BASHERON, Noorodden

Inside the partnership, the entry is:

A, Capital 25,000
PARTNERSHIP
B, Capital 25,000

FORMATION Outside the partnership, B pays A 25,000.

 In terms of legal and taxability aspect, it is
more advantageous for businessmen in the 3. Capital Investment
Philippines  TCC ≠ TAC
 Relatively easier to form  Total contributed capital will increase
 Unlimited liability, limited life
Contribution AGREED ratio
Valuation of Contribution A 100,000 60/100
B 50,000 40/100
Cash Face Value
Total 150,000
Non-Cash Assets i. Agreed Value
ii. Fair Value/Appraised
iii. Carrying Value First step is to find out who and how much will
have to be invested
 Only consider the assets invested and liabilities
 It is incorrect to use B as a basis because
assumed by the partnership. TCC will decrease
 Accounts Receivable – can have an allowance for o TCC= 50,000/40% = 125,000.
doubtful account but deduct those deemed  If we use A as a basis
uncollectible o TCC = 100,000/60% = 166,667.
 PPE- don’t include accumulated depreciation; o Hence, B’s investment should be 66,667
consider under/over depreciation if any. (166,667 x 40%). He should invest an
additional 16,667. Since A is already the
Methods of Accounting for Capital Investment basis, he doesn’t need to invest
additional capital.
1. Bonus Method (assumed if silent)
 Agreed Capital = Contributed Capital NOTE: If there are 3 or more partners, choose the
 No recording of goodwill; there is only partner that will yield the highest total contributed
transfer of capital capital. (If problem is silent.)
 TAC=TCC
N 4. Capital Withdrawal
TCC TAC (based on agreed  TCC ≠ TAC
ratio of 50-50)  Total Agreed Capital should decrease
A 100,000 75,000
B 50,000 75,000 Contribution AGREED ratio
TCC 150,000 150,000 A 100,000 60/100
B 50,000 40/100
2. Direct Settlement Total 150,000
 Agreed Capital = Contributed Capital
 Similar to bonus method but there’s  Using B as a basis, agreed capital will
cash settlement between partners that decrease
are not recorded in the books o TCC=125,000 (50,000/40%).
 TAC=TCC o Hence, A will have to withdraw 25,000
(150,000-125,000)
TCC TAC (based on
agreed ratio of 50-50)
NOTE: Choose the partner with lowest contributed
A 100,000 75,000 capital as a basis.
B 50,000 75,000
TCC 150,000 150,000
 BASHERON, Noorodden
OPERATIONS

ISSUE: How to allocate partnership profits/losses? Example:

Scenario P L Result
Both P&L Salary – 50,000
agreement are   Follow Agreement Interest – 30,000
given Net Income – 200,000
There’s profit Follow profit Bonus rate – 20%
agreement but agreement for
  Scenarios:
no loss BOTH profit and
agreement loss 1. Before salary, interest, and bonus:
For profit, use
There’s loss original capital B = 200,000 x 20% = 40,000
agreement but contribution ratio B=NI X BR
 
no profit
agreement For loss, follow 2. Before salary and interest, and after bonus
loss ratio
There’s no profit Follow original B = 200,000 / (1.2) x 20% = 33,333
𝐍𝐈 𝐗 𝐁𝐑
or loss   capital contribution 𝐁=
agreement ratio for both 𝟏 + 𝐁𝐑

Methods of allocating capital balance (in order) 3. After salary and interest, but before bonus
1. Weighted Average Capital
2. Simple Average Capital B = (200,000-50,000-30,000) x 20% = 24,000
3. Beginning Capital B=(NI – S – I) X BR
4. Ending Capital
5. Original Capital (Use if there’s an agreement 4. After salary, interest, and bonus
but unsure as to which method to use)
B = (200000-50,000-30,000)/1.2 x 20% = 20,000
(𝐍𝐈 − 𝐒 − 𝐈) 𝐗 𝐁𝐑
Accounting for Salaries, Interest, and Bonus 𝐁=
𝟏 + 𝐁𝐑
1. Before salary, interest, bonus (assumed if
silent)
*After allocating these items, any remaining profit
2. Before salary and interest, but after bonus
is allocated based on the stipulated profit or loss
3. After salary and interest, but before bonus
ratio
4. After salary, interest, and bonus
Statement of Changes in Partner’s Capital
Salaries and interest
o They are regardless whether there’s profit or Beginning Balance P XX
loss, EXCEPT when the problem states that
Additional Investment XX
there’s an “order of priority” or “only up to
Less: Permanent Withdrawals (XX)
extend of earning”
Balance P XX
o This could for a fractional year only. Annual or
monthly amount is usually given for salaries. Net Income Share XX
o Interest is based on capital balance (weighted, Less: Temporary Withdrawals (XX)
simple, beg, end, orig) Ending Capital P XX
o These are NOT treated as expense.
Bonus  Permanent: irregular drawings in excess of
o it should only be given if there is profit and the capital (direct debit to capital)
basis (positive value) depends on partners  Temporary: regular drawings in anticipation
agreement of future salaries
 If withdrawal is silent as to permanent or
regular, it will be considered as
PERMANENT withdrawal.
 BASHERON, Noorodden
DISSOLUTION
Example:
Methods: C invests 100,000 for 30% share.
1. Admission Basis of new capital is the NEW PARTNER’S
a. Purchase of Interest PAYMENT. Hence, if this is the case,
i. With revaluation
ii. No revaluation (if silent) TAC = 100,000 / 30% = 333,333
b. Direct Investment TCC = 300,000
2. Retirement Revaluation = 333,333 – 300,000 = 33,333
a. Bought by partner
i. With revaluation This amount of revaluation pertains to one of the
ii. No revaluation partnership’s assets (e.g. Land), and is allocated
b. Bought by partnership (assumed) according to P&L ratio.

Purchase of Interest Without Revaluation Land 33,000

 Purchase price is to be ignored. A, Capital (60%) 20,000
 Transaction between new partner and the B, Capital (40%) 13,000
partner who is selling shares is considered as
PERSONAL TRANSACTION.
 The total agreed capital would still be equal to A, Capital 36,000
the total contributed capital TCC = TAC B, Capital 64,000
C, Capital 100,000
Example:
C invests 100,000 for 30% share. *(100K+20K)X30%=36K
A’s capital is 100,000 *(200K+13K)X30%=64K
B’s capital is 200,000
Direct Investment
Journal entry to record purchase of interest:  Bonus method is to be applied if the problem is
silent. Revaluation method should also be
A, Capital 30,000 applied if the problem says so.
B, Capital 60,000  Do purchase of purchase of interest first before
C, Capital 90,000 direct investment
 Simply compare new investment against new
Payment outside the partnership: agreed capital after revaluation. The difference
Transferred Gain Payment between the two is considered bonus.
Capital(∆ in Cap) Allocation
A 30,000 6,000 36,000 investment > agreed cap bonus to existing
TCC>TAC partners
B 60,000 4,000 64,000
Total 90,000 10,000* 100,000 investment < agreed cap bonus to new
TCC < TAC partner
*Allocated using P&L ratio of partners
Bonus to old partner
Purchase of Interest with Revaluation Cash xxx
 Purchase price is used to determine the Capital, old partner xxx
amount of revaluation Capital, old partner xxx
 The revaluation increases the amount of Capital, new partner xxx
capital of the old partner and so is distributed
among P& L ratio TCC ≠ TAC Bonus to new partner
Cash xxx
purchase price Capital, old partner xxx
= Total Agreed Capital
% of interest Capital, old partner xxx
Less: Total Contributed Capital Capital, new partner xxx
Revaluation
 BASHERON, Noorodden
Example:
C invests 100,000 for 30% share. Total Retirement of Partner Bought by Partnership
contributed capital of old partners is 300,000. Formula:
Total interest (after revaluation)* P XX
Investment 100,000 Less: Payment to Partner (XX)
Agreed new capital 120,000 (400k*30%) Bonus P XX
Bonus to new partner 20,000 Capital Balance P xxx
+/- Share in Net Income/Loss xxx
Entry: +/- Revaluation xxx
Cash 100,000 +Payable/Due to Partner xxx
A, Capital 12,000 -Receivable/Due from Partner (xxx)
B, Capital 8,000 Total Interest PXXX
C, Capital 120,000

