INTERMEDIATE ACCOUNTING Vol.1 (2021 Edition) Conrado T. Valix, Jose F. Peralta & Christian | Exams Accounting

ADVANCED FINANCIAL REPORTING: ACCOUNTING FOR PARTNERSHIP

DEFINITION OF PARTNERSHIP

-A contract where two or more persons bind themselves to contribute money, property or industry to a common fund with the intention of

dividing profits among themselves. Two or more persons may also form a partnership for the practice of profession or what we call GENERAL

PROFESSIONAL PARTNERSHIP (Art. 1767, Civil Code of the Philippines)

CHARACTERISTICS OF A PARTNERSHIP

Some characteristics of a partnership that distinguish it from other forms of business organization (Sole and Corporation) are the following:

 Voluntary Association

A partnership is created by voluntary agreement of individual rather than operation of law.

 Limited life

Partnership is created by a contract and anything that ends the contract of the partnership dissolves it (admission of new partner,

withdrawal, death/retirement, liquidation).

 Unlimited Liability

A partner’s liability extends beyond his/her capital contribution (except limited partners).

 Mutual Agency

Each partner is an agent of the partnership within the scope of the business.

PARTNERSHIP AS DISTINGUISHED FROM CORPORATION

1. Manner of Creation P- mere agreement of the partners

C- created by operation of law

2. No. of persons P- 2 or more

C- at least 5 persons, not exceeding 15

3. Commencement of Juridical Personality P-execution of articles of “P”

C- issuance of certificate of incorporation by SEC

4. Management P- every partner is an agent of the “P” if no managing partner was

appointed

C- Management is vested in the Board of directors

5. Extent of Liability P- up to personal assets excluding limited partner

C-only up to extent of interest and investment

6. Right of Succession P- no right of succession (One partner died, the “P” will dissolve)

C- there is right of succession, it will continue even if one died

7. Terms of Existence P- based on contract agreed

C- 50 years subject to extension

CLASSIFICATION OF PARTNERSHIP

1. According to Liability

a. General – up to separate assets

b. Limited – up to contribution

2. According to Duration

a. W/ fixed term

b. Partnership at will – no term specified

3. According to Purpose

a. Commercial/trading – for business transaction

b. Professional/non-trading – exercise of profession

4. According to Legality

a. De jure – complied all legal requirements

b. De facto – failed to comply all legal requirements

5. According to Subject

a. Universal “P” of all present properties – all contribution becomes part of the “P” fund

b. Universal “P” of all profits – if the problem is silent it is assumed to be letter B

KINDS OF PARTNERS

1. General partner

2. Limited Partner

3. Capitalist

4. Industrial

5. Managing partner

6. Liquidating

7. Dormant

8. Silent

9. Secret

10. Nominal or partner by estoffel

EQUITY THEORIES IN PARTNERSHIP

1. ENTITY THEORY holds that the business is separate and distinct from the owners of the business. The business is the entity.

2. PROPRIETARY THEORY holds that the owners are the entity

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ADVANCED FINANCIAL REPORTING: ACCOUNTING FOR PARTNERSHIP

DEFINITION OF PARTNERSHIP

A contract where two or more persons bind themselves to contribute money, property or industry to a common fund with the intention of

dividing profits among themselves. Two or more persons may also form a partnership for the practice of profession or what we call GENERAL

PROFESSIONAL PARTNERSHIP (Art. 1767, Civil Code of the Philippines)

CHARACTERISTICS OF A PARTNERSHIP

Some characteristics of a partnership that distinguish it from other forms of business organization (Sole and Corporation) are the following:

 Voluntary Association

A partnership is created by voluntary agreement of individual rather than operation of law.

 Limited life

Partnership is created by a contract and anything that ends the contract of the partnership dissolves it (admission of new partner,

withdrawal, death/retirement, liquidation).

 Unlimited Liability

A partner’s liability extends beyond his/her capital contribution (except limited partners).

 Mutual Agency

Each partner is an agent of the partnership within the scope of the business.

