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Afar 01 Partnership Formation

This document defines a partnership as a contract between two or more persons to contribute money, property, or skills to a common fund with the intention of sharing profits. Key characteristics of a partnership include separate legal identity, ease of formation, co-ownership of assets, unlimited liability of partners, and limited life. The stages of a partnership are formation, operation, dissolution, and liquidation. Formation issues include valuation of partner contributions and aligning contributions with the partnership agreement. Contributed assets and liabilities must be valued at agreed, fair, or book value. A partner's capital contribution represents net assets invested, while their capital credit is their agreed capital amount. Differences are accounted for through bonus, goodwill, revaluation, additional

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John Laurence Loplop
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220 views

Afar 01 Partnership Formation

This document defines a partnership as a contract between two or more persons to contribute money, property, or skills to a common fund with the intention of sharing profits. Key characteristics of a partnership include separate legal identity, ease of formation, co-ownership of assets, unlimited liability of partners, and limited life. The stages of a partnership are formation, operation, dissolution, and liquidation. Formation issues include valuation of partner contributions and aligning contributions with the partnership agreement. Contributed assets and liabilities must be valued at agreed, fair, or book value. A partner's capital contribution represents net assets invested, while their capital credit is their agreed capital amount. Differences are accounted for through bonus, goodwill, revaluation, additional

Uploaded by

John Laurence Loplop
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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PARTNERSHIP (LECPA – 10% of 70 items AFAR)

Definition:
It is a contract whereby two or more persons bind themselves to contribute money, property or
industry to a common fund, with the intention of dividing the profits among themselves.

Two or more persons may also form a partnership for the exercise of a profession. (Article 1767, Civil
Code of the Philippines.)

Characteristics of a Partnership
1. Separate legal personality
2. Ease of formation
3. Co-ownership of contributed assets
4. Mutual agency, mutual participation in the profits
5. Unlimited liability
6. Limited life
7. Income tax

Stages in the life of the Partnership:


1. Formation – the first-time creation of the partnership
2. Operation – this is the reason why a partnership is formed, to operate and earn profit
3. Dissolution – changes in the partnership agreement or relations among the partners
4. Liquidation – realization of assets of the partnership and settlement of partnership liabilities

PARTNERSHIP FORMATION
Primary formation issues include:
1. Valuation of contribution
2. Re-alignment of contribution with partnership agreement

Valuation of contribution
1. Assets – contributed by the partners to the partnership should be valued in the following
order of priority:
a. Agreed values (Art. 1767 Civil Code)
b. Fair values (Art 1787 Civil Code and PFRS 2)
c. Book values
2. Liabilities – attached to assets contributed by the partners are recognized only in the
partnership books to the extent that they are assumed by the partnership. When assumed by
the partnership, contributed liabilities operate to decrease the contributed capital of the
contributing partner; otherwise the liabilities of the contributing partner. Liabilities assumed by
the partnership is valued in the following order of priority:
a. Agreed values (Art. 1767 Civil Code)
b. Fair values (Art 1787 Civil Code and PFRS 2)
c. Book values

Capital contribution VS Capital Credit


Capital contribution Capital Credit
Represents the net assets invested by a partner Represents the agreed capital for a partner. An
accounting issue will arise when two do not
equal.
Such differential is accounted for by either:
1. Bonus Method – an increase (decrease) in any partner’s contributed capital is treated as an
addition (reduction) to other’s capital contribution.
2. Goodwill method – the increase in any partner’s contributed capital is treated as an
unidentifiable. However, goodwill method is not allowed under PFRS.
3. Revaluation method – the increase in any partner’s contributed capital is treated as an
identifiable.
4. Additional investment – an increase in any partner’s contributed capital as a result of
additional investment
5. Withdrawal – a decrease in any partner’s contributed capital as a result of withdrawal.

DO NOT REPRODUCE

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