- determines order of priority to cash distribution partners

Steps
 a. Compute total interest/ partners’s cap
b. Compute loss absorption potential (LAP) of each partner
c. Determine priority of payments to partners
d. Compute the amount of cash to be paid under each priority by multiplying
incremental diff in the partner’s LAP & P&L
*Loss Absorption Potential= Net interest/ profit sharing ratio

ASSUMPTION IN INSTALLMENT LIQUIDATION

1. Individual partners are assumed to be personally insolvent
2. Remaining NCA are deemed to be worthless (creating max possible amount of loss)

STATEMENT OF PARTNERSHIP LIQUIDATION- schedule shows in detail all

transaction associated with liquidation of partnership. Partner’s equity/ interest

Partner’s cap bal xx

(-) drawing act ( not yet closed)               (xx)
(+) payable to partner xx
(-) receivable from partner               (xx)
PARTNERS’ EQUITY/ INTEREST xx

RECEIVABLE PAYABLE
1. Loans to partners 1. Loans from partners
2. Due from partners 2. Due to partners
3. Dances to partners 3. Advances from partners
4. Receivable from partners 4. Payable to partners