PARTNERSHIP

- a contract whereby two or more person bind themselves together to contribute money, property, and industry
into 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.

 STAGES OF PARTNERSHIP
1) Partnership Formation
2) Partnership Operation
3) Partnership Dissolution
4) Partnership Liquidation

 UNDERLYING THEORIES
1. PROPRIETARY THEORY
- looks at the entity through the eyes of the owners
Example
a. salaries to partners are considered as distribution of income rather than determinant of net income
b. Unlimited liability of general partners extends beyond the entity to the individual partners
c. Original partnership are dissolved upon the admission or withdrawal of a partner.

2. ENTITY THEORIES
- views business as a separate and distinct entity possessing its own existence apart from the individual
partner.

PATNERSHIP FORMATION
ACCOUNTS:
1) Capital
2) Drawings
3) Loans to or from partnership

 CAPITAL ACCOUNT
DEBIT CREDIT
Permanent or capital withdrawal initial investment
Drawings in excess of a specified amount additional investment
Share in net losses share in net income
  WITHDRAWALS
1) Permanent - directly affects the capital balance
2) Temporary - personal withdrawals in anticipation of profit.
periodic withdrawal.

CAPITAL INTEREST PROFIT INTEREST

 Partner’s capital interest is the claim against Determines how the partner’s capital will
 The net assets of partnership Increase or decrease as a result of operations

HOW PARTNERSHIP FORMED?

1. For the first time (indi with another indi)

2. Conversion of sole proprietorship to partnership
a) Indi and sole
b) Sole and sole
3. Conversion of existing partnership to new
a) Existing P and sole
b) Existing P with another existing P
4. ADMISSION OF NEW PARTNER

MEASUREMENT
1. Cash- measured at face value. If cash is in foreign currency, measure them at the current exchange rate.
2. NON-CASH ASSET- measure at the ff hierarchy:
A. Agreed value
B. Fair value
C. Appraised value
D. Carrying value/ book value
3. Services - memo entry
In the case of inventory:
1. AV
2. FV
3. LCNRV
4. LIABILITIES
5. CAPITAL
A. IF TCC= TAC:
1. CC= AC (FULL INVESTMENT APPROACH)
2. CC X AC (BONUS METHOD)
B. TCC>TAC
1. WITHDRAWAL OF INITITIAL INVESTMENT
2. DOWNWARD REVALUATION
C. TCC< TAC
1. ADDITIONAL INVESTMENT
2. UPWARD REVALUATION
3. GOODWILL
 Partnership Formation - Sole Proprietor versus Sole Proprietor
On October 1, 20x4, J and K decided to pool their assets and form a partnership. They allocate profit and
loss in the ratio of 44:56 for J and K, respectively. The firm is to take over business assets and assume business
liabilities, and capitals are to be based on net assets transferred after the following adjustments:

a. J’s inventory amounting to P12,000 is worthless, while K’s agreed value of inventory amounted to
P150,000.

b. Additional uncollectible accounts of P7,200 for J is to be provided; a 5% allowance is to be

recognized in the books of K.

c. Accrued rent income of P12,000 on J, and accrued salaries of P9,600 on K should be recognized on
their respective books.

d. Interest at 16% on Notes Receivable dated August 17, 20x4 should be accrued.

e. The office supplies unused amounted to P24,000.

f. The equipment’s agreed value amounted to P60,000.

g. The furniture and fixtures have a fair market value of P108,000.

h. Interest at 12% on Notes Payable dated July 1, 20x4 should be accrued.

i. K has an unrecorded patent amounting to P48,000 and is to invest the additional cash necessary to
have a 60% interest in the new firm.

