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    76 views18 pages

    CHAPTER 18 Partnership Operations

    Uploaded by

    Jona kelss

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    © All Rights Reserved
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    of 18
    chapter 18 - Partnership Operations inroduction ne operations of o partnership are similar in most respects to those fperating in the some fine of business. At the end of each fiscal year, when revenues ‘and ace closed out. some assignments must be made of the resuiting income figure because @ partnership wil ‘tal ot or more capital accounts rather than a single retained earings batance. Ths atocation fo the copie! fecounts s based on the agreement establshed by the partners preferably as a port of the Articles of , porinership. ‘wide range of profit cllocation is found in the business world, Some partnerships have straightfo crbution plans while others have extremely complex ones. It is the accountant's responsibil Geroule the prof or loss according fo the porinership agreement regardless of how simple or complex that agreement is. Profit cstibutions are similar to dividends for « corporation. ‘Accounting for Partnership Operations: Methods to Allocate Net Income or Loss in measuring partnership profit for a period, expenses should be scrutinized to make gute that partners’ personal expenses are excluded from the partnership's business expenses. If personal expenses of a partner are paid with partnership assets, the payment is charged to the drawing or capital account of that partner. Drawings are closed fo the capital accounts of the partners rather fo an income summary account. Practically all partnerships have a profit or loss allocation agreement. It would be rare tofind a partnership that did not spell out the divisions of profits or losses in details. The agreement must be followed precisely, and ifit is unclear, the accountant should make sute that all partners agree to the profit or loss distribution. Partners should select a formula that is sensible, practical, and equitable. The formula used fo divide profits and losses is determined through negotiations among the partners. Whether it is fair or not, it does not concern the accountant. Itis necessary that the benefit the partners expect to obtain from the combination of their respective contribution should be common fo all the partners, because if such were not the case, there would be no partnership. forms of organizations of other aaa hiforward ity f0 Now the question that arises is: “How will the partners divide the profits or losses ‘esulting from the operation of the parinership?" The Partnership Law provides that if the profit has been agreed upon, the share of each Partner in the losses shall be in the same proportion with the net income allocation. It so provides that in the absence of agreement, the share of each partner in the profits Snd fosses shall be in proportion to what they have contributed (based on capital Contribution), but the industrial partner shall receive such share as may be just'and “duitable under the circumstances. However, the law is not clear as to what capital balances shall be applied, whether the wal balances refers to original capital, beginning or end of each. period or the "tage capital during the period. in as much as the law does not clearly specify the “pital balance, itis therefore, presumed fo be the original capital, in the absence of “Ch original capital it should be the beginning capital. 1256 loss reas All SHA PTER jg The reason behind the usage of original capital {in his absence, the be, 's that, if atthe fime of formation there s no agreement, the law should apy only available capital bolance is the original capital. Even though Copital seems to be unreasonable because of inequity, logic dictat ‘ining copigy Md opply and tng sage of aging teS that proft ang should be established at the fime of formation due to some of the folowing sons: 1. Subsequent adjustments in assets and liabiities; 2. Admission of a new partner; 3. Retirement or withdrawal of a partner; and 4, Liquidation of partnership. of the above reasons require the use of profit and oss ratio. The walt period for he end-of-he-year balances fo determine the average or ending capital would be exercise of uly because ofthe urgency of profit and loss rao, Deferal of such oefon wot ld not address the above reasons. {nthe United States, in the absence of any agreement, profit or loss should be allocated ‘equally and if they agreed on capital balances it is presumed to be the ave opital. Nevertheless, these are practices which ore not applicable under Phippine setting because ofits differing law provisions, Profits and, loss can be shared in many ways among partners of a portneship. Most Profit and loss shoring fomula includes one or more of the following feotves or techniques: 1. Equally: 2. Atbiary ratio: 3. In the ratio of portner’s capital account balances and the dividing the botance en agreed rato: (©. Original copia - the intial investment / capital atthe time of formation 'b Beginning copitol ofthe period . Average copito! cl. Simple average 2. Weighted average 2.1. Peso-day approach .2.2. Peso-month approach; Interest on partners’ capital accounts and dividing the balance on agreed ratio: Salaries fo partners and dividing the balance on agreed ratio; Bonus fo pariners ond giving the balance on agreed ratio; ond te interest 09 capital account bolonce, salaries and bonus to partners and dividing ‘botance on agreed ratio. NE oA Because of is simplicity, the equally or the arbitrary ratio approach isthe most commen of allocating profit o loss Its simple because it ignores capital balances. Assigning profi based equally or on on arbitrary ratio may be simple, but this 0P isnol necessary equitable to ol partners. No Indeed, an unlimited : ne Single ratio is lke to relect property the various contibulions made bY 7 neo? number of alterative allocation plans could be devise of ochieving fair teatment for all porties, ‘Advanced Financial Accounting - A Comprehensive: Conceptual & Procedural Approach ca ARTNERSHID | » Ration; nustration 18-1: Allocation of yey 'neome a 1 net income of sume thal © Of F288 0095 jequat wilhcrowals by porns at 10° on Po ro) line owing Accounts permanent copigyscP=HN of Treat ot the end of 24, * ears have been ord COPFOLaccoun oth end inr tmauea ee mS the ihe x soy aa iy Mitoy 1 204 ‘War ri rat sey Wat — se Wiest “ae 100 Weal aston '. Taio iat ais Tir Sar wal considered fo be the same, The enity of the partnership of X and ¥ to 28,000 