Partnership

1. When two or more persons bind themselves to contribute money, property or industry to a common fund with the intension of dividing the profits among themselves. Two or more persons may also form a partnership for the exercise of a profession Partnership

2. Characteristic of a Partnership

3. General partnership • Limited partnership • Commercial Partnership • General Professional Partnership • De jure Partnership • De Facto Partnership • Partnership at will • Partnership with fixed term • Partnership by estoppel Kinds of Partnership As to Liability As to Purpose As to legality of existence As to duration As to representation to others

4. Capitalist partner • Industrial partner • Capitalist-Industrial partner • General partner • Limited partner • Managing partner • Silent partner • Liquidating partner • Secret partner • Dormant partner • Ostensible partner Kinds of Partners As to contribution As to Liability As to participation As to third person

5. A written contract made by the partners. It is needed to appear in a public instrument and to be registered with the SEC if partners contributed a real property or real rights or if total partnership capital amounted toP3,000 or more. Articles of Partnership

6. Partnership Formation • Partnership Operation • Partnership Dissolution • Partnership Liquidation Accounting for partnership

7. It refers to the perfection of the partnership contract by the partners. When a partnership is formed, partners commonly observe the following to effect fair and honest business • Execution of partners’ agreement • Valuation of partners’ investments • Adjustments of the accounts PARTNERSHIP FORMATION

8. Rules to be observed: Amount of contribution. The amount of contribution shall be based on the partner’s agreement. In the absence of any agreement, it shall be contributed equally. INITIAL INVESTMENT BY PARTNERS

9. A and B form a partnership with the total agreed capitalization of P150, 000 to be contributed in cash of 40% and 60% by A and B, respectively, through the issuance of their personal checks. The amount contributed and capital credited to be recorded per agreement would be: Illustration (Partner’s agreement)

10. A and B form a partnership with the total agreed capitalization of P150, 000 to be contributed in cash through the issuance of their personal checks. The amount contributed and capital credited to be recorded per agreement would be: Illustration (no agreement)

11. If cash contribution – based on face value If non cash – based on agreed value, in the absence of agreed value it shall be based on fair value. *Fair value or fair market value – represents the estimated amount in which the seller and buyer would be willing to exchange value in an open market. Valuation of partner’s contributions

12. C, D and E formed a partnership with agreed total capitalization of P300, 000 which should be contributed equally by C and D. Meanwhile, E was designated to manage the operation of the partnership as industrial partner with a share of 20% from partnership profits. C and D contribute the following assets: Illustration (valuation)

13. Partner C At cost At fair value Land P50,000 P 110,000 Equipment 70,000 60,000 Notes Payable 20,000 20,000 assumed by the partners Partner D At cost At fair value Cash P100,000 P 100,000 Equipment 50,000 40,000 Supplies 20,000 10,000

14. Actual investment method - amount credited to capital account is equal to the actual contributed assets. • Bonus Method - actual contribution is not the same as the agreed capital credited to him as recorded in the partnership books. FORMATION OF PARTNERSHIP

15. Scott, a sole proprietor, allows Ann to join his business to form a partnership, provided that the latter would contribute cash amounting to P70,000. Scott’s contribution comprised the following: P10,000 cash, P30,000 Accounts Receivable, P20,000 merchandise and Accounts Payable of P8,000 to be assumed by the partnership. They agreed that their initial capital balances would be of equal amount upon the formation. Assume that Scott and Ann agreed that the capital would be P122,000. Illustration( bonus method)

16. Acosta and Beltran, both sole proprietors, agreed to form a partnership. Account balances per ledger and respective agreed values upon formation are shown below: Exercises:

17. Adam, a single proprietorship has the following balances: Cash P10,000, Equipment P90,000 and Notes Payable P15,000. Eve is invited to invest P40,000 cash to convert the sole proprietorship into partnership. The non cash assets of sole proprietorship can be sold in an open market for P50,000. Adam and Eve agreed that their respective capital balances would be 60% and 40% of the total partnership capitalization.

18. Distribution of Profits and Losses • Art. 1799 of the New Civil Code provides that any stipulation that excludes one or more partners from any share in the profits or losses is null and void. • Art. 1797 provides the following guidelines on how partnership profits and losses shall be distributed among the partners: Partnership operation

19. Rules for dividing profits and losses: I. As to Capitalist Partner 1. Division of profits a. In accordance with agreement b. In the absence of an agreement, in accordance with capital contributions. 2. Division of losses a. In accordance with agreement b. If only the division of profits is agreed upon, the division of losses will be the same as the agreement on the division of losses c. In the absence of agreement, based on capital contribution

20. II. As to Industrial Partner 1. Division of profits a. In accordance with agreement b. In the absence of an agreement, industrial partner shall receive a just and equitable share of the profits. 2. Division of losses a. In accordance with agreement b. In the absence of agreement, industrial partner shall have no share in the losses.