PARTNERSHIP AS DISTINGUISHED FROM CORPORATION

1. Manner of Creation P- mere agreement of the partners

C- created by operation of law

2. No. of persons P- 2 or more

C- at least 5 persons, not exceeding 15

3. Commencement of Juridical Personality P-execution of articles of “P”

C- issuance of certificate of incorporation by SEC

4. Management P- every partner is an agent of the “P” if no managing partner was

appointed

C- Management is vested in the Board of directors

5. Extent of Liability P- up to personal assets excluding limited partner

C-only up to extent of interest and investment

6. Right of Succession P- no right of succession (One partner died, the “P” will dissolve)

C- there is right of succession, it will continue even if one died

7. Terms of Existence P- based on contract agreed

C- 50 years subject to extension

CLASSIFICATION OF PARTNERSHIP

1. According to Liability

a. General – up to separate assets

b. Limited – up to contribution

2. According to Duration

a. W/ fixed term

b. Partnership at will – no term specified

3. According to Purpose

a. Commercial/trading – for business transaction

b. Professional/non-trading – exercise of profession

4. According to Legality

a. De jure – complied all legal requirements

b. De facto – failed to comply all legal requirements

5. According to Subject

a. Universal “P” of all present properties – all contribution becomes part of the “P” fund

b. Universal “P” of all profits – if the problem is silent it is assumed to be letter B

KINDS OF PARTNERS

1. General partner

2. Limited Partner

3. Capitalist

4. Industrial

5. Managing partner

6. Liquidating

7. Dormant

8. Silent

9. Secret

10. Nominal or partner by estoffel

EQUITY THEORIES IN PARTNERSHIP

1. ENTITY THEORY holds that the business is separate and distinct from the owners of the business. The business is the entity.

2. PROPRIETARY THEORY holds that the owners are the entity

ACCOUNTING FORMATION

Partnership may be formed in several ways:

a. Formation of the partnership for the first time

b. Conversion of sole proprietorship to a partnership

c. Admission of a new partner

ACCOUNTING FOR PARTNERSHIP FORMATION

Cash investments – recorded at face value as far as cash valuation is concerned (agreed value)

Non-cash investment – agreed value or FV or the price at which assets and liabilities can be exchanged in an arm length transactions between

knowledgeable, unrelated, willing parties (IFRS 3). In case there is conflict between agreed value and FV, the former prevails.

Liabilities – PV or remaining cash flows

Services – memo entry

VALUATION OF INVETSMENTS

1. Bonus approach – retains historical cost

2. Revaluation approach – depart from HC, non-GAAP believed not in accordance with substance over form

(GW Method)

ILLUSTRATION 1 : TWO NEW INDIVIDUAL FORM A PARTNERSHIP (FIRST TIMERS)

On July 1 2016, Pholdz and JC agreed to form a partnership. The partnership agreement specified that Pholdz is to invest cash of

50,000 and JC is to contribute land with FMV of P100,000 with 20,000 mortgage liability in the bank to be assumed by the

partnership.

ILLUSTRATION 2: SOLE PROPRIETORSHIP TO PARTNERSHIP

Assume that AA and BS form a partnership. AA has been operating a business that is to be carried on by the new partnership. B is to invest cash of P250,000 and equipment with a fair value of 125,000 encumbered by a mortgage note payable of P25,000. Just before the partnership is formed, a statement of financial position is drawn up for AA’s business as follows: AA Statement of Financial Position As of January 31, 2016 Assets Liabilities and Capital Cash 162,000 Trade and other payables 240, Trade Receivables 200,000 AA’s Capital 404, Less: Allowance for Bad debts 12, 000 188,000 Total Liabilities and Capital 644, Inventory 214, Other current assets 16, Equipment 120, Less: Accum. Depreciation 56,000 64, Total Assets 644, The following adjustments must be made in establishing AA’s interest. a. Trade receivable - Doubtful accounts of 10,000 are to be written off; a 4% allowance for doubtful accounts is to be recognized on the remaining accounts. b. Inventory- this should be written up to P266,000 fair value c. Equipment- This is over depreciated by P11, d. Accrued expenses of P10,000 was unrecorded (credit to this trade and other payables) Prepare the adjusting entries and financial position of the partnership  AA’s books will be used as the partnership books  New partnership books will be used

PROPRIETARY ENTITY

The entity is viewed as the individual owners The business unit is separate and distinct from its

owners

Salaries to partners are distributions of income

(not expenses)

Partnership enters contracts in its own name

Unlimited liability extends to personal assets of

owners

Partnership give up title to their contribution

Original partnership is dissolved with the

admission or withdrawal of a partner

Accum. Depr’n. (9,000) (3,000) PREPAID RENT Total Assets 100,000 120, AP 28,000 20, Capital 72,000 100, Total liabilities and Capital 100,000 120, Determine the following:

The net adjustment – capital in the books of HB and KM.
The adjusted capital of HB and KM in their respective books
The additional investment (withdrawal) made by HB
The total assets of the partnership after formation
The total liabilities of the partnership after formation
The total capital of the partnership after formation
The capital balances of HB and KM in the combined balance sheet Problem 2: On December 1, 2011, Arjay and Homarr formed a partnership with each contributing the following assets at fair market values: Arjay Homarr Cash 9,000 18, Machinery 13,500 ----- Land ------ 90, Building ------ 27, Office Furniture 13,500 ------ The land and building are subject to a mortgage loan of P54,000 that the partnership will assume. The partnership agreement provides that Arjay and Homarr share profits and losses, 40% and 60% respectively and partners agreed to bring their capital balances in proportion to the profit and loss ratio and using capital balance of Homarr as the basis. The additional cash investment made by Arjay should be. Problem 3: JR and BS are joining their separate business to form a partnership. Cash and non-cash assets are to be contributed for a total capital of 300,000. The non-cash assets to be contributed and liabilities to be assumed are: JR BS BV FV BV FV AR 22,500 22, Inventory 22,500 33,750 60,000 67, Equipment 37,500 30,000 67,500 71, AP 11,250 11,250 7,500 7, The partner’s capital accounts are to be equal after all contributions of assets and assumptions of liabilities.
The total assets of the partnership is
The amount of cash that each partner must contribute: Problem 4: On April 30, 2012, XX, YY and ZZ formed a partnership by combining their separate business proprietorships. XX contributed cash f 75,000. YY contributed property with a 54,000 carrying amount, a 60,000 original cost and 120,000 fair value. The partnership accepted responsibility for the 52,500 mortgage attached to the property. ZZ contributed equipment with a 45,000 carrying amount, a 112,500 originalcost and 82,500 fair value. The partnership agreement specifies that profits and losses are to be shared equally but is silent regarding capital contributions. Which partner has the largest April 30, 2012 capital balance? PARTNERSHIP OPERATIONS

PARTNER’S LEDGER

1. Capital Accounts

2. Drawings Account

3. Account for loans to or from partner

CAPITAL ACCOUNT DRAWINGS Permanent withdrawal Original Investment Partnership Withdrawals Obligations of “P Debit balance of the drawing account Additional Investment Partner’s personal indebtedness assumed or paid Share in Losses Partner’s share in profit Funds or claims of “P” collected and by partner Retained by partner personal funds of partner collected or retained by “P Partner’s salaries Depending on the Agreement DIVISION OF PROFITS AND LOSSES RULE 1: The losses and profits shall be distributed in conformity with the agreement. RULE 2: If ONLY the share of each partner in the profits has been agreed upon, the share of each in the losses shall be in the same proportion RULE3: In the absence of stipulation, the share of each partner in the profits and losses shall be in proportion to what they have contributed (original capital contribution) but the industrial partner shall not be liable for the losses. As for the profits, the industrial partner shall receive such share as may be just and equitable under the circumstances. RULE 4: If beside his services, he also contributed capital, he shall also receive a share in the profits in proportion to his capital. (Law on Partnership, Civil code of the Philippines, article 1797) METHODS OF DIVIDING PROFITS AND LOSSES Partners may agree on the distribution of profits and losses in any manner they choose as long as the provisions of the law are not violated. The agreement on this matter should be specific and complete to avoid misunderstanding and dispute.

Equally
In an arbitrary or agreed ratio
In the ratio of partners’ capital a. Original capital b. Beginning of the year capital c. End of the year capital d. Simple average during the year e. Weighted average during the year
Interest, salaries and bonus are to be allowed, the balance to be divided based on some arbitrary basis as agreed upon. EQUALLY  Assume that A, B, C are partners in ABC partnership. Profit for the period is P120,000. Entry: IN AN ARTBITRARY OR AGREED RATIO  Assume that in the ABC partnership, income is divided 40%, 30%, 30% to ABC respectively. Entry: IN THE RATIO OF PARTNERS’CAPITAL Using the ratio of partners’ capital in dividing profits, the following are the methods: a. Based on Original capital b. Based on beginning capital c. Based on ending capital d. Based on simple average e. Based on weighted average capital  Assume that the ABC partnership was organized two years ago with each partner contributing the following: A- P180, 000 B- 120, C- 300, Transactions between the partners and the partnership during the current year are as follows: PARTNER A: January 1 Balance 200, March 1 Additional Investment 50, June 30 Withdrawal 30, October 31 Additional Investment 20, December 31 Balance (before division of income) 240, PARTNER B: January 1 Balance 150, August 1 Additional Investment 20, November 1 Additional Investment 70, December 31 Balance (before division of income) 200, PARTNER C: January 1 Balance 400, February 1 additional Investment 50, May 31 Additional investment 60, October 31 Additional investment 20, December 31 Balance (before division of income) 530,

