Partnership Formation New Format

Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY

Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: BRG6-2NDSEM-2020-2021
College: Business Education

Campus : Bayombong Campus
DEGREE BSBA COURSE BRG 6

PROGRAM NO.
SPECIALIZATION FM/MM/HRM/BE COURSE Partnership and Corporation
TITLE Accounting
YEAR LEVEL First Year TIME FRAME WK NO. 2-4 IM NO. 02
I. UNIT TITLE/CHAPTER TITLE: PARTNERSHIP FORMATION
II. LESSON TITLE:

Lesson 1: Owner’s equity and Other Accounts in a Partnership
Lesson 2: Execution of Partner’s agreement
Lesson 3: Valuation of investments by Partners
Lesson 4: Adjustment of accounts prior to formation
Lesson 5: Opening entries of a partnership upon formation
III. LESSON OVERVIEW
In general, the accounting principles and procedures used in recording partnership

transactions with outside parties are the same as those of sole proprietorship. The
difference however, lies in the owner’s equity accounts and division of profits or loss.
This chapter explains the ways by which a partnership organization can be formed, its
accounting procedures and the overview of the partnership financial statement after its
formation.
IV. DESIRED LEARNING OUTCOMES
1. Distinguish the equity accounts of a Sole Proprietorship, Partnership and Corporation.

2. Discuss the different ways by which a partnership can be formed.
3. Explain the valuation of investment of partners.
4. Discuss the basic procedure in partnership formation.
5. Journalize opening journal entries in partnership formation
6. Prepare balance sheet of a newly formed partnership.
V. LESSON CONTENT
Lesson 1: Owner’s equity and Other Accounts in a Partnership
The differences arise between the two forms of business concerning owner’s equity. For
proprietorship, there is only a single owner. There is only one capital account and one drawing
account. Since a partnership has two or more owners, separate capital and drawing account are
established partners.
A partner’s capital account is credited for his initial and additional net investment and credit
balance of the drawing account at the end of the period. It is debited for his permanent
withdrawals and debit balance the drawing account at the end of the period.
A partners drawing account is debited to reflect assets temporarily withdrawn by him from the
partnership
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The use of the drawing accounts for temporary withdrawals provides are record of each
partners drawing during an accounting period. Drawing in excess of the allowed amounts as
stated in the partnership agreement may be controlled. The choice of the account to credit or
debit depends on the intention of the partners.
Partner's Capital Account

DEBIT CREDIT
1. Permanent withdrawals. 1. Original investment
2. Debit balance of the drawing
account at the end of the period. 2. Additional Investment
3. Credit balance of the
drawing account at the end
of the period
Partner's Drawing Account

DEBIT CREDIT
1. Share in profit ( this may
1. Temporary withdrawals credited directly to Capital
2. Share in loss (this may be
debited directly to Capital
Loans Receivable from or Payable to Partners

If a partner withdraws a substantial amount of money with the intention of repaying it, the debit
should be to loans receivable- partner account instead of to partner’s drawing account. This
account should be classified separately from the other receivables of the partnership.
A partner may lend amounts to the partnership in excess of his intended permanent investment.
These advances should be credited to loans payable- partner account and not to partner’s
capital account classified among the liabilities but separate from liabilities to outsiders. Loans
payable to partners must be paid after the claims of outside creditors have been paid in full.
Lesson 2: Execution of Partner’s agreement

