ACCOUNTING FOR SPECIAL TRANSACTIONS

the partnership
Partnership Formation Receivable from / Payable to a Partner
Partnership - result of a loan transaction with a partner
- a contract whereby two or more persons bind themselves to contribute money, property or  Receivable from: partnership  partner
industry into a common fund with the intention of dividing profits among themselves
 NPayable to: partner  partnership
Accounting for Partnerships
Bonus on Initial Investments
- application of Conceptual Framework for Financial Reporting and PFRS like all other entities Bonus to the Partner Bonus to Other Partner(s)
regardless of the type of organization capital account is credited above fair value capital account is credited below fair value
- main distinction: Accounting for Equity (additional credit) (credited only up to interest)
a. Formation – accounting for initial investments to the partnerships deduction (debit) to other partners addition (credit) to other partners
b. Operations – division of profits or losses
c. Dissolution – change in the relation caused by any partner being disassociated Variations to the Bonus Method
d. Liquidation – winding-up of affairs Ratio
- representing a specific interest that must be maintained by the partners
Formation - this is a stipulation that gives rise to adjustments to initial contributions (not a bonus):
- created by the agreement of the partners which may be constituted in any form (oral or written)  cash settlements among the partners (not recorded in the books = not a partnership transaction)
- however, must be made in a public instrument and recorded with the SEC when:  additional investment or withdrawal of investment of a partner
 immovable property or real rights are contributed
 has a capital of Php 3,000 or more Partnership Operations
Valuation of Contributions of Partners Division of Profits and Losses
Appraisal – valuation of capital contribution at fair value General Rule: In accordance with their partnership agreement
* All assets contributed (and related liabilities assumed) are initially measured at fair value.
Additional Rules:
Type of Contribution Measurement  if only share in profits has been agreed upon, share in losses shall be in the same proportion
Fair value (PFRS 2)  in the absence of stipulation, share in profit or losses shall be in proportion to initial contribution
Goods or Noncash Items  manner prescribed in the contract
 made by experts chosen by partners Exception:
Cash and Cash Equivalents Face amount (PAS 7) Industrial Partner
- not liable to losses
Inventory Lower of Cost and Net Realizable Value (PAS 2) - just and equitable share in profit
- capital contribution = share in profits in proportion to capital contributed
Capital account - credited for the fair value of net contribution (assets less liabilities)
* A stipulation which excludes one or more partners from any share in profits or losses is void.
 Permanent withdrawals – debited to capital account
 Temporary withdrawals – debited to drawings account Additional Stipulations to be Shared
Partner’s Ledger Accounts Interest on Capital
Salaries Bonuses
Capital Account Contributions
- real account entitled to a managing partner for
- normal credit balance his excellent management
normally received by an industrial may be stipulated for the
performance
partner, for his services, in capitalist partner to earn annual
addition to his share in profits only given if the partnership interest
Permanent withdrawals of capital Initial investment
earned profit
Share in Losses Additional Investments
- With remaining profit – different - With profit - Interest on capital and bonus
Debit balance of drawings account Share in profits P/L ratio
Drawings Account - With loss - Interest on capital – Partial year
- nominal account - No remaining profit – different
- contra equity account P/L ratio
- Bonus – With limit - Interest on capital – With limit
- normal debit balance
- No P/L ratio
- Bonus – Choice of profit sharing
scheme
Temporary withdrawals during the period Recurring reimbursable costs paid by
the partner
Temporary funds held to be remitted to - Bonus – Comparison of profit
 ACCOUNTING FOR SPECIAL TRANSACTIONS
sharing schemes
settlement < interest = excess added to
Bonus After Bonus: B = P – [P / (1 + Br)] remaining partners
remaining partners)
* They are normally provided first and the remaining amounts shared through profit or loss ratio.
decrease capital account
Deferred Settlement
Partnership Dissolution – seller of interest (withdrawing,
retired, or deceased partner) - pending; transferred to a liability account
- not a termination and can continue until the remaining partners decide to liquidate - interest (entitled profits) shall accrue from the
date of disassociation up to the date of
Admission of a New Partner settlement

- requires the consent of all existing partners

Incorporation of a Partnership
Purchase of Interest Investment in the Partnership
- conversion into a corporation wherein partners become stockholders
part or all of the interest of one or more
Definition existing partner
investing directly into the business
On the date of incorporation:
 Partner’s capital balances are adjusted to determine how many number of shares will it convert into
NOT RECORDED RECORDED
 Books of the partnership are closed and a new book for the corporation is opened
Transaction personal transaction between and transaction between the new partner and
among partners the partnership
only records a new capital account (equity
only records transfer within equity transaction with an owner):
wherein:
investment = capital credit
No Gain / Loss new capital account
Recognized – buyer of interest (new partner) investment > capital credit  bonus to old
partners
decrease capital account
– seller of interest (existing partner) investment < capital credit  bonus to new
partner

Revaluation of Assets
- restatement to fair values after being carried over into a new partnership
- adjustment: allocating first to existing partners, then record admission of new partner

Goodwill Method
- traditional accounting: used to recognize an implied value from a partner’s contribution during
admission (and payment to a partner during withdrawal)
- outlawed by PFRS 3: prohibits the recognition of goodwill from non-business combination
transactions

Withdrawal, Retirement, or Death of a Partner

Adjustments:
 Share of Any Profit or Loss – up to the date
 Share of Any Revaluation Gains or Losses – as at the date

Purchase of Interest Settlement in the Partnership

Definition by one or all of the remaining partners payment shouldered by the partnership

RECORDED
NOT RECORDED
transaction between the withdrawing,
Transaction personal transaction between and
retiring, or deceased partner and the
among partners
partnership

only records transfer within equity

Bonus Method:
wherein:
No Gain / Loss
Recognized settlement > interest = deficiency deducted
increase capital account from remaining partners
– buyer of interest (one or more