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ACCOUNTING FOR PARTNERSHIPS Basic Considerations and Formation “In this new wave of technology, you can’t do it all yourself, you have to form alliances.” --Carlos Slim Helu Telecommunications billionaire Carlos Slim Helu learned early in his career that money partnering is critical to helping ensure success. While Helu made his money creating Mexico’s first privately owned telecommunications company, Telemex, he had to partner with French and American telecom companies in order to take his native Mexico’s phone service away from the government. Sergey Brin, 34 years old and Larry Page, 35, both single, with $18.7 billion net worth each, ranked 32" and 33” (Forbes 2008, The World’s Billionaires). They are the founders of Google. In 2003, Forbes estimated their collective worth at $1.1 billion. They erred. Since taking their Internet search engine public in August 2005, the dynamic duo behind Google has seen their combined fortune soar to $8.0 billion. In 2005, it’s $11.0 billion each. Both partners have math teacher parents. Brin emigrated from Russia; Page grew up in Michigan. They met at Stanford while pursuing graduate degrees in computer science. They founded Google in Sept. 7, 1998. Google is an Internet gateway that combs through more than 3 billion web pages. Raised $25 million from venture capitalists. As at Sept. 2007, Google is leading the pack with 55.34% search engine market share excluding Google in other countries like Google U.K., Canada, Germany, Spain, etc. Yahoo is down to 10.73% and MSN to 3.08% (Source: www.netapplications.com). In the 1° quarter of 2005, Google has a 51% global search market share (Source: ComScore, Piper Jaffray & Co.). Yahoo is a distant 24% and MSN at 13%. Top this, the accounting firm Deloitte Touche named Google the fastest-growing company ever—noting that its five-year revenue growth exceeded 400,000 percent. This means Google rocketed from being unknown to having the status of Apple or Microsoft in five years. Google is now into satellite mapping, online payment systems, news, YouTube and recently, smart phones powered by Android. 2 | Chapter 1 - Basic Considerations and Formation At the outset of their business endeavor, the partnership form of business may have provided Brin and Page the necessary advantages to start-up their software venture, How much should they contribute to the business considering its business potential? In what form will the investment be? How should the partners divide profits and losses? If ever, how should a partner who leaves the entity compensated for his share of the business? What will be the share of venture capitalists? DEFINITION In a contract of partnership, tWwoworsmorespersons=bind=themselves™tomcontribute money, property, or industry"to aycommonsfund, with the intention of dividing the profityamong themselves. Two or more persons may also form a partnership for the exerciseof'a"profession (Civil Code of the Philippines, Article1767). An association of two or more persons to carry on, as co-owners, a business for profit (Uniform Partnership Act, Section 6). The partnership has'@ Teiennoeeeetae separate and distinct from that of each of the partners) (Civil Code of the Philippines, Article"1768). Thus, for example, where Fabella and Neis established a partnership, three person’ are involved, namely: the partnership and the partners, Fabella and Neis. : Partnérshipsiresemble"solesproprietorships; except that there are two or more owners of the business. Each owner is called a partner. Partnerships are often formed to bring together various talents and knowledge. Partnerships provide a means of obtaining more equity capital than a single individual can obtain and allow the sharing of risks for rapidly growing businesses. Aeprofession: is an occupation that involves a higher education or its equivalent, ahd mentalrather than,manual labor. Strictly speaking, the exercise of a profession is not a business or an enterprise for profit but the law allows two or more persons to act as partners in the practice of their profession. Pantnerships:are generally-associated. with the. practice of |aw,.public accounting, medicine and other. professions, Partnerships of this nature are called generalsprofessional partnerships. On the other hand, service industries, retail trade, wholesale and manufacturing enterprises may also be organized as partnerships. CHARACTERISTICS OF A PARTNERSHIP. The characteristics of partnerships are different from the sole proprietorships already studied in basic accounting. Some of the more important characteristics are as follows: ny -There*cannot bea. partnership. without. contribution of money, Property‘or industry (i.e. work or services which may either be personal manual efforts or intellectual) to a common fund. Chapter 1 - Basic Considerations and Formation |_3 Division,of,Profits,orsLosses. The essence of partnership,is that each partner must sharein the profits or losses of the venture. CoxOWNE Hip" SF COntBUTEE"ASSEts. All assets contributed into the partnership are owned by the partnership by virtue of its separate and distinct juridical personality. If one partner contributes an asset to the business, alliparthers jointly own it in 2 special sense. (mutUaWABENE). Any-partnercan’bind the other partners to a contract if he is acting withinyhis.expressor implied authority. : Limitedstife. A partnership has a limited"lifé. It may be dissolved by the admission, death, ifS6IVEREY, incapacity, withdrawallfofwalpartner or expiration of the term specified in,thepartnership agreement. Gnlimited Wability. All partners (except limited partners), including, industrialpartners, are:personally liablé for all debts incurred by thé partnership. if the partnership can not Settle its obligations, creditorst”laims will béisatisfiedsfromitheipersonal assets of the partners without prejudice to the rights of the separate creditors of the partners. IncomeeTaies. Partnerships, except-generalyprofessionalipartnerships; are subject'to tax at the rate of 30% (per R.A. No. 9337) of taxable income. ®@SrtherseequityyAecounts® Accounting for partnerships are much like accounting for sole proprietorships. The difference lies in the number of partners’ equity accounts. Eachspartnershas»a.capital_account,andwa: withdrawalwaccount that serves similar functions as the related accounts for sole proprietorships. ADVANTAGES AND DISADVANTAGES OF A PARTNERSHIP A partnership offers certain advantages over a sole proprietorship and a corporation. It also has a number of disadvantages. They are as follows: Advantages versus Proprietorships 1. _Bringsgreaterfinancial:capability to the business. 2. Combines specialiskills, expertise and experience of the partners. 3. Offersrelativetreedom and flexibility of action in decision-making. a yncorporators > Founders f cor aaaticsS Advantages versus Corporations 1. Easienand lessiexpensive to organize. 2. More personaland informal’ Disadvantages 1, «Easilyidissolvediand thus Uifistable compared to a Corporations 2. qMutuahagency and unlimitediliability may create personal obligations tojpartnersy 3. skessieffective.than a corporation in raisinglargeamounts:of.capital. 4 | Chapter 1 - Basic Considerations and Formation PARTNERSHIP DISTINGUISHED FROM CORPORATION Manner of Creation. A partnership is created by mers-agreement of thelpartners while a corporation is created by operation of law. Number of Persons. Two or more persons may form a partnership; in a corporation, at least five (5) persons, not exceeding fifteen (15) cpanged Commencement of Juridical Personality. In a partnership, juridical personality conimenees'fromithevexecutionjofithevarticlesiof partnership; in a corporation, from the issuance of certificate of incorporation by the Securities and Exchange Commission. Management. In a partnership, évery"partner is an agent of the partnership lifithe partners.didsnotyappoint’aimanaging partner; in a corporation, management is vested on the Board of Directors. Extent of Liability. In a partnership, each of the partners @xceptyavlimited.partner js liable*tortherextent/of his personallasséts; in a corporation, stockholders are liable only to the extent of their interest or investment in the corporation Right of Succession. In a partnership, thérerisinolrightiof/succession; in a corporation, there is right of succession. A corporation has the capacity of continued existence regardless of the death, withdrawal, insolvency or incapacity of its directors or stockholders. 4 yy bred celadiém by wehoe of ANG Lon Terms of Existence. In a partnership, for any period of time stipulated by the partners; in a corporation, not to exceed fifty (SO) years but subject to extension. * erargro) HCOL PTAA H8eK SHAPES are €LASSIFICATIONS OF PARTNERSHIPS, Arancherrable even wip Fhe ANT merabere eonsent 1. According to object: » A. Universalpantnership"oralpresentproperty. Alkcontributions-become part of the partnership fund. a jet 4 amquibitions B. Uhiversalepartnership.ofyprofits. All that the partners may-acquire-by-their industry-or-work during, the existence ‘of the partnership and the use of whatever the partners contributed at the time of the institution of the contract belong to the partnership. C. Partetlar partnership. The object of the partnership is determinate—its use or fruit, specific undertaking, or the exercise of a profession or vocation. 2. According to liability: A. GenéFal. All partners are liableto-the-extent-of-their. separate properties. 