ADVANCED ACCOUNTING

ACCOUNTING FOR THE FORMATION, OPERATION AND

DISSOLUTION OF PARTNERSHIP

BY PROF. CESAR V. RAMIREZ, CPA. MBA, CESO IV,

FRIACC, BSA PROGRAM CHAIR
OPENING PRAYER
 FORMATION OF A PARTNERSHIP
• The partnership may be formed in three different
ways, namely:
– Formation for the first time
– Conversion of sole proprietorship to partnership
• A sole proprietor allows another person without
business
• Two or more sole proprietors form partnership
– Admission of a new partner
 FORMATION OF A PARTNERSHIP
A. Formation for the First Time- Investment
a. Cash Investment
Cash 200,000
A, Capital 100,000
B, Capital 100,000
To record the investment of A and B.
 FORMATION OF A PARTNERSHIP
A. Formation for the First time- Non-cash Investment
A and B form a partnership for the first time and invest the following:
A: Cash, P 70,000
B: Merchandise with a cost of P 50,000-Fair Value is P 60,000
• Journal Entries
Cash 70,000
Merchandise 60,000
A, Capital 70,000
B, Capital 60,000
To record the investments of A and B.
 FORMATION OF A PARTNERSHIP
• Bonus or Goodwill Methods on Initial Investments
– Valuation problem arise when partners agree on capital interests
that are not equal to their net assets invested.
– Using the preceding example on investments of A and B of P 70,000
and P 60,000, respectively. Assuming, they have agreed to have
equal interest in the partnership.
– Bonus method
– Journal entry
A, Capital 10,000
B, Capital 10,000
To recognize bonus to B based on equal interest agreed upon.
 FORMATION OF A PARTNERSHIP
• Goodwill Method
– Journal Entry
Goodwill 10,000
B, Capital 10,000
To recognize goodwill based on the equal interest agreed upon.
 FORMATION OF A PARTNERSHIP
B. Sole Proprietor and Another Person Form a Partnership
- Assuming that A has an existing retail business with a
Statement of Financial Position as of July 1, 2020 as follows:
Assets
Cash P 60,000
Accounts Receivable 50,000
Inventory 70,000
Equipment P 40,000
Less: Accumulated depreciation 4,000 36,000
Total Assets P 216,000
Liabilities and Equity
Accounts payable P 86,000
A, Capital 130,000
Total Liabilities and Equity P 216,000
 FORMATION OF A PARTNERSHIP
The audit and appraisal of the assets and liabilities shows the
following:
1. Allowance for bad debts of P 5,000 is to be provided.
2. Inventory is to be recorded at market value of P 80,000
3. The equipment has a fair value of P 35,000
4. P 2,000 of accounts payable has not been recorded.
A offers B an interest in the business with P 100,000 cash
contribution for a one-third(1/3) interest in the business.
 FORMATION OF A PARTNERSHIP
• Journal Entries-July 1
a. Inventory 10,000
Accumulated depreciation 4,000
Equipment 5,000
Allowance for Bad Debts 5,000
Accounts Payable 2,000
Jose Capital 2,000
To record the adjustments in the assets and liabilities of A.
b. Cash 100,000
B, Capital 100,000
To recognize the capital contribution of B.
 FORMATION OF A PARTNERSHIP
Statement of Financial Position- New Partnership
Assets
Cash P160,000
Accounts receivable P 50,000
Less: Allowance for bad debts 5,000 45,000
Inventory 80,000
Equipment 35,000
Total assets P 320,000
Liabilities and Equity
Accounts payable P 88,000
A, capital 132,000
B, capital 100,000
Total Liabilities and Equity P 320,000
 OPERATIONS OF A PARTNERSHIP
• ILLUSTRATIVE PROBLEMS IN THE DISTRIBUTION OF PROFITS
• Assume that on January 1, 2020, A and B formed a
partnership with an investment of P 40,000 by A and P 60,000
by B. For the first year of operation, the partnership earned P
60,000. The following shows changes in capital accounts in
2020
A B

