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Formation of Partnership and Types of Partnership in Companies Accounting

This course covers the formation of partnership, net income allocation, changes in partners, liquidation of a partnership, and the types of partnership in companies accounting.

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Formation of Partnership and Types of Partnership in Companies Accounting

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  1. بسم الله الرحمن الرحيم

  2. COMPANIES ACCOUNTING 3th Puplic Finance

  3. COURSE CONTENTS: A- Partnership • Formation of Partnership. • Net Income Allocation. • Changes in Partners. • Liquidation a Partnership. B- Corporationship

  4. Partnership Proprietorship • Sole enterprise • Only one owner • - It has one capital account.

  5. partnership The partners in partnership may be: General partner: • He has unlimited responsibility toward the company's liabilities. (So, he can enter his name in the name of the company, and he manages the company) Limited partner: • He has a limited responsibility toward company's debts, because he is responsible only within the amount of his capital in the company. • He can't participate in management of the company. • He can't enter his name in the name of the company.

  6. partnership Types of partnership We have two types of partnership: general partnership: • All partners are general partners. limited partnership: Here we have 2 kinds of partners. • One at least is a general partner. • One or more are limited partners.

  7. partnership • According to this type of firms there are more than one owner, so each one will have a capital account, each capital account will express the equity of its owner.

  8. Example (1): If we have 2 owners A & B, then 2 capital accounts will be found in the balance sheet:

  9. Example (2): If we have 3 partners A & B & C, then 3 capital accounts will be found in the balance sheet:

  10. Example (3): On 1/1/2010 A & B formed a partnership by producing the following contribution: Required: prepare the journal entry to record the formation of the partnership. Sol:

  11. What are the types of assets that should be contributedby the partners?

  12. First: contribution in cash: Example (1): On Jan 1st., 2010 Yasser and Hossam started their partnership with total capital $200000, divided as 50,000 to Yasser and 150000 to Hossam, and each partner contributed his share in cash at the foundation date. Required: Prepare the Journal entries to record the foundation of the partnership.

  13. solution To prepare the journal entry you have to remember that: We record the transactions in the journal from the company point of view not from the partner's points of view So in this case the effect on the co. is:

  14. So the entry is:

  15. Second: contribution by presenting assets and liabilities: Any partner may pay his contribution by presenting assets (or assets and liabilities) to the partnership. These assets could be:

  16. N.B. All current assets and fixed assets are to be considered by their market value (Fair value) except for A/R & N/R.

  17. a-The Fixed assets: The Market value will be given. However, if it is not given, so you have to use the net book value (cost – accumulated dep.) N.B. No accumulated depreciation will be recorded in the formation of the new co.

  18. Example: Yasser present car as a contribution in a new partnership the cost of the car 100000 and accumulated dep. 25000. And the market value of the car 80000. So the value of the car that should be taken in the formation entry is 80000 (M.V), so the entry is: Cars 80000 Partner capital Yasser 80000 But if there is no market value was given, so you have to use the net book value (100000-25000) = 75000 and then the entry is: Cars 75000 Partner capital Yasser 75000

  19. b-Accounts Receivables: A/R It should be recorded by the face value (nominal value) (after deducting the written off debts if any), and the difference between this new face value and M.V should be recorded as AFDA (allowance for Doutful accounts).

  20. Example: Yasser presented A.R of 14000 and it's AFDA 2000, but the partners agreed that there is written off debt of 4000 and they agreed that realized value (M.V.) of accounts receivable is 7000. So, AR should be recorded at the face value after deducting any written off debt= 14000 – 4000= 10000 (Dr) And the AFDA is computed by the difference between face value and M.V., So AFDA = 10000 – 7000 = 3000 (Cr). N.B. The old AFDA is neglected because he gives you a M.V. of AR to compute a new AFDA AR 10000 AFDA 3000 Yasser capital 7000 If there is no M.V is given, so you have to use the old AFDA and the entry will be: AR 10000 AFDA2000 Yasser capital 8000

  21. Summary of AR: (Steps) Summary of AR: (Steps): • Record the AR (dr) by its total face value (after deducting written off debt). • Record AFDA (cr), but we have 2 cases:

  22. c-Notes Receivable It is treated exactly as A.R but instead of AFDA we use another account which is "Allowance for discounting note".

  23. Example Yasser and Hossam agreed to form a partnership by presenting the following assets:

  24. Required prepare the formation entries. • Contribution of Yasser: • Building 60000 AR 50000 face value NR 30000 face value AFDA 10000 All .for discounting note 5000 Difference between face value and M.V. capital 125000 2- Contribution of Hossam: Cars 30000 net B.V (there is no M.V) AR 65000 face value AFDA 5000 difference between face value and M.V Capital 90000

  25. When the partner presents his sole-enterprise as a contribution on the partnership so, All assets and liabilities are transferred to the partnership except:

  26. What do we have to do if there is difference between the assets and liabilities contributed and his share in capital of new co.?It depends on the agreement between the partners as follows:

  27. Assets received xx Assets received xx (each asset by its name) (each asset by its name) xx xx G.W. Cash Complimentary Transferred liab. xx Transferred liab. xx Partner capital xx Partner_capital xx Cash xx RE xx

  28. Example 1: • Partners A,B, and C started their business on 1/10/2010 with total capital of $110,000. A's share in this capital is 30,000 and B's share is 10,000, and the remaining capital is allocated to partner C. If they agreed on the following: • A and B contributed their capital in cash at once at the formation date. • Partner C provided his share by transferring the assets and liabilities of his sole enterprise which had the following balance sheet at the formation date:

  29. Balance sheet (c)

  30. If you know that: 1-The market value of assets reported above are as follows: Building 40000, equipment 11000, good will 2000, 11500 AR, NR 7000, investment 2-The partners agree on that, partner C has to pay or receive the difference between his capital and net assets contributed in cash. Required: Prepare the journal entries to record the foundation of the partnership.

  31. Solution Orig. bal. 3000 + the diff. dr 500

  32. Notes: 1- We didn't take into consideration the following items from the old balance sheet of the sole enterprise: The old equity items (capital & net income). The prepaid advertising. 2- We take the assets in the formation entry by their M.V. except the AR & NR as we explained previously. 3- He mentioned in the exercise that the difference is cash so when we recorded the assets and liabilities received (including cash of 3000 dr) and the required capital of partner C the entry was not balance and still has a difference of 500 in the dr side, so the cash is to become 3500 in the entry.

  33. Example 2: Assume the same facts as in example (1) except that The M.V. of the equipment was 31000 (instead of 11000) and they agree on that any difference should be paid or drawn in cash. Solution Orig. bal. 3000(dr) But the diff. (Cr) 19500 So, the net result Cr cash by 16500

  34. Note: He mentioned in the exercise that the difference is cash so when we recorded the assets and liabilities received (including cash of 3000 dr) and the required capital of partner C the entry was not balance and still has a difference of 19500 in the cr side, so the cash is to become 16500 in the entry (3000 dr & 19500 cr).

  35. Example 3: Assume the same facts as example (1) except that the agreement didn't state any thing related to the difference. Solution: Since the contract didn't mention any thing about the treatment of the difference so it should be treated as G.W. (dr) or reserve (cr) Orig. bal. 2000 + The diff. dr 500

  36. Note The dr side included original G.W. of 2000 but the entry was not balance and still has a difference of 500 in the dr side (treated as G.W.), so the G.W. is to become 2500 in the entry (2000 dr & 500 dr).

  37. Example 4: Assume the same facts as example (1) except that, the equipment has M.V. of 31000 (instead of 11000), and the agreement didn't state any thing related to the difference.

  38. Solution Since the contract didn't mention any thing about the treatment of the difference so it should be treated as G.W. (dr) or reserve (cr) The diff. of the entry, in the cr side

  39. The methods of recording the formation of partnership

  40. Notes: The meaning of the previous 3 method will be explained through the following example. Remember that, the main point in partnership format is to compare the contributed net assets (assets invested in the partnership by the partner) with share in capital.

  41. Example:At 1/1/2010 Yasser & Hossam formed a partnership.The following is the net assets contributedby '‘Yasser'' & '‘Hossam'' Required: Prepare the journal entries to record the formation of the partnership under each of the following methods: • Net investment method. • Bonus method (If the bonus was 5000 from partner '‘Y'' to partner '‘H''). • Goodwill method if the partnership is worth by 165000 and the difference considered as a goodwill to partner '‘H''.

  42. Before Solution; You must know that: In the formation of partnership we deal with market value of the assets and we ignore the cost. Sol: (1) Net Investment Method: The journal entry:

  43. Notes:1- Ap.is considered as liability.2-According to this method: Net Contributed Assets Share In Capital Partner '‘Yasser'‘ 100000 = 100000 Partner '‘Hossam'‘ 55000 = 55000 Total 155000 = 155000

  44. (2) Bonus Method: According to this method a partner gives a bonus to the other partner to encourage him to agree to enter the partnership. This bonus will lead to decrease the capital of the first and increase the capital of the second. bonus The capital, partner Yasser = 100000 – 5000 = 95000 The capital, partner Hossam = 55000 + 5000 = 60000

  45. The entry:

  46. Note : According to this method: Net Contributed Assets Share In Capital Partner '‘Yasser'‘ 100000 ≠ 95000 Partner '‘Hossam'‘ 55000 ≠ 60000 Total 155000 = 155000

  47. Another solutionThe journal entry: Cash 30000 Building 80000 Cars 30000 Furniture 25000 Accounts payable 10000 Capital, Partner '‘Yasser'‘ 100000 Capital, Partner '‘Hossam'‘ 55000

  48. Capital, Partner '‘Yasser'‘ 5000 Capital, Partner '‘Hossam'‘ 5000

  49. (3) Goodwill Method (Intangible asset): According to this method the partnership is valuated by amount more than the total contributed net assets. Total contributed net assets<Total share capital (Tangible assets – liabilities) of the comp. So, the difference between total contributed assets & total capital is considered as goodwill.

  50. In our example, the partnership is worth by 165000 and the total contributed assets = (100000 + 55000) = 155000. • The goodwill = 165000 – 155000 = 10000. Total Capital165000 Partner '‘Yasser''100000 Partner'‘Hossam'‘ Contributed assets 55000 The goodwill value 10000 65000

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