5. ‘Limited: The limited partners are liable-only-to-the-extent.of.their_personal contributionss*In a limited partnership, the law states that there shall be af least one general partner. Chopter 1 - Basic Considerations and Formation |_S 3. According to duration: A. Partnership with aixedterm or for a particular undertaking. 8. PartnershipgguwiliOne in which no term i: nd is not formed for any Particular undertaking 4. According to purpose: A. GommercisSrutrsdingepartnersiip. One formed for the transaction_of ~business.— a 8. _ PeokessionaworFOntaane. ParnerMp. One formed for the exercise of Profession. 5. According to legality of existence: A. Deiurespartnership. One which has complied with all the legal requirements for its establishment. PeEEe B. OemfactompSHhership. One which has failed.toscomply with all the legal requirements for its establishment. KINDS OF PARTNERS 1. Generaliparther” One who is liable to the extent of his separate property after all the assets of the partnership are exhausted. mmiteapartiier. One who is liable only to the extent of his capital contribution. €apitalistparthiér. One who contributes money or property to the common fund of the partnership. 4. Widusteiakpartner, One who contributes his knowledge or personal service to the partnership. 5. Managing™Partners.One whom the partners has appointed as manager of the partnership. 6. shiguidating partner. One who is designated to wind up or settle the affairs of the partnership after dissolution. (7. @ormantepasiner. One who does not take active part in the business of the partnership and is not known asa partner. 72, “SWentepartner.. One who does not take active part in the business of the partnership though may be known as a partner. K9. ecretpartner. One who takes active part in the business but is not known to be a partner by outside parties. 10.=ominal.partner or partnerby.esteppel One who is actually not # partner but who represents himself as one. 4 3 leat 4 general portatcy. Lyne 3 nea mer achire Ym his name te oe ued eter, accomodation =o comsdewation (iC) is @ Quibrid form.of _businéis for-it-combmnes.the bec cactnershigramdba-cosporetean. LIC i 2 form ofilegakentity.that provides im 1988, the Internal Revenue Service (RS) of the United ¢ LLC may be treated as 2 partnership for tax purposes subject to conditions. As 2 result of this ruling, all SO U.S. states allow LiCs. a features of 3 Emited lability to Rs owners. States of America ruled tha Fhe-owness of -en-tt€-ere-cated—members These owners may be individusis, arpa SS Tar eevee ie the company a “This-type_of entity.is attractivefor professional service firms because the owners wil not-have personattiebility for the other owners’ malipractice. il tolemnited-ebilety pactnership (LLP) is very similar to an LLC except that investmentimil> ig. nestricted-to-professionats. The four major international accounting firms KPMG, Emst & Young, PricewaterhouseCoopers and Deloitte Touche started as partnerships. As they grew and the risk increased, these firms were allowed to change, By operation of law, to LLPs. The LLP concept is different from that of a limited partnership. The accounting for LLCs is the similar to partnerships. The terms “member” and “member's equity” are used instead of “partner” and “partner's equity. ARTICLES OF PARTNERSHIP A partnership may-be-constituted-orally-or-in-writing- In the latter case, partnership agreements are embodied in the APHGIES"6P Partnership. The following essential provisions may be contained in the agreement: 1. The partnership name, nature, purpose and location; 2. The names, citizenship and residences of the partners; 3. The date of formation and the duration of the partnership; 4 The capital contribution of each partner, the procedure for valuing non-cash investments, treatment of excess contribution (as capital or as loan) and the penalties for a partner's failure to invest and maintain the agreed capital; 5. The rights and duties of each partner; 6. The accounting period to be adopted, the nature of accounting records, financial statements and audits by independent public accountants; Chapter 1 Basie ag and Farmation | 7 ee 7. The method of sharing profit or loss, frequency of incanie measurement and distribution, including any provisions for the recognition of differences in contribution: 8. The drawings or salaries to be allowed to partners, The provision for arbitration of disputes, dissolution, and liquidstion A contract of partnership is yoitewheneversimmavable" propery or Vealwightsnere SEC REGISTRATION When the partnership-capital-is-P3,000-0F-more, in money oF property, the public instrument must-be-recorded-with the Securities-and-Exchange Commission (SEC). Even -itit-not-registered, the partnership having a capital of P3,000-or-more-is-still-valid-and therefore has legal personality. The SEC shall not-register—any corporation organized for the practice-of—public accountancy. (The Philippine Accountancy Act of 2004, Sec. 28) The SURPOSE OPTS FERRTFatIONTs to\set a condition for the issuance of the licenses to engage in business or trade.In this way, the tax liabilities,of big partnerships cannot be evaded, and the public can»also-determine_more.accurately.their membership and capital, before dealing with'them.” (Dean Capistrano, IV Civil Code of the Philippines) To register a partnership with the SEC, here are the basic steps to follow: - Have your proposed business name verified in the verification unit of SEC; - Submit the following documents: = Articles of Partnership = Verification Slip for the Business Name = Written undertaking to change business name if required * Tax identification number of each partner and/or that of the partnership = Registration data sheet for partnership duly accomplished in six copies nae bee = Other documents that may be required > Pay the registration/filing and miscellaneous fees; + Forward documents to the SEC Commissioner for signature. asic Considerations and Formation 8 | chap’ ACCREDITATION TO PRACTICE PUBLIC ACCOUNTANCY Certified public accountants (CPAs), firms and partnerships of CPAs, engaged in the practice of public accountancy, including the partners and staff members thereof, shalj register with the Professional Regulation Commission and the Professional Regulatory Board of Accountancy. The registration shall be renewed eVery=three»years (The Philippine Accountancy Act of 2004, Sec. 31). The rules and regulations cévering the accreditation for the practice of public accountancy are specified in Annex B of The Rules and Regulations Implementing Republic Act 9298 otherwise known as the Philippine Accountancy Act of 2004. ACCOUNTING FOR PARTNERSHIPS Owners’ Equity Accounts enerally accepted accounting principles were discussed in the These accounting principles also apply to a liabilities, income and expenses is consistent Comparing two businesses of the same another as a partnership, there will In Basic Accounting, g context of a sole proprietorship. partnership. Thus, the recording of assets, for both proprietorships and partnerships. nature, one organized as a sole proprietorship and be no marked difference in their operations. However, differences arise between the two forms of business concerning owners’ equity. For a proprietorship, there is only a single owner. Therefore, there is only one capital account and one drawing account. On the other hand, since a partnership has two or more owners, s@parate capital and drawing accounts are established for each partner. t is credited. for-his»initial and. additional net investments lities assumed by the partnership), and cnedit;batance of the riod» It is debited for his permanent.withdrawals A partner's.capital accoun (assets contributed fess liabil drawinig"account at the-end-of the pe! and debit’balance of the drawing: accountiat the end of the period. Typically, partners do not wait until the end of the year to determine how much of the profits they wish to withdraw from the partnership. To meet personal living expenses, partners customarily withdraw money on a periodic basis throughoutstheyyear. A partner's drawing account is debited to reflect assets temporarily withdrawn. by him from the partnership. At the end of each accounting period, the balances in the drawing accounts are-closed.to the related capital.accounts, Chapter ic Considerations and Formation | 9 Partner’s Capital Account *C“ Debit Credit 1. Perm: i Debit balance of the drawing. account at the end of the period Original investment. Additional investment. Credit balance of the drawing account at the end of the period. wn Partner’s Drawing Account +p t + Debit Credit 1. Temporary withdrawals. ¢n Cezf.| 1. Share in profit (this may be 2. “Share in loss (this may be debited credited directly to Capital). directly to Capital). Permanent-withdrawals are made with the intention of permanently-decreasing-the partner’s-capital while temporary-withdrawals are regular~advances made by the partners in anticipation.of their share.in.profit. The use of drawing accounts for temporary withdrawals provides a record of each partner’s drawings during an accounting period. Hence, drawings in excess of the allowed amounts as stated in the partnership agreement may be controlled. Menton tut scott: (or team Ia chedived doe riehites) elther to.2he drwetre pecnunt.or te the capital account. The choice of the account to credit or debit depends on the intention of the partners. If they wish to maintain™their™capitalaccounts” for investments.and.