ACCOUNTING FOR PARTNERSHIPS Basic Considerations and Formation Sergey Brin, 34 years old and Larry Page, 35, both single, with $18.7 billion net worth each, ranked 32° and 33" (Forbes 2008, The World's Billionaires) They are the founders of Google in 2003, Forbes estimated their collective worth at $1.1 billion They erred. Since taking their Internet search engine public in August 2005, the dynamic duo behind Google has seen their combined fortune soar to $8, billion. In 2005, is $11.0 billion each. Both partners have math teacher parents. Brin emigrated from Russia; Page grew up in Michigan. They met at Stanford while pursuing graduste degrees in Fe Tcnce: They founded Google in Sept. 7, 1998. Google is an internet fough more than 3 billion web pages. Raised $25 million from venture capitalists, AS 3t Sent. 2007, Google is leading the pack with 55.34% search engine market share O2cluding Google in other countries like Google UK, Canada, Germany, ‘Spain, ete. ISN to 3.08% (Source: www.netapplications.com). In the 1° quarter of 2005, Google has a 51% global search market share (Source: Comscore, Piper Jaffray & Co.). Yahoo is distant 24% and MSN at 1396, Top this; the accounting firm Deloitte Touche named Google the fastest-growing This al ever noting that its five-year revenue growth exceeded 400,000 percent, his means Google rocketed from being unknown to having the statue of Apple or Microsoft in five years. Google is now into satelite mapping, online payment systems, ews, YouTube and recently, cellphone, At the outset of their business endeavor, the partnership form of business may have provided Brin and Page the necessary advantages to start-up thelr software venture. How much should they contribute to the business considering its business potential? In what form will the investment be? How should the partners divide Profits and losses? \f ever, how should'a partner who leaves the entity compensated fer his share of the » Pusiness? What will be the share of venture capitalists?DEFINITION In a 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 profit among themselves. Two or more persons may also form a partnership for the exercise of a profession (Civil Code of the Philippines, Article 1767). ‘An association of two or more persons to carry on, as co-owners, a business for profit (Uniform Partnership Act, Section 6). “The partnership has a juridical personality separate and distinct from that of each of the partners (Civil Code of the Philippines, Article 1768). Thus, for example, where Fabella ‘nd Neis established a partnership, three persons are involved, namely: the partnership and the partners, Fabella and Neis, Partnerships resemble sole proprietorships, except that there are two or more owners of the business. Each owner is called a partner. Partnerships are often formed to bring together various talents and knowledge. Partnerships provide a means of obtaining more equity capital than a single individual can obtain and allow the sharing of risks for rapidly growing businesses. {A profession is an occupation that involves a higher education or its equivalent, and mental rather than manual labor. Strictly speaking, the exercise of a profession is not a business or an enterprise for profit but the law allows two or more persons to act as partners in the practice of their profession. Partnerships are generally associated with the practice of law, public accounting, medicine and other professions. Partnerships of ‘this nature are called general professional partnerships. On the other hand, service industries, retail trade, wholesale and manufacturing enterprises may also be organized as partnerships. CHARACTERISTICS OF A PARTNERSHIP ‘The characteristics of partnerships are different from the sole proprietorships already studied in basic accounting. Some of the more important characteristics are as follows: ‘Mutual Contribution. There cannot be a partnership without contribution of money, property or industry (i.e. work or services which may either be personal manual efforts cr intellectual} to a common fund. Division of Profits or Losses. The essence of partnership is that each partner must hare in the profits or losses of the venture. Co-Ownership of Contributed Assets. All assets contributed into the partnership are ‘owned by the partnership by virtue of its separate and distinct juridical personality. If one partner contributes an asset to the business, all partners jointly own it in a special sense.