equally would be as fotows: Tan ‘Card the allocation of net income of Xsshore ofnel care hol PST 7 Ysshereofretincare hotrcto "hams Tolol........4.. venssnses £286.00 The resuting bolances in the drawing accouns may be closed into the con ee 9 1 ed nfo the capital Aibrary Ratio Wen the capital and service contibuton of the partners ote unequal, on arbitrary Poll ratio may be employed to recogrite these lerences. in intequentty used variation of tis method species one rato for profs ond « tent ratio for losses. Because prof and lass years may alternate, itis extremely ortant that profi or loss for each yeor be delerined accurately in ol material "Secls when this varationis wed. 04h ogreements to share pros ond nse equ crn spaced rts ore The MO#e Complex rol shang ageeent ce cto encour ir practice ie Ae that poriners devote tote patent busines ond he con pel ‘hat ing snes by individual pariners ee fequely considered in detemining the profit "9 agreement, a me that, since the expertse, ob. o Fergie ® t0 the success ofthe partner. "0 of 3:2. The entry to recerd the olcotio 4 reguation of X are factors of special ‘ond ¥ ogee fo alocate nel income in mol net income of PZB8.000 8: ¢ ooh hare of netincome 3/5 of P288.000......_ P172800 Y's share of net income 2/5 of 288,000... 115.200 Tok, cHievtettieoiestictel 2.268.000 Capital Balances Many fis alocate profits and losses solely on the basis of capital balance. In these Cases, each poriner must maintain a specified capitaHbolance that is corelated to ty level of responsbilty assumed in the partnership. This method is not only easy to opp but can aso prevent certain inequities from occuring among pariners i the parinesn, is iquidated. This allocation of profits is most ikely found in limited partnerships in which substantial investment isthe principal ingredient for success, To avoid argument, itis essential that the partnership contract specifies whether the profitshoring rato is based on (1) the original capitol investments, (2} the begining Copital account balances at the beginring of each year, (3) the balances at the end of each year (before the cisibution of net income or loss), or (4) the average bolances duting each yeor. Original Capital. If the agreement between X and Y provides that the allocation of net income shall be based upon original capitals, reference would be made to the ‘amounts originally invested by the partners. Beginning Capital, When beginning copital balances are used in allocating partnership profit, additional investments during the accounting period may be discouraged becouse the partners making such investments are not compensated in the division of proft unti a later period. Usage of this wil prove to be inequitable, Assuming this agreement for X and ¥Y, the entry to record the allocation of net income of P288,000 for the year is: X copital Jonvory Y. P300,000 X, capital, Jonvary 1. 470,000 Total copita’s 720000 Ws shore of netincone: 300/720 of P2B8.000...._P 120,000 Y's share of net income 420/720 of P288,000.... 166,000 Total capitals... ceseeeresess 2860000 Ending Capital. A similar problem exists when ending copital balances ore oan Year-end investments are encouraged by their inclusion in determining | : partner's shore of profi, but no incentive exists for a partner to.mal investments before year-end. ted ‘Aso, no penalty exists for withdrawal: i the amounts withdrawn er of before the period's end. I the partnership agreement provides for an aloce™ net income based upon partners capital at the end of each yeor the recat the alocaion of net income of P2880 for he years fet ee he ee “Advanced Financial Accounting ~ A Comprehensive: Conceptual & Procedural Approach oT me ena rea ‘opal duting the year. An agreement for chy avotobe fr use by the partnership incentive or adonalivesinensyrensese S208 Cont oko oct mers when 8 an canbe ff the parinership contac provide shang Wenicbaiaias without affecting the capital account. Any ad entered directly. on partes’ cop! oc Computation of average contig oem! O% feere invence the The problem with the average coptl computtonis wha! wihckowal of crowing ‘accounts are 10 be considered to reduce copial necesary to compute the ‘overage amount: The following gudelnes shouldbe cosidered: * An agreement should indicate ceoty what withdrawals or drawings accounts are fo be recognized: + A partnership dgreement may stale that only withdrawals above o certain limit ore fo be viewed as oftels (educton) ogoinst coptol balances. tt means that drawing account bolances up fo the arauns spectied inthe ‘agreement would not be deduced ceerinse teats mage jear-end capital bolances. For puposes of local i, Growing: in exces: of low ovat 08 dete fone ppatine's Capital accounts in computing ‘overage or ending costa bolonces, temporary withdrawals or drawing * Typicaly, ether penond a sf share in anicipated profi) are not accounls (which a winéral ford MOP "cone, capt! recognized in the computation wth re widow ‘agains! original withdrawals or permanent! wihrorot (oF additional invesiment) oe 1099 — The reason for the rerieon chs computation of ver00® COP ets evenly throughout the ye. incon of 5 Mathematically, the resulting fase Senecio oe excluded inthe averoge oP cing the folowing computed wing . con The average capital batances vente ; Pproach: so widel U2 spangesin capital 1oke |. Simple average. Ths nets ie ios te failure to take into consider" Place, | withdrawos inthe profis ae generated ‘on average amount ich withdrawals oF cccountoisin view oft 260 CHAPTER 2, Weighted average. The aries may wis 0 recogn2e ol he changes ny copital os wel os in their drawing accounsin determing the copia used in distiouting the profs or losses the operation ofthe parinestin parineship contract should state whether weighted copital account bos are to be computed fo the nearest day (using daly bolances/pe approach) of to the neorest month fbeginning-of-month bolances er ena ‘month bolances/peso-month approach.) 