-permanent ‘withdrawals, then profit-ortoss-should-be-entered "inthe drawingraccount. On the other hand, if the purpose of the partners is to make-profit-or-loss»part-of.their capital;-then the capitalaccount Should-be-used....In either case, the resulting partners’ ending capital balances will be the same. On Sept. 6, 2007, the International Accounting Standards Board (IASB) issued a revised International Accounting Standards (IAS) No. 1, Presentation of Financial Statements. This standard supersedes the 2003 version of IAS 1 as amended in 2005. It’s common to encounter “profit or loss” rather than usual “net income or net loss” as the descriptive term used in the Statement of Comprehensive Income (the new title of the income statement per revised IAS No. 1). The balance sheet is called the Statement of Financial Position. The complete set of financial statements will be discussed in Chapter as 10 | Chapter 1 - Basic Considerations and Formation Loans Receivable from or Payable to Partners Ife.partner.withdraws.a substantial-amountof money with the intention of repaying it the.-debit..should.-be.to..Loans..Receivable-Partner™account instead of to Partners Drawing account. This account should be classified™separately.from th other receivables of the partnership. A partner may-lend-amounts-to.the.partnership-in excess of his intended Permanent investment. These advances should be crédited to Loans-Payable-Partner account ang not to Partner’s Capital account classified among the liabilities but separate from liabiligies to outsiders. This distinction is important-in-case-of liquida tion. Loans payabie foupartners.must:bespaid.after-the claims. of.outside-creditOTs"haverbeen paid in fult These loans have priority over partners’ equity. PARTNERSHIP FORMATION Pncanb/ aaa agrud Valuation of Investments by Partners FIV The books of the partnership are opened.with-entries.reflecting-the-net contributions of the-partners"to thE"fiftn. Asset accounts are debited for assets contributed to the Partnership, liability accounts are credited for any liabilities assumed by the and separate capital accounts are credited f Partnership for the amount of each p: investment-(assets.less.liabilities). artner's -net Partners may invest cash or non-cash assets in thi © partnership. When.a partner invests non-cash-assets, les agreed.upon.by the Partners. In the will be recognized at their fair-market The fairmarketwalle of an asset is the estimated:amount-thatea willing-seller. would receiverfrom a financially capable"buyersfor:the"sale-ofithe:assetsin.asfree market Per International Financial Reporting Standards (IFRS) No. 3, fair value is the rice at which asset_ or it coull exchange: in n! ction between knowledgeable, uni willing’pa Adjustment of Accounts Prior to Formation In cases when the prospective partners have existing businesses, their respective book will have to be adjusted to reflect the fair market values of their assets or to corre tte ital misstatements in the accounts. If the adjustments will not be made, the initial capital balances of the partners may be inequitable. \s Nlustration. A reconditioned printing equipment invested by Milavel Maan OR recorded incorrectly in the partnership books at P730,000—its book value uipment Proprietorship’s records. If the partnership immediately sold the printing Seats the for its fair market value of P800,000, the resulting P70,000 gain would ‘The printing capital balances of both Partners Milavel Nazario and Ricardo Pangan. Chapter 1 - Basic Considerations and Formation | 11 equipment should have been recorded at P800,000 and Nazario’s capital credited with P800,000. Simply stated iMEreasesuinassenivall accruing before formation should be for the benefit of the contributing partner. , The adjustments of the assets and liabilities prior to formation will be similar to the adjustments that we are already familiar with. However, when the adjustment involves a debitor credit toa nominal.account, the Capital account would instead be debited or credited. This is so because the business;hasiceased:toibera going concern. A business is not viewed as a going concern if liquidation appears imminent. For example, two sole Proprietorships will cease operations because of their agreement to enter into a partnership. Both proprietorships have ceased to be going concerns. Illustration. Emerita Geron and Emerita Modesto formed a general professional partnership. Emerita Geron will invest sufficient cash to get an equal interest in the partnership while Emerita Modesto will’ transfer the assets and liabilities of her business. The account balances on the books of Modesto prior to partnership formation follows: ‘ Debit Credit 4 AK Cash 180,000 Accounts Receivable 300,000 Office Equipment 1,500,000 7 Accumulated Depreciation 600,000 Accounts Payable 155,000 Salaries Payable 25,000 Emerita Modesto, Capital 1,200,000 It is agreed that for purposes of establishing Emerita Geron’s interest, the following adjustments shall be made in the books of Emerita Modesto: 1. An allowance for uncollectible accounts of 5% of accounts receivable is to be established. Prepaid expenses amounting to P30,000 were omitted by the accountant. This is to be recognized. Additional salaries payable in the amount of P10,000 is to be established. To understand the adjustments that will be made prior to formation, it will be helpful to review the basics. The book—Basic Accounting Made Easy 2011 Edition by WIN Ballada ably discussed the basics of accounting in a manner similar to the following: The accounting equation states that @8Sets|must/a/ways equal liabilities: andyowner's equity. The basic accounting model is: Assets a Liabilities + Owner’s Equity 12 | chapter 1 - Basic Considerations and Formation. assets are on the left side of the equation opposite the liabilities and This explains why increases and decreases in assets are recorded in the opposite manner as liabilities and owner's equity are recorded. The equation also explaing why llabillties and capital follow the same rules of debit and credit. The logic Sf debiting and crediting is related to the accounting equation. Note that the owner's equity. ‘Accounting is based on a double-entry system which means that the dual effects of a business transaction are recorded. A debit side entry must have a corresponding credit side entry. For every transaction, there must be one or more accounts debited and one or more accounts credited. Each transaction affects at least two accounts. The total debits for a transaction must always equal the total credits. The account type determines how increases and decreases in it are recorded Increases in assets are recorded as debits (left side of the account) while decreases in assets are recorded as credits (on the right side). Conversely, increases in liabilities ‘and owner's equity are recorded by credits; decreases in liabilities and owner's equity are recorded by debits. The rules of debit and credit for income and expense accounts are based on the relationship of these accounts to owner’s equity. Income increases owner’s equity and expense decreases owner’s equity. Hence, increases in income are recorded as credits and decreases as debits. Increases in expenses are recorded as debits and decreases as credits. These are the rules of debit and credit. Using the accounting equation approach of analysis, the adjustments are as follows: Assets = Liabilities + Owner's Equity 1. -P15,000 = + -P15,000 a + 30,000 a + + 30,000 3. = +P10,000 + = 10,000 +P15,000, = +P10,000 + +P 5,000 +P15,000 = +P15,000 hee Entries and Explanations: 1. An allowance of 5% of P300,000 or P:15,000 needs to be established. The account ‘Allowance for Uncollectible Accounts is a contra-asset account. When this accounts increased, the effect is to decrease the related asset account. The owner's equity is also decreased since this provision for uncollectibles is considered as an expense in the ordinary course of business. 15,000 Emerita Modesto, Capital 15,000 Allowance for Uncollectible Acts. 2. An omission to record the asset—prepaid expenses will denote that the business are overstated. When the expenses are overstati correspondingly the owner’s equity is understated. To recognize t expense, the entry will be: the expenses of ed, profit and he prepaid 30,000 Prepaid Expenses 30,000 Emerita Modesto, Capital Chapter 1 - Basic Considerations and Formation | 13 3. The establishment of additional salaries payable will increase liabilities. It can be deduced that the salaries expenses are understated and to correct the misstatement the owner’s equity will be decreased. Emerita Modesto, Capital 10,000 Salaries Payable 10,000 The adjustments prior to formation will entail debits or credits to asset or liability accounts. To maintain the double entry system of accounting, a corresponding debit or credit to owner's equity account will be made. The following T-account will serve to summarize the necessary adjustments to the capital account: Owner’s Equity Account Debit Credit 1. Decrease in asset. 1. Increase in asset. 2. Increase in liability. 2. Decrease in liability. 3. Increase in contra-asset. 3. Decrease in contra-asset. Opening Entries of a Partnership Upon Formation A partnership may be formed in any of the following ways: 1. Individuals with no existing business form a partnership. 2. Conversion of a sole proprietorship to a partnership. a. A sole proprietor and an individual without an existing business form a partnership. b. Two or more sole proprietors form a partnership. 