chapter 19 - Partners . hip Dissolution: changes in Ownership ip Dissolution: aD discuss the Abpler. we dBCus the changes in o or of the partnershi aN Pore {£00 snes ora ce ehe lemon the paresip i ee Oy Darna c bev luton is defines go o9 ent. Such change mn ownership ree DisOUHON ery ee SOCOIEd in te corms change fe rloten ofthe pores Spe exc he asciohonat parece go angie om re weg pile xpOPION. CONGES in ownership stuctre oe e, iginal pupose. en Lpariners courting ot Partnership Dissolution "ol requ pec occountna team, USUAly has ch, O¥METSID that co nat neg MeN dung Hs exétence, In ti 8 entity Dropriety theory, which views a eosuring changes in the eauity ot ne het. 95 «group oF individ investos patnership accounting, individual partne’s is @ mojor aspect of gecause Ownership Changes result in the eet eppotndy to eee Gissolution of the partnership, this provides an the . length transactions that reflect the curent vaueclhovateate dia Copital interest versus Profit and Loss Interest In preparing Partnership agreement, the partners must recognize that there is a dstinction between a partner's capital interest and his/her interest in income and losses subsequently reported in the partnership, A poriner’s capita] interest is a claim against the net assets of the partnership as shown by the balance in the partner's capitol account. An interest in profit ond oss determines how the partner's capital interest wil increase or decrease as a result of subsequent operations. In some cases, the relationship of the capital accounts to one another does not conespond with the partner's profit and loss ratio. Capital balances are historical cost figures. As describe earlier, a partner's capital interest may change over time because they result from contributions and withdrawals made throughout the life of the business os well 0s from the allocation of parinership income, Therefore, any correlation between o partner's recorded capital at a particular point in time and the profit and loss percentage would probably coincidental having a capital of P40,000 out of a total for exomple, Mr. X became a partner by 9 riot capt ees ih the copital of P100,000. Mr. X received © forly-percet A ent (35%) interest in profit and loss. Dortnership, but he was given a thitty-ve Per Ass terest to a Third Party ; sarment oh on ies assigns haere! nthe parnesip yiner A partnership is not dissolved when @ par ne the relationship of load party, because such a0 or oe rei receve We esiging ‘he partners. Such assignment 0! - Scanned with CamScanneros 200 CHAPTER I orine's Interest in future partnership profs ond partnership asses in the even, Bquidation. : ‘ausignee partner and does not obtain the right fo share Pence ei pemenhp Wo review fansacon ond records of yn Partnership. Because the assignee does not become a poriner. the only chang tequbed on the partnership books is o fransfer the Interest of the assignor perine, j, the assignee. Mustration 19-1; The capital bolonces {and profit ond loss ratio) of A and B in the AB portnership is presenteg a, ‘A.copttal (75%). B. copitol (25%)... Samii ‘A ossigns 30% of hs interest to C (C paid P26,000 for the interest assigned). The entry to recorg the 60,000 C.copital.. assess seseesenessaaseys The purchose price paid by C is completely relevant to the entry recorded on the books The folowing should be noted: |. The omount of the capital transfers equal fo the book valve of A’s copitol at the tine Of the assignment, andis independent of the consideration received by A. 2. I the book valve of A's capitol is P22.500 (20% x P75.000), then the amount of the ‘transter entry is P22.500, regardless of whether C poys A P22,500 or some other amount. The remaining discussions of this chopter consider the problems that arise upon dissolution as o result of the: 1. Admission of a new partner: 2. by Purchase of Interest. and ‘b. by Investment 2. Withdrawal or retirement of o partner 3. Death or incapacity ofa partner, and 4. Incorporation ofa partnership Partnerships commonly deviate from GAAP in the following arecs: 1. the use of the cosh basis instead of the accrual bass, 2. the use of prior period adjustments, 3. the use of current vaives instead of historical cost (usually in connection with a change in ownership), ond 4, the recognition of goodwil (usually in connection with a change in ownership}. Valuation - An Issue When there is a change in the ownership of the partnership, the problem of assigning a foir valve of the firm arses. I © question as to whether or not the assels and fbiiies f the continuing partnership should be revolved. There are two approaches under this Parficularissue: 1. Revaluation approach (usually referred to as goodwill procedure- Non-GAAP). Under this approach, the use of fair values provides an equitable measure of ‘each partner's copital interest in the partnership. ‘Advanced Financial Accounting - A Comprehensive: Conceptual & Procedural Approach Scanned with CamScanner‘te supported on the basis that, In dissolution, ine ol potenti It legal dsolved and a new partnership enfly Is formed. Tete nd Ue Yaluation for new entities is the fal value of the axsets acqured and labilles ossumed by the newly formed entity. gue thal revaling al asses ond In Partnership membership states fully the te economic Condition of the partnership at thot point in ine, ‘ond pope liability values ond goodwill to the partners been managing the business during the fime changes in value further, ins cproach results in a marked departure from the historical cost pincile ‘ es es from the accepted ‘2ccounting principles in Philippine Finan : Porting Standards (PFRS) 3, "Business Combinations". which prohibits eniis from recognizing goodwal that has not been acquired by acaustion, Accountonts ne use the ‘900dwill or asset revaluation methods orgue tha! the goat of Paste .. ‘Accounting is to state fairly the relative capital equities of is May require different aoe ‘Occounting procedures from those ‘Absence of revaluation (usually refered fo as the bonus procedure/book valve ‘approach - GAAP). Proponents of this approach would retain the historical cost camying valve. Others argue that changes in portnership interests ore tke changes in stockholders of a corporation. and that private sales of ownership interests provide no basis for revaluation of the business entity, Some accountants cfiticize the revaluation of assets or recognition of goodwil, even though there may be objective evidence that a specific asset is undervalued or overvalued because it results in a marked departure from the historical cost principle. They argue that recording an increase in fair value for extemal reporting is nat in ‘accordance with substance over form principle, That js, even though the Partnership may be legally dissolved, the economic substance of some types of dissolution is that the business activity continues without intemuption which ‘means the new partnership is merely an extension of the old These alternative views reflect the concept of legal and business entities, respectively. Both views have merit, and this text does no! emphasize either. Instead, both views are Oscussed ond illustrated in the following sections For quite some time, it hos been a praclice lo fist revalve assets and abilities to their lt values ‘and record any Identifiable unrecorded assels and ltablities before ‘ecording the admission or withdrawal of a partner, Bul, cent serach becare Pohibitive on the issues of revaluation. In summary, Ihe fotowioo, ee bserved in relation to valuation of assets and liabilities on dissolution px — ‘rence Financial Accounting ~ A Comprohesive Conceptual Scanned with CamScanneroy po EARTER Ig 1. there ison agreement omong parines that revoluation & Olowed, then rete, the necessary adjustments before dissolution. 