‘Mutual Agency. Any partner can bind the other partners to a contract if he is acting ‘within his express or implied authority. United Life. A partnership has a limited life. It may be dissolved by the admission, ‘eeth, insolvency, incapacity, withdrawal of a partner or expiration of the term ‘Specified in the partnership agreement. Uslimited Liability. All partners (except limited partners), including industrial partners, ‘= personally liable for all debts incurred by the partnership. if the partnership can not settle its obligations, creditors’ claims will be satisfied from the personal assets of the ‘Partners without prejudice to the rights of the separate creditors of the partners. ‘rome Taxes. Partnerships, except general professional partnerships, are subject to ‘“2xat the rate of 30% (per R.A. No. 9337) of taxable income. ‘Partners’ Equity Accounts. Accounting for partnerships are much like accounting for ‘Sele proprietorships. The difference lies in the number of Partners’ equity accounts. 2-8 partner has a capital account and a withdrawal account that serves similar ‘Sections as the related accounts for sole proprietorships. ADVANTAGES AND DISADVANTAGES OF A PARTNERSHIP ‘partnership offers certain advantages over a sole proprietorship and a corporation. It -250hasa number of disadvantages. They are as follows: Advantages versus Proprietorships Brings greater financial capability to the business. = Combines special skills, expertise and experience of the partners. > Oifers relative freedom and flexibility of action in decision-making. ‘Asrantazes versus Corporations = Ezsier and less expensive to organize. = More personal and informal. Disadvantages = Ecsily dissolved and thus unstable compared to a corporation. = Mutual agency and unlimited liability may create personal obligations to partners. = tess effective than a corporation in raising large amounts of capital. PARTNERSHIP DISTINGUISHED FROM CORPORATION ‘Memer of Creation. A partnership is created by mere agreement of the partners while += corporation is created by operation of law. Member of Persons. Two or more persons may form a partnership; in a corporation, at 2st five (5) persons, not exceeding fifteen (15). 13Commencement of Juridical Personality. In 2 partnership, juridical per ‘commences from the execution of the articles of partnership; in a corporation, from: ssuance of certificate of incorporation by the Securities and Exchange Commission. ‘Management. In a partnership, every partner is an agent of the partnership if partners did not appoint a managing partner; in 2 corporation, management is, ‘on the Board of Directors, Extent of Liability. In a partnership, each of the partners except a limited partner liable to the extent of his personal assets; in a corporation, stockholders are liable omy to the extent of their interest or investment in the corporation. Right of Succession. Ina partnership, there is no right of succession; in a corporation, there is right of succession. A corporation has the capacity of continued existence regardless of the death, withdrawal, insolvency or incapacity of its directors or stockholders. Terms of Existence. In a partnership, for any period of time stipulated by the partners; ina corporation, not to exceed fifty (50) years but subject to extension. CLASSIFICATIONS OF PARTNERSHIPS 1. According to object: ‘A. Universal partnership of all present property. All contributions become part of the partnership fund. B. Universal partnership of profits. All that the partners may acquire by their industry or work during the existence of the partnership and the use of whatever the partners contributed at the time of the institution of the contract belong to the partnership. C. Particular partnership. The object of the partnership is determinate—its use or fruit, specific undertaking, or the exercise of a profession or vocation. 2, According to lability: A. General. All partners are liable to the extent of their separate properties. B, Limited. The limited partners are liable only to the extent of their personal contributions. In a limited partnership, the law states that there shall be at least one general partner. 3. According to duration: ‘A. Partnership with a fixed term or for a particular undertaking. B. Partnership at will. One in which no term is specified and is not formed for any lar undertaking.4, According to purpose: A. Commercial or trading partnership. One formed for the transaction of business. B. Professional or non-trading partnership. One formed for the exercise of profession. 5. According to legality of existence: ‘A. De jure partnership. One which has complied with all the legal requirements for its establishment. B. De facto partnership. One which has failed to comply with all the legal requirements for its establishment. KINDS OF PARTNERS . General partner. One who is liable to the extent of his separate property after all the assets of the partnership are exhausted. Limited partner. One who is liable only to the extent of his capital contribution. Capitalist partner. One who contributes money or property to the common fund of the partnership. Industrial partner. One who contributes his knowledge or personal service to the partnership. Managing partner. One whom the partners has appointed as manager of the partnership. 