Partnership Formation

Partnership Formation
Chapter 11
Learning Objectives
1. Differentiate between the accounting for partnerships, sole proprietorship,

and corporations.
2. State the valuation of contributions of partners.
3. Account for the initial investments of the partners to the partnership.
4. State the peculiar accounts used in a partnership and identify the
transactions that affect these accounts.
Definition
A partnership is an unincorporated association of two or more individuals to

carry on, as co-owners, a business, with the intention of dividing the profits
among themselves.
Characteristics
a. Ease of Formation
b. Separate legal personality
c. Mutual agency
d. Co-ownership of property
e. Co-ownership of profits
f. Limited Life
g. Transfer of ownership
h. Unlimited Liability
Limited Life
Dissolution
1. By the express will of any partner
2. By the termination of a definite term stipulated in the contract
3. By any event which makes it unlawful to carry out the partnership
4. When a specific thing which a partner had promised to contribute to the
partnership perishes before the delivery
5. Expulsion, death, insolvency or civil interdiction of a partner
Unlimited Liability
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
• Ease of formation • Easily dissolved/limited life

• Shared responsibility of running the • Unlimited liability
business
• Conflict among partners
• Flexibility in decision making
• Greater capital compared to sole • Lesser capital compared to a
proprietorship corporation
• Relative lack of regulation by the • A partnership (other than GPP)
government as compared to is taxed like a corporation
corporations
ACCOUNTING FOR PARTNERSHIPS
The accounting for assets and liabilities remains the same regardless of the
form of business organization. What changes is the accounting for equity.
Sole Proprietorship Corporation
EQUITY EQUITY
Mr. A's Capital XX Share Capital XX
Retained Earnings XX
Other components of equity XX
Partnership TOTAL EQUITY XX
EQUITY
Mr. A's Capital XX
Cooperative
Mr. B's Capital XX
EQUITY
Mr. C's Capital XX
Share Capital XX
TOTAL EQUITY XX
Donations and grants XX
Statutory funds XX
TOTAL EQUITY XX
Major considerations
1. Formation – Accounting for initial investments to the

partnership
2. Operations – Divisions of profits or losses
3. Dissolution – admission of a new partner and withdrawal, retirement or
death of a partner
4. Liquidation – winding-up of affairs
Formation
- 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
Temporary funds held to be

remitted to the partnership
Receivable from/Payable to a 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:
A and B formed a partnership. A contributed cash of P500,000 while B contributed

land with carrying amount of P400,000 and fair value of P800,000. The land has an
unpaid mortgage of P200,000 which is assumed by the partnership.
Requirements:
1. Determine the correct valuations of the partners’ contributions in the partnership
books of accounts.
2. Provide the journal entry.
Solutions
Requirement (a) A B Partnership

Cash 500,000.00 - 500,000.00
Land (fair value) 800,000.00 800,000.00
Total 500,000.00 800,000.00 1,300,000.00
Mortgage payable - 200,000.00 200,000.00

A, Capital 500,000.00 - 500,000.00
B, Capital (800k-200k) 600,000.00 600,000.00
Total 500,000.00 800,000.00 1,300,000.00
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 and B formed a partnership. The following are their contributions:

A B
Cash 500,000.00 -
Accounts Receivable 100,000.00 -
Building 700,000.00
Total 600,000.00 700,000.00
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 (a): A B Partnership

Cash 500,000.00 - 500,000.00
Accounts Receivable (100k-20k) 80,000.00 - 80,000.00
Building (700k-50k) 650,000.00 650,000.00
Total 580,000.00 650,000.00 1,230,000.00
A, Capital 580,000.00 580,000.00

B, Capital 650,000.00 650,000.00
Total 580,000.00 650,000.00 1,230,000.00
Requirement (b)
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
A and B agreed to form a partnership. A contributed P40,000 cash while B

contributed equipment with fair value of P100,000. However, due to the
expertise that A will be bringing to the partnership, the partners agreed that
they should initially have an equal interest in the partnership capital.
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
Date Cash 40,000.00

Equipment 100,000.00
A, Capital 70,000.00
B, Capital 70,000.00
Variations to the bonus method
A partnership agreement may stipulate a certain ratio to be maintained by the

partners representing their specific interests in the equity of the partnership.
Capital adjustment is accounted for as either:

a. Cash settlement among the partners; or
b. Additional investment or withdrawal of investment of a partner.
Illustration 1
A, B and C formed a partnership. Their contributions are as follows:
A B C
Cash 40,000.00 100,000.00 100,000.00

Equipment - 80,000.00 -
Total 40,000.00 180,000.00 100,000.00
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
Cash 40,000.00 10,000.00 100,000.00 150,000.00

Equipment 80,000.00 80,000.00
Mortgage payable (20,000.00) - (20,000.00)
Net contribution 40,000.00 70,000.00 100,000.00 210,000.00
Equal interest (210/3) 70,000.00 70,000.00 70,000.00 210,000.00
Cash receipt (payment) (30,000.00) - 30,000.00 -
Answer: C shall receive P30,000 form A.
Journal entry

Equipment 80,000.00
Mortgage payable 20,000.00
A, Capital 70,000.00
B, Capital 70,000.00
C, Capital 70,000.00
Illustration 2
Additional investment (Withdrawal of investment)
A and B agreed to form a partnership. The partnership agreement stipulates the following:
• Initial capital of P140,000.
• A 60:40 interest in the equity of the partnership.
A contributed P100,000 cash while B contributed P40,000 cash.
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:
Agreed initial capital 140,000.00
A's required capital balance (140k x 60%) 84,000.00

B's required capital balance (140k x 40%) 56,000.00
A B Totals
Actual contributions 100,000.00 40,000.00 140,000.00

Required capital balance 84,000.00 56,000.00 140,000.00
Additional (Withdrawal) (16,000.00) 16,000.00 -
Answer: A shall withdraw P16,000 from his initial contribution while B
shall make an additional investment of P16,000
end
ROLDAN P. CARBONEL CPA, MBA

Partnership Formation

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Partnership Formation

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Partnership Formation

1. Differentiate between the accounting for partnerships, sole proprietorship,

A partnership is an unincorporated association of two or more individuals to

• Ease of formation • Easily dissolved/limited life

1. Formation – Accounting for initial investments to the

Temporary funds held to be

A and B formed a partnership. A contributed cash of P500,000 while B contributed

Requirement (a) A B Partnership

Mortgage payable - 200,000.00 200,000.00

A and B formed a partnership. The following are their contributions:

Requirement (a): A B Partnership

A, Capital 580,000.00 580,000.00

A and B agreed to form a partnership. A contributed P40,000 cash while B

Date Cash 40,000.00

A partnership agreement may stipulate a certain ratio to be maintained by the

Capital adjustment is accounted for as either:

Cash 40,000.00 100,000.00 100,000.00

Cash 40,000.00 10,000.00 100,000.00 150,000.00

Date Cash 150,000.00

A contributed P100,000 cash while B contributed P40,000 cash.

Agreed initial capital 140,000.00

A's required capital balance (140k x 60%) 84,000.00

Actual contributions 100,000.00 40,000.00 140,000.00

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