Illustration: With agreement on individual contribution
A and B form a partnership with a total agreed capitalization of 150,000 to be contributed in
cash of 40% and 60% by A and B, respectively, through the issuance of their personal checks.
The amount contributed and capital credit to be recorded per agreement would be:
Debit Credit
Cash 60,000
A, Capital 60,000
To record A's initial investment
Cash 90,000
B, Capital 90,000
To record B's initial investment
If there is no agreement on individual capital contribution it shall mean that equal amount of
cash shall be collected from each partner.
Lesson 3: Valuation of investments by Partners
Partners may invest cash or noncash assets in the partnership. When a partner invests non-
cash assets, they are to be recorded at values agreed upon by the partners. The contributions
will be recognized at their fair market values at the date of transfer to the partnership.
The fair market value on an asset is the estimated amount that a willing seller would receive
from a financially capable buyer for the sale of the assets in a free market. The fair value is the
price at which an asset or liability could be exchanged in a current transaction between
knowledgeable, unrelated willing parties.
To record the distribution of an industrial partner, a memorandum entry in the general
ledger would be made.
Lesson 4: Adjustment of accounts prior to formation
In cases when the prospective partners existing businesses their respective books will have to
be adjusted to reflect the fair market values of their assets or to correct misstatement in the
accounts.
Illustration: AA and BB form a general professional partnership. AA will invest sufficient cash to
get an equal interest in the partnership while AA will transfer the asset and liabilities of her
business.
The account balances on the books of AA prior to partnership formation follows:
Debit Credit
Cash 180,000
Accounts Receivable 300,000
Office Equipment 1,500,000
Accumulated Depreciation 600,000
Accounts Payable 155,000
Salaries Payable 25,000
AA, Capital 1,200,000
It is agreed that for purpose of establishing AA's interest, the following adjustment shall be
made in the books of AA:
1. An allowance of uncollectible accounts of 5% of accounts receivable is to be
established.
2. Prepaid expenses amounting to 30,000 were omitted by the accountant.
3. Additional salaries payable in the amount of 10,000 is to be established.
Entries and Explanation:

An allowance of 5% of P300,000 or P15,000 needs to be established. The account allowance
for uncollectible accounts is a contra asset account. When this account is increased the effect is
to decreased the related asset account. The owner's equity is also decreased since this
provision for uncollectible is considered as an expense in the ordinary course of business.
AA, Capital 15,000
Allowance for Uncollectible Accts. 15,000
1. An omission to record the as prepaid expenses are overstated. When the expenses are
over stated, profit and correspondingly the owners equity is understated. To recognize
the prepaid expense, the entry will be;
Prepaid expenses 30,000

AA, Capital 30,000
2. The establishment of additional salaries payable will increase liabilities. It can be deduce
that the salaries expenses are understated and to correct the misstatement the owners'
equity will be decreased;
AA, Capital 10,000

Salaries Payable 10,000
Lesson 5: Opening entries of a partnership upon formation

A partnership, may be formed in any of the following ways:
1. Individuals with no existing business form a partnership.
2. A sole proprietorship and an individual without an existing business form a partnership.
3. Two or more proprietors form a partnership.
1. Individuals with no existing business form a partnership
The opening entry to recognize the contributions of each partner and to the partnership is simply
to debit the assets contributed, and to credit liabilities assumed and the capital account of each
partner.
ILLUSTRATION. On July 1, 2020, Ferdinand and Magellan agreed to form a partnership. The
partnership agreement specified that Ferdinand is to invest cash of P700,000 and Magellan is to
contribute land with a fair market value of P1,300,000 with P300,000 mortgage to be assumed
by the partnership.
Cas
h 700,000
Lan 1,300,00
d 0
Mortgage Payable 300,000
Ferdinand, Capital 700,000
1,000,00
Magellan, Capital 0
To record initial investment of partners.
After the formation, the statement of financial position (the new tittle of the balance sheet per
revised IAS No.1) of the newly formed partnership is:
FERDINAND AND MAGELLAN

Statement of Financial Position
July 1, 2020
ASSETS
Cash 700,000
1,300,00
Land 0
2,000,00
Total Assets 0
LIABILITIES & OWNER'S EQUITY

