BUSACT2 Lecture 2 Partnership Formation

Partnership Formation
PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

School of Accountancy and Business
Asia Pacific College
Learning Outcomes:
1. Define partnership
2. Compare and contrast partnership from
proprietorship
3. Identify the characteristics of a partnership
4. Account for partnership transactions

Partnership, defined
Article 1767, Chapter 1, Title IX, Book IV of
Republic Act 386
(Civil Code of the Philippines)
A contract whereby two or more persons bind
themselves to contribute money, property, or
industry into a common fund with the
intention of dividing the profits among
themselves

Partnership
 Association of two or more natural persons
 Combines:
1. Capital (money and/or property)
2. Talent (special skills)
3. Experience
4. Business

Articles of Co-Partnership, contents
1. Name, location and nature of the business
2. Name, amount of investment and duties of each
partner
3. Manner new partner is admitted
4. Manner profits and losses are divided
5. Withdrawals of assets by the partners
6. Manner of settling a retiring partner
7. Manner of liquidating the business

Characteristics of a Partnership
1. Limited Life
2. Mutual Agency
3. Unlimited Liability
4. Co-Ownership of Property
5. Mutual Participation in profits
6. Legal Personality
7. Income Taxation

Kinds and Classifications of
Partnerships
Classification:
As to ACTIVITY
Kinds:
1. Service
2. Merchandising (Trading)
3. Manufacturing

Partnerships
Classification:
As to OBJECT
Kinds:
1. Universal Partnership
2. Particular Partnership

Partnerships
Classification:
As to LIABILITY OF PARTNERS
Kinds:
1. General Partnership
2. Limited Partnership

Partnerships
Classification:
As to DURATION
Kinds:
1. Partnership at Will
2. Partnership with a Fixed Term

Partnerships
Classification:
As to REPRESENTATION TO OTHERS
Kinds:
1. Ordinary Partnership
2. Partnership by Estoppel

Partnerships
Classification:
As to LEGALITY OF EXISTENCE
Kinds:
1. De Jure partnership
2. De Facto partnership

Partnerships
Classification:
As to PUBLICITY
Kinds:
1. Secret Partnership
2. Open Partnership

Kinds and Classifications of Partners
Classification:
As to CONTRIBUTION
Kinds:
1. Capitalist Partner
2. Industrial Partner
3. Capital-Industrial Partner

Classification:
As to LIABILITY
Kinds:
1. General Partner
2. Limited Partner

Classification:
As to MANAGEMENT
Kinds:
1. Managing Partner
2. Silent Partner

Classification:
OTHER CLASSIFICATIONS
Kinds:
1. Liquidating Partner
2. Nominal Partner
3. Ostensible Partner
4. Secret Partner
5. Dormant Partner
Accounting for Partner’s Investment
Assets invested by the partners and
Liabilities assumed by the partnership
are recorded in the books of the
partnership at fair market values
at date of investment

Example
Case 1: Cash Contribution Only
“SYCIP, GORRES and VELAYO

formed a partnership by
contributing P50,000 cash
each.”
Journal Entry Case 1
GENERAL JOURNAL
Date Particulars Ref Debit Credit
3 1Cash 150,000
Sycip, Capital 50,000
Gorres, Capital 50,000
Velayo, Capital 50,000
initial investment

Example
Case 2: Cash and Non-Cash Contribution
“On September 1, LAYA contributed cash–P100,000

and inventories–P50,000; MANABAT contributed
cash–P50,000 and equipment–P50,000; and
SALGADO contributed cash–P25,000, inventories–
P15,000, and equipment–P10,000.”

GENERAL JOURNAL
9 1Cash 175,000
Inventories 65,000
Equipment 60,000
Laya, Capital 150,000
Manabat, Capital 100,000
Salgado, Capital 50,000
initial investment

Example
Case 3: Cash, Non-Cash and Skills Contribution
“On October 1, FERNANDEZ contributed P150,000

cash, SANTOS invested P50,000 cash and P50,000
equipment, and LOPEZ contributed special skills
and talent.”

