Philippines Partnership Reviewer 2013

K.B. ADVANCED FINANCIAL ACCOUNTING and REPORTING

PARTNERSHIP By the contract of Partnership, two or more persons bind themselves to contribute money property and industry to a common fund with the intention of dividing the profits among themselves Advantages:

Goodwill Method 1.

Easy to Form Higher Capital than Sole

2.

decrease in Capital

Proprietorship

3.

Disadvantages: Liability of Partner (Unlimited) High Tax Rate (Same as Corporation 30%)

4.

4.

Total Contributed Capital [TCC] < [TAC] Total Agreed Capital [Partner CC/AC%] Partner used as the Basis of Goodwill is never the recipient the Goodwill

TCC

Life of a Partnership 1. 2. 3.

Unidentified Assets (Goodwill) is Recorded for the increase in Individual [Partner CC ≥ Partner AC] No

TAC Goodwill CONTRIBUTIO Capital NS A:200k Non-Cash Assets 300k, Capital B Liabilities 100k 400k 40k B: Cash=360K Capital C: Non-Cash Assets 400k410k, 10k liabilities 20k

Formation Operation Dissolution a. Admission of new Partner/s b. Retirement of existing partner/s Liquidation

 FORMATION

1M Capital50k AGREED Ratio

A

ABC

Cash @Face Value

B

Non-Cash Assets

(Liabilitie s)

(1) @Agreed Value (2) @Fair Value

(1) @Agreed

TCC

360k C

B Capital

C Capital

TCC*AC%

TCC*AC%

TCC*AC%

40%

390k

40%

950k <

Cash---------------------------------------------360k Non-Cash Assets (300k+410k) ------------710k Goodwill (40k+10k) ---------------------------50k Liabilities (100k+20k) ---------------- 120k

Basis of Goodwill ( Partner A ) Test 1: TCC < TAC

Partner A

Partner B (950k >

TAC

900k) x Partner C

Value

A Capital

20%

(950k < 1M) 

Value

(2) @Fair/Present



200k

Journal Entry:

After formation A=20% B=40%

C

A

(950k < 975)  *both Partner B’s and C’s TCC < TAC

Test 2: Individual Partner CC ≤ AC Contributed Assets and Assumed Liabilities are revalued at agreed amount (Partnership Contract), or if not available, at fair value or as given.

[BOG=C] Partner A 200k > 195k (390k/40%*20%)

[BOG=A] Partner C 200k = 200k (200k/20%*20%) x

Unidentifiable Asset (Goodwill) Special Asset Contributions such as Business Connections to Suppliers, Government, Bankers, Lenders, etc. and/or Specific Skills or Reputation that are essential for the Business.

Bonus Method 1. 2.

No recording of Unidentified Assets (Goodwill) Transfer of Capital (Bonus) [ increase/decrease in capital

If Recorded Goodwill Method

If Not Recorded Bonus Method Used if the Problem is

Silent

]

CONTRIBUTIO 3. Total Contributed Capital [TCC] = [TAC] Total NS Agreed Capital A: Non-Cash 4. All Bonuses(to/from Partners) always offsets to Assets 300k, ZERO Liabilities 100k B: Cash=360K, Goodwill 40k C: Non-Cash TCC Assets 420k TAC Bonus (including Goodwill of 10k), liabilities 20k AGREED Capital

K.B. ADVANCED FINANCIAL ACCOUNTING and REPORTING

Capital A 190k

200k

2.

20%

150k Capital B (50k) Capital C

380k 380k

360k

40%

390k

Bonus – Provided to Partner/s ONLY if



the company has profit o Basis of Bonus 1. Agreement (as stipulated)  NI before SIB ------ b=b%(NI)  NI before B after SI  b=b%(NI-SI)  NI before IB after S  b=b%(NI-S)  NI before SB after I  b=b%(NI-I)  NI before SI after B  b=b%

40%

(100k) 950k

950k

Ending Capital before Share in Net Income

=

0 Journal Entry: Cash---------------------------------------------360k Non-Cash Assets (300k+410k) ------------710k Liabilities (100k+20k) ---------------- 120k A Capital---------------------------------

(NI/1+b %)



NI before S after IB 

b=b%(NI-

I/1+b%)



NI before I after SB  S/1+b%)



NI after SIB

--------

b=b%(NIb=b%(NI-

SI/1+b%)



Peso Amount or other Basis

2. Silent [NI before SIB]

--- b=b%(NI)

 OPERATION 

Profit or Loss Ratio (priority) 1. Profit and Loss Agreement (P&L Ratio) 2. Profit Agreement Only a.

b.