1 ithdrawals made at the beg For peso-month approach, investments and wi begin (of the month if made before the middle of the month and are to be conse ‘os made at the beginning of the following month if made after the middle of the month, : IF the allocation of net income is to be based upon average (weighted) copitas forthe ‘year, the entry to record the allocation of net income of 288,000 for the year - paRINERSHIP OPERATION, st on Capital as a Dstbuon porine's' Copital accounts gs posno effect on the measurement gemember that the partners’ capital co account and on interest Payable some partnerships do recerd imputed nt comect, it does not affect the final profit saiance in the Interest Payabie account gt account. Another tem of expense arising from deok ys wecaton ct Net income, of meting Sng partnership proft equitably ‘net income or loss ti perinethip. According i's nt ae account, Beco accounts not an expense ofthe pornenng eres inthis may ond ls allocations. Eventually, ony remaining Using interest allowances ‘ofthe parinership, re ust tht they ére not foans to Propile fo charge an Interest Expense interest on poriner's capital nner, although, not technically Yearendis then transfered to the partner fy i. ings between a parine it portnes is commonly encountered when th a aaa ae Thcome surnmay porinethip leases property from a lessor who alto a parfner. Ren! expente is recognted by ie panne. Assume that X and Y agree fo allow interest on av The pln for ving the enfte prof n the ratio of pares’ copie accoun DOCS wa based on the osumpfion that contouted copitl was the donna oct success of the partnership. However, in most cases the amount of contribute fy. at only ane fact that contributes fo he succes ofthe pexinestip. Coneavent Partnerships choose to divide only a portion of the profit by giving interes solary clowances and bonus. Interest on Capital Balances diference’ The purpose of allowing interest on capital is to give recognition fo /r0Q@ Capital at %; any net income betes on Capital Accou the 3250 jstication fronting he ower "We location of net income maybe summaries ints with Resultant Net Loss ‘Copital No.of Mos. orloss balance is to be allocated 37.. Assuming no entries for interest during the course x oonce |_|" unchonged at he year, entries fo record the allowance of iterest and the remaining allocation of Time | Ps00000 Px 3 Pw retincome follow: anes: | 360000 |x 2 3240000 R Baan ores . = wera. P_345,000 7 frawing S eo Y. drawing sesseess " 24,300 Copia Wo. of Mo Xs infers on overage copie: rc PASM... PAID ¥ boonce |_| unchanged Y'sinlres on avenge copie olPasa00... 24300 Tia: | P4200 [x 2 ea | on caer 25000 mine: | 390000 x 8 \ = RO W/Mixa: | 450,000 | x. 2 200,000 72900 2 4840009 | 170100 oo fasion a = = Interest on overage capitol F20700 ee a Ws shore of nel come: 345/780 of PIBBOOD... 132480 Bctance (Thinmnm TD SI Y'sshore of netincome: 05/750 of P2880... _155520 Total = Tota Teena ereac00 ina sngl ent os follows: a yunts, this cllowing interest on copital accot ny wheter operons ote prottable or interest on poriness' capital accounts 2 O contoc! conoing a speciic net : orinestip Copital contributions by partners. It also recognizes the contribution of ie poe 79.255 year would be inthe cn ay for interest in such 0 Sat arene opie conibuton fo the parinership’spoft-generaling-capacly. Mew snes | tan" et cmon sccount i rorfened 10 fhe por on capital cs © means of alocating profs would be appropriate when fh Treg | ge. 0C8 in the income sum ‘ ith Capital intensive versus abor intensive oi the partners were not significant the day-to-day operations, oe ee ‘Advanced Financial Accounting ~ A Comprehensive: Conceptual & Procedural Appro#t nts in the proft-andtloss ato. Re: : 2. CHAPTER In case Of loss, the interest allowed to the partners shall be added fo the net the total resuliing loss shall be dishibuted in the ratio agreed upon by the lost ang the distbution of the balance afer allowance of interest Pres fy Further, when the partnership agreement also provides without quaitieg Interest is fo be alowed on capitol, interest must be allowed even inp ‘operations have resulted in net income that ae less than the allowable interey feb HOM thal the. For example, assume that operations for and Y prio othe recognition of intr resuited in a net loss of P60.000 and ony balance wil be allocaled into I:4roto. Entries to close the income summary account would have been as folows: 2 fons. When g advance fo @ partner oF receives on ameun 9 eat@0NP makes a tempor ies ansactions are recognized os ceing yn 2% Hah tom a patna te pane! cd the poesia, ey ens Eon: between recognized as interest-expensesiteresncore "3 CHS on uch Honsctons ere X sinterest on average capital 6% of P345000...., P2070 ] | _Inlerest accruals are recognized petodicaly on ‘sinters on everoge conta 6 of PS 000, x0 | payable balances. When settlement fr elt ems os oherreceivable ond Told. 24sin9 i cilecton of interes or the payment ne ae mre oa ete ec0 he Made in he usual manner, When settlement is not to be made in cosh but djs : | inleest on on advance to a porneris recoded ms dome Repune a is account and a credit fo interes Income, on alon made by a porns Ie The net effect of the foregoing on capitots partnership by a charge to Interest Expense ond 0 credit to the Partner's drawing x Y Total ‘occount. Trferest on average copiiol 20700 P 24300 48000, lnsummary, interest on loan fom panes seco E ; | /, ognized cs expente and a a factor in Betonce ee rarer a ‘he measurement of net income ot los of the panenhip, Silay, interest eared on bors is recognized as partnership reveru.Tisiscanssen wth he pincile that loans ‘tom partners are assets and. liabilities, respectively, Ferional Services Rendered in Net Income ond los Shang Agreements Aayoes Partners may wish to provide for on alocaion of net income that recognizes i a ae them fo business, Partners can provide by agreement that net income or loss shall be allocated a Giletences in their abies ond cxpfce ae ne devoted by them to arbitrary manner without recognition of interest when-the results from operations 1S may agree to an arbitrary raf isp vanes cover a specified interest alowance. | RYevet the use of an exbiary ao recognize copta Interest on Excess Capital Balance. It may be agreed to allow interest ute joie | {ae limitations G i Lets tar feoorifon ofthe sever factors : the o ie. it moy fo inequitable in he event the average capital of one pariner over that of another. these were Ine AIT Eg | cana oN ri crd tay prove ne between x ond ¥, the entry to record interest and the balance in net income és en re oe eye od ete ges pasonal contioution to the aco ership is charged wilh he greta (zt Aoance . wel as olher factors that are Tuté®onitng aferences in pene xb as ganesh be "sponsible for the success of the paris! ce ote sais ‘vided in some sat sores, ith any nat nce jes no eon Ft tennant rane fAlio. Philippine partnestip I" sent roitupto the porinss one" services inthe absence of "OF 'Sjust and fair compensation. The allocation of net income may be summarized in a single entry os follows: KSAPTER ig A partner who devotes time to the partnershi lp business while the other elsewhere may ‘receive a. salary allowance. Salary allowances compensate for differences In the fair value of the tale: devote their time to the partnership. The purpose of olay alowances are means of achieving afi avin of po the partners based on the time and falents devoted fo partnership businers ‘ee Patiners ore ofen included os part ofthe pro ditibuton plan fo resp” compensate fr flesng amounts of personal sevices parnes poe a hates Following ore the reasons why salaries cannot be treated as expense of the paren |. It's important fo note that this treatment of partners solaes dies tom t lrealmen! of employee/sharcholder salaries of « corporaon. Calsaig Parinesship income ater solary allowances is proper when compaing fa performance of a partnership business with similar businesses operated unde corporate structure. 