GENERAL JOURNAL

10 1Cash 200,000
Equipment 50,000
Fernandez, Capital 150,000
Santos, Capital 100,000
initial investment


GENERAL JOURNAL

10 1Lopez is admitted into the
partnership as an industrial
partner to share #% in the
profits


Example
SPECIAL ACCOUNTING PROBLEM
“PONCE and CASTRO formed a partnership

by contributing P500,000 and P600,000
cash, respectively. They agreed that their
capital balances should be equal after the
formation of the partnership.”
Example
GENERAL JOURNAL

xxxxCash 1,100,000
Ponce, Capital 550,000
Castro, Capital 550,000
initial investment


1. Two or More Individuals
2. Individual and an existing Sole
Proprietor
3. Two or More Sole Proprietors

Individual and an existing
Sole Proprietor
Choices:
1. Use the Books of Accounts of the Sole
Proprietor
2. Use a new set of Books of Accounts
Individual and an existing Sole Proprietor
– Use Existing Books of Accounts
Steps:
1. Adjust the Books of Accounts of the
Sole Proprietor
2. Record the investment of the Individual

Individual and an existing Sole Proprietor
– Use New Set of Books of Accounts
Steps:
1. Adjust and Close the Books of Accounts of the Sole
Proprietor
2. Transfer the assets and liabilities of the sole
proprietor into the new books of the partnership
3. Record the investment of the Individual
Two or More Sole
Proprietors
Choices:
1. Use the Books of Accounts of ANY of
the Sole Proprietors
2. Use a new set of Books of Accounts
Two or More Sole Proprietors – Use
Existing Books of Accounts of Any of the
Sole Proprietors
Steps:
1. Adjust the Books of Accounts of EACH of the Sole Proprietors
2. Close the Books of Accounts of the Other Sole Proprietor
3. Transfer the assets and liabilities of the Other Sole Proprietor

Two or More Sole Proprietors – Use New
Set of Books of Accounts
Steps:
1. Adjust and Close the Books of Accounts of ALL the
Sole Proprietors
2. Transfer the assets and liabilities of EACH of the
sole proprietors into the new books of the
partnership

End of Lecture
We’ll have a five-minute break

Quick Review 1:
James and Laura are forming a partnership. James will invest a
truck which cost him P17,500 five years ago and which now
have a fair market value of P14,000. Laura will contribute a
building with a book value of P30,000 and a fair market value
of P42,000 with a mortgage of P15,000.
At what amount should the building be recorded in the books

of the partnership?
A. P30,000
B. P27,000
C. P42,000
D. P45,000
Quick Review 2:
Norton and Casper are forming a partnership. Norton will
invest a truck with a book value of P20,000 and a fair market
value of P14,000. Casper will invest a building with a book
value of P30,000 and a fair market value of P42,000 with a
mortgage of P15,000.
What amount should be recorded in Casper’s capital account?

A. P30,000
B. P27,000
C. P42,000
D. P45,000
Quick Review 2:
Fair market value of the building P42,000
Mortgage liability 15,000
Casper’s capital account balance P27,000

Quick Review 3:
David and Ricky are combining their respective
businesses. Each of their books show the following
accounts and balances:
David Ricky
Cash 10,000 15,000
Receivable 15,000 20,000
Inventory 10,000 5,000
Prepaid Expenses 5,000 5,000
Equipment 20,000 15,000
Accounts Payable 25,000 20,000

Quick Review 3:
It has been agreed to provide an allowance for bad debts
equal to 5% of the receivable of each partner and the
equipment contributed by Ricky is over depreciated by P2,000.
How much is the capital account of each partner?

A. David – P34,250; Ricky – P39,000
B. David – P35,750; Ricky – P43,000
C. David – P35,000; Ricky – P40,000
D. David – P34,250; Ricky – P41,000

Quick Review 3:
David Ricky
Cash P10,000 P15,000
Equipment 20,000 17,000
Accounts Payable (25,000 ) (20,000 )
Allow for bad debts (750) (1,000)
Capital Balances P34,250 P41,000

Quick Review 4:
David Ricky
Cash 10,000 15,000
Equipment 20,000 15,000

Quick Review 4:
equipment contributed by Ricky is over depreciated by
P2,000.
How much is the total assets of the partnership?

