chapter 17 - Partnership Formation

_.oducffon
~ I ps ore a popular forin of business bee
,4JdUOls to combine t~~ir talents and skffls in aauserttey are _easy to form and they allow several
r,ovde a means o~ obta1~1ng more equity capital th: acs~~ar b_usi~~ss venture. In _addition, partnerships
j liStS rapidly growing bus1ne~es. Partnerships are f ·r1 g/e '~d,vidual ~on obtain and allow a sharing
,recjcine, qnd accounting. Historically. these profe~~iin~otmon in the service of professions including law.
t:xJSineSS because of thei/ long-standing tradition f ave gene~ally not adopted the corporate form
1
da commitment of the professional busin"ess d O close professionol associaUon with clients and the
'f!(Ce to clients. an personal assets to the propriety of the advice and

p(ltnershlp Defined
A~rtnership is an association of tw~ or more persons who contribute money, property,
Cl industry to a co~~o~ fund with the intention of dividing the profits among
lhe_~selves. The term. persons" .refers to natural or juridical which may either be an
rov1dual, a co~poration,_ and even other partnerships. Typical example of partnership
ocludes professional se~1ces, such as the practice of law or accountancy, real estate
develo~ment compan_ies and a variety of small manufacturing concerns.
leasons for Forming a Partnership
ihebasic consideration of prospective owner(s) of a business is the various attributes of
lhedifferent forms of business orga·nizations as their basis in selecting the one that they
believe be~t me'et their organizational objectives and personal goals. A form suitable for
one set of business objectives may not be appropriate for another. It is possible for a
lim to start as a sole proprietor and, as the business and personal environments change,
lomove to a partnership foITT1, and ultimately, to incorporate.
One of the major advantages of a partnership is that it permits the pooling of ~apital
a~d oth~r resources without the complexities and formalities of a corporation. A
PClrtnership is easier and less costly to establish than a corporation and is generally not
su~ect to much governmental regulation. In addition, the partners may be able to
operate with more flexibility because they are not subject to the control of a board of
erectors. · ·
lYPes of Partnerships
ihere are two types of partnerships: (1) general partnerships and (2) limited partnerships:
General Partnerships
Ge . · which each partner is personally liable to the
neral partnerships are those in t ffi •ent to pay such creditors. Such
Pennersh'1p,s ered"tI ors 'fI partnership assets are no su 1c1
Cha ters 19 to 23 of this book focus on this
~ ners are referred to as general partners. P
Q'\d of partnership.
~ ed Partnerships d to be a general portner. The
,11~ artner nee s d·t
this kind of partnerships only one P s that their obligations to ere I ors ~re
re . ' . d which mean rt· re not put into nsk
rna1ning partners can be 1im1te , their personal prope ,es O •
irnned to their capital contributions. Thus, .

___-- _ __J .,.,,.J ~oorooch

 ment. which is full responsibility of the
and they play no role in the partnership manage
general partner.
features of General Partnerships
ures : . .
General Partnerships have the following unique feat th eir agreemen! into writing
1. Ease of Formation . The partners merel_y put
ing who con tributes assets or services , thei r role .0nd func tion s, and how
concern
nt is called the partnership
profits and losses are allocated. Ttiis written docume
be cr~ated by oral agreement
agreement. In some cases, partnership may also
their agreement.
between two or more persons or maybe impfie~ by
ns of a partner~hip could not
2. Limited Ufe. The possibility that the operatio
ner was considered a major
continue ·after the withdrawal or death of a part
pitfall of this form of .business organization .
of partner 's interest does not
3. Assignment of Partner's Interest. Assignment
ner's relationship to the other
automatically dissolve a partnership. Since a part
a partner's interest does not
partners is a personal one, an assignment of
hip. The assignee has no right
au_tomatically .admit the assignee into the partners
nership, their right are only
to participate in managing the affairs of the part
right to receive assignor's
limited in the allocation of profit and loss and the
interest in the event of dissolution.
as previously discussed refers
11

4. Unlimited Uablllty . The term general partnership

11

for liabilities and have all th

to a firm in which all the partners are responsible
having difficulty in collectin
authority to act on his behalf. Partnership creditors
partner who has persona
from the partnership may request payment from any
assets in excess of personal liabilities.
has the authority to act for th
5. Mutual Agency. Every partner is an agent and
However, acts beyond th
partnership and to ente~into contracts on its behalf.
ining loan by a partner
normal scope of business operations such as obta
authority has been give n t
generally do not bind the partnership unless specific · ·
the partner.
ides that partnership has
6. ~e~~rate Legal _Personality. Partnership law prov
of each partner.
Jund1cal personality separate and distinct from that
ed among the partners in an
7. Sharing Profits and Losses. Profit and losses are shar
.
man ner to whic h they agree.
ories)
Underlying Equity Theories (Proprietary and E~tlty The
ed from the accounting and leg
Eq~i~y t~e?ries {~late to h~w an entity can be view
who the entity is. Partnershi
~ h~dv~e;.cte~se :~~~es deal with the question ofries:
on ,n uenced by the following theo
· .
I th rough _the eyes of the owner. It views th
l . Proprietary theory looksbat the. enfty
assets of O busine
t? The liabilities of a business a
debts of the pro~ ?~ el~~ging the propnetor.
e from are viewed as a
increase in the ~ ~;~t ~ prpfl!s generated ther
tics of this theory con
demon~trated by ihe ~ollo:~g :capital. Characteris
. . . . .
a. Salaries to partners are consid ered as distnbut1on of Income rather as a determ1n o
of net income (treat d
net income) .
b. Unlimited liability of e as expenses In computing the indlvid
partners. gen: ral ~artn ers extends beyond the entity to
 c Original partnership Is ciissolv d
· e upon the admission or withdrawal of a partner.
, In practice, proprietorships are t t h in
theory they are not It sh Id b rea ed as separate entities, even thoug , d
most ,;artnershlps. · ou e noted, that this type of theory primarily affecte

th
2. Entity ~ory views th e bu~iness as a separate and distinct er.itity possessing its
own exis_tence apart ~rom the individual partners. Profits earned by th e
partn~rs~ip ~re usually viewed as profit to the "entity" 'l{ith each partner entitled
-to O diStnbutive sh?r~ of the profit. The legal life of firms in this fashion transcends
th
the dea ~r admissio~ of a partner. In partnership agreements for instance, the
so-called _big accounting firms usually provide for the continued existence of the
partnership qeyond the death of a partl')er.
wntten Partnership Agreements (Articles of Partnership)
While it is perfectly acceptable to have an oral partnership agreement, it is preferable
locommit such_ agreement in writing. Lapses in .memory and future misunderstandinqs
oreusually avoide~ when agreements are written. A written agreement is called the
articles of partnership and usually provides for the following: .
1. Name of the partnerships;
2. The name, addresses of the pqrtners, classes of partners, stating whether the
partners are general or limited; ·
3. The effective date of the contract;
4. The purpose/s an9 principal office of the business;
5. The capital of the partnerships, stating the contribution of individual partners,
their desciiption and agreed values; ·
, 6. The rights and duties of each partner;
7. The manner of dividing net income or loss among the portn_ers including salary
allowance and interest on capital; ,
8. The conditions under which the partners withdra~ money or other assets for
partnership use;
9. The manner of keeping the book of accounts;
10. The causes of dissolution; and
11. The provision for arbitr'otion in settling disputes.
Accounflng and Financial Reporting Requirements for Partnership
Most partnerships are small or medium-sized entities, alth_
ough there are some large
~nership entities. Piartnership does not issue stock and thus the information needs of a
P0rtnership are typically different those of corporations that have stockholders. A
IX!rtnership has much more flexibility to select specific accounting measurement and
recognition methods and sp~ciflc financial reporting formats. .
O
ff Partnership wishes to issue general-purpose financial statements for external users
lJchas credit granters, vendors, or others, then ·the partnership should use generally
ltcepted accounting principles (GAAP) as promulgateo by the International
~counting Standards Board (IASB) and other standard-setting bodies, and the
foePendent auditor can issue an opinion that the statements are in accordance with
G.4Ap_ .
 ---z
If a partnenhlp has only Internal reporting needs. th en
the accounHng O d
reporting shoufd meet th~se Internal Information needs of the partners . In t~ ffnonc1a,
partnership may use non-GAAP accounting methods and have flnoncial :: case. the
format different from those required under GAAP • Ports In a

For example, some partnerships use the accounting methods prescribed by 1

· I rt S rt h' ax laws
thereby generating tax-base~ financ,a red~o ts. otme pathnerfis tps ~se the cash-based
accounting system, often with s~~e a JUS men s, so e 1nanc1al reports provide
specific cash flow and' cash posth?ns. And other p~rtnershlps may use accounting
methods that are close to GAAP, with some other adJustments that fit the informer
needs of the partners, sue~ as recognizing increases in the fair value of nonfinan:
assets at the time of the admission of a new partner.
In these cases, ·1t the ffnanclal statements are presented to users external to lhe
partnership, such as bankJ, vendors, or regulatory bodies, It should be clearly identified
on the statements what specific accounting methods were used by the entity so that
the users are informed that the Information presented in the financial statements does
not conform to GAAP.
An independent accountant's opinion on these financials would also hove to disclose
the specific accounting methods used or the deviations from GAAP that affected the
amounts reported in the financial statements. It is up to the partners to determine ther
financial information needs and then the partnership accountant applies the necessary
accounting measurement, recognition, and reporting methods that meet the partners'
financial information needs.