3. Admission or retirement of a partner (to be covered in Chapter 3). Individuals with No Existing Business Form a Partners! The opening entry to recognize the contributions of each partner into the partnership is simply to debitethesassets contributed, and to creditythesliabilitiesyassumedvand the capital account of each partner. Mlustration. On July 1, 2012, Nilo Burgos and Helenita Ruiz agreed to form a partnership. The partnership agreement specified that Burgos is to invest cash of 700,000 and Ruiz is to contribute land with a fair market value of P1,300,000 with P300,000 mortgage to be assumed by the partnership. The entries are as follows: Cash 700,000 ve Land 1,300,000 Mortgage Payable 300,000 Nilo Burgos, Capital 700,000 Helenita Ruiz, Capital 1,000,000 To record the initial investments of Burgos and Ruiz. 1- Basic Considerations and Formation f financial position (the new title of th, the formation, the statement 0 ; i paar sheet per revised IAS No. 1) of the newly formed partnership is: Burgos and Ruiz Statement of Financial Position July 1, 2012 Assets Cash P 700,000 land 1,300,000 Total Assets 2,000,000 Liabilities and Owners’ Equity Mortgage Payable P 300,000 Nilo Burgos, Capital 700,000 Helenita Ruiz, Capital 1,000,000 Total Liabilities and Owners’ Equity 2,000,000 Illustration. Suppose that Burgos and Ruiz formed another partnership with Dr. Debbie Abiog-Adriano. Burgos and Ruiz considered Adriano who has a vast business network in Bicol as an industrial partner. The partnership did not receive any asset from Adriano. In this case, only a memorandum entry in the general journal will be made. A’Sole:Proprietorand Another.Individual Form a Partnership A sole proprietor may consider forming a partnership with an individual who has no existing business. Under this type of formation, the assetsjandsthellliabilitiestof the proprietorship Willlbestransferred to the newly formed partnership at ValU@svagreed uponibyaallithelpartners or atitheinicurrent fair prices: Illustration. The statement of financial position of Galicano Del Mundo on Oct. 1, 2012, before accepting Christine Resultay as partner is shown as follows: Galicano Del Mundo Statement of Financial Position Oct. 1, 2012 Assets Cash ' P 60,000 Notes Receivable 30,000 Accounts Receivable 240,000 Less: Allowance for Uncollectible Acts. 10,000 230,000 Merchandise Inventory 80,000 Furniture and Fixtures 60,000 Less: Accumulated Depreciation 2 yeo00 1 es40008 Total Assets 454,000 Chapter 1 - Basic Considerations and Formation | 15 Liabilities and Owner's Equity Notes Payable P 40,000 Accounts Payable 100,000 Galicano Del Mundo, Capital 314,000 Total Liabilities and Owner's Equity P454,000 Christine Resultay offered to invest cash to get a capital credit equal to one-half of Galicano Del Mundo’s capital after giving effect to the adjustments below. Del Mundo accepted the offer. 4 1. The merchandise is to be valued at P74,000. 2. The accounts receivable is estimated to be 95% collectible. “AD OC 3. Interest accrued on the notes receivable will be recognized: P10,000, 12% dated July 1, 2012 and P20, 000, 12% dated August 1, 2012. 4. Interest on notes payable to be accrued at 14% annually from Apr. 1, 2012. 5. The furniture and fixtures are to be valued at P46,000. Office supplies on hand that have been charged to expense in the past amounted to P4,000. These will be used by the partnership. New books for the Partnership (required per National Internal Revenue Code) The following procedures may be used in recording the formation of the partnership: Books of Galicano Del Mundo: 1. Adjust the assets and liabilities of Galicano Del Mundo in accordance with the agreement. Adjustments are to be made to his capital account. 2. Close the books. Books of the Partnership: 1. Record the investment of Galicano Del Mundo. 2. Record the investment of Christine Resultay. Following the procedures, the entries are: : Books of Galicano Del Mundo (ay Galicano Del Mundo, Capital® 14,100 Office Supplies 4,000 Interest Receivable* 700 16 | Chapter 1 - Basic Considerations and Formation Merchandise Inventory* Allowance for Uncollectible Accounts’ Interest Payable* Accumulated Depreciation® To record adjustments to restate Del Mundo’s capital. (2) Notes Payable 40,000 Accounts Payable 100,000 Interest Payable 2,800 Allowance for Uncollectible Acts. 12,000 Accumulated Depreciation 14,000 Galicano Del Mundo, Capital 299,900 Cash Notes Receivable Accounts Receivable Interest Receivable Merchandise Inventory Office Supplies Furniture and Fixtures To close the books of Del Mundo. Books of the Partnership 1e3) Cash 60,000 Notes Receivable 30,000 Accounts Receivable 240,000 Interest Receivable 700 Merchandise Inventory 74,000 Office Supplies 4,000 Furniture and Fixtures” 46,000 Notes Payable Accounts Payable Interest Payable Allowance for Uncollectible Accounts Galicano Del Mundo, Capital To record the investment of Del Mundo. (2) Cash® Christine Resultay, Capital 149,950 To record the investment of Resultay. 6,000 2,000 2,800 8,000 60,000 30,000 240,000 700 74,000 4,000 60,000 40,000 100,000 2,800 12,000 299,900 149,950 Chapter 1 - Basic Considerations and Formation \_17 Eee Computations: c Merchandise Inventory, per ledger 80,000 Merchandise Inventory, as agreed 74,000 Decrease in Merchandise Inventory P_6,000 Accounts Receivable, net per ledger 230,000 Accounts Receivable, net as agreed (P240,000 x 95%) 228,000 Increase in Allowance P_2,000 . Interest accrued on Notes Receivable: Interest = Principal x Rate x Time On P10,000: P 10,000 x 12% x 3/12 300 On P20,000: 20,000 x 12% x 2/12 400 Pz00 Interest accrued on Notes Payable: ‘On P40,000: P40,000 x 14% x 6/12 22,800 Furniture and Fixtures, net per ledger P54,000 Furniture and Fixtures, net as agreed ~46,000 Increase in Accumulated Depreciation 28,000 . Net effect of adjustments on Capit: Decrease in Merchandise Inventory P (6,000) Increase in Allowance for Uncollectibles (2,000) Increase in Interest Receivable 700 Increase in Interest Payable (2,800) Increase in Accumulated Depreciation (8,000) Increase in Office Supplies 4,060 Decrease in Capital (44,100) . Furniture and Fixtures, cost per books 60,000 Furniture and Fixtures, cost as agreed 46,000 Writedown of Furniture and Fixtures 14,000 Galicano Del Mundo, Capital before adjustment P314,000 Net Adjustments to Capital 14,100 Galicano Del Mundo, Capital after adjustment —_ P299,900 Agreed Capital Credit for Christine Resultay 50% Cash Investment of Christine Resultay 149,950 After the formation, the statement of financial position of the newly formed partnership is: Del Mundo and Resultay Statement of Financial Position Oct. 1, 2012 Assets Cash Notes Receivable Accounts Receivable Less: Allowance for Uncollectible Acts. P209,950 30,000 240,000 12,000_ 228,000 18 | Chapter 1 - Basic Considerations and Formation Interest Receivable MN el Merchandise Inventory oe Office Supplies a Furniture and Fixtures 46,000 Total Assets P592,650 Liabilities and Owners’ Equity Notes Payable P 40,000 Accounts Payable 100,000 Interest Payable 2,800 Galicano Del Mundo, Capital 299,900 Christine Resultay, Capital 149,950 Total Liabilities and Owners’ Equity P592,650 Note that furniture and fixtures are now recorded in the Partnership books at the agreed amount of P46,000 which represented the cost of the asset to the Partnership. On the other hand, the accounts receivable is still recorded at 8ross amount of P240,000 with a related allowance for uncollectible accounts of P12,000. The P12,000 is only a provision for possible uncollectibles. Two or More Sole Proprietors Forma Partnership Mustration. On June 30, 2012, Deogracia Corpuz and Esterlina Gevera, friendly competitors in a certain line of business, decided to combine their talents and capital to form a partnership. Their statements of financial position are as follows: Deogracia Corpuz Statement of Financial Position June 30, 2012 Assets Cash P 50,000 Accounts Receivable 100,000 Merchandise inventory 80,000 Furniture and Fixtures 60,000 Total Assets 290,000 Uabilities and Owner's Equity Accounts Payable P 30,000 Deogracia Corpuz, Capital 260,000 Total Liabilities and Owner's Equity x 290,000 Chapter 1 Basic Considerations and Formation \_19 Veterlina Gevera Statement of Financial Position june 30, 2012 Asnots Cast P 40,000 Accounts Receivable Merchanilise Inventory Delivery Equipment Total Assets Labilities and Owner's Equity Accounts Payable P 60,000 Esterlina Gevera, Capital __ 250,000 Total Liabilities and Owner's Equity 310,000 The conditions and adjustments agreed upon by the partners for purposes of determining their interests in the partnership are: 1. Actual count and bank reconciliation on Corpuz proprietorship’s cash account revealed cash short and unrecorded expenses of P3,500. Establishment of a 10% allowance for uncollectible accounts in each book. The merchandise inventory of Gevera is to be increased by P10,000. BYeN The furniture and fixtures of Corpuz are to be depreciated by P6,000. 5. The delivery equipment of Gevera is to be depreciated by P9,000. New books for the Partnership (required per National Internal Revenue Code) The following procedures may be used in recording=the=formation..of=the partnership: Books of Deogracia Corpuz and Esterlina Gevera: 1, Adjustthe,accounts of both»partiesith accordance with the agreement. Adjustments are to be made to their respective capital accounts. 2. Glose'the books. Books of the Partnership: 1, RegordthelinvestHent of Deogracia Corpuz. 2. Record theinvestment of Esterlina Gevera. 20 | Chapter 1 - Basic Considerations and Formation Following the procedures, the entries are: Books of Deogracla Corpuz qa) Deogracia Corpuz, Capital 19,500 Cash Allowance for Uncollectible Accounts. Accumulated Depreciation To record adjustments to restate Corpuz’s capital. (2) Accounts Payable 30,000 Allowance for Uncollectible Accts. 