2. Calculation of partnership income after solary allowances is fkewise proper in ‘assessing the success of a business. The financial success of a parnentip business les in its eaming a foir retum for the services performed by partners, x copital invested in the business, and for the risks taken. To. illustrate the effect of a solary arrangement, assume that X and Y agree to the allowance of monthly salaries of P10,000 and P9,000, respectively; any net income or loss balance to be allocated in the ratio of beginning capitcl. Amounts actly withdrawn by partners during the year were recorded in their drawing accounts os presented in the original problem. The net income of 288,000 before recognition of salaries is allocated to the partners by the following entries: Income summary... =r a X. drawing. Y.drowing » ore te nt for anes ope a X:Solery for 12 months GtP10,000 permonth.... 120000 Y: Salary for 12:months at P9,000permonth..... 108,000 Wold scat ecieseaitin PiNiecct : 226.000 Income summary X.drowing . Y, drawn Salaries Boionce (200:420) * oe nol ; Soe oe : jes to parines ion A general precept of partnership accounting is that pe oft @ 0 expenses in the determination of perinersip nel prot Bul Or cyners Pes Plan, Tis precept is closely related fo the proprietary CONCEE efor discussed in Chapter 19. According to the proprietary theory. “Advonced Financlal Accounting A Comprehensive: Concept & Proce Feaatsudi pe eee oe vs 265 fal and personal services in ‘ Pursuit of investments. E OP The rise the resus of hose two The Some IOG OPPRES 10 the borne: contribute copital while othes corps ® Of oro axe hypically rewarded wih intrest on ng on te core rewarded with salaries, * Copitot: those ization. Some poriners te who contibute capital ‘who contibute personal ime Some partnerships do record solory alo exec doesrol le her Deland escort rl etic Jance in the Accrue vertualy, ener oceoent et SAY Foye occa yenendisthenKosoned foro However, both interest ond salaries a 4 fe results of the respectiv used notin the determination of incor eae tc at se, me butrather os on alacaton of prof Solar Allowances with Resultant Net Loss | nen an agreement provides for solaris whut quotation, slay allocations must be made even though profi is inadequate to cover sols or there isc los. Afler | sdlies ore recorded, the income summary account shows a debit bolance that is ‘ronslered to the partnes' accounts asageed, Bonuses: Bonuses ore sometimes used os « means of providing additional compensation to | Partners who have provided services to the partnership. Bonuses ore typically stated as | APercentage of profit ether before or ater the bonus Inthe absence of any agreed basis bonus is computed onthe basis of parinership net lncome and the concept of ‘parnentip nel income” is generly Understood in Secounting practice fie. before bonuses re deducted) . se fying the rent Nowever, partnership ogeemen stad be pecs beating he mecazem Procedures to be used in determining the omounto! wi owonces, 0 bonus shoud be considered as a AS with i , solar alo a th interest on capitals and solory eae " ds tic ec i. ae of profit and not tobe: me vera pot be ened ble times the partnership agreemer . 'scoleuloted. s = pation 182: ‘Action of Net eae nt oe Yo PCOED. A the menoging et income of A ond 8 Parinestio sumptions: net isalowed os. «bonus bosedonine ONE seca, the bor woud be 4. A bonus of 20% of net income ‘Computed as folows lets =Borus B= 2ohotNetincam™ y oe ir ss 1266 Re be CHAPTER pARTNERIHIP OPERaTi gy, H B. A bonus of 20% of net Income afier deduction of the bonus, Ae tee ‘computed os folows: ‘he bons woud be Note: sho be no team Inthe compaaion of er 2 bo wag, TetB = Bonus blero ot neon! Br oy muh 8 het icore pact 8 = 20% ofNtincome after Bonus iron cope. new ey NOS Bee pa ADae he gest aera, 3 = 20% 420000-8) akacaon of et cane ave ‘toa rn poen og Shocoten oetnca "eam oes tse Proof: nee : aaa As 0 generale, when Ihe porinestio provides without quaticaton that bour aD crete ce bbe allowed, bonus should be based on net income before deduction of bonus 8 Netincome at bon a ages Basis of Computation for Bonus alee br tons... As lang os he bass of computation fr borus wil be a poive omeunt the erg The schedule showing he alocaton ofan = ES bonus should aways be allocated io porines ened to, regarcles of he avalab Fe econ ofretncnei peeiedesolows,_ of the residual amount. Bonus. 7 aa 5 yea Sales = lustation 18-3: Allocation of Net Income with Bonus, Salaries, Inerest and Income ox Ines hag P4800 Tonto Reler to tlustration 18-2, ossume that the pariners futher agreed on the ollocaton of ret aoionce (2 3 aus gp _ income: Nd vnc? Bm BR ee ‘« Bonus of 20% to A; ‘ 4, Bonus is based on nef income offer bonus tains onde i: « Salaries to A, P40,000 and 8, P60,000: Let8 = Boru = Sdaies matePiecs ee * Interest on average capital balances ~ A, P12,000 and B, P8,000. B = 20% of Net income ater Sonus, Soles and interest ‘Residual balance in net income be allocated fo A and B in the ratio of 2: rato. | 8 =20% azo000. ‘The folowing assumptions for bonus are considered: 4 |. Bonus is based on net income before bonus, salaries and interest - same as llustration 18.2 8 A. 1208 ‘The schedule showing the allocation of net income is presented as follows: B A Tole Le Beni Pa400 i pa eapeenaion Seinen sane TE ines. 200° 600020000 les: Bonus. oe Balance e400 7000 _216000 ee > oom Totel Pasooo0 Piogoo 42,000 Net income itr bonus sles ele ess gr 2. Bonus is based on net income affer bonus but before salaries and inferest - some Ries reas Elo IMustration 18-2 (a). WS eae The schedule showing the allocation of net income is, presented os follows: The schedule showing the olocation of net income s presente sills rhe re | (sig Fo . " Jonus anes 0.000 100,000 ‘oom reomo od oe Salaries... em on 200 - 12000 © 80020 Interest... war 3 250000 153333 _16.667 Bolance (2:I)...... Poase? Fisias 2420000 275333 Pasco” 420000 Woh fstisaad = __— put before bonus ond inferes: 3. Bonusis based on net income after bors and solaris but before interest 5. Bonus is based on netincome ste 7 LetB = Bonus: = Soiaries: and = interest. Sle saies belo bons 8 =20% of Net income alter Bonus ond Salaries before interest . 