Retirement of Partner Bought by Partner BONUS

with Revaluation Total interest > payment bonus to remaining
partners
Example: Total interest < payment bonus to retiring
A, Capital – 100,000 partner
B, Capital – 200,000
C Capital – 120,000 Example
120,000 is C’s Capital
B buys C’s capital for 150,000. 150,000 is given by the partnership
P&L ratio: A-50%, B-25%, C-25% P&L ratio: C-50%, A-30%, B-20%
Given 150,000 Journal entry is:
Capital (120,000)
Revaluation 30,000 C, Capital 120,000
/ P&L Ratio 0.25 A, Capital 18,000
Revaluation 120,000 B, Capital 12,000
Cash 150,000
Journal entries:
Land 120,000
A, Capital 60,000
B, Capital 30,000
C, Capital 30,000

C, Capital 150,000
B, Capital 150,000

Retirement of Partner Bought by Partner

without Revaluation

Example:
A, Capital – 100,000
B, Capital – 200,000
C, Capital – 120,000

If B buys C, journal entry is:

C, Capital 120,000
B, Capital 120,000
 BASHERON, Noorodden
LIQUIDATION
Safe Payment Schedule
Process:
1. Lump-sum/total 1. Compute total interest net of gain/loss on
2. Installment/piecemeal realization condonation, liquidation expense, and
contribution to parties
General steps: 2. Compute maximum possible loss
1. Sell noncurrent assets 3. If there is capital deficiency  loss absorption
2. Pay creditors (in priority) 4. Distribute to partners
3. Distribute excess to partners
NOTE:
Marshalling of Assets/Hierarchy of Claims  Max Possible Loss =BV of asset unsold +Cash
Personal Assets Partnership Assets withheld for future expenses
1 Personal Creditors Partnership creditors  Total interest after distribution = Max. Possible Loss
2 Partnership creditors Personal creditors  Total interest of partner after distribution =
3 Other parties Other parties Max Possible Loss share + Loss Absorption

NOTE:  Under the statement of liquidation, partners are

 If silent, assume INSOLVENT. assumed to be solvent.
 If partner has capital deficiency,  Under the schedule of safe payment, partners are
1. If solvent (A>L), contribute assumed to be insolvent
2. If insolvent (A<L), loss absorption by
other partners (except those who are Cash Priority Program (CPP)
deficient and insolvent)
1. Determine the total interest
Installment Liquidation 2. Compute loss absorption balance or Maximum
Formula: Loss (ML)
3. Equalize maximum loss from the highest to the
Proceeds P xx
second highest until equal to determine priority
BV sold (xx)
of payment
G/L on revaluation P xx 4. Distribution to partners (difference in ML x P&L
ratio)
EQUITY SIDE Partner A Partner B Partner C TOTAL
Total Interest XX Total Interest P xxx P xxx P xxx P xxx
Contribution XX Divided by
xxx xxx xxx xxx
+/- Gain or Loss on Realization XX P&L ratio
Condonation of Debt XX Max Loss P xxx P xxx P xxx P xxx
Liquidation Expenses (XX) Priority I P xxx P xxx
Maximum Possible Loss: Priority II P xxx xxx xxx xxx
BV of asset unsold (XX) Priority III P xxx xxx xxx xxx
Cash Withheld for future expenses (XX) Cash
P xxx P xxx P xxx P xxx
Distribution
Total Distribution to Partners XX

ASSET-LIAB SIDE When to use CPP?

Cash on Hand XX  If there is no deficiency in the partners’ capital
Proceeds from Sale XX  When the problem gives payment to any of the
Contribution (must be stated) XX partners
Liquidation Expenses (XX) o ex. If partner A receives P xxx, how
much will partner B receive?
Payment of Liabilities(paid/unpaid) (XX)
 If there is no additional investment
Cash Withheld for future expenses (XX)
Total Distribution to Partners XX