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AFAR 2 Module CH 1
Accounting (Dominican College of Tarlac )
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AFAR 2: ADVANCED FINANCIAL ACCOUNTING AND REPORTING
1
This module is prepared by professor Venus L. Catacutan. She’s an
associate professor in the College of Business and AccountancyAccountancy department at Tarlac State University . Being a Certified
Accountant, in addition to her teaching profession, shes’ likewise
involve in public practice which brings to this module some
experiences on specialized accounting concerns of different industries.
COURSE
DEVELOPER AND THEIR
BACKGROUND
This course is designed to provide fundamental knowledge to
students concerning accounting for special transactions and advanced
financial reporting issues likely to be encountered in practice. It deals
with the sthe study of fundamental valuation accounting theory as
applied to special income and expense recognition methods and
expanded business operations. The course includes specialized
problems in partnership accounting, revenue from contract with
customers (PFRS 15) and accounting for domestic branches. The
other topics deal with accounting for the effect of changes in foreign
exchange rates and other similar current issues. Likewise discussed
are debt restructuring and accounting for financially distressed
corporations.
1. Partnership Formation
2. Partnership Operations
3. Partnership Dissolutions
4. Partnership Liquidation (lump-Sum and Installment method)
5. Corporate Liquidation
6. Revenue Recognition- contract with customers (PFRS 15)
7. Revenue Recognition- contract with customers (Construction
Contract)
8. Renenue Recognition- contract with customers ( Franchise
and Consignment)
9. Home Office, Branch, and Agency Accounting (General
Procedures)
10. Home Office, Branch, and Agency Accounting (Special
Procedures)
11. Foreign Currency Transactions
12. Hedging and Derivatives (FOREX)
13. Foreign Currency Translation
COURSE DESCRIPTION
COURSE OUTLINE
CHAPTER
1
TITLE
PARTNERSHIP FORMATION
I. RATIONALE
INSTRUCTION TO THE USERS
This particular module covers the topics regarding partnership
formation. It discusses the concept, nature and scope of partnership in
genreral. Included in the detail discussions are the different types of
partneship, kinds of partners, features of a Partnership in general,
articles of partnership based on the New civil code of the Philippines.
Likewise, the module provides the students what are the accounting
and financial reporting requirements for a partnership. Lastly
information concerning the accounts maintained by the partners in
accounting for partnership activities and accounting for partnership
formation were made available.
The very first topic of the course is Partnership formation, the expected
learning to be achieved by the student are properly disclosed in the
learning objectives stated below. Prior to taking this course, a
student must have already a concrete knowledge on basic
accounting concepts, and skills in preparing financial statements
otherwise the user of this module must review the basic and financial
accounting undertaken in previous courses(preparatory activities)
The developmental activities section provides the comprehensive
and vital information concerning accounting for partnership formation.
For assessment of learning,closure activities like theoretical
questions and problem solving with different degree in terms of
difficulty were provided. For evaluation , see the evaluation sectionfor
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details, and lastly for activities and preparation to be undertaken for
next topic this module provides the student/s the details.
At the end of the chapter, the student should be able to:
✓ Differentiate between the accounting for partnerships, sole
proprietorships, and corporation.
✓ State the valuation of contributions of partners.
✓ Account for the initial investments of the partners to the
partnership.
✓ Identify the peculiar accounts used in a partnership and
identify and journalize the transactions that affect these
accounts.
✓ Prepare and interpret financial statements of a partnership
II. LEARNING OBJECTIVES
III. CONTENT
A. PREPARATORY ACTIVITIES
Considering the fact that this course is an advanced course in
accounting, students must already have a thorough knowledge in
basic accounting concepts, and skills in preparing financial statements.
Thus, students must;
1. Review the basic accounting concepts and the theoretical
framework in preparing financial statements
2. Have a reading on partnership law.
B. DEVELOPMENTAL ACTIVITIES
INTRODUCTION
Accounting is the language of business. It communicates business information to stakeholders needed in making
economic decision that are useful to sustain profitable business operations. There are three types of business
organizations. These are:
• Sole Proprietorship – business organization owned by one person who is generally called the proprietor.