10,000 Accumulated Depreciation 6,000 240,500 Deogracia Corpuz, Capital Cash Accounts Receivable Merchandise Inventory Furniture and Fixtures To close the books of Corpuz. Books of Esterlina Gevera (a) Merchandise Inventory 10,000 Esterlina Gevera, Capital 7,000 Allowance for Uncollectible Accounts Accumulated Depreciation To record adjustments to restate Gevera’s capital. (2) Accounts Payable 60,000 Allowance for Uncollectible Acts. 8,000 Accumulated Depreciation 9,000 Esterlina Gevera, Capital 243,000 Cash Accounts Receivable Merchandise Inventory Delivery Equipment To close the books of Gevera, 3,500 10,000 6,000 46,500 100,000 80,000 60,000 8,000 9,000 40,000 80,000 110,000 90,000 Chapter 1 - Basic Considerations and Formation | 21 SSS Books of the Partnership (1) Cash 46,500 Accounts Receivable 100,000 Merchandise Inventory 80,000 Furniture and Fixtures 54,000 Accounts Payable 30,000 Allowance for Uncollectible Acts. 10,000 Deogracia Corpuz, Capital 240,500 To record the investment of Corpuz. (2) Cash 40,000 Accounts Receivable 80,000 Merchandise Inventory 110,000 Delivery Equipment 81,000 Accounts Payable 60,000 Allowance for Uncollectible Accts. 8,000 Esterlina Gevera, Capital 243,000 To record the investment of Gevera. After the formation, the statement of financial position of the newly formed partnership is: Corpuz and Gevera Statement of Financial Position June 30, 2012 Assets Cash Accounts Receivable 180,000 Less: Allowance for Uncollectible Acts. 18,000 Merchandise Inventory Furniture and Fixtures Delivery Equipment Total Assets P573,500 Liabilities and Owners’ Equity Accounts Payable P 90,000 Deogracia Corpuz, Capital 240,500 Esterlina Gevera, Capital 243,000 Total Liabilities and Owners’ Equity 22 | Chapter 1 - Basic Considerations and Formation i REVIEW QUESTIONS Pw NP pon any a4. ne 43. 14. aS. 16. 17. 18. 19. 20. 21. 22. 23. Define partnership. Discuss the phrase “exercise of a profession”. What are the essential characteristics of a partnership? g operation. Ables Liwaywa i rtners in a-drillin way Ables and Teresita Galang are pa ee his) purchase purchased a drilling rig to be used in the entity’s operations. binding on Galang even though she was not involved in it? Explain. What is meant by mutual agency and unlimit Identify three advantages of a partnership in Identify three advantages of a partnership in com Identify three disadvantages of a partnership form Differentiate a partnership from a corporation. ed liability? comparison with a sole proprietorship. parison with a corporation. £ business organization. Identify the kinds of partnership as to object, liability, duration, purpose and legality of existence. partner. trial partner. iffer from one another? Differentiate a general from a limited Differentiate a capitalist from an indust How do dormant, secret and silent partners dit company. Discuss the concept of a limited liability en important provisions to be incorporated Define articles of partnership. Name sew in this instrument. What are the steps involved in the SEC registration of-partnerships? tions normally debited and credited to the partner's capital What are the transact account? Differentiate permanent withdrawals from temporary withdrawals. What is the proper accounting treatment of loans receivable from partners and loans payable to partners? What is the basis for recording the values of the non-cash assets contributed to the partnership? What is meant by fair market value of an asset? ee te accounting procedures involved in recording the formation of a partnership by a sole proprietor and an individual with no existing business. Gro 7 i i pba ate Organize the class into groups of five students. Get samples of Peau contracts. Be able to identify and understand the essential provisions ‘ontained in the articles of partnership. Chapter jasic Considerations and Formation | 23 | NAME: SCORE: SECTION: PROFESSOR: True orFalse @) All partnerships are subject to tax at the rate of 30% of taxable income. 2. When the partners invest assets other than cash in a partnership, their capital accounts should be credited with the current fair market values of the assets. @ A dormant partner is one who does not take active part in the partnership business though may be known as a partner. © A partner usually retains title to assets contributed to a partnership, so that certain assets may be identified as belonging to a given partner. ® In a general partnership, each partner's liability for losses is limited to_his investment in the firm. 6. The basis of valuation for non-cash investments should be at values agreed upon by the partners. 7. A partnership has a limited life because any change in the relationship of the partners dissolves the partnership. 8. The essence of partnership is that each partner must share in the profits or losses of the venture. 9. A partnership with a capital of P3,000 or more is valid even if it is unregistered with the Securities and Exchange Commission. The partner's capital account is debited for the debit balance of the drawing account at the end of the period. 11. A partnership agreement should include the procedure for ending the business. 12. Each partner is personally liable for all debts of the partnership. 7 ha-Avosdag 13.) One advantage of a partnership over a corporate form of organization is the unlimited liability of partners. RY A partner by estoppel is one who is actually not a partner but who represents himself as one. x 15.) The partner’s capital account is debited for addi ) his share in profit. nal investments and credited for 24 | Chapter 1 - Basic Considerations and Formation A secret partner is one who does ngt take active part in the partnership business and is not known as a partner. 17. Apartnership is created by mere agreement of the partners. 18. A partnership with a capital of less than P3,000 is void if it is unregistered with the Securities and Exchange Commission. 19. Each partner has a capital account and a drawing account. These accounts are useq ina slightly different way compared to those in a sole proprietorship. >) Adjustments prior to formation may be omitted since these will not affect the partners’ capital credits. 21. In a contract of partnership, two or more persons bind themselves to contribute money, property or industry to a common fund, with the intention of dividing the profit among themselves. In a limited partnership, none of the partners has unlimited liability for the business debts. 5 A silent partner takes active part in the business of the partnership and is not known by outsiders to be a partner. 24. Apartner’s capital account is debited to reflect assets permanently withdrawn. 25. A limited partnership must have at least one general partner. 26.) A partnership may be established for charity. 27. Assets invested in the partnership should be recorded at their cost to the partner. 28. All partnerships have a limited life and assets are co-owned by the partners. 29. A disadvantage of partnerships over corporations is the partners’ unlimited liability. There is no income tax imposed on a partnership. 31. A partnership has a juridical personality separate and distinct from that of each of the partners. 32. A partnership must always have two or more owners. 33. i 3. One of the partners ina Proposed partnership is a multi-millionaire. The stipulation in the articles of partnership that this ing i Partner shall be excluded from sharing in the profits of the partnership is void. . Chapter 1 - Basic Considerations and Formation | 25 NAME: SCORE: SECTION: PROFESSOR: 1. All partners in a general partnership are personally liable for all debts incurred by the partnership. (2) An advantage of the partnership form of business is that each partner's potential loss is limited to that partner's investment in the partnership. 3. Apartnership is a legal entity separate and apart from its owners. {'L 4. A limited partnership normally has one or more general partners whose liability is unlimited. Mt ® The basis of valuation for non-cash investments should be fair market value. When a partner invests assets in a partnership, the assets are recorded at the partner's book value of 7. Liabilities related to assets invested in a partnership by a new ‘partner cannot be transferred to the partnership. 8. A partner who invests assets into a partnership retains control over those specific assets. 9. Accounting for a partnership comes closer to accounting for a sole proprietorship than to accounting for a corporation. i &) Partners’ drawing accounts have normal credit balances. 11. The manner in which profits are to be shared should be specified in the articles of partnership. 12, A partnership should always be constituted in writing. 13. A public instrument needs to be executed when immovable property or real rights are contributed to the partnership. 14. Mutual agency means that each partner has the right to bind the partnership to contracts. Tw 15. As long as the action is within the scope of the partnership, any partner can bind the partnership. 16. When the partnership capital is P3,000 or more, the public instrument must be recorded with the Securities and Exchange Commission. -{/-u 26 | Chapter 1- Basic Considerations and Formation 17. Apartnership with a capital of less than P3,000 Is valid even if itis unregistered with the Securities and Exchange Commission, ||) 18. Two or more persons may form a partnership for the exercise of a profession. -|t 19. There can never be a partnership without contribution of money, property or industry to a common fund. 20. Work or services that may either be personal manual efforts or intellectual may also be contributed to a partnership. \ @ Ownership is easily transferred in a partnership. 