PARTNERSHIP: BASIC

CONCEPTS AND
FORMATION
PARTNERSHIP AS DEFINED IN THE CIVIL
CODE OF THE PHILIPPINES

A Partnership is an organization where 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. (New Civil Code, Art. 1767)
FEATURES OF PARTNERSHIP

1. Voluntary Association. Individuals, by their own free will, agree to join

together and form partnership.
2. Legal entity. It has a juridical personality separate and distinct from the
partners. (Art. 1768) It can acquire, sell or dispose properties, incur obligations
and transact business in its name.
FEATURES OF PARTNERSHIP

3. Co-ownership of property. Partnership assets are jointly owned by the

partners. Once assets are invested and or acquired by the partnership, these
cease to become personal properties and intead become joint property of all the
partners. Partners have a claim on all partnership assets based on their capital
accounts and share in partnership earnings (or base on their agreement).
FEATURES OF PARTNERSHIP

4. Taxable entity. The income of ordinary partnership and corporations are

taxed at 30% but was reduced to 20% effective 2021 for taxable income which
is not morethan P5,000,000. Exempted from tax is general professional
partnership which is formed for the sole purpose of excercising their common
profession, such as accounting, tax, law, medicine and engineering. (NIRC,
Sec. 20 and 24). The professionals are taxed as individual taxpayers.
FEATURES OF PARTNERSHIP

5. Mutual agency. Each partner is fully authorized agent of the partnership.

Acts of the partners within the scope of the partnership are binding when
transacting partnership business. The partnership can be sued, together with the
partners, by third parties when a partner commits a wrongful act or a breach of
trust. (Art. 1818)
FEATURES OF PARTNERSHIP

6. Limited life. Legally, a partnership can operate for an indefinite period of time.
However, in practice, it can easily be dissolved or terminated with the mere
withdrawal, incapacity or death of a partner. (Art. 1830 – 31)
7. Unlimited liability. Each partner personally and individually liable for all
partnership liabilities. In the event that cash flow problems occur and partnership
assets are not sufficient to liquidate partnership liabilities, the personal assets of the
partners should be used to help settle the company’s obligations. (Art. 1791 and
1835)
ELEMENTS OF A PARTNERSHIP

1. There must be a valid contract, whether oral or written.

2. A partnership must be put up by persons having legal capacity to contract.
3. Their contributions must be in the form of money, property or service.
4. The purpose of the business is to divide the profit among them.
ELEMENTS OF A PARTNERSHIP

With regards a written or oral contract, the law does not provide a mandatory
requirement for this, not unless the investment of the partner is in the form of
immovable property, in which case a public instrument is necessary. (Art.
1667)
ELEMENTS OF A PARTNERSHIP

Additionally, Art. 1772 provides: Every contract of partnership having a capital

of three thousand pesos (P3,000) or more, in money or property, shall appear in
a public instrument which must be recorded in the office of the SEC. However,
failure to do so does not negate the recognition of the partnership as a juridical
personality.
ROLE OF PARTNERS

1. The partners are co-owners of the partnership property. It means that when a
partner invests his land or building, this ceases to be his personal property.
Instead, this becomes joint property of all the partners.
ROLE OF PARTNERS

2. The partners have unlimited liability. The partners become individually

liable for all partnership debts in the event that the partnership assets are not
sufficient to cover up its liabilities. (Art. 1791) This means that in the event
partnership assets are inadequate to settle the claims of the partnership
creditors, these creditors can seize the personal properties of anyone of the
partners.
3. The partnership is bound by the acts of any of the partners since they are
considered agents of the partnership for the purpose of carrying its activities.
KINDS OF PARTNERSHIPS

1. As to liability -
General Partnership is one where all partners are general partners with
unlimited liability and are therefore liable to partnership creditors even up to
the extent of their personal properties especially when partnership becomes
insolvent.
KINDS OF PARTNERSHIPS

1. As to liability -
Limited Partnership is composed of at least one general partner with the others
as limited partners who are liable to partnership creditors only to the extent of
their investment in the partnership. This type of partnership has two classes of
partners: General and Limited. (Art. 1816 and 1843)
KINDS OF PARTNERSHIPS