Mortgage Payable 300,000
Ferdinand, Capital 700,000
1,000,00
Magellan, Capital 0
2,000,00
Total Liabilities and Owner's Equity 0
Suppose that Ferdinand and Magellan formed another partnership with Lapulapu. Ferdinand
and Magellan considered Lapulapu who has a vast business network in Southern Mindanao as
an Industrial partner. The partnership did not receive any asset from Lapulapu. In this case, only
a memorandum entry in the general journal will be made.
2. A sole proprietor and another individual form a partnership
A sole proprietor may consider forming a partnership with an individual who has no existing
business. Under this type of formation, the assets and liabilities of the proprietorship will be
transferred to the newly form partnership at values agreed upon by all the partners or at their
current fair prices.
ILLUSTRATION: The Statement of financial position of Ana on Oct 1, 2020, before accepting
Marie as a partner is shown as follows:
Ana Malayo
Oct. 1, 2020
Assets
Cash P 60,000
Notes Receivable 30,000
Accounts Receivable P 240,000
Less: Allowance for Uncollectible Accounts 10,000 230,000
Merchandise Inventory 80,000
Furniture and Fixtures P 60,000
Less: Accumulated Depreciation 6,000 54,000
Totals Assets P454,000
Liabilities and Owner's Equity

Notes Payable P 40,000
Ana, Capital 314,000
Total Liabilities and Owner's Equity P454,000
Marie Beltran offered to invest cash to get a capital equal to one-half of Ana Malayo’s capital
after giving effect to the adjustment below. Malayo accepted the offer.
1. The merchandise is to be valued at P74,000.

2. The accounts receivable is estimated to be 95% collectible.
3. Interest accrued on the notes receivable will be recognized: P10,000, 12% dated July 1,
2020 and P20,000, 12% dated August 1, 2020.
4. Interest on notes payable to be accrued at 14% annually from April 1, 2019.
5. The furniture and fixtures are to be valued at P46,000
6. Office supplies on hand that have been charged to expense in the past amounted to
P4,000. These will be used by the partnership.
New Books for the Partnership (required per National Internal Revenue Code)
The following procedures may be used in recording the formation of the partnership:
Books of Ana Malayo:
1. Adjust the assets and liabilities of Ana Malayo in accordance with the agreement.
Adjustments are to be made to his capital account.
2. Close the books.
Books of Partnership:
1. Record the investment of Ana Malayo.
2. Record the investment of Marie Beltran.
(Books of Malayo)
1. Malayo, Capital 14,100
Office Supplies 4,000
Interest Receivable 700
Allowance for Uncollectible Accounts 2,000
Interest Payable 2,800
To record adjustments to restate Ana Malayo’s Capital
2. Notes Payable P40,000

Allowance for Uncollectible Accts 12,000
Malayo, Capital 299,900
Cash 60,000
Notes Payable 30,000
Furniture and Fixtures 60,000
To close the books of Ana Malayo.
(Books of the Partnership)

1. Cash 60,000
Furnitures and Fixtures 46,000

Malayo, Capital 299,900
To record the investment of Ana MAlayo.
2. Cash 149,950
Beltran, Capital 149,950
To record the investment of Beltran.
After the formation, the statement of financial position of the newly formed partnership is:
Malayo Beltran
Oct. 1, 2020
Assets
209,95
Cash 0
240,00
Accounts Receivable 0
228,00
Less: Allowance for Uncollectible Accts 12,000 0
592,65
Total Assets 0

100,00
Accounts Payable 0
299,90
Malayo, Capital 0
149,95
Beltran, Capital 0
592,65
Note that Furniture and Fixtures are now recorded in the partnership books at the
agreed amount of P46,000 which represented the cost of the asset to the partnership.
On the other hand the accounts receivable is still recorded at gross amount of P240,000
with a related allowance for uncollectible accounts of P12,000. The P12,000 is only a
provision for possible uncollectible.
3. Two or More Sole Proprietors Form a Partnership

ILLUSTRATION: On June 30, 2020, Robo and Kap, friendly competitors in a certain line
of business, decided to combine their talents and capital to form a partnership. Their
statements of financial position are as follows:
Robo
June 30, 2020
Assets
Cash 50,000
Totals Assets 290,000

Robo, Capital 260,000
Total Liabilities and Owner's Equity 290,000
Kap
June 30, 2020
Assets
Cash 40,000
Totals Assets 310,000

