SCOPE

In this module, the learner is able to demonstrate understanding of key concept, uses
and importance of FA2 – Conceptual Frameworks and Accounting Standards in real
business world.

OVERVIEW and OBJECTIVES

This course provide an understanding of both Philippine and international reporting
regulations, uses and limitation of financial accounting information and current issues
in reporting, gives thorough knowledge of current concepts, frameworks and
techniques in financial accounting. It deals with fundamental financial reporting issues
such as the objectives and users of financial statements, the characteristics that make
the accounting information useful, the concepts for recognizing and measuring the
elements in the financial statements, and how various types of transactions and events
should reflect in the financial reports.

DISCUSSION OF TOPICS:
FA2 – Conceptual Frameworks and
Chapter 1:
Accounting Standards MODULE ACCOUNTING FOR PARTNERSHIP

Chapter Objectives:
This chapter should enable the learner to know and understand:
 The definition of partnership and its characteristics.
 Advantages and disadvantages of a partnership.
 Difference between partnership and corporation.
 The different classifications of partnership and the different kind of partners.

 PARTNERSHIP
In a 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
profit among themselves. Two or more persons may also form a partnership for
the exercise of a profession.

Clariza C. Gamboa  Characteristics of a Partnership

 Mutual Contribution
FA2 Professor  Division of Profits and Losses
 Co-ownership of Contributed Assets
  Mutual Agency  Partnership with a fixed term or for a particular undertaking.
 Limited life  Partnership at will.
 Unlimited liability 4. According to Purpose:
 Income taxes  Commercial or trading partnership.
 Partner’s equity Accounts  Professional or non-trading partnership.
5. According to legality of existence:
 Advantages and Disadvantages of a Partnership  De jure partnership.
 Advantages versus Proprietorship  De facto partnership.
 Brings greater financial capability to the business.
 Combines special skills, expertise and experience of the partners.  Kinds of Partners:
 Offers relative freedom and flexibility of action in decision-making. 1. General partner
2. Limited partner
 Advantages versus Corporations 3. Capitalist partner
 Easier and less expensive to organize. 4. Industrial partner
 More personal and informal. 5. Managing partner
6. Liquidating partner
 Disadvantages 7. Dormant partner
 Easily dissolved and thus unstable compared to a corporation. 8. Silent partner
 Mutual agency and unlimited liability may create personal obligations to 9. Secret partner
partners.
 Less effective than a corporation in raising large amounts of capital.  ARTICLES OF PARTNERSHIP
A partnership may be constituted orally or in writing. In the latter case, partnership
 PARTNERSHIP DISTINGUISHED FROM CORPORATION agreements are embodied in the Articles of Partnership.
 Manner of Creation
 Number of Persons  ACCOUNTING FOR PARTNERSHIP
 Commencement of Juridical Personality
 Management Formation of Partnership for the first time
 Extent of liability
 Right of Succession On July 1, 2021, Nicanor and Angel agreed to form a business
 Terms of Existence partnership with the following investments.
Nicanor Angel
 Classifications of Partnerships Cash 100,000 150,000
1. According to object: Accounts receivable 90,000 120,000
 Universal partnership of all present property. Allowance for doubtful accounts 15,000 10,000
 Universal partnership of profits. Merchandise inventory 200,000 150,000
 Particular partnership.
2. According to liability:
The partners agreed to the following:
 General
 Limited 1. The specific accounts receivable of Angel amounting to P10,000
3. According to duration: is not included.
 2. The allowance for doubtful accounts of Nicanor is increased to An Individual and a Sole Proprietor, or Two or More Proprietors Form a
P17,000. Partnership
3. The merchandise inventory of Nicanor is valued at its net
realizable value of P190,000. On March 1, 2021, Jocelyn, Josephine, and Jennifer, all proprietors,
4. The fair market value of Angel's inventory amounts to P158,000. agreed to form JJJ
Partnership by pooling their respective business resources as follows:
Required:
Prepare the entry recording the formation of the partnership. Jocelyn Josephine Jennifer
Cash 120,000 150,000 130,000
ADJUSTMENTS: Accounts receivable 90,000 100,000 120,000
Allowance for doubtful accounts 10,000 8,000 11,000
NICANOR Merchandise inventory 250,000 280,000 230,000
Before After Accounts payable 80,000 90,000 70,000
Adjustment Adjustment
Cash 100,000 100,000 The three agreed on the following adjustments:
Accounts receivable 90,000 90,000 1. The accounts receivable adjusted based on their net realizable values as
Allowance for doubtful accounts 15,000 17,000 follows:
Merchandise inventory 200,000 190,000 Jocelyn 75,000 80,000 (5,000)
Total Assets 375,000 363,000 Josephine 85,000 92,000 (7,000)
Jennifer 103,000 109,000 (6,000)
ANGEL
Before After 2. The merchandise is reduced by the following amounts:
Adjustment Adjustment Jocelyn 3,000
Cash 150,000 150,000 Josephine 2,000
Accounts receivable 120,000 110,000 Jennifer 3,000
Allowance for doubtful accounts 10,000 10,000 Required:
Record the formation of the partnership using a new set of books for the
Merchandise inventory 150,000 158,000 partnership.
Total Assets 410,000 408,000
JOURNAL ENTRIES:
1. Adjustment of books of the partners.
JOURNAL ENTRY a. Jocelyn, Capital 8,000
Cash 250,000 Alllowance for Doubtful accounts 5,000
Accounts receivable 200,000 Merchandise inventory 3,000
Merchandise inventory 348,000
Nicanor, Capital 363,000 b. Josephine, Capital 9,000
Angel, Capital 408,000 Alllowance for Doubtful accounts 7,000
Allowance for doubtful accounts 27,000 Merchandise inventory 2,000
c. Jennifer, Capital 9,000 ASSETS
Alllowance for Doubtful accounts 6,000 Current Assets
Merchandise inventory 3,000 Cash 400,000
Accounts receivable 310,000
2. Close the books of the sole proprietorships. Less: ADA 47,000 263,000
a. Jocelyn, Capital 362,000
Merchandise inventory 752,000
Allowance for doubtful accounts 15,000
Total Assets 1,415,000
Accounts payable 80,000
Cash 120,000
Accounts receivable 90,000 Liabilities and Equity
Merchandise inventory 247,000 Current liabilities
Accounts payable 240,000
b. Josephine, Capital 423,000
Allowance for doubtful accounts 15,000 Partner's Capital
Accounts payable 90,000 Jocelyn, Capital 362,000
Cash 150,000 Josephine, Capital 423,000
Accounts receivable 100,000 Jennifer, Capital 390,000 1,175,000
Merchandise inventory 278,000 Total Liabilities and Capital 1,415,000