2. As to property –
Universal Partnership of Property is one where all the partners contribute all
their properties into a common fund. (Art. 1778 of the New Civil Code)
Univeral Partnership of Profits is one where the partners contribute all what
they will receive as a result of their worker service rendered during the lifetime
of the partnership. The partners retain ownership over their present or future
property. (Art. 1780)
KINDS OF PARTNERS

1. General Partner is one who manages the partnership, contributes property

or service and has unlimited liability assuming risk of loss personal property in
the event partnership becomes insolvent.
Limited Partner is one who invests cash or property, has no unlimited liability
and has no active role in the management of the partnership.
KINDS OF PARTNERS

2. Capitalist Partner is one who contributes money or property into the

partnership fund, whereas an Industrial Partner is one who contributes
industry or service only.
3. Real Partner is one who is an actual partner, whereas a Nominal Partner is
a partner in name only.
KINDS OF PARTNERS

4. Ostensible Partner is one who is known to the public that he is a partner,

whereas a Secret Partner is one who is not known as such to the public.
5. Universal Partner is one whose participation extends to the entire business
whereas a Particular Partner is one whose participation is limited to a unit or
part of a business.
KINDS OF PARTNERS

Take note that an Industrial Partner is also a general partner, with unlimited
liability and is not allowed to engage in any other kind of business unless
expressly authorized by the other partners. (Art. 1789)
PARTNERSHIP CONTRACT

An agreement concerning formation, operation, dissolution, and liquidation of

the partnership is embodied in a contract called Articles of Co-Parnership.
Although a verbal agreement is valid, it is advisable to put it in writing as
conflicts and disagreements may easily arise because of the number of persons
involved. The contract will act as a form of governance of partnership
avtivities and will clearly reflect the relationships of the partners among each
other and with third parties.
PARTNERSHIP CONTRACT

An article 1772 of the New Civil Code requires that contributions of partners in
cash or properties should be in a public intrument duly registered with the SEC if
it amounts to three thousand pesos or more. The SEC is a government agency
which supervises partnership and corporate forms of businesses. Registration
with the SEC is necessary as a condition for the issuance of a license to engage in
business or trade. In this way, tax liabilities of partnership as well as corporate
businesses cannot be evaded. The public can also determine more accurately the
financial status of these businesses before dealing with them as these businesses
are required to prepare periodic financial statements.
PARTNERSHIP CONTRACT

The following information are contained in the Articles of Co-Partnership:

1. Name of partnership
2. Principal place of business
3. Date of effectiveness and life of the partnership
4. Purpose of the partnership
5. Names, addresses and contributions of the partners
PARTNERSHIP CONTRACT

The following information are contained in the Articles of Co-Partnership:

6. Manner of management of the partnership
7. Manner of dividing the profits among the partners
8. Periodic withdrawals allowed for a partner
9. Manner of liquidating the partnership with the rights and duties of the
partners.
10. Arbitration of disputes.
RIGHTS OF A PARTNER

1. A partner has a right over specific partnership property.

2. A partner has a right to share in the profits resulting from business operation.
3. A partner has a right to share in the remaining assets upon partnership
liquidation after the patnership creditors have been paid.
4. A partner has a right to co-manage the partnership.
5. A partner has a right to ask that the books be kept in the principal place of
business subjects to inspection at a reasonable time.
BUSINESS ENTITY CONCEPT

The entity concept emphasizes the view that a business unit such as a
partnership, sole proprietorship or a corporation should be treated as distinct
and separate from the owner, partners or shareholders. As such, only
transactions of the business are recorded in its books. A partnership acquires,
holds, disposes properties in its own name; it enters into contracts with others
through the partners who are merely acting as its agents.
BUSINESS ENTITY CONCEPT

The partnership cannot be held liable when a partner enters into a contract with
a third party on activities not within the bounds of the partnership as provided
in its articles of co-partnership. Care therefore should be taken in recording its
assets, liabilities, revenues, expenses and that what is personal to the partners
or not within the bounds of the activities of the partnership should be excluded
from the partnership books.
BUSINESS ENTITY CONCEPT