2. Inthe absence of an agreement: «. Revaluation approach (or goodwl procedtre - Non-GAAP) The ase ang lobes should be recorded at their far value: Alter a complete anahas both tangible and intangible assels acquired by the new entity, inctacing ‘goodwil created by the previous partnership, should be recorded, b. Absence of revaluation approach (or bows procedure - GAAP). Extn, book values should not be adjusted to fair valve unless such Odjustments would have otherwise been alowed by GAAP: ».1. Recognition of Decreases in Net Asset Revaluations (GAAP). Folowing the principle of conservatism (prudence). decreases oF write-downs in the volue of assets may be recognized even though they ore no} reoized, Recognition of unrealized losses is not unique to Partnership accounting ‘and is notin confict with GAAP. Even if there is no dissolution, unrealized losses suggested by economic events should be recognized. For example, PAS No. 36, “Impairment of Assets", presents procedues for recognizing impoiments of fixed assets and currently held good Net asset revoluations performed using the appropriate accounting stondords are in accordance with GAAP. b.2. Non-Recogniion of Increases in Net Asset Revalvations (Non-GAAP). Thete are no GAAP standards that provide for increases in the value of ‘onfinancial assets or recognition of new goodwil, solely due to a change in partnership membership. The use of absence of revaluation approach (or bonus procedure] does prevent the recognition of asset appreciation, which would otherwise not be allowed by GAAP. ‘Admission of « New Partner ‘Anew partner can be admitied with the consent of all partners in the business. Such con admission brings about a new association of individuals ond represents the formation of new partnership: the original partnership is considered dissolved by ‘common consent, ‘A partnership agreement is binding only while the relationship between the original Portes fo the agreement remains unchanged. ‘A new agreement should be drawn up that specifies the partners’ interests upon formation of the partnership, the distribution of profits and losses among partners, and l of the other considerations relative to the new association, The accounting problems in respect to the admission of a new partner are os follows: 1. Recognition of accounting exors in prior periods 2. Recognition of proft or los from the beginning of the accounting period to the date of adrrission. "[dvanced Financlel Acrsuuins sd Qn ‘Advanced Financial Accounting ~ A Comprehensive: Conceptul & Procedural Approach Scanned with CamScanner~~ man } qosng of partnership books 3 fecogniion one! ae! evaluation subject fo heres ccsed previous, by Purchase of an interest ey fon kieret fom one o mere ofthe paren rxhting partners pe PMS ansaction between the Incoming partner ond ‘_ ie ” the seling partner(s). No (gerd ett carats sole a caputcinstek re yen made hon i Corporation stock. The only entry made yo, ip's books transfers on amount from the seling pats copie ‘ccount 7ewpariner'scopitol ccount 19-1: Admislon by Prchave fan interest Mrot after operations and pores’ withdrawals dung 204 ortnenhip ae e ox value of PICDOO0 ond profi and loss (Pl percentege on lorry xd 05 . pie * Copital PAL Balances _Percentog repchase pice paid by Fis completely ielevant othe enty recorded on the partnership De Breprdess o why F pad mare than the book valve of the partnership interest. Simply, x ol P4,000's personal gain of partner D. eexces re above ent shows that no cosh s tonsa othe porinesip, The new profit and les ‘io wilbe set by the new set of portners. tue hechase of Interest rom All Parnes This sation ves se to Ine assumptions: usmoton 1: Purchase at Book Valve. F puchases 0 one-fouth (1/4) interest in he fern, One- farot each portne’s copitl is 10 be Hronslened to the new partner. F pays the portner’s 700). The entry to record the transaction in the books follows: D.copitol(P60,000x ZA)... -s2+e E.copita (P40,000 x "4 . F.copitol.....- : Tarscard he camisonofF oF bookvOve Decapital balances o the partners aller the admision of F woukd be a 7 Po D___E_{book valve) _Totol | Copiiclbefare admission... P 60,000 P 40.000 100,000 Kater! remained % y Copital after admission 45.000 P.30.000 __P 25,000 mee a ~ enn enc —__—- Scanned with CamScannereT ag before and after admission, 1 sou be observed thatthe total conic! DIONE ie sone ook vaive of the portnershio wos men itis presumed that ths intrest represented the copie profit ond oss ratio 1 the interest acquired is % a oy prot ands res Therefore, the of he porne afte he adressen would be 0s folows: D, copital 70% x4). E.copitol (30% x) : : F. copital (equivalent to interest acqured) Total. wes Value. F purchased one-fourth of D's interey payment directly 100 and € Tene than Book ‘ 5 for P12,000, making ‘Assumption 2: Purchase at More and the old portners continue 10 Us their old pop 18,000 ond one-fourth of F's interes partner wil have a % profit and loss ratio and loss ratio. There ore three altematives to reflect the above transaction: opproach, Same answer with Assumption | above. The postive £. computed as follows: ‘Alternative 1: Book value (BV)* excess of PS,000 represents a personal gain of D and “Amount poid (P18,000 + PI2000).-.......- Less: BV of interest acquired ~(P 100.000 x %) Excess (Gain of D ond € - personalin nature) The partnership does not record this gain becouse it was not benefited from i. ‘ths may also refer to as bonus method, ‘Alternative 2: Revaluation (goodwill) approach. Under this approach. the positive excess of the ‘amount paid over book value acquired will be copitoized 10 determine the revaivation of cosets. The entry to record the transaction in the books folows: Assets (Goodwill) 20,000 D. copitol (20,000 x 708) ....... 14000 E, copital (P20.000 x 303) 8000 To revalve osets below oamision of new poriner computed as flows: “Amount paid (18.000 + P12.000) Less: BV of interest acquired ~(P 100.000 x Bicess . Ovided by (copitalzed al): Interest acquired Revalvoion of Asse! Upword... ws PRU) P2000 100%) 1. copital [[P60,000 + P14,000) x %)] : ~ 18500 E copia [(P40,000 + P6,000) x AJ]... 11,500 F.copital 7 ei Torecord the acrmssono/Fusng revaluation approach The capital balances of the partners after the admission of F would be as follows t P30000 7 7120000 (100%) 25,000 190,000 (100%) ° 5.000 30,000 D> (amount paid) Total Capital Before admission... P 60,000 P 40,000 P 100,000 Revaluation upward 14,000 __6,000 20,000 Copito! bolance atter | Revaluation P 74,000 P 46,000 P 120,000 x Interest remained % % Capital after admission P5550) 34500 Pp 30.000 P120,000 “Advanced Financial Acountng - A Comprehensive: Conceptual & Procedural Ipprooh Scanned with CamScannerinl jn 5 } D(G/Ax708)...... | Paves 20 y 1d that the fotol coptal 3 ys lance ater he odrison revere: equate! | oP eon of sels Omountn to P20, iio 19 10 P20.000. The reason of such ae such odjusiments i fo equotte | 3; Purchase of Less thon 9h | gga ‘éreclly 10 D ond E Ten Valve. F purchased one-fourth of 0's interest Dy | Ww pariner wil have a 4 profit and loss ratio and the 2.00 Foes eontrue 8 er ok pot ands, #l etree ateratives toreflect the above transaction: ee" | | 1; Book value (BV) approach. Some conswer with 73,000 represents a personal loss of D and E. conned ons mereoone | of mn] [POG sscsscssvvsseesvsnsacee i BV ofinerest ocquted~ 100000. 