Advanced Financial Accounting and Reporting

Accounting for Partnership

Partnership Formation

Each partners initial investment in a partnership should be recorded at the fair market value of the
assets or present value of the liabilities at the date of their transfer to the partnership. The values
assigned to each partners capital must be agreed to by all of the partners. After the partnership has been
formed, the accounting is similar to accounting for transactions of any other type of business organization.

Partnership Operation

Partnership net income or net loss is shared by the partners based on their agreement. If no agreement
has been made, then net income or net loss is shared based on each partners original capital
investment. Partnership agreement should specify the basis for sharing net income or net loss. The
following are typical income ratios:
1. A fixed ratio, expressed as a proportion (6:4), a percentage (60% and 40%), or a fraction (3/5 and
2/5).
2. A ratio based on either capital balances at the beginning of the year or on average capital balances
during the year.
3. Salaries to partners and the remainder on a fixed or capital ratio.
4. Interest on partners capital balances and the remainder on a fixed or capital ratio.
5. Salaries to partners, interest on partners capital balances, and the remainder on a fixed or capital
ratio.
Bonus to partners may also be given provided that the basis for bonus is a positive amount.

The following 4 closing entries are required for a partnership:

1. Debit each revenue account for its balance and credit income summary for total revenues.
Revenues xx
Income Summary xx
2. Debit income summary for total expenses and credit each expense account for its balance.
Income Summary xx
Expenses xx
3. Debit (credit) income summary account for its balance and credit (debit) each partners drawing
account for his/her share of net income (net loss).
Income Summary xx
Partner A, Drawing xx
Partner B, Drawing xx

or if net loss
Partner A, Drawing xx
Partner B, Drawing xx
Income Summary xx
4. Debit (credit) each partners drawing account for its balance and credit (debit) each partners
capital account for the same amount.
Partner A, Drawing xx
Partner B, Drawing xx
Partner A, Capital xx
Partner B, Capital xx

Partnership Dissolution

Partnership dissolution is different to partnership liquidation as the former indicates ending of agreement
only to replace it with a new one and the latter indicates the ending of the partnership business
altogether. Partnership dissolution may takes place under the following circumstances:
1. Admission of a new partner either by:
a. Purchasing the interest of an existing partner
b. Investing assets in the partnership
2. Withdrawal of a partner
3. Incorporation

Admission by purchase
The admission of a partner by purchase of an interest in the firm is a personal transaction between one
or more existing partners and the new partner. The price paid is negotiated and determined by the
individuals involved; it may be equal to or different from the capital equity acquired. Any money or other
consideration exchanged is the personal property of the participants and not the property of the
partnership. Any gain or loss on the exchange is also personal to the participants.

Admission by investment
When a partner is admitted by investment, both the total net assets and the total capital change. When
the new partners investment differs from the capital equity acquired, the difference is considered a bonus
either to: 1) the existing (old) partners, or 2) the new partner.
Assets may be under (over) valued at the time of the admission (in both cases) of new partners. Any
difference in the revaluation of partnership assets shall be shared only by the existing (old) partners.

Withdrawal of a partner
A partner may withdraw from a partnership voluntarily by selling his or her equity in the firm or
involuntarily by reaching mandatory retirement age or by dying. The withdrawal of a partner may be
accomplished by 1) payment from remaining partners personal assets, or 2) payment from partnership
assets.

The withdrawal of a partner when payment is made from partners personal assets is the direct opposite
of admitting a new partner who purchases a partners interest. Withdrawal by payment from partners
personal assets is a personal transaction between the partners.

Using partnership assets to pay for a withdrawing partners interest decreases both total assets and total
partnership capital. In accounting for a withdrawal by payment from partnership assets:
1. Asset revaluations may be recorded
2. Any difference between the amount paid and the withdrawing partners capital balance should be
considered a bonus to the retiring partner or a bonus to the remaining partners.