3. Liquidating partner. One who is designated to wind up or settle the affairs of the partnership after dissolution. . Dormant partner. One who does not take active part in the business of the partnership and is not known as a partner. Silent partner. One who does not take active part in the business of the partnership though may be known as a partner. Secret partner. One who takes active part in the business but is not known to be a partner by outside parties. . Nominal partner or partner by estoppel. One who is actually not a partner but who represents himself as one,LIMITED LIABILITY PARTNERSHIPS The traditional form of partnership is the general partnership in which all partners have unlimited personal liability for unpaid debts of the partnership. Recent laws of several states in the United States of America have permitted the formation of limited liability partnerships (LLPs); LLP has supplanted the general partnership as the primary form of partnership organization. LPs have features of both general partnerships and professional corporations. Individual partners of LLPs are personally responsible for their own actions and for the actions of partnership employees under their supervision. However, they are not responsible for the actions of other partners. The LLP as @ whole, like a general partnership, is responsible for the actions of all partners and employees. This concept is different from that of a limited partnership. ARTICLES OF PARTNERSHIP ‘A partnership may be constituted orally or in writing. In the latter case, partnership ‘agreements are embodied in the Articles of Partnership. The following essential provisions may be contained in the agreement: 1. The partnership name, nature, purpose and locatio 2. The names, citizenship and residences of the partners; 3, The date of formation and the duration of the partnership; 4, The capital contribution of each partner, the procedure for valuing non-cash investments, treatment of excess contribution (as capital or as loan) and the penalties for a partner's failure to invest and maintain the agreed capital; ‘The rights and duties of each partner; 6. The accounting period to be adopted, the nature of accounting records, financial statements and audits by independent public accountants; 7. The method of sharing profit or loss, frequency of income measurement and distribution, including any provisions for the recognition of differences in contributions; The drawings or salaries to be allowed to partners; ‘The provision for arbitration of disputes, dissolution, and liquidation. ‘A contract of partnership is void whenever immovable property or real rights are contributed and a signed inventory of the said property is not made and attached to a public instrument.SEC REGISTRATION When the partnership capital is P3,000 or more, in money or property, the public ~_ instrument must be recorded with the Securities and Exchange Commission (SEC). Even if it not registered, the partnership having a capital of P3,000 or more is stil valid and therefore has legal personality. ‘The ‘SEC shall not register any corporation organized for the practice of public accountancy (The Philippine Accountancy Act of 2004, Sec. 28). ‘The purpose of the registration is to set “a condition for the issuance of the licenses to engage in business or trade. In this way, the tax liabilities of big partnerships cannot be evaded, and the public can also determine more accurately their membership and ‘pital before dealing with them.” (Dean Capistrano, IV Civil Code of the Philippines) To register a partnership with the SEC, here are the basic steps to follow: + Have your proposed business name verified in the verification unit of SEC; > Submit the following documents: ® Articles of Partnership = Verification Slip for the Business Name = Written undertaking to change business name if required ‘Tax identification number of each partner and/or that of the Partnership Registration data sheet for partnership duly accomplished in six copies = Other documents that may be required » Pay the registration/filing and miscellaneous fees; ~ Forward documents to the SEC Commissioner for signature, ACCREDITATION TO PRACTICE PUBLIC ACCOUNTANCY Certified public accountants (cPAs), firms and partnerships of CPAs, engaged in the Practice of public accountancy, including the partners and staff members thereof, shall register with the Professional Regulation Commission and the Professional Regulatory Board of Accountancy. The registration shall be renewed every three years (The Philippine Accountancy Act of 2004, Sec. 31). The rules and regulations covering the accreditation for the practice of public accountancy are specified in Annex 8 of The Rules and Regulations Implementing Republic Act 9298 otherwise known as the Philippine Accountancy Act of 2004.ACCOUNTING FOR PARTNERSHIPS ‘Owners’ Equity Accounts Im Basic Accounting, generally accepted accounting principles were discussed in the context of a sole proprietorship. These accounting principles also apply to a Partnership. Thus, the recording of assets, liabilities, Income and expenses is consistent for both proprietorships and partnerships. Comparing two businesses of the same ‘nature, one organized as a sole proprietorship and another as a partnership, there will be no marked difference in their operations. However, differences arise between the two forms of business concerning owners’ ‘equity. For 2 proprietorship, there is only a single owner. Therefore, there is only one capital account and one drawing account. On the other hand, since a partnership has two or more owners, separate capital and drawing accounts are established for each partner. A partner’s capital account is credited for his initial and additional net investments {assets contributed less liabilities assumed by the partnership), and credit balance of the drawing account at the end of the period. It is debited for his permanent withdrawals and debit balance of the drawing account at the end of the period. Typically, partners do not wait until the end of the year to determine how much of the profits they wish to withdraw from the partnership. To meet personal living expenses, Partners customarily withdraw money on a periodic basis throughout the year. A partner's drawing account is debited to reflect assets temporarily withdrawn by him from the partnership. At the end of each accounting period, the balances in the drawing accounts are closed to the related capital accounts. Partner's Capital Account Debit Credit 1. Permanent withdrawals, 1. Original investment, 2. Debit balance of the drawing | 2. Additional investment. ‘account at the end of the period. 3. Credit balance of the drawing account at the end of the period. Partner's Drawing Account Debit 4. Temporary withdrawals. Credit 1. Share in profit (this may be credited directly to Capital). 2, Share in oss (this may be debited directly to Capital),Permanent withdrawals are made with the intention of permanently decreasing the partner's capital while temporary withdrawals are regular advances made by the Partners in anticipation of their share in profit, ‘The use of drawing accounts for temporary withdrawals provides a record of each Partner's drawings during an accounting period. Hence, drawings in excess of the allowed amounts as stated in the partnership agreement may be controlled. Notice that profit (or loss) is credited (or debited) either to the drawing account or to the capital account. The choice of the account to credit or debit depends on the intention of the partners, if they wish to. maintain their capital accounts for investments and permanent withdrawals, then profit or loss should be entered in the drawing account. On the other hand, ifthe purpose of the partners isto make profit or loss part of their capital, then the capital account should be used. In either case, the resulting partners” ending capital balances will be the same. On Sept. 6, 2007, the International Accounting Standards Board (IASB) issued a revised international Accounting Standards (IAS) No. 1, Presentation of Financial Statements. ‘his standard supersedes the 2003 version of IAS 1 as amended in 2005. It’s common {to encounter “profit or loss” rather than usual “net income or net loss” as the descriptive term used in the Statement of Comprehensive Income (the new ttle of the income statement per revised IAS No. 1). The balance sheet is called the Statement of Financial Position. The complete set of financial statements will be discussed in Chopter 2 Loans Receivable from or Payable to Partners {fa partner withdraws a substantial amount of money with the intention of repaying it, the debit should be to Loans Receivable-Partner account instead of to Partner's Drawing account. This account should be classified separately from the other receivables of the partnership. A partner may lend amounts to the partnership in excess of his intended permanent investment, These advances should be credited to Loans Payable-Partner account and not to Partner's Capital account classified among the liabilities but separate