4). wn : * eo l : 15.000) | | 2: Revaluation (goodwill) approach, Under this approach, the negalve ex ot ens FO ook valve ccqured wil be conoid fo delemine re revouoon of nate entry 10 record the transaction inthe books folows: 1 copia 12000708). 3400 F copia PI2O00K3) ess svsoseon 3600 [Pi a — re ne Se aT a1] Pano 7 P6800 (1008) Timon po |e Vole ocquted “100000 togcoo (1008) cess ‘ . Le PF3.000) Reged oy: hires ocauted 1. coptal[(P60,000 - P8400) x" Teeesesees 12900 | | copital [(P40,000 -P3.600 x Yess 9.100 *.copito. : : 200 | ee ro a be as follows se copitl bolonces ofthe porne’s oe he OSTEO? of Fwould | F ___ o {amount paid) __Totl Capiai before adrrisson.... P 0,000 P 40.000 Pp ‘an Revaluation downward. 8400 300 {| copteibolonce otter Revalation p siao0 P3600 P8000 sinleestremoined y | Capital ofter admission pag700 P.27.200 22,000 98,000 | | Copital interest % % PALE D844 70%) 5250 £ (94x30) 20 Le fap essen ws Scanned with CamScannershoud balance ater the admission " observed thot the told copia see fie reravaton a ose anaing fo PZ. fh og Ste the cop o he new portne tothe omoun! * sean menos fs ‘cbsence of an agreement, for assumptions 2 ond 3 above ‘ais Domotec pecans! weadtelon he sent co COMO abe of et PHI, observe! Mg Jore when the purchase was made ffom one portner va een ones made in (4) ond (6) above have no effect on how. cancer = Fst be dibued to O ond E ouside the panei. The amount an gine" Mare negated toracon between incrdvah ond does nt tec! the pornayh Sn Unless he omount is used as a bas for he revaluation of the fm, oats Comparison of book Valve and Revaluation Approach (Goodwill roc edure) the portners in making a decision between the two methods on their re tosoncer the lm were loced to iquidate. the identifiable assets (orn cone ty recoged wil be evertvtyimpored and woud robObY Be of no vas on 2D would represent alos to the portnestip. le The book vue and revaution approach wil yd the sme res Ho Condon gy the new prof and oss agreement cre met. These ore: Hedy 1 The new partner’ prof ond bs shang rofo must Be equal 0 she capi uy ot (percentage interes in assets), 2. The old partner's continue to shore profits ond losses between themselves i ratio. '9 Cose 2. Asumption (2). both the concions [0] ond (b} above were met. 0 ein y terakaton (goodwl] approach or obsence of revovaton fOeck value) approach ey selected. The balances for each method ore presented as follows: * Schedule of Account Balances — Goodwal? —— the ogg Nel Ast Copia fHeetVove Aeprooch __aueh_fewvoten o_o Bolonce before omission... 100000 P0000 P «Octo 1 Adiision by purchase... {15.000 110.900) as ong | Bolonce ater admission of F... P100000 P4000 P3000 2s0%9/ Revataton Approach Bolonce belore odmision...... P100000 P 0000 Revaluation .. P 20.000 14,000 ‘Acmission by purchase... 118.500) Bolonce ater admission of F be depreciation/ impairment 100,000 =P 20,000 P $5500 Depreciaton/mpaiment” m0) 110500 Balonce otter depreciation/ imporment. Plog PH P4500 ‘new BOW endow oo SORE TSR anak 00) ‘The two methods will yield the same results computed as follows: Copii D E E Bolances after ocrission o F (BV approach] P 45.000 P3000 25000 Bolances after admission of F (Revaluation. approach} 45,000 _30.000 _25,000 Goin cr (los) through use of book value approach Pop op “Teen ho PnencelAcwuntig = A Camprohancv Concepts! d Procedure Approoh Scanned with CamScanneryolve (b0NUS) approge; PR coming partners fem i ed it Prof gy HO” CBpOGCh wil not iowed in S8eI5 (COPitOLintereny) ono 8 Noli yield the some uN be as fo mn Therel fenfical with the percentage Z ! ore, the selection proces for he new ion ‘book vie neler (Bonus), ‘method results in eventual odvontog® to the new port a ond corespendng dadvnage he ogre Revoluation (Goodwi 1 a ereml cnet) cpeoch 1 | choice evaluation (¢ il) P&L Inferest < Coptial , Cee pan chase gems nano na es. | | | | orn by Investment | may obtair i i wai a er ke eee interest in copitol ond future income by eid py debiling the assets pene, {f assets ove invested, the admission is C ty a.coresponcing omen ‘ond ‘adjusting the net capital interest in the Peper rota erneialaler enor ie alocated on the basis ofthe new omen 4 prof and los rato. i parner may acquire an res! nthe partnehp based onthe fotowind ‘No bonus [absence of evaluation) orno Bonus [absence of revaluation) pills inraeal (goodwl) approach: 4 Revaluation (goodwill approach, ne stuation indicated above (2) bonus approach. and [i revaluation (goodwill jach are mutually exclusive of each, Both methods undessond the possibility of sing assets and/or the exslence of revaluation of sets (and fabities). However fe atflerin ow these condtons re ecogriaed. proach (GAAP). The bonus approach generaly follows the book-valve ‘nod, that is, exiting book volves should no! ibe odjusted fo curent volves unless 1s would have otherwise been allowed by GAAP. riner is odmitted fo on exiting partnership, the total (agreed ‘ons of the folowing: partnership ess Poe prewous pornennp’s ase OS recognized bY fed) 1 re such adjustment therefore, when o capital of the new partnership c 1. The book value ofthe previous 2. Any wite-coowns in the valve GAAP and 4. he fora of he consideration pa (net set conn! fone partnership By IME incoming partner. rhe boot value method of he bonus approach does no} directly recognize increases by the corsideration that the incoming partner POYs creases vy realiocating OF in esse volves suggested fowever the method does inarecty recognize such Mt ating the copitl balances ofthe parines tevalvation (Goodwil) Approach (Non-GAAP), The rev emphosies the Tego! sgriicance of a change in the Own “accounting ~A Comprehanive: Conceptual Procedural Approach ‘Advanced Financ! uation (goodwill opProIc? ership structure of Scanned with CamScanneree ace of © NW POFMET TSU in, partners iewpoin! entrance ‘ oo the err reation of a New legal entity. Sin, een a fit be eq at ine previous oars eed ea ent sro Be Tecorded on new entity has result {for valve rong 070 intongible goat ote ten Ae oe rorev oof net ose {goodwill ree ership, including eres, shoud be recorded pattnership wil conss! of the toto Therefore, the total (agreed) copital of renew “s = ‘i ioe assets of the previous parinerstip Ps , 1 eyed oe cen less unrecognized depreciation on the recordeg 2. Umecognized o ween net assets eae previous pammenip Pe a yoosttie 10D Dog 4 Umecognzed revaluation of porinesnip plus ond on pid net asset controued) both tangible 4. The foir value of the consideration Peng porine’ ‘ond intangible, received from the in Therefore in onalying transactions involving oom folowing procedure is folowed! ‘A. Generally. compare the tot copitol TAC: 1. ITEC = TAC, no adjustment is mage for revolation (goodwill of ne! ose 2 ICC > TAC. the difeence is due 10 ene (which is normally the cose) 10 the overstatement of the partnership assels oF !ne required diminution in porine's capital which can be effected by drawing (this hoppens if there is P specification thatthe old partners wil continue to use their old profit and toss tio). 