CoN ata a Group 1 Prepared by: Bautista, Denisse A.A partnership is an unincorporated association of two or more individuals to carry on, as co-owners, a business, with the intention of dividing the profits among ‘themselves,‘As compared to corporations, the formation of a partnership requires less formality, ‘The partnership has a juridical personality separate and distinct from the partners, Partners are agents of the partnership for the purpose of its business. A partner may legally bind the partnership to a contract or agreement that is in line with the partnerships operations. Each partner is a co-owner of the properties invested in the partnership and each has ‘an equal right with his partners to possess specific partnership property for partnership purposes. However, a partner has no right to possess a partnership property for ang other purpose without the consent of his partners.A partnership is created as a business and each partner Is entitled to his share in the partnership profit. A stipulation which excludes one or more partners from any share in the profits or losses is void, A partnership is easily dissolved: Lig the express wif of an porter: ico the termination of «cenit term stipulated inthe contracts iby any event whch makes it unlawful to carry ov the partnership te nen a apecii thing mich a parter had promised to contibet to the partnership parishes before the delve™™l exelons deathissivency or CMI Inter dletion of per ter In case of dissolution, the transfer of ownership, whether to a new or existing partner, requires the approval of the remaining partners, Each partner, including industrial ones, may be held personally liable for partnership debt after all partnership assets have been exhausted. If a partner is personally insolvent, his share in the partnership debt shall be assumed by the other solvent partners.The Conceptual Framework for Financial Reporting and the PFRSs are applicable to all reporting entities regardless of the type of organization. Thus, most accounting procedures used for other types of business organizations are also applicable to, partnerships, The main distinction lies on the accounting for equity. In addition, the accounting for partnerships should also comply with relevant provisions of the Civil Code of the, lippines.i A contract of partnership is consensual, It is created by the agreement of the partners which may be constituted in any form, such as oral or written. However, Articles 1771 and 1772 of the Philippine Civil Code require that a partnership agreement must be made ina public instrument and recorded with the Securities ‘and Exchange Commission (SEC) when: ©. immovable property or real rights are contributed to the partnership or b, the partnership has a copital of P3,000 or more,"When the capital or part thereof which a partner is bound to contribute consists of goods, their appraisal must be made in the manner prescribed in the contract of partnership, and in the absence of stipulation, it shall be made by experts chosen by the partners, and according to current prices, the subsequent changes thereof being for the account of the partnership.’7 All assets contributed to the par thapship ore initially measured ot f > An equity instrument is ol that evidences a residualinterest in the assets of an entity after deducting all of its liabilities, > Fair valve is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Type of Contribution] Measurement Cosh and cash equivalents Face amount Lower of Cost and Inventor 7 Net realizable valud Each partners capital account is credited for the fair value of his net contribution. No contribution shalll be valued at an amount that exceeds the contributions recoverable ‘amount. Each partners contribution shall be adjusted accordingly before recognition in the partnerships books,Recoverable amount - is “the higher between an asset's fair value less cost to sell and value in use, A partner's subsequent share in profits (losses) shall also be credited (debited) to his capital account. Likewise, permanent withdrawals of capital ore debited to the partner's capital account. withdrawals may be debited to the partner's drawings Temporary account. The sum of the balances in the partners’ individual capital accounts represents the total equity of the partnership. * Capital accounts + Drawings accounts + Receivable from/ Payable to 0 partnerroe coer) cael eee) creer drawings account era Cen er) ery Crees ee ed cor NS Dr. is xx o ig be ed DRAWINGS i Cr. cod xx xx Seer re) ey ce! cs ees Coen partnerJ@eeeeeeeeeecc The partnership may enter into a loan transaction with a partner. A loan extended by the partnership to a partner is recorded as a receivable from the partner, while a loan obtained by the partnership from a partner is recorded as a payable to the partner,A 8 | [| TToTat 230,000 170,000 ‘additional cash to bring the partners! capital balances proportionate to their profit and loss F aU Wihich partner should provide additional cash and how much si the adaltional cash contributionf+ Included in accounts receivable is an account amounting to P20,000 which is deemed uncollectible. + The inventory has an estimated selling price of P100,000 and estimated costs to sell of P10,000. + The partnership assumed a P10,000 unpaid mortgage on the land, + The building is under-depreciated by P25,000. + There is an unpaid mortgage of P15,000 on the building which B agreed to settle using his personal funds. + The note payable is stated at face amount. A proper valuation require: the recognition of a P15,000 discount on note payable. + A and B shall share in profits and losses on a 60:40 ratio, 4@spe@eeeee*ee*ee?ee7?e Requirement ( A PARTNERSHIP Cash 100,000 700,000 Accounts receivable (50k-20k) 30,000 - 30,000 Inventory (at cost. the lower amount) 80,000 80,000 Land 50,000 50,000 Building (120k-25k) 95,000 95,000 TOTAL 210,000 145,000 355,000 Note payable, net (60k-15k) (45,000) (45.000) Mortgage payable ~land (10,000) (10,000) TADJUSTED CAPITALBALANCES 165,000 _185.000____300,000_Requirement (b) Using A's capital first, let us determine if B's capital contribution has any deficiency A copital 165,000 Divide by: Profit (loss) shoring ratio of A 60% Total 275,000 Multiply by: B's profit (loss) sharing ratio 40% Minimum capital required of B 710,000 B's copital 135,000 DEFICIENCY IN B's CAPITAL CONTRIBUTION = CONCLUSION: B's contribution has no deficiency.Requirement (b) Now using B's capital, let us determine if A's capital contribution has any deficiency. B, copital 135,000 Divide by: Profit (loss) sharing ratio of A 40% Total 337,500 Multiply by: A's profit (loss) shoring ratio 60% Minimum capital required of A 202.500 A's copital 165,000 DEFICIENCY IN A’s CAPITAL CONTRIBUTION 37,500 CONCLUSION: Partner A shall contribute additional cash of P37.500 to make his contribution proportionate to his profit-sharingAn accounting problem exists when a partner's capital account is credited for an amount greater than the fair value of his contributions. For instance, a partnership agreement may allow a certain partner who is bringing in expertise or special skill to the partnership to have a capital credit greater than the fair value of his contributions, In such case, the additional credit to the partner's capital (ie., the ‘bonus’) is accounted for. as a deduction from the capital of the other partners, This accounting method is called the “bonus” method, Although, the credit to the partner's capital may vary due to a ‘bonus, the corresponding debit to the asset account must still be equal to the fai value of the contribution, The difference between the amount ste:| SEne A and B agreed to form o par-smershi contributed P40,000 cash whileBeontributed equipment with fair value of P100,000, However, due to the expertise that A wil be bringing to the partnership, the partners ‘agreed that they should initially have on equal interest in the partnership capital Actual contributions Bonus A 40,000 140kx50% zee B__100,000_140kx50%' Total 140,000 70,000 740,000 10. Cash Equipment ‘A. Capital (40k+30k bonus) [40,000 f100,000 B, Copital (100k-30k bonus) [70.00 [79.000}Aportnership agreement may stipate a certoin ratio to be maintained by the partners representing their specific interests ni the equity of the partnership. This stipulation may give rise to adjustments to the initial contributions of the partners, Since technically there is no "bonus" being given to a certain partner, ony increase or decrease to the capital credit of o partner is not deducted from his co"parners’ capital accounts. Instead, the capital adjustment is accounted for as either: ‘©, Cash settlement among the partners’ or b, Additional investment or withdrawal of investment of a partnerA and B agreed to form a partnership. The partnership agreement stipulates the following ‘Initial capital of P140,000. +A 60:40 interest in the equity of the partnership. A contributed P100,000 cash while B contributed P40,000 cash. Requirement: Which partner shall provide additional investment (or withdraw part of his investment) in order to bring the partners’ capital credits equal to their respective interests in the equity of the partnership?