CAPITAL BALANCES, JANUARY 1, 2020 P 40,000 P 60,000

ADDITIONAL INVESTMENTS, MARCH 1 20,000 50,000
ADDITIONAL INVESTMENTS, AUGUST 1 20,000 40,000
WITHDRAWAL, OCTOBER 1 (20,000) -
WITHDRAWAL, NOVEMBER 1 - (50,000)
CAPITAL BALANCES, DECEMBER 31, 2020 P 60,000 P 100,000
 OPERATIONS OF A PARTNERSHIP
• DIVISION OF PROFIT OR LOSS EQUALLY
• Journal entries
Income Summary 60,000
A, Capital 30,000
B, Capital 30,000
To record division of net income in 2020.
• Assuming there is a net loss of P 10,000, the entry is as follows:
A, Capital 5,000
B, Capital 5,000
Income Summary 10,000
To record the division in net loss in 2020.
 OPERATIONS OF A PARTNERSHIP
• ARBITRATY(UNEQUAL) SHARING
• Using the same example, assume A and B agreed to share
profits 60% and 40%, respectively.
• Journal Entry
Income Summary 60,000
A, Capital 36,000
B, Capital 24,000
To record the distribution of net profit in 2020.
 OPERATIONS OF A PARTNERSHIP
• OTHER PROFIT AND LOSS SHARING METHODS
– CAPITAL BALANCES
• ORIGINAL CAPITAL
• BEGINNING CAPITAL
• ENDING CAPITAL
• AVERAGE CAPITAL
– INTEREST TO PARNER’S CAPITAL; REMAINING BALANCE ON SPECIFIED
RATIO
– SALARIES TO PARTNER/S; REMAINING BALANCE ON SPECIFIED RATIO
– BONUS TO MANAGING PARTNER BASED ON NET INCOME
 OPERATIONS OF A PARTNERSHIP
• BONUS TO MANAGING PARTNER BASED ON NET INCOME
– NET INCOME BEFORE SALARIES, INTEREST, AND BONUS
– NET INCOME BEFORE SALARIES AND INTEREST BUT AFTER BONUS.
– NET INCOME AFTER SALARIES AND INTEREST BUT BEFORE BONUS.
– NET INCOME AFTER SALARIES, INTEREST ANDD BONUS.
 OPERATIONS OF A PARTNERSHIP
• ILLUSTRATIVE PROBLEM
• Assume that the partnership of A and B has a net income of P
190,200 before salaries, interest and bonus to partners. The
partnership contract provides for the following:
– Salaries to A and B of P 30,000 each
– Interest on capital account balances
• A- P 7,000
• B- P 3,200
– Bonus to A- 20% of net income
– Remaining profit after salaries, interest and bonus, equally
 OPERATIONS OF A PARTNERSHIP
• NET INCOME BEFORE SALARIES, INTEREST, AND BONUS
– Net income before salaries, interest and bonus P 190,200
– Bonus percentage 20%
– Bonus P 38,040
– SCHEDULE OF PROFIT DISTRIBUTION
A B TOTAL
SALARIES P 30,000 P 30,000 P 60,000
INTEREST 7,000 3,300 10,200
BONUS 38,040 38,040
REMAINDER, EQUALLY 40,980 40,980 81,960
TOTALS P116,000 P74,180 P 190,200
 OPERATIONS OF A PARTNERSHIP
• NET INCOME BEFORE SALARIES AND INTEREST, BUT AFTER BONUS
– Bonus + Income After Bonus= P 190,200
– Let X = Income After Bonus
– 0.20X = Bonus
– Then 1.20 X= P 190,200 Income Before Bonus
– X= P 190,200/1.20
– X= P 158,200
– 0.20X= P 31,700
• Alternative Computation
– Net income before salaries, interest and bonus P 190,200=120%
– Net income after bonus( P 190,200/120%) P 158,500= 100%
– Bonus P 31,700= 20%
 OPERATIONS OF A PARTNERSHIP
• SCHEDULE OF PROFIT DISTRIBUTION
A B TOTAL

SALARY P 30,000 P 30,000 P 60,000

INTEREST 7,000 3,200 10,200
BONUS TO A 31,700 - 31,700
REMAINDER, EQUALLY (P190,200-P101,900) 44,150 44,150 88,300
TOTALS P 112,850 P 77,350 P 190,200
END OF PRESENTATION
• THANK YOU