4. ICC- AC, the difference is a capital transfer or bonus to the old partners 3 " the cc < AC, the additional capital credit is either share in bonus oF revaluation of net assets (goodwill from the old partners as the case maybe. sion of a partner by investment, he tal contributed capital (TCC) with the total agreed Fenda | Accounting ~ A Comprehensive: Conceptual &P Scanned with CamScanneryoges in porentheses otter the ~ - ts ond losses. Portner’s fone reameeoruseseneeaen ‘ofthe fir. : Revaluation. Jin sto 40,000. vets PIOGO0 for oY interest nthe fr, The 1010! FT® 2B pe 1010! ota! caer (gen, foto! ogreed copitl(PZ0,000+ PI ve 401080 piference esses (P20,000 + P10,000 +,P10,000) rpenew parne’s coriolis the eo » estojonoberecograed, Some wih his act nvestment here! fore, no BONUS OF interest 019 xorg ers should be observe settee tout 1/4) test ocaved by 25 frond loss interest ownership, resumed to De the copital 2. any loons fotrom ony exing pores shoud not be ince i coset adrrission fotainteres: rai ore? becouse i'scriy he copitaliterest It's ‘being acquied not few Porter, invests PIO for 35% interest in the firm. The * coe Honus 10 N cppiatotter ‘admission is P40,000. , Te toto! contributed copital (ICC) fs equal to foto! cogreed capitol rac}. 30 °° revaluation oodwill) should be rec ized os follows: Total agreed capita (given) P 40,000 Less Total agreed copital {p20,000 + P70,000 + P10.0001 40.000 Difference : ce . pes) pital, the ciference s riner's contributed copit , The new por ner. cttbutable to bonus 10 NW. ‘sconiripuied copia! (aver) Ysagreed capita: (P40.000x dierence (onus tonew porte] veeninytorecord the tonsoction in Ne woot FOS Cosh : 10,000 | G copital (P4000 60%) 2,400 | : 1,600 000 H capitol (P4.000x 40%) 1 Scanned with CamScannerCH, meg Coxe 3: Revaluation (Goodwill) to New Porines 1 vests PIOGED 1917 nergy ‘ond'is akowed a credit of P15,000 for his COPOL the tot the ©. The foe contovted conics FCC] $18 MP ME TOM! O9FEEC copy nye 0 revaluation i] sno pe re ore Tolol agreed copttat (P15.000/ | " pitooey Less Toto contd copia (P20000 *°10,000 1 — aa Diterence revalvation/goodwall . The new parne’s contributed copies than the OOFSEC COD he aay. 5.000 infos atibutable fo revaluation/goodwil 0 new. of T'scontibyied copia! (given) => J's agreed copital (given) : . Dilerende (revaivation/goodwal fo new porinet 25009 The ent ‘Case 4: Bonus to Old Partners. J conveyed o tangible assets with o fair valve of P25,009 with on ‘assumed mortgage of P5000 in exchange for a 30% interest in capital with bonus to by recognized, keeping in mind thal J would be acquiing o 1/4 interest in profits. Before the ‘o saan ‘abonus method). sevens : Less Tota contbuted copia (F280 fo] * P6001. — 4.0 . The new portner’s contributed capital is less than the agreed capial the citerence ‘ttibutable to bonus to new porn: rs " P6000 Ts contibuted copital (gwen) J's agreed copia (P34,000 x 30%) : : 1020 Diference (bonus to new partner) : vo B4200 The enttis to record the transaction inthe books folows G copital (P2000 60%) = 1.200 H,copitol (P2000 x 40)... 800 Equipments. 2.000 To reduced he vake eames te Coit : 6000 ] G, copitl (P4200 x 60%) 2520 H. capital (P4200 x 408) 1.680 J. copital 10.200 Toreccra he Corson O17 Case 11: Revaivation (Goodwill) fo Old Partners with an indication of a Revaluation (Goodwil) invests P15,000 for a 4 interest in the frm. GH Partnership's had other assets with & book volve ‘of PS.500 ond o fair value of P10.500, Revaluation (goodwill approach is recorded on the firm boos prior to J's acimission, (0. There is an understatement of asset amounting to P5000 (P10.500 - P.500) that is needed to be recorded (oko even in cases of overstatement) as jong as the ‘evaluation (goodwill opproach is being used. Therefore, the contibuted capital of partner G and H are 05 follows: 6, copitot P20,000 + [P5,000 x 60%) : P 73,000 H. capitol: 10,000 + {P5.000 x 40%) —12.000 Total contributed copitol before the admission 35.000 b. The foto! contributed capital (ICC) is less than the total agreed capital (TAC). 50 ‘evaluation (goodwill should be recognized as follows Total agreed capital 15.000 %)" P 60.000 Less: Total contributed capital [P35 000 (a) + P1 5.000] 50,000 Difference (tevaluation/goodwil | Eno.09 Cece 2100007 wip “A Coaprabonha Coniphald Remy Scanned with CamScannersavone ve sienna nat mt Cee ene Te nol rors be Upere. e FSN wos copitend ie Bovemine he vale ol the parmeryp a o whole. oe new portnet’s contbuted capitals equal to the agreed copital the citference ol ek & FipQ00in [0 safbable fo revaluation (goodwl o od porines Ts fed copital (given)... ? ysagreed copital... : : ~ P 18,000 gvoiyation/goodwil 0 new porn. Lo %,copital [P5000 x 60) ito P5,000 x 408)... Cohn: pss (goodwill 4, copital oe ‘copitl(P10,000x 60%) . 4 ee 1 copital 10.000 x AOR)... poses 4,000 reve Pe TON OL , poud DE ‘opserved that when revaluation {goodwil) i indicated 10 be recognized, then f ud ape no ate bor approach be app? we ee it (Goodwit) fo New Partner with g gine ‘and is alowed a credit of P6,000 for evaluation (goodwill. teil contributed copia! (TCC) is lst Woe the total agreed capital (TAC). 5° me 0 Tawation (goodwil) snoud pe recognized 05 follows: capital (TCC. P50.000 + P6000, ode} = P 56,000 — 50.000 Tord agreed Tek rol contributed coptol (F2H 1000 + P10.000 + F20,000). werrence (@vOUaHN/ GOON ooo E500 copitol, the diference of ‘perew porn’ conbuted copra’ § less thon the greed pation (goodwil) new partner: >. Me goin al isobutable 10revak ‘pital (GWEN) «=o * Tas P 200000 26.00 Fs contbuted C | Ssogeed copita: (P20; (000 + P6,000) .- ee “3 P6000 evotction|goodwil 10 new PONE 5° ‘ansaction in the books follows: reenty torecord the I Cosh : a ~ 20,000 cee 6000 ‘ses (goodwill peers on pi ani 138 26: J.copital...» Torecord he oarsson of oe 1: Wihdrawals Instead of Revaluation. invests P20, ‘oa copa ito be P4000 and partners agreed hal ‘xd fo their new profit and loss ratio. (00 for 0 50% interest in the fir. The their capital balances should made “emced Fnancl Aecuntng “A Comprehensive Conceptual & Procedural al Approach Scanned with CamScanner~eee ts ay CHAPTER , poe ee—“i—O lol ogreed copite is greater thon tot MAC), ©. The tolol contbuted coP*a, wee nce there was ON indcation thoy a it ross nove been © ne NT fo 0 Men he ggg equal Refi 0 pOstNe TXONAHON # SOU Hay pt ‘bolances should be should be considered 8 wINOT™" 1's snouid have been settlement Sesnona wesiment ond # the TCC > TAC: a partners) instead of negative fevaUaho”. vom Total agreed copia! (aver) + 710,000 + P20.000). — 80.00 (ess fot eonrbvied coo (P20000* P19 mn | Oiterence (wihnrowos) joa copia ses tran the opr@ed COPS the erence « b. The new partner's conto. attnbutable to bonus to.new pomner: 7a 000 Tsconiibvied capita (aver) Jsogreed capita: (PAD.000 x 50%) rd Diterence : : ft The withdrowo’s of P10.000 shoud be ottrbuiable 10 the O14 Portness Computed a, folows: Totol ogreed capital {given} ae Less: J's agreed copitol (P40,000 x 50%) ap Total agreed copitol o! the od potnen a Less: G's ogreed capitol {P20,000 x 60%) | H's ogieed conito (P20000 x 4%) 8000 20000 ‘G's withdrawal: P20,000 - 12.000 P8000 H's withdrawal: P10,000 - 8.000 _ £2000 | The entry to admission ond withdrawal in the books 05 follows: ‘Cash (P20,000 - F10.000) 4 ] G.copital.... H. capital 2.000 J copttal 2000 Toreeord te oars oF ond wr Case 14: Bonus and Revaluation (Goodwill) When No! Specifically Stated. An agreement may indicate that an incoming