In cases, wherein days are considered, use 360 days as the basis.
Balance sheets for J and K on October 1, 20x4 before adjustments are given below:

ACCOUNTS J K
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 90,000 P 54,000
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,000 180,000
Allowance for doubtful accounts . . . . . . . . . . . ( 4,800) ( 6,000)
Notes Receivable . . . . . . . . . . . . . . . . . . . 60,000
Merchandise Inventory . . . . . . . . . . . . . . . 192,000 144,000
Office Supplies . . . . . . . . . . . . . . . . 32,400
Equipment . . . . . . . . . . . . . . . . . . . . . . . 120,000
Accumulated depreciation – equipment . . . . . ( 54,000)
Furniture and Fixtures . . . . . . . . . . . . 144,000
Accumulated depreciation – furniture and fixtures . . . ._________ ( 24,000)
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . P 591,600 P 552,000
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . P 159,600 P 120,000
Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 -0-
Capitals . . . . . . . . . . . . . . . . . . . . . . . . . . 372,000 432,000
Total Liabilities and Capital . . . . . . . . . . . P 591,600 P 552,000
Determine:
1. The net adjustments – capital in the books of:
a. J, P23,400 net debit; K, P30,600 net credit
b. J, P23,400 net credit; K, P30,600 net debit
c. J, P23,400 net debit; K, P2,000 net credit
d. J, P18,600 net debit; K, P30,600 net debit

2. The adjusted capital of J and K in their respective books.

a. J – P348,600; K – P462,600 c. J – P372,000; K – P432,000
b. J – P353,800; K – P462,600 d. J – P348,600; K – P522,900

3. The additional investment (withdrawal) made by K:

a. None c. (P60,300)
b. (P 54,000) d. P 60,300

4. The total assets of the partnership after formation:

a. P1,143,600 c. P1,220,100
b. P1,162,000 d. P1,222,500

5. The total liabilities of the partnership after formation:

a. P279,600 c. P339,600
b. P281,400 d. P351,000

6. The total capital of the partnership after formation:

a. P804,000 c. P811,200
b. P806,400 d. P871,500

7. The capital balances of J and K in the combined balance sheet:

a. J – P348,600; K – P462,600 c. J – P372,000; K – P432,000
b. J – P353,800; K – P462,600 d. J – P348,600; K – P522,90

On December 1, 2023, AA and BB formed a partnership with contributing the following assets at fair market
values:
AA BB
Cash ………………………………… P 9,000 P18,000
Machinery and equipment……… 13,500
Land ………………………………... 90,000
Building …………………………….. 27,000
Office Furniture ………………….... 13,500 -

The land and building are subject to a mortgage loan of P54,000 that the partnership will assume. The
partnership agreement provides that AA and BB share profits and losses, 40% and 60%, respectively and
partners agreed to bring their capital balances in proportion to the profit and loss ratio and using the capital
balance of BB as the basis.
The additional cash investment made by AA should be:
a. P18,000.00 c. P134,100.00
b. P85,500.00 d. P166,250.00

III.

OO and PP are partners sharing profits in this proportion – 60:40. A balance sheet prepared for the partners
on April 1, 20x4 shows the following:

Cash . . . . . . . . . . . . . . . . . . . . P48,000 Accounts payable . . . . . . . . . P 89,000

Accounts Receivable . . . . . . . 92,000 OO, capital . . . . . . . . . . . . . . 133,000
Inventories . . . . . . . . . . . . . . . . 165,000 PP, capital. . . . . . . . . . . . . . . 108,000
Equipment . . . . . 70,000
Less: Acc. depreciation . . 45,000 25,000
Total Assets . . . . . . . . . . . . . . P330,000 Total Liabilities & Capital . . . . P 330,000

On this date, the partners agree to admit RR as a partner. The terms of the agreement are summarized
below. Assets and liabilities are to be restated as follows:
• An allowance for possible uncollectible of P4,500 is to be established.
• Inventories are to be restated at their present replacement value of P170,000.
• Accrued expenses of P4,000 are to be Recognized.

OO, PP and RR will divide profits in the ratio of 5:3:2. Capital balances of the partners after the formation of
the new partnership are to be in the aforementioned ratio, with OO and PP making cash settlement
between them outside of the partnership to adjust their capitals, and RR investing cash in the partnership
for his interest.

1. The cash to be invested by RR is:

a. P60,250 c. P50,000
b. P47,500 d. P59,375

2. The total capital of the partnership after the admission of RR is:

a. P296,875 c. P237,500
b. P301,250 d. P286,850

3. Cash settlement between OO and PP is:

a. OO will pay PP P17,537.50 c. OO will invest P17,537.50
b. PP will pay OO P17,537.50 d. PP will withdraw P17,537.5