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Illustrative Problems - Formation of a Partnership

BS accountancy

ILLUSTRATIVE PROBLEMS: PARTNERSHIP 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.

I. INDIVIDUALS WITH NO EXISTING BUSINESS FORM A PARTNERSHIP

On January 2, 20A, Cesario Edulan, Edgar Detoya and Pamela Tao formed a partnership business with the following contributions:  C. Edulan (General partner) contributed cash of P100,000 and shares profit of 50%.  E. Detoya (Limited Partner) contributed a brand new motorcycle costing P120,000 in which his liability of P15,000 from Cebu Motorama will be assumed by the partnership and shares profit of 50%.  P. Tao’s (Industrial Partner) contribution will be her personal services and shares 10% in profit. Prepare two single journal entries recording their respective contributions.

Cash P100, C. Edulan, Capital P100, Initial investment of C. Edulan.

Equipment P120, Accounts Payable P 15, E. Detoya, Capital 105, Initial investment of E. Detoya With assumption of a liability.

Ms. Pamela Tao was admitted in the partnership as an industrial partner with a 10% share in profit. Signed: C. Edulan E. Detoya P. Tao

II. A SOLE PROPRIETOR AND ANOTHER INDIVIDUAL FORM A PARTNERSHIP

Albert Malquisto was already in trading business a year ago. He offered Julius Rocabo to join with him in the business for the first time. The general ledger balances of Malquisto prior to partnership formation follows:

Cash P 375, Accounts Receivable 90, Estimated Uncollectible Accounts ( 1,000 ) Merchandise 420, Equipment 250, Accumulated Depreciation ( 50,000 ) Accounts Payable ( 75,000 ) Malquisto, Capital? Rocabo will contribute cash equal to one-half of Malquisto’s capital balance after the following adjustments are reflected in the sole proprietor’s book of Malquisto. a. Accounts Receivable should have an estimated realizable value of P85,000. b. Merchandise Inventory should have a net realizable value of P390,000 after considering obsolescence.

c. Equipment should have a carrying value or net book value of P180,000. d. The omitted accrued utilities of P1,500 should be considered in the adjustment.

Required:

1. Compute the capital balance of Malquisto prior to partnership formation.
2. Adjusting entry necessary to correct the book of Malquisto.
3. Compute the adjusted capital account of Malquisto.
4. Closing entry in the sole proprietorship book of Malquisto.
5. Opening entry in the partnership book.
6. Statement of Financial Position after the formation of partnership.

Requirement 1: Debits: Cash P375, Accounts Receivable 90, Merchandise 420, Equipment 250,000 P1,135, Credits: Estimated Uncollectible P 1, Accumulated Depreciation 50, Accounts Payable 75,000 126, Capital balance of Malquisto P1,009,

Requirement 2:

Note: 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 debit or credit to a nominal account, the Capital account would instead be debited or credited. This is so because the business has ceased to be a going concern. A business is not viewed as a going concern if liquidation appears imminent.

a. Malquisto, Capital 4, Estimated Uncollectible Account 4,

Per Books Per Agreement Accounts Receivable 90,000 90, Estimated Uncollectible Accounts 1,000 + 4000 5, Net Realizable Value 89,000 85,

b. Malquisto, Capital 30, Merchandise 30,

420,000 – 390,000 = 30,

c. Malquisto, Capital 20, Accumulated Depreciation 20,

Per Books Per Agreement Equipment 250,000 250, Accumulated Depreciation 50,000 + 20,000 70, Net Book Value 200,000 180,

d. Malquisto, Capital 1, Accrued Utilities 1,