pariner is fo receive on interest thot is gfeater or smaller than that which would be recognized i the portner were simply to receive credit fr the amount invested Such an agreement, however. may fai fo point out whetner cr not the required interest tobe ‘accomplished through recognition of bonus oF revaluation (goodwill. in the absence of an expresied statement, the conditions for admission must be carefully anciyzed. Folowing are the examples: Assumption 1: Revelvation (Goodwill) or Bonus fo New Partner. J invests Ccopitl interest and 0 25% interest in profs Since there wos no specification os to what approach is to be used. the folowing altematives are presented: ~ ‘Atematve 1: Bonus Approach. ©. The total contributed capital (TCC} is equal to th revaluation (goodwill) should be recognized as follows 5,000 for a 40% tol agreed capital (TAC), so no Scanned with CamScanner™sOLUTIONCHANG: U yi " U wer ar S (ORs elo Md be equalloTCE: noes otal contibuled copital wesc ss (P2000 + Piooees ° ass PDR +PogD Psa mm net's contibuled copi to bonus Copia is to new portner: ‘ess than the agreed capital the dilference is "dg r cn soe? Tee 18000 pence (pons 10 new pore) 1890 record the transact 200 “oe ion in the books follows: a a Ero (P30 x 608] ves 15.000 fi cost (P3000x AOR] ve : 1.800 J, HCl. ee 1,200 ~ 18,000 tt reco he OTN t (Goodwal) Approach, dM otal cont s me 1 eet ei ICC] fe thn te total ogeed copia (ACh *° ce — Fa] epee COREA + POA (0 contd coil (2000 tera oon weencerevovton/ goed . hs So00 ate net's contibuied copital is less thor 1 the difference of ra cae Freeriioted COPRAQHEN) ooo -|Fpogreed conta: (PS0.000 408)». cee _gg.00 J mance (evouvoton/goodwa fonew pane . E500 toh 7 : Toseeneeetet 75,000 (eat (good) vases T5000 Pp cppitL aaaeecssessceceeeeee ____-0000 a sebdvng es sroud be observed 1d 105s 5. 25%, 50 + pene Profi ond Los Ratio. P= copitl interest of J 40% while tis profit on pene profit cand loss interest ‘of tne new partnership computed 0s f0l0ws: os _G Coptalinieres! %. PELs G0%x 755) 45 H (40x 75%) v 3 1 he Coptal Balances ofthe New partners, Aller adision of partner J the capital balances ofthe new partners ore computed as follows: onus Appxoach (rora. agreed capital) = refer to Alemative | 0b0¥°: “ocd Fanci Account ~ A Zomerhansve Conceptual & Procedure ApEroach — Scanned with CamScanner. a In admission by purch, (Goodwl) i 8 fle, eects mt nf “Assumption 2, comes ons because o he flow a ih ™ isinlerent on Bo prof ond loss sharing ato S IME COBH eas a. The new partner assets) (percentage interes 7 sre profits ond losses between themnseives in jing b. The old partner's confinve 10 shore gay ratio. , 14, assumption 1). the COpitol interest which Bus prin (Cose i of 25% 50, 10 Compare onus again Ke (goodwil) as lolows: Schedule of Account Balances cand los interes! Bolonces odmision Of)... Revaluation Approach: folonce betore odmision of J. Bolance atter deprecio e270 eas ‘pew rot andi (GASH OR ond 25%) The two methods will yield the some results computed as follows: ; ———Caoitol__ H Bolances ater admission of J Bonus approach) P'18.200 P 8800 P 18000 Balances otter admission of J (Revakuation approach) _17,75 8,500 _18,750 Gain oF toss through use of bonus approach 2450 P 300 PL 75) The bonus approach and revaluation (goodwil) approach will not yield the some resut it he incoming partner's shore profit and loss is not identical with the percentage interest alowed n Cssets (Capital interest). Therefore. the selection process for the new (incoming) partner shoud be 0s follows: |. Prefer Bonus approach if, P & L interes! > Capital interest. 2. Preler Revaluation (Goodwill approach if, P & Linterest < Capital interest Therefore. the new partner should elect fo use the. i ne the P750 advantage. ‘evouaton (goodwi approach 2 “Teckel Fran en lel Accountiog~ A Comprehensive Conceptual & Procedural Approach « Scanned with CamScanneroF Bonus 4 Ofd Partners. J invests 15.000 1 © 27% 2, Revalvation (Go poo nda 4% interest in profits, spre #8 HO SPECTECHON OS 10 who PpIOOCh iso be used. the folowing aera tone total contbuted copitl (1c -C} 4 [evavation (Goodwill Frans aed fo Wiel cowed coptel TAC) © °° ragreed capital (should ‘ponus method) (should be equal lo TCC, snceilisa ies Toll contbuled capital an ae annie (20,000 + Pio.o00 + F15.000) pe new partners contibut - - Fotbulable 10 bonus to o—e thon the ogeed contol Me Fa coniiouled copia’ (given yysagreed copia (PAS, 000 nat piterence (onus 10 old portnes}) ... a we ‘2 Revaluation (Goodwil) Approach 9. Tre total contiibuted copital (ICC) is greater hon te total ote? a revaluation {goodwill should be recognized 08 follows: {oral ogyeed Copia: PIS.000 | 30% ” Jotal contributed capital {P20,000 + P10.000 * 15,000) «~~ Difference (revauation/goodwl) p, Te new partner's ‘contibuted capitals eave! 6 5000 in (0) is attbutable 10 revaluation (goodwAl Zoninbuted copital given) ‘agreed copia: (P50 (00x the agreed ¢ to. 08d pomme’s: Pp 15,000 1 asi Js oars Thetalowing tems should DE observed: Ratio. The copital interest of J is 1d loss is 40%. ‘of the new parinessip is COT 5 30%, while his profit an ited as follows 1. The New Profit ond Loss so the new profit ond loss interest 3 4 z ‘enced Financed Accoursed ie Scanned with CamScannerR CoplieIE cg PALS G(60%x 608) : m4 H (Ox 408). _o 1 fines 2 The Copta talonces ole Hew Prarie on radon of pete 4th copie ofthe new parinen are computed os, ta, G. copital (P20,000 + P90)...» H, capitol (P10,000 + P600).....-- J, copitol. Total... Revaluation oo G. capital (P20,000 + P3, we H, copital (P10,000 + P2000) ....+ +--+ “Pom J, copital {PS0,000x 30%)... . 2222 — 15009 Total... Sn 2 3000 3. Comparing tonus o¢ Revaluation (Goodtll) Approach. In Case 14. ASumpFon 2 Priner prefer the revaluation (goodwil] approach becouse the profit ang a eet {258} sess thon his capitol interes (40%) Bu, in his portcuor situation (Assumption 2). he profi and ios interes (40%) #920 ha is copita interes! (30%). eventualy: the bonus approach should be prefered. Toc, onus agains revaluation (goodwill as folows: ‘moa copitl rele o Allemative | above: se re 3.309 ‘Schedule of Account Balances Goodwill Net Asel Cavite Bonus h Assets Revavoton H 4 folonces odmason oF] 500 P2090 Fl Eas Revaluation Approach Bolance before admision of J.P 45000 P SOND F-23000 P 12009 +l Depreciaion/mooiment 5000 L800) 41700) one, Salance ater desreciaton/ . 2 P2120 PI “Tew pol ond to (6. 6 HT. one | OR] The two methods will yield the some results computed as follows: ital iH Bolances atter admision of J (Bonus approach) 20900 P 10.600 P 13.500 Bolonces ter odmison of J (Revaluation approach) 2,200 10.800 13000 Gain or (15s) through use of bonus approach PL_a00) Pi 200) P soo The bonus approach and revaluation (goodwill oporoach wil not yielo the same sesuit it the incoming Portne’s share profit anc! oss snot identical with the percentage interest alowed in Gssels [Copa interes). Therefore, the selection praces for ne new (incoming) partner shoud be as folows: |. Prefer Bonus approoch if, P & | interest > Copital interest, 2. Prefer Revaluation (Goodwill opproach if. P & L interest < Capital interest. ‘Advenced Fioanchel Accounting =A Comprehensive Conceptual & Procedural hvproadh Scanned with CamScannerne new portner should elect fo use the bonus approach becouse of the PS0O of where there 1s NO speclicatlon os to bonus approach or revaluation (goodwill ip ne DOr PRON should be applied becouse it contorms to the cost principle of cose Sean 3 eton partner withdraws, the ogreement should be consulted to determine ° < fea 1 On axis ave been exicbihed hal woud hence the pocedte. he ‘ign 019 pone ecuts 0 deeminaton othe fi value ol he panes erty ond Seossemer! ortnership income to the date of withdrawl. in many OSes, the interest ofthe ret 1 be equal to the partner's v once csareutolthelolowngicne ey 1, Copital balonce (including withdrawals and additional investments}: 2. Recognition of accounting errrsin prior periods: 4 Recognition of profit or loss from the beginning of the accounting period to the date of relrement: 14, toons and advances to (from) the partnership: and 5, Recognition of net asset revaluations subject to the rues discussed previousy. in some coses. a Partner withdraws in violation of the partnership agreement and without gpproval of the femoining portners, he is entitled only to his interest in the firm without roasderation of revaluation (goodwill. In such o cose, the withdrawing partner is fable for gomages sustained by the remaining parties for his breach of the partnership agreement. however, 0 partner who is forced to withdraw from o partnership is entiled to compensation for tstlinterest including revaluation (goodwill os determined. inthe folowing examples, its assumed that the partners mutually agree fo the refirement such nat 1. The retiing partner moy elect to sel his interest to an outside party 1. The retving partner may elect fo sel his interest 10 one of mote of the remaining partners: o 3. The partners may mutvaly agree fo transler partnership assets (payment from pportnership funds) to the retiring partner for his interest in the frm. Settlement may either be (©. Payment in cash: b. Transfer on non-cash assets: and . Recognition of lability for the full or balance of the unpaid total interest of the reling portner. Stuation | hos been discussed earier in admission by purchase (the only difference with telrement is that in admission by putchose it should be capital interests only unike retirement ‘wherein it should be total interest of the retiing partner) and need not be reviewed. The same considerations apply to Situation 2 if negotiated outside the partnership. Svation 3 will be discussed thoroughly in the following istration: The partners may agree to use the bonus approach or the revaluation {goodwill approach to fecord the withdrawal: onus Approach (GAAP). If the bonus approach is used. the remoiring portners are charged with the amount of the payment that exceeds the book value of the retiring portner’s capital boionce. ee “Advanced Fanci Acreunting ~ A Comprehensive: Conceptual & Precedrel Approach Scanned with CamScannerCHAPTER partner is commonly located t he the rating {nis cose the lative rat 29 ‘The omount of the bonus paid 10 profit and 0s oO "a ‘poriners onthe basis of thee relative 52). tor hs h The bors opFEc may ay Support for this opproact oor oe moh to gel fid of © partner for ye on srivrecwantton ot revalvation (good Sicut 10H in he absence onan length transaction. evaluation (Goodwil) Approach tl oppr00, Non-GAAP). The revaluation (goodwil Ch og evan (Good) Apprege os oniictn ole 1 VOUS 0! teri Furthermore is used # (I) maining pares wit na! ogree fo reduction nek cont, a the partners made specific provisions in he porinership agreement On n +h wit a be recorded: or (3) the pariners agree thon a revaluation {goodwill is 10 be ecognized. tig partnership has been profitable, the partnership os 0 whole may be worth more than the tay valve ofthe net asels. ‘Once agoin the revaluation (goodwill approach is supported on the bass thot a new enti, boeing formed and the accounts ofthe new enlily should be based. Many accountants cficize recording revaluation (goodwill on the retirement of o partner en the some theoretical grounds as hey clicize recording unrecognized revaluation (good on the admision of 0 new partner. Nevertheles, partnership accounting sometimes Uses ol the recognition of revaluation (goodwill) at this event. lustratton 19-3: Withdrawal/Retrement of a Partner ‘Assume the following data on Jonuary |, 20x4 for KLM Partnership had the following condenseq the cost principle is based on Ihe on rious es bolonce sheet ; t i C08 eee 50000 Liobites P 10.000 Noncosh assets... 40,000 _K. capitol (30%). 30,000 loan receivable -K.. 5000 |. copital/S0%) 40.000 M, copia! (20%) sn 15.000 Total... 95.000 Total. vee P25,000 The percentages in parentheses after the portner’s capital bolonces represent their respective interests in profs ond losses. (On May 1, 20x4, K relies from the partnership. The net income of the partnership to date of retirement amounted to P20.000. The partnership paid cash to the retiring partner also on the fetrement date The folowing ents are necessory on the portnership books before paying the interest of the retiring partner: Income Summory . - ~. 20,000 ] K. copitol (P20,000 x 30%) bees 6000 L. capital (P20,000 x 50%) 10,000 M. capital (20,000 x 208) . 4.000 | Torecora dsmbuton of prof? [k eo0¥@) p06) Loan receivable-K....... - $000 To cose oon ecevabe count ol he etang pare ‘Advonced Finance! Ascounting- A Comprehensive: Conceptual & Procedural Approach Scanned with CamScanner_Copii p93 (oecuct: inet income joan receivable .. igointees ol bere hirelvement. remeni ot Book Valve ~ - aati (heme pce weet eerie ena the transact ns eo Hon in the books f CO T1000 a “31,000 poyment cat More than t Hock Vote (settee price ote RON Sareea an ate paid. 26.0, ‘rnd ne roncamn ose on invert srt 3 10000, The remaining partners contin snargeodle ne: 1; Bonus fo Retking Partner. The excessis considered bors morc neronoctennhebeasielos, _—5— COMO cocoa cesssrsscnee 71000 L copital (P4,000x $/7) .. 7 * 9987 Otol (PA000X 2/7)... cscs | 13 : 35,000 i [thas GUAPO ence 7 TF 35,000 398 "aroun BO ti BY of 's toll interes! (308) i | genus fo Reting Partner seaibeasgeseerss 2 parser tes shold be observed: mlaepors approach vodercuotion of nt cossets should not De ‘ntrociction of curent accounting stondorcs re 0s [OHOWS: wave nc pec fol balances of the iners after the retvement ol K of 3 capital (P40,000 + P10,000. profit = P2857, bonus} p 47,143 ty copitol [P15,000 + P4000 profi P13, borwil = 17,857 sing he some 0t0 ‘excep! that by mutual ‘agreement the inventOry to be odsted fo Then. the ‘undervalued asset: should be recorded first before the settiement ref fot vale. reais torecord the transaction # he books folows: ; 4000 ] . 1,200 inventory 2 x, copital (P4,000 x 30%) {L copital{P4.000 x 50%) 4 copital (P4000 x 208) ventory bused on eee =a) Torrcreaied ine wave of [Kcopital 32,200 | t-copita 2,800 x 5/7) 2.000 : 800 35,000 M.copital (P2.800. 2/7) Cosh. passed Scanned with CamScanner‘Amount paid. Leis: BV of K's fol iterest (208 - Bonus to Retiring Portner 2 {Goodwlo eteng Pre. The Cx conigeay revaluation (goodwill fo be recognaed. Teen ocr herein nebo > . : 1.200 | inventory “ai 000 + PI 200 2m K, Copitol (PA000 308) «se. -2-s8027* 10 L capitol (P4,000 x S0%) neeeeeeeee a Tench ve offre Kiet (5 ees 2800 Torecard eae ok conpied onto ~P 35000 ‘aroun pad... : Less: BV of K's total inerest (30%) - (01.0 : 32200 Goodwill fo Retiring Portner “| 200 The following items should be observed: ‘Some argue that, in accordance with the cost bosis, only the revalvation (goodwil) of 2.800 that has been purchased should be recorded. The situation at bor is the some situation in admission by investment Cose 9. thot recognition of understatement of assels is in compliance with GAAP under the revaluation (goodwill approach. 