20% of Net ince B =20% (P420000- 8-5} 000) 8 = 20% (Paz0.000-8-P100,000) 200-0 8 =20% {P320,000-8) 3 i ‘Advanced Finance! Accounting =A Comprehensive Concaptaol& Procedural Approa¢! | “ted Financ anti = Cone Chapter 1.- Business Combinations; Statutory Merger and Statutory Consolidation Introduction binatons is one of the most sgnficant ond interesting topics of accounting 1h is mulfaceted and divisive. Susness combination involve finan tudes bushess empires, tumphant stories and invidva frunes, ‘Gebacles. By Ihe nature, they alfect the destiny of enive ‘evaluated in terms of ls economic substonce, regardless ot ‘Accounting for business come theory and practice. Simultaneous, transactions of immeasurable magni ‘managerial genius, and management ‘companies. ach exceptional and must be iislegat fom. Wy do business entities enter into o business combination? Athough a number of reasons have been arene evening reasons probably growth. Growth a mojor objective of mony busines erganatons. J company may grow slowly, may gradualy expand its product snes facilis, or Services oF may skyrocket oimost overnight -usiness combinations may destroy value father than creote, in some instances. For example, i the smonage’s of merged fim franfe resources fo subsite moneylsing segments stead of shuting them own the rest wal be ¢ suboptimal alocation cf copia. This stvation may arse because of euctonce fo eliminate jobs or lo acknowledge o post mistake, ‘his chopler presents reasons forthe popularly of business combination the methods and techniques ‘dealing with them The Nature of a Business Combination ‘A business combination may be friendly or unfriendly (hostile takeovers): » ina fiendly combination, the boord of directors ofthe potential combining companies negotiates mutuoly agreeable terms of a proposed combination. The fropotd] ‘Submitted fo the stockholders of the involved compares for approval. Normal, © Twos hide oF three-fourths postive vole is requted by corporcte bylaws fo bind ot stockholders to the combination. «An unfiendly (hostie) combination results when the board of diectors of « compcry targeted for acquisition rests he combination. A formal tender offer endbies the aequirng fimo deal drecty with individual shoreholdes. fa sufcient number o| shores deat mode avaiable fhe acquting Tim may reserve the right fo witharaw the oft Because they are relatively quick and easily executed (offen in about a month}, fender offers ore the preferred means of acquiring public companies. ‘Although tender offs Ge the prefered method for presenting hose bids, most fender offers ae fe ones, done with the support of the target company's management. Nonetheless. hose tokeovers have become sufficienty common that a number of mechan have emerged to resis takeover. \ it i Resistance ollen involves various moves by the target company, general wih colo rs or nol remains terms, Whether such defenses are ultimately beneficial to shareholders nsive contovenial sve. Academic reseerch examining the price reaction 10 dee ‘Aadvanced Financial Accounting =A Comprehensive: Conceptual & Procedural Approcch — sp TNERSH ys with Resultant Net Loss concep! of Bonus it not app te he BONUS POON aegagene ipsuilent Income to Cover location some c0ses, the Partnership net in onus provided forin the athetship ope 0 bee et ss, Wnen We does ‘© partnership operates at a the puppose of giving bonus, than the inferest, salary and/or ccumence in sgoblshed practice is fo allocate the inter ‘the profit and loss formula, the freome had been eame i soary an) i come eto ed. The amount by which the ae bonus as if sufficient exceeds the 's alocated to the india) Salary and/or bonus ‘locating residual income, 110) partners in their agreed ratio for rperetore, it is simply satisiying oll provsons ‘cde should ato be Toloved when he pores o owen hi frevous discussion onintres, clr ond nut aretonearag alee refs cial Problems in Allocatio " ee e : Ee Profit cnd Loss - ‘and Interest os on Expense inthe previous discussions, net income was viewed ashe pat . {ul contribution fo the business as owners - capitals el rpenor toe ress tad salary llowances fo pornes wer regaded es «mean pong fren equilable distribution of such income. @ 11's possible fo record salaries and interest os poof expense tems rather than cs disiibution or allocation of net income. ‘When these items are made to expense accounts rather thon to the partners’ drawing ‘cccounts (or capital accounts}; expense ‘bolonce are then closed into the Income Summary account in arfving atthe net income fo be olocated in the agreed profit and oss ratio. : On the income statement, panes iret ond sles woud bested with he oer expenses in atving at net income oss he pore. ‘ether partners interest and soles re teoedin he occouis expen pms f fon of 65 distibutions of allocation of net income, the eventual eniom of Patnessip net income orlos cng he pres eon Conections of Parine alot Patod ship Net Income : to cere o fas may occur in accounting for prresip. op eran he Seer expenses of revenve esi he est CAlulation or amortization of ase caer co Pa i Fables inthe alocaion of pil and SCOT tered te fons hove Seunted in specific prior yeas ond 2 he pare ed cron, oer Seement since the period it ich ae 0 ection is accounted for 05 7 08 nce, ¢ RI0 ccrinership the correction is allocated to the inclvi SCCoun. The allocation should be based on the prof ond lox ting the period of the emer. Subsequent Changes in Methods to Allocate Net Income OF Loss, 'f the partners subsequently agree to change the method to al equity dictates that assets be revalved fo theit curent valk change. 100! partners: con Soreement in fe locate profit o Ives ot the ire oe For example, assume that partners X and Y shared profis ond los respectively, but at a later date agreed to share Profits and losses that the partnership hoids a piece of machinery com with a 140,000 current value. Partner ¥ would receive a larger share ofthe pone machinery (when itis later sold) than had the machinery-been sold before noo in the method to share profits ond losses were shared 6:4 ratio, chonge AS an alternative to revoluing the machinery to its current value to Profit-sharing formula that the first P40,000 of profit on the sale of the shared in the old profit and loss shoring ratio. 