from ities to outsiders. This distinction is important in case of liquidation. Loans payable {0 Partners must be paid after the claims of outside creditors have been paid in ful These loans have priority over partners’ equity.PARTNERSHIP FORMATION Valuation of Investments by Partners The books of the partnership are opened with entries reflecting the net contributions of ‘the partners to the firm. Asset accounts are debited for assets contributed to the Partnership, liability accounts are credited for any liabilities assumed by the partnership and separate capital accounts are credited for the amount of each partner's net investment (assets less liabilities), Partners may invest cash or non-cash assets in the partnership. When a partner invests on-cash assets, they are to be recorded at values agreed upon by the partners. In the absence of any agreement, the contributions will be recognized at their fair market Values at the date of transfer to the partnershi ‘The fair market value of an asset is the estimated amount that a willing seller would receive from a financially capable buyer for the sale of the asset in a free market. Per International Financial Reporting Standards (IFRS) No. 3, fair value is the price at which an asset or liability could be exchanged in a current transaction between knowledgeable, unrelated willing parties. Adjustment of Accounts Prior to Formation ln cases when the prospective partners have existing businesses, their respective books will have to be adjusted to reflect the fair market values of their assets or to correct misstatements in the accounts. if the adjustments will not be made, the initial capital balances of the partners may be inequitable. Mlustration. A reconditioned printing equipment invested by Juanita Pineda was recorded incorrectly in the Partnership books at P630,000—its book value from ‘the Proprietorship’s records. if the partnership immediately sold the Printing equipment for its fair market value of 700,000, the resulting P70,000 gain would increase the capital balances of both Partners Juanita Pineda and Joel Feliciano. The pri ‘equipment should have been recorded at P700,000 and Pineda’s capital credited with 700,000. Simply stated, increases in asset values accruing before formation should be for the benefit of the contributing partner. The adjustments of the assets and liabilities prior to formation will be similar to the adjustments that we are already familiar with, However, when the adjustment involves. 2 debit or credit to a nominal account, the Capital account would instead be debited or credited. This is so because the business has ceased to be a going concern. A business 's not viewed as a going concern if iquidation appears imminent. For example, two sole Proprietorships will cease operations because of their agreement to enter into a partnership. Both proprietorships have ceased to be going concerns.Wustration. Luz Pascua and Lydia Dela Cruz formed a general professional partnership. Luz Pascua will invest sufficient cash to give her an equal interest in the Partnership while Lydia Dela Cruz will transfer the assets and liabilities of her business, ‘The account balances on the books of Dela Cruz prior to partnership formation follows: Debit creait ash 18,000 Accounts Receivable 30,000 Office Equipment 150,000 ‘Accumulated Depreciation 60,000 ‘Accounts Payable 15,500 Salaries Payable 2,500 Lydia Dela Cruz, Capital 120,000 It is agreed that for purposes of establishing Luz Pascua's interest, the following adjustments shall be made in thie books of Lydia Dela Cruz: » An allowance for uncollectible accounts of 596 of accounts receivable is to be established. Prepaid expenses amounting to P3,000 were omitted by the accountant, Thisis to be recognized. Additional salaries payable in the amount of P2,000 is to be established, To understand the adjustments that will be made prior to formation, it wll be helpful to review the basics. The book—satic Accounting Made Easy 2008 edition by the same authors Aiscussed the basics of accounting in a manner similar to the following: ‘The accounting equation states that assets must always equal liabilities and owner's equity. The basic accounting model is: Assets = Liabilities, + Owner's Equity Note that the assets are on the left side of the equation opposite the liabilities and ‘wmer's equity. This explains why increases and decreases in assets are recorded in the opposite manner as liabilities and owner’ equity are recorded. The equation also explains why iabllties and capital follow the same rules of debit and credit. The logic (of debiting and crediting is related to the accounting equation. ‘Accounting is based on a double-entry system which means thet the dual effects of a business transaction are recorded. A debit side entry must have a corresponding Gredit side entry. For every transaction, there must be one or more accounts debited and one or more accounts credited. Each transaction affects at least two accounts: ‘The total debits for a transaction must always equal the total credits. ‘The account type determines how increases and decreases in it are recorded. Increases in assets are recorded as debits (left side of the account) while decreases in assets are recorded as credits (on the right side). Conversely, increases in liabilities aa‘and owner's equity are recorded by credits; decreases in liabilities and owner's equity are recorded by debits ‘The rules of debit and credit for income and expense accounts are based on the ‘elationship of these accounts to owner’s equity. income increases owner's equity and expense decreases owner's equity. Hence, increases in income are recorded a5. redits and decreases as debits. Increases in expenses are recorded as debits and decreases as credits. These are the rules of debit and credit. Using the accounting equation approach of analysis, the adjustments are as follows: Assets liabilities + Owner's Equity 1 -P1,500 + P1,500 2 +3,000 + +3,000 a +P1000_ + = 1,000 #P1500_ = __+P1,000. + +P 500 +P1,500 +P1,500, Entries and Explanations: 1. An allowance of 5% of P30,000 or P1,500 needs to be established. The account Allowance for Uncollectible Accounts is a contra-asset account, When this account is increased, the effect is to decrease the related asset account. The owner's equity is also decreased since this provision for uncollectibles is considered as an expense in the ordinary course of business. Lydia Dela Cruz, Capital 1,500 Allowance for Uncollectible Accts. 1,500 2. An omission to record the asset—prepaid expenses will denote that the expenses of the business are overstated. When the expenses are overstated, profit and correspondingly the owner's equity is understated. To recognize the prepaid ‘expense, the entry will be: Prepaid Expenses 3,000 Lydia Dela Cruz, Capital 3,000 3. The establishment of additional salaries payable will increase liabilities. It can be deduced that the salaries expenses are understated and to correct the misstatement the owner's equity will be decreased. Lydia Dela Cruz, Capital 2,000 Salaries Payable 2,000 The adjustments prior to formation will entail debits or credits to asset or liability accounts. To maintain the double entry system of accounting, a corresponding debit or credit to owner's equity account will be made. The following T-account will serve to ‘summarize the necessary adjustments to the capital account:Owner's Equity Account Debit Credit 1. Decrease in asset. 1. Increase in asset. 2. Increase in liability 2, Decrease in liability, 3. Increase in contra-asset. | 3. Decrease in contra-asset. Opening Entries of a Partnership Upon Formation partnership may be formed in any of the following ways: 1. Individuals with no existing business form a partnership. 2. Conversion of a sole proprietorship to a partnership. a. A sole proprietor and an individual without an existing. business form a partnership. b. Two or more sole proprietors form a partnership. 3. Admission or retifement of a partner (to be covered in Chapter 3). Individuals with No Existing Business Form a Partnership The opening entry to recognize the contributions of each partner into the partnership is simply to debit the assets contributed, and to credit the liabilities assumed and the capital account of each partner, Mlustration. On July 1, 2008, Marivis Gangoso and Lovell Abello agreed to form a Partnership. The partnership agreement specified that Gangoso is to invest cash of 350,000 and Abello is to contribute land with a fair market value of P650,000 with 150,000 mortgage to be assumed by the partnership. The entries are as follows: Cash land Mortgage Payable ‘Marivis Gangoso, Capital Lovell Abello, Capital To record the initial Investments of Gangoso and Abello After the formation, the statement of financial position (the new title of the balance sheet per revised IAS No. 1) of the newly formed partnership is:Gangoso and Abello ‘Statement of Financial Position July 4, 2008 Assets Cash P. 350,000 Land {550,000 Total Assets 1,000,000, Liabilities and Owners’ Equity Notes Payable Marivis Gangoso, Capital Lovell Abello, Capital Total Liabilities and Owners’ Equity Illustration. Suppose that Gangoso and Abello formed another partnership with Lalaine: Manalo. Gangoso and Abello considered Manalo who has a vast business network in. Southern Luzon as an industrial partner. The partnership did not receive any asset from Manalo. in this case, only a memorandum entry in the general journal will be made. ASole Proprietor and Another individual Form a Partnership A sole proprietor may consider forming a partnership with an individual who has no ‘existing business. Under this type of formation, the assets and the liabilities of the Proprietorship will be transferred to the newly formed partnership at values agreed upon by all the partners or at their current fair prices. Illustration. The statement of financial position of Belinda Narvaez on Oct. 1, 2008, before accepting Mary May Eulogio as partner is shown as follows: Belinda Narvaez Statement of Financial Postion oct 3, 2008 Assets cash 60,000 Notes Receivable 30,000 Accounts Receivable 240,000, tess: Allowance for Uncollectble Accts. __10,000_ 230,000, Merchandise inventory 80,000 Furniture and Fixtures 60,000 Less: Accumulated Depreciation 6,000__54,000 Total Assetsabilities and Owner's Equity Notes Payable ‘Accounts Payable Mary May Eulogio offered to invest cash to give her a capital credit equal to one-half of Belinda Narvaez’s capital after giving effect to the adjustments below. Narvaez accepted the offer. 1. The merchandise isto be valued at P74,000.~ 000 OECKEFSE- (0.8) 2. The accounts receivable is estimated to be 95% collectible.- 32 U.A BOO oncreace 3. Interest accrued on the notes receivable will be recognized: P 10,000, 12% dated Jul 2008 and P20,000, 12% dated August 1, 2008. ee NS bam ated ype Interest on notes payable to be accfued at 14% annually from Apr. 1, 2008 The furniture and fixtures are to be valued at P46,000, Office supplies on hand that have been charged to expense in the past amounted to P4,000. These will be used by the partnership. New books for the Partnership (required per National Internal Revenue Code) The following procedures may be used in recording the formation of the partnership: Books of Belinda Narvaez: 1. Adjust the assets and liabilities of Belinda Narvaez in accordance with the agreement. Adjustments are to be made to bis capital account. 2. Close the books. Books of the Partnership: 4. Record the investment of Belinda Narvaez, 2. Record the investment of Mary May Eulogio. Following the procedures, the entries are: Books of Belinda Norvaet - NosuicruENTS @ Belinda Narvaez, Capital® 14,100 Office Supplies 4,000: Interest Receivable* 700 Merchandise Inventory? Allowance for Uncollectible Accounts? 145Interest Payable* 2,200 Accumulated Depreciation? 8,000 Torecord adjustments to. restate Narvaer’s capital. @ Notes Payable 40,000 ‘Accounts Payable 100,000 Interest Payable 2,800 ‘Allowance for Uncollectibie Accts 22,000 ‘Accumulated Depreciation 34,000 Belinda Narvaez, Capital 299,900 Cash 60,000 Notes Receivable 30,000 Accounts Receivable 240,000 Interest Receivable 700 Merchandise inventory 74,000 Office Supplies 4,000 Furniture and Fixtures 60,000 To close the books of Narvaer. Books of the Partnership (a) Cash 60,000 Notes Receivable 30,000 Accounts Receivable 240,000 Interest Receivable 700 Merchandise inventory 74,000 Office Supplies 4,000 Furniture and Fixtures? 46,000 Notes Payable 40,000 ‘Accounts Payable 300,000 Interest Payable 2,800 ‘Allowance for Uncollectible Accounts 32,000 Belinda Narvaez, Capital 299,300 Torecord the investment of Narvaez. @ Cash® 149,950 Mary May Eulogio, Capital 149.950 To record the investment of Eulogio. Computations: 1. Merchandise inventory, per ledger 80,000 Merchandise inventory, as agreed 74,000 Decrease in Merchandise Inventory 26.900 2. Accounts Receivable, net per ledger 230,000 ‘Accounts Receivable, net as agreed 116(240,000 x 95%), Increase in Allowance 228,000 B_2,000 3, Interest accrued on Notes Receivable: Interest = Principal x Rate x Time On P10,000: (On P20,000: 10,000 x 12% «3/22 20,000 x 12% «2/12 4, Interest accrued on Notes Payable: (On.P40,000: 40,000 1436 6/12 5. Furniture and Fixtures, net per ledger Furniture and Fostures, net as agreed Increase in Accumulated Depreciation 6. Neteffect of adjustments on Capital: Decrease in Merchandise Inventory Increase in Allowance for Uncollectibles Increase in interest Receivable Increase in interest Payable Increase in Accumulated Depreciation Increase in Office Supplies Decrease in Capital 7. Furniture and Foxtures, cost per books Furniture and Fixtures, costas agreed Writedown of Furniture and Fotures 8, Belinda Narvaez, Capital before adjustment ‘Net Adjustments to Capital Belinda Narvaez, Capital after adjustment ‘Agreed Capital Credit for Mary May Eulogio Cash Investment of Mary May Eulogio 300 JULY “40g cyst 2200 P2800 28,000 (6,000) (2,000 700 (2,800) > {@.000)- 4,000 * (24.400) - 60,000 46,000 B1a.000 314,000 14109 299,900 50% baa9.950 After the formation, the statement of financial position of the newly formed partnership is: Narvaez and Eulogio Statement of Financial Position Oct. 1, 2008: Assets Cash Notes Receivable ‘Accounts Receivable Less: Allowance for Uncollectible Accts Interest Receivable Merchandise Inventory Office Supplies Furniture and Fixtures Total Assets 209,950 30,000 240,000 12,000 228000 00 74000 4,000 46000 E50abilities and Owners! Equity Notes Payable 40,000 ‘Accounts Payable 100,000 Interest Payable 2,800 Belinda Narvaez, Capital 299,900, ‘Mary May Eulogio, Capital 149,950 Total Liabilities and Owners’ Equity 592,650 Note that furniture and fixtures are now recorded in the partnership books at the agreed amount of P46,000 which represented the cost of the asset to the partnership. On the other hand, the accounts receivable is still recorded at Bross amount of P240,000 with a related allowance for uncollectible accounts of P12,000. The P12,000 is only a provision for possible uncollectibles. ‘Two or More Sole Proprietors Form a Partnership Mlustration. On June 30,°2008, Challoner Matero and Marichu Fornolles, fierce competitors in a certain line of business, decided to combine their talents and capital to form a partnership. Their statements of financial position are as follows: Challoner Matero ‘Statement of Financial Position June 30, 2008 Assets Cash ‘Accounts Receivable Merchandise Inventory Furniture and Fixtures Total Assets abilities and Owner's Equity ‘Accounts Payable Challoner Matero, Capital Total Liabilities and Owner's Equity‘Marichu Fornolles ‘Statement of Financial Position June 30, 2008 Assets Cash ‘Accounts Receivable ‘Merchandise inventory Delivery Equipment Total Assets abilities and Owner's Equity ‘Accounts Payable 60,000 Marichu Fornolles, Capital 250,000, Total Liabilities and Owner's Equity 310,000, ‘he conditions and adjustments agreed upon by the partners for Purposes of determining their interests in the partnership ar 1. Actual count and bank reconciliation on Matero proprietorship’s cash account revealed cash short and unrecorded expenses of P3,500. Establishment of a 10% allowance for uncollectible accounts in each book, ‘The merchandise inventory of Fornolles is to be increased by P10,000. The furniture and fixtures of Matero are to be depreciated by P6,000, 5. The delivery equipment of Fornolles isto be depreciated by P9,000. New books for the Partnership (required per National internal Revenue Code) The following procedures may be used in recording the formation of the Partnership: Books of Challoner Matero and Marichu Fornolles: 1. Adjust the accounts of both parties in accordance with the agreement. Adjustments are to be made to their respective capital accounts, 2. Close the books. Books of the Partnership: 1. Record the investment of Challoner Matero. 2. Record the investment of Marichu Fornolles,Following the procedures, the entries are: Books of Challoner Matero eo) Challoner Matero, Capital 19,500 Cash Allowance for Uncollectible Accounts Accumulated Depreciation To record adjustments to restate Matero’s capital, (2) Accounts Payable 30,000 Allowance for Uncollectible Acts, 10,000 Accumulated Depreciation 6,000 Challoner Matero, Capital 240,500 Cash ‘Accounts Receivable ‘Merchandise Inventory Furniture and Fixtures To close the books of Matero. Books of Marichu Fornolles a Merchandise inventory 410,000 Marichu Fornolles, Capital 7,000 Allowance for Uncollectible Accounts ‘Accumulated Depreciation To record adjustments to restate Fornolles’ capital. 2) Accounts Payable 60,000 Allowance for Uncollectible Accts. 8,000 ‘Accumulated Depreciation 9,000 Marichu Fornolles, Capital 243,000 Cash Accounts Receivable ‘Merchandise Inventory Delivery Equipment To close the books of Fornolles. 3,500 10,000 6,000 46,500 100,000 80,000 60,000 8,000 9,000 40,000 80,000 110,000 90,000Books of the Partnership (a) Cash 46,500 ‘Accounts Receivable 100,000 Merchandise Inventory 80,000 Furniture and Fixtures i 4,000 ‘Accounts Payable Allowance for Uncollectible Accts. Challoner Matero, Capital To record the investment of Matero. @) cash ‘Accounts Receivable ‘Merchandise inventory Delivery Equipment Accounts Payable Allowance for Uncollectible Accts, Marichu Fornolles, Capital To record the investment of Fornolles. 60,000 8,000, 243,000 After the formation, the statement of financial position of the partnership is: Matero and Fornolles Statement of Financial Position June 30, 2008 Assets cash ‘Accounts Receivable 180,000 Less: Allowance for Uncollectible Accts. ___18,000 Merchandise inventory Furniture and Fixtures Delivery Equipment Total Assets abilities and Owners’ Equity ‘Accounts Payable Challoner Matero, Capital Matichu Fornolles, Capital Total Liabilities and Owners’ Equity 86,500 162,000 190,000 54,000 81,000 573,500