22. A partnership cannot be established for religious purposes. 23. A partnership must always have at least two owners. A proprietorship has a limited life whereas a partnership may have an unlimited life, 25. Not all of the partners in a general partnership are personally liable for all debts incurred by the partnership. 26. A dormant partner is one who does not take active part in the partnership business and is not known as a partner. 27. Bankruptcy of a partner will dissolve the partnership. 28. A partnership involves mutual agency, unlimited liability for general partners and limited life. ~\y Ge) A partnership and a corporation cannot form a partnership. 30. A de jure partnership is one which has complied with all the legal requirements for its establishment. ® In a limited partnership, the general partner's liability is limited to his investment. 32. The limited partners are liable only to the extent of their personal contributions: @) One of the partners in a proposed partnership is a multi-millionaire. The stipulation in the articles of partnership that this partner shall be excluded from sharing in the Profits of the partnership is valid. yg Under the partnership form of business, large amounts of capital can be raised easily. My. Chapter 1 - Basic Considerations and Formation \_27 NAM SCORE: SECTION: PROFESSOR: Multiple Choice 4. Which of the following partnership characteristics is a disadvantage? 4 a. Unlimited liability b. Ease of dissolution c. Voluntary association d. Participation in partnership income 2. Allof the following are true for both general and limited partnerships except both are easily dissolved. both must have at least one general partner. all partners are liable for all debts of the firm. all partners have the right to participate in the profits of the business. as » 3. Apartnership agreement should include each partner's duties. the purpose of the business. the method of allocating profits and losses. all of these. aoso 4. Apartnership records a partner's investment of assets in the business at a value set by the partners. the market value of the assets invested. the partner’s book value of the assets invested. any of the above. apo 5. Which of the following is not a characteristic of most partnerships? a. Ease of formation (b.) Limited liability c. Mutual agency d. Limited life 6. Inalimited partnership, (_, the general partners have limited liability, all partners have limited liability. (c. all but the general partners have limited liability. d. all but the general partners have unlimited liability. ge 28 | Chapter 1 - Basic Considerations and Formation 7. The partner’s capital account is credited in the following cases except when involves the recording of the it 10. 11. 12. poco additional investment. original investment. share in profit. debit balance of the drawing account at the end of the period. An advantage of the partnership as a form of business organization would be: aolne A partnership is bound by the acts of the partners. A partnership is created by mere agreement of the partners. Partners do not pay income taxes on their share in partnership profit. The death or withdrawal of a partner may terminate a partnership. The partnership agreement is contained in the articles of partnership, an express contract among the partners. Such an agreement ordinarily does not include aos the rights and duties of the partners. a limitation on a partner's liability to creditors. the allocation of income between the partners. the rights and duties of the partners in the event of partnership dissolution. Which of the following is a characteristic of most partnerships? aos Unlimited life Limited liability Mutual contribution Division of profits only Non-cash assets invested into a partnership are recorded at a. b. c. d zero. their original cost. their carrying value. their fair market value. A partnership which comprises all the profits that the partners may acquire by thei work or industry during the existence of the partnership is called aoe de jure partnership. universal partnership of profits. particular partnership. universal partnership of all present property. 1 43. 14. 15. 16. 417. aore asic Considerations and Formation | 29 ed a partnership. Escareal contributed contributed property other than cash, ed by the partnership. On July 1, 2011, Escareal and Acosta form cash. Acosta, previously a sole proprietor, including land subject to a mortgage, which was assum Acosta’s capital account at July 1, 2011 should be recorded at a. Acosta’s book value of the property less the mortgage payable at July 1, 2011. b. Acosta’s book value of the property at July 1, 2011. €) The fair value of the property at July 1, 2011. d. The fair value of the property less the mortgage payable at July 1, 2011. A partner who is liable for the payment of partnership debts to the extent of his separate property after the partnership assets are exhausted is called Limited partner. (.) General partner. ¢. Managing partner. d. Capitalist partner. The ability of a partner to enter into a contract on behalf of all partners is called mutual agency. voluntary association. unlimited liability. the partnership agreement. ao op) two sole proprietors formed a partnership. Non-cash assets forming part of the initial investment in the partnership would be recorded at the a. Proprietors’ book values or the fair value of the property at the date of the investment, whichever is higher. b. Proprietors’ book values or the fair value of the property at the date of the investment, whichever is lower. ‘c. Fair value of the property at the date of the investment. ~ d. Proprietors’ book values of the property at the date of the investment. A large cash withdrawal by Partner Ruiz from Bernal, Ruiz, Adriano and Gogola, which is viewed by all partners as a permanent reduction of Ruiz’s ownership equity in the partnership, is recorded with a debit to Ruiz, Capital. / Retained Earnings. Loan Receivable from Ruiz. Ruiz, Drawing. 30_|_ Chapter 1 Basie Considerations and Formation 18, A partnership a Is created by agreement of the partners. hat of each of th, fom tha le b. has a juridical personality separate and distinct fr partners. i ble property or rea} immova' © may be constituted in any form, except eee that a public instrument rights are contributed, in which case, the law red be executed. d. Is dissolved by death of a partner. ©. allof the above. ibuting assets to the business, Jue in excess of its cost. Pido tt market value. At what 19, Lintao and Pido formed a partnership, each contr Lintao contributed inventory with a current market val contributed real estate with a cost in excess of its See eas amount should the partnership record each of the following Inventory Real Estate a. Cost Cost b. Market Value Cost c Cost Market Value d Market Value Market Value 20. Partnership capital and drawing accounts are similar to the corporate a. Retained earnings account. b. Paid-in capital and retained earnings accounts. c. Preferred and common stock accounts. 4. Paid-in capital, retained earnings and dividends accounts. 21. Which of the following partnership characteristics is an advantage? a, Mutual agency Unlimited liability c. Limited life d) Ease of formation / s 22. A partner who contributes his work, labor or in try to mMmon fund of the , industry to the cor a. limited Partner, >. capitalist partner, © industrial partner, / 4 managing partner. da. 24. 25. 26. 27. Chapter 1 - Basic Considerations and Formation \ 31 Partnership capital balances include the cumulative effect of a. Initial investments. b. Additional investments. c. Share in profit. d. Share in loss. e. Drawings. f. Allof the above. 8 a,b, cand d only. When a partner invests assets other than cash into a partnership, these assets should be listed on the statement of financial position at their carrying (book) value. their original cost. their fair market value. / the value the investing partner assigns to them. aooe Partner's investments may include which of the following? a. Cash b. Non-cash assets c. Non-cash assets with liabilities to be assumed d. Allof the above. e. Onlyaandb. A partner whose liability for partnership debts is limited to his capital contribution is called industrial partner. general partner. limited partner. secret partner. aose One who takes charge of the winding up of partnership affairs upon dissolution: Dormant partner Liquidating partner Silent partner Ostensible partner eon. 32 | Chapter 1 - Basic Considerations and Formation ee 28. Which of the following is not a characteristic of partnerships? a. Voluntary association b, Mutual agency c. Limited liability d. Limited life ional partnership? 29. Which of these characteristics does not apply to a general professional Pp: Pp a. Unlimited life b. Mutual agency c. Unlimited liability d. No business income tax i ii rs isin the 30. The most appropriate lead to look for relationships among partne! accounting records. voluntary association. partnership agreement. relevant professional journals. ance 31. A partner will not bind the partnership to an outside purchase contract when the a. the item purchased is considered immaterial in amount. b_) item purchased is not within the normal scope of the business. partner who made the purchase withdraws from the partnership. d. partner was not authorized by the other partners to make the purchase. 