The death of a partner dissolves the partnership. But provision generally is made for the surviving
partners to continue operations. When a partner dies, it is necessary to determine the partners equity at
the date of death. This is done by determining the net income or loss for the year to date of death. The
surviving partners will agree to either:
1. Purchase the deceased partners equity from their personal assets
2. Use partnership assets to settle with the deceased partners estate

Procedures in Incorporation of a partnership

1. Adjust the assets and liabilities of the partnership to their fair market values and allocate the
difference to the partners capital accounts according to their profit and loss ratio.
2. Compute for and record the goodwill by comparing the total par value of the stocks to be issued
to the partners with the total adjusted partners capital accounts. If the total par value of the
stocks issued is greater than the adjusted partners capital accounts, the difference represents
goodwill. If the par value of the stocks issued is less than the adjusted partners capital accounts,
the difference is considered as additional paid in capital.
3. Close the partnership books because a new book will be used for the new entity.
4. Record in the new set of books by debiting the assets at their fair market values, crediting the
liabilities at their current values, and crediting capital stock for the total par value of the stocks
issued to the partners.

Partnership Liquidation

The liquidation of a partnership terminates the business. In a liquidation, it is necessary to:

1. Sell non cash assets for cash and recognize a gain or loss on realization,
2. Allocate gain or loss on realization to the partners based on their income or loss ratios
3. Pay partnership liabilities in cash
4. Distribute remaining cash to partners on the basis of their remaining capital balances.
Each of the steps must be performed in sequence. Creditors must be paid before partners receive any
cash distributions and must be recorded by an accounting entry.

The term no capital deficiency means that all partners have credit balances in their capital accounts. If at
least one partners capital account has a debit balance, the situation is termed a capital deficiency. A
capital deficiency may be caused by: 1) recurring net losses, 2) excessive drawings before liquidation, or
3) losses from realization suffered through liquidation. The capital deficiency of a partner may be
eliminated through: 1) offsetting of partnership loan payable to the deficient partner (if theres any), 2)
additional investment of the deficient partner (if partner is solvent), or 3) absorption of the other partners.

Partnership liquidation may be performed under:

1. Lump sum all non-cash assets are sold for cash.
2. Installment involves the distribution of cash to partners as it becomes available during the
liquidation period and before all liquidation gains and losses have been realized.

In the second kind of liquidation, a schedule of safe payment of computation must be performed. The
calculation of safe payment is based on the following assumptions: 1) all partners are personally
insolvent, and 2) all noncash assets represent possible losses. The development of cash distribution
plan for the liquidation of a partnership involves ranking the partners in terms of their vulnerability to
possible losses.
Partnership Formation

1. Rachel and Shine formed a partnership on June 1, 2016. Rachel contributed cash of P150,000, and
Shine contributed land and building. The land cost is P45,000 and has a current market value of
P75,000. The building cost is P120,000 and has an accumulated depreciation of P30,000. The fair
market value is P105,000. Land and building are mortgaged at P45,000, which is to be assumed by
the partnership. How much is the capital account of Rachel and Shine on the date of formation?

2. Jek and Mike formed a partnership and agreed to divide initial capital equally even though Jek
contributed P318,000 and Mike contributed P282,000 in identifiable assets.
a. Assuming the bonus method was used to adjust the capital accounts, how much capital is to be
credited to Jek and Mike?
b. Assuming the goodwill method was used to adjust the capital accounts, how much is the amount
of goodwill and the capital balances of Jek and Mike?