INTERMEDIATE ACCOUNTING Vol.1 (2021 Edition) Conrado T. Valix, Jose F. Peralta & Christian, Exams of Accounting

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Download INTERMEDIATE ACCOUNTING Vol.1 (2021 Edition) Conrado T. Valix, Jose F. Peralta & Christian and more Exams Accounting in PDF only on Docsity!

ADVANCED FINANCIAL REPORTING: ACCOUNTING FOR PARTNERSHIP

DEFINITION OF PARTNERSHIP

dividing profits among themselves. Two or more persons may also form a partnership for the practice of profession or what we call GENERAL

PROFESSIONAL PARTNERSHIP (Art. 1767, Civil Code of the Philippines)

CHARACTERISTICS OF A PARTNERSHIP

Some characteristics of a partnership that distinguish it from other forms of business organization (Sole and Corporation) are the following:

 Voluntary Association

A partnership is created by voluntary agreement of individual rather than operation of law.

 Limited life

Partnership is created by a contract and anything that ends the contract of the partnership dissolves it (admission of new partner,

withdrawal, death/retirement, liquidation).

 Unlimited Liability

A partner’s liability extends beyond his/her capital contribution (except limited partners).

 Mutual Agency

Each partner is an agent of the partnership within the scope of the business.

PARTNERSHIP AS DISTINGUISHED FROM CORPORATION

1. Manner of Creation P- mere agreement of the partners

C- created by operation of law

2. No. of persons P- 2 or more

C- at least 5 persons, not exceeding 15

3. Commencement of Juridical Personality P-execution of articles of “P”

C- issuance of certificate of incorporation by SEC

4. Management P- every partner is an agent of the “P” if no managing partner was

appointed

C- Management is vested in the Board of directors

5. Extent of Liability P- up to personal assets excluding limited partner

C-only up to extent of interest and investment

6. Right of Succession P- no right of succession (One partner died, the “P” will dissolve)

C- there is right of succession, it will continue even if one died

7. Terms of Existence P- based on contract agreed

C- 50 years subject to extension

CLASSIFICATION OF PARTNERSHIP

1. According to Liability

a. General – up to separate assets

b. Limited – up to contribution

2. According to Duration

a. W/ fixed term

b. Partnership at will – no term specified

3. According to Purpose

a. Commercial/trading – for business transaction

b. Professional/non-trading – exercise of profession

4. According to Legality

a. De jure – complied all legal requirements

b. De facto – failed to comply all legal requirements

5. According to Subject

a. Universal “P” of all present properties – all contribution becomes part of the “P” fund

b. Universal “P” of all profits – if the problem is silent it is assumed to be letter B

KINDS OF PARTNERS

1. General partner

2. Limited Partner

3. Capitalist

4. Industrial

5. Managing partner

6. Liquidating

7. Dormant

8. Silent

9. Secret

10. Nominal or partner by estoffel

EQUITY THEORIES IN PARTNERSHIP

1. ENTITY THEORY holds that the business is separate and distinct from the owners of the business. The business is the entity.

2. PROPRIETARY THEORY holds that the owners are the entity

ACCOUNTING FORMATION

Partnership may be formed in several ways:

a. Formation of the partnership for the first time

b. Conversion of sole proprietorship to a partnership

c. Admission of a new partner

ACCOUNTING FOR PARTNERSHIP FORMATION

Cash investments – recorded at face value as far as cash valuation is concerned (agreed value)

Non-cash investment – agreed value or FV or the price at which assets and liabilities can be exchanged in an arm length transactions between

knowledgeable, unrelated, willing parties (IFRS 3). In case there is conflict between agreed value and FV, the former prevails.

Liabilities – PV or remaining cash flows

Services – memo entry

VALUATION OF INVETSMENTS

1. Bonus approach – retains historical cost

2. Revaluation approach – depart from HC, non-GAAP believed not in accordance with substance over form

(GW Method)