510.6 6 ap equaly, jed on the books at Plooge Stipuite in he new ‘at Machinery sto be Under this method, the porinership avoids making an enity that sciferent wit what Generally Accepted Accounting Principles (GAAP). This is not o major reason fo selecting this altemative, however, ifrevaluing assels is more practical, When the profit and loss sharing formula is revised, the new formula should contain provision specifying that the old formula applies to certain types of subsequent ‘adjustments arising out of activities that took place before the revision date. Examples are as follows: 1. Unrecorded liabilties at the revision date; 2. Settlement on lawsuits not provided for at the’ revision date, even though the Tiabilty may not have been probable os to payment or reasonably estimate that time: 3. Write-offs of accounts receivable existing as of the revision date. Regardless of the fact that some of these items do not qualify os Lealieg) adjustments greater equity is usually ‘achieved among the partners by ie pio sharing formula. Because partnerships need not follow GAAP, the will of may prevail Special Profit Allocation Methods Some partnerships distribute net income on the boss of other criteria. For example public accounting partnerships distribute profit: es 1. On the basis of parnership “units”. A new poriner may acauite 0 cet of units, and addtional units are ossigned by a partnessia cor oars commitiee for obtaining new clients, or for providing the frm wi of industrial expertise. ae use of i fic performance 2. Performance methods. It gives some weigh! fo the specific pent mn pariner to provide incentives to perform well, Some exar performance criteria are listed below: ge ai est te So eee ‘Procedural Approach “Advanced Financial Accounting ~ A Comprehensive: Conceptual & CHAPTER However, in a p a 1278 yamenniiny OPenattons _____—"* yh! ner ‘9, Chargeable hours. These ore the total number of houss that cpa in incured on clientzelated assignments, Weight may be given to excess of normal. . Total billings. The total amount billed to clients for work performed Gs supervised by G partner Constitutes total bilings. Weight may be given pilings in excess of normal, c. Wiite-offs. Write-olfs consist of the amount of uncollectible billings. Weight may be given fo a write-off percentage below normal. , Promotional and clvic activites. ime devoted to developing future business ‘and enhancing the partnership name in the community is considered ‘promotional and civic activity, Weight may be given to time spent in excess of normal or to specific accomplishments resulting in new clients. ¢, Profits In excess of specified level. Designated partners commonly receive a ceticin percentage of profi in excess of a specified level of earnings. | galement of Changes in Partners’ Capital Accounts. tte balance sheet and income statement for a partnership are accompanied by a ttidstatement that reports the changes that have taken place in the partners interests | daing the period. The statement of changes in partners’ capital accounts based on. | | | | | Ihstation 18-1 (assuming that 6% interest is based on average capital with the remdning net income be allocated based on « 37 ratio for X and Y, respectively) may beprepared in the following manner: Xand ¥ Partnership ‘Statement of Changes in Pariner’s Capital Accounts. For the Year Ended, December 31, 20x4 x Y Total (Cop, January T, 0x Peomoo —FanoO00 —F 720000 Ad: Additional investments 40000 __s0000 120000 tole ss eseatt a .. P340.000 Pago000 PBe0.000 Les: Copital withdcawals...... ss —— _100 — _30.000 {nding Copital before Net income Padooo0 P4s0000 © P 810.000 dd: Net income {see schedule} ota es: Penonal withdrawls ts. December 31, 2044 Kend y Partnership fete le~ Allocation of Net Income fear Ended, December 31, 20x4 x Y___Total P2070 24300 P 45,000 2290 170100243000 B25.400 P124.400 288,000 \sktesTon average conta, tance (3:7 Wd re eeesesesF—er “ohn Acunng~A Compe Ce ' 1+ Alloce ‘Assume that a net income of P34 seterc Net income r 5,600 is determined for x Reguor withdrawals by parines in anlcipation ofnet income ron rawing accounts: permanent capital chang Drawing and copital accounts at the end of HID at he fea ges have been turns been s ae ied i mad 204 oppearastolows: Mei ccaat ——___‘xex a VN Fx4 340.000, Wit 5 : Ea a, a Tis tt ps ee Alia sae X.drowng . Vina amp TARGA Tae BI Tae Required: Prepare journal enties to allocate net Income based on: 1, Beginning Capital 2. Ending Copital 3. is 'nterest on Excess Average Capitol Balance and the balance allocotedin te rtae I~ Computation of Bonus The net income of A and B Partnership for 20x4 amounted to P504,000. Aas the monagrg, Partner, is alowed os a bonus, Required: Determine the amount of bonus, assuming: 1." Bonus of 20% of net income before the bonus is deducted (bonus is treated os 0 allocation of distribution of net income). 2. Bonus of 20% of net income after deduction of the bonus foonus is heated oe ‘expense in computing the bonus amount). Ill Allocation of Net Income with Bonus, Solaries, Interest and Income fox The net income of A and 8 Partnership for 20x4 amounted to PS04.000. A. the marae portner. Assume that the partners agreed on the allocation of net income os olows: + Bonus of 20% to A: '* Salaries to A, P48,000 and B, P72,000; « Interest on average capitol bolances-A.P14.4000nd B,P9.600, in + Residual balance in net income be allocated fo A and Bin the ratio of 2:1 rae Required: Prepare a schedule to allocate net income, assuming: 1. Bonusis based on net income before bonus, salaries andinterest: 2. Bonusis based on net income after bonus bul before scares and ner 3. Bonusis based on net income afer bonus and salaries but before interes 4, Bonus s based on net income after bonus, solaris ondinterest. 5. Bonusis based on nel income aller solaris bul before bonus and i 6, Bonusis based on net income afferinterest but before bonus onde as 7. Bonus's based on net income before bonus but after income - ee . 