Kap, Capital 250,000
Total Liabilities and Owner's Equity 310,000
The conditions and adjustments agreed upon by the partners for purposes of
determining their interests in the partnership are:
1. Actual count on Robo proprietorship’s cash account revealed cash short and
unrecorded expenses of P3,500.
2. Establishment of a 10% allowance for uncollectible accounts in each book.
3. The merchandise inventory of Kap is to be increase by P10,000.
4. The furniture and fixtures are to be depreciated by P6,000.
5. The delivery equipment of Kap is to be depreciated by P9,000.
The following procedures may be used in recording the formation of the partnership:
Books of Robo and Kap:

1. Adjust the accounts of both parties in accordance with the agreement. Adjustment are to
be made to their respective capital accounts.
2. Clos the books.
Books of Partnership:
1. Record the investment of Robo.
2. Record the investment of Kap.
Following the procedures, the entries are:
BOOKS OF ROBO
1. Robo, Capital 19,500

Cash 3,500
To record adjustments to restate Robo’s capital.
2. Accounts Payable 30,000

Cash 46,500
To close the books of Robo.
BOOKS OF KAP
1. Merchandise Inventory 10,000

Kap, Capital 7,000
To record adjustment to restate Kap’s capital.
2. Accounts Payable 46,500

Allowance for Uncollectible 8,000
Cash 40,000
Delivery Equipment 90,000
To close the books of Kap.
BOOKS OF PARTNERSHIP
1. Cash 46,500
Furniture & Fixtures 54,000
To record the investment of Robo.
2. Cash 40,000
To record the investment of Kap.
After the formation, the statement of financial position of the newly formed
partnership is:
Robo Kap
June 30, 2020
Assets
Cash 86,500
180,00
Accounts Receivable 0
162,00
Less: Allowance for Uncollectible Accts 18,000 0
190,00
Merchandise Inventory 0
573,50
0

240,50
Robo, Capital 0
243,00
Kap, Capital 0
573,50
VI. LEARNING ACTIVITIES
Activity 1. Multiple Choice. Choose the letter which corresponds to the best answer.
1. Which of the following is an asset account?

a. Partner’s capital c. Prepaid expense
b. Partner’s drawing d. Unearned income
2. What type of account has a normal credit balance?

a. Loan from partners c. Partner’s drawing
b. Partner’s capital d. Due from partner
3. Which of the following items is not a collectible from a partner?

a. Loans receivable from partner c. Loans from partner
b. Loans to partner d. Due from partner
4. What is the basis of capital sharing if the partners do not have an agreement as to the
amount of capital contribution?
a. Equally c. Fair value of asset contributed
b. Based on profit and loss agreement d. Service
5. At what value will cash contributions of a partner be recorded in the partnership books?
a. Future value of cash c. Actual amount of cash
b. Purchasing value of cash d. Past value of cash
6. What is the valuation if a partner contributes a noncash property in the partnership?

a. Agreed value of property
b. Acquisition cost of the property
c. Actual amount of the property
d. Fair value of the property
7. What is the entry for the acceptance of industrial partner’s contribution?

a. General journal through a memorandum entry
b. General ledger through a debit-credit entry
c. General journal through a debit-credit entry
d. General ledger through a memorandum entry
8. The capital credit is more than the actual contribution of a new partner, but the
partnership agreed capital is equal to total capital contributed. The admission of the new
partner implies
a. Goodwill. c. goodwill and bonus.
b. Bonus. d. error.
9. The partner’s capital account is credited when there is a (an)

a. withdrawal. c. net income.
b. Additional investment. d. quoted values.
10. Upon the formation of the partnership, each partner’s initial investment of noncash
assets should be recorded at their
a. Book values. c. market values.
b. Cost. d. quoted values.
11. The partner’s capital account is credited in the following cases except when it involves
the recording of the
a. Original investment
b. Closing drawing account at the end of the period
c. Share in the net income
d. Additional investment
12. The drawing account is debited, except for
a. Withdrawal of assets by the partner.

b. Partnership obligations assumed or paid by the partner.
c. Partner’s personal indebtedness paid or assumed by the partnership.
d. Funds or claims of partnership collected and retained by the partner.
13. Which of the following is debited directly to capital?