32. A partner invested into a partnership a building with a P250,000 carrying value and 400,000 fair market value. The related mortgage payable of P125,000 was assumed by the partnership. As a result of the investment, the partner's capital account will be credited for P125,000. P275,000. P250,000. P400,000. — geo 33. A business would be organized as a limited liability partnership to reduce regulation of the business. eliminate double taxation. raise additional cap limit the liability of the owners to their investment. - Qooo Chapter 1 - Basic Considerations ond Formation [2 secvon: Tress Problem #1 © ~Partner's Original Investment Leopoldo Medina contributed land, inventory, and P280,000 cash to a partnership. The land has a book value of P650,000 and a market value of P1,350,000. The inventory has a book value of P600,000 and a market value of P510,000. The partnership also assumed a P350,000 note payable owed by Medina that was used to purchase the land. Lenore Loqueloque agreed to put up cash equivalent to Medina’s net investment. wthcels 5 0 Required: Prepare the journal entry to record Medina's and Loqueloque’s investment in the partnership. 34 | Chapter 1 - Basic Considerations and Formation ———— SECTION: Problem #2 A Sole Proprietor and an Individual with No Business Form On Apr. 8, 2011, Pascua who has her own retail bu a partnership wherein they will divide profits in statement of financial position of Pascua is as follows: Pascua Marketing Statement of Financial Position PROFESSOR: a Partnership siness and Dela Cruz, decided to form the ratio of 40:60, respectively. The April 8, 2012 Assets Cash P 4,000 I 0 Accounts Receivable fea fe aaa Laser Allowance for Uncollectible Accounts) __26,900 Inventory , i P 50,000 Equipment , ; Less: Accumulated Depreciation 10,000 80.000 Total Assets SS Liabilities and Capital ‘Accounts Payable P 36,000 Pascua, Capital 352,000 Total Liabilities and Capital 388,000 ditions agreed upon before the formation of the partnership: S Con ca The accounts receivable of Pascua is estimated to be 70% realizable. [ b. The accumulated depreciation of the equipment will be increased py P10,000. t c. The accounts payable will be assumed by the partnership. 3 d. The capital of the partnership is based on the adjusted capital balance of Pascua. Dela Cruz is to contribute cash in order to make the partner's capital balances proportionate to the profit and loss ratio. Required: 1 Prepare the necessary journal entries in the books of Pascua. 2. Prepare the opening journal entries in the books of the partnership. Chapter 1 - Basic Considerations and Formation | 35 NAME: SCORE: SECTION: PROFESSOR: Problem #3/ A Sole Proprietor-and an Individual with No Business Form a Partnership Espanol operated a specialty shop that sold fishing equipment and accessories. Her post-closing trial balance on Dec. 31, 2010 is as follows: Fish Post-Closing Trial Balance i Dec. 31, 2010 Debit Credit Cash P 36,000 Accounts Receivable 450,000 !40; 00 “Allowance for Uncollectible Accounts. P--16,000 Inventory 440,000 4(- 08 Equipment 135,000 |2 “Accumulated Depreciation 75,000- Accounts Payable 3 30,000 Espanol, Capital 640,000 P761,000 P761,000 Espanol plans to enter into a partnership with trusted associate, Quino, effective Jan. 1, 2011. Profits or losses will be shared equally. Espanol is to transfer all assets and liabilities of her shop to the partnership after revaluation. Quino will invest cash equal to Espanol’s investment after revaluation. The agreed values are as follows: accounts receivable (net), P140,000; inventory, P460,000; and equipment (net), P124,000. The partnership will operate under the business name of Fish R’ Us. Required: 1. Prepare the opening journal entries in the books of the partnership. 2. Prepare the partnership's statement of financial position as at the date of formation of the partnership. 36 | Chapter 1 - Basic Considerations and Formation Problem #4 i rm a Partnership A Sole Proprietor and an Individual with No Busines For business, felt that it is time to expang ship with Lucena, the owner of a nearby "1 Mulles & Lucena Storage and Sales, 5 formed on July 1, 2011. Mulles, the owner of a successful fertilizer operations. Mulles offered to form a partner: warehouse. The partnership would be callee ST Lucena accepted Mulles’ offer and the partnershiP er Supply on June 30, 2011: rtiliz Presented below is the trial balance for Mulles Fe! p 229,500 Cash 2,103,000 Accounts Receivable P447,000 Allowance for Uncollectible Accounts 1,012,500 Inventory 29,250 Prepaid Rent 390,000 Store Equipment 97,500 Accumulated Depreciation 330,000 Notes Payable : 505,500 Accounts Payable 2,714,250 Mulles, Capital ana Cee Totals and losses equally and decided to invest an equal amount in the partnership. Lucena and Mulles agreed that Lucena’s land is worth 500,000 and his building P1,450,000. Lucena is to contribute cash in an amount sufficient to make his capital account balance equal to Mulles. The partners agreed to share profits ’ An agreement is reached by the two partners on the following items: a. The accounts receivable are to be valued at P1,799,000 and the allowance for uncollectible accounts will be eliminated. b. Inventory is to be decreased by P112,500. c. The prepaid rent is for the warehouse used by Mulles. All merchandise will be transferred to Lucena’s building. No refund will be received on the unused rent paid in advance. d. fhe store equipment has a fair value of P300,000. €. All the other assets and liabilities are to be transferred at their book values. Required: Prepare the necessary Be t 4 y journal entries in the books of Mulles. Also, record the rmation of the partnership in a new set of books. Chapter 1 - Basic Considerations and Formation | 37 bsecnon Td roresson Problem #5 Two Sole Proprietors Form a Partnership The business assets of Geron and Yumol appear below: Geron Yumol Cash P 11,000 P 22,354 Accounts Receivable 234,536 567,890 Inventories 120,035 260,102 Land 603,000 : Building - 428,267 Furniture and Fixtures 50,345 34,789 Other Assets 2,000 3,600 Total 1,020,916 _P1,317,002 Account Payable P 178,940 P 243,650 Notes Payable 200,000 345,000 Geron, Capital 641,976 . Yumol, Capital : 728,352 Total 1,020,916 _P1,317,002 Geron and Yumol agreed to form a partnership contributing their assets and equities subject to the following adjustments: a. Accounts receivable of P20,000 in Geron’s books and P35,000 in Yumol’s are uncollectible. Inventories of P5,500 and P6,700 are worthless in Geron’s and Yumot’s respective books. Other assets of P2,000 for Geron and P3,600 for Yumol are to be written off. s 9 Required: Prepare the journal entries for the formation of the partnership as at July 1. 38 | Chapter 1 - Basic Considerations and Formation | _——awl [secronr rors Problem #6 Two Sole Proprietors Form a Partnership , : nership by combining the Debbie Adriano and Helenita Ruiz decided form 8 the following assets to the assets of their separate businesses. Adriano contribute mount of P1,590,000 ang . 7 ith a face a! : Cee eee men beni vi ereandie inventory with a cost lated depreciation an allowance for uncollectible accounts of P97,00U, accumu of P1,000,000; and equipment with a cost of P1,550,000 and of P1,000,000. The partners agreed on the following: that P60,000 of the accounts receivable are completely worthless and are not to be accepted by the partnership, that P114,000 is a reasonable allowance for the accounts, that the merch P914,500, and d._ that the equipment is to be valued at P625,000. 2 uncollectibility of the remaining o andise inventory is to be recorded at the net realizable value of 9 Required: Prepare the journal entry to record Adriano's investment in the partnership. Chapter 1 - Basic Considerations and Formation | 39 — ha PROFESSOR: Problem #7 Two Sole Proprietors Form a Partnership On Oct. 31, 2011, Apalisoc and Tuddao agreed to combine their proprietorships as a partnership. Their statements of financial position are as follows: Apalisoc’s Business Tuddao’s Business Book Current Book Current Assets Value Market Value Value Market Value Cash p 37,000 P 37,000 P 80,000 P 80,000 Accounts Receivable (net) 220,000 202,000 80,000 63,000 Inventory 510,000 460,000 340,000 351,000 Property and Equipment (net) 1,218,000 1,235,000 __ 535,000 574,000 Total Assets P1,985,000 __P1,934,000 _P1,035,000_P,068,000 Liabilities and Capital Accounts Payable P 236,000 P 236,000 P 91,000 P 91,000 Accrued Expenses 22,000 22,000 14,000 14,000 Notes Payable 750,000 750,000 3 - Apalisoc, Capital 977,000 : : - Tuddao, Capital e 930,000 : Total'Liabilities & Capital 1,985,000 P1,934,000 1,035,000 1,068,000 Required: 1. Record the partnership formation. 2. Prepare the partnership's statement of financial position as at Oct. 31, 2011. 40 | chapter 2 - Basic Considerations and Formation i, [scone PROFESSOR: Problem #8 Two Sole Proprietors Form a Partnership fin Antonio and Gayas are fierce competitors who sell hunting equipment. poe ay ; decided to join forces in order to increase their business and reduce » AN agreement is reached between the two to begin operations as a partnership on Mar. 1, 2011. Antonio and Gayas have decided to share profits or losses in the ratio of 60:40, respectively. The statements of financial position of Antonio and Gayas as at Mar. 1, 2011 are as follows: Antonio Gayas Cash P 42,000 P 30,000 Accounts Receivable 389,200 169,200 Allowance for Uncollectible Accounts (22,400) (14,400) Merchandise Inventory 461,600 300,800 Prepaid Rent - 6,000 Office Supplies 30,400 4,000 land 40,000 - Building 128,000 - Accumulated Depreciation (32,000) - Office Equipment 24,000 62,000 Accumulated Depreciation (6,000) (13,200) Repair Equipment 172,000 ahs Accumulated Depreciation (68,000) Total Assets P1,158,800 544,400 Notes Payable P 120,000 - Accounts Payable 170,000 P111,600 Mortgage Payable 200,000 - Antonio, Capital 668,800 - Gayas, Capital : 432,800 Total Liabilities and Owners’ Equity 1,158,800 P544,400 Chapter 1 - Basic Considerations and Formation \ 41 The name of the partnership will be Antonio and Gayas Hunting Gears. The partners have agreed to effect the following adjustments: Antonio's merchandise inventory is to be reduced by P105,200. The inventory of Gayas will be increased by P7,200. a. b, The following are the fair market values of the various assets: Antonio Gayas Land P108,000 Building 192,000 7 Office Equipment 16,000 P40,000 Repair Equipment 124,000 ° One-half of the notes payable of Antonio are personal notes. All other liabilities of the partners are assumed by the partnership. ° a . The prepaid rent in the books of Gayas will be consumed by the partnership. Required: Prepare the journal entries to record the formation of the partnership. 42_| Chapter 1 - Basic Considerations and Formation ————— PROFESSOR: Multiple Choice s 1. On May 1, 2011, Gonzaga and Balace formed a partnership and agreed to share profits and losses in the ratio of 3:7, respectively. Gonzaga contributed a parce} o¢ land that cost P10,000. Balace contributed P40,000 cash. The land was sold fo, P18,000 on May 1, 2011, immediately after formation of the partnership. What amount should be recorded in Gonzaga’s capital account on formation of the partnership? a. P15,000 b. P17,400 \ c. P10,000 d. P18,000 On Mar. 1, 2011, Sarabia and Abad decided to combine their businesses and forma Partnership. Their statements of financial position on Mar. 1, before adjustments, showed the following: Sarabia Abad Cash P 9,000 P 3,750 « Accounts receivable (910) 18,500 13,500 Inventories C80) 30,000 19,500 Furniture and Fixtures (net) \\0W0 '30,000 9,000 Office Equipment (net) 11,500, 2,750 Prepaid Expenses 375 3,000 , Total 105,375. P51,500 Aged Accounts Payable P 45,750 P18,000 Capital 59,6256" 33,500 Total P105,375 P51,500 They agreed to have the following items recorded in their books: 1. Provide 2% allowance for doubtful accounts. Ad ML D a Sarabia’s furniture and fixtures should be P31,000, while Abad’s office equipment is under-depreciated by 250) r 3H Rent expense incurred previously by Sarabia was not yet recorded amounting to a P1,000, while salary expense incurred by Abad was not also recorded amounting to P800. 4. The fair market values of inventory amounted to: For Sarabia P29,500 : For Abad 21,000 Chapter 1 - Basic Considerations and Formation | 43 Compute the net (debit) credit adjustment for Sarabia and Abad: —Sarabla__ = __Abad_ _Sarabla_____Abad a. P2,870 P 2,820 & P(870) P 180 b. P(2,870) P(2,820) d. P 870 P(180) Using the same information in the previous number, what is amount of total liabilities after the formation? a. P63,950 c. P63,750 b. -P65,550 d. 61,556 Using the same information ie #2, what is the amount of total assets after the formation? a P160,765 b. P152,985 P157,985 d. P156,875 Abies and Galang executed a partnership agreement that lists the following assets contributed at the partnership’s formation: Contributed by: Ables Galang Cash 20,000 30,000 Inventory 15,000 Building 40,000 (D6) = $5; dy Furniture and Equipment 15,000, F —15,000__ WS The building is subject to a mortgage of #10000, which the partnership has assumed. The partnership agreement also specified that profits and losses are to be distributed equally. What amounts should be recorded as capital for Ables and Galang at the formation of the partnership? Ables Galang a. P35,000 P85,000 b. P35,000 P75,000 c. P55,000 55,000 d. P60,000 60,000 Orcajada invested in a partnership a parcel of land which cost his father P200,000. The land had a market value of P300,000 when Orcajada inherited it three years go. Currently, the land is independently appraised at P500,000 even though Orcajada insisted that he "wouldn't take P900,000 for it." The land should be recorded in the accounts of the partnership at a. 300,000. b. 500,000. 44 | Chapter 1 - Basic Considerations and Formation ——————, c. P900,000. d. P200,000. 7. On Apr. 30, 2011, Lacson, Yacapin, and Bernal formed a partners ay co their separate business proprietorships. Lacson contributed cash oF (P50.000, Yacapin contributed property with a P36,000 carrying amount, a P40, cent cost, and P80,000 fair value. The partners accepted responsibility for the P35,000 mortgage attached to the property. \.5 0 Bernal contributed equipment with a P30,000 carrying amount, a P75,000 origina} cost, and P55,000 fair-value. The partnership agreement specifies thas profits and losses are to be shared equally but is silent regarding capital contributions. ich partner has the largest Apr. 30, 2011, capital balance? a. Lacson —c. Bernal b. — Yacapin d. All capital account balances are equal 8. On Aug. 1, Isada and Ureta-Reyes pooled their assets to form a partnership, with the firm to take over their business assets and assume the liabilities. Partnership capitals are to be based on net assets transferred after the following adjustments. Profits and losses are allocated equally. The inventory of Ureta-Reyes is to be increased by P4,000; an allowance for doubtful accounts of P1,000 and P1,500 are to be set up in the books of Isada and Ureta-Reyes, respectively; and accounts payable of P4,000 is to be recognized in Isada’s books. The individual trial balances on August, before adjustments, follow: Isada Ureta-Reyes Assets 75,000 P113,000 Liabilities 5,000 34,500 What is the capital of lsada and Ureta-Reyes after the above adjustments? a. Isada, P68,750; U. Reyes, P77,250 cc. __Isada, P65,000; U. Reyes, P76,000 b. Isada, P65,000; U. Reyes, P81,000 d. Isada, P75,000; U. Reyes, P81,000 9. Calma and Abello formed a partnership on April 1 and contributed the following assets: Calma Abello Sie; Cash P 150,000 P 50,000 =\440 oA Land 310,000 » UE Cray ® pen eeegige? The land was subject to a mortgage of P30,000, which was assumed by the Partnership. Under the partnership agreement, Calma and Abello will share profit and loss in the ratio of one-third and two-thirds, respectively, Abello’s capital account at April 1 should be 10. a1. 12. Chapter 1 - Basic Considerations and Formation |_45 a. P330,000. b. P360,000. cc. P300,000. d. 340,000. pedernal, Pating, and Liggayu are forming a new partnership. Pedernal is to invest cash of P100,000 and stapling equipment originally costing P120,000 but has a second-hand market value of P50,000. Pating is to invest cash of P160,000. Liggayu, whose family is engaged in selling stapling equipment, is to contribute cash of P50,000 and a brand new stapling equipment to be used by the partnership with a regular price of 120,000 but which cost their family’s business P100,000. Partners agreed to share profits equally. The capital balances upon formation are Pedernal, P220,000; Pating, P160,000; and Liggayu, P150,000. Pedernal, P150,000; Pating, P160,000; and Liggayu, P170,000. Pedernal, P160,000; Pating, P160,000; and Liggayu, P160,000. Pedernal, P176,666; Pating, P176,666; and Liggayu, P176,668. pols» Estrada and Molina formed a partnership on Mar. 1, 2011 and contributed the following assets: Estrada Molina Cash P80,000 Equipment PS0,000 The equipment was subject to a chattel mortgage of P10,000 that was assumed by the partnership. The partners agreed to share profits and losses equally, Molina’s capital account at Mar. 1, 2011 should be a. P50,000. c. P40,000. b. P45,000. d. P60,000. On Mar. 1, 2011, Kalaw and Borromeo formed a partnership with each contributing the following assets: i kalaw Borromeo Cash 30,000 P 70,000 Machinery and Equipment 25,000 75,000 Building - 225,000 Furniture and Fixtures 10,000 5 The building is subject to mortgage loan of P80,000, which is to be assumed by the Partnership. Agreement provides that Kalaw and Borromeo share profits and losses 30% and 70%, respectively. On Mar. 1, 2011 the balance in Borromeo’s capital account should be mation 46 | Chapter 1 - Basic Considerations and Fo! c. 305,000. a. P370,000. d, 290,000. b. 314,000. e loan is hat the mortgags Not 13. The same information in the previous number Laie in Borromeo’s capity assumed by the partnership. On Mar. 1, 2011 the account should be 000. _a. P370,000. i ean b. 314,000. Set ar att 14. On July 1, Faminial and Fetalvero formed a partnership, agreeing to rua and losses in the ratio of 4:6 respectively. Faminial contributed a parce pea at Cost P25,000. Fetalvero contributed P50,000 cash. The land was sold for P50,009 en july 2, three hours after formation of the partnership. How Se aTitn recorded in Faminial’s capital account on formation of the partnership? a. P50,000. c. P25,000. b. P20,000. d. P10,000. 15. On Apr. 30, 2011, Foja, Lupian, and Separate business proprietorships. contributed property with a P36,000 80,000 fair value. The Property. Retada contributed equipment with a P30, Retada formed a partnership by combining their Foja contributed cash of P50,000. Lupian carrying amount, a P40,000 original cost, and a. Foja. b. Retada. c. Lupian. d. All capital account balances are equal. 36. Lacson and Solis started a partnership, Purchased 10 years ago for P100,000. building on the date of formation of the pa P110,000. For what amount will Lacson’s of the partnership? a. P100,000 b. P75,000 Lacson contributed a building that she The accumulated depreciation on the rtnership is P25,000 and the fair value is capital account be credited on the books £. P110,000 d. P25,000