8. Bonus is based on net income, that f, after bonus and income 10% ry W=Computation of Bons aye Pn Rodgers and Michael formed a partnership on January 2, 204, ett a meee cash, Rodgers invested land valued ct P30,000, which he had PE aanage cacition, Rodgers possessed superior managerial sls ond oot partners agreed fo the folowing profit and loss allocation formu i 1273 pnoBLEMs a, lterest - 8% 0n ofgnal copital investments . - Golary - P5:000 a month to Rodgers. acting the e See -Rodg@t i 10 be aloccted « bonus of 20% of net income after subWocling * yorus, interest, and salary, 4, Remairing profs 1 be divided equally. ; atthe end ‘of 20x4 the partnership reported net income before interest, salaries, and bonus of 700. teqied: Calculate the emount of borus fo be aocoted to Rodgers. V=Computation of Average Capital sores, Keler ond Rivers have the folowing copitl balances; P48, 000,770,000 and 90.000 repeclvely. Because of c cosh shortage James invests an addtional P12,000 on June Ist. Each ~ poner withdraws P00 per month Jomes, Keler and Rivers receive a salary of P13,000,P15:000 ‘ond P20,000, respectively, for work done during the year. Each partner receives interest of 8% on thei weighted average copital balance without regard to normal drawings. Any remaining ‘polls re spl 20%, 30% ond SOR respectively. The net income for the year is P30,000. Required: What are the ending capital balances for each partner? Vi~ Allocation of Net income The PQ portnership has the folowing plan for the distribution of partnership net income (oss) ker Te Solaies oe 60,000 | 100,000 Bonus on net income .. : & 1% Interest on average copital balance. % ™% Remainder (i postive .. on | 4% “Remainder (iinegative) 50%, 50% lequted: Calculate the diibution of partnership net income (lois) for each independent Sivofion below (for each situation, esume the average capil balance of Pis P140.000 and of Qisr240,000): : : 1. Partnership net income is F360.000. 2. Partnership net income is P240,000. 3. Partnership net losis 40,000. Vil-Allecation of Net Income Carey and Drew formed @ partnership on January 1, 20x4. Corey invested P100,000, Drew 70000. Each poriner withdrew copitl of PI2000 on each of the folowing dates during 20x4: February 1, august 1, and Novernber 1. These withdrawals in total were equal to solates for the Yeor. interest of 8 percent wos to be paid partner on the boss of thei average capital 5 excluding net income. Addtionaly, Carey wos to get © 20 percent bonus based on Patnership net income ofter the bonus, but before the scares ond interest, ‘Ay Temaining profit (or los} was to be allocated equally among the poriners Aequled: If partnership net income wos P150000, how was i fo be allocated between Corey ‘8nd Drew? ‘ VitetovelotNetncome ab ible ar dering forming porinership whereby profits wil be allocated eh the imac stove od ‘Denuses. Bonuses wil be 10K of net income afer total soiaies rd otal bonuses: Cable wil receive o slary of P32000 and a 10% bonus. Jones has the option leceiving a eat payQ00 ond @ oRsborus oF smoly receiving osalry of PS2.000. Yecuiced: Determine the level of income thal would be necessary s0 That Jones would be 'eent to the profit-sharing option selected 1274 IX~ Allocation + Olsen and Katch organized the Ox einaneee Cr Portnersi thei capitol accounts ding 20d: eo” VOM. he folowing ents weg ™Odeing ~Dsen n — Petits Cred an rae 10/1 pee a Debits Cae an, ro.o00 ae on 10.000 Wh 1a200 ‘The partnership a losses: * Solories of P48,000 and P36,000 would be allocated to Olsen and Kat + Interest of 8% on average capital balances, ee * Katch will receive a bonus of 10% on oll partnership bilings in excess of 300,000, * Any remaining profits/losses wil be allocated 60/40 to Olsen and Katch, respectively, Required: (Account for each situation independently] 1. Determine the distribution of partnership net income. Assume the partnership income of 85,000; partnership billings amounted to 400,000. 2. Determine the distribution of partnership net income of P165,000 on bilings of P400000. X~ Allocation of Net Income ‘Matt and Jeff organized their partnership on 1/1/20x4, The following entries were made into thee Capital accounts during 20x4: gteement called forthe folowing in the elocaton of portnentip rts ang Mail Debi Cred Belonce me 35000 3500 on 1.000 45000 10/1 5000 0.00 ——_——_—— Debit Cred Balance " 25000 3 10,000 Be an 10.000 m 5.000 20000 lan 8000 73000 t it fons betwee" Required: if partnership profi for the year equaled P66,000, indicate the allocations bel i fon conditions. the partners under the folowing independent profit sharing allocation con ae 1. Inlerest of 10% is allocated on weighted average capital balance and the is divided equally 2. salary of P9,000 will be allocated to Jeff; 10% interest on ending copii to the poriners remainders vided 40/40 to Matt and Jerespecrret got. 3. Solaries ore allocated to Matt and Jeff in the amount of FIDET fos capt respectively ond the remainder is located in proportion to weia - balances - ay ol? 4, Abbonus of 10% of partnership profs after bonus s credited fo iMate aoe a ie! is allocated to Jeff, a P20,000 salary is allocated to Matt, capitals located, and remainder spit equally “Advanced Financial Accounting ~ A Comprehensive: Conceptual & Procedural Approach atocated Ee : 1275 ee Ran Cr Car ea eee enn ‘XI Allocation of Net Income with Personal and Capital Withdrawals Becton Average Capital 4a.88, and CC Porinenstip was formed on January 2, 2044, The original cash investments 0s] BLEMS 144,000 access 216,000 ing tothe Ge Inership contract, the partners were fo be remunerated os follows: ee states of P14 400 for AA, P12.000 for BB, and 13,400 for CC. {Interest at 12% on the average copital account bolonces during the yeor. | 5 gemainder divided 40% to AA, 30% to BB, and d 30% for CC. before partners’ salaries for the year ended December 31, 20x4, was 92,080. AA reed an addtional P24,000, in the partnership on July 1; CC withdrew 36,000 from the getneship on October |; ond, 0s authorized by'the parinership contract, AA. 8B, and CC each row P750 monthly agains! their shares of net income forthe year. 1, The share of partner Ain the net income 1. The copital balance of portner CC on Decemioer 31, 2014 4. Ifthe salaries to parines' are to be recognized as operating expenses by the partnership, the shore of partner B8 in the net income? 