Phlllpplne Financial Reporting Standards for Small and Medium-Sized Entitles

In 2010. the International Accounting Standards Board (IASB) issued "lntemotionOI
(Philippine) Financial Reporting Standards for Small and Medium-sized entities", more
commonly known as PFRS for SMEs. SMfs are defined a.s those entltle.s that:
1. Do not have public accountability (i.e., do not have stock or issue bonds in°
public capital market)" and ·
2. Publish general-purpose financial statements for external users.
T~e. standard presen,ts the ~efinitio~s of items and accounting concepts that are q~ite
similar to th0se already in the international financial accounting and reporting
sta~d-~rd.s, exc~pt that less detail and fewer disclosures are mandated and more
. 1statements.
the fin anc1a
. of
flex1b1llty 1s provided for the formats
Accounting for Partnership.Actlvlttes
Accounting for partnership diffe f ti n
as far as sharing of fit rs rom accounting for a sole proprietor or a corpora 0
accounts. To maintain ~~rt an~ loss and .the maintenance of the partner's ledge
ledger account for each ne~ship accounting records, it might be· possible to have one
0
accounts. These partnershipa ner, and the usual practice is to maintain three types
- . accounts consist of·
1• Capital accounts. · ·
2. Drawings or personal accounts and
3. Accounts for loans to and f .
rom partners. ·
/
oP"al Accounts
.
~ initial inve~tm?~ts by each partner is recorded by debiting the
assets contributed,
,-editing_any habihties assumed by the firm, and crediting the partn
er's capital a~count
,""efair value of !he ne l U:>:>cts (assets minu s riab·I·1·
11 IL., , '- Jn 1,luv t€·w.
; 111 • • •

tjtnet' s equity is increased by additional investments at fair value

prestrnent and any share of net income. at the time of

•~ er·s equity is decreased by withdrawal of cash or other assets and share

0
of net
csses. Wi!hdrawals ,f larg~ and irregular accounts are ordinarily ch.arged direc
tly to the
, !tl(irawing partners capital account. The entry for such a withdrawa
l is:

A, Capital ..... .. . .. ..... ... . ..... ..... .... .... . .. .. . . .

rWithdra
_ Cash ..... ..... . .... .. ...... ... . . ... ......·... . .... . .
wal of cash.
XXX
XXX

:j.~wing are the items that affect capital account:

Capital Accounts
Permanent or capital withdrawal
Initial/Original Investment
Drawings in excess of a specified amount
Additional investment
Withdrawal of large and irregular occounts
Share in net losses lthis may be debited to
Share in net income (this may be
credited to drawing accounts)
'
drawin g accounts)
Closing of a net debit balance in the
partner's drawing account

Mthe end of each accounting period, the net income or

loss in the· pdrlnershlp's
klcome Summary ledger account is transferred to the partners'
capital accounts in
occo.rdance with the partnership contract.
(xi occasion, a partner's capital account may have
a debit balance, called a
deficiency or sometimes called a deficit, which occurs when the capit
al accounts debit
bcimce is greater than the credit balance. A deficiency is usually elimi
nated by
oddlional capital contributions.
flawtngs or Personal Accounts versus Capital Withdrawals
'-'ship profits are the business rewards of partners, so partners do
have take-home
~Y as do the employees of the partnership business. So,
partners generally make
'ilhdrawal of assets from the pqrtnership in anticipation of profits or
drawings that are
~ ed salary allowances. Noncash drawings should be valued at
their market
~ sat the date of the wlthdraw.als. A few partnerships make an·exception
to the rule
:~'1'l0rket val~e for partners' withdrawals instead record it at
cost. .thereby not
' "Of'ding a gain or loss on these drawings.
~~ie Partners commonly withdraw regular amou~ts of money on a weekly_
or monthly
~- Such withdrawals are called drawings. draw,ng allowances, or
sometimes salary
~ onces and they are usually ch~rged to the partn~rs' draw
ing accounts. For
't.-~Ple. if B and c withdraw p 10,000 from _the partnership each month.
they would
·-Ordlhe monthly withdrawals as follows:

· i~ •awing . . ...... .. . . . . . .. · · ·
Cash . . .. . . . , . . .. . .... .... . . •· ·· ···· ····· ···· ···· ···
10.000
10,0~
I
Dra-..,ng oJJowonce /01 Jonuorf
 7
I.
C, Drawing .... . .. .. .. .. . . . . . .... ... ... ... . .. ...... • · • ·
Cash ... .. ... .. .... . .. .. . .... . . . . .. ... . . •••··· ·· ··· ·
Drawing allowance for January.
10,000
~o,oooJ

Drawing accounts provide a record of each partner's drawings during an accounti

period. These drawings may be compared with drawings allowed In the partnersh
agreement in order to establish an accounting control over excessive drawing
(Drawings are also a factor in many profit and loss sharing agreements, refer to Chapt
2.) If Bdraws P10,000 each month during the year, th~ drawing account is closed at t
end oft1e year by the following entry:

8, capital : ...... .. . .. ..... . . . . . . . . .. . .. . •• • • • • · · · · · · · 120,000 I

. 8, drawing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,00~
1
Close drawing account.

Following are the items that affect drawing account:

Drawing Accounts

Personal withdrawals in anticipation of profits

\
!temporary withdrawal)
Periodic withdra~ ol

Regardless of the name given to regular withdrawals by partners, such withdrawals a

disinvestments of essentially the same nature as large and Irregular wlthdrawa
Drawing accounts should be closed to the capital accounts at the end of ea .
accounffng period before a partnership balance sheet is prepared.
Considering the above discussions, there are two classes of withdrawal:
I. CapHal withdrawal or permanent withdrawal - They directly affect the capital accou
balance because they arise mostly from withdrawals of Investment be It oriQlnal
additional. ·
'
2. P.rsonaf withdrawal temp01ary wtthdrawal or drawing accounts. These ore lnltla
01
recorded In a drawing account. More often these are drawings from share of Pl
which wm eventually be closed to capttal accounts.
Loan Accounts
R~~ a partner may recelv~ cash from the partnership with the intention of repayi
fhis omoun1. Such a transaction may be debited to the loans Receivable from Partn
ledger account rathftf than to the partner's drawing account. Unlf:SS all partners agr
otherwise. these loans should bear Interest. and the Interest Income Is recognized
the partnership's Income statement.
On the other hand. a partner may make a cash payment to the partnership fhat
con1'd&re-d a loan rather than an Increase In the partner's capital pccount balance. T
transaction is recorded by a credit to loons Payable to Partners and normally
accompanied by the issuance of a''promissory note.'' .
Again. unless all partners agree otherwise, the partnership is obllgatea to pay lnttrest
the loan to the Individual partner. Nole that Interest Is not required to· be paid on cop
lnveslmenls u.nfess the partnership agreement states that capital Interest Is to be Po
The partnership records Interest on loons as on operating exp'enk•) The following ent
mode to record O PS0.000. 10 percent, one-year loan from C t6 the partnership
Morch l , 20x6: ., . , .
,

Cash ..... .......... .