Industrial Partner/s – Just and Reasonable Share in the Partnership Profit as Agreed (Liable to losses unless stipulated otherwise) Capitalist Partner/s Losses

 ABC Partnership began operations on

(remainder)

1. Profit = Profit Ratio as Agreed 2. Loss = Profit Ratio



3. Loss Agreement Only b.

b.

Industrial Partner – Just and Reasonable Share in the Partnership Profit (Can be Exempted in Losses if Stipulated) Capitalist Partner (remainder) 3. Profit = Original Capital Ratio, if 4.

4.

Comprehensive Problem





not given then equally Loss = Loss Ratio as Agreed

May 1, 20xA During the year, A invested the Machinery he purchased for 100k and has an AD of 30k. FV of Machinery is 60k. C invested Cash for 50k. A and B withdrew 50k and 20k cash respectively. Their Profit and Loss Ratio is 1:2:1 respectively. Their agreement includes the following :

no Profit and Loss Agreement c.

b.



Industrial Partner – Just and Reasonable Share in the Partnership Profit Capitalist Partner (remainder)

 

[Profit and Loss]

Net Income before Salaries after Interest and Bonus

5. Original Capital Ratio 6. Equally if Original Capital is not given.







Impairment Losses can be exempted from Profit and Loss Distribution If Agreed by Partners. Industrial Partners can be exempted from losses if agreed by the partners.



Basis = As Stipulated/given. If Silent = 1. Average Capital

Other information includes, Sales of 2.2M and Cost of Sales 1.3M.

 Find the Adjusted Ending Capital of Each Partners assuming the following cases.

CASE A – Operating Expenses = 600k CASE B – Operating Expenses =

Salaries and Interest – Provided whether the company has profit or loss unless there is an existing priority agreement and the remaining profit is insufficient to cover Salaries or Interests or both (partial provision-by PL Ratio or none at all)

Annual Salaries, 112.5k to A and 75k to C Interest to A and B, 30% of Ending Capital Balance Bonus to all Partners, 5% of

675k CASE C – Operating Expenses = 980k

A C

25% 850k

B

Total

Capital 150k

25%

5/1

300k

400k

50%

K.B. ADVANCED FINANCIAL ACCOUNTING and REPORTING 50k

Add’l Investment 110k

60k

Withdrawals -

(50k)

(20k)

310k

380k

Interest: (Case A & C) Partner A = 310k*30%*8/12 = 62k Partner B = 380k*30%*8/12 = 76k

(70k) Unadj. Capital 12/31

200k

-

890k

CASE A

Salaries 50k

Interest -Bonus

--

62k

76k

138k 1,333 2,667 138,333

Total 51,333

75k

125k

1,333 78,667

5,333

268,333

Remaining

7,917

15,833

7,917

31,667 146,250

59,250

Share in Net Income 300k Unadj. Capital 12/31

310k

200k

890k__ Adj. Capital 12/31

259,250

456,250

94, 500

380k

Salaries

75k

--

125k

Interest

--

--

--

--

--

--

(insufficient)

--

Bonus

(insufficient)

75k (Interest ratio)

44,928

Share in Net Income 225k

--

119,928

Inc&Exp Summary------300k A Capital------------------

Inc&Exp Summary------225k A Capital------------------

380k

429,928

Adj. Capital 12/31

CASE C 75k

--

62k

76k

125k 138k --

Total

-137k

B Capital------------------55,072

C Capital--------------------

-76k

Closing Entries: Case C

Fair

435,072

1.115M

Salaries

119,928

Sales------------------------2.2M Inc&Exp Summary--------80k Cost of Sales------------------1.3M

55,072

890k__

Interest -Bonus

Expenses----------------------675k Inc&Exp Summary-----------225k

59,250

55,072

310k

Unadj. Capital 12/31

50k

Expenses----------------------600k Inc&Exp Summary-----------300k

C Capital--------------------

--

125k

Remaining

250k

Sales------------------------2.2M Cost of Sales------------------1.3M

B Capital-------------------

100k

200k

Sales------------------------2.2M Cost of Sales------------------1.3M

94, 500

Total

50k

Closing Entries: Case B

146,250

--___ 50k

Closing Entries: Case A

474,500

1.19M

CASE B 50k

Remaining (Balancing Figure): Case A (300k-268,333) * PL% (Partner A, B, &C) Case B (225k-125k) * (A 62/138)/(B 76/138) Case C (-80k-263k) * PL% (Partner A, B, &C) Bonus: b = b%(NI-i)/(1+b%) b = 5%(250k – 138k)/1.05 b = 5,600/1.05 b = 5,333 *PL%

-50k

Expenses----------------------- Value----------------------------------------xx 980k Book Value of Net Assets-------------------------- (xx) B Capital--------------------95.5k Fair Value C Capital--------------------35.75k Inc&Exp Summary-----------80k A Capital---------------------51.25k

263k Unadj.

(85,750) (35,750)

Loss

Unadj. Capital 12/31

200k

(171,500)

51,250

310k

(95, 500)

380k

890k__ Adj. Capital 12/31

164,250

(85,750)

(bal.fig.)

(343k) Share in Net Loss (80k)

361,250

284,500

810k

 DISSOLUTION Change in Partnership Ownership Interest. New Partner Joins, or existing Partner Leaves the Partnership, or Dies. Capital Accounts of Existing Partners should be Adjusted (if in-between B/S date) before Dissolution as if the Partnership is closing and starting again as a New Partnership.

SOLUTIONS Gross Income: 2.2M – 1.3M = 900k Net Income/Loss: Case A: 900k – 600k = 300k Case B: 900k – 675k = 225k Case C: 900k – 980k = (80k) Salaries: (Case A, B, & C) Partner A = 112.5k*8/12 = 75k Partner C = 75k*8/12 = 50k

a.

Admission of new Partner/s 1. Admission by Purchase of Interest 

Personal Transaction  Payment of New Partner to the Existing Partner/s  Cash received by partner/s and gain/loss from the purchase of

K.B. ADVANCED FINANCIAL ACCOUNTING and REPORTING capital interest are not recorded in the Partnership Books, only the transfer of capital from existing partner/s to the new partner.





A Capital (old) --------------------xx B Capital (old) --------------------xx C Capital (old) --------------------xx D Capital (new) -----------------xx Cash received by existing partner/s who sold their capital interest/s to a new partner is distributed accordingly: 1. the amount of the Capital 2.

Partner depending on the agreement or the absence of such (Problem is Silent) Existing Partners’ Capital Accounts are adjusted/closed before the acceptance of the New Partner. Capital Adjustments include  Capital Transactions (If Any) Loans, Withdrawals and Investments



Share in Net Income/Loss



Revaluation of Net Assets (If Agreed)

In-between BS Date

Transferred Excess(BTO)/Deficiency(BTN)

Revaluation Method is

of the Purchase Price over the total transferred capital to the new partner via P&L %

Used

3. TCC=TCC



Purchase Price pd. By D ABC Co. ---------------------------> ---------------------xx ABCD Co. A Capital (Transferred to D) ---------xx (D is Accepted as a Partner) B Capital (Transferred to D) ---------xx C Capital (Transferred to D) ---------xx (xx) Beg. L/W/I SNI/L R Excess/Deficiency--------------------------xx/ TCC TAC B / GW (xx) Capital A xx xx xx xx xx xx xx/(xx) Cash Received by Old Partners CapitalorB– xx xx xx xx A = Capital Transferred to D + Excess(PL%) xx xx xx/(xx) Capital C xx xx xx xx Revaluation Method xx xx xx/(xx) Total/Net xx ± xx ±  The Existing Partners can revalue xx ± xx = xx xx xx/(xx) the Net Assets of the Partnership Capital D xx to their Fair Values (if agreed) xx xx/(xx) before accepting a Partner, or Capital After Admission xx before a Partner leaves the xx 0 / xx Partnership  The Revaluation of Net Assets to their Fair Values are recorded as adjustments to each Partner’s 3. Retirement, Withdrawal or Capital Account allocated by their PL % Death of a Partner  If the Under/(Over)valuation  Settlement of Leaving Partner’s differs from the Net Assets Fair Capital Interest Value Adjustment, or is completely  Partnership Capital Accounts are unrelated to it, the Excess/Full Amount can be recorded as: adjusted/closed before Settlement Undervaluation Overvaluation

Goodwill (If Agreed) Adjustment or

Capital

(Impairment Loss)

Capital Adjustment (Bonus to Capital)



of the Leaving Partner’s Capital Interest.

Silent Problems: Agreement: Non-Revaluation

(Similar to Admission of new partner)

ABCD Co.