3. Effective August 1, 2016, Alex and Bob agreed to form a partnership from their two respective
proprietorships. The balance sheets presented below reflect the financial position of both
proprietorships as of July 31, 2016:
ALEX BOB
Cash P 12,000 P 30,000
Accounts Receivable 72,000 42,000
Merchandise Inventory 198,000 252,000
Prepaid Rent 24,000
Store Equipment 240,000 180,000
Accumulated Depreciation (90,000) (108,000)
Building 750,000
Accumulated Depreciation (150,000)
Land 360,000 ________
Totals P1,392,000 P420,000

Accounts Payable P 45,000 P 18,000

Mortgage Payable 360,000
Alex, Capital 987,000
Bob, Capital ________ 402,000
Totals P1,392,000 P420,000
As of August 1, 2016, the fair value of Alexs assets were: merchandise inventory, P162,000; store
equipment, P90,000; building, P1,500,000; and land, P600,000. For Bob, the fair value of the assets
on the same date were: merchandise inventory, P270,000; store equipment, P39,000; prepaid rent,
zero. All other items on the two balance sheets were stated at their fair values. How much capital
must be credited to Alex upon formation of partnership?

4. Jayson admits Sam as a partner in business. Accounts in the ledger of Jayson on June 1, 2016, just
before the admission of Sam, show the following balances:
Cash P 26,000 Accounts Payable P264,000
Accounts Receivable 120,000 Jayson, Capital 62,000
Merchandise Inventory 180,000
It is agreed that for purposes of establishing Jaysons interest, the following adjustments should be
made:
An allowance for doubtful accounts of 2% of accounts receivable is to be established.
The merchandise inventory is to be valued at P202,000.
Prepaid expenses of P6,500 and accrued expenses of P4,000 are to be established.

Sam is to invest sufficient funds in order to receive a 1/3 interest in the partnership.
a. How much is the adjusted capital of Jayson?
b. How much cash should Sam invest?

5. The partnership of Alrene and Chris was formed on February 28, 2016. The following assets were
contributed:
Alrene Chris
Cash P 125,000 P 175,000
Merchandise 275,000
Building 500,000
Furniture and Equipment 75,000

The building is subject to a mortgage loan of P150,000 which is to be assumed by the partnership.
The partnership agreement provides that Alrene and Chris share profits or losses 1:3, respectively. If
the partnership agreement provides that the partners initially should have an equal interest in
partnership capital with no contribution of intangible assets, Alrenes capital account at February 28,
2016 would be ___________.
Partnership Operation

1. A, B, and C, doctors, agree to form a partnership and to share profits in the ratio 5:3:2. They also
agreed that C is to be allowed a salary of P140,000 and that B is to be guaranteed P105,000 as his
share of the profits. During the first year of operations, income from fees are P900,000, while
expenses total P480,000. How much of the profit should be credited to A?, to B?, to C?

2. A and B are partners sharing profits in the ratio of 3:2. The partnership agreement states that each
partner is to be allowed drawings of P30,000 annually. Each partner withdrew this amount during the
year and drawing accounts being charged. The net profit for the year was P100,000. What was the
share of each partner if the balances in the drawing accounts are recognized as partners salaries?
Assuming that the balances in the drawing accounts are recognized as partners drawings, what was
the share of each partner on the abovementioned profit?

3. A and B formed a partnership in 2015. The partnership agreement provides for annual salary
allowances of P55,000 for A and P45,000 for B. The partners share profits equally and losses in a
60:40 ratio. The partnership had earnings of P80,000 for 2016 before any allowance to partners.
What amount of these earnings should be credited to each partners capital account?

4. D and E entered into partnership on March 1, 2016, investing P62,500 and P37,500, respectively. It
was agreed that D, the managing partner was to receive a salary of P15,000 per year and also 10%
bonus of the net profit after adjustment for the salary, the balance of the profit was to be divided in the
ratio of original capitals. On December 31, 2016, account balances were as follows:
Cash P35,000 Payable P30,000
Receivable 33,500 Sales 116,500
Fixtures 22,500 D, capital 62,500
Purchases 98,000 E, capital 37,500
Returns and allowances 2,500
Operating expenses 30,000
D, drawing 10,000
E, drawing 15,000 _______
P246,500 P246,500
Inventories on December 31, 2016, were: merchandise, P36,500; supplies, P1,250. Prepaid taxes
and insurance were P475 and accrued liabilities totaled P775. Depreciation on fixtures is to be
computed at 20% per year.
a. How much is the net income of the partnership for 2016?
b. How much is the share of D and E on the above computed net income:
c. How much is the capital balance of partner D and E as of Dec. 31, 2016.