Loan Payable to C.....· · ·.......
·.· · · · · ·..
· · · · · · · · · · · · · · · · · · · · · · •• 50,000
sir,, loan ogeement wilti PCYtner c . · · · · · · · · · · · · · · · · · • •• , 50,000
,.ctlvable from partners are displa d .
IOO" ble to rtn ye as auets rn the partnership balance sheet
tfd ,oans pay~ pa en are displayed as liabilities. The classification of these
re,ns as cur:n~~ n-curre nt usually depends on the maturity dote. Sir:ice these
~ts ~ . party fransactlon for which separate footnote disclosure Is
0nd t
_,ttd, it muS be reported as a stparat!1balance sheet Item. · .
J!i8(Jble unsecure? 1?an has been made by a partnership to a partner and settlement
~ doubtful, it 1s. ~roper to offset the receivabl~ against the partner's capital
~ ount bala":e. If this is not done, partnership total assets and total partners' equity
tat be deceptive. .
~ Interest Opposed to., Profit Interest
~pcrtnership agreement, the partners must identify that there is a difference between
0p(lfntl'I capllal Interest and his/her Interest In profits and losses subsequently
,epcrled by the partnership. A partner's capital Interest is a claim against the net assets
,,,. partntnhlp as shown by the balance In the partner's capHal accounts: on Interest
~,. and lou determines how the partner's capital Interest wffl Increase or decrea,e
1 a resul of subsequent operations. For example, partners may agree that on
~al partner is to receive a one-fourth capital interest and a profit and loss interest
done-thrd. .
Accounting for Partnership Formation
'
Calhlnvestments
Al properties brought into the partnership or acquJred by the partnership ore
,~hip property.
Cadt Investments in accordance with the· current standards being a financial asset are
bded at fat value most often known as face value as far as cash valuation is
COIIClffltd, · which is the amount payable on demand or to be collected at the
~e $heet date. .
1Cash denominated in f01elgn cu"ency is valued at the current exchange rate, while
Clmlil bank under receivership should be shown at its estimated rec~verable amount.
lorcastt Investment
-~SOon as .property other than cash is invested.in a partnership, no.ncosh property is
~ at the agreed value which Is normally the fair value of the property at the
~ of investment. ·

~ etk:aDy, ~e fair value should be determined by independent valuations, but as far

' ·Jtacticability is con·cemed, the fair value of noncash assets is determined by
~ o1 all partners. The 9mounts involved should be specified. in the written
~ hip agreement.
,~ be noted that in case there is a confl.ict between agreed value and fair value,
"'-c, Value )prevails.
Once services are contributed to the partnership, a memorandum entry is essential if
were no value agreed upon, otherwise 0 Journal entry would be required .
Uabllffles assumed by the partnership should be valued at the present value (fair vatu
of the remaining cash ffows.
The individual partners must agree to 'the percentage of equity that each will have
the net assets of the partnership. Generally, the capitol balance is determined by t
proportionate share of each partner's capitol contribution.
The valuation of net assets achieves equity among partners, an objective repeate
stressed in partnership accounting. If these valuation principles (for cash, none
property and liabilities) were not •followed, then, the subsequent operations do
reflect the true earnings of the partnership, qnd certain ·partners are treated inequita
In the final analysis of capital interest, the partnership must clearly distinguish betw
capital contributions and loans made to the partnership by individual par:tners. L
arrangements should be evidenced by promissory notef or 9ther. legal docume
necessary to show that a loon arrangement exists between the partnership and
individual partn~r.
A partnership _may be formed in numerous ways, to wit:
l . For the first time:
a. Individual versus Individual (two or more persons)
2. ~onversion of a sole proprietor to a partnership:
a. Individual versus Sole Proprietor
b. Sole Proprietor versus Sole Proprietor
3. Conversion of an o'ld partnership to a new partnership:
a. Partnership versus So!e Proprietor
b. Partnership versus Partnership
4. Admission of new partners {to be discussed in Chapter 21)
The guidelines are to be strictly followed regarding formation:
Individual versus Individual
,
Books of Partnership
Books
lndlvldual
Adjusting entries .. ....... .... .. ... .... N/A
Closing entries (real accoun~) ..... . . . .. . N/A
Investments ... . ... . .. . . . . . .. .. . .. ... .. .' Yes
Balance Sheet .. . . . . ....... . . . . . .. . . . . .. Yes
Where. NIA - not opphcoble because there ore no books of individual
Individual versus Sole Proprietor (Old set of boob Is used; retain boo'ics of Sole Proorietor} ·
Books of •Books of
Sole
lndlvldual Proprietor
Adjusting entries .. . . .. . . .... . .. . .• N/A Yes
Closing entries (real accounts) . . .... .' .· .· .' .' NIA No
Investments. . .. •. . . . . .. . .. .. .. ..
• Yes••
Balance Sheet. . . .. . ..... . . . .. . . .· · · ·: .. ·
• Partnership books •· · · · • Yes
"' Investments of Individual: additional investme ts •
n or Wllhdrawals of sole proprietor.
 1211
~ ual versus Sole Proprietor (New set f bo
0
oks Is used)
looks of
looks of •New Set ol
Adjustin1 entries lndlvtdual
• t t • ♦ Sole Procrletor looks
N/A
o O • t • • • • I t •

dosing entries (real accounts) .•. • Yes

Investments ... ... .. ..... .... . .. N/A Yes
.
Bilance Sheet. . .. . o I I o O o o .. o t I I
Yes ..
..• Partnership books
Investments of indMduol: add,ti o/ .
.. Yes
on rivestments
,.,ie ,roprletor versus Sole Proprietor (Old t °' wi,'"-aowa1s of sole proprietor
11
•
.
~ J se of boob Is used; retain boob ot one of the Sole
looks of 'Books of
Adjusting entries Sole Proorletor Sole Procrletor
Oosing entries (r~~j ~sj .' .' ." ." ." Yes Yes
Investments . .. . Yes No
Balance Sheet.. · · · · · · · · · · · · · · · · · Yes••
•Io o I o Io o It IO I

•patnefShipbooks Yes
.. Additional investments or withdrawals of sole .
~t Pro~to, versus Soe
I Pr ·
oimetor fNew set ofpropnetor
boob /ss. usedJ
looks of looks of 'New Set of
Sole Sole Proprietor Books
Proprietor '
Adjusting entries 0 o O o I I IO o O I I t o
Yes Yes
Closing entries (real accounts) ..
Yes Yes
Investments 1 o t I I O O O I I to I I

Yes••
O 1

.
0 0

Balance Sheet o I • I I o I I I I o I

Yes
I It

Portne11tvp boob
I

.. Additional investments or withdrawals of sole proprietoo.

(linfflhlp versus Sole Proprietor (Old set ol books Is used;
retain books of Partnenhlol
BooJcs of 'Books of
Sole Partnership
Proorletor
Adjusting entries .. . : . .. . .. ..... . ... . . .... Yes .
Yes
Closlng entries (real accounts) ....... . ..... Yes No
Investments .. ........ ........ .. , ... .. . ... Yes••
Balance Sheet . ... . ... . ... .. . . .. . . .... ... Yes
Jtnmhip versus Sole Pro ew.set of boob ls used
Books of Books of ' 'New Set of
Sole Pro rletor Partnershl Books
Adjusting entries . . . . . . . . . . . . Yes Yes
Closing entries (real accounts) Yes · Yes
Investments .. . .•. .. ~ ... .. . . . Yes ..
Balance Sheet . ..... . ..... . . Yes ·
' Partnership books
.. Adcflionol Investments or withdrawals of sole proprietOf' and pcvtne11.
rlnenhi Pversus Partnership (Old set of booksls used;retan I b00 ks of oneof th e Partnenhlp)
Books of 'Books of
Partnership Partnenhlp
Adjusting entries .. .. . ... . . • • · · · · · · · · · · · · · · Yes Yes
Closing entries (real accounts) . . . • • • · · · · · · · · Yes No
Investments . . . . .. . . .. .... . .. • • • · · · · · · · · · · Yes"
Ba)ance Sheet . ..... ... . . . • • · · · · · · · · · · · · · Yes
' Poonervip boob
.. A.dcftiooa investments or v.1Mowals of porlners.
Partnership venus ,Ortnershl ew set of boob Is us& •
looks °'
Partnershl
1o01cs or
pa,tnershl
•New Set of
loolu
Ad.JUSting enu,es
"'" . ........... . . Yes Yes
Closing entries !real accounts) .. Yes Yes
Investments .... . . ... . . . .... . . Yes••
Balance Sheet ..... . . . ... ... . Yes
' PartneMip books
" Additional investments or withd'owo/s of partners.
'
lllustraflon 17· 1: lndlvldual vs. lndlvldual
Illustrative examples are presented below to appreciate the different ways of forming
partnership.
The followin items are bein invested to form AB Portnershi :
A reed Values
Investment Investment
by F byG
Accounts
Cash ....... .. ............. .. . . ... ·" .. .. ... •.. . .... .- .. . . P 100.000 . ti tit