a. Permanent withdrawal of capital
b. Partner’s share in the losses
c. Partner’s share in the profits
d. Withdrawal of assets by the partner in anticipation of partnership profit
14. When a noncash asset is invested in the partnership and its book value and fair value
are available, its valuation would be the
a. Asset’s book value or fair value at the date of the investment, whichever is higher.
b. Asset’s book value or fair value at the date investment, whichever is lower.
c. Average of the book value and the fair value at the date of investment.
d. The fair value of the asset at the time of investment.
Activity 2. Issues in Capital Contribution
Mar and Ria agreed to form a partnership with a total contribution of P500,000 cash.
Required: make the journal entries for the partner’s respective initial contribution to the
partnership assuming that:
1. There was no agreement as to how much would be the specific share of each partner.
2. The contribution would be 60% and 40% for Mar and Ria, respectively.
Activity 3. Journal Entries: First Time in Business
1. A and B to contribute P250,000 each
2. A, B and C to contribute the following:

A – Cash, P50,000
B – Land, acquired two years ago at P60,000. It present market value is P100,000.
C – Merchandise inventory with a fair market value of P80,000; quoted price of C is
P100,000.
3. A, B and C to contribute the following:

A – Cash, P60,000 and equipment with a book value of P80,000. The partners agreed to
value the equipment of P60,000.
B – Land with fair market value of P150,000. The land is subject to a mortgage of
P30,000 to be assumed by the partnership.
C – Industrial partner who shares 25% in the partnership profits.
4. A and B to contribute cash equal to the total agreed capitalization of P240,000. A to

contribute one-third (1/3), and B to contribute two-thirds (2/3) of the total agreed
capitalization.
5. A to contribute cash of P140,000 for 40% of the total agreed capitalization. B to

contribute the remaining in cash.
6. A to contribute land with fair market value of P60,000 and book value of P50,000, plus
cash. B to contribute P130,000 cash for 65% claim in the partnership.
7. A to contribute land at agreed value of P75,000 and unpaid mortgage of P25,000 to be

assumed by the partnership. B to contribute cash equal to 50% of total partnership’s
capitalization based on A’s contribution.
8. A to contribute his skill as industrial partner. B to contribute cash for the total partnership
capitalization of P250,000.
9. A to contribute his skill plus P50,000 cash as industrial-capitalist partner. B to contribute

cash equal to 75% of total agreed capitalization.
10. A to contribute in cash the 60% of the total partnership capitalization. B to contribute
P140,000 based on agreed capitalization.
Activity 4. Sole Proprietor and an Individual with No Business Form a partnership.
Mintes has successfully operated a sari-sari store for a number of years. She wishes to expand
the business, but to do so she needs additional capital, which she is unable to supply. She
therefore enters into an agreement with Sablay to recognize and continue her business as a
partnership called “MS.” The partners agree that after revaluation of certain assets, Mintes is to
invest her on-going business in the partnership and additional cash from her personal assets to
bring her total investment to P50,000.
Sablay is to contribute a computer costing P30, 000 with a fair market value of P25,000,
merchandise inventory worth P10,000 and cash capital sufficient to make his total investment
equal to that of Mintes. The accumulated depreciation of the computer is P8,000.
The post-closing trial balance of Mintes just prior to the formation of the partnership appeared
as follows:
Debit Credit
Cash P 2,000
Accounts receivable 5,000
Merchandise inventory 10,000
Store equipment 8,000
Accumulated depreciation – store equipment P 1,600
Accounts payable 6,400
Mintes, capital 17,000
P25,000 P25,000
The partners agree that the realizable value of accounts receivable is 80%, the merchandise
inventory should be revalued at P9,000 and the accumulated depreciation should be increase to
P3,000.
Requirements:
A. Journalize adjustments in the books of Mintes.
B. Close the books of Mintes.
C. Record the investments in the MS partnership’s books.
D. Prepare the balance sheet of MS Partnership.
Activity 5. Sole Proprietor Form a Partnership

Amos and Anah agreed to convert their respective sole proprietorship into a partnership. They
agreed that their respective individual assets and liabilities are to be recorded at their book
value. They will contribute additional cash to bring their capital balance to 40% for Amos and
60% for Anah from the total agreed capitalization of P250, 000. Their sole proprietorship’s
balance sheets before the partnership formation are as follows:
Amos Anah
Cash P 5,000 P 10,000
Accounts receivable 95,000 100,000
Equipment 180,000 200,000