c. Jennifer, Capital 390,000

Allowance for doubtful accounts 17,000 -End of Discussion-
Accounts payable 70,000 SELF-CHECK TEST:
Cash 130,000
Accounts receivable 120,000 1. A partner invested into a partnership a building with a P250,000 carrying value
Merchandise inventory 227,000 and P400,000 fair market value. The related mortgage payable of P125,000 was
assumed by the partnership. As a result of the investment, the partner's capital
3. Record the investments of the partners. account will be credited for ____________________.
Cash 400,000
Accounts receivable 310,000 2. Leopoldo Medina contributed land, inventory, and P280,000 cash to a partnership.
Merchandise inventory 752,000 The land has a book value of P650,000 and a market value of P1,350,000. The
Allowance for doubtful accounts 47,000
inventory has a book value of P600,000 and a market value of P510,000. The
Accounts payable 240,000
partnership also assumed a P350,000 note payable owed by Medina that was used
Jocelyn, Capital 362,000
Josephine, Capital 423,000 to purchase the land. Lenore Loqueloque agreed to put up cash equivalent to
Jennifer, Capital 390,000 Medina's net investment.

JJJ Partnership Required:

Statement of Financial Position Prepare the journal entry to record Medina's and Loqueloque's investment in the
As of March 1, 2021 partnership.
3. Gogola and Paglinawan have just formed a partnership. Gogola contributed cash
of P1,260,000 and computer that cost P450,000. The fair value of the computer is Required: prepare the entry recording the distribution of the profits equally.
P360,000. Gogola has notes payable on the computer of P120,000 to be assumed
by the partnership. Gogola is to have 60% capital interest in the partnership. Answer:
Paglinawan contributed only P900,000. The partners agreed to share profit or loss To record the distribution of the profits, the following entry is made:
equally. Income Summary 360,000
Jocelyn, Capital 120,000
Loddy, Capital 120,000
Required:
Joji, Capital 120,000
Compute for the ending balance of each partner after formation.
2. Arbitrary Ratio
- In dividing the profits and losses based on the arbitrary ratio, the capital
contributions or the service rendered are not given much consideration. In
other words, the partners agree on a specific profit and loss distribution
Chapter 2:
mechanism based on what they believe is equitable, fair and just.
PARTNERSHIP OPERATIONS - Arbitrary ratio can be presented in any of the following forms: fraction;
percentage; decimal; and ratio.
Learning Objectives:
 State the items that affect the division of a partnership’s profits or losses Illustration:
among the partners. The general partners in Prime Partnership are Gian and Justin, with capital contribution
 Compute for the share of a partner in the partnership’s profit or loss. of P320,000 and P180,000, respectively. And Ryven, who contributes his services.
Gian, Justin and Ryven share the profits and losses of the partnership as follows: 3/6,
2/6, and 1/6, respectively. The partnership realized a profit amounting to P430,000
Start of Discussion for 2020.