Inventory ... .. .. ... . .... ·. . . ....... . .. . .... .. .. . ... •••••• 100.000

land .. .. : ....... . . . . .. .. . ..• ...... .. ........... .. . ... . • • 200,00)
Building . . . ........ . . .. ...... •.... . .. . ..... . ............. 400,00)
Equipment . ........ . ........ . .. .. . ... ................ • • • 200,000
Totals . , .......... . .......... . .. . ..... . . ... . • • • • • • • · · · · · · P 400,000 P 700,CXX>
Mortgage on building assumed by the partnership .......... . 200,COO
P400.000 p 500,(XX)

Assumption 1: Assuming that F and G agree that each partner is to receive a capitol er
equal to the agreed .values of the net assets each pa~ner invested:
To record.adjustments: nothing to adjust since both of them have no set of books.
To close the books: nothing to close since both of them have no set of books.
To record Investments - Partnershlo books
Cash . .... .. ... ...•. . . . . .. . . ............... . .. •. ..•. .. .•..... 100,000
lnv~ntory .. . . . . . ..... : ...... , ... . ... . .. . ......... . : . .... . . . . ,, 100,000
Equipment . ....... .. ........ . ... . .. . ... .. .. .. . .... .. .. . . . ... . 200,000
F, capital .. .................. . .. .... . ... . ............ . 400,CXX>
Initial investment.
Cash .... . . . . ........... .. .. . ..... .. ............... .. ..... . . 100.000
Land ... . ... . .. ... ..... . . ... .. ... .......... . ............... . 200,000
Buflding ... .. . . ... ..... . ... .. ...... . . ... ..... . .. .. ..... . . .. . 400,000
Mortg_age payable . .......... .. .. ·.. . . . .. .. ... .. . . ... . 200,000
G. capital . . ............. . .. ..... . . . .. .......... . .. . . .. . 500.000
Initial investment.