In contrast, the proprietary theory emphasizes the view of the individual

partners as owners of the net assets of the business especially when salaries are
given to them, or when obligation to partnership creditors extend to their
personal properties, or when the original partnership is dissolved and the
consent of the partners are required ni admitting a new partner.
ACCOUNTING FOR PARTNERSHIP

The accountant must have a sufficient knowledge of the legal provisions

regarding a partnership as these would affect certain aspects of partnership
accounting such as investments of the partners, dissolution of the partnership,
distribution of profit or loss to the partners and liquidation of the partnership.
In addition, the accountant uses the Articles of Co-Partnership as a guide in
recording transactions regarding the partners’ capital contributions, distribution
of profit or loss, dissolution and liquidation.
PARTNERS’ EQUITY

The rights of the partners over the net assets of the business is called Partner’s
equity. Each partner’s equity is represented by two accounts: Partner’s Capital
and Partner’s Drawings. This is the same rule that one applies in a sole
proprietorship except that there are more accounts in a partnership since there
are two or more partners involved. Thus, in a partnership of Abad and Basa, the
general ledger will show the following partners’ equity: Abad, Capital; Abad,
Drawing; Basa, Capital; Basa, Drawing.
PARTNER’S CAPITAL ACCOUNT

The capital account represents original investment which becomes its

permanent or fixed interest. This could change only if additional investment
are made or when non-current assets are revalued. The following transactions
affect this account:
Investment – contribution made are credited to each partner’s capital account
to increase the partner’s equity.
Permanent Withdrawal – withdrawal of capital are debited to each partner’s
capital account to decrease the partner’s equity.
PARTNER’S CAPITAL ACCOUNT

To illustrate:
Assume that Abad and Basa opened Sun Internet Cafe on January 1, 2021. The
following transactions took place:
January 1: Initial cash investment of P300,000 from each partner.
March 1: Abad made another cash investment of P150,000.
June 1: Basa made a permanent cash withdrawal of P25,000.

(See excel file for the journal entries)

PARTNER’S CAPITAL ACCOUNT
Partners’ Equity:
Abad, Capital P450,000
Basa, Capital P275,000
Total P725,000
These balances should also be reflected in the Article of Co-Partnership as their
permanent interest. Partners usually make investment only once or twice over
the lifetime of the partnership. If additional investment is made which will
affect the other provisions of the partnership contract, such as the agreement on
profit distribution, there should have been a provision to this effect, otherwise
there will be a need to revise the Articles of Co-Partnership.
PARTNER’S DRAWING ACCOUNT
This is the account title use to reflect temporary interest of a partner. Ordinarily
there are two transactions affecting this account:
1. Share in the Net Profit (the agreement as to the manner of distribution is
provided in the Articles of Co-Partnership) is credited to the drawing account
to increase the partner’s equity and becomes a source of regular drawings by
the partner, or Share in the Net Loss is debited to the drawing account to
decrease the partner’s equity as well as decrease the amount that a partner can
withdraw.
PARTNER’S DRAWING ACCOUNT
2. Personal Drawings may be formal as provided in the Articles of Co-
Partnereship. These are often times called “Salaries” but are in fact
withdrawals of profit and are debited to the drawing account to decrease the
partner’s equity. Informal or irregular withdrawals may also be made by the
partners when the need arises (made with the consent of all the partners) and
are also debited to the drawing account and viewed as decreases in the overall
equity or interest of the partner.
PARTNER’S DRAWING ACCOUNT
Balance of the drawing account is closed to the capital account. If the share of
the partner in the profit (credited to his/her drawing account) is greater than the
actual withdrawals made by him/her (debited to is/her drawing account), the
credit balance of the drawing account is added to the capital account to arrive
at the total partner’s equity.
CONTINUATION OF ILLUSTRATION
The partnership started operation on October 1 and at the end of each month
Abad, as managing partner, withdrew P10,000 cash as monthly salary starting
October while Basa made a cash withdrawal only once for P10,000 at the end
of December. A net profit of P150,000 was reported at the end of the year
which was divided equally between them.
(See excel file for sample journal entries to start up the business)
CONTINUATION OF ILLUSTRATION
From the entries and T-Accounts, the equity will appear thus:
Abad, Capital P450,000
Abad, Drawing P 45,000
P495,000