Required: Prepare the entry recording the distribution of profits.

PARTNERSHIP OPERATIONS
Answer:
Methods of Dividing Profits or Losses Income Summary 430,000
1. Equal Distribution Gian, Capital 215,000
- An equal distribution of profits and losses disregards the capital balances of or Justin, Capital 143,333
any efforts contributed by the partners to the partnership. Ryven, Capital 71,667

Illustration: Computation:
The Golden Partnership realized a net profit of P360,000 for the period which ended Partner Proportion Allocation
on December 31, 2020. The capital balances of the partners are as follows: Gian 430,000 x 3/6 215,000
Justin 430,000 x 2/6 143,333
Jocelyn, Capital P 490,000 Ryven 430,000 x 1/6 71,667
Loddy, Capital 510,000 430,000
Joji, Capital 600,000
3. Capital Ratio Jun. 1, 2020 Additional P60,000 310,000
- The distribution of the profits and losses based on the capital ratio emphasizes Investment
to the contributions of the partners. In this perspective, the services, efforts, Aug. 1, 2020 Additional 40,000 350,000
or time provided by the partners to the partnership are disregarded. Investment
- The term “capital” may refer to any of the following:
1. original capital Izzy, Capital
2. beginning capital Date Particular Debit Credit Balance
Jan. 1, 2020 Beg. Balance P330,000
3. ending capital
May 1, 2020 Additional P90,000 420,000
4. average capital
Investment
July 1, 2020 Withdrawal P30,000 390,000
- The general concept is that the profits and losses are distributed in accordance Sep. 1, 2020 Additional 60,000 450,000
with the agreement of the partners. Investment

- In the absence of an agreement, the share of each partner in the profits and The partnership realized a profit of P400,000 for the year 2020.
losses is determined by their contribution to the partnership. If there is no
stipulation as to the division of the profits and losses, the share will be based Required: Distribute the profit of P400,000 based on the following:
on the original capital of each partner as specified in the articles of co- a. original capital
partnership. b. beginning capital
c. ending capital
- However, if the original capital is not provided or explicitly indicated in the d. average capital
articles, the term “capital” will refer to the beginning capital of each partner at
the start of any particular period. A. Original Capital
Income Summary 400,000
- In case the partnership agreement provides only the provision for the division Hazel, Capital 160,000
of profits, the share of each partner in the losses will be in the same proportion Izzy, Capital 240,000
as the profit distribution.
The distribution of profit:
Illustration: Hazel 2/5 x P400,000 = P160,000
HI Partnership started its operation on January 1, 2019 with the following original Izzy 3/5 x P400,000 = 240,000
capital contributions of the partners as indicated in the articles of co-partnership:
Hazel’s total contributions, P200,000; Ivy’s total contributions, P300,000. B. Beginning Capital
Income Summary 400,000
On December 31, 2020, two years after the formation of the partnership, the capital Hazel, Capital 180,000
accounts of the partners showed the following information: Izzy, Capital 220,000

Hazel, Capital The distribution of profit:

Date Particular Debit Credit Balance Hazel 27/60 x P400,000 = P180,000
Jan. 1, 2020 Beg. Balance P270,000 Izzy 33/60 x P400,000 = 220,000
Mar. 1, 2020 Withdrawal P20,000 250,000
C. Ending Capital
 Income Summary 400,000
Hazel, Capital 175,000 Bonus Computation
Izzy, Capital 225,000 A partnership contract may provide for a bonus to the managing partner equal to a
specified percentage of income.
The distribution of profit:
Hazel 35/80 x P400,000 = P175,000 The bonus computation usually has four variations:
Izzy 45/80 x P400,000 = 225,000 Illustration:
Income before bonus and tax 4,400,000
D. Average Capital Bonus 10%
Income Summary 400,000 Income tax rate 30%
Hazel, Capital 174,286
Izzy, Capital 225,714 1. Bonus is expressed as a certain percent of income before bonus and before tax.

The distribution of profit: Income before bonus and tax 4,400,000

Hazel 305/700 x P400,000 = P174,286 Multiply by 10%
Izzy 395/700 x P400,000 = 225, 714 Bonus 440,000