Assumptlon_2: Assuming that Fand G agree that each partner is to receive an equal capital i
To record adjustments: nothing to adjust since both of them have no set of books.
To close the books: nothing to close since both of them hove no set of books.
To record Investments · Partnership books:
lonus A oach:
Cash . ........ . . ... .... . . .. . .. . . , ... . . ...... . .. .. .. .. ...... . 100,000 I
~I
Inventory . ... .... ... ... . . ... . ..... . ... .. . . · 100,000 ~-
Equipment .................. .. .. .. .. ...... .. · · · · ·.· · · · · · · · · · · · ·
F, ca ·,o1 ....... ....... ..... ....· .... · · · · · · · · · · · · · · · · · · 200,000
lnitid Investment. · · · ••• · · · • · · · · · · · · · •·
400.000
'
'
 1233
Cash . . .... .. .... .
Land. ... .. .... . . . . . · ·~~ ~~ ~: -:- -- -- --_ _ _ _
· · · · · •. . . . ... _ _ _ ___. ,
Building. ... ... .· .·· ··· · · · · · · · · · •...
. . ......
· · .· · · · · · · · · · · · · · · · · · 100,000
• Mortgage pay~bj~ · · · · · · · · · · · • ·..
.. . · · · · · · · · · · · · · · · 200,000
G, capital . · · · · · · · · · · · • .. .. .. .. :::: · · · · · · · · · · · 400,000
Initial investment. · · · · · · · · · · · · · · · ·· ···
· ················ 200,000
o o o o o I • o o Io o o o o to ♦ Io I I f •• o o o
500,000
[ G. ~.o~~~j~,-- ..._......... _.. __ _...... : . .. . .. .. _ ..
Bonus to F , · • · • · • · · · · • • · • •..
_ 50,000
· · · ·•·•· ·
0 0 0 f IO I IO I O • IO t If f O of o o •
50,000 I
Toto! o_greed capitol (P400 000
Multiplied by: Capitol inte , t + PS00,000
) ......... p 900,000
Partner's individual capit ~l~s ,(equal) ..
Less · F' .. .. .. .. .. .. I12
. •
· s capitol interest 0 1n erest
Bonus to F .. .. · .. ·.. .. .. .. . P 450,000
.... · .... .. .... .. ·, .. .... . 400000
Not~: Under the bonus method · ·· · ···· ···· · · ·
th . · · : · · · · · · · · · · · · · · · · · • •• ~ - 1 ' - 7"1..
the capital balances. Such an e~tryerse P 50 ODO
~~~ c?pitol interest transfer of PS0,000 from
the ffrm other !hon the tangible assets; but
or a value for ,t cannot be determined b.
if Portner G recognizes that Fis contri~uting
1 h~ partners ore reluctant to recognize an
f
G to F to equalize
something to
· I ff . G o 1ectively intangible asset
Reva ua on oodwlll A roach: '
·
Cash . . . . . .. ... .- .... .. ... .
Inventory . . . . . · · · · · · · · · · · · · · · · · · · · · · · · · · • • • • • .. .. 100.000
Equipment ... .·.·.·.·.·.· ··· · · · ···_- ··· ··
· · ···· · ·· · · ·· ·· · · · ··· · · ·· 100,000
F ca ital · · · · · · · · ·.' · · · · · · · · : · · · · · · · · · · · · · · · · · · · · · · 200,000
' ... ... .... .
Initial investment. · · ·· ··· ···· ·· · ···· ···· ···· ·· ·· ·· 400,000
·· ··· I

Cash IO O O O I o o I I ♦ Io o o I I O ♦ o If o O

Land . . ... ... ... .. . 100,000

I I IO o I I I o o o I t: 0 I o o o t O o O ♦ ♦ o t f I Io

Building
M rt .... .... .... ..... ... ... ..... ... .... .... .. ... ... ' ... ..
· · · · · · ' · · · · · · · · ················ ·········· 200 .000
400,000
o gage
G. capital payable .... .... . .. . .... . · · 200,000
·· ·· ···· ·· · ····· ····
Initial investment. · · · · · · · · · · · · · · · · · 500,000
· ····· ·· ··· ······ ·· ··· ··· ···· · I

Assets {or goodwill or intangible asset) ....

.. .. . . . . . . .... .... .... . 100,000 ·
' F, Ca ital . . .... ..... . ... .. ,. .. ·.... ...
.. .... . .. .... . .. ... . .. . 100.000
Goodwill to F:
r. -:;::
To~ta-:;1--=a--=g~=e-=--
ed::;-c-:-:a-p-;;
- ita-:-l-;;:(P::;:
:Soo::-.000-=
-= ::-:/:-:-l-/27"")
:: .-.-. .-. .-.-. .-: .-.-. .-.-.--P-,.000-.000
-~
Less: Total contributed capital (P400.000'+
PS00,000). . 900,000
Assets (or goodwill or intangible asset) .
.... . .... P 100 ooo

Note: Under the revaluation (goodwill)

approach, if ·equal capital interests wer
given to each partner"'F's capital is e to be
increased by Pl00,000, This is occomp
recognizing an intangible asset of Pl00 Oshed by
,000 It should be noted that the capital
used as. a basis to determine the tota of G was
l agr1;3ed capital instead of the capital
may not give rise to a positive revaluation of F which
of asset (9oodwill). It is therefore assumed
iscontributing something of value to the that F
partnership that is intangible in nature, and
cotild not be specifically idenJified..Unle which
ss the intc;mgible is specifically identifiable,
a patent, it should not be probably reco such as
gnized.
Bonus or Revaluation Approach on lnltl
al Investments. A valuation problem arise
partners agree on relative capital inter s when
ests that ore not align~d with their inve
idenfifiable assets. Both approaches are stm ents of
equally ,tolerable in o!igning the capital
with the agreement and are equita~le accounts
in assi,gr,ing c?pital interests to indivldual
A decision to use one approach ove partners .
r· tbe other will depend on partners'
toward recording the pJQ0,000 adjustm agr eement
ents in assets under the revaluatton app
P50,000 under the bonus approach. roa ~h and
If there Is no specification as to what app · ·
roach may be used, the bonus app roach would
be preferred (refer to Chapter 21 on the
justification of the ~sage of bonus approa
the revaluation approach.) Also, refe ch over
r to Chapter 21 regarding goodwill
in cases of
admission of a partner.
 lllustr~on 17-2: lndlvldual vs. Sole Proprietor
. Below is the balan
ce sheet of H on November 30, 20x4 before accepting I as his partn er
to form HI Partnership: ·
H ,artnenhlp
Balance Sheet
November 30, 20x4
Assets p 100,CXX)
Cash . . ..... .. ....... .. . .. .. .. . ... . · ·· ·· · · ······· · · .... p 40,CXX)
Accounh receivable ...... .. ... . . . • • • · · · · · · · · · · · · · · · · · · 2.500 37,500
Less: Alowance for doubtful accounts . . .. • • • • • • : · · · · · · · · · 50,CXX)
Notes receivable ...... ... ..... . .. • . • • • • · · · · · · · · · · · · · · · · 22,500
Merchandise inventcxy . . . ... . . ..... ..... • • · · · · · · · · · · · · · p 60,CXX)
Equipment ...... ..· ... ....... .. .... . • • • • · · · · · · · · · · · · · · · ~.CXX) ~~.©'.)
Less: Accumulated depreciation ....... ..... • • .. · · · · · · · · · e2os.coo
Total asset5 .. . .... •.. . .. . . . . . ...... • • • • · · · · · · · · · · · · · · · ·
Uabllffles and Capital p 10,CXX)
Accounh payable .... . ... . . . ..• . .. . ...... • • • • • · · · · · · · · 50.CXX>
Notes payable .. . .... .... ... ... . ... : . ... • • • • • • · · · · · · · · · 205,©'.)
H, capital . ... .. . .... . ..... . . . : .. .. . . . . ... . ..... .. . .... e26s.cm
Total liabilities and caoitol ....... . . ...... ... ..... : • • • • • • •
ents shall be made:
It is agreed that for purposes of estab6shing H's interest the following adjustm
a. The accounts receivable is estimated to be 90% realizable.
b. Interest at 8% on notes receivable doted March 1, 20x4 is to be accrued.
c. The ~erchondise inventory is to be valu~ at Pl 7,500. ·
d. n,e equipment is under-depreciated by P4,000 .
nized.
e. Prepaid expenses of P2,000 and accrued expenses of P6,000 are to be recog
I is to invest cash to obtain a one-third interest in the partnership.
d by the new partnership; the
Assumption 1: Old set of ~ooks. Assuming the books of H Is to be retaine
following procedures are to be followed:
·1ndlvldual vs. Sole Proprietor

looks of •Books of
Individual Sole Proorletor
N/A .Yes
Adjusting entries . . . ... . .. .. ... .. .... .. . .. ....... .
Closing entries (real ac~oun tsJ . . ... . . .. .·. .... .. .. ... NIA No
.... ....• . ... .... ..... . . .. .. : ... Yes..
lnvestmenh.. . ...
Balance Sheet.. ....... ..... ..... .... ... ... ....... Yes
' Books of H, Pcxtnerstip books
or.
•• Investments of in<frviduol; additional investments or withdrawals of sole propriet
Books of Sole Proprietor (HJ:
To record adjustments:
a. H, capital .... ... .... .... . ..... 1,500
Allowance for doubtful accou~ts· · · · · · · · · · · · · · · · · · · · · · 1,500
Additional provision computed as fono~:· · · · · · · • • · • · · · · • · · · · ·
Required aBowonce: 10% x P40,000 . : ... P4,000