Having one owner, a single proprietorship is easy to organize, decision making is vested to single owner,
and the owner enjoys all the profits. However, since there is only one owner, this could result to limited
investments, the owner becomes the sole trouble shooter, and in times of losses, the owner shoulders them
all. In some cases, there could be limited access to credit lines.
• Partnership – owned by two or more persons called the partners. In a partnership, more investments and
losses are shared among themselves. However, when profits are earned, these have to be distributed
among the partners.
• Corporation – owned by one or more persons called the shareholders. Ownership in a corporation is
represented by the number of shares owned.
PARTNERSHIP AS A BUSINESS ORGANIZATION
Article 1767 of the Law of Partnership defines partnership as:
“By the 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 profits among themselves.”
The law provides the following essential elements of a partnership:
1. A valid contract must exist.
2. A mutual contribution of money, property or industry to a common fund must be made.
3. The intention must to engage in lawful business, trade or profession.
4. The purpose of the agreement must be to generate profits and to distribute profits among the partners.
5. The objectives of the business must be in accordance with the law.
6. The partners must have the legal capacity to contract.
A partnership agreement may be oral or in writing.
Advantages of a Partnership
1. Over a Single Proprietorship
a. More source of capital – A partnership is able to generate more capital than a single
proprietorship in as much as there are more owners. Two or more persons form a partnership.
There is a pooling of resources from among the partners of the business.
b. Management is shared among the partners authorized to manage the business. Unlike single
proprietorship, management is vested only in one person, the owner.
c. Losses are shared among thepartners based on their agreements or provisions of law. In single
proprietorship, losses are shouldered only by the single proprietor.
d. Varied skills are available - Partners can contribute their respective skills and efforts in
accomplishing the goals of the partnership. Only one person can contribute skills in a single
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proprietorship, who is the owner.
e. Partners serve as agent s of the business (mutual agency) – Each partner becomes a agent of
the business. They can promote the business undertakings in their own way that could contribute
to the success of the business. In a single proprietorship, promotion of the business is limited to the
owner.
f. Juridical Personality – The partnership acquires a juridical or legal personality under the
Philippine laws. It becomes distinct and separate from the owners. As such, it can acquire assets
and seek credit lines. The assets become property of the partnership and not of the partners.
Similarly, financial obligations of the partnership are not the financial obligations of the partners.
2. Over a Corporation
a. Ease of formation – the partnership is easier to organize than a corporation. The mere agreement
of the partners forms a partnership. Documentation for registration as well as requirements needed
to register a partnership is lesser as compared with those needed to register a corporation.
b. Profits are distributed among the partners – The profits of the partners are distributed among
themselves based on their agreements and /or provisions of the law. In a corporation, profits are
distributed only when declared by the Board of Directors.
c. Management is vested to partners – The partners are vested with the power to control and
manage the affairs of the partners. The management of a corporation is vested on the Board of
Directors.
d. Exempted from tax (General Professional Partnership) – A general professional partnership is
one which is organized for the practice of a profession, such as accountancy, engineering,
medicine and architecture. The general professional partnership is not subject to income tax.
However, the partnership has to withhold or record withholding tax on the share of the partners
over the net income of the partnership.
Tax Reform Act of 1997 requires however, that a registered partnership in trade is taxable like a
corporation except on the Improperly Accumulated Earnings Tax (IAET) imposed on a corporation.
This is so because the corporation is considered to have distributed income after tax. Whereas in
partnership, tax is deducted from the income generated before it is distributed to the partners. The
partners then pay for the tax from their share of the income after tax has been deducted.
e. Mutual trust and confidence – The relationship of the partners is governed by mutual trust and
confidence. They personally know each other as partners of the business. In a corporation,
shareholders may not know each other personally.
Disadvantages of Partnership
The following are the disadvantages of a partnership:
1. Limited Life – A partnership can be easily dissolved by a slightest change in the agreement of the partners.
The withdrawal, bankruptcy or death of any of the partners could lead to the dissolution of the partnership.
The admission of a new partner dissolves the partnership. This happens because partnership is governed
by a contract or agreement between among the partners. Any change therefore in the contract or agreement
will terminate the life of the original partnership covered by the original contract.
2. Unlimited life – General partners are liable to the partnership creditors to the extent of their personal
assets. The partnership creditors can run after the general partners and satisfy their claims against the
personal property of the latter.
3. Difficulty in transferring ownership – Since a partnership is governed by an agreement or a written
contract and that mutual trust and confidence are the foundation of partners’ relationship, any transfer of
ownership should be approved and authorized by all the partners. No partner can sell any portion of his
ownership or investments to any individual without the consent of the partners.
4. Limited capital – A partnership could raise limited capital as prospective investors would prefer investing in
a corporation than a partnership. One of the basic reasons for this is the fact that partners must know each
other personally as ownership is based on agreement, trust and confidence on each other.
5. Profits are divided among the Partners – the law provides that any profits generated by the partnership
profits are then distributed to as many partners as there are. In a single proprietorship, all of the profits
accrue to the owner.
ACCOUNTING FOR PARTNERSHIP
The following are major considerations in the accounting for the equity of a partnership:
a. Formation – accounting for initial investments to the partnership
b. Operations – division of profits or losses
c. Dissolution- admission of a new partner and withdrawal, retirement or death of a partner
d. Liquidation – winding-up of affairs
Partner’s Ledger Account
The partners’ ledger accounts are
✓ Capital accounts
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Credited for:
▪ Original investment
▪ Additional investment
▪ Partner’s share in the profits
o Debited for:
▪ Permanent withdrawal of capital
▪ Debit balance of the drawing account
▪ Partner’s share in the losses
✓ Drawing or Personal accounts
o Credited for:
▪ Partnership obligations assumed or paid by the partner
▪ Personal fund or claims of partner collected an retained by the partnership.
▪ Periodic partner’s salaries depending on the accounting and disbursement procedures
agreed upon.
o Debited for:
▪ Withdrawal of asset by the partners in anticipation of net income
▪ Partner’s personal indebtedness paid or assumed by the partnership
▪ Funds or claims of partnership collected and retained by the partner
✓ Account for loans to or from partners
o Debited to Receivable from partner account:
▪ Withdrawal by a partner of a substantial amount with assumption of its repayment
o Credited to the Loans Payable to partners account:
▪ Advance to the partnership by a partner with assumption of its ultimate repayment by the
partnership
ACCOUNTING FOR FORMATION OF A PARTNERSHIP
o
Formation of partnership is created by agreement of partners (oral or written). The agreement should be made in
public instrument if :
✓ immovable property or real rights are contributed to the patnership
✓ the partnership total capital is P3,000 or more
A. Valuation
✓ All assets contributed to the partnership are recorded by the partnership at their agreed values. In the
absence of the agreed values, the fair values are used. For cash contribution it should be recorded at face
value or cash equivalent contributed
✓ For service/industry/intangibles -memo entry (unless service has designated value)
✓ All liabilities that the partnership will assumes are recorded at their net present values.
B. Circumstances in Partnership Formation:
✓ Individual +individual
✓ individual + existing business
✓ Existing business + existing Business
B. Journal Entries
CASE 1: Partnership Formation for the First Time –(Individual + Individual) Initial Investment
Procedures:
1. Debit the contribution of the partners at their agreed values. In absence of the agreed values, use their
fair values on the date of the partnership formation.
2. Credit the capital account of the partners at the amount equal to their contribution. In case a liability is
attached to the contribution of a partner that is to be assumed by the partnership, credit the appropriate
liability account and credit the capital of the partner equal to the amount of contribution after deducting
the assumed liability
Example:
a. Cash Investments
X and Y contributed P300,000 each to form a Algebra partnership.
Entry to record Investment of X and Y:
Cash
600,000
X, Capital
300,000
Y, Capital
300,000
b. Noncash Investments
Assume that aside from contributing cash P300,000 cash each, X contributed an equipment with a fair value of
P250,000 while Y contributed a building with a fair value of P750,000. The building is subject to P500,000 mortgage
loan which is to be assumed by the partnership.
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Entry to record Investment of X and Y:
Cash
Equipment
Land
Mortgage Payable
X, Capital
Y, Capital
600,000
250,000
750,000
500,000
550,000
550,000
CASE 2: Conversion of a sole proprietorship to a partnership:
2.1. A sole proprietorship allows another individual, who has no business of his own to join his business:
Procedures:
1. Adjust the capital of the sole proprietor based on the agreements of the parties prior to partnership
2. Close the books of the sole proprietor (adjusted balance) by debiting all accounts with credit balances and
crediting all accounts with debit balances.
3. Record the investment of the sole proprietor in the partnership books. Non-current asset accounts with
related accumulated depreciation are recorded in the new partnership books NET OF ACCUMULATED
DEPRECIATION.
4. Record the investment of the individual in the new partnership books at their fair market values. On the date
of partnership formation.
Examples:
A statement of financial position on June 30, 2020 of JJ Co. as follows:
JJ Company
Statement of Financial Position
June 30, 2020
ASSETS
Cash
Accounts Receivable
Inventory
Equipment
Less: Accumulated Depreciation
Furniture and Fixtures
Less: Accumulated Depreciation
Building
Less: Accumulated Depreciation
Land
TOTAL
P 50,000
30,000
20,000
200,000
50,000
100,000
25,000
500,000
100,000
LIABILITIES and EQUITY
Accounts Payable
Mortgage Payable – Building
JJ, Capital
TOTAL
150,000
75,000
400,000
400,000
1,125,000
100,000
250,000
775,000
1,125,000
JJ needs additional capital to meet the increasing sales and offers KK an interest in the business. JJ and KK agree to
form JK Partnership. Also, the partners agreed on the following:
1. P5,000 of the accounts receivable is to be written off.
2. The merchandise inventory should be decreased by P5,000
3. The fair market value of the land is P500,000.
4. Furniture and fixtures is under-depreciated by P5,000.
5. The remaining assets reflect their fair market value.
6. The partnership will assume all the liabilities of JJ Co.
7. KK will invest an equipment with a fair value of P360,000 and cash amounting P500,000.
2.1.a. Sole Proprietor Books are retained for the Partnership
Step 1: Adjust the capital of JJ Co. based on the agreements of the parties prior to partnership.
JJ, Capital
5,000
Accounts Receivable
5,000
To record write-off of accounts
JJ, Capital
5,000
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Inventory
To record the decrease in inventory
5,000
Land
100,000
JJ, Capital
To record the increase in FMV of land
100,000
JJ, Capital
5,000
Accumulated Depreciation –
Furniture and Fixtures
To record under-depreciation of Furniture and Fixtures.
5,000
SinceJJ’s Books are retained for the Partnership, no need to close the books of JJ Co. The books of JJ Co.
are now the books of the Partnership. Proceed to Step 4.
Step 4: Record the investment of KK in the partnership books.
Cash
Equipment
500,000
360,000
KK, Capital
860,000
2.1.b. New Books are opened for the Partnership
Step 1: Adjust the capital of JJ Co. based on the agreements of the parties prior to partnership.
JJ, Capital
5,000
Accounts Receivable
5,000
To record write-off of accounts
JJ, Capital
5,000
Inventory
To record the decrease in inventory
Land
5,000
100,000
JJ, Capital
To record the increase in FMV of land
JJ, Capital
Accumulated Depreciation –
Furniture and Fixtures
To record under-depreciation of Furniture and Fixtures.
100,000
5,000
Step 2: Close the books of JJ Co. (adjusted balance) by debiting all accounts with
crediting all accounts with debit balances.
Accounts Payable
100,000
Mortgage Payable
250,000
Accumulated Depreciation – Equipment
50,000
Accumulated Depreciation – Furniture and Fixtures
30,000
Accumulated Depreciation – Building
100,000
JJ, Capital
860,000
Cash
Accounts Receivable
Inventory
Equipment
Furniture and Fixtures
Building
Land
5,000
credit balances and
50,000
25,000
15,000
200,000
100,000
500,000
500,000
Step 3: Record the investment of JJ in the partnership books. Non-current asset accounts with related
accumulated depreciation are recorded in the new partnership books NET OF ACCUMULATED
DEPRECIATION.
Cash
50,000
Accounts Receivable
25,000
Inventory
15,000
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Equipment
Furniture and Fixtures
Building
Land
150,000
70,000
400,000
500,000
Accounts Payable
Mortgage Payable
JJ, Capital
100,000
250,000
860,000
Step 4: Record the investment of KK in the new partnership books at their fair market values on the date of
partnership formation.
Cash
Equipment
500,000
360,000
KK, Capital
860,000
After the formation, the statement of financial position of the newly formed partnership is:
JK Partnership
Statement of Financial Position
June 30, 2020
ASSETS
Cash
Accounts Receivable
Inventory
Equipment
(P50,000
500,000)
(P150,000
360,000)
+
P 550,000
+
25,000
15,000
510,000
Furniture and Fixtures
Building
Land
TOTAL
70,000
400,000
500,000
2,070,000
LIABILITIES and EQUITY
Accounts Payable
Mortgage Payable
JJ, Capital
KK, Capital
TOTAL
100,000
250,000
860,000
860,000
2,070,000
CASE 3: Two Proprietors Form a partnership
Procedures:
1. Adjust the capital of the sole proprietors based on the agreement of the parties prior to partnership
formation.
2. Close the books of the sole proprietors (adjusted balances) by debiting all accounts with credit balances and
crediting all accounts with debit balances.
3. Record investment of the sole proprietors in the new partnership books. Non-current asset accounts with
related accumulated depreciation are recorded in the new partnership books NET OF ACCUMULATED
DEPRECIATION.
Examples:
A statement of financial position on June 30, 2020 of JJ Co. as follows:
JJ Company
Statement of Financial Position
June 30, 2020
ASSETS
Cash
Accounts Receivable
Inventory
Equipment
Less: Accumulated Depreciation
Furniture and Fixtures
P 50,000
30,000
20,000
200,000
50,000
100,000
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Less: Accumulated Depreciation
Building
Less: Accumulated Depreciation
Land
TOTAL
25,000
500,000
100,000
LIABILITIES and EQUITY
Accounts Payable
Mortgage Payable – Building
JJ, Capital
TOTAL
75,000
400,000
400,000
1,125,000
100,000
250,000
775,000
1,125,000
A statement of financial position on June 30, 2020 of KK Co. as follows:
KK Company
Statement of Financial Position
June 30, 2020
ASSETS
Cash
Accounts Receivable
Inventory
Equipment
Less: Accumulated Depreciation
Furniture and Fixtures
Less: Accumulated Depreciation
TOTAL
P 50,000
100,000
50,000
350,000
150,000
150,000
50,000
LIABILITIES and EQUITY
Accounts Payable
KK, Capital
TOTAL
200,000
100,000
500,000
200,000
300,000
500,000
JJ and KK agree to invest their own businesses to form JK Partnership. Also, the partners agreed on the following:
1. Accounts receivable of JJ and KK is to be written off amountingP5,000 and P 15,000, respectively.
2. The JJ’s inventory should be decreased by P5,000.
3. The fair market value of the land is P500,000.
4. JJ’s Furniture and fixtures was under-depreciated by P5,000 while KK’s Furniture and Fixtures was
over-depreciated by 10,000.
5. The remaining assets reflect their fair market value.
6. The partnership will assume all the liabilities of both partners.
7. KK will invest an additional equipment with a fair value of P300,000 plus cash of P100,000.
Step 1: Adjust the capital of the sole proprietors based on the agreement of the parties prior to partnership formation.
JJ’s Books
JJ, Capital
5,000
Accounts Receivable
To record write-off of accounts
JJ, Capital
5,000
5,000
Inventory
To record the decrease in inventory
Land
5,000
100,000
JJ, Capital
To record the increase in FMV of land
JJ, Capital
Accumulated Depreciation –
Furniture and Fixtures
To record under-depreciation of Furniture and Fixtures.
100,000
5,000
KK’s Books
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KK, Capital
15,000
Accounts receivable
To record write-off of accounts receivable
Accumulated Depreciation – Furniture and Fixtures
KK, Capital
To record under-depreciation of Furniture and Fixtures.
15,000
10,000
10,000
Step2: Close the books of the sole proprietors (adjusted balances) by debiting all accounts with credit balances and
crediting all accounts with debit balances.
JJ’s Books
Accounts Payable
Mortgage Payable
Accumulated Depreciation – Equipment
Accumulated Depreciation – Furniture and Fixtures
Accumulated Depreciation – Building
JJ, Capital
Cash
Accounts Receivable
Inventory
Equipment
Furniture and Fixtures
Building
Land
100,000
250,000
50,000
30,000
100,000
860,000
Accounts Payable
Accumulated Depreciation – Equipment
Accumulated Depreciation – Furniture and Fixtures
KK, Capital
Cash
Accounts Receivable
Inventory
Equipment
Furniture and Fixtures
200,000
150,000
40,000
295,000
50,000
25,000
15,000
200,000
100,000
500,000
500,000
KK’s Books
50,000
85,000
50,000
350,000
150,000
Step 3: Record investment of the sole proprietors in the new partnership books. Non-current asset accounts with
related accumulated depreciation are recorded in the new partnership books NET OF ACCUMULATED
DEPRECIATION.
Cash
Accounts Receivable
Inventory
Equipment
Furniture and Fixtures
Building
Land
50,000
25,000
15,000
150,000
70,000
400,000
500,000
Accounts Payable
Mortgage Payable
JJ, Capital
100,000
250,000
860,000
To record investment of JJ.
Cash
Accounts Receivable
Inventory
Equipment
Furniture and Fixtures
150,000
85,000
50,000
500,000
110,000
Accounts Payable
KK, Capital
To record investment of KK.
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200,000
695,000
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After the formation, the statement of financial position of the newly formed partnership is:
JK Partnership
Statement of Financial Position
June 30, 2020
ASSETS
Cash
Accounts Receivable
Inventory
Equipment
(P50,000
150,000)
+
(P15,000 + 50,000)
(P150,000
+
500,000)
P 200,000
110,000
65,000
650,000
Furniture and Fixtures
Building
Land
TOTAL
180,000
400,000
500,000
2,105,000
LIABILITIES and EQUITY
Accounts Payable
Mortgage Payable
JJ, Capital
KK, Capital
TOTAL
300,000
250,000
860,000
695,000
2,105,000
BONUS ON INITIAL INVESTMENT
Valuation problems exist when a partner’s capital account is credited is not equal to their net assets invested. Using
the previous example, assuming the partners agreed that the partners will share equal interest in the partnership. As
per agreement, the partners should be credited with equal capital amount of P777,500 [(860,000 + 695,000) / 2].
However, JJ’s net investment is P82,5000 greater than the agreed capital while KK’s net investment was P82,500
lesser. The partners may stipulate to withdraw (excess) or make additional investment (deficiency) in order to meet
the agreed capital. To comply with the agreement without withdrawing or making additional investment, the
partnership will decrease the capital account of JJ and increase the capital of KK. This method is called bonus
method.
JJ, Capital
82,500
KK, Capital
82,500
To record bonus to KK.
C. CLOSURE ACTIVITIES
The following work exercises intend to evaluate what the learners have learned in this topic. Write your answers in
your portfolio journal.
I. REVIEW QUESTIONS
1. What are the different types of business organization?
2. Give the definition of partnership.
3. Discuss the advantages of partnership over a single proprietorship.
4. Discuss the advantages of partnership over a corporation.
5. When is a partner’s capital account debited?
6. When is a partner’s drawing account debited?
7. When is loan to a partner account used?
8. When is a loan from a partner account used?
9. At what amount are non-cash assets invested into the partnership recorded.
10. When is bonus method used?
II. TRUE OR FALSE
1. Article 1767 of the partnership law states the definition of the Partnership.
2. Adjustments prior to formation may be omitted since these will not affect the partner’s capital.
3. A bonus exists when the capital account of a partner is credited for an amount greater than or less than the
fair value of his contributions.
4. A bonus given to a partner is treated as an adjustment to the capital accounts of the other partners.
5. The asset contributed to (and related liabilities assumed by) the partnership are measured in the partnership
books at book values.
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6.
7.
8.
9.
The capital accounts can be created for any peso agreed by all partners.
The market value of non-cash asset must be considered when creating the initial capital balances.
Each partner’s capital accounts must have a non-zero value assigned to it.
Assigning historical cost to noncash assets contributed to the partnership will not cause partner taxable
income to differ from the partner’s share of partnership income.
10. The revaluation method always results an increase in a partner’s capital account.
III. PROBLEMS
Problem 1:
On June 1, 2020, A & B agreed to form a partnership for the first time. Their investments are as follows:
A
B
Cash
P700,000
Land and building
P800,000
Furniture and Fixtures
100,000
The building is subject to a mortgage loan of P400,000. The land is appraised at P200,000. The partners agreed to
share a profit and loss ratio of 6:4.
Requirements: Prepare all necessary entries under the following assumptions using net investment method, bonus
method (to reflect their capital balances equal to their P/L ratio) and asset revaluation method (to reflect their
capital balances equal to their P/L ratio):
1. The partnership did not assume the mortgage loan.
2. The partnership assumed the mortgage loan.
3. A is a sole proprietor and instead of contributing a cash of P700,000, A agreed to invest his business. The
balance sheet of A as of June 1, 2020 is as follows:
A
Balance Sheet
As of June 1, 2020
Assets
Liabilities and Capital
Cash
P300,000
Accounts Payable P70,000
Accounts Receivable
150,000
A, Capital
730,000
Merchandise Inventory
170,000
Furniture and Fixtures
200,000
Accumulated Depreciation
20,000
180,000
Total
P800,000
Total P800,000
The partnership agreed to assume all the liabilities. The book values in the balance sheet of A reflect their
fair values.
• Case 1: Sole proprietorship books are retained for the partnership.
• Case 2: New books are opened for the partnership.
Problem 2: On July 1, 2020, OO and PP decided to form a partnership. The firm is to take over business assets and
assume liabilities, and capitals are to be based on net assets transferred after the following adjustments:
a. OO and PP’s inventory is to be valued at P31,000 and P22,000, respectively.
b. Accounts receivable of P2,000 in OO books and P1,000 in BB’s books are uncollectible.
c. Accrued salaries of P4,000 for OO and P5,000 for BB are still to be recognized.
d. Unused office supplies of OO amounted to P5,000 while that of PP amounted to P1,500.
e. Unrecorded patent of P7,000 and prepaid rent of P4,500 are to be recognized in the books of OO and
PP, respectively.
f. OO is to invest or withdrew cash necessary to have a 40% interest in the firm.
Balance sheets for OO and PP on July 1, 2020 before adjustments are given below:
OO
Cash
P31,000
Accounts Receivable
26,000
Inventory
32,000
Office Supplies
Equipment
20,000
Accumulated Depreciation
(9,000)
TOTAL ASSETS
P100,000
Accounts Payable
Capitals
TOTAL LIABILITIES AND CAPITAL
P28,000
72,000
P100,000
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PP
P50,000
20,000
24,000
5,000
24,000
(3,000)
P120,000
P20,000
100,000
P120,000
lOMoARcPSD|16796982
Requirements:
a. Prepare all necessary entries under the following assumptions:
1. if books of OO will be retain by the partnership
2. If books of PP will be used by the partnership
3. New sets of books will be used
b. Determine:
1. Net adjustments- capital in the books of OO and PP
2. Adjusted capital of OO and PP in their respective books
3. Additional investment or withdrawal made by OO
4. Total assets of the partnership after formation
5. Total liabilities of the partnership after formation
Problem 3:
On June 1, 2019, Clavis and Cularlus formed a partnership. Clavis is to invest assets at a fair value which are yet to
be agreed upon. She is to transfer her liabilities and is to contribute sufficient cash to bring her total capital to P210
000 which is 70% of the total capital of the partnership.
Details regarding the book values of Clavis’ business assets and liabilities and their corresponding valuations are:
Book Values
Fair Values
Agreed Values
Accounts Receivables
P 58,000
P58,000
P58,000
Allow. For Doubt. Accts.
4,200
4,600
5,000
Merchandise Inventory
98,400
102,300
107,000
Store Equipment
32,000
32,000
32,000
Acc. Depre. – Store Eqmt.
19,000
15,300
16,400
Office Equipment
27,000
27,000
27,000
Acc. Depre. – Office Eqmt.
14,200
7,600
8,600
Accounts Payable
56,000
56,000
56,000
Cularlus agrees to invest cash of P42,000 and merchandise valued at current market price. The value of the
merchandise to be invested by Cularlus and the cash to be invested by Clavis are:
Problem 4:
On January 1, 2020, Ari and Janco formed a partnership. Ari, who has many years of experience in this line of
business, contributed P100,000 in cash. Janco contributed assets having the following book values and fair market
values:
Book Value
Market Value
Merchandise
P15,000
P25,000
Building
40,000
150,000
Equipment
60,000
85,000
The partnership assumed a mortgage of P40,000 on the building. Capital accounts are set equal to net assets
invested.
What is the Capital balances of each after formation using: (1) Net investment method and (2)Bonus method
Problem 5:
On January 15, 2020 JJ, the sole proprietor of JJ company, expands the company and establish a partnership with
MM and DD. The partners plan to share profits and losses as follows: JJ 50%; MM 25% DD 25%. They also agree
that the beginning capital balances of the partnership will reflect this same relationship.
JJ asked MM to join the partnership due to his connections. MM is also contributing P56,000 cash. DD is contributing
P 22,000 cash and marketable securities costing P84,000 to DD but are currently worth P115,000.
JJ investment in the partnership is the JJ company. He plans to pay off the notes with his personal assets. The other
partners have agreed that the partnership will assume the accounts payable. The statement of financial position for
the JJ company shown below:
JJ Company
Statement of Financial Position
January 15, 2020
Assets
Liabilities and Equity
Cash
P20,000
Accounts Payable
P 106,,000
Accounts Receivable (net)
96 ,000
Notes Payable
124,000
Merchandise Inventory
144,000
DD Capital
170,000
Equipment (Net of A. Depr’n)
140,000
Total assets
P400,000
Total Liab and Equity
400,000
The partners agree that the inventory is worth 170,000, and the equipment is worth half its original cost, and the
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lOMoARcPSD|16796982
allowance established for doubtful account is correct.
Requirement: Prepare the statement of financial position of the partnership on January 15, 2020 under Bonus
Method and Asset Revaluation Method.
IV. SYNTHESIS/ GENERALIZATION
CHAPTER SUMMARY:
• There are three types of business organizations. These are: (a) Sole Proprietorship; (b) Partnership; and (c)
Corporation.
• The major considerations in accounting for the equity of partnerships are: (a) formation; (b) Operations; (c)
Dissolutions, (d) Liquidation.
• The contributions of the partners to the partnership are measured at fair value.
• A partner’s capital balance is normally credited for the fair value of his net contribution to the partnership. If
a partner’s capital balance is credited for a greater amount than or less than the fair value of his net
contribution, there is bonus.
• Under bonus method, any increase (or decrease) in the capital credits of the other partners. The total
partnership capital remains equal to the fair value of the partners’ net contributions to the partnership.
V. EVALUATION
The student’s performance will be evaluated as follows:
20% Attendance, Poll Questioning and Oral Exercises
20% Portfolio Journal for work exercises
20% Formative Examination (One online/Offline written quiz covering this specific topic)
40% Summative Examination (This topic is one of the topics included in the Online/Offline Written Examination)
Have an advance reading, and understand the next topic which is
Partnership Operation.
VI. ASSIGNMENT/ AGREEMENT
Be familiar with the computation of Net Income of the partnership
Understand the different profit and loss allocation scheme
VII. REFERENCES
Millan, Accounting for Special Transactions 2018e
Dayag, Advanced Financial Accounting and Reporting 2019e
Guerrero, Advanced Accounting
Catacutan, et al, Fundamentals of Accounting Part II
Baysa and Lupisan, Advanced Accounting
New Civil code of The Philippines
END OF CHAPTER 1
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