Basa, Capital P275,000

Basa, Drawing P 65,000
P340,000
CONTINUATION OF ILLUSTRATION
The balances in the “Drawing Accounts” represent “Unwithdrawn Profits”.
These balances could be left open and brought forward next accounting period
especially if partners intend to withdraw them as per agreement. These
balances could be closed to Capital Accounts and made part of their permanent
investments. The entry to close the drawing account balances to capital
accounts will appear thus:

(See excel file for sample journal closing entries)

CONTINUATION OF ILLUSTRATION
The partners’ capital accounts, appearing in the Statement of Financial Position
as Partners’ Equity, will show a credit balance of P495,000 for Abad and a
Credit balance of P340,000 for Basa. Note that whether or not the drawing
balances are closed, the partners’ equity will remain the same in terms of total
balance.
STATEMENT OF CHANGES IN PARTNERS’
EQUITY
The statement of financial position only shows the final balances of the capital
accounts, P495,000 for Abad and P340,000 for Basa. Partners should be
informed of the changes (transactions) that brought about the final balances
requiring the accountant to prepare a statement of changes in partners’ equity
which will appear as follows:
OTHER TRANSACTIONS AFFECTING PARTNER’S
CAPITAL
A variation in the investment of a partner may be made as described in the following
transactions:

Jun. 10: A partnership note payable to the bank in the amount of P5,000 fell due and was paid
by Abad out of his own personal cash.
Jul. 5: A personal receivable of Basa in the amount of P6,000 was collected and retained by the
partnership.
Sep. 15: A personal note of Basa payable to Filinvest in the amount of P3,500 was paid out of
the partnership cash.
Nov. 10: A partnership receivable in the amount of P2,000 was collected and retained by Abad.

(See excel file for sample journal entries)

OTHER TRANSACTIONS AFFECTING PARTNER’S
CAPITAL
Note that the “Capital Account” is increased or decreased to represent either as
an additional investment or a permanent withdrawal. The alternative will be to
treat these transactions as either a loan payable to or loan receivable from a
partner depending on partners’ agreement
LOAN PAYABLE TO OR RECEIVABLE FROM A PARTNER

In the course of the organization of the business, the partnership obligations

may be paid out through a partner’s personal cash. Or the partnership may
borrow cash from the partner. In both cases, the amount paid by the partner or
borrowed by the partnership from the partner will represent a liability. For
instance, assume that in the June 10 transaction, Abad paid for the note of the
business for P5,000 with the condition that it will be paid back to him after 3
months. The entry in the partnership books will be a credit to a Payable to
Abad account rather than Abad, Capital.
LOAN PAYABLE TO OR RECEIVABLE FROM A PARTNER

Or suppose Abad extended a P15,000 loan to the partnership on July 15 after

one year. The entry to record the cash received will give rise to a liability to
pay Abad:
July 15 : Cash P15,000
Loan Payable to Abad P15,000
In like manner, the partnership may loan cash to a partner which will give rise
to a receivable account. For instance, assume that on July 31, the partnership
lent partner Basa P20,000 cash to be repaid after 6 days. The entry for this is:
July 31: Loan receivable from Basa P20,000
Cash P20,000
LOAN PAYABLE TO OR RECEIVABLE FROM A PARTNER

It emphasizes that Loan payable to partner is a liability and Loan receivable

from a partner is an asset and therefore are not to be considered in
determining partner’s equity.
OPENING THE BOOKS OF THE PARTNERSHIP

The first entry in the partnership books pertain to the contributions made by the
partners. The contribution may be in the form of cash, property, services or
an already existing business. Proforma entry for contributing any type of
asset:
Asset account xxx
Partner, Capital xxx

A contribution in the form of property should be recorded, as of investment

date, at current fair market value or appraised value. It may be the amount of
Exchange Price or Cost Principle as stated in PAS/IAS 16.
OPENING THE BOOKS OF THE PARTNERSHIP

Additionally, fair treatment requires that the properties be valued at its current
fair market value or appraised value since these will become business
properties; and that subsequently any gain or loss from its sale will be shared
by all the partners according to their profit or loss agreement.