Less: Previous balance .. ...... .... .... 2:s.00
Additional provision ... ... .. ... ..... .. p 1.500

b. lntere.st re~eivable or accrued interest inco 3,000

H, capital .. . me · · · · · · · · · .. ·
3,000
Interest inco~ ~ ~ ~ ~~',;,~~;e·d ~ ;~;~.;,;:··· ••••••..
, X 8% X 9/12 =PJ,000.
c. H, capital . .. ...
Merchandise ·;;~~~t ····· ···.' ··· ·· ······ · · · ···· · · •• •• 5,000
. 5,000
Decf,ne ,n ory ......
. the value of mercha ndise.· .• .. ..••.. . . . .... . . ... •
P22,500- P17,500 =PS,000.
 ■-
d. H, capitol . ... .
Accumulat~d
Under deoreciation.
d~;;~~ ~·tion· · ·· · · · · · · · · · • • . ....... .. .
1 4,000
• • • .. . .. ...... . .. .. . . . .. . 4,000
e. Prepaid expenses . . ' ..
H. capitol.. . . · · · · · · · · · · · · · · · · • • • ..... ... . .... . 2,000
Expenses po,d in ad~~~~~--·· · ···· ·· ·· ·· •• ..... ... ...... . . 2,000
f. H, capital ...
Accrued ~x· · · · · · · · · · · · · · · · · · · · · · · · · • • • .. .. .. . 6.000
Unrecorded expenses. · · · · · ·. · · · · · · · · · · · · · · · , • • • • .. . .. . . . 6,000
Note: All adjustment that ren t
capital account. because
formation. 0
tc
n~mlnol accounts should be coursed through the
nominal accounts ore already closed at the time of

To close the books: nothing to close since the books of H will be retained.
To record Investment:
Cash
• ;,·~~- . ,. ·1· . . .. .•. . .• ... .. ·•••• ...... . .•......•• . 96.750
PIO ......... ..
Initial investment comp~t~d ~ ·,;; ;~s·· · · · · · · · · · · · · · · 96.750
1
Unadjusted capital of H. . . . . . . . . ·
Add {deduct): adjustments: · · · · · · ·.· · · · · · · · · · · · P205,000.
o. Doubtful accounts ' ..... ' .. .... ... .....
. I 1,500)
b. Interest income
3,000
c. Decline In the v~I ~; ~hdi ::::::.. I s,oooJ
d. Under-depreciation ... . ... . .. .. ....... .. . I 4,000)
e. Pr~paid expenses ........ : ...... . .... . .. . 2,000
Accrued expenses ..... ....... .. .... ·.... . . I 6,000)
Adjusted capitol balance of H ... .. ... . ..... ..... , .. P193,500
Divided by: Capitol interest of H .......... .......... . . 2/3
Total agreed capitol ...... . ........ . ..... . . . ..... . P290.250
Multiplled by: Capitol interest of I .. ... ... ..... ._.. . . . . 1/3
Investment of I .. . ...... . ... . ..... .. ... . .. ... ..... . P 96.750
Note: The initial investment of H is already recorded in as much as his books are already
retained. 'No further entry is required bec::ause there ore no additional investments or
'Nithdrowols mode by H.
Assumption 2: New set of b~oks. The following procedures are to be followed:
lndMdual vs. Soe
I Prop r1 etor
Books of Books of •New Set of
Books
lndlvldual Sole
Proprietor
Adjusting entries ......... .. • • N/A Yes
Closing entries (real accounts). N/A Yes
Investments .... \ ..... . . • • • · · Yes..
Balance Sheet. : .......... • • • Yes
• Partne/Ship boo/cs . ' •
.. Investments of individual: additional investments or withdrawals of sole propnetor.
looks of Sole Proprietor (HJ:
lo record ad ustments:
OH a ... .......• •··· , ... ......... .. ....... .. .... . .. . 1.600
. , cap /ti
Allowance for doubtful accounts · · · · · · · · · · · · · · · · : · · · · · · 1.500
0
Additionai'provlslon computed as f°c! ~ p 4·ooo
Required al/owance: 1010 x 0•000 · · · · · '
• ·us balance · · · · .. • ........ ·
Less: Prev10 2,500
·
·· tViOVlSl 0n P 1.500
1.,. · .... · · ......
. .. · ..
0 0

Add1tiono,
· ,.
b. Interest receivab crued interest income ......... . . • 3.000
1e or ac
3,000
H, capital .... .... • • · · · · · · ; · ~ 11
~t~d ;~
;~~ • • • • • • • • • • •
Interest Income for nine months co P ,
PS0.000 x8% x 9/1 2 = PJ,OOO.
 c. H, capita/ .. .... .. . . .. ... , .... . ..... . • • · · · · · · · · · · · · · · · · · 5,000
Merchandise inventory .. . . .. .. . • • · · · · · · · · · · · · · · · · · · · · 5.000
Decline in the value of merchandise.
P22,500- P17,500 = PS,000.
d. H, capital ...... ... ... . ... . .. . .. . • • • · · · · · · · · · · · · · · · · · · · · 4,000
Accumulated depreciation . . . . . . • ··· ·· · · ········· ···· 4.000
Under depreciation. 2,000
e. prepaid expenses .... .·.. .. . . . • •• ·· ············.·.·.·. ·.·.·.·.·. :
H, capitol . ... .. . .. .. . . .. . ••••···· · · · ·· ··· 2,000
Expenses paid in advance. ...... 6,000
f. H, capital ........ . . . ... • • • • · · · · · · · · · · · · · · · · · · .' .' : .. . ... .
Accrued expenses ..... .. . • • • · · · · · · · · · · · · · 6,000
Unrecorded exoenses. . unts should be coursed through the
Note: AU adjustment that reflects nominal
capital account, since all nominal accounts·are area
accf
dy closed at the time of formation.
·
To close the books: ·
Allowance f-or doubtfu/ accounts .. • • · · · · · · · · · · · · · · · · · · · · · 4,000
Accumulated depreciation . .... . • • • • · · · · · · · · · · · · · · · · · · · · 9,000
Accrued expens~s .. . . .. . ..... • • • • · · · · · · · · · · · · · · · · · · · · · · · 6,000
Accounts payable .. .. . . .... .. • • · · · · · · · · · ... .~ ... ...... . 10,000
Notes payable : .• •• •··· ······· i · · · · · · · · · · · · · · · ·:·.·.·.·.·_-_-.-.- 50,000
H, capital ... . .. . .. . .. . .... . •••··········· · ··· · · 193,500
Cdsh ..... . ... · · · · : · · · · · · · · · · · · · · · · .. .... ... ...... . . 100,000
Notes receivable .. . . . • • • · · · · · · · · · · · · · · · · · · · · · · · · · · · · ·; 40,000
Interest receivable ... . • • • · · · · · · · · · · · · · • · · · · · · · · · · · · · · 3,000
Accounts' receivable . . • • • • · · · · · · · · · · · · · · · · · ·.· · · · · · · · · 50,000
Merchandise inventory . , • • • · · · · · · · · · · · · · · · · · · · · · · · · · · 17,500
Prepaid expenses ... . • • • • • · · · · · · · · · · · ·.· · · · · · ·. · · · · · · · · 2,000
Equipment . . . ... . .. •• •···· ·· ·· ·· · · ··· ·.·· · · · ······· · · 60,000
Closing of real accovnts.
New set of Books (Partnership Books):
To record Investments:
Cash ... .. .. .. . . • •• ··· ·· · ···· · · · ······· ·· ··· · ······· · ·· · 100,000
Notes receivable . ... . . • • • • • • • · · · · · · · · · · · · · · · · · · · · · · · · · · · 50,000
Interest receivable . . . : . • • • • • · · · · · · · · · · · · · · · · · · · · · · • · · · · · · 3,000
Accounts receivable . .... • • : • • • • · · · · · · · · · · · · · · · · · · · · · · · · 40,000
Merchandise inventory . .. . • • • • • • • · · · · · · · ·.· · · · · · · · · · · · · · · 17,500
Prepaid expenses . ...... • • • • • • • • · · · · · · · · · · · · · · · · · · · · · · · · · 2,000
Equipment .. .. .. , . . • • • • • • • · · · · · · · · · : · · · · · · · · · · · · · · · · · · · · 51,000
Allowance for doubtful accounts .... ... . . ... . . . .. .. . 4,000
Accrued expenses .. .. . . . . : .. .. .. . ... . . .. .... . .... . 6,000
Accounts payable . .. .. . . . ... .. . .. . .... . .. . . . ..... . 10,000
Notes payable . .. . ... . . . . . ..· ..... . . ............ .. . 50,000
H, capital .. ....... .. . .. .. . . ... . . ... . .... . ... .. .. .
Initial investment. -193,500

Cash . . . .. . ... . . . •• ••• •• •••••••• • ••• • •••• •• . .. . . .. -~ . .·.

96,750
I, capital .. ..... ... . ..... ... .. . . . . . .... .. ... .. .•.. .
Initial investment. 96,750
Note:
1. No fvrther entries are reqvired becavse there are no additional investments or withdrawals
~K - .
2. It shovld be recognized that accv,:nvlated depreciation is not carried forward to the newly
formed partnership in· the same fashion with bvsiness combination. The reason is that the net
amovnt wiH be depreciated based' on the remaining or revised life of the depreciable asset.
 1237
mebalance sheet for both cases present d . ,
• e above 1s as follows·
HI Partnership ·
Balance Sheet
Assets November 30, 20x4
Cmh . . . . . .. . . . .. .. . .
Accounts receivables · · · · · · · · · · · · · · · · · ·
· · · · · · · · · ••. . . . . .
Less: Allowance for do~btt~i ~ · ~i
Noles receivable .
··············•.. ...... p ~ -00)
P 196,750
s · · · · · · · · · · · · • . . . . .. , . .
Interest receivable · · · · · · · · · · · · · · · · · · · · · · ~ 36,00)