4. Intelation to No.3, the capital bolance of partner CC on December 31, 20:4? XII Multiple Bases: location of Net Income ‘sand, Pice and Russel ore parinersin « business which manufactures garden tools. Their profit cadixs ogreement has the following provisions: ‘+ Salaries of P40,000, P20,000, ond P45 00 for Durand, rice, ond Russel, respectively. + Pice wil receive c bonus equal to 5% of soles in excess of P1,000,000. + Alpariners will receive c borus of 10% of net income in excess of P150,000 ater the total ‘ofall such bonuses. + Portners will be cllocated interest on thet weighted-average capital balance. Drawings in excess of annual solories wil be considered reduction in copital. Interest is computed al the rate of 10%. : ; + Remoining profi and losses willbe clocated 35%, 25%, and 40% to Durand, Price, and Russel, «con Serene he ste of depreciable ose il be excded fom the cbove Provisions and willbe equally alacated among the partners. ‘elutyin the poriners' capital ond drawing occounls dung the yeot was as folows: Deore, | Duond | mice. | hee. | Ravel, | Reset coptal_| drawings | copiel_| craving: |_coptol_ | crowings p__o| ewon| Po P75000| PF ie 125,000 ane aoe 10,000. $5,000, 15,000 10000 | 5 3000 T5000, To 4 P7000 | Pass 85,000 er aso] Bs in on the sole of te Determine how annual net income of P20. gel pera Ted *itdagg ‘f 15,000} should be allocated om ng eco “te ea Rcntng ome 0s f0 equal the ini Not and Caylor agreed to the folowing procedure for shen, onde 19 Pros ond Pe Neat Begining capital bolonce: PIO per hour of we ta cose Partnership's cient; and the remainder divided in @ 32 ratio, The Articles of Pornerhip specified that each poriner shoud withcraw {onth. For 20x, the partnership's income was P70,000, Nor had 1.000 ioe rilt ee Worked Ba mbe Rous. n 205, the Parnes income was P2400) era oe onde Towner 200 bilobie hous respectively, Each partner withdrew Pigg ows Ca! throughout 20x4 and 2035. Requied: |. Determine the omount of income allocated to each partner for 20x, 2. Determine'the balance in both capital accounts at the end of Zora & Delermine the ameunt of Income olocated to each parine or 25 to the neve peso. 4 Determine the bolance in both capital accounts al the end of 2x5 tothe neces peso XIV ~ Allocation of Net Income. Inthe eatly pat of 2x4, the partners of Page, Chides, and Smith sought asssance tem olacd Sccountant. They had begun a new business in 203 but hod never used on account services. Page ond Childers begon the parinerhip by contibuting 80000 and P3000 in cath {espectively. Page wos to work occasionally at the business, and Childers wos fo be employed fuletime. They decided that year-end profits and losses should be assigned as follows: * Each partner was to be allocated 10 percent interest computed on the begiing capitol balances for the period. * Acompensation allowance of P5,000 was to go to Page with o P20,000 amount asigned to Childers. ‘Any remaining income would be spit on 0 4:6 bass to Page and Childers respective. In 203, revenves lotaled PP0,000, and expenses were P64,000 (not including the compensa Glowonce asigned to the partnes). Page withdrew cosh of P8000 dung the Yeo! CCilcers took out P11,000. In adit. the business paid PS,000 for repairs made fo Page's hone ‘and charged it to repair expense. ‘On January 1, 20x4, the, porinership sold a 20 percent interest to Smith. for P&3:000 om ‘money was contributed fo the business with the bonus method used for accounting puPO# Required: 7 re Why was the ofginal profit and loss olocotion, as jut outined, deigned by he Pa 2. Why did the drawings for 20:3 not agree with the compensation alowances 0 in the partnership agreement? 3.2008 4 nttournal ens shoud the paneshp have recorded on Decebe 3) 4. What journal entry should the partnership have recorded on January 1,20 Advanced Financia Accounting ~ A Comprehensive: Conceptual & Procedural Approath | | | 277 ee ™ Lees 7 Ata had ¢ capital balance on January 1, 20x4 of P45,000 and made additional etl conttons ding 204 losing P5000 Oring the year 20x, Ata wilhcrew 78000 pet month. Altos post-closing copital balance on December 31, 20xd is P30; ‘a's shore of 20x4 portnesship income i: ‘0. P96,000 ©. P31,000 b. 50.000 4. P8000 2, Partners A and B hove 2 profi ond loss agreement wilh the following provisions: salaries of 20.000 ond P25,000 for A ond 8, respectively: a bonus to A’of 10% of nel income after ‘bonus: and interest of 20% on average copital balances of P40,000 and P50,000 for A and B, respectively. Any temcinder is spit equal, the porinership had net income of P88,000, how much should be olocated to Partner A? ©. P36,000 ©. 50900 b. P44,500 d.P43.500 4. BB and ond GG formed @ portnership in 204, The partnership agreement provides for nual salary allowances of PS5,000 for BB and P4500 for GG. The poriners share profs ‘equally and losses in a 60:40 ratio, The partnership had earings of PB0,000 for 20x5 before ‘ny allowance fo partners. What amount of these eamings should be credited to ech partner's capital accounte Blue Green Bue Green a a c — P44000 36,000 b. P4300 ——P37,000 di —_P451000 35,000 4 Partners A ond B have a profit and loss agreement with the following provisions: salaries of 30,000 and P45,000 for A and B, respectively; o bonus to A of 12% of net income after solaries and bonus; and interest of 10% on ‘average Copital balonces of P§0,000 and 65.000 for A and 8, respectively. Onefouth of any remiing profits are alocated fo ‘Gnd the balance to B. If the partnership had net income of 108,600, How much should be located fo Partner A? a 43.205 c b. pasate 4 ar Bs0 P6575, Fartners A and 8 have o profit ond loss agreement with the folowing provisos: sales of 40.000 nd P4S,000 for A and 8, respeclvely © bonus to A of 10% of net income ter {Rvs and bonus: and interest of 15% on average copital bolonces of P40,000 and P60,000 {0"A.and &, respectively, One-third of any remairing prfis oases oe allocated to B ane balance to A. if the porinership hod net income of P52.000. How much should be located to Partner AF © P1490 c. ” P38.000 : b. Pap.c00 4. * None of he above Patines Acker, Becker & Checker have the folowing prot andloss agreement * Acker 3B ive salaries of P40,000 each * Checker gotsabent tlio pecent ole! come clare ond bonus the bonus 's2er0 it solves exhous net income) . * Remaining profits are shared by Acker, Becker & Checker in the following ratios "espectively: 3:43. Parineship had a net income of P91,000, How much should be ollocoted to Checker? ora cc. P1000 i d. P4000 P10300 a Financia Accounting ~ A Comprebensive Conceptual & reeds AP 2278 1,600 and P38,400 for A ond 8, respect rg Prov ny remaining profi balance to 8. i the parinenhip had'@ net income Paseo ee fo hove! llocated to Partner Az MUCH should bg . P12,000 c. Pa7.t00 b. P1800 Pai 600 8, Partners Tuba and Drum share profis and losses of thei it partnership Salary allowances of P25,000 for Tuba and 20,000 for Drum and 2) oka el Tuba Dum Tuba Dum . 26,000 24,000 ©. P25,000 P25,000 b. 27,000 23,000 d. P27,500 22.500 % Mack and Ruben ore parines operating an electronics repair shop. For 20d, nt income, Ctr salaries expense of P150,000 was P50,000. Mack and Ruben have solary allowances of F72000 ond F40.000, tespecivey and remcinng profs and losses oe thored fei

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