--------------------------->

BCD Co. (A is Leaving the Partnership)

Method

Undervaluation: Bonus Method

2. Admission by Direct Investment  

Contribution/Investment of the New Partner to the Partnership Similar to Partnership Formation, Admission by Direct Investment also uses Goodwill or Bonus Method in Accepting the new

A

B

C

D__ Capital Beg. xx xx ± Loans/Investment/Drawings xx ± Share in NI/(NL) xx xx ± Under/(Over)valuation xx_ Adj. Capital Balance xx xx

xx xx xx xx xx

xx xx

xx

xx xx xx

xx

K.B. ADVANCED FINANCIAL ACCOUNTING and REPORTING

Settlement to A (Leaving Partner) - _ Balance xx xx Bonus to Old / (New) xx xx_ Remaining Capital Balance xx

(xx)____ -

-

xx

xx

(xx)

xx

0

xx

xx

RETIREMENT/WITHDRAWAL/DE ATH ADMISSION Closing Entries Closing Entries

Share in in Net Income/Loss Share Net Income/Loss In In Between B/S Date Between B/S Date Sales---------------------------------------xx Sales---------------------------------------xx Cost of of Sales--------------------------------------------xx Cost Sales--------------------------------------------xx Expenses------------------------------------------------xx Expenses------------------------------------------------xx Inc&Exp Summary------------------------------------xx Inc&Exp Summary------------------------------------xx Inc&Exp Summary-------------------xx Inc&Exp Summary-------------------xx A Capital-----------------------------------------------xx xx A Capital-----------------------------------------------B Capital-----------------------------------------------xx xx B Capital-----------------------------------------------C Capital-----------------------------------------------xx xx C Capital-----------------------------------------------D Capital------------------------------------------------xx

Additional Investment Additional Investment

Net Asset (Contribution)-----------xx Net Asset (Contribution)-----------xx A/B/C Capital------------------------------------------xx A/B/C/D Capital----------------------------------------xx

Withdrawals Withdrawals

A/B/C Capital--------------------------xx A/B/C/DA/B/C Capital-----------------------xx Drawings----------------------------------------xx A/B/C/D Drawings-------------------------------------xx

Loan Offseting (Loan to/from Partnership) Loan Offseting (Loan to/from Partnership)

Loans Payable--------------------------xx Loans Payable--------------------------xx A/B/C Capital-------------------------------------------xx A/B/C/D Capital----------------------------------------xx A/B/C Capital---------------------------xx A/B/C/DLoans Capital------------------------xx Receivable--------------------------------------xx Loans Receivable--------------------------------------xx

REVALUATION REVALUATION

Revaluation (undervalued Net Assets) Revaluation Net Assets) Net Asset/s(undervalued (Adjustments) ----------xx Net Asset/s (Adjustments) ----------xx *Goodwill--------------------------xx *Goodwill--------------------------xx A Capital-----------------------A Capital-----------------------xx xx B Capital-----------------------B Capital-----------------------xx xx C Capital-----------------------C Capital-----------------------xx xx D Capital-----------------------Revaluation (overvalued Net Assets/Impairment xxLoss) A Capital--------------------------xx Revaluation (overvalued Net Assets/Impairment B Capital--------------------------xx Loss) C Capital--------------------------xx A Capital--------------------------xx Net Asset/s (Adjustments) B ---------xx Capital--------------------------xx C Capital--------------------------xx D Capital--------------------------xx ADMISSION by PURCHASE of Net Asset/s (Adjustments) INTEREST ---------xx

 LIQUIDATION

Winding-Up/Closing of the Partnership. Liabilities

Transfer of Capital (@Purchase Price) SETTLEMENT of PARTNER’S are Settled andRETIRING Assets of the Company are A Capital (old) --------------------xx distributed toCAPITAL the Partners.

B Capital (old) --------------------xx C Capital (old) --------------------xx a. Lump Sum/Simple D Capital (new) -----------------xx Liquidation – Single Realization Distribution of Partnership Assets after ADMISSION by DIRECT INVESTMENT Settlements of Liabilities Transfer of Capital (@FV of Contributed Net  Procedures Asset/s)

Realization ofxx Non-Cash Assets – Net Asset1. (Contribution)--------Gain/Loss is Allocated to each D Capital (new)------------------xx Partner’s Capital via their PL%. Unsold Non-Cash Assets (incl. Goodwill) are Record Goodwill or Bonus to/from Partners Loss also via their PL% New Partnerdistributed CC > AC as (ABC Capital Undervalued) Goodwill/D Capital (bonus from) ------------xx A Capital (old) (bonus to) ----------------xx B Capital (old) (bonus to) ----------------xx C Capital (old) (bonus to) ----------------xx

New Partner CC < AC (ABC Capital

K.B. ADVANCED FINANCIAL ACCOUNTING and REPORTING 2. Loan Offsetting – Loan/s of the Partnership from a Partner and vice versa are offsetted on that Partner’s Capital Account

3. Asset Distribution a. Settlement of Partnership Liabilities  Offsetted Loan/s to/from Partner/s are not included in Loan settlements b. Settlement of Partnership Capitals

 After settling the Partnership Liabilities, Remaining Cash are then distributed as Capital Settlements to All Partners  Partner/s with Deficient Capital Accounts should make additional investments (to the extent of their personal Net Assets) to offset their deficiency.  If after Deficient Partner/s Invests all their remaining Personal Net assets and their Capital Account/s still shows Deficit Amount, they are considered Insolvent  Deficit on an Insolvent Partner’s Capital account should be absorbed by the Solvent Partners via their (Solvent Partners) PL% even it makes a deficit in their own capital account/s; at which point, they should also invest to offset that deficiency, also to the



Priority of Partnership’s Liability Settlements General Partnership

Limited Partnership

1. Judicial Liquidation fees (court order) incl. Taxes 2. Liabilities to 3rd party incl. Salaries to Employees 3. Liabilities to Partner/s 3. Liabilities to 3rd 4. 5.

other than Capital and Profit Liabilities to General Partner for His Capital Liabilities to General Partner for his Share in Profit

party 4. Liabilities to Limited Partners other than Capital and Profit 5. Liabilities to Limited Partner for his Profit 6. Liabilities to Limited Partner for his Capital 7. Liabilities to General Partner other than Capital and Profit 8. Liabilities to General Partner for his Profit 9. Liabilities to General Partner for his Capital

b. Installment Liquidation Piecemeal / Multiple Realizations and Distributions of Partnership assets.



Safe Payment Method – Determines whether currently available cash can be safely distributed to partners (or if it can, to whom only, and how much) using the Safe Payment Schedule. 1. Partner to Partnership loans are offsetted to the Ending Capital Account Balances, 2. Remaining Non-Cash Assets at Full Amount Are Assumed as Loss and Distributed to the Partners 3. Contingent and Other losses are also assumed and Distributed to the partners 4. All Partners are assumed to be Insolvent, so all capital deficits are absorbed by partners with positive capital balances.



Under/Overvaluation of Distributed Non-Cash Asset/s (Book Value vs Fair Value) – Distributed to All Partners as Gain/Loss adjustment to Capital via PL% before the distribution of the

Lump Sum Liquidation ASSETS - LIAB. = CAPITAL______ Cash NCA L B C D__ Safe Payment Schedule Ending Balances xx xx xx Possible Losses B xx xx xx C D__ Loan Offsets -xx -Capital End xx xx (xx) -xx xx Realization xx (xx) -Loan Offsetsof Assets xx(xx) (xx) (xx) -Balance loss on: Possible xx -xx xx (xx)Realization xx of Assets xx xx Paymentxx xx of Liabilities (xx) (xx) --- Contingencies -xx xx C Add’l Investment xx xx xx --xx Others -_xx xx Balance xx__ xx xx --xx -Balance xx -xx Settlement (xx) xx of Capital (xx) --(xx) -Deficiency (xx) Absorption (B & D PL%) (xx) Balance(xx)_ xx -----(Max) Safe -- Payments to Partners xx -xx If C’s Personal Net Assets are not Sufficient to Cover up hisCurrently Cash Capital Deficit, at hand B --------------xx & D will Absorb the remaining Deficit and Priority Liabilities---------------------(xx) distribute the Loss via B & D ‘s PL% (recompute Cash available PL% forwithout distribution-----xx C)

extent of their personal net assets, and if they became insolvent because of it, then the deficit is absorbed, again, by the remaining solvent partners and so on. If silent, Partner = Solvent

K.B. ADVANCED FINANCIAL ACCOUNTING and REPORTING

Asset, not just the partner who receives the Under/Overvalued Asset



Cash Distribution Plan/Cash Priority Program – Priority for Cash Distribution is determined based on each partner’s vulnerability to losses. The more vulnerable a partner’s capital is to loss the higher the priority rank. Procedure 1. Partner to Partnership loans are offsetted to the Capital Account Balances, 2. Loss Absorption Balance (LAB) is computed by Dividing the Capital Balance with Individual Partner’s PL% 3. Rank each partner’s LAB from Highest to Lowest. 4. Priority Payments Are Computed by Subtracting the Highest Rank LAB with the Next One and multiplying the Difference by the PL% of the Partner/s with the Highest LAB. 5. The Remaining Distributable Cash after the Priority Payments are Distributed via PL%

K.B. ADVANCED FINANCIAL ACCOUNTING and REPORTING