· · · · · · · · · · • • . .. . .
Merchandise Inve nt~ : .· .' .· .' .' .· .' .· · · · · · · · · · 50,00)
· · · · · · · · · · · · · · · •• • 3,00)
Prepaid expenses- · · · · · · · · · · · · · · · · · · · · · · · · · •·
Equipment !net) . .· .· .· .·.· .· .· .· .· .· .· .' .' .· .' · · · · · · · · 17,500
· · · · : · · · · · · • • • . .. 2,00)
Less: Accumulated depreciation · · · · · · · ·
· ·· ··· ·· ········· p 60,00)
lol ,.~~~ts
T0 rux: .. .... . ... .. O • • o o •, 0

9,000
0 0 o O o O o O O O o
.. .. . .. . .... .
51,000
O • I o o • 0 0 o

UablDtles and C9pltal ····················

Liabi~ties
P356 2.50
Accru~d ~ - ~
s·.·.·.· .·.·.·.·--· ·.·.·.:.· ..· · .· · · · · · · · · · · · · · · · · · · · ·
Accounts payable ·· ········· · ··· ····· p 6,00)
Notes payable · ·· · · · · ·· ·· ·· ·· ··· ········ ··· ········
Total Uabififies
.. .... .. .. ... .. .... ..·... ... .... .... .. .. . 10,00)
• o o o 50,00)
Capital
O Io O o o o O O O o O o O O O O o O O o O o o • o O o O o o O o o I o o O

P 66,CXX)
o 0

H. capital ... ...

.. .... .... ... .. .. .....
I. capital .. ... .. . . .... . . . . .. ... . . ~. .. ..... .... ..... . P 193,500
Total Cap ital. .. .. .. .. ·
. · · · .. .. .. · .. · .. .... 96,750
Total Uabifities and Caplt~-1·. ·. ~ ·. : ·. ·. ·. ::: ·. ·. ·. ·. P 290,250
·. ·. ·. ·. : ·. : ·. ·. ·: ·. ·. ·. : : ·. :
Illustration 17-3: Sole Propri&tor vs. Sole Proprie P356 250
tor
On 0~tober 1, 20x4 , J ·and K decided to poo
l their assets and form a partnership. They allo
profit and lqss in the ·ratio of 44:56 for th~m. cate
respectively. The firm is to take over business
and assume business liabilities, and capitals assets
are to be based on net assets transferred afte
following adjustments: r the
a. J's inventory amounting to Pl0,000 is worthles
s, while K's agreed value of inventory
amounted to P125,000:
b. Uncollectible accounts of P6,000 for J is
to be provided; a 5% allowance is to be
recognized in the books of K.
c. Accrued rent income of Pl0,000 on J,
and accrued salaries of PB,000 on K should
recognized on their respective books. be
d. Interest at 16% on Notes R·eceivable date
d August 17. 20x4 should be accrued.
e. The office supplies unused amounted to P20
,000.
f. f!1e equipment's agreed value amounted
to PS0,000.
g. The.furniture and fixtures has a fair market
value of P90.000.
h. Interest at 12% on Notes Payable dated
July 1, 20x4 should be accrued. Use 360 day
year. sa
i. Khas an unrecorded patent amounting to
P40,000 and is to invest the additional cash
necessary to have a 60% inter.est in the new
firm
Salonee 'sheets for J ·and
K on October 1. 20x4 before ad" 11ustmentsare given beow
I :
Accounts J K
Cash ..... . . . . . ... . .. . . .. . .... . ••· ·· ·· · p 75,00) p 45,00)
·· · ···· · · ·· · ·· ·
Accounts Receivable .. .. . . • • • · · · · · · · · · · · I 80,00) 150,00)
··············
Allowance ror doubtful accounts . . • • · · · · · · ( -4,00)1
··············· ( 5,00))
NotesReceivable . .. . . . . . . • · · · · · · · · · · · · · 50,00)
············ ··
Merchandise Inven tory .. . .. • • · · · · · · · · · · · · 160,00) 120,CXX)
··············
Office Supplies .... ... . . . . . . . • • · · · · · · · · · · 27,00)
················
Equipment .. . .. . . . . . . .. . . . . . • •• ··· · · ·· ·· 100,CXX)
·· · ··· · ·· · ···
Accumulated depredation - equipmen( · · · ( 45,oo:>I
· · ·· ·· ·· ··· · ·
Furniture and Fixtures . . . . .. • .. · · .. · · · · ....
~ .... · · · .. · .. 120,CXX)
Accu mulaled depreciation - furni ture and fix
res · · · · · · · · I 20,!ml
Jolal Assets . . . . . . . . . .. ... .. . . • · · · · · · · · · p 423 000 e 460W)
· · · · · · · · · · · · · ·: · ·
 p 133,CXX) p 100,CXX)
Accounts Payable .. . . ... . . ....... . .. . .. .. . . ......... . .
50,CXX)
Notes Payable . .... ..... . ....... . ... . .. .. . . ... .. .. ·. .. . . . -0-
Capitols . . . .. ... .. . ... .... .. ... .... .. . . .. . .. . . ..... . . · · ~ ~
Total Uobi~ttes and Cooltot ......... . .. . . .. .. . .. .. • • · · · · · · · e ~23 cm e {60.0CX)
AssumpHon 1: Old set of books. Assuming the books of IC Is to be retained by the new partnership
the following procedures are to be followed: ·
Sole Pro etor vs. Sole Pro etor
(J) looks of (K) •tooks of

Sole Pro etor Sole Pro rletor

Yes Yes
Adjusting entries . . . . . . . . . . . . . . . . . . . . . . . . • . • . . . . .
Yes No
Closing entries (real.accounts) . . . . . . . . . . . . . . . . . . . .
Yes••
lnvestn'lents...... ........ . .......... • • · · · · · · · · ·
Yes
Balance Sheet... . •. ......... . .. . ... . •• ••··· · ·· ·
• PortnMhip books
•• Addlior:,ol investments or withdrawals of sole proprietors.
looks of Sole Proprietor •
To record adlustments:
.. looks of K
looks of J
a. J. capitol ................ 10,000 a. Merchandise inventory...... 5,000
Merchandise Inventory ... 10,000 K. capital ..... .. . . ....... 5,000
Worthless inventory. Upward revaluation.
b. K. capitol .......... . . ... . 2,500
b. J, capital .... .... : ........ 6,000
Allowance fOI' doubtful
Allowance for dou~tful 2,500
Accounts.. . . : . . ... ...
Additional provision.
Accounts ... .. ........ 6,000 Requred allowance:
Additional provision. ~ x Pl50,CXX).. . . . . P7,500
Less: Previous
Balance....... ~
Addittonol Provision. f2.500
c. Rent receivable ....... . . . 10,000 c. K. capital .... . ... ... .... . 8,000
J, capital . ... ......... . 10,000 Salaries payable........ . 8,000
'
Income earned. Unpaid salaries.
d. Interest receivable ....... . 1.000
. K. capital.......... . .. ..
Interest Income from Ausust
1.000

17 to October I .
P50,CXX) X 16~ X45/360 .
e. J, capitol . . . . . . . .... .... . 7JXXJ
Office supp6es. ; .. ... .. .. 7,r:JXJ
Expired office supplies.
-
f. J, capitol . . ............. . . 5.000
Accumulated depreciation 5.000
equipment . . .. ·... ..... .
Under-depreciated. I

g. K. capitol .. .... .... .... .. 10.000

Accumulated depreclc 10,000
furniture and fixtures ...... '
Under-depreciated.
h. J, capitol .... .... ... .... . 1.500
Interest payable. . . . . . . . . . , 1.500
Interest expense from
July I to October I PS0,000 x
12%x3/11
i. Potent • • . • • •. 0 • I e o O • 0 I I • e 40.000
K, capital . ... .- , . ..•..... · 40,(XX)
Unrecorded potent.
 ~usted capital of J .. . . . . .
P 310.00)
Add(dedUCII: adjustments: . Unadjusted capllal of K p 360,(XX)
a. Worth'eSS merchondse Add(deduct): adjustme~is·: . . . . .
b. OOUbtfu accounts ··· I 10.0001
c. Rent income . ... . : : : : : : .
I 6,0001 a. Merchandise revaluation s:cm
10.000 b. Doubtful accounts ··· I 2.5001
e. Office suppies expense c. Salaries. . . . ····· I a,cxx,l
I. Mdlfionol depreciatton · ·
I 7,COOI d. Interest inco~-· · · · · · · · · · 1.(XX)
h. Interest expense . . ···
( 5,00>1
g. AddlNonal depr~d~ti;~ : : : ( 1O,(XX))
Adiusted c ·tal of J ...· .....· ....
.. · L l,5001 h. Patent
~Q.500 Ad usted ca· · i~i'~i
K· · · · · · · · · ·
~,OC()

to cloSt the books:

- loo~of J
- ~ e fOf doubtful looks of K
OCC<X1'1ts ... ............. 10,000 Not appficable.
1
ACa.nuAClted dep-eciaHon-
equpment ... .... ....... .
I AcCOIJOts payable ... . ......
50,000
133,000
I Notes payable . .. . .. ..... . ..
interest payable . ...........
50,000
1.500
J. capitol .. .... . . . . . ..... . . .. 290,500
Cash .. . .. . .... . ..... .·.. 75,000
Aceounts receivable .. . . . . 180,000
Merchandise inventory . ... 150,000
Office supplies . .. ... ..... 20,000
Equipment . . . .. ... .. .. ... 100,000
Rent receivable ..... . .... 10,000
.
Close the-books of J.

looks of K- To record Investments·.

looks of J looks of K
Not applicable. Cash .... . . .... . .. . .. .. . . . . 75,000
Accounts receivable . ... .. .. 180:000
Merchandise inventory ...... 150,000
Office suppies . .. ... ... ... . 20,000
Equipment (net) . .. .. ... . .. . ,50,000
Rent receivable ......... . . . 10,000
Allowance for doubtful

I
cc.counts: .. . .. . .. ... . 10,000
Accounts payable . . . ... 133,000
Notes payable ......... . - 50.000
Interest payable .. . ... . . 1.500
J, capital ............. . . 290,500