5. The capital accounts of E and F shows the following facts for the fiscal year ended December 31,
2006:
E F
Jan. 1 Balance 260,000 Jan 1 Balance 165,000
Mar 30 Investment 30,000 May 18 Investment 50,000
May 10 Investment 70,000 Aug 24 Withdrawal 20,000
July 25 Withdrawal 40,000 Dec. 31 Balance 195,000
Dec. 31 Balance 320,000
The profit and loss account shows a credit balance of P238,000 on Dec. 31.
a. How much should be the share of E and F, assuming that profit or loss are distributed by giving
allowance to E of a bonus of 25% of the net profit after bonus, interest of 6% to be allowed on the
excess of the average investment of one partner over that of the other, and any balance in the
ratio of 3:2 to E and F, respectively? (Investments and withdrawals are to be considered as made
at the beginning of the month if made before the middle of the month and are to be considered as
made at the beginning of the following month if made after the middle of the month.)
b. Using the above data, how much should be credited to E and F, assuming that profit or loss
should be divided by giving salaries of P15,000 and P10,000 a month to E and F, respectively,
provided annual earnings are sufficient to cover the allowances; if earnings are insufficient, the
profit shall be distributed in the salary ratio; if operations result in a loss, if shall be distributed
equally?

Partnership Dissolution

Admission of a new partner

In the ALTL partnership, Andeng's capital is P200,000 and Anton's is P100,000 and they share income in
a 3:2 ratio, respectively. They decide to admit Grace to the partnership. Compute for each partners
capital balance after Graces admission.
1. Assume that Grace purchased 20% interest of the old partners by paying P60,000 to the partners in
exchange of 20% of their equity.

2. Assume that Grace purchased 20% interest of the old partners by paying P50,000 to the partners in
exchange of 20% of their equity.

3. Assume that Grace purchased 20% interest of the old partners by paying P70,000 to the partners in
exchange of 20% of their equity.

4. Assume that Grace purchased 20% interest of the partnership by paying P75,000 to Andeng.

5. Assume that Grace purchased 20% interest of Andeng by paying her P60,000.

6. Assume that Grace purchased 20% interest of Andeng by paying her P55,000 but only after the land
account is revalued.

7. Assume that Grace purchased 20% interest of the partnership by paying P80,000 to the partners but
only after land account is revalued.

8. Assume that Grace will invest cash to give him 20% interest in the partnership. How much cash will
he invest?

9. Assume that Grace invests P90,000 for a 20% interest in the partnership and that revaluation of the
land is to be recorded.

10. Assume that Grace invests P60,000 for a 20% interest in the partnership and that bonus is to be
recorded.

11. Andeng and Anton agree that some of the inventory is obsolete. The inventory account is decreased
before Grace is admitted. Grace invests P80,000 for 25% interest in the partnership. How much
should the inventory account be written-off?

12. Assume instead that Grace invests P75,000 for a 20% interest in the total capital of P375,000. What
are the capital balances of Andeng and Anton after Grace is admitted into the partnership?

13. Assume instead that Grace invests P75,000 for a 20% interest in the total capital of P400,000. What
are the capital balances of Andeng and Anton after Grace is admitted into the partnership?

Retirement of a partner
Paolo, Baste and Sara are partners with capital balance of P175,000, P200,000 and P125,000
respectively and share profit and loss in the ratio 3:4:1. Sara decided to retire to the partnership

1. If the partners decide to revalue the land increasing its value by P50,000. How much will Sara receive
as settlement?

2. If Sara received P140,000 cash as her settlement after receiving her share in asset revaluation, how
much is Paolos balance after Saras retirement?