21. Assume that Adam and Eve formed a partnership with original capital contributions of P60,000 and P30,000 respectively. The profit agreement is 60% and 40% respectively. During the year, the partnership generated an income of P100,000. Illustration: (w/ agreement)

22. Assume that Adam and Eve formed a partnership with original capital contributions of P60,000 and P30,000 respectively. During the year, the partnership generated an income of P100,000. Illustration: (no agreement)

23. Equally Specified ratio Capital ratio Interest allowed on partner’s capitals, the remainder to be divided equally in an agreed ratio. Salaries or Bonus allowed for partner’s services, the remainder to be divided in an agreed ratio Multiple bases of allocation Arbitrary agreement In computing profits and losses

24. Assume that Adam and Eve formed a partnership with original capital contributions of P60,000 and P30,000 respectively. General ledger for their capital accounts before closing entries are shown below: Illustration:

26. During the year Net Income of P100,000 was earned by the partnership. They agreed that profit will be divided: 1. Equally 2. 60% to Adam and 40% to Eve 3. Based on capital ratio: - original capital contribution - beginning capital balance - ending capital balance

27. 4. 10% Interest on beginning capital and the balance will be distributed equally 5. Salary to Eve for P10,000 and the balance distributed 60% for Adam and 40% to Eve. 6. 10% interest on ending capital, salary to Eve for 10,000, 10% bonus based on Net Income before salaries and interest for Adam. The balance will be divided equally. 7. 10% interest on ending capital, salary to Eve for 10,000, 10% bonus based on Net Income after salaries and interest for Adam. The balance will be divided equally.

28. As a rule. The prescribed allocation for salaries and/or interest should still be given in spite of the insufficiency of partnership’s net income to cover them. The earnings deficiency resulted for giving salaries and/or interest shall be allocated among the partners based on their profit and loss sharing. insufficient income

29. Using the same example above, only the operations resulted from P10,000 net income. The partnership agreement is: • 10% interest on ending capital, salary to Eve for 10,000, 10% bonus based on Net Income before salaries and interest for Adam. The balance will be divided 60%Adam and 40% to Eve. illustration

30. The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business. • The change of partners in the partnership ends their original agreement, thus terminating the partnership. Partnership dissolution

31. 1. Admission of a New Partner • admission by purchasing a partner’s interest directly from one or more of the current partners. The selling partner could sell his interest in the partnership at an amount: a.) equal to book value of his interest b.) less than the book value of his interest c.) more than the book value of his interest Note: gain or loss in the purchase of interest transaction is a personal gain or loss of the partner/s involved. Accounting for dissolution

32. The capital balances and agreed profit and loss distribution of B1 and B2 partnership prior to dissolution are as follows: PartnersCapital BalancesP&L Ratio B1 250,000 25% B2 750,000 75% Doding Daga wants to buy 50% of the interest of B2 to give him interest of 37.5% in the partnership’s asset and in the partnership’s profit and loss. Illustration:

33. Case 1: Purchase at Book Value: Assume that Dodi paid P375,000 directly to B2. Case 2: Purchase Lesser than Book Value: Assume that Dodi paid P350,000 directly to B2. Case 3: Purchase More than Book Value: Assume that Dodi paid P400,000 directly to B2. What is the journal entry for the admission and what is the new profit and loss ratio of new partnership?

34. The capital balances and agreed profit and loss distribution of Pat and Sponge partnership prior to dissolution are as follows: PartnersCapital BalancesP&L Ratio Pat 150,000 30% Sponge 350,000 70% Mr. Crab wants to buy 20% of the interest in the partnership’s asset and profit by paying directly to each of the existing partners. Illustration:

35. Case 1: Purchase at Book Value: Assume that Mr. Crab paid P100,000 directly to the partners. Case 2: Purchase Lesser than Book Value: Assume that Mr. Crab paid P60,000 directly to the partners. Case 3: Purchase More than Book Value: Assume that Mr. Crab paid P150,000 directly to the partners.

36. This manner of admitting a new partner is a transaction between the incoming partner and the partnership. To acquire interest in the partnership, the incoming partner directly invests cash and/or other non cash assets to the partnership, thereby increasing the total assets of the partnership. • Investment equals capital credits • Bonus method Admission by direct investment

37. Triple A partnership has the following adjusted accounts prior to the acceptance of Nimrod as a new partner: Aaron, Capital 150,000 Ahab, Capital 150,000 Amber, Capital 150,000 The partners have been dividing profit equally. They approved admission of Nimrod provided that the latter will contribute to the partnership equipment with fair value of P100,000 and cash of P50,000/ They further agreed that they would received capital interest equal to their actual contributions Illustration

38. The capital balances and agreed profit and loss distribution ratio of the partners before admitting Judy are as follows: Judy admitted by investing cash of P200,000 for 30% interest in the partnership assets and profits Illustration (bonus method)

39. Required: 1.) Journalized admission of new partner Judy 2.) What is the new profit and loss sharing of the partners? 3.) Assume that Judy admitted by investing cash of P200,000 for 20% interest in the partnership.

40. Liquidation is the process of converting all assets of the business into cash (realization), followed by the final payments of the creditors’ claims and the partners’ capital balances in the partnership (liquidation). This process is usually called “winding up of business activities.” Partnership liquidation

41. Capital deficiency Solvent or Insolvent partners Gain or Loss on Realization Loans to partners and Loans from partners Statement of Liquidation Accounting Terms and account titles

43. On October 31, 2011, the partners dissolved and liquidated the partnership. The trade accounts receivable, merchandise inventory, equipment and other non cash assets were sold for P130,000 Illustration:

45. Suppose that the non cash assets were realized at a total lump sum amount of P195,000. and all partners are solvent. Prepare statement of liquidation. Exercise: