Chapter 1

Chapter 1
Partnership - Part
1
Overview on the topic Our discussion on the accounting for
partnerships is subdivided into the following chapters: Chapter
Title
Sub-topics
Partnership - Part 1
Partnership formation
Partnership operations
Partnership dissolution
Partnership
liquidation
Learning Objectives 1. Differentiate b

etween the
accounting for partnerships, sole
proprietorships, and corporations. 2. State the valuation of
contributions of partners. 3 . Account for the initial investments of
the partners to the
partnership. 4. State the peculiar accounts used in a
partnership and identify the
transactions that affect these accounts.
Introduction A partnership i s an unincorporated association of

wners, a business,
two or more individuals to carry on, as co-o
with the intention of dividing the profits among themselves.
The following distinguish a partnership from other types of
entities: a. A partnership is owned by two or more individuals
while a sole
proprietorship i s owned by only one individual. . b. A
partnership is created by agreement between the partners
while a corporation o r c ooperative is created by the
operation of
law. C. A partnership is formed for a business undertaking
that is,
normally, of continuing nature while a joint venture may or may
not be formed for an undertaking that is to be continued over
several years.
Characteristics of a partnership a. Ease of f ormation - as

compared to corporations, the formation of
a partnership requires less
formality.
b. Separate legal personality - the partnership has a judicial
personality separate and d istinct from the partners. The
partnership can t ransact and acquire properties in i ts
name.
c. Mutual a
gency – the partners a
re agents of the partnership
for the
purpose of i ts business. As such, a partner may legally bind the
partnership to a contract or agreement that is in line with
the p operations.
artnership's
d. Co- ownership o

f propert y –
each partner is a
co-owner of t he
properties invested i n the partnership and each has an equal right
with his p artners to possess specific partnership
property for partnership purposes. However, a partner has no
right to possess a partnership property for any other
purpose without the consent o f his partners.
e. Co-ow
nership of pr ofits - a partnership is created as a
business
(a profit-oriented entity), as such, each partner is entitled
to his share in the partnership profit. A stipulation which
excludes one or more partners from any share in the
profits or losses is void ( Art. 1 799 of the Civil C
ode o
f t he
Philippines) .
f. Limited l ife - the creation of a partnership is basically

consensual.
As such, a partnership may be dissolved: i . by the express will of
any partner; ii. by the termination of a definite term
stipulated in the contract; iii. by any event which
makes it unlawful to carry out the
partnership; . iv. when a specific t hing which a partner had
promised to
t he
contribute to t he partnership perishes before
rt.
delivery (A
1830( 4 r v.
)) ; o xpulsion, death, insolvency or civil
e
interdiction of a partner.
g. Transfer of ownership - in c ase of dissolution, the transfer o
f
ownership, whether to a new or existing partner,
requires the approval of the remaining partners.
h. Unlimited l iability – each partner, including industrial ones,

may
be held personally liable to partnership debt after all
partnership assets have been exhausted. If a partner is
personally insolvent, his share in the partnership debt
shall be assumed by the other solvent partners. A
partnership in which all partners are individually liable is
called a general partnership.
artnership includes at least one general partner who
limited p
maintains unlimited liability. The others, called limited
partners, may limit their liability up to the extent of their
contributions to the marinership. A limited liability partnership
usually has "L
LP" in its name.
Advantages and disadvantages of a

partnership
Advantage

Disadvantag
e
• Ease of
formation
Easily dissolved/ l imited life. Shared
responsibility of • Unlimited liability r unning the business
Flexibility in decision making . C
onflict among partners
Greater capital compared to Lesser capital compared to
sole proprietorship
corporation Relative lack of
regulation as A partnership (other than a compared to
corporations
general professional partnership) is taxed like a corporation.
nceptual Framework fo

Accounting for partnerships The Co r
Financial Reporting and the Standards (or PFRS for SMEs,
when appropriate) are applicable to all reporting e
ntities
regardless of the type of organization. Thus, most accounting
procedures used for other types of business organizations are
also applicable to partnerships. The main distinction lies on the
accounting for equity. In addition, the accounting for
partnerships should also comply with relevant provisions of the
Civil Code of the Philippines.
The following are the major considerations i n the accounting for the
equity of a partnership: a. F
ormation - accounting for initial
investments to the partnership b. Operation - division of profits
or losses C
. Dissolution - admission of a new partner and
withdrawal.
retirement or death of a partner
d. Liquidation - w
i nding-up of
affairs
Formation A contract of

partnership is consensual. It i s
created by the agreement of the partners which may be
constituted in any form, such as oral or written.
However, Articles 1771 and 1772 of the Philippine Civil
Code requires that a partnership a greement be made in a
public instrument and recorded in the office of the Securities
and Exchange Commission (SEC) when: a . immovable
property o
r real rights are contributed to the
r b. the partnership has a
partnership (e.g., PPE), o
capital of P3,000 or more.
Art 1773 of the Civil Code further requires that an inventory of
any immovable property contributed to the partnership should be
made. signed by the parties, and attached to the public
instrument, otherwise the p artnership shall be deemed void.
A partnership's legal existence begins from the moment the

contract is executed, unless it is otherwise stipulated
Valuation of contributions of partners Art. 1787 of the Civil Code
states that when the capital or part thereof which a partner is
bound to contribute consists of goods their appraisal must be
made in the manner prescribed in the contract of partnership,
and in the absence of stipulation, i t shail be made by experts chosen
by the partners, and according to current prices the subsequent
changes thereof being for the account of the partnership."
The term "appraisal" a

s u
sed in the Civil Code, w hether in
accordance with the contract of partnership or in the absence
thereof, suggests valuation of c apital contributions at fair value.
Although there are no specific financial reporting

standards that address the accounting for partnerships a
similar provision under PFRS 2 Share-b ased Payments
which states that equity i nstruments issued fo rn on- cash items
should b e valued a t t he fair value of the n on- c ash items
received may be construed to be in accordance with the
provision of Art. 1787.
An equity ins
trument is any contract that evidences a r esidual
interest in the assets of an entity after deducting all of
its liabilities. The meaning of equity interest is not l imited to
corporations. An interest in a
partnership or an association of
persons in the nature of ownership interest is an equity instrument.
Therefore all assets contributed t o (and related liabilities assumed

by) the partnership shall be measured at fair v alue.
air V
PERS 13 F alue M
easurement defines fair v alue ' as the price mal would be
received to sell an a sset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date."
When determining the fair value of contributions of partners, the
following additional guidance f rom the PFRSs shall be observed:
[Type o f co
n
tribution
Cash a nd
cash
equivalents
ace amount of cash o
alue F
Fair v r cash equivalent
contributed. (P S
AS 7 tatement of
Cash Flows)
Inventory
Net realizable value (estimated
selling price less c osts to complete
and sell), if lower than cost. (PAS 2
Inventories)
Fach partner's capital a

ccount i s credited for the fair value of his
net contribution. No contribution shall be valued at an
amount that exceeds th e contribution's recoverable amount.
Each partner's contribution shall be adjusted accordingly before
recognition in the partnership's books.
PAS 36 Impairment of Assets defines recoverable a mount as

"the higher b etween a
n asset's fair value less cost t o sell and
value in u
se.
A partner's subsequent share in profits (losses) shall also be

credited (debited) to his capital account. Likewise, permanent
withdrawals of capital are debited to the partner's capital
account. Temporary withdrawals may be debited to the
partner's drawings account which is a temporary account that is
closed to the partner's capital account p rior to the preparation
of the financial statements. The s um of the balances in t he
partners' individual capital accounts represents the total equity
of the partnership
Partners' ledger a ccounts The

partners' ledger accounts are: a
Capital accounts b. Drawing accounts
m/ P
C. Receivable fro ayable to a
partner
nd drawing accounts E
Capital a ach partner shall have
his or her own capital and drawing account eg. "Juan dela Cruz,
Capital" and "Juan dela Cruz, D
rawings." These accounts are
equity accounts and are used to record the following
transactions
Juan d ela Cruz,
Capital
r.
_D T
Cr.
Initial investment
X
X
Additional
investments
Permanent withdrawals of
capital Share in losses
Share in
profits
Debit balance of

drawing account
l account and has a
The partner's capital account is a rea
normal credit b alance.
ela Cruz,
Juan d
Drawings
Dr. Cr.
Recurring
Temporary withdrawals
reimbursable costs
during the period
XX paid by the partner
Temporary funds held to be remitted to the partnership
The partner's drawings account is a nominal account t hat is
closed to the related capital account at the end of the period.
This account is a contra-e
quity account a
nd has a normal debit
balance.
The partners' capital and d

rawings accounts are similar to the
corporate paid in c apital, r etained earnings, and
dividends accounts.
he partnership may
Receivable from/ Payable to a partner T
enter into a loan transaction with a partner. A loan
extended to a partner is recorded as a rec eivable from
artner while a loan obtained is recorded as a p
the p ayable t o
the partner.
Illustration: Formation of partnership - Valuation of

capital A and B formed a partnership. The following are
their contributions:
A
B Cash
100,000
Accounts receivable
50,000
Inventory
80,000 Land
50,000
Building
120,000 T otal
230.000 170,000 Note
payable
;
60,000 A
capital
170,000 B
,
capital
170,000 Total
230,000 170,000
=
Additional information: * Included in accounts receivable is an

account amounting to
P20,000 which is deemed uncollectible. The inventory has
an estimated selling p rice of P100,000 and estimated costs
to sell of P10,000. An unpaid mortgage of P10,000 on t he
land is assumed by the p artnership The building is
underdepreciated by P25,000. The building also has an
unpaid mortgage amounting to P15,000, but the mortgage is
not assumed by the partnership. B agreed to settle the
mortgage using his personal funds. The note payable is
stated at face amount. A proper valuation requires the
recognition of a P15,000 discount on note payable. A and B
shall share in profits and losses 6 0% and 40%,
respectively. Requirement ( a ) : Compute for the adjusted
balances of the partners' capital accounts.
Solution
:
А
100.000
30, 0
00
80,00
0
Cash Accounts receivable (50K -
20K) Inventory Land Building
(120K - 25K) Total Note
payable, net (60K - 1 5K)
Mortgage payable - land
apital
Adjusted c
balances
50,000
95, 0
00
145,0
00
Partnershi
p1 00,000
30,000
80,000
50,000
95,000
355,000
(45,000)
(10,000)
300, 0
00
210,00
0
(45,0
0
0)
0,0
(1 00
)
135, 0
0
0
165, 0

00
The unpaid mortgage on the building is not included because it is
not assumed by the partnership.
The compound entry to record the initial investments of the
partners in the partnership's books i s as follows:
Date Cash
100.000 Accounts
receivable
30,000 Inventory
80,00
0
Land
50,000 B
uilding:
95,000 Discount
on note payable
15,000 Note payable
60.000 Mortgage
payable
10,000 A, Capital
165, 0
00 B, Capital
135,0
0
0
Requirement ( b ) : Assume that a partner's capital shall be
increas acc
ordingl y b y contributing additional cash to
bring the partne capital balances proportionate to their profit
or loss ratio. Which partner should provide additional cash
and how much is the additional cash contribution?
Using first A's capital, l et us determine if B's capital contribution
ny deficiency.
has a
A,
capital
165,000 Divide
by: Profit (loss) sharing ratio of A
60% Total
275,000
Multiply by: B's profit (loss) sharing ratio
40% Minimum capital required of B
110,000 B's

capital
135,000
nB
Deficiency o ' s capital c ontribution
It can be shown above that B's contribution has no
deficiency.
Now using B' s capital, let us determine if A's capital

contribution has any deficiency.
B,
capital
135,000
Divide by: Profit ( loss) sharing ratio of A
40% Total
337,500
Multiply by: A's profit (loss) sharing ratio
60% Mi nimum capital required of A
202,500 A's
capital
165,000
n A's capital
Deficiency o
contribution 37,500
From the above computations, Partner A should provide additional
cash contribution of P37,500 t o make his contribution
proportionate to i ts profit or loss ratio...
Bonus on initial investments An accounting problem exists

when the capital acco u
nt of a partner is credited for an a
mount
greater than the fair value of his contributions.
For instance, a partnership agreement may allow a certain partner

bringing in expertise or special skill to the partnership to have a
capital credit greater than the fair v alue of his contributions. In
such case, the additional credit to the partner's capital (i.e., the
'bonus ) s hall be accounted for as a deduction in the capital of
the one partners. T his accounting m ethod is called "bonus"
method.
Alth
much the credit to the partner's capital may be varied due to a
nonus.' the corresponding debit t o the asset account must s till be
alue of the contribution. The difference
Co to the fair v
between the
punts credited and debited is treated as adjustment to the capital
accounts of the other partners.
equalt
Hlustration 1: Bonus method Ä and B agreed to form a

partnership. A shall contribute P40,000 cash while B shall
contribute P100,000 c ash. H owever due to the expertise that A
will be bringing to the partnership, the partners agreed that they
n equal i
should initially have a n t in the partnership
teres
capital.
Requirement: Using the bonus method, provide the journal entry
to r ecord the initial investments of the partners.
Solution:
Actual
contributio
ns
40,000 100,000 140,000
(140,000 x
50%) ( 140,000
x 50%)
Bonus
method
70,000
70,000
140,000
Total
Date
140,0
00
as
h
A, Capital (40,000 + 30.000 bonus) B, Capital
(100,000 - 30,000 bonus)
70,000 70,000
Notes:
The bonus given to A, i.e., P30,000 (+70,000 capital credit -
P40.000 actual contribution) is treated as a reduction to the
capital credit of B. After applying the bonus method, the
total capital of the partnership is sti ll equal t o the fair
value of the partners' contributions. The debit t o " Cash”
is still equal to the fair value o f the contribution. Only the
amounts credited to t he partners' capital accounts have
ried.
va
Variations to the bonus method A partnership agreement may

stipulate a certain ratio to be maintained by the partners
representing their specific i nterests in t he e
quity o f the
partnership. This stipulation may give rise to adjustments to
the initial contributions of the partners. Since technically there is
no "bonus" being given to a certain partner, any increase or
decrease to the capital credit of a partner is not deducted f rom
his co-partners'
capital accounts. Instead, the capital adjustment is accounted for
as e ither: a. Cash settlement among t he partners; or b.
Additional investment or withdrawal of investment of a partner
The following illustrations are variations
to the bonus
method:
Illustration 1: Cash settlement between partners A, B and

C formed a partnership. Their c ontributions are as follows:
B
с
Cas
h
40,000 10,000 100,000
Equipment
80,000
Totals
40,0
00 90
,0
00
100, 000
Additional
information:
Although C has contributed the most cash to the
partnership, he did not have the full amount of P100,000
available and was forced to borrow P40,000. The
equipment contributed by B has an unpaid mortgage
of
P20,000, the repayment of which is assumed by the
partnership
e their interest. Cash
• The partners agreed to equaliz
settlements
among t he partners a re to be m ade outside the
partnership.
Requirements: a. Which partner(s) shall receive cash

payment from the other
partner(s)? b. Provide the entry t o record the
contributions of the partners.
Cas
h
C
100,0
00
Solutions:
Requirement
):
(a
A
40,000
Equipment Mortgage
payable
40.000 Equal interest (210 + 3)
70,000 Cash rec
eipt
ayment) (30,000)
(p
B
10,00
0
80.000
0,000
(2
)
70.000
70,000
Partners
hip
150,0
00
80,000
(20,000
)
210,0 0
0
210,0
0
0
100,0
00
70,000
30, 0
00
Answer: C s hall r eceive

P30,0
00 from A.
150,00
0
80,000
Requirement
) : Date Cash
(b
Equipme
nt
Mortgage
payable A,
Capital B,
Capital C,
Capital
20,000 70,000 70,000 7 0,000
Note
s:
The cash settlement among the partners is not r ecorded i n the
partnership's books because this is no t a
transaction
of the partnership but rather a transaction among the
partners themselves. The p artnership's capital of P210,000
remains the same after the cash settlement. Again, what
varied are only the credits to the partners' capital accounts.
The personal loan of C is ignored because it is not
assumed by the partnership.
Illustration 2: Additional investment (Wi thdrawal of

investment) A and B agreed t o form a partnership. The
partnership agreement stipulates the following:
• Initial capital of
P140,000.
• A 60:40 interest in the equity of
the partnership.
A c ontributed P100,000 cash w
hile B contributed
P40,000 cash.
Requirement: W hich partner should provide additional investment

ithdraw part of his investment) in order to bring the
(or w
partners' capital credits equal to their respective interests in
the equity of the partnership?
Solution: A
greed initial capital A's
required capital balance (1
40K x
60%) B's required capital
balance (140K x 40%)
140,0
00
84,00
0
56,00
0
Actual contributions Required

capital balance
Ad ditional
ithdrawal)
(W
100,00
0
84,000
6,0
(1 00
)
40,00
0
56,00
0
16, 00
0
Totals 140,000 140,000
Answer : A shall withdraw P16,000 from his initial

contribution while B shall make an additional investment of
P16,000.
11
| Chapter 1:
Summary
• The major considerations in the accounting for the equity of
partnerships are: (a ) Formation; (b) Operation (c )
Dissolution: and ( d) Liquidation. T he net contributions (assets
and related liabilities assumed by the partnership) of the
partners to the partnership a re measured a t fair v
alue. A

partner's capital balance is normally credited for the fair
value of his net contribution to the partnership. If a partner's
capital balance is credited for a n amount g reater t han o r
les s than t he fair value of his n et contribution, there is
bonus. Under the bonus method, any increase or
decrease in the capital credit of a partner is deducted
from or added to the capital credits of the other partners. The
qual to the fair value of the
total partnership capital remains e
net contributions to the partnership.
PROBL
EMS
PROBLEM 1-1: THEORY 1. The net contributions (assets and
related liabilities assumed by t he
partnership) of the partners to the partnership are
measured at a. f air value
c discretionary amount determined by partners b. cost
d. any of
these
2
.
If a partner's capital balance is credited for an amount greater than or less than
the fair value of his net contribution the excess or deficiency is c
alled
a a/bonus
b.goodwill c. discounte d
premium
3
:
Under the bonus method any increase or decrease in
the capital credit of a partner is a. deducted from or
added to the capital credits of the other partners. b.
recognized as goodwill c recognized as expense d.
deferred and amortized to profit or loss
4. Partnership capital and drawings accounts are similar to the
corporate
a Paid in capital. retained earnings and dividends
accounts. b . Retained e ccount. C Paid in capital and
arnings a
retained earnings accounts
d. Preferred and common stock accounts. (AICPA)
5 Under the bonus method,
ay Total partnership capital is equal to the fair value of
the net
. Total partnership capital is less than the
contributions to the partnership b
fair value of the ne
contributions to the
partnership
12
C
.
Total partnership capital is greater than the fair value of the net contributions to the
partnership Total p artnership capital is less than the fair value of
the net contributions to the partnership, if the bonus is given to the
incoming partner
PROBLEM 1-2: THEORY & COMPUTATIONAL 1. When property other

than cash is invested in a partnership, at what
amount should the noncash property credited to the contributing partner's c apital
account? a. Fair value at the date o
f contribution b Contributing partner's
original cost
Assessed valuation for property tax purposes d
Contributing partner's tax basis
2
You and I formed a partnership. The fair value of my contribution is
P100.000 while the fair value of your contribution is P50.000 However,
you will be contributing an expertise to the partnership. we have agreed
to value that expertise Accordingly we have agreed that our
respective capital accounts will be credited for equal amounts Which
of the following statements is correct? a. Our agreement results to a
bonus of P25,000 which relates to the
valuation of your expertise. Accordingly we will record goodwill of P25,000.
Our agreement results to a bonus o f P25,000. In accordance with our
agreement, I shall pay you P25,000. Our asset contributions will be
debited at their fair values of P100.000 and P50,000. respectively.
Our agreement results to a bonus of P25,000 which is treated
as a capital adjustment - an increase to your capital account
and a decrease to my capital account. My asset contribution
will be debited at P75 000 while your asset contribution will be
debited at
P75,000. d. Our agreement results to a bonus of P25,000 which is
treated as a
capital adjustment - an increase t
o your capital account and a decrease to
my capital account, O debited at
ur asset contributions will be
their fair values of P100.000 and P50,000, respectively.
3
On January 1, 20x1, Mr A and Ms. B agreed to form a
partnership contributing their respective assets and equities
subject to adjustments. On that date, the following were
provided.
Mr.
A
28,000 200.000 120,000 600.000
Ms.
B
62,000 600,000 200,000
Cash Accounts
receivable
Inventories Land
Building Furniture
& fixtures
50.0
00
500,0
00
35,00
0
Intangible assets
Accounts
payable Other
liabilities Capital
2,000
180,000
200,000
620,000
3.000
250,00
0
350,0
00
800,00
0
The following adjustments were agreed upon: a. Accounts
receivable of P20,000 and P40,000 are uncollectible in A's and
B's respective books. b. Inventories of P6,000 and P7,000 are
worthless in A's and B's respective
books. C. Intangible assets ar e to be written off in
both books.
Requirements: a. C ompute for the adjusted capital

balances of the partners. b. P
rovide the entry in the
partnership's books. ( AICPA)
Use the following i nformation f or the n

ext t hree q
uestio : Mr. A and Ms. B formed
ns
a partnership and agreed to divide the initial capital equally even
though Mr. A contributed P100,0
00 and Ms. B contributed P84,000 in
identifiable assets. ( AICPA)
4
.
The partners agree that the difference in the amount of contribution and the
amount of credit to the partner's capital shall be treated as
compensation for the expertise that the partner will be bringing to
the p
artnership
Requirement: P
rovide the entry to be made in the
partnership books.
5
.
The partners agree that the difference in the amount of contribution
and the amount of credit to the partner's capital shall be treated
as cash settlement between the partners.
Requirement: P rovide the entry to be made in the

partnership books.
6
.
The partners agree that the difference in the amount of contribution and the amount
of credit to the partner's capital s hall be treated as
compensation for the expertise that the partner will be bringing to
the partnership.
Requirement: How much is the unidentifiable asset to be

recognized in the books for Ms. B' s expertise?
PROBLEM 1-3: MULTIPLE CHOICE: COMPUTATIONAL 1. Roberts and
Smith drafted a partnership agreement that lists the
following assets contributed at the partnership's
formation:
Roberts S mith C ash
20.000 30,000 Inventory
15,000
Building
40,000
Furniture & equipment
15,00
0
The building is subject to a mortgage of P10,000, w

hich the partnership ha
s assumed.
The partnership agreement also specifies t hat profits and losses are to be
distributed evenly. What amounts should be recorded as capital for Roberts and
Smith at the formation of the partnership?
Robert
s
Smith a.
35,000
35,000 35,000
75,000 55,000
55,000 d.
60,000
60,000 ( A ICPA) 2. On April 30, 20 03, Algee,
Belger, and Ceda formed a partnership by
combining their separate business p roprietorships. Algee
contributed c ash of P50,000. B
elger contributed property with a P36,000
carrying amount, a P40,000 original cost, and P80,000 fair value. The
partnership accepted responsibility for the P35,000 mortgage
attached to the property. Ceda contributed equipment with a P30,000
carrying amount, a P75,000 original cost, and P55,000 fair value. The
partnership agreement specifies that profits and losses are to be
shared equally but i s silent regarding c apital contributions. Which
partner has the largest April 30, 2003 capital account balance? a. Algee.
c. Ceda. b.
Belger.
ICPA)
d. All capital account balances are equal. (A
3. On April 30, 20x1, AAA, BBB and CCC formed a
partnership by
combining their separate business proprietorships. AAA contributed cash
of P50,000. BBB contributed properly with a P36,000
carrying amount, a P40,000 original cost, and P80,000 fair
value. The partnership accepted responsibility for the P35,000
mortgage attached to the property. CCC contributed equipment with a
P30,000 carrying amount, a P
75,000 original cost, and P55, 000 fair
value. The partnership agreement specifies that profits and losses
are to be shared equally but is silent regarding capital contributions.
Which partner has t he smallest April 30, 20x1 capital account
balance? a. AAA
c. CCC b.
BBB
d. All capital account balances are
ICPA)
equal (A
rmed a partnership by

4. On April 30, 20x1, XX and YY and ZZ fo
combining
their separate business proprietorship. XX contributed cash of P75,000.
YY contributed property with a P54,000 carrying amount, a P60,000
original costs, and P120,000 fair value. The partnership
accepted
1
5
responsibility for the P52,000 mortgage attached to the property. 27
contributed equipment with a P45,000 carrying amount, a P112.500
original costs, and P82,5 he partnership agreement specifies
00 fair value. T
that profits and losses are to be shared equally but is silent regarding
capital contributions. Which partners has the largest April 30 20x1,
capital balance? a. XX
c. ZZ bYY
ll capital account b
d. A alances are equal (AICPA)
5. Abel and Carr formed a partnership and agreed to divide initial capital
equally, even though Abel contributed P100,000 and Carr contributed P84.000 in
identifiable assets. Under the bonus approach to adjust the capital accounts,
Carr's unidentifiable asset should be debited for a. 46,000 . b.
16,000 C. 8,000
d. O
(AICPA)
PROBLEM 1-4: EXERCISES: COMPUTATIONAL 1 Mr. Angie and M

s.
Billy agreed to form a partnership. The asset
contributions of the partners are as
follows:
Mr .
A
20,00
0
Cash Inventory
Building Furniture &
equipment
Ms.
B
30,000
15,000
40,00
0
15,0
00
The building is subject to a mortgage of P10,000 which the partnership has
assumed. The partnership agreement also specified that profits and losses
are to be distributed evenly.
Requireme nt: Compute for the adjusted capital balances of
the partners. (A
ICPA)
2. On January 1. 2

0x1, M
r. A
nn and Ms. Buoy agreed to
form a partnership.
The partners' contributions are
listed below:
Mr. A
nn.
50,000
360,000
216,000
1,080,0
00
Ms. Buoy
120,000 1,080,000
360,00
0
Cash Accounts receivable
Inventories Land
Building
Equipment
Accounts payable
Capital
90,000
336.000
1,460,
000
900.0
00
90,000
450,000
2.100,0
00
The partners agreed to the following: a The recoverable amounts of the partners'

respective accounts receivable
are P300,000 and P760.000 for Mr. Ann a
nd Ms. Buoy. respectively
b. The inventory contributed b
y Ms. Buoy includes obsolete items
with a
recorded cost of P20,000. C. The land contributed by Mr. Ann has an
attached mortgage of P180,000
The partnership shall assume the mortgage. d. The equipment contributed
by Ms. Buoy has a fair value of P130,000. e. Mr. Ann has an
unrecorded accounts payable of P100,000. The
partnership assumes the obligation of settling that account.
. Compute for t he adjusted capital

Requirement s: a
balances of the partners. b. Provide the entry in the
partnership's books.
3. On January 1, 20x1, Mr. Angot and Ms. Banglo agreed to form
a
partnership and share profits and losses in the ratio of 3:7, respectively Mr. Angot
contributed a parcel of land that cost him P10,000. Ms. Banglo contributed
P40,000 cash. The land was sold for P 18,000 on January 1, 20x1,
immediately after formation of the partnership.
Requirement C ompute for the adjusted capital balances of the

partners on J anuary 1, 20x1
On January 1. 20x1, A

, B
and C formed a partnership by combining their
separate business proprietorships. A contributed cash of P500,000.
Benjie contributed land with a P360.000 carrying amount, a P 400,000 original
cost, and P800,000 fair value. The partnership accepted responsibility
for the P350,000 mortgage attached to the property. C contributed
equipment with a P300,000 carrying amount, a P750,000 original cost, and
P550,000 fair value. The partnership specifies that profits and losses are
to be shared equally but is silent regarding capital contributions.
Requirements: C
ompute for the adjusted capital balances of the
partners.
PROBLEM 1-5: CLASSROOM ACTIVITY I NSTRUCTIONS: 1. Find a

study partner. 2. Imagine that you and your study partner are
entrepreneurs and have
agreed to form a business partnership. 3. Read the facts
below and answer the s ucceeding requirements.
Your contributions are as

follows:

Partner 2
1,800,0
00
1,000,0
00
Cash Accounts
receivable Land
Building
Accounts
payable Notes
payable Capital

Partner 1
250,000
430,000
1,250,0
00
2,000,00
0
330,0
00
400.000
500.000
1,900,0
00
3,600,0
00
nal information:
Additio
• The cash contribution of Partner 1 as listed above is the peso
equivalent
of 6 250 foreign currency units (FCU). The current exchange rate
is P45: FCU1. Partner 2's account receivable should be written
down by P200.000. The land has an appraised value of P1,500,000. The
building has an appraised value of P1,400,000 Attached to the building, is
an unpaid mortgage of P800,000. Partner 1 agrees to settle this
mortgage immediately using his/her personal funds. There is a
pending lawsuit over Partner 1's contributed properties - a claim by a
third party. A discussion with Partner 1's legal counsel reveals that it is
probable that the plaintiff will accept an out of court settlement of n
ot less
than P300,000. The partnership shall assume the obligation of paying the
plaintiff. There are unpaid real property taxes on the properties
contributed by Partner 1 amounting to P40.000. The partners agree
that the partnership shall assume those obligations. The notes payable
above is stated at face amount An inspection of the related
promissory note reveals that th
e note is a 5-year non-interest
bearing note issued 2 years ago and requires a lump sum payment at
maturity date. The appropriate discount rate is 10%
Requirements a Compute for a

djusted balances of your capital accounts. b
Provide the entry to r ecord your contributions in the partnership
books.
Vari ation #
1: You and your partner agree that one of you is significantly
cuter than the other ( decide which one of you is that partner, but
please don't argue *). You determined that that cuteness will bring good
feng shui to the business. A you decided to h
ccordingly, ave your
capital accounts credited at equal a
mounts
Requirements: a . How much is the

bonus? b Which partner receives
the bonus?
Explain briefly how the bonus will be accounted for in
the partnership
books. d.
rovide the entry to record your contributions in the
P
partnership books.
Variation #2: You and y
our partner agree that one of you is
significantly hotter than the other. However, you determine that that
ood to the business. Accordingly, you decided to
hotness will not bring any g
equalize your interest and make cash settlement for the difference among
yourselves
Which partner shall receive cash payment

Requirements a
from the other partner?
1
8
b. Explain briefly how the cash receipt/ c ash payment will be accounted for
in the partnership books. C. Provide the entry to record your contributions in the
partnership books.
3
Variation # : Y
ou and your partner agree t hat both of you are equally beautiful and that your
respective interests in the partnership must be equal. You agree that a partner's
capital shall be increased accordingly by contributing additional c ash to bring both
of your capital balances proportionate to your equity interests.
Requirements: a . Which partner s hall make the additional cash contribution? b. How much is
additional contribution by that partner?
Variation #4: Y
ou and your partner agree that both of you are equally gorgeous and that
your respective interests in the partnership must be equal. You agree that the initial capital of the
business should be equal to the fair value of your net asset contributions. You further agree
that a partner should provide additional investment (or withdraw part of his
investment) in order to bring both o
f your capital credits equal to your
respective interests in the equity of the partnership
Requirement: W hich partner(s) should provide a dditional investment (or withdraw

part of his/her investment) in order to bring both of your capital credits equal to your
respective interests in the equity o
f the partnership?

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Chapter ​1

Learning ​Objectives ​1​. ​Differentiate b

Introduction ​A ​par​tnershi​p i ​ ​s ​an ​unincorporated ​association ​of

Characteristics ​of ​a ​partnership ​a​. ​Ease ​of f​ ormation -​ ​as

d​. ​C​o-​ ​ow​nership o

f​. ​L​imited l​ ife ​- ​the ​creation ​of ​a ​partnership ​is ​basically

h​. ​Unlimited l​ iability ​– ​each partne​r​, ​including ​industrial ​ones​,

A​dv​antages ​and ​disadvantages ​of ​a

​ nceptual ​F​ramewor​k ​fo

Formation ​A ​co​n​tract ​of

A ​partnership​'​s ​legal ​existence ​begins ​from the ​moment ​the

The ​term ​"​appraisal​" a

Although ​there ​are ​no ​specific ​f​i​n​ancial ​reportin​g

Therefor​e ​a​ll ​assets ​contributed t​ o ​(​and ​related ​liabiliti​es ​assumed

Fach ​partner​'​s ​capit​a​l a

PAS ​36 ​Impairment ​of ​Asse​ts​ ​defines ​recoverable a ​ mount ​as

A ​part​n​er​'​s ​subsequent ​share ​in ​profits ​(losses​) ​shall ​also ​be

Partners​' ​ledge​r a​ c​counts ​The

Debit ​balance ​of

The ​partners​' ​capital ​a​nd d

Illustra​t​ion​: ​Formation ​of ​partnership ​- ​Valuation ​of

Additional ​information:​ * ​ ​Included ​in ​accounts ​receivable ​is ​an

Now ​using ​B'​ ​s ​capital​, ​let ​us ​determine if ​A​'s​ ​capital

Bonus ​on initial ​investments ​An ​accounting ​problem exists

For ​instance​, ​a ​partnership ​agreement ​may ​allow ​a ​certain ​partner

Hlustration 1​: ​Bonus ​method ​Ä ​and ​B ​agreed ​to ​form ​a

Variations ​to ​the ​bonus ​method ​A ​p​a​rtnersh​ip ​ag​reement ​m​ay

Illustration ​1​: ​Cash ​settlement ​between ​partners ​A​, ​B ​and

Requirements​: ​a​. ​Which ​p​artner​(​s​) ​s​h​all receive ​cas​h

A​nswer​: C ​ s​ hall r​ eceive

Illustration ​2​: ​Additional ​investment ​(​Wi​ thdrawal ​of

Requirement:​ W​ hich partner ​should provide ​additional ​inve​stment

Actual ​contributions ​Required

A​nswer​ ​: ​A ​sha​l​l ​withdraw ​P16​,​000 ​f​r​om ​his ​initial

PROBLEM ​1​-​2​: ​THEORY ​& ​COMPUTATIONAL ​1​. ​When ​property ​other

Requirements​: ​a​. C ​ ompute ​for ​the adjuste​d capital

Use the ​following i​ nformation f​ or the n

Requirement:​ P​ rovide ​the ​entry ​to ​be ​made ​in ​the

Requiremen​t​: ​How ​much ​is ​the ​unidentifiable ​asset ​to ​be

The ​building ​is ​subject to ​a ​mortgage ​of ​P10​,​00​0​, w

​ rmed ​a ​partnersh​ip ​by

PROBLEM ​1​-​4​: ​EXERCISES​: ​COMPUTATIONAL ​1 ​M​r​. ​Angie ​a​n​d M

2​. ​On ​January ​1​. 2

​ ​. ​Compute ​for t​ he ​adjusted ​capital

Requirement C ​ ompute ​for ​the ​adjusted ​capital ​balances ​of the

On ​January ​1​. ​2​0​x1​, A

PROBLEM ​1​-​5​: ​C​LA​SS​ROOM ​ACTIVITY I​ NSTRUCTIONS​: ​1​. ​F​ind ​a

Your ​contribu​tions are ​as

Requirements​ ​a ​Compute ​for a

Requirements:​ a​ ​. ​How ​much ​is ​the

​ ​Which ​pa​r​tner ​shall ​receive ​cash ​payment

Requireme​nt​: W ​ hich ​p​artner​(​s​) ​should ​provide a ​ ​dditional ​i​nvestme​nt ​(​or ​withdraw

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Learning Objectives 1. Differentiate b

Introduction A partnership i s an unincorporated association of

Characteristics of a partnership a. Ease of f ormation - as

d. Co- ownership o

f. Limited l ife - the creation of a partnership is basically

h. Unlimited l iability – each partner, including industrial ones,

Advantages and disadvantages of a

nceptual Framework fo

Formation A contract of

A partnership's legal existence begins from the moment the

The term "appraisal" a

Although there are no specific financial reporting

Therefore all assets contributed t o (and related liabilities assumed

Fach partner's capital a

PAS 36 Impairment of Assets defines recoverable a mount as

A partner's subsequent share in profits (losses) shall also be

Partners' ledger a ccounts The

Debit balance of

The partners' capital and d

Illustration: Formation of partnership - Valuation of

Additional information: * Included in accounts receivable is an

Now using B' s capital, let us determine if A's capital

Bonus on initial investments An accounting problem exists

For instance, a partnership agreement may allow a certain partner

Hlustration 1: Bonus method Ä and B agreed to form a

Variations to the bonus method A partnership agreement may

Illustration 1: Cash settlement between partners A, B and

Requirements: a. Which partner(s) shall receive cash

Answer: C s hall r eceive

Illustration 2: Additional investment (Wi thdrawal of

Requirement: W hich partner should provide additional investment

Actual contributions Required

Answer : A shall withdraw P16,000 from his initial

PROBLEM 1-2: THEORY & COMPUTATIONAL 1. When property other

Requirements: a. C ompute for the adjusted capital

Use the following i nformation f or the n

Requirement: P rovide the entry to be made in the

Requirement: How much is the unidentifiable asset to be

The building is subject to a mortgage of P10,000, w

rmed a partnership by

PROBLEM 1-4: EXERCISES: COMPUTATIONAL 1 Mr. Angie and M

2. On January 1. 2

. Compute for t he adjusted capital

Requirement C ompute for the adjusted capital balances of the

On January 1. 20x1, A

PROBLEM 1-5: CLASSROOM ACTIVITY I NSTRUCTIONS: 1. Find a

Your contributions are as

Requirements a Compute for a

Requirements: a . How much is the

Which partner shall receive cash payment

Requirement: W hich partner(s) should provide a dditional investment (or withdraw