Liabilities attached to invested properties may be assumed by the partnership

in which case the capital of the partner will be credited only for the “Net
Amount” of the asset contributed.
OPENING THE BOOKS OF THE PARTNERSHIP

If the contribution is in the form of service, a “Memorandum Entry” should be

prepared as follows:
Jan. 2: Admitted Joshua Artuz to act as a general manager for a 20% share
in the profit.
CASE 1: CONTRIBUTION IN THE FORM OF CASH,
PROPERTY AND INDUSTRY
Santos, Ambros and Carlos formed a partnership on August 1, 2021.
Investments are as follows: Cash of P50,000 from Santos; Merchandise from
Ambros which she bought last year for P50,000 but which has a current fair
value of 80% of its cost. Carlos is to be admitted as Sales Manager for a 10%
share in the profits.
(See excel file for the journal entries)
CASE 2: CONTRIBUTION OF ASSET WITH AN ATTACHED
LIABILITY
Aug. 2: Ambros decided to invest also her land, which cost her P100,000 when
she bought this in 2010 but which current appraised value is P500,000.
However, this land has a mortgage balance of P50,000 and the partners agreed
that this be assumed by the partnership. The entry will appear, thus:

(See excel file for the journal entries)

INVESTMENT OF AN ALREADY EXISTING BUSINESS

An investment of an already existing business into the partnership is more

complicated since two books will be affected – the sole proprietorship books
and the new books of the partnership. The following are the accounting
procedures:
1. Present for review the assets and liabilities of the sole proprietorship
business to the other partners for adjustments or revaluation.
INVESTMENT OF AN ALREADY EXISTING BUSINESS

2. In the books of the sole proprietorship business:

a.) Update the assets and liabilities for any adjustments/revaluations agreed
upon by the partners. Since this business is not going to operate anymore,
“neither revenue nor expense accounts” should be used. Any revaluation or
adjustment is coursed through the sole proprietor’s capital account. The assets
and liabilities of these business represent the partner’s capital contribution,
thus any adjustment or revaluation passes through the capital account.

b.) Close the books at the adjusted amounts.