Accounts payable 150,000 250,000
Notes payable 50,000 0
Required:
1. Prepare the journal entries for the following:

a. To close the books of Amos’ proprietorship
b. To record the investments of Amos in the partnership books.
c. To close the books of Anah’s sole proprietorship.
d. To record the investments of Amos in the partnership books.
2. Prepare the balance sheet of Amos and Anah partnership upon formation
VII. REFERENCES
Ballada, Win. Ballada Susan, (2016). Partnership and Corporation Accounting (Made
Easy). Sampaloc, Manila: Domadane Publishers
Domingo, A. 2nd Edition. Partnership, Revised Corporation, Cooperative Law. #02

Ampucao, Itogon, Benguet: Coaching for Results Publishing
Lopez, JR., R., (2015). Learning the Basic of ACCOUNTING. Davao City, Philippines:
MS LOPEZ Printing & Publishing
Millan, Z., (2020). Financial Accounting and Reportin (Fundamentals), 2019 Edition.
Baguio City: Bandolin Exterprise

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Republic of the Philippines

NUEVA VIZCAYA STATE UNIVERSITY

College: Business Education

DEGREE BSBA COURSE BRG 6

I. UNIT TITLE/CHAPTER TITLE: PARTNERSHIP FORMATION

II. LESSON TITLE:

III. LESSON OVERVIEW

In general, the accounting principles and procedures used in recording partnership

IV. DESIRED LEARNING OUTCOMES

1. Distinguish the equity accounts of a Sole Proprietorship, Partnership and Corporation.

Lesson 1: Owner’s equity and Other Accounts in a Partnership

Partner's Capital Account

Partner's Drawing Account

Loans Receivable from or Payable to Partners

Lesson 2: Execution of Partner’s agreement

Entries and Explanation:

Prepaid expenses 30,000

AA, Capital 10,000

Lesson 5: Opening entries of a partnership upon formation

1. Individuals with no existing business form a partnership

FERDINAND AND MAGELLAN

LIABILITIES & OWNER'S EQUITY

2. A sole proprietor and another individual form a partnership

Liabilities and Owner's Equity

1. The merchandise is to be valued at P74,000.

2. Notes Payable P40,000

(Books of the Partnership)

Furnitures and Fixtures 46,000

Liabilities and Owner's Equity

3. Two or More Sole Proprietors Form a Partnership

Liabilities and Owner's Equity

Liabilities and Owner's Equity

Accounts Payable 60,000

Books of Robo and Kap:

Following the procedures, the entries are:

1. Robo, Capital 19,500

2. Accounts Payable 30,000

1. Merchandise Inventory 10,000

2. Accounts Payable 46,500

Liabilities and Owner's Equity

VI. LEARNING ACTIVITIES

1. Which of the following is an asset account?

2. What type of account has a normal credit balance?

3. Which of the following items is not a collectible from a partner?

6. What is the valuation if a partner contributes a noncash property in the partnership?

7. What is the entry for the acceptance of industrial partner’s contribution?

9. The partner’s capital account is credited when there is a (an)

12. The drawing account is debited, except for

a. Withdrawal of assets by the partner.

13. Which of the following is debited directly to capital?

Activity 3. Journal Entries: First Time in Business

1. A and B to contribute P250,000 each

2. A, B and C to contribute the following:

3. A, B and C to contribute the following:

4. A and B to contribute cash equal to the total agreed capitalization of P240,000. A to

5. A to contribute cash of P140,000 for 40% of the total agreed capitalization. B to

7. A to contribute land at agreed value of P75,000 and unpaid mortgage of P25,000 to be

9. A to contribute his skill plus P50,000 cash as industrial-capitalist partner. B to contribute

Activity 4. Sole Proprietor and an Individual with No Business Form a partnership.

Activity 5. Sole Proprietor Form a Partnership

Equipment 180,000 200,000

1. Prepare the journal entries for the following: