Professional Documents
Culture Documents
Partnership Formation
Partnership Formation
Chapter 11
Learning Objectives
Each partner, including industrial ones, may be held personally liable for partnership
debt after all partnership assets have been exhausted. If a partner is personally
insolvent, his share in the partnership debt shall be assumed by the other solvent
partners.
GENERAL PARTNERSHIP – a partnership in which all partners are individually liable
LIMITED PARTNERSHIP – a partnership in which at least one partner is personally
liable, includes at least one general partner who maintains unlimited liability.
ADVANTAGES AND DISADVANTAGES
Advantage Disadvantage
- Consensual
- Legal existence begins from the moment the contract executed, unless it is
otherwise stipulated
Valuation of contributions of partners
FAIR VALUE
Initial valuation – (the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date)
Additional PFRS guidelines
Type of contribution Measurement
Cash and cash equivalents Face amount of cash or cash
equivalent. (PAS 7)
Inventory Net Realizable value (estimated
selling price less costs to
complete and sell), if lower than
cost
Each partner’s capital account is credited for the fair value of his net contribution (fair value of contribution
less any liability assumed by the partnership). NO CONTRIBUTION SHALL BE VALUED AT AN AMOUNT
GREATER THAN ITS FAIR VALUE.
Partners’ ledger accounts
a. Capital Accounts
b. Drawings accounts
c. Receivable from/Payable to a partner
A's Capital
Permanent withdrawals of
Initial investment
capital
Share in losses Additional investments
Debit balance of drawings
Share in profits
accounts
A's Drawings
Temporary withdrawals during Recurring reimbursable costs paid by
thr period the partner
The partnership may enter into loan transaction with a partner. The loan
extended by the partnership to a partner is recorded as a receivable from
the partner while a loan obtained by the partnership from a partner is
recorded as a payable to the partner.
Illustration 1:
Requirements:
1. Determine the correct valuations of the partners’ contributions in the partnership
books of accounts.
2. Provide the journal entry.
Solutions
Requirement (b)
Date Cash 500,000.00
Land 800,000.00
Mortgage payable 200,000.00
A, Capital 500,000.00
B, Capital 600,000.00
Illustration 2
A, Capital 600,000.00
B, Capital 700,000.00
Total 600,000.00 700,000.00
Additional information:
• The accounts receivable includes P20,000 account that is deemed uncollectible.
• The building is under-depreciated by P50,000.
• The building has an unpaid mortgage P100,000, but this is not assumed by the
partnership. Partner B promised to pay for the mortgage himself.
Requirements:
a. Determine the correct valuations of the partners’ contributions in the partnership books of
accounts.
b. Provide the journal entry.
Requirement (b)
Date Cash 500,000.00
Accounts Receivable 80,000.00
Building 650,000.00
A, Capital 580,000.00
B, Capital 650,000.00
Bonus on initial investments
Partner’s capital account is credited for an amount greater than the fair value
of his contributions.
Illustration 1: Bonus method
Requirement:
Provide the journal entry to record the initial investment of the partners.
Solution:
Actual
Bonus method
contribution
A 40,000.00 (140,000 x 50%) 70,000.00
B 100,000.00 (140,000 x 50%) 70,000.00
Total 140,000.00 - 140,000.00
Journal entry
Additional information:
• The equipment has an unpaid mortgage of P20,000, which the partnership assumes to repay.
• The partners agreed to equalize their interests, Cash settlements among the partners are to
be made outside the partnership.
Requirements:
1. Which partner(s) shall receive cash payment from the other partner(s)?
2. Provide the entry to record the contributions of the partners.
A B C Partnership
Journal entry
Requirement:
Which partner should provide additional investment (ow withdraw part of his investment)in
order to bring the partners’ capital credits equal to their respective interests in the equity of
the partnership?
Solution:
A B Totals