A. P120,250
B. P118,250
C. P123,750
D. P120,000
Quick Review 4:
David Ricky Total
Cash P10,000 P15,000 P25,000
Receivable 15,000 20,000 35,000
Inventory 10,000 5,000 15,000
Prepaid Expenses 5,000 5,000 10,000
Equipment 20,000 17,000 37,000
Allow for bad debts (750) (1,000) (1,750)
Total Assets P120,250

Quick Review 5:
David Ricky
Cash 10,000 15,000
Equipment 20,000 15,000

Quick Review 5:
equipment contributed by Ricky is over depreciated by
P2,000.
Refer to Quick Review #3, How much is the net assets of the
partnership?
A. P73,250
B. P78,750
C. P75,000
D. P75,250
Quick Review 5:
David Ricky Total
Cash P10,000 P15,000 P25,000
Receivable 15,000 20,000 35,000
Inventory 10,000 5,000 15,000
Prepaid Expenses 5,000 5,000 10,000
Equipment 20,000 17,000 37,000
Accounts Payable (25,000 ) (20,000 ) (45,000)
Allow for bad debts (750) (1,000) (1,750)
Net Assets P75,250

Quick Review 6:
As part of the initial investment, Oswald contributes accounts
receivable that had a balance of P25,000 in the accounts of a sole
proprietorship. Of this amount, P1,250 is completely worthless.
For the remaining accounts, the partnership will establish a
provision for possible future uncollectible accounts of P750. The
amount debited to Accounts Receivable for the new partnership
is
A. P23,000
B. P25,000
C. P24,250
D. P23,750

Exercise 1
Tonto Company and Ranger Company decide to merge their
proprietorships into a partnership called Westward Ho
Company. The statement of financial position of Ranger
Company shows:
Accounts Receivable P15,000

Less: Allowance for doubtful accounts 1,500 P13,500
Equipment P20,000
Less: Accumulated depreciation 10,000 P10,000

Exercise 1
The partners agree that the net realizable value of the
receivables is P12,500 and that the fair market value of the
equipment is P15,000.
What is the journal entry to record the investment of Ranger

Company in the new books of the partnership?
GENERAL JOURNAL
xx xxAccounts Receivable 15,000
Equipment 15,000
Allowance for Doubtful Accts 2,500
Ranger, Capital 27,500
Exercise 2
Ed and Frank form a partnership by combining the assets of their
separate businesses. Ed contributes accounts receivable with a
face amount of P50,000 and equipment with a cost of P180,000
and accumulated depreciation of P100,000. The partners agree
that the equipment is to be priced at P70,000, that P2,500 of the
accounts receivable are completely worthless and are not to be
accepted by the partnership, and that P1,500 is a reasonable
allowance for the uncollectibility of the remaining accounts
receivable. Frank contributes cash of P20,000 and merchandise
inventory of P49,500. The partners agree that the merchandise
inventory is to be priced at P51,000.

Exercise 2
Journalize the entries to record in the partnership accounts
(a) Ed's investment
GENERAL JOURNAL
xx xxAccounts Receivable 47,500
Equipment 70,000
Allowance for Doubtful Accts 1,500
Ed, Capital 116,000
initial investment

Exercise 2
Journalize the entries to record in the partnership accounts
(b) Frank's investment
GENERAL JOURNAL
xx xxCash 20,000
Merchandise Inventory 51,000
Frank, Capital 71,000
initial investment

Exercise 3:
Arnel invites Carmela into his merchandising business on
September 1, 2010. As of this date, the trial balance of
Arnel has the following accounts and balances:
Debit Credit
Cash on Hand & in Bank 83,200
Accounts Receivable 384,000
Inventory 576,000
Accounts Payable 198,400
Arnel, Capital 844,800

Exercise 3:
The partners agreed that the following adjustments in
the accounts of Arnel be taken up to establish the capital
interest of Arnel:
1. An allowance for bad debts of 2% of Accounts
Receivable must be established
2. The inventory is to be valued at P777,600
3. Prepaid expenses of P15,975 and an unrecorded
liability of P8,600 are to be recognized
4. Carmela is to invest sufficient cash to have an equal
capital interest with Arnel

Exercise 3:
Requirements:
1. Journal entries and Statement of Financial Position if
the partnership will use the books of Arnel
2. Journal entries and Statement of Financial Position if
the partnership will use a new set of books of
accounts

Solution to Exercise 3:
Requirement 1: Journal Entries
Books of Arnel
Debit Credit
Inventory 201,600
Prepaid Expenses 15,975
Allowance for bad debts 7,680
Accrued Expenses 8,600
Arnel, Capital 201,295
to adjust accounts
Cash 1,046,095
Carmela, Capital 1,046,095
initial investment