3. If Sara received P107,500 cash as her settlement after bonus is distributed, how much is Bastes
balance after Saras retirement?

4. If Paolo decided to buy Saras interest for P110,000, how much will Paolos capital balance be after
Saras retirement?

5. If Baste decided to buy Saras interest for P130,000 but only after revaluing the assets, how much will
Bastes capital balance be after Saras retirement?

Incorporation of a partnership
The balance sheet of R and S, a partnership appears as follows:
R AND S PARTNERSHIP
Balance Sheet
October 31, 2016
ASSETS
Current Assets:
Cash P 41,100
Accounts Receivable P 212,160
Allowance for bad debts 8,000 204,160
Inventories 241,100
Prepaid expenses 10,140
 P 496,500
Plant Assets:
Furniture and Fixtures P 241,000
Accumulated Depreciation 68,200 172,800
Total assets P 669,300

LIABILITIES AND CAPITAL

Current Liabilities:
Accounts payable P 162,200
Accrued expenses 20,000
P 182,200
Partners capital:
R, capital P 260,350
S, capital 226,750 487,100
Total Liabilities and capital P 669,300

R and S share profits and losses equally.

The partners incorporate as H & G Corporation with an authorized capital of 5,000 shares at P100 par
stock, of which 4,400 are issued to the partners in exchange for their interest in the net assets of R
and S, and the remainder are issued at P120 per share for cash. The partners agree that the
following adjustment should be recorded:
Allowance for bad debts decreased by P 4,000
Inventories increased by 12,000
Accumulated depreciation decreased by 6,200
Goodwill is to be recognized in an amount which will cause the net assets of the partnership to equal
the cash issuance price of the shares to be issued therefore.
Questions: 1. How much is the additional paid-capital contributed by R and S to the new corp.?
2. How much goodwill is to be recognized in the corporations books?
3. How many shares R will receive?

Partnership Liquidation

1. On December 31, 2012, Allan, Belen and Carlos have the following accounts and balances: Allan,
Capital(40%) - 235,000; Belen, Capital(40%) - 158,000; Carlos, Capital (20%) - 163,000; Loan due to
Carlos - 34,000; Loan due to Belen - 10,000. Because of some misunderstanding between partners,
they decided to liquidate. At this time, the partnership has Cash of 180,000, Other Assets of 870,000
and Liabilities of 450,000.
Compute for each partners final cash settlement
Case 1 - The Other Assets were sold for 1,000,000.

Case 2 - The Other Assets were sold for 456,000.

Case 3 - The Other Assets were sold for 387,000.

Case 4 - The Other Assets were sold for 387,000 and B is a Limited Partner.

2. On January 1, 2016, the partners of Queen, Royal, and Squire, who share profits and losses in the
ratio of 5:3:2, respectively, decide to liquidate their partnership condensed balance sheet was as
follows:
Assets Liabilities and Capital
Cash P 50,000 Liabilities P 60,000
Other Assets 250,000 Queen, Capital 80,000
Royal, Capital 90,000
Squire, Capital 70,000
P 300,000 P 300,000

On January 15, 2016, the first cash sales of other assets with a carrying amount of P150,000 realized
P70,000. The partnership incurred P10,000 for liquidation expenses and expects to incurs P5,000 more.
The partnership also paid P40,000 of its liabilities. Safe installment payments to the partners were made
the same date. How much should be distributed to each partner?

3. On January 1, 2016, Rus and Tan, who share profits and losses on a 60:40 ratio, decided to liquidate
their partnership. After all of the non-cash assets of the partnership were sold for P760,000 and all of
the P120,000 liabilities were settled, the partners had P720,000 to distribute among themselves. Rus
received P112,000 in the settlement of his P400,000 capital balance
a. How much was the total assets immediately before liquidation?
b. How much was the cash balance immediately before the non-cash assets were sold?