INVESTMENT OF AN ALREADY EXISTING BUSINESS

3. Record the assets and liabilities or partner’s contribution in the books of the
partnership as well as the contribution(s) of the other partner(s) at the revalued
or adjusted amounts.
If the partners agree to continue using the sole proprietor’s books as the
partnership books, Step 2 b.) will be change: record the investment of the other
partner(s). Omit step 3.
CASE 3: INVESTMENT OF AN ALREADY EXISTING
BUSINESS WITH THE OLD BOOKS CLOSED AND NEW
PARTNERSHIP BOOKS OPENED
Peter has a bookstore along the Taft Ave. Called Peter Pan’s Bookstore which
has been operating for 5 years. On March 1, 2021, Pilar Garces invites him to
put up a partnership within the university belt of Mendiola. Peter agrees to
close his business and invest his net assets in the partnership. Pilar agrees to
put up cash equal to half of the contribution of Peter.
CASE 3: INVESTMENT OF AN ALREADY EXISTING
BUSINESS WITH THE OLD BOOKS CLOSED AND NEW
PARTNERSHIP BOOKS OPENED
The following are the assets and liabilities of the bookstore since Mar. 1, 2021:
Debit Credit
Cash P12,000
Accounts receivable 50,000
Allowance for Bad debts P5,500
Merchandise inventory 25,000
Furniture and Fixtures 10,000
Accum. Depn. – Fur. & Fix 2,000
Accounts payable 27,000
Pan, Capital 62,500
Totals P97,000 P97,000
CASE 3: INVESTMENT OF AN ALREADY EXISTING
BUSINESS WITH THE OLD BOOKS CLOSED AND NEW
PARTNERSHIP BOOKS OPENED
The articles of co-partnership was drawn after considering the following:
a. The Allowance for bad debts should be adjusted to 15% of the Accounts
receivable.
b. The furniture and fixtures should be 25% depreciated
c. Obsolete merchandise amounting to P3,000 must be written off.
d. Both partners will act as managing partners and share profits and losses
according to their capital contributions.
(See excel file for the journal entries)
CASE 4: BOTH PARTNERS INVESTED THEIR CURRENT
BUSINESSES WITH NEW BOOKS SET UP FOR THE
PARTNERSHIP
James Laredo and Jim Lopez, sole proprietors, operate a novelty shop, one in
Manila and another in Cubao. After a year of operation, James invited Jim to
form the Lalo Novelty Store. The following are their statements of financial
position as at January 2, 2021:
CASE 4: BOTH PARTNERS INVESTED THEIR CURRENT
BUSINESSES WITH NEW BOOKS SET UP FOR THE
PARTNERSHIP
CASE 4: BOTH PARTNERS INVESTED THEIR CURRENT
BUSINESSES WITH NEW BOOKS SET UP FOR THE
PARTNERSHIP
CASE 4: BOTH PARTNERS INVESTED THEIR CURRENT
BUSINESSES WITH NEW BOOKS SET UP FOR THE
PARTNERSHIP
The following provisions were agreed upon by James and Jim:
1. James will invest his business subject to the following conditions:
a.) That P2,000 of the accounts receivable be written off.
b.) The furniture be adjusted to its fair market value of P4,000.
c.) Accrued expenses of P2,500 be recognized.
2.) Jim’s net contribution should be adjusted to the following:
a.) 15% of the accounts receivable is estimated to be uncollectible.
b.) Furniture and fixtures should have a net book value of P12,000.
CASE 4: BOTH PARTNERS INVESTED THEIR CURRENT
BUSINESSES WITH NEW BOOKS SET UP FOR THE
PARTNERSHIP
It was further agreed that James’ and Jim’s interest should be the same as their
profit and loss ratio of 1:1 so that one of them must make additional
investment to conform to the agreed interest. New books should be for the
partnership.
A table to analyze and adjust partners’ capital contributions may be prepared in
this manner:
(See excel file for illustration)
BONUS OR GOODWILL RECOGNITION

Contribution of a partner may go beyond actual assets invested due to the

following reason: a partner has a special talents needed by the partnership or
has a large base of clients/customers or if a business being transferred to the
partnership promises exceptional future earnings. These factors will surely be
equally important as the actual investments made by a partner.
BONUS OR GOODWILL RECOGNITION

For example, Dr. Gil who recently passed the medical board examination
wants to put up a medical clinic and invites Dr. Casey, a known surgeon and
medical practitioner to join him. Dr. Gil agrees to contribute P500,000 while
Dr. Casey agrees to contribute P300,000 only. They further agree on an equal
sharing ratio on the assets and the profits. In recording their contributions,
there are two options: Bonus or Goodwill
BONUS OR GOODWILL RECOGNITION

Bonus Method. Under this method, the skill and experience of Dr. Casey
cannot be recognized as asset specially since there is no reliable measurement
basis for this. Only the actual investment of P500,000 and P300,000 or a total
of P800,000 can be recognize as assets. The partners may agree to adjust their
capital amounts to reflect an equal sharing by transferring interest from Dr. Gil
to Dr. Casey. Dr. Casey’s capital will be credited for P400,000 without making
additional investement and Dr. Gil will also be credited for P400,000 although
his actual investment is P500,000.
BONUS OR GOODWILL RECOGNITION

The transfer of capital of P100,000 received by Dr. Casey from Dr. Gil is
called Bonus Capital. Total actual contributions stands at P800,000. In table
format, it will appear as follows:
Gil Casey Total
Total Agreed Capital P400,000 P400,000 P800,000
Total Contributed Capital P500,000 P300,000 P800,000
Bonus (P100,000) P100,000 P 0
BONUS OR GOODWILL RECOGNITION