·Investment of K.
-
The following observations should be noted:
l. Accounts receiv~ble is norm·ally recorded at gross amount less allowance. The reason for
such practice is that the new partnership seldom changes the percent of doubtful accounts,
usually they based it qn the original·estimate wherein the gross amount is the basis.
2· Assets that ore based on depreciation (.and amortizaHonl is recorded at net amount
because the life of such assets are usually revised by the new partnership. The estimated life
of such assets may change overtime because they are based either on functional· or
Physical
. factors . .
AssumpHon 2: New set of books. The following procedur~s ore to be followed:
Sole Pro rletor vs. Sole Pro rletor
(J) looks of (K) looks of New Set of
Books
Sole Pro tor Sole Pro etor
Adjusting entries Yes Yes
Closing entries (real accounts) Yes Yes
Investments Yes••
Balance Sheet Yes

Books of Sole Proprietor

lo record ad ustments:
looks of J looks of K
a. J, capita! . . . . . . . . . . . . . . . . 10,000 a. Merchandise inventory. . . . . . 5,000
Merchancise Inventory . . . 10,000 · K. capital . . . . . . . . . . . . • . . . 5,000
Worthless inventor(. Upward revaluation.
b. J. capital.. . ... .. . ... . .. . 6,000 b. K. capital . . . . . . . . . . . . . . . . 2.500
Allowance for doubtful Allowance for doubtful
-Accounts... .... .... .. 2.500
Addnonol provision.
Accounts . . . . . . . . . . . . . 6,000 Requred allowance:
Addifionol provision. ~ x P150,(XX)... . . . P7,500
Less: Previous
Balance.. . . . .. ~
Additional Provision. E.2.500
c. Rent receivable . . . . . . . . . . 10.000 c. K. capitol ...... .... .. . .. . 8.000·
J. capitol . . . . . . . . . . . . . . 10.000 Salaries payable. ... . . ... 8.000
Income eaned. Unpaid solories.
d.Jnterest receivable . . . ... : . 1.CXX>
K. capital. . . . . . . . . . . . . . . . I ,(XX)
Interest income from August
17 to October I.
P50.0CO X 16~ X 45/360
e . J. capital. . . . . . . . . . . . . . . . 7.r:nJ
Office supplies. . ... . .. . . . 7,r:nJ
Expred office supplies.
f. J. capitol .. . . . . . . . . . . . . . . . 5.(XX}
>,ccumulated'depreciation

- equipment . . . . . . . . . . . . . 5,000
Unde<-deprecioted.
g. K.. capital . . . . . . . . . . . . . . . . 10,(XX)
Accumulated depreciaNon-
11.mture and fixtures . . . . . . 1Q,(XX)
Under-de iated.
h. J capita .... . ... ... ...... 1.500
Interest payoble. . .. . .. . . . 1.500
ilfefest eicpense from
M I to October I
P.50.CXX>x 12S r. 3/12
I. Patent . . . . . . . . . . . . . . . . . . . 40.r:nJ
K. capital . . . . . . . . . . . . . . . 40,(XX)
Unrecorded potent.
 l)n0Ct..6ted capital of J . . .. . .. .
P310,(XX)
~(deOJC1): adjustments:
u~ed capita of K ...... . . p 360.CXX>
o. Worthless merchandse .. . Add(deoJctJ: oqustmen~:
( 10,(XX))
b. Ooubtfu occounh ..... .
I 6,CXX>l a. Merchandse revaluation.. . 5,00)
c. Rent income .. . .... . . . . . 10,(XX) b. Dovbtful accoun~ . .. . . . ( 2.500)
e. Office supplies expense .. C. Salaries.
.. - •lionol ~ -H ( 7,CXX,) ( 8.00))
f. ,,,,,,__ ............,<>'-N on . . . d. tnterest~~: : : : : : : : : : :
h. interest expense ..... _. . .
( 5.CXX>) l,(XX)
g. Additional depredation .. . ( 10.CXX>J
Acf.vsled ca ·101 of J . . .. . .. .. . h. Patent . . . . .... .. .. .. . . . .
Ad' ted ca ·ta of K, .. . . . .. ..
To cloSe the books:
~ looks of J
• Allowance for doubtful Books of K
Allowance lor doubtful
accoun~ . .. . .. . .. . . . .. 10.000
Accumulated depreciatiorr accounts .,... ... ... . . .... 7.500
Accumulated depreciation-
I equpment..... .. . .. .. . so.ooo
Accounts payable . . . . . . . . 133.000 fumihKes and fixtures. . . . . . 30.000
Accounts payable . . . . . . . . . . 100.000
I Notes payobre...... .. . ... 50.000 Salaries payable. .. ......... 8.000
Interest payable ..... . . . . . 1,500 K. capital . . . . . . . . . . . . . . . . . . 385,500
, J. capital . . . . . . . . . . . . . . . . 290,500 Cash .... . . .... ........ . 45.000
Cash .... . .. ... .. : . •. . 75.000 Accounts receivable .... . 150,000
Accounts receivable ... . 180,000 Notes receivable . . . ... : . 50,000
Merchancfise inventory .. 150,000 Interest receivable .. .•. ... 1.000
Office supples ........ . 20.000 Merchondse inventory . .. . 125.000
Equipment ........... . 100.000 Funiture and fixt\Kes .. .. . . 120,000
j Rent receivable ...... . 10,000 . Potent. .... .. .. .. .. .. .. . 40.000
i Close the books of J. Oose the boob of K.

New Set of Books -

To record Investments:
Cash . . .. ........... . .... ••• ••·· ···· ··· · · ·········· 75,000
Accounts receivable .. . ..... ... • • • • • • · · · · · · · · · · · · · · · · 180.000
Merchandise inventory ..... .. • • • • • · · · · · · · · · · · · · · · · · · · 150.000
Office supplies ......... • • • • · · · · · · · · · · · · · · · · · · · · · · · · · 20,(XX)
Equipment (net) ... ... .. •. • • • · · · · · · · · · · · · · · · · · · · · · · · · · 50,000
Rent Receivable . ... ... • • • · · · · · · · · · · · · · · · · · · · · · · · · · · · 10,000
. Allowance for doubtful accounts · · · · · · .. . ..... .. . . 10.000
Accounts payable · · · · · · · · · · · · · · · · · · · · • · · · · · · · · · · 133.000
50,000
Notes payable .' • • · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · ·
lnteresfpayoble • · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · 1.500
J. capital ..... • ••· ·· · · · ··· · ··········· ···· ·· ···· 390.500
Investments of J.
\ sh
Ca . ' ......... ' .... ·; . . ...... ... .... .. . 45,000
.... . . .. .. .. . ... . 150.000
Accounts receivable • · · · · · · · · · · · · · · · · · · · · · · · · · 50.000
Notes receivable ... • · · · · · · · · · · · · · · ·. ·. ·. ·. ·. ·. ·.-.·. ·. ·. ·. ·.·. ·. ·. ·. 1.000
Interest receivable .. • .. · · · · · .. · · · · · ......... . 125,(XX)
Merchandise inventory · · · · · · · · · · · · · · · · · · · ·.......... . 90.000
Furniture and fixtures (net) · · · · · · · · · · · · · · · · · . .... .. .. . 40,000
I
Patent . .. ..... . • • · · · btt~I
·~ :::::::........ .. 7.500
I
Allowance for dou .. .. ........ . 100.000
ts paya ble .. . ··· ··· ·· ..... .
Accoun . .. .. ... ... .. . 8.000
i Salaries payable • · · · · · · · · · · .' .' .' .' .' .' .' ........ . .... . 385.500
K, capital .... • • · · · · · · · · · · ·
Investments of K.
The balance sheet after formation is as follows :

Jand KPartnership
Balance Sheet
Odober 1, 20x4
Assets
Cash .. ....... .... -~ ...... .. ..... ..... .... ... . ... P 120,000
P330,000
Accounts receivables ... ....... ....... .... • • • • · · · ·
~ess: Allowance for doubtful accounts ....... ....... • 17,~00 312,500
Notes receivable . . . ... . ....... .. . .... ... . . . • • • · · · 50,000
1,000
Interest receivable ....... ....... . . ..... .. • • • • • · · · ·
10,000
Rent receivable . .... ....... ....... ....... . • • • • • • :
275.000
Merchandise lnver:itory . .. . .. .. ... .... ..... . . . • • • • •
Office supplies .. .. . .. .. .. .. ... . ....... ..... • . • • • • • 20,000
Equipment (net) ... .. .... ... .. .. ... .... ... .. . • • • • • 50,000
Furniture and fixtures (net) ..... ... .... .. ....... . .. . . 90,000
- 40,000
Patent ... .. .. . .. . . . . .. ... ... ... . . .... . .. .. ..... •
Total Assets ...... .. . ... ....... .... . ....... ..... . . . e268.soo
Uabllltles and Capital
Liabifities . . . . ... .. .... .. ... . .. . .. . ...... . ... . . ....
p 8,000
Salaries payable ..·... .. . . ..... .. ... .. ... . . .. . . .
Accounts payable . ... .. .. ... .. ... .. ....... . .. .. 133,000
Notes payable . . .. . .. . .. . . . .... . . . . ... ... . .. ... 50,000
Interest pa'table .... .. .... . .... . ....... ....... . . 1,500
Total Liabilities ....... ....... ....... ... . . . . . .. .. ... P 192,500
Capital
J, capital . . ....... .. . .. . ....... .... .. .. . . . ..... P390,500
K. capital . . . . . ....... ..... ... . ... . . .... . ....... 385,500
Total Capital .... .. . . . ....... .... .. ... . ....... .... P776,000
Total Liabilities and Capital .. .. . . . . . .. .. ... . . . . . ~ . . . e268.soo
I