Advanced Accounting 1 (1)

Advanced Accounting 1 Partnership FORMATION

Review: Partnership  What is partnership?  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. Ibig sabihin: Ito ay isang Negosyo na pinapatakbo ng dalawa o higit pang indibidwal. Maari silang mag contribute ng Pera(Capital), Industriya(Skills), o Mga Kagamitan na hindi Pera (Non-Cash Asset). Nasa Basic accounting lang po iyan.

Take note: For example, Partner B contributes a building.. Once na narecord sa book of partnership ung contribution ni B, wala na syang karapatan sa Building na iyon.. Dahil automatic pagaari na ito ng PARTNERSHIP. Dahil yan sa “SEPARATE LEGAL PERSONALITY” ng Partnership.

Major Considerations in the accounting for the equity of partnership 1. 2. 3.

4.

Formation – Creation of the partnership Operation – Division of profit or loss (P/L) Dissolution – Admission/withdrawal of partner Liquidation- winding-up of affairs

Formation  Valuation 

of contributions of partnership

All assets contributed to (liabilities assumed by) the partnership shall be measured at Fair Value FV.

Kapag nag form ng Partnership ang dalawang „Sole Proprietorship business‟ dito tayo magkakaroon ng accounting problem. First we should adjust the books of sole proprietors (SP) into their Fair Market Value or (FV). After adjusting, we should close the nominal accounts of the SP.. (Ung parang closing entries lang sa basic accounting). Now after closing the nominal accounts, we transfer the permanent accounts like Cash, Inventories, PPE and liabilities carried at their Fair Market Value to the books of the Partnership.. Gets? And ang total ng mga yan ay ang Net, Contriubtion ng partner.. Profit and loss is based on the agreement of the partners. However, If the problem is silent about the P/L ratio, Equity ratio is the most proper way to distribute the P/L

Type of contribution

Fair Value

Cash and Cash Equivalents

Face amount of cash or cash equivalent contributed.

Inventory

Net Realizable Value (Estimated selling price less cost to sell), If and only if it is lower than the COST.

Fixed asset

Order of Priority: a) Price in a binding sale agreement b) Quoted price in an active market c) Estimate based on best information available

Financial Instruments Order of Priority: (Financial assets and a) Quoted price in an active market financial liabilities) b) Fair Value based on observable data c) Estimate based on best information available

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

Cash Accounts Recievable Inventory Land Building Total Note Payable A, capital B, Capital Total

B

100000 75000 80000

10000

50000 130000 255000 190000 70000 185000 190000 255000 190000

Requirement: 1. Compute for the adjusted balances on partners'‟ capital accounts. 2. Journal Entry.

Cash A/R Inventory Land Building Discount on Note N/P Mortgage A, Cap B, Cap

110,000 45,000 80,000 50,000 140,000 15,000

70,000 5,000 170,000 195,000

Additional Information: • Included in accounts receivable is an account amounting to 30,000 which is deemed uncollectible. • The inventory has an estimated selling price of 120,000 and 15,000 cost to sell. • Unpaid mortgage in Land of 10,000 is not assumed by the partnership. • Unpaid mortgage in Building of 5,000 is assumed by the partnership. • The building is over-depreciated by 10,000. • The Note Payable is stated at face amount. A proper valuation requires recognition of a 15,000 discount on note payable. • A and B shares P/L 50% and 50% respectively. ADJUSTED BALANCES Cash Accounts Receivable (75-30) Inventory (No adjustment) Land (No adjustment) Building (130+10) Total Note patable (70-15) Mortgage Payable-bldg (Assumed by the partnership) A, capital B, Capital Total

A

225000

Partners hip 10000 110000 45000 80000 50000 50000 140000 140000 200000 425000

55000

55000

B 100000 45000 80000

5000

5000 170000 170000 195000 195000 225000 200000 425000

Bonus method Bonus on initial investment: An accounting exists when the capital account of a partner is credited for an amount greater than the fair value of his contribution. Hirap iexplain pero eto ang example: Union and Christian agreed to form a partnership. Union shall contribute 100,000 cash while Christian shall contribute 140,000 cash. However due to the expertise of Union , the partners agreed that they should initially have equal interest in the partnership capital.

Actual Contribution

Percentage

Bonus

Total

Union

100000

50%

20000

120000

Christian

140000

50%

-20000

120000

Total

240000

Dapat ang capital ni Union is 50% of the total contributions. At para mangyari iyon, mababawasan ang capital ni Christian nang sa gayon ay ma kumpleto ang 50% ni Union. Bakin nga ba gugustuhin ni Christian na magbigay ng capital kay Union?? Simple, kasi si Union ang may EXPERTISE. Meaning si Union ang magbibigay buhay sa kanilang partnership.. Hope gets mo?

Other ways to make the initial investments equalize. 1.

Cash Settlement between partners Cash settlement outside the partnership is one way of buying the equity of the other partner. For example U invested 100k while C invested 70k. U Initial Investment

C 100000

70000

Partnership 170000

Now, to equalize their capitals instead of making additional investment to the partnership, C can ask U to buy 15k of his equity so that the initial investment would 170k, 85 for U and 85 for C. U Initial Investment

C 85000

Partnership 85000 170000

Cash 170000 U,cap 100000 C,cap 70000

Cash 170000 U,cap 85000 C,cap 85000

Partner U received 15000 pesos from C. This transaction is not recognized anymore by the partnership‟s book because it is made under the table. And we can see that the Total cash contributed remains at 170,000. Let‟s compare the values if C decided to make additional investment to the partnership.. The capital of U is 100k, meaning C should meet this amount.. C would have invested an additional (100k-70k) 30k pesos. Times two than of paying U for an additional 15k. GETS? Mejo baluktot na english pasensya naman daw. 

Other ways to make the initial investments equalize. 2. Additional investment (Withdrawal of investment)

Additional investment or withdrawal of investment can be one alternative to equalize the partners‟ capital. For example Initial investment is 100k . P/L sharing is 45% and 55% for E and D respectively. D contributed 60k while 40k for E. E D

initial contribution 40000 60000

Additional(withdraw) Required Cap 5000 45000 (5000) 55000

Practice question PP, RR, and SS are new CPA‟s and are to form a partnership. PP is to contribute cash of 50,000 and a computer originally costing 60,000 but has a second hand value of 25,000. RR is to contribute cash of 80,000. SS, whose family is selling computers, is to contribute cash of 25,000 and a brand new computer with a regular selling price of 60,000 but which cost is 50,000. Required: what would be the capital balances upon formation are? PP,RR,SS. Using the 3 independent situations. 1. 2. 3.

Partners agree to share profits equally. Partners agreed to have equal interest on the initial investment. Partners agreed to share profits 20%, 20%, 60% for PP, RR, SS respectively. All partners are willing to make additional investment if ever.

Test your brain. Don’t scan any notes you have with you right now! AJA!

Nga mahahalagang pakakatandaan sa Formation. Sa partnership kahit nd pareho ang “Contributed Capitals” ninyo ai pwede paring Equal ang P/L sharing. Depende kasi yan sa Agreement. It is very important to make either written, orally or implied agreement between partners before the inception of the partnership. This may minimize if not eliminate the confusion and disputes that may arise between or among partners.. Written agreement is recommended. Madali lang ang FORMATION.! Antabayanan ang susunud na kabanata! GOD BLESS YOU! Reference: Advance Accounting 1 Author1 Zeus Vernon B. Millan 2014 Author2 P. Guerrero and J. Peralta