Computation of Average Capital: 2. Bonus is expressed as a certain percent of income after bonus but before tax.
Hazel Average Capital
No. of Mos. B = .10 (4,400,000 – B)
Period Covered Balance Unchanged Total B = 440,000 - .10B
Jan 1- Feb 28 P270,000 2 P540,000 B + .10B = 440,000
Mar 1- May 31 250,000 3 750,000 1.10B = 440,000
Jun 1 – Jul 31 310,000 2 620,000 B = 440,000/1.10
Aug 1- Dec 31 350,000 5 1,750,000 B = 400,000
P3,660,000
3. Bonus is expressed as a certain percent of income after bonus and after tax.
Average Capital (P3,660,000/12months) P 305,000
B = .10 (4,400,000 – B – T)
Izzy Average Capital T = .30 (4,400,000 – B)
No. of Mos. B = .10 [4,400,000 – B – .30 (4,400,000 – B)]
Period Covered Balance Unchanged Total B = .10 (4,400,000 – B – 1,320,000 + .30B)
Jan 1- Apr. 30 P330,000 4 P1,320,000 B = 440,000 - .10B – 132,000 + .03B
May 1- Jun 30 420,000 2 840,000 B + .10B - .03B = 440,000 – 132,000
Jul 1 – Aug 31 390,000 2 780,000 1.07B = 308,000
Sep 1- Dec 31 450,000 4 1,800,000 B = 308,000/ 1.07
P4,740,000 B = 287,850
T = .30 (4,400,000 – 287,850)
Average Capital (P4,740,000/12months) P 395,000 T = 1,233,645
4. Bonus is expressed as a certain percent of income after tax but before bonus. Income Summary 44,000
AJ, Capital 16,800
B= .10 (4,400,000 – T) BJ, Capital 7,800
T= .30 (4,400,000 – B) CJ, Capital 19,400
B= .10 [4,400,000 – .30 (4,400,000 – B)]
B= .10 (4,400,000 – 1,320,000 + .30B)
B= 440,000 – 132,000 + .03B -End of Discussion-
B - .03B = 440,000 – 132,000
.97B = 308,000 SELF-CHECK TEST:
B= 308,000/.97
B= 317,526 Problem 1:
Elisa Diaz and Ma. Concepcion Manalo formed a partnership investing P330,000 and
Illustration: P110,000 respectively. Determine the partner's participation in the 2019 profit of
Profit Distribution with Salary, Interest and Bonus. P420,000 under each of the following independent assumptions:
AJ, BJ and CJ are partners in an accounting firm. Their capital account balances at
December 31, 2020 were: AJ, P90,000; BJ, P110,000; CJ, P50,000. They share profits a) No agreement concerning division of profit.
and losses in a 4:4:2 ratio, after the following special terms: b) Divided in the ratio of original capital investment.
c) Interest at the rate of 8% allowed on original investments and the remainder
1. Partner CJ is to receive a bonus of 10% of the net income after the bonus. divided in the ratio of 2:3.
2. Interest of 10% shall be paid on that portion of partner’s capital in excess of d) Salary allowances of P50,000 and P70,000, respectively, and the balance to be
P100,000. divided equally.
3. Salaries of P10,000 and P12,000 shall be paid to partners AJ and CJ, respectively. e) Allowance of interest at the rate of 8% on original investments, salary allowances
of P50,000 and P70,000, respectively, and the remainder to be divided equally.
The income summary account for the year 2020 shows a credit balance of P44,000.
What is the profit share of each partner? Problem 2:
Laguna and Cadelina share profits and losses on a fractional-share basis with 2/5 for
Computations: Laguna and 3/5 for Cadelina. This year, the firm has profits of P650,000. the beginning
AJ BJ CJ Total capital balances for the year were P900,000 for Laguna and P1,300,000 for Cadelina.
The balances of the Drawing accounts are P300,000 for Laguna and P240,000 for
Bonus to CJ
Cadelina.
Net profit before bonus P44,000 Required:
Journalize the entry to close income summary and partners' drawer accounts on
Net profit after bonus (P44,000/110%)P40,000 – – P4,000 P4,000 December 31.
Interest to BJ – P1,000 – 1,000
Problem 3:
Salaries P 10,000 – 12,00022,000 Sarah and Cally are partners in a business. Sarah's original capital investment was
Balance,4:4:2 __6,800 6,800 3,400 _17,000 P400,000 and Cally's was P600,000. They agreed to share profits and losses as follows:

Total P 16,800 P7,800P19,400 P44,000 Sarah Cally

Journal entry to record the distribution of profit to partners: Salaries P120,000 P180,000
Interest on original capital 10% 10%
Remaining profits or losses 3/5 2/5 Purchase of interest
 The incoming partner’s
Required: contribution is not recorded in
1. If profit for the year was P500,000, what is the share of Sarah in the partnership the partnership books.
profit?  The transaction is recorded by
a transfer within equity. The
2. If profit for the year was P300,000, what is the share of Cally in the partnership
incoming partner’s capital
profit? account is credited with a
3. If losses for the year were P100,000, what is the share of Sarah in the partnership corresponding debit to the
profit? selling partner’s capital
4. If profit for the year was P150,000, what is the share of Sarah in the partnership account.
profit?  Partnership capital remains
5. If profit for the year was P150,000, what is the share of Cally in the partnership the same before and after the
profit? admission of the incoming
partner.
 No gain or loss is recognized in
the partnership books.
The admission by investment may be recorded using bonus or revaluation method.
Chapter 3:
PARTNERSHIP DISSOLUTION Withdrawal, retirement or death of a partner
Learning Objectives: Purchase by remaining
 Determine the causes of partnership dissolution. partners
 Account for the effects of partnership dissolution on the partnership equity.  The payment to the outgoing
partner is not recorded in the
partnership books.
 The transaction is recorded by
Start of Discussion a transfer within equity. The
outgoing partner’s capital
account is debited with a
PARTNERSHIP DISSOLUTION corresponding credit to the
purchasing partner’s capital
Dissolution is the change in the relationship of the partners caused by any partner account.
ceasing to be associated in the carrying on of the business.  Partnership capital remains
the same before and after the
The following are examples of events that result to partners dissolution: withdrawal, retirement or death
of outgoing partner.
a) Admission of a partner
 No gain or loss is recognized in
b) Withdrawal, retirement or death of a partner the partnership books.
c) Incorporation of a partnership. Incorporation of a partnership
Admission of a partner
Investment in the partnership
 The incoming partner’s
contribution is recorded in the
partnership books.
 The transaction is recorded in
the regular manner. The
incoming partner’s capital
account is credited with a
corresponding debit to the
asset invested.
 Partnership capital is increased
by the incoming partner’s
contribution.
 No gain or loss is recognized in
the partnership books.
Purchase by partnership
 The payment to the outgoing
partner is recorded in the
partnership books.
 The transaction is recorded in
the regular manner. The
outgoing partner’s capital
account is debited with a
corresponding credit to the
payment made.
 Partnership capital is decreased
by the payment for outgoing
partner’s capital balance.
 No gain or loss is recognized in
the partnership books.
 When a partnership is incorporated, the corporation acquires and assumes the
assets and liabilities of the partnership in exchange for the shares of stocks issued
as settlement of the partner’s respective interests.
 Any excess of the fair value of the net assets of the partnership over the aggregate
par value of shares issued is credited to share premium.
Assume that the assets and liabilities are fairly valued on the
statement of financial position and the partnership decides to admit
Leon as a new partner, with a 20% interest. No goodwill or bonus is
to be recorded. How much cash must Leon contribute?

In all cases of dissolution, the partnership assets and liabilities at date of dissolution Chapter 4:
may need to be revalued to their fair values. Any revaluation increase or decrease is
allocated to all of the existing partners as at the date of dissolution. PARTNERSHIP LIQUIDATION
Learning Objectives:
-End of Discussion-  State the order of priority in cases of liquidation.
 Account for the liquidation of a partnership.
SELF-CHECK TEST:
1. Garachico invested P100,000 for a one-third interest in a partnership in which the
other partners have capital totaling P260,000 before admitting Garachico. After Start of Discussion
distribution of the bonus, what is Garachico's capital?

2. Partners Chung, Detoya and Digao share profits and losses in a 3:1:2 ratio, PARTNERSHIP LIQUIDATION
respectively. Detoya wishes to leave the partnership, so the assets are revalued
and are found to be overvalued by P300,000. If each partner had a capital balance Liquidation is the termination of business operations or the winding up of affairs. It is
of P500,000 prior to Detoya's notification of withdrawal, what amount should a process by which
Detoya be allowed to withdraw from the partnership? 1. The assets of the business are converted into cash
2. The liabilities of the business are settled, and
3. 3. Any remaining amount is distributed to the owners.
The following is the condensed statement of financial position of
the partnership of Rica, Tan and Ann who share profits and losses Liquidation may either be voluntary or involuntary.
in the ratio of 4:3:3.
Conversion of Non-cash Assets into Cash
The conversion of assets into cash is referred to as “realization”, while the settlement
Cash 180,000 Accounts payable 420,000
of claims of creditors and owners is referred to as “liquidation”. However, the term
Other Assets 1,660,000 Payable - Partner Ann 60,000
liquidation is used in a broader sense to include the entire winding up process.
Receivable -
Partner Rica 40,000 Rica, Capital 620,000
Methods of Liquidation:
Tan, Capital 400,000 1. Lump-sum Method
_________ Ann, Capital 380,000 All the noncash assets of the partnership are sold simultaneously or within a very
Total 1,880,000 1,880,000 short period of time. The proceeds are then used to settle all of the liabilities first,
and any remaining amount is paid to the partners under a lump-sum payment.
2. Installment liquidation 3. The liabilities to outside  The liabilities to outside
In most cases, it would take some time before all the assets of the business are creditors are fully settled. creditors are partially or fully
converted into cash. In such case, the partner’s claims are settled on installment settled.
basis as cash becomes available, but only after all partnership liabilities are fully 4. The liabilities to inside  The liabilities to inside
settled. creditors are fully settled. creditors are partially or fully
settled but only after full
When financial statements are prepared during the liquidation process, all of assets of settlement of the liabilities to
the partnership are restated to their realizable values and liabilities to their expected outside creditor.
settlement amounts. The use of historical cost, present value, or fair value is 5. Any remaining cash is  If both the liabilities to
appropriate only when the entity is a going concern. distributed to the owners in outside and inside creditors
full settlement of their are fully settled, any
Settlement of Claims: interests. remaining cash less cash set
The available cash of the partnership is used to settle claims in the following aside for future liquidation
descending order: expenses is distributed to
 First, to outside creditors. the owners as partial
 Second, to inside creditors (e.g. payables to partners) settlement of their interests.
 Third, to owner’s interests

Right of off-set -End of Discussion-

As shown above, a loan payable to a partner has a higher priority over the partner’s
capital balance but a lower priority over the claims of outside creditors. However, the SELF-CHECK TEST:
legal right of offset allows a deficit in a partner’s capital account to be offset by a loan Illustration: Lump-sum vs Installment liquidation
payable to that partner. Use the following information for the next two independent cases:

Lump-sum Liquidation VS Installment Liquidation Fact Pattern: On January 1, 2021, the partners of ABC Co. decided to liquidate their
Lump-sum Installment partnership. The following information was made available:
1. All of the noncash assets are  Some of the noncash assets
converted to cash. are converted to cash. Cash P 20,000
1. The total gain or loss on the  The carrying amount of any Accounts receivable 60,000
sale is allocated to the unsold noncash asset is Inventory 120,000
partner’s capital balances considered as loss. This is Equipment 300,000
based on their profit or loss allocated to the partners’ Total P500,000
ratios. capital balances based on
their profit or loss ratios. Accounts payable P 30,000
2. Actual liquidation expenses  Actual and estimated future Payable to B 20,000
are allocated to the partners’ liquidation expenses are A, Capital (20%) 100,000
capital balances based on allocated to the partners’ B, Capital (30%) 150,000
their profit or loss ratios. capital balances based on C, Capital (50%) 200,000
their profit or loss ratios. Total P500,000
Case #1: Lump-sum liquidation
Information on the conversion of noncash assets is as follows:
a. P50,000 was collected on accounts receivable; the balance is uncollectible.
b. P70,000 was received for the entire inventory.
c. The equipment was sold for P250,000.
d. P2,000 liquidation expense were paid.
Requirement: Determine the amounts of cash distributed to the partners in the final
settlement of their capital accounts.
Case #2: Installment liquidation
Use the fact pattern above but assume that the partnership will be liquidated over a
prolonged period of time. Distributions to owners shall be made as cash becomes
available. Information on the conversion of noncash assets is as follows:
a. 75% of the accounts receivable was collected for only P30,000.
b. Half of the inventory was sold for P40,000.
c. Equipment with carrying amount of P200,000 was sold for P120,000.
d. P2,000 liquidation expenses were paid. Estimated future liquidation expenses
totaled P1,000.
e. P9,000 cash was retained in the business for potential unrecorded liabilities and
anticipated expenses.
Requirement: Determine the amounts of cash distributed to the partners from the
partial realization of partnership’s assets.
Chapter 5:
ACCOUNTING FOR CORPORATION’S SHAREHOLDERS’
EQUITY
Learning Objectives:
 The accounting for shareholder’s equity of a corporation.
 Major components of SHE and basic types of shares.
 Issuance of shares and possible considerations.
Start of Discussion
What is Stockholders’ Equity?
Stockholders' equity is the amount of assets remaining in a business after all
liabilities have been settled. It is calculated as the capital given to a business by
its shareholders, plus donated capital and earnings generated by the operation of
the business, less any dividends issued. On the balance sheet, stockholders' equity
is calculated as:
Total assets - Total liabilities = Stockholders' equity
An alternative calculation of stockholders' equity is:
Share capital + Retained earnings - Treasury stock = Stockholders'
equity
Both calculations result in the same amount of stockholders' equity. This amount
appears in the balance sheet, as well as the statement of stockholders' equity.
The stockholders' equity concept is important for judging the amount of funds
retained within a business. A negative stockholders' equity balance, especially
when combined with a large debt liability, is a strong indicator of impending
bankruptcy.
Stockholders' equity can be referred to as the book value of a business, since it
theoretically represents the residual value of the entity if all liabilities were to be
paid for with existing assets. However, since the market value and carrying
amount of assets and liabilities do not always match, the concept of book value
does not hold up well in practice.
Two Major Components of SHE:
 Share Capital – reflects the amount of resources received by a corporation as a
result of investment by shareholders, donation or other share capital transactions.
(Legal Capital and Share Premium)
 Retained Earnings – (accumulated profits or losses) is the amount of capital
accumulated and retained through the profitable operations of the business.
Two Basic Types of Shares
 Ordinary Share - The basic ownership class of the corporation. When only one Two Methods of Accounting for Share Capital
class o share is issued, it must be ordinary share. Ordinary shares are the entity’s Memorandum Entry
Transactions Journal Entry Method
residual equity. Method
Unissued share capital xxx Notation to the ledger as follows:
 Preference Share – This share gives its owners certain advantages over ordinary Authorization Authorized share capital xxx Dr. Authorized Share Capital
Cr. Shares amount
shareholders. These special benefits relate either to the receipt of dividends when
declared before the ordinary shareholders or to priority claims on assets in the Subscription
1. At par Subscription receivable xxx Subscription receivable xxx
event of corporate liquidation.
Subscribed share capital xxx Subscribed share capital xxx
2. Above Subscription receivable xxx Subscription receivable xxx
Terms Related to Share Capital par Subscribed share capital xxx Subscribed share capital xxx
 Authorized Share Capital – the maximum number of shares the corporation can Share Premium xxx Share Premium xxx
issue as specified in the article of incorporation. Collection of Cash xxx Cash xxx
Subscription Subscription receivable xxx Subscription receivable xxx
 Issued Share Capital – shares which have been sold and paid for in full. Issued
shares may include treasury shares. Issuance of Subscribed share capital xxx Subscribed share capital xxx
 Subscribed Share Capital – the portion of the authorized share capital that has shares Unissued share capital xxx Share capital xxx
been subscribed but not yet paid.
 Outstanding Share Capital – Issued shares which are in the hands of the -End of Discussion-
shareholders.
 Treasury Shares – issued shares acquired by the corporation but not retired and SELF-CHECK TEST
are therefore awaiting to be reissued at a later date. Problem 1:
L Corp. is authorized to issue P1,000,000 ordinary shares divided into 10,000 shares,
Accounting for Issuance of Share Capital with a par value of P100 per share. The diversified corporation issued on cash basis
• Shares with par value are sold. 2,000 shares at par. Prepare journal entry for the transaction.
– Proceeds should be credited to the share capital account to the extent of
par value of the shares, with any excess being reflected as share premium. Problem 2:
• Shares without par value are sold. Abusado Co. is authorized to issue 300,000 of P2 par value ordinary shares. The
– Proceeds should be credited to the share capital account. If no-par stock company has the following transactions:
has a stated value, the excess proceeds over stated value may alternatively a) Issued 60,000 shares at P30 per share; received cash.
be credited to share premium. b) Issued 750 shares, selling at P35 per share, to lawyers for services in
connection with the organization of the corporation. The value of the services
Considerations for Issuance of Shares was P27,000.
1. Actual cash paid to the corporation. c) Issued 900 shares, valued objectively at P30,000, to the employees instead of
2. Tangible or intangible properties actually received by the corporation. paying them cash wages.
3. Labor already performed for or services actually rendered to the corporation. d) Issued 37,500 shares in exchange for a building valued at P885,000 and land
4. Previously incurred indebtedness by the corporation. valued at P240,000. (The building was originally acquired by the investor for
5. Amounts transferred from unrestricted retained earnings to stated capital. P750,000 and has P300,000 of accumulated depreciation; the land was
6. Outstanding shares exchanged for stocks in the event of reclassification or originally acquired for P90,000)
conversion. e) Received cash for 19,500 shares issued at P38 per share.
7. Shares of stock in another corporation. f) Issued 12,000 shares at P45 per share; received cash.
8. Other generally accepted form of consideration.
Chapter 6:  Dividends out of capital
RETAINED EARNINGS  Liquidating dividend

Three Important Dates:

Learning Objectives:
 Date of Declaration
 To have an overview of the Retained Earnings
– the date on which the directors authorize the payment of dividends to
 To know what is a Dividend and its types
shareholders.
 To know the process of distribution of dividends to shareholders.
 Date of Record
– the date on which the stock and transfer book of the corporation will be
closed for registration.
Start of Discussion
 Date of Payment
– the date on which the dividend liability is to be paid.
Overview of Retained Earnings
CASH DIVIDENDS
- It represents the component of the shareholder’s equity arising from the retention
Cash dividends are the most common type of dividend. Dividends may be expressed
of the assets generated from the profit-directed activities of the corporation.
as follows:
a) A certain amount of pesos per share – For example, the dividend is P5 per
- Retained earnings represent the cumulative balance of periodic net income or
share.
loss, dividend distributions, prior period errors, changes in accounting policy and
b) A certain percent of the par or stated value – For example, 7% dividend is
other capital adjustments.
declared, a P200 par value share will receive P14 as dividend.
Kinds of Retained Earnings
Illustration:
 Unappropriated Retained Earnings
MEB, Inc. declared a cash dividend of P12 per share of ordinary shares on July 1.
Represent the portion which is free and can be declared as dividends to
The dividends are payable on August 1 to shareholders of record on July 21. The
shareholders.
entity has 100,000 ordinary shares issued of which 7,000 shares are held in treasury.
 Appropriated Retained Earnings
Date of Declaration:
Represent that portion which has been restricted and therefore is not available for
Retained Earnings/ Dividends 1,116,000
any dividend declaration.
Cash Dividends Payable 1,116,000
[P12 per share x (100,000-7,000)]
DIVIDENDS
Dividends are distributions of earnings or capital to the shareholders in proportion to
Date of Record:
their shareholdings.
No Entry.
Dividends are broadly defined into:
Date of Payment:
 Dividends out of earnings
Cash Dividends Payable 1,116,000
 Cash dividends
Cash 1,116,000
 Property dividends
 Liability dividends in the form of bond and scrip
PROPERTY DIVIDENDS
 Stock dividends or bonus issue
Also known as dividends in kind are distribution of earnings of the entity to the SHARE DIVIDENDS
shareholders in the form of noncash assets. Stock dividends / Bonus issues are distributions of the earnings of the entity in
the form of the entity’s own shares.
MEASUREMENT:
– An entity shall measure a liability to distribute non-cash assets as dividend to its The stock dividends create only a change in the components of the shareholders’
owners at the fair value of the assets to be distributed. equity – decrease in retained earnings but increase in share capital.
– At the end of each reporting period and at the date of settlement, the entity shall  If the stock dividend is less than 20%, it is a small stock dividend.
review and adjust the carrying amount of the dividend payable with any change  If the stock dividend is 20% or more, it is considered as large stock dividend.
recognized in equity as adjustment to the amount of distribution.
DIVIDENDS ON PREFERENCE & ORDINARY SHARES
Settlement of Property Dividend Payable - When the board of directors declares cash dividends, preference shareholders
When an entity settles the dividend payable, the difference between the carrying are entitled to dividends before ordinary shareholders receive any distribution.
amount of the dividend payable and the carrying amount of the asset distributed
shall be recognized in profit or loss. - The corporation is not obliged to declare dividends annually. When the board
does not declare dividends for cumulative preference shares accumulate; these
Measurement of Noncash Asset Distributed: are called dividends in arrears.
An entity shall measure a noncurrent asset classified for distribution to owners at the
lower of carrying amount and fair value less cost to distribute. PREFERENCE AS TO DIVIDENDS:
Preference as to dividends does not mean that the preference shareholders have an
Impairment Loss absolute right to dividends.
- If the FV less cost to distribute < Carrying Amount
When preference share has preference as to dividends, the dividend right may be:
Illustration: a) Noncumulative and non-participating
3S Food Industries, Inc. has 5,000 shares investment in another entity accounted for b) Noncumulative and participating
as nonmarketable equity investment. The carrying amount of this investment is c) Cumulative and non-participating
P500,000. on Dec. 1, 2021, this growing food corporation declared as property d) Cumulative and participating
dividends this investment to all its outstanding par value shares to be distributed on
Dec. 15, 2021. The fair market value of the investment at the declaration date was -End of Discussion-
P950,000. There was no change in fair value on settlement date.
SELF-CHECK TEST:
Journal Entries: DomDane Publishers, Inc., the premier publisher of accounting, finance, economics,
Date of Declaration: math, taxation, entrepreneurship and other business textbooks, has the following
Retained Earnings 950,000 selected accounts in its shareholders’ equity:
Property Dividends Payable 950,000
12% Preference Shares, P100 par, authorized 4,000
Date of Payment/Settlement: shares, 2,000 shares issued and outstanding P200,000
Property Dividends Payable 950,000 Ordinary Shares, P100 par, authorized 6,000 shares,
Investment in Equity Securities 500,000 3,000 shares issued and outstanding 300,000
Gain on Distribution of Property Dividends 450,000 Retained Earnings 260,000
The board failed to declare dividends for the past two years. The current year’s results
of operations gave the board reasons to declare cash dividends of P200,000.

Required:
Compute for the dividends received by preference and ordinary shareholders given
that the preference shareholders are:
a) Noncumulative and non-participating
b) Noncumulative and participating
c) Cumulative and non-participating
d) Cumulative and participating

END OF MODULE

REFERENCES/ LEARNING RESOURCES:

1. Theory of Account Volume 1 2018 Edition
Conrado T. Valix/Christian M. Valix

2. Theory of Account Volume 2 2018 Edition

Conrado T. Valix/Christian M. Valix

3. Conceptual Framework and Accounting Standards 2020 Edition

Conrado T. Valix/Christian M. Valix

4. Partnership and Corporation Accounting 2020 Issue – 22nd Edition

Win Ballada/Susan Ballada