Partnership-Formation

Step 1: Identify the Asset and liabilities contributed.

Individual with no existing business- liabilities must be assumed by the partnership
Sole proprietor- liabilities no need to be assumed, always included
If contributed of the individual is net asset, the liabilities are included
Step 2: Determine the invested or contributed capital
If not, equal there is a possibility of goodwill or bonus
Step 3: Determine the capital credit or agreed capital
Step 4: Compute the bonus
If the problem is silent bonus, invested capital not equal to agreed capital = bonus
If there is bonus deduct either to the old partner or admission by investment
Step 5: Prepare the journal entries

Rule: Goodwill need to be explicitly stated in the problem.

Capital contribution not equal Capital Interest (Agreed Capital)

a. BONUS METHOD – transfer of capital from one or more partner to another partner
b. REVALUATION SURPLUS – the asset contributed of the partners are adjusted because it might
be over or under valueds
Undervaluation: Total Contributed capital < Total Agreed capital
Overvaluation: Total Contributed capital > Total Agreed capital

Note: if problem is silent use BONUS METHOD

Valuation
1. Assets
Cash  @ Face Value
A/R  @ Gross of ADA
Inventory  @ LCNRV
Land 1. Agreed value
Depreciable Asset 2. Fair Value
Non-current Asset 3. Appraised value
4. Book Value

2. Liabilities
- if the problem is silent: ignored/not assumed
3. Capital – excess goes to capital of partner