Partnership Formation

PARTNERSHIP
FORMATION
Nature of
Partnership
Nature of Partnership
Two or more persons may contribute

money, property, or industry to a
common fund with the intention of
dividing profits among themselves.
Should be present
Two or more
persons
Voluntary
Limited Life
Agreement
Should be present
Contribute money,
property, or industry to a
common fund
Mutual Unlimited
Contribution Liability
Mutual
Co-ownership
Agency
Should be present
Dividing profits
Profits Losses
Accounting
for
Partnership
Formation
Cosmetic Store
Investment Geoff (A) Anne (B)
Cash 1,000,000 100,000
Accounts Receivable 50,000
Land 1,500,000
Building 1,000,000
Accounts Payable 30,000 50,000
Bryan (C) is admitted as an industrial partner.
Profits are divided as follows:
Geoff (A) - 20%, Anne (B) - 60% and Bryan (C) - 20%.
Requirement:
1. Compute for the capital balances of the partners.
2. Provide the journal entries to record the formation of
the partnership.
SW1: Partnership Formation
Investments Partner 1 Partner 2
Cash P 350,000
Land 1,050,000
Equipment P 550,000
Partner 1 and Partner 2 agreed to divide profits and losses in the
ratio of 70:30, respectively and to assume the mortgage payable
amounting to P200,000 on the land of Partner 2.
Req. 1 Decide on the following:
a) Partnership name
b) Nature of the business
c) Principal office of the business.
Req. 2 Compute for the capital balances of the partners.
Req. 3 Give the entries to record the formation of the partnership.
SW1: Scenario A

Cash P 350,000
Land 1,050,000
Equipment P 550,000
Mortgage payable (200,000)
Capital P 550,000 P 1,200,000
SW1: Scenario A
Cash P 350,000
Land 1,050,000
Equipment P 550,000
Capital P 550,000 P 1,200,000
Equipment P550,000
Partner 1, Capital P550,000
SW1: Scenario A
Cash P 350,000
Land 1,050,000
Equipment P 550,000
Capital P 550,000 P 1,200,000
Cash P 350,000
Land 1,050,000
Mortgage payable P 200,000
Partner 2, Capital 1,200,000
SW1: Scenario B

Cash P 350,000
Land 1,050,000
Equipment P 550,000
Partner 1 and Partner 2 agreed to divide profits and losses in the
ratio of 70:30, respectively and assume that Partner 2 will personally
settle the mortgage payable related to the land that he invested.
Req. 2 Compute for the capital balances of the partners.

Req. 3 Give the entries to record the formation of the partnership.
SW1: Scenario B

Cash P 350,000
Land 1,050,000
Equipment P 550,000
Capital P 550,000 P 1,400,000
SW1: Scenario B

Cash P 350,000
Land 1,050,000
Equipment P 550,000
Capital P 550,000 P 1,400,000
Equipment P550,000
Partner 1, Capital P550,000
SW1: Scenario B

Cash P 350,000
Land 1,050,000
Equipment P 550,000
Capital P 550,000 P 1,400,000
Cash P 350,000
Land 1,050,000
Partner 2, Capital 1,400,000
Investment Ratio
AAA admits BBB as a partner in his business. Accounts in the
ledger of AAA on December 31, 2017, just before the admission of
BBB show the following balances:
Cash P 10,000
Accounts receivable 5,000
Merchandise inventory 30,000
Accounts payable 5,000
AAA, Capital 40,000
BBB is to invest sufficient cash to obtain a 20% interest in the
partnership.
2. Provide the journal entries to record the formation of the
partnership.
SW2: Investment Ratio
CCC admits DDD as a partner in his business. Accounts in the ledger
of CCC on December 31, 2017, just before the admission of DDD
show the following balances:
Cash P 12,000
CCC, Capital 50,000
DDD is to invest sufficient cash to obtain a 60% interest in the
partnership.
partnership.
Investments CCC (40%) DDD (60%) Total (100%)
Cash P 12,000 75,000 P 87,000
Accounts receivable 8,000 8,000
Merchandise inventory 32,000 32,000
Accounts payable (2,000) (2,000)
Capital P 50,000 75,000 P 125,000
Cash P 75,000
DDD, Capital 75,000
EEE admits FFF as a partner in his business. Accounts in the ledger of
EEE on December 31, 2017, just before the admission of FFF show
the following balances:
Cash P 15,000
EEE, Capital 70,000
FFF is to invest sufficient cash to obtain a 80% interest in the
partnership.
partnership.
Investments EEE (20%) FFF (80%) Total (100%)
Cash 15,000 280,000 295,000
Merchandise inventory 50,000 50,000
Accounts payable (20,000) (20,000)
Capital 70,000 280,000 350,000
Cash 280,000
FFF, Capital 280,000
PE B on page 34 Old Book
On July 1, 2017, Ding and Dong agreed to invest equal amounts and
share profits and losses equally in a partnership with Ding investing
P44,000 cash and merchandise valued at P56,000. Dong will also
invest a total of P100,000, including cash and the agreed values of
the following:
Book Value Fair Value
Accounts receivable P 78,000 P 70,000
Allowance for BD 3,500 5,000
Inventory 9,300 10,500
Office equipment, net 12,000 8,000
Accounts payable 30,000 30,000
What amount of cash should Dong invest upon the formation of the
partnership?
PE B on page 34 Old Book
Investments Ding Dong

Cash 44,000 46,500.
Accounts receivable 70,000.
Allowance for BD (5,000)
Inventory 56,000 10,500
Office equipment, net 8,000
Accounts payable (30,000)
Capital 100,000 100,000.
SW4: PE D on page 35 Old Book
Billy and Joel are combining their separate businesses to form a

partnership. Cash and non-cash assets are to be contributed for a
total capital of P300,000. The non-cash assets to be contributed and
the liabilities to be assumed are as follows:
Billy Joel
BV FV BV FV
Accounts receivable 40,000 40,000 - -
Inventory 50,000 60,000 40,000 45,000
Property & equip. 80,000 65,000 60,000 70,000
Accounts payable 35,000 35,000 30,000 30,000
The partners’ capital accounts are to be equal after the contribution

of assets and assumption of liabilities. They agreed that the partner
with lower net asset contribution shall contribute additional cash.
5. How much cash should Joel contribute to the partnership?

6. How much shall be the total partnership assets immediately after
its formation?
Investments Billy Joel Total

Cash 20,000 65,000 85,000
Accounts receivable 40,000 - 40,000
Inventory 60,000 45,000 105,000
Property & equip. 65,000 70,000 135,000
Accounts payable (35,000) (30,000) (65,000)
Capital 150,000 150,000 300,000
Total Assets = P 365,000

SW5: PE E on page 32 New Book
On December 1, 2015, MG and AN are combining their separate

businesses to form a partnership. Cash and noncash assets are to be
contributed . The noncash assets to be contributed and the liabilities to be
assumed are as follows:
MG AN
CV FV CV FV
Accounts receivable 250,000 262,500 200,000 195,000
Inventory 400,000 450,000 200,000 207,500
PPE 1,000,000 912,500 862,500 822,500
Accounts payable 150,000 150,000 112,500 112,500
MG and AN are to invest equal amounts of cash such that the contribution
of MG would be 10% more than the investment of AN.
What is the amount of cash presented on the partnership’s statement of
financial position on December 1, 2015?
SW5: PE E on page 32 New Book
MG AN
Noncash assets 1,475,000 1,112,500
Cash 2,512,500 2,512,500
Capital 3,987,500 3,625,000
SW6: P1 on page 25 New Book
DBM, MGX and SPV decided to form a partnership. They are to

engage in the business of selling computers and related gadgets.
DBM contributed cash of P700,000. MGX contributed a house and
lot, which he inherited from his grandfather three years ago. At the
same time of inheritance, the property was value P1,575,000 for
transfer tax purposes. A week before the partnership was formed,
several buyers indicated their intention to buy the property for
P2,187,500. SPV, being a computer science graduate, is to contribute
his skills and knowledge to the partnership. They agreed that SPV is
to be given a 20% share in the partnership profits.
Compute for the capital balances of the partners.

DBM MGX SPV

700,000 2,187,500 industrial partner
PE A on page 34 Old Book
King invites Ace to join in his business. Ace agreed to join King
provided that the following adjustments are taken up in the books of
King:
• Prepaid expenses of P20,000 and accrued expenses of P15,000
are to be recognized.
• The fair value of King’s equipment is P20,000 higher than its
carrying value.
• The merchandise inventory is to be reduced by P16,000.
King’s capital before adjustment for the above items was P450,000.
Ace will invest enough cash to make his interest equal to 40%.
1. How much is King’s adjusted capital balance?

2. How much should Ace invest to give him a 40% equity in the firm?
PE A on page 34 Old Book
Investments King Ace Total

60% 40% 100%
Balance before adj. 450,000 450,000
Prepaid expenses 20,000 20,000
Accrued expenses (15,000) (15,000)
Equipment 20,000 20,000
Mdse inventory (16,000) (16,000)
Cash 306,000 306,000
Capital 459,000 306,000 765,000
SW7: PE C on page 31 New Book
On January 1, 2016, AB and QR agreed to form a partnership. The

following are their assets and liabilities:
AB QR
Cash 136,000 76,000
Inventories 304,000 364,000
Machinery 480,000 440,000
Notes payable 140,000 60,000
AB decided to pay-off his notes payable from his personal assets. It

was also agreed that QR inventories were overstated by P24,000 and
AB machinery was over depreciated by P20,000. QR is to
invest/withdraw cash in order to receive a capital credit that is 20%
more than AB’s total net investment in the partnership?
Required:
6. How much cash will be presented in the partnership’s statement of
financial position?
Investments AB QR Total
Cash 136,000 350,400 486,400
Accounts receivable 88,000 48,000 136,000
Inventories 304,000 340,000 644,000
Machinery 500,000 440,000 940,000
Accounts payable (216,000) (144,000) (360,000)
Notes payable 0 (60,000) (60,000)
Capital 812,000 974,400 1,786,400
SW8: PE A on page 30 New Book
A and B decided to form a partnership on Oct. 1, 2015. Their

Statement of Financial Position on this data were:
A B
Cash 262,500 656,250
Accounts receivable 5,950,000 3,587,500
Merchandise inventory 3,500,000 3,543,750
Equipment 2,625,000 5,075,000
Total 12,337,500 12,862,500
Accounts payable 1,837,500 4,637,500

A, Capital 10,500,000
B, Capital 8,225,000
Total 12,337,500 12,862,500
They agreed to have the following adjustments:

• Equipment of A is underdepreciated by P350,000 and
that B is overdepreciated by P525,000;
• The Allowance for doubtful accounts is to be set up
amounting to P1,190,000 for A and P787,500 for B;
• Inventories of P87,500 and P61,250 are worthless in A’s
and B’s books respectively; and
• The partnership agreement provides for a profit and loss
of 70% to A and 30% to B.
Required:
1. Assuming the use of transfer of capital method, how much must
be A’s agreed account capital to bring the capital balances
proportionate to their profit and loss ratio?
2. Assuming the use of transfer of capital method, by what amount
will B debit his capital account to bring the capital balances
3. Assuming A will invest/withdraw cash to bring the capital balances
of the partners proportionate to their profit and loss ratio, how
much will A invest?
4. Assuming B will invest/withdraw cash to bring the capital balances
proportionate to their profit and loss ratio, how much B will
invest?
A B Total
70% 30% 100%
Capital (at BV) 10,500,000 8,225,000 18,725,000
Acc. Depreciation (350,000) 525,000 175,000
All. For DA (1,190,000) (787,500) (1,977,500)
Mdse. Inventory (87,500) (61,250) (148,750)
Capital (at FV) 8,872,500 7,901,250 16,773,750
Agreed capital 11,741,625 5,032,125 16,773,750

Required:
2. Assuming the use of transfer of capital method, by what amount
will B debit his capital account to bring the capital balances
A B Total
70% 30% 100%
Agreed capital 11,741,625 5,032,125 16,773,750
Capital (at FV) 8,872,500 7,901,250 16,773,750
Invest/(Withdraw) 2,869,125 (2,869,125) 0
Required:
3. Assuming A will invest/withdraw cash to bring the capital balances
of the partners proportionate to their profit and loss ratio, how
much will A invest?
A B Total
70% 30% 100%
Agreed capital 18,436,250 7,901,250 26,337,500
Capital (at FV) 8,872,500 7,901,250 16,773,750
Invest 9,563,750 0 9,563,750
Required:
4. Assuming B will invest/withdraw cash to bring the capital balances
proportionate to their profit and loss ratio, how much B will invest?
A B Total
70% 30% 100%
Agreed capital 8,872,500 3,802,500 26,337,500
Capital (at FV) 8,872,500 7,901,250 16,773,750
Withdraw 0 (4,098,750) 12,675,000
SW9: PE B on page 31 New Book
A and B agreed the lists of the following assets to be contributed in

the partnership.
A B
Cash 2,000,000 3,000,000
Inventory 1,500,000
Land 1,000,000
Building 3,000,000
Furniture & Fixtures 1,500,000
The building is subject to a mortgage loan, already past due, in the
amount of P1,000,000. A settled the mortgage from his personal
funds. Partners agreed that A should be credited for this. The
partnership agreement calls for equal distribution of profit and loss
between A and B.
SW9: PE B on page 31 New Book
Required:
5. What amounts should be listed as capital for each of the partners?
Investments A B Total
Cash 2,000,000 3,000,000 5,000,000
Inventory 1,500,000 1,500,000
Land 1,000,000 1,000,000
Building 3,000,000 3,000,000
Furniture & Fixtures 1,500,000 1,500,000
Mortgage paid 1,000,000 1,000,000
Capital 4,500,000 8,500,000 13,000,000
SW10: PE H on page 38 Old Book
PE F on page 33 New Book
As of February 1, 2015, Heckel and Jeckel decided to form a

partnership. Their statements of financial position on this date are
as follows:
Heckel Jeckel
Cash 41,000 53,500
Merchandise inventory - 242,500
Property, plant & equipment 360,000 470,000
Total 826,000 1,046,000
Capital 676,000 726,000
Total 826,000 1,046,000
The partners agreed that the property, plant and equipment of
Heckel and Jeckel were overvalued by P35,000 and P60,000,
respectively. An allowance for uncollectible accounts of P150,000
and P80,000 shall be recognized in the books of Heckel and Jeckel,
respectively.
The capital contribution of each partner is the net amount of the

assets contributed to and liabilities taken over by the partnership.
9. What would be the total partner’s equity immediately after the
formation of the partnership?
10. How much cash should Heckel invest if the partnership
agreement provides for capital balances proportionate to profit
and loss sharing ratio of 3:2 to Heckel and Jeckel, respectively,
using the adjusted capital of Jeckel as the base?
Heckel Jeckel
Capital before adj. (at BV) 676,000 726,000
Property, plant & equipment (35,000) (60,000)
All. for uncollectible accounts (150,000) (80,000)
Capital after adj. (at FV) 491,000 586,000
Heckel Jeckel Total

Capital after adj. (at FV) 491,000 586,000 1,077,000
Cash investment 388,000 388,000
Agreed Capital 879,000 586,000 1,465,000
Partnership Books
OLD
Mr. White
OLD
Mr. Black
Mr. White Mr. Black
NEW
SW11: P 3 on page 26 New Book
JPB admits KDO as a partner in his business. Accounts in the ledger

of JPB on December 31, 2015 immediately before the admission of
KDO show the following balances:
Cash 455,000
JPB, Capital 1,575,000
It is agreed that for purposes of establishing IPB’s interest, the

following adjustments should be made:
• An allowance for uncollectible accounts of 2% of accounts
receivable is to be established;
• The merchandise inventory is to be valued at P875,000; and
• Prepaid expenses of P43,750 and accrued expenses of P11,550
are to be recognized;
KDO is to invest sufficient cash to obtain 1/3 interest in the
partnership. The partnership will use a new set of books.
Required:
a. Give the entries to adjust and close the books of JPB.
b. Give the necessary entries in the new set of books of the
partnership.
JPB KDO Total

2/3 1/3 1
Capital before adj. (at BV) 1,575,000
All. for uncollectible accts. (14,700)
Prepaid expenses 43,750
Accrued expenses (11,550)
Cash 813,750
Capital after adj. (at FV) 1,627,500 813,750 2,441,250
1. Adjusting journal entries

Allowance for uncollectible accts 14,700
Accrued expenses 11,550
JPB, Capital 52,500
2. Closing entries
All. for uncollectible accts 14,700

Cash 455,000
3. Record the partners’ investment
Cash 455,000
All. for uncollectible accts 14,700
Cash 813,750
KDO, Capital 813,750
The statement of financial position of ITV Company, a single

proprietorship on December 1, 2016 is as follows:
Assets
Cash 630,000
Accounts receivable 1,680,000
Less: All. for doubtful accts 70,000 1,610,000
Property, plant & equipment 420,000
Less: Acc. depreciation 35,000 385,000
Total Assets 3,185,000
Liabilities & Capital
ITV Co, Capital 2,205,000
Total Liabilities & Capital 3,185,000
ITV Co admits YSI, and the latter is to invest cash to give him a capital
credit equal to ¼ of ITV Co’s capital after giving effect to the
adjustments of the items below:
• The merchandise inventory is to be valued at P612,500.
• The accounts receivable is estimated to be 95% collectible.
• The recoverable amount of property, plant & equipment is
estimated to be P280,000.
A new set of books for the partnership is to be used in compliance
with the BIR requirements.
Required:
a. Prepare the necessary entries to adjust and close the books of
ITV Company.
b. Prepare the entries to record the investments of ITV Co and YSL
in the new partnership books.
ITV YSL Total

¼ of ITV
Cash 630,000 534,625 1,164,625
Acc receivable 1,596,000 1,596,000
Mdse inventory 612,500 612,500
PPE 280,000 280,000
Acc payable (980,000) (980,000)
Total 2,138,500 534,625 2,673,125
1. Adjusting journal entries

ITV Co, Capital 66,500
All for uncollectible accts 14,000
Accumulated depreciation 105,000
2. Closing entries
All for doubtful accounts 84,000
Acc. depreciation 140,000
Cash 630,000
Property, plant & equip 420,000

Cash 630,000
Property, plant & equip 280,000
All for doubtful accounts 84,000

Cash 534,625
YSL, Capital 534,625
Assets
Cash 1,164,625
Less: All. for DA 84,000 1,596,000
Property, plant & equipment 280,000
Total Assets 3,653,125
Liabilities & Capital
ITV, Capital 2,138,500
JSL, Capital 534,625
Total Liabilities & Capital 3,653,125
SW13: PE D on page 32 New Book
On December 1, 2015, MV and CD agreed to invest equal amounts

and share profits equally to form a partnership. MV invested
P3,120,000 cash and a piece of equipment. CD invested some assets
which are shown below:
Carrying amount
Accounts receivable P 400,000
Inventory 1,120,000
Machinery, net 2,240,000
Intangibles, net 920,000
The assets invested by CD are not properly valued. P32,000 of the

accounts receivable are proved uncollectible. Inventories are to be
written down to P1,040,000. included in the machineries is an
obsolete apparatus acquired for P384,000 with an accumulated
depreciation balance of P336,000. Part of the intangible is a patent
with a carrying value of P56,000 which was sued upon by a
competitor. CD unsuccessfully defended the case and the final
decision of the court was released on November 29, 2015.
7. What is the fair value of the equipment invested by MV?

CD MV Total
Cash 3,120,000 3,120,000
All. For DA (32,000) (32,000)
Inventory 1,040,000 1,040,000
Machinery, net 2,192,000 2,192,000
Equipment 1,344,000 1,344,000
Intangibles, net 864,000 864,000
Capital 4,464,000 4,464,000 8,928,000
Reminders: Partnership
Formation
• Contribution of money, property or industry.

• Assets increase the capital balance.
• Liabilities decrease the capital balance.
• Memorandum entry for industrial partners.
• The value of the property invested is equal
to the current fair value of the asset.

Partnership Formation

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Partnership Formation

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PARTNERSHIP

Two or more persons may contribute

Investments Partner 1 Partner 2

Investments Partner 1 Partner 2

Req. 2 Compute for the capital balances of the partners.

Investments Partner 1 Partner 2

Investments Partner 1 Partner 2

Investments Partner 1 Partner 2

Investments Ding Dong

Billy and Joel are combining their separate businesses to form a

The partners’ capital accounts are to be equal after the contribution

5. How much cash should Joel contribute to the partnership?

Investments Billy Joel Total

Total Assets = P 365,000

On December 1, 2015, MG and AN are combining their separate

DBM, MGX and SPV decided to form a partnership. They are to

Compute for the capital balances of the partners.

DBM MGX SPV

1. How much is King’s adjusted capital balance?

Investments King Ace Total

On January 1, 2016, AB and QR agreed to form a partnership. The

AB decided to pay-off his notes payable from his personal assets. It

A and B decided to form a partnership on Oct. 1, 2015. Their

Accounts payable 1,837,500 4,637,500

They agreed to have the following adjustments:

Agreed capital 11,741,625 5,032,125 16,773,750

A and B agreed the lists of the following assets to be contributed in

As of February 1, 2015, Heckel and Jeckel decided to form a

The capital contribution of each partner is the net amount of the

Heckel Jeckel Total

JPB admits KDO as a partner in his business. Accounts in the ledger

It is agreed that for purposes of establishing IPB’s interest, the

JPB KDO Total

1. Adjusting journal entries

Merchandise inventory 35,000

All. for uncollectible accts 14,700

3. Record the partners’ investment

3. Record the partners’ investment

The statement of financial position of ITV Company, a single

ITV YSL Total

1. Adjusting journal entries

Merchandise inventory 52,500

3. Record the partners’ investment

3. Record the partners’ investment

On December 1, 2015, MV and CD agreed to invest equal amounts

The assets invested by CD are not properly valued. P32,000 of the

7. What is the fair value of the equipment invested by MV?

• Contribution of money, property or industry.

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