Requirement 1: Statement of Financial Position
ARNEL AND CARMELA Partnership
Statement of Financial Position
As of September 1, 2010
Cash P1,129,296 Accounts Payable P198,400
Accounts Receivable 384,000 Accrued Expenses 8,600
Allow for BD (7,680) Arnel, Capital 1,046,095
Inventory 777,600 Carmela, Capital 1,046,095
Total Assets P2,299,190 Total Liab & Capital P2,299,190

Books of the Partnership
Debit Credit
Cash 83,200
Inventory 777,600
Accrued Expenses 8,600
Arnel, Capital 1,046,095
initial investment

Debit Credit
Cash 1,046,095
Carmela, Capital 1,046,095
initial investment

ARNEL AND CARMELA Partnership
Cash P1,129,296 Accounts Payable P198,400
Accounts Receivable 384,000 Accrued Expenses 8,600
Allow for BD (7,680) Arnel, Capital 1,046,095
Inventory 777,600 Carmela, Capital 1,046,095

Exercise 4:
Erick and Sam organized a partnership on September
30, 2010. They agreed to invest equal amount of
capital into the business. Erick will contribute
P307,200 cash and inventory valued at P460,800.

Exercise 4:
Sam will contribute the following assets of his business
along with the transfer to the partnership of his
liabilities. Sam will contribute sufficient cash to bring his
capital equal to Erick.
Fair Market
Book Value Value
Accounts Receivable P716,800 P716,800
Allowance for Bad Debts 30,720 64,000
Inventory 76,800 102,400
Office Equipment, net 102,400 64,000

Exercise 4:
Requirements:
1. Journal entries if the partnership will use a new set of
books of accounts
2. Prepare the Statement of Financial Position of the new
partnership as of September 30, 2010

Debit Credit
Cash 179,200
Inventory 102,400
Equipment 64,000
Sam, Capital 768,000
initial investment

Debit Credit
Cash 307,200
Inventory 460,800
Erick, Capital 768,000
initial investment

SAM & ERICK Partnership
Cash P486,400 Accounts Payable P230,400
Allow for BD (64,000) Sam, Capital 768,000
Inventory 563,200 Erick, Capital 768,000
Equipment 64,000

Exercise 5:
On October 1, 2010, Mariel and Robin decided to pool their
businesses into one. The new partnership will take over the
assets and assume the liabilities of their respective
businesses. Capitals are to be based on the net assets
transferred subject to the following adjustments:
1. Robin’s inventory is to be valued at P35,000
2. 5% allowance for bad debts on each partner’s receivables
3. Accrued expenses of P2,000 are to be recognized in
Mariel’s books

Exercise 5:
Mariel Robin
Cash P18,750 P11,250
Accounts Receivable 45,000 37,500
Inventory 40,000 30,000
Equipment 25,000 30,000
Accumulated Depreciation 11,250 3,750
Total P117,500 P105,000
Accounts Payable P34,500 P25,000

Capital 83,000 80,000
Total P117,500 P105,000

Exercise 5:
Requirements:
1. Prepare the Statement of Financial Position of the new
partnership as of October 1, 2010

Requirement 1: Balance Sheet
MARIEL & ROBIN Partnership
As of October 1, 2010
Cash P30,000 Accounts Payable P59,500
Accounts Receivable 82,500 Accrued Expense 2,000
Allow for BD (4,125) Mariel, Capital 78,750
Inventory 75,000 Erick, Capital 83,125
Equipment 40,000
Total Assets P223,375 Total Liab & Capital P223,375


BUSACT2 Lecture 2 Partnership Formation

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

BUSACT2 Lecture 2 Partnership Formation

Uploaded by

Copyright:

Available Formats

Partnership Formation

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

“SYCIP, GORRES and VELAYO

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

“On September 1, LAYA contributed cash–P100,000

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

“On October 1, FERNANDEZ contributed P150,000

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

Date Particulars Ref Debit Credit

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

Date Particulars Ref Debit Credit

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

“PONCE and CASTRO formed a partnership

Date Particulars Ref Debit Credit

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

We’ll have a five-minute break

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

At what amount should the building be recorded in the books

What amount should be recorded in Casper’s capital account?

Casper’s capital account balance P27,000

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

How much is the capital account of each partner?

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

How much is the total assets of the partnership?

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

Accounts Receivable P15,000

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

What is the journal entry to record the investment of Ranger

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

PowerPoint Lecture Presentation: Prof. OSLER T. AQUINO, CPA, MBA

Total Assets P2,299,190 Total Liab & Capital P2,299,190