Note that the total agreed capital is equal to total contributed capital. Using the
partner’s agreement of having 50% interest of each partner, it will be journalize
as follows:
Cash P800,000
Gil, Capital P400,000
Casey, Capital P400,000
BONUS OR GOODWILL RECOGNITION

Goodwill Method. Under this method, two contributions are made by Dr.
Casey: Cash of P300,000 and an intangible asset in the form of goodwill. What
is goodwill? Goodwill is an intangible asset representing ability to generate
earnings more than what is normal or expected. Factors such as a good
reputations (such as a skillful surgeon), or a good location, service or product
may bring in more customers and therefore more earnings for the business.
BONUS OR GOODWILL RECOGNITION

What are the effects on the accounting values if goodwill is recognized? Assets
will increase (Debit Goodwill) and the partner’s equity will also increase
(Credit Partner’s Capital). How much is the goodwill? Since the agreement
calls for equal sharing, the intangible assets amount to P200,000 plus his actual
investment of P300,000 the capital credit for Dr. Casey will become P500,000
the same as that of Dr. Gil who invested cash for P500,000:
Gil Casey Total
Total Agreed Capital P500,000 P500,000 P1,000,000
Total Contributed Capital P500,000 P300,000 P800,000
Goodwill P 0 P200,000 P200,000
BONUS OR GOODWILL RECOGNITION

*Note that under the Bonus Method, TAC and TCC are equal. But under
Goodwill Method, TAC is greater than TCC. How was the total agreed capital
computed? It was based on actual Gil’s contribution of P500,000 divided by
his interest of 50% = P1,000,000. Since agreement calls for equal sharing,
Casey should also be credited for P500,000:
Cash P800,000
Goodwill P200,000
Gil, Capital P500,000
Casey, Capital P500,000
BONUS OR GOODWILL RECOGNITION

PAS 38 recognizes goodwill only as a result of an acquisition of a business.

Partnership goodwill has no related acquisition cost since no funds have been
spent to acquire the goodwill. Partnership goodwill is rare in actual practice.
Therefore, Bonus is the preferred method.
CASE 5: INVESTMENT OF AN ALREADY EXISTING BUSINESS
WITH RECOGNITION OF BONUS AND NEW BOOKS ARE SET UP
FOR THE PARTNERSHIP
The following is the statement of financial position of Jazz Grocery as of
December 31, 2021:
CASE 5: INVESTMENT OF AN ALREADY EXISTING
BUSINESS WITH RECOGNITION OF BONUS AND NEW
BOOKS ARE SET UP FOR THE PARTNERSHIP
Jasmin and Cory agree to form a partnershjp and call it the JasCor Grocery.
Jasmin will invest her grocery while Cory will invest automated equipment
worth P300,000. The following provisions were also agreed upon by the
partners:
1. Set up 10% of customers’ accounts receivable as doubtful after writing off
P5,000 worthless account.
2. Inventories should be adjusted to 85% of its book value.
3. Equipment should be adjusted to its fair market value of P20,000
CASE 5: INVESTMENT OF AN ALREADY EXISTING
BUSINESS WITH RECOGNITION OF BONUS AND NEW
BOOKS ARE SET UP FOR THE PARTNERSHIP
4. Land should be recorded at its appraised value of P150,125.
5. Accrued expenses should be set up in the amount of P2,500.
6. Jasmin will be credited for a 60% equity in the partnership.

(See excel file for illustration)

CASH METHOD – ADDITIONAL TOPIC

If expressly agreed, deficient partner may be required to contribute cash to

comply with the equity requirement. Thus, based on the table, Cory should
make a cash contribution of P19,667:

JASMIN CORY TOTAL

TAC P479,500 319667 P799,167
TCC P479,500 300,000 P779,500
P 0 P19,667 P19,667
CASH METHOD

TAC = 479,500 / 60% = P799,167. This is higher than TCC. Compare the
actual against the agreed, it means additinal contribution should be made by
the dificient partner:
Equipment P300,000
Cash P19,667
Cory, capital P319,667