3. The capitol balances of the partners after the retrement of K are as folows . copital (P40,000 + P10,000, profi + P2000, adjustment)... P 52.000 M, capital (P15,000 + P4,000. profi + P800 adjustment) ..... 19,800 ‘A modified version of this partial revaluation (goodwill) approach hoppens assuming that when ‘assets and fiablities are revalved only to the extent of the excess payment 0 K. the entry to record the transaction is as flows: Kcopital... 2... ~ 31,000 ABEL. cece Seseendoe =. 4000 | Cosh. : 7 35,000 To record rwement ok compUied os OOws ‘Amount paid ~ P3500 | Less: BV of K's foolinteest (90%)... ...--- 31.000 | Portal revaluation (goodwl to Retin Pariner. P_4000 Assumption 3: Tolal Revaluation (Goodwill to Retring Partner, The excess is considered os revaivation (goodwill o be recognized The entries to record the transaction in the books follows: Inventory K, capital (P4,000 x 30 L. capital 4.000 x50)... A 2000 M. copitl[P.000 x 203 ce 800 Tonareaie he vate ofmerioy ——— SS Advanced Fiaancial Accounting - A Comprehensive: Conceptual & Procedural Approach 4000 1.200 Scanned with CamScannerunt paid - bees ee By of K’stotolinterest (30%) vided DY {copitalzed al): Profit , 7 Revovaton Good Ond loss RotK......+ epee R MET eft mK inreaaon Fay peers he Tea TS Te Se ae wt PMI. Pee ae ge ed oe iyaron igooen oo mat * cence aways soe tate versace Ce Coad sams rat a weele baeragc en ) may not be deterined objective. Vike es rc I TOR. Nec te remoning pores weaver ra Beg ones he pores thereat tt 1 {.copita °40.000 + P1000. proft + P2000. regent + PASSO SEAS 4. copital (P15,000 + P4,000, prot + POO adjustment * PI B67)... 2067 “dna Aoroach ond Ren Approach (Coane POECAT eA vos cpproch onareraucin (gnc cae 10 Hee Ne ata eggs he copra! boiances. Ca masncaa ra papain Case 2 00°. Refer to the folowing schedule for 7 | sus. Forces after rewerent OK pod Revaiation JGoodwil Approach: | sgonces ater retrerent otk" Depreoation/imparment” taonce oer depreciation/imparment a iy 2 ord PDI L OM OREN son P3100 = P40, porto revoluahO" = xipottandiosroto (5/7 ond M 217) aa 7A Comoran Cacao & roel APPS Scanned with CamScanner800 | vestry of P2:00 OM 3 33 Texcug p3s.000-P3/,000 =P. 000, reston| me Lcopiat(P40,000 + P 10,000) + (P13. eT cop 15 000+ P4,00) #1339 208) = oid ott ondiossrato (L703 M207) the vee methocs wi ya the some resis computed O$ follows: ame —M_ ‘opproach) Paris PI7aS7 Bclonces te reement fk onus POSS 9» CaN ETS Bolances after retirement of K (Port soccer ofterrelzement of k (fot Revaluation approach) — 471A} P 17857 , the bonus approach ang ‘Agon, as previdusy discussed in admission by purchase, revoke (apode) ‘poprooch vil yield the some resuit becouse the remdining Parner continue to shy profs ond losses between themselves in the original ratio. suotion with odmission by purchase. wherein there is no specification a5 to rrevoUero pproach, the bonus approach should be cboied | revaluation (goodwill moy be vseq In the some ‘approach oF revatuation (goodwill o revaluation (goodwill opproach, both the partial or total fo comply withthe provisions of PRS ® Coxe 3: Payment at Less than Book Vaive (Settlement price Is less than the interest of reting pportnes) The partnership paid K, P26,000. ‘A partner who is anxious to dispose of his/her interest in the partnership may agree to accept Jes: han his/her book valve interest in the partnership. When a withdrawing partner agrees to accept less than the omount reported in his/her copital account, such a difference may be viewed (I) 05 @ Bonus accruing to remaining partners, 6 (2) revaluation approach (in cose rete 6 an existing goodwil, as an offset against the goodwill balance). The poriner may do so for a number of reasons, such as {1} he/she may view the future of the company negatively, (2) he/she may need operating capital for personal reasons, oF (3) the buses association may no longer be acceptable to the partner and, in hs oF her opinion, ¢ fo/ced Iquidation of the firm might be detrimental to his/her interest. In such cases. use of the app10ach is justified. since the settlement may not be based on the economic valve of bors the Assum 'o Remaining Poriners. The excess is considered bonus chargeable to | ‘ond M The enty to record the transaction in the books folows: K-copital 31,000 Cosh 26,000 L copital (P5000 x 5/7) 3571 1.429 | |__M. capita! {P5000 x 2/7 . Torecadrelremer' otk computed flows ‘Advonced Financal Acrounting ~ A Comprehensive: Conceptual & Procedural Approach Scanned with CamScannerich Poe ‘ of the, ~ ee ners after the ref itl P40.000 the oie Med ie eceeement ol oe 05 fie L + P4.000 profit + P1429, bonus)... P $357) ‘2 Partial Revoluation/Wite 429, Doms). ir Aaa ts ga : le-down ol spec rized gata neocon nth bodks hows specific assets to be recog! ARUN POD. {ess BY Of K's toto interest (20%) teal evalvation/wite-down of specic ossels cops botoncesot the portners after 187 pital (P40,000 + P10.000, ae telzement of ote 05 [0 1 5000s PUACO pom m ' orscered ronlatte-down of oe fo the entre entity restorecor ne rnsactonin he Boks lows { copital (P16.667 x 30%) {capil (P6.667 x 50%) : pa, copia) (P16.687 x 208) psselS Sick conpued a oor ‘Amount paid senses Less: BV of K's total interes (30%). 7 000 | He revelutonite-down of sbecfe Ose we Ps piaded by (copitalzed a): Prof ancl ss Balk. Total Revalvation/wrte-down of ss == : ce a Cs 3 ered wre clown of sas of PIB B6T. NOM «the P5000 represen! thot the P5.000 e sentsK'sinterest if the iss " copito’ (P 31,000 P5.000) ve Cosh. axieee rmcatrewerent ok comoied os 01 ‘ne copital balor c | m.copital(P15:000+ FADED Comparison of Bonus ‘Approach and evoluation Approach (Goodwill 4 10 ord the nireugh either the onus oF revaUSCn {goodwil) aperoach used pies involving wihdrawal of K. it should be observed that, os in the case of yer eX! some problems of bonus ond revaluation (goodwill, he oiternative approaches © selves partners continue 10 snore profits between ‘timate ests only when the remaining inthe original ratio. Scanned with CamScannerOo — CHAPT, ‘R Deoth of « Poriner I specific The death of a porter dssoives the partneship. In the absence oI Proviions to Conroy, rot and os shoud be sunmoree he prrastip Oses FOU be appre. the descendont's intrest n he porineship shoud be est0bfshed! oo the date o! death, peg Fos om the dote the boots were lst closed is determined ond Harsfered fo he cont ‘CCOUntS in the existing profit and loss ratio. The change in asset values arising from revaluation is fkewise corried in the capital acc, the Brot ond los rato. I's hen the obgation ofthe pores 10 wind Up the business ae ‘e Sold fables ore poid-off, ond settlement is made with the portner's estate ang oriners. Partners may provide by agreement that in the event of the death of o portner the bus, shal be continued by suvivng pares, Parner: may ogree fo see for he intrest of ms eceased partner {I} by payment from porinentip axel. (2} by Poyment fom portnenn, ‘Ossets, (3) by poyment from portnership insurance proceeds with surviving partners cauing the deceased partners interest Incorporation ofa Parinership Portners may evalvate the possible advantages to be gained by incorporating a partnership, ‘Among such odvontages ore fnited fabilty of stockholdes, cose of attracting odctonsy Copital, ond possible income tax advantages. Partners may decide to incorporate in order to sect the advantages in he corporate form of ‘orgonizotion. When a charter i granted recognizing 0 corporation, the corporation wal act fp ‘ocquie the net ossets of the portnersip forts shores of sock. To ensure that each partner receives on equitable portion of the capital stock issued by the new corporation, the assets of the portnersip must be adjusted fo Curent fair valve before being ‘ronsfered fo the corporation. Any identifiable intangible asset or goodwill developed by the Partnership isinctuded among the asses transfered to the corporation, ‘The shares of stock receive by the partnership s distibuled to the partners in settlement o their ‘equities. The corporation thus tokes over the assets and assumes the fobs of the partnership: the partnership is disolved ond the portner now becomes shareholders in the newy orgarized Corporation. In recording activities of the new entity the partnership books may be retained. or new set of books may be opened. Partnership Books Retained It the partnership books are retained, entries are necessary to report 1. Changes in asset and fabilty volues in the partners interests prior to incorporation, and 2, The change in the form of proprietorship. A revaluation account may be debited with {osses ond credited with goins from revaluation. and the balance in this account may subsequently be closed into the copital accountsin the profit and lss rat. However, with relatively few adjustments, the capital accounts may be debited or credited rectly for losses and goins from revaluation. The issuance of shores of stocks in exchange for the partners’ interests is recorded by debits fo the partners’ capitals and credits to the ‘appropriate copital accounts New Books Opened for the Corporation '¥ new books are opened for the corporation. al the accounts ofthe partnership are closed. In closing the accounts of the partnership, the transter of assets and liabiltes to the corporation ‘the receipt of shares of stocks in payment of net assets anslerTed. and the distibution of shares —— Advanced Financial Accounting - A Comprehensive: Conceptual & Procedural Approach Scanned with CamScannerpatina ore recorded, wit | ie es Sata ‘bso record the restatement of net xsels ond pOre® 1 pad On he new bo se peter cme ot he copaaten ec he se " tre son rot eared parent! O88 | 1 ee rtners of Janel & Khay Portnerstip, who shore “prt, organize J & K Corpora J the sesnee! ofthe partnership Yion fo toke over the net ossets of Ihe porinestio. (on June 30, 2014, the date of Incorporation. isos olows os toh pecountsTecevOD fess Alowance for doubt occ " ores. ist in. rst out cost ou tot cost es. AccuTuIOted depreciation f Tol ose ot ecuioment ‘ond Portne's Copia \" ‘obits pccouns poyenle potne’s conto: | ‘yonel, copital . hay. copitol otal bobs ond 1er's Cop 7 anon opps of the equipment ond 0 ‘oudt of he parineshir ‘ne gars 702 MN IE Tolowing adjustments ore equred 1° restate ME ponent ‘fo current fair value: eroose te alowonce fox doubt occouns to !.000. 1 increase the inventories fo ‘Sonent repiocement cos! Of 730,000. ess ceumso1ed Ineo he equipment 10 is reproduction Sest new, °70% depreciation on this basis, P30.S00: that i. tocument fair ‘voue, + Recognize ‘occrued fobilties of PI 100. * gecogrize goodwil of P10.000 7,500 s4:Coporation is outnored 10 save 10.000 shores of PIO PO pi ‘common stock valved ot PIT ‘ashore 10 the i med betwee” 1 ad iners MOY. | roe re parinestip. Te 7.800 shores received by tne | ‘on the basis of the ‘agjusted bolonces of their copitat accoun! | mw gl crounts of cosh 10 rou theircopital account DOC | pgrg tne ssuance of factional ee ‘ot common stock] TAS Sesison ond iqucation ofthe partners tetnerhip Books Retained enties to adjust ond efrrinal ‘204, ore 05 folows: ds of the one! & te the accounting reco" Ire puna, Ferneship on June 30. } “Gad Nari Copan Capo Pree APreeh Scanned with CamScannerTrenton P30 000 P 25.50) : feqvpment 70.000 - P4000) ives 0.000 besrcnaat Accounts 1.000 F600)». . oe ten cf Equemen P50 = P2600). % ‘Accrved expenses a i Jove Cont 800x080) nase ny Con aad amour on to re 90" 7% 180 betven pres 4 0. = “Janel Copital (P47,990 + P14.800) eaaitvageapeesotat ane Khoy, Copitol (P16,010 + 3.700) . oe ‘ Common sock P10 por 7.00 3Nae5} oss Poidin copitatn exces of por (P1"~ P10) x 7.500 shores Terecer dorbuton of conmon sock 18K Coperaton fe pormen: “net P4790» P00) /PI1 per ae = 5708 hoes oy (14010 P70) /Plips vee = LIne: | Tooter New Books Opened for the Corporation Athough the accounting records of the parinertip may be modified 10 V8 0§ he recon the new corporation. itis cuslomary to use anew set of accounting record forthe coporays ot I this altemative is folowed, the procedures required ore: "on {mn Accounting Records of Prinership: 1 Prepare joumal entries for revaluation of assets. including recognition of good 2 Record any cash withcrowols necessary to ads! partners’ copia Oc count Dolancas ‘ound amounts in some instances, the contract may requie Honsfer tothe compcratgn, of oll assets except cash) 3. Record the transfer of assets ond fabifes fo the COrpOLaON. the rece oF ing Corporation's common stock by the partnership. and the ditibution of the ¢ stock to the partners in settiement of the bolances of their capital accounts, The journal enties to adjust ond efrinate the accounting records of the Jonel & kngy Partnership on June 30, 20x4, are presented below: Entries in the Books of the Partnership: | lpwentories (P30,000 - P 25.500) a 4,500 Equipment (P70,000 - P40,000), . 10,000 Good 190.000 ‘Aowance er Doubt Accounts (100 P60) j ‘Accumulated Depreciation of Equipment (?30,$00 ~ 26.000 4 Accrued expenses. : i Janel, Copitol [P18.500 x0.80).. 4800 | Koy, Copia P18 $00x0.2) 3.70 | To og eset ond leites 6 ogred amounts and fo Sve net gon of 18500 between panes in 41080 | Receivable rom J & K Corporation (P6400 - P18 00). 62.500 ‘Accounts Payable . 35000 i Accrued expenses 1.100 { ‘Alowance for Doubtty Accounls 1.000 ' ‘Accumsated Depreciation of Equipment 30500 Cash 12000 ‘Accounts Receivable 28.100 | Inventoies 30000 Equipment 70000 Good o.oo Torecard rare set ond lates fo JK Coporaton ‘Adivanced Fincnciel Accounting - A Comprehensive: Conceptual, & Procedural Approach — tei mane Scanned with CamScanner¢ ywoble trom J receipt of 7,500 shores of PI : x re 10 por common stock volus sfigochonrnntor oar at ° 0 y Fock of 1 BK Corporation (750 hon sgt hee T7s00 shares «PIN) EH 0 Pl a7 990 PB) copie (16010 + P3700). ve eno - PO pnen Sock OL BK CODAraN . . oe | dsribution of common stock of. pens rine rocoto tame oct Capagion Pre ioe nish Monee = Lo end Recor the Corporation: forme ret ‘obites (nena obi" '° wa oath cord Ne geauon of assets ond 1s rom the partnership at curent fo values. tne obkge" ihe suonce of commen stock a cunt for valve poyment 0! soreord 00 ‘2tSeta na he Feenin a ano PDB 750021) | cart cantl Excess of Pot ; |. pprecord asuance of 7500 shores ‘i common stock valued or net assets of Janel & Khay Pains b= Fe slowance for doubt accounts sec be becouse the specific accounts recewoble thal MOY reornersnio seg ’e depreciation recogrized by the JO Nhe yew ci Carn contrast, th 7 ‘i Corporation becouse the “cost” of the equiomen! ae rgcostee! Tor) k Corporation on June 30, 2084.5 7810 37100 Toto atts ee [eset qganslomsnam 8 - ee ae 5 go Eras _—_—— | otitis ora stock Scanned with CamScanner