Financial Accounting and Reporting I

Module Content || Week 13 & 14

Lesson: Module 13 & 14
___________________________________________________________

Topics (Coverage) The accounting equation

Target First Students of the Bachelor of Science and Accountancy Course
Participants
Learning Time: 3 hours/week for 18 weeks, 54 total hours
Means for Learner The students may contact teacher for assistance and guidance to the following:
Support
Airen Bequiso
FB: Airen Laurente Bequiso
Email: [email protected]
Contact number: 0942-527-1474

Summative Description of expectation, real-world context, and Rubrics/Standards

Assessment requirements for the final authentic performance-based
(for the authentic
assessment of the course
(Performance/Produ assessment)
ct)

Greetings everyone!

Welcome to Module 9 of your course AE 15: Financial Accounting and Reporting I

Our objectives for this topic are the following:

1. Differentiate between 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.

Let’s activate your prior knowledge!

Suppose you and your friend decided to open up a business- a partnership, in particular.
List down all the agreement that you want to be undertaken in your partnership. Write your answer
in a yellow paper.

Now, let’s acquire new knowledge!

Partnership Formation

Partnership is an unincorporated association of two or more individuals to carry on, as co-owners, a

business, with the intention of dividing the profits among themselves.

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Characteristics of a partnership
a. Ease of formation – as compared to corporations, the formation of a partnership requires less
formality.
b. Separate legal personality - personality separate and distinct from the partners. The partnership
can transact and acquire properties in its name. the partnership has a judicial
c. Mutual agency – the partners are agents of the partnership for the purpose of its business. As
such; a partner may legally bind the partnership to with the partnership's operations. A contract
or agreement that is in line
d. Co-ownership of property - each partner is a co-owner of the properties invested in the
partnership and each has an equal Fight with his partners to possess specific partnership
property Tor partnership purposes. However, a partner has no right to possess a partnership
property for any other purpose without the consent of his partners.
e. Co-ownership of profits - 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.
f. Limited life 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 creation of a partnership is basically
contract;
iii. by any event that makes it unlawful to carry out the partnership;
iv. when a specific thing which a partner had promised to contribute to the partnership perishes
before the delivery; or
v. expulsion, death, insolvency or civil interdiction of a partner.

g. Transfer of ownership - in case of dissolution, the transfer of ownership, whether to a new or

existing partner, requires the approval of the remaining partners.
h. Unlimited liability - each partner, including industrial ones, may be held personally liable for
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.
 A partnership in which at least one partner is personally liable is called a limited
partnership. A limited partnership includes at least one general partner who maintains
unlimited liability. The others, called limited partners, may limit their liability up to the
extent of their contributions to the partnership. A limited liability partnership usually has
"LLP" in its name.
Advantages and disadvantages of a partnership
Advantage Disadvantage
Ease of formation Easily dissolved/ limited life
Shared responsibility of running the business Unlimited liability
Flexibility in decision making Conflict among partners

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Greater capital compared to sole proprietorship Lesser capital compared to a corporation
Relative lack of regulation by the government as A partnership (other than a general professional
compared to corporations partnership) is taxed like a corporation

PARTNERSHIP DISTINGUISHED FROM CORPORATIONS

Manner of Creation- A partnership is created by mere agreement of the partners while a corporation is
created by operation of law.

Number of Persons- Two or more may form a partnership; in a corporation, at least five (5) persons,
not exceeding fifteen (15).

Commencement of Juridical Personality- In a partnership, juridical personality commences from the

execution of the articles of partnership; in a corporation, from the issuance of certificate of incorporation
by the Securities of Exchange Commission.

Management- In a partnership, every partner is an agent of the partnership if the partners did not
appoint a managing partner; in a corporation, management is vested on the Board of Directors.

Extent of Liability- In a partnership, each of the partners except a limited partner is liable to the extent
of his personal assets; in a corporation, stockholder ls are liable only to the extent of their interest or
investment in the corporation.

Right of Succession- In a partnership, there is no right of succession; in a corporation, there is right of

succession. A corporation has the capacity off continued existence regardless of the death, withdrawal,
insolvency or incapacity of its directors or stockholders.

Terms of Existence- In a partnership, for any period of time stipulated by the partners; in a
corporation, not to exceed fifty (50) years but subject to extension.

CLASSIFICATIONS OF PARTNERSHIPS
1. According to object:
A. Universal partnership of all present property. All contributions become part of the
partnership fund.
B. Universal partnership of profits. All that the partners may acquire by their industry or
work during the existence of the partnership and the use of whatever the partners
contributed at the time of the institution of the contract belong to the partnership. If the
articles of universal partnership did not specify its nature, it will considered a universal
partnership of profits.
C. Particular partnership. The object of the partnership is determinate-- its use or fruit,
specific undertaking, or the exercise of a profession or vocation.

2. According to liability:
A. General- All partners are liable to the extent of their separate properties.
B. Limited- The limited partners are liable only to the extent of their personal contributions.

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In a limited partnership, the law states that there shall be at least one general partner.
3. According to duration:
A. Partnership with a fixed term or for a particular undertaking
B. Partnership at will- One in which no term is specified and is not formed for any particular
undertaking.
4. According to purpose:
A. Commercial or trading partnership. One formed for the transaction of business.
B. Professional or non-trading partnership. One formed for the exercise of profession.
5. According to legality of existence:
A. De jure partnership- One which has complied with all the legal requirements for its
establishment.
B. De facto partnership- One which has failed to comply with all the legal requirements for
its establishment.

KINDS OF PARTNERS
1. General partner. One who is liable to the extent of his separate property after all
the assets of the partnership are exhausted.
2. Limited partner. One who is liable only to the extent of his capital contribution. He is not allowed
to contribute industry or services only.
3. Capitalist partner. One who contributes money or property to the common fund of the
partnership.
4. Industrial partner. One who contributes his knowledge or personal service to the partnership.
5. Managing partner. One whom the partners has appointed as manager of the partnership;
6. Liquidating partner. One who is designated to wind up or settle the affairs of the partnership
after dissolution.
7. Dormant partner. One who does not take active part in the business of the partnership and is not
known as a partner.
8. Silent partner. One who does not take active part in the business of the partnership though may
be known as a partner.
9. Secret partner. One who takes active part in the business but is not known to be a partner by
outside parties.
10. Nominal partner or partner by estoppel. One who is actually not a partner but who represents
himself as one.

ARTICLES OF PARTNERSHIP
A partnership may be constituted orally or in writing. In the latter case, partnership agreements are
embodied In the Articles of Partnership. The following essential provisions may be contained in the
agreement:
1. The partnership name, nature, purpose and location;
2. The names, citizenship and residences of the partners;
3. The date of formation and the duration of the partnership;

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4. The capital contribution of each partner, the procedure for valuing non-cash investments,
treatment of excess contribution (as capital or as loan) and the penalties for a partner's failure to
invest and maintain the agreed capital;
5. The rights and duties of each partner;
6. The accounting period to be adopted, the nature of accounting records, financial statements and
audits by independent public accountants;
7. The method of sharing profit or loss, frequency of income measurement and distribution,
including any provisions for the recognition of differences in contributions;
8. The drawings or salaries to be allowed to partners;
9. The provision for arbitration of disputes, dissolution, and liquidation.
A contract of partnership is void whenever immovable property or real rights are
contributed and a signed inventory of the said property is not made and attached to a
public instrument.

SEC REGISTRATION
When the partnership capital is P3, 000 or more, in money or property, the public
instrument must be recorded with the Securities and Exchange Commission (SEC). Even if it not
registered, the partnership having a capital of P3,000 or more is still valid and therefore has legal
personality.
The SEC shall not register any corporation organized for the practice of public accountancy (The
Philippine Accountancy Act of 2004, Sec. 28).
The purpose of the registration is to set "a condition for the issuance of the licenses to engage in
business or trade. In this way, the tax liabilities of big partnerships cannot be evaded, and the public can
also determine more accurately their membership and capital before dealing with them." (Dean
Capistrano, IV Civil Code of the Philippines)

To register a partnership with the SEC, here are the basic steps to follow:

 Have your proposed business name verified in the verification unit of SEC;
The partnership name shall bear the word "Company" or "Co." and if it's a limited partnership, the word
"Limited" or "Ltd." A professional partnership may bear the word "Company," "Associates" or "Partners"
or other similar descriptions (SEC Memorandum Circular 5, Series 2008).
 Submit the following documents:
 Articles of Partnership
 Verification Slip for the Business Name
 Written undertaking to change business name if required
 Tax identification number of each partner and/or that of the partnership
 Registration data sheet for partnership duly accomplished in six copies
 Other documents that may be required:
 endorsement from other government agencies if the proposed partnership will
engage in an industry regulated1 by the government.
 for partnership with foreign partners: SEC Form F-105, bank certificate on the capital
contribution of partners, proof of remittance of contribution of foreign partners;

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 Pay the registration/filing and miscellaneous fees: filing fee equivalent to 1/5 of 1% of the
partnership capital but not less than Pl,000 and legal research fee which is 1% of the filing
fee;
 Forward documents to the SEC Commissioner for signature.

ACCREDITATION TO PRACTICE PUBLIC ACCOUNTANCY

Certified public accountants (CPAs), linns and partnerships of CPAs, engaged in the practice of public
accountancy, including the partners and staff members thereof, shall register with the Professional
Regulation Commission and the Professional Regulatory- Board of Accountancy. The registration shall be
renewed every three years (The Philippine Accountancy Act of 2004, Sec. 31). The rules and regulations
covering the accreditation for the practice of public accountancy are specified in Annex 8 of The Rules
and Regulations Implementing Republic Act 9298 otherwise known as the Philippine Accountancy Act of
2004.

Accounting for partnerships

The accounting for assets and liabilities remains the same regardless of the form of a business
organization. What changes is the accounting for equity. The balance sheets of the different forms of
business organization are shown. Notice the similarities and differences.

Exhibit 1: Sole Proprietorship

WIN-WIN’s Special Barbeque
Statement of Financial Position
As of December 31, 20x1
ASSETS
Cash and cash equivalents P 20, 000
Trade and other receivables 60, 000
Inventory 90, 000
Total current assets 170, 000
Property, plant and equipment 270, 000
Total non-current assets 270, 000
TOTAL ASSETS P 440, 000
LIABILITIES
Trade and other payables P 110, 000
Total current liabilities 110, 000
EQUITY
Ms. Win’s, Capital 330, 000
TOTAL LIABILITIES AND EQUITY P 440, 000

Exhibit 2: Partnership
EPG Partnership
Statement of Financial Position

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As of December 31, 20x1
ASSETS
Cash and cash equivalents P 20, 000
Trade and other receivables 60, 000
Inventory 90, 000
Total current assets 170, 000
Property, plant and equipment 270, 000
Total non-current assets 270, 000
TOTAL ASSETS P 440, 000
LIABILITIES
Trade and other payables P 110, 000
Total current liabilities 110, 000
EQUITY
Ms. E’s, Capital 110, 000
Ms. P’s, Capital 110, 000
Ms. G’s, Capital 110, 000
TOTAL LIABILITIES AND EQUITY P 440, 000

Exhibit 3: Corporation
EPG Corporation
Statement of Financial Position
As of December 31, 20x1
ASSETS
Cash and cash equivalents P 20, 000
Trade and other receivables 60, 000
Inventory 90, 000
Total current assets 170, 000
Property, plant and equipment 270, 000
Total non-current assets 270, 000
TOTAL ASSETS P 440, 000
LIABILITIES
Trade and other payables P 110, 000
Total current liabilities 110, 000
EQUITY
Share capital 110, 000
Retained earnings 270, 000
Other components of equity 60, 000
TOTAL LIABILITIES AND EQUITY P 440, 000

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Exhibit 4: Cooperatives
EPG Multi-purpose Cooperative
Statement of Financial Position
As of December 31, 20x1
ASSETS
Cash and cash equivalents P 20, 000
Trade and other receivables 60, 000
Inventory 90, 000
Total current assets 170, 000
Property, plant and equipment 270, 000
Total non-current assets 270, 000
TOTAL ASSETS P 440, 000
LIABILITIES
Trade and other payables P 110, 000
Total current liabilities 110, 000
EQUITY
Share capital 250, 000
Donations and grants 100, 000
Statutory funds 90, 000
TOTAL LIABILITIES AND EQUITY P 440, 000

Observe the following:

 The equity of a partnership is similar to the equity of a sole proprietorship except that the former is
subdivided into the partners' capital balances.
 The equity of a corporation is similar to the equity of a cooperative, in the sense that both have
"Share capital." However, a peculiar characteristic of the equity of a cooperative is that it includes
"statutory funds." Recall from our discussion that a cooperative is required by law to appropriate a
portion of its annual profit to some funds. These funds are referred to as "statutory funds."

The following are the major considerations in the accounting for the equity of a partnership:
a) Formation partnership- accounting for initial investments to the partnership
b) Operations – division of profits or losses
c) Dissolution - admission of a new partner and withdrawal, retirement or death of a partner
d) Liquidation - winding-up of affairs

Partnership Formation
A contract of partnership is consensual. It is created by the agreement of the partners which may be
constituted in any form, such as oral or written. A partnership's legal existence begins from the moment
the contract is executed, unless otherwise stipulated.

Valuation of contributions of partners

Capital contributions of partners to the partnership are initially measured at fair value (is "the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date." (PFRS 13)) When measuring the contributions of - partners, the
following additional guidance from the PFRSs shall be observed:

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Type of contribution Measurement

Face amount of cash and cash equivalent
Cash and cash equivalents
contributed. (PAS 7)
Net realizable value (estimated selling price less
Inventory costs to complete and sell), if lower than cost.
(PAS 2)

Each partner's capital account is credited for the fair value of his net contribution (i.e., fair value of
contribution less any liability assumed by the partnership). No contribution shall be valued at an amount
greater than its fair value.
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. The sum of the balances in the partners'
individual capital accounts represents the total equity of the partnership.

Partners' ledger accounts

The partners' ledger accounts are:
a. Capital accounts
b. Drawings accounts
c. Receivable fro/ Payable to a partner

Capital and Drawings accounts

Each partner has his or her own capital and drawings account, e.g., "Pedro dela Cruz, Capital” and “Pedro
dela Cruz, Drawings." These accounts are equity accounts and are used to record the following
transactions:

Pedro dela Cruz, Capital

DR. Cr.
 Permanent withdrawals of capital xx xx Initial investment
 Share in losses xx xx Additional investments
 Debit balance of drawings account xx xx Share in profits

The partner’s capital account is a real account and has a normal credit balance.

Pedro dela Cruz, Drawings

DR. Cr.
 Temporary withdrawals of capital xx xx Recurring reimbursable costs paid by
during the period the partner
 Temporary funds held to be xx
remitted to the partnership

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The drawings account is a nominal account that is closed to the related capital account at the end of the
period. This account is a contra equity account and has a normal debit balance.

Receivable from/Payable to a partner

The partnership may enter into a loan transaction with a partner. If a partner withdraws a substantial
amount of money with the intention of repaying it, the debit should be to Loan Receivable- Partner
account instead of the Partner’s Drawing account. This account should be classified separately from the
other receivables of the partnership. A loan extended by the partnership to a partner is recorded as a
receivable from the partner, while a loan obtained by the partnership from a partner is recorded as a
payable to the partner.

Adjustment of Accounts Prior to Formation

In case when the prospective partners have existing businesses, their respective books will have to be
adjusted to reflect the fair market values of their assets or to correct misstatements in the accounts. If
the adjustments will not be made, the initial capital balances of the partners may be inequitable.

Illustration. A furniture and fixtures brought by Ms. Lady in the partnership were incorrectly recorded
in the partnership books at P90, 000, representing the book value from the proprietor’s records. If the
partnership immediately sold the furniture and fixtures for its fair market value of P 130, 000, the
resulting P 40, 000 ga in would increase the capital balances of both partners. Simply stated, increases in
asset values accruing before the formation should be for the benefit of the contributing partner.

The adjustments of the asset and liabilities prior to formation will be similar to the adjustments we are
familiar with. However, when the adjustment involves a debit or credit to a nominal account, the Capital
account would instead be debited or credited. This is so because the business has ceased to be a going
concern. A business is not viewed as a going concern if liquidation appears imminent. For example, two
sole proprietorships will cease operations because of their agreement to enter into a partnership. Both
proprietorships have ceased to be going concern.

Illustration 1:
ABA and ALB formed a general professional partnership. ABA will contribute sufficient cash to get an
equal interest in the partnership while ALB will transfer the assets and liabilities of her business. The
account balances of books of ALB prior to partnership formation follows:

Debit Credit
Cash 150, 000
Accounts Receivable 350, 000
Office Supplies 50, 000
Land 400, 000
Accounts Payable 355, 000
ALB, Capital 595, 000

It is agreed that for purposes of establishing ALB’s interest, the following adjustments shall be made in
the books of ALB:

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1. An allowance for uncollectible accounts of 5% of accounts receivable is to be established;
2. Prepaid expenses amounting to P45, 000 were omitted by the accountant. This is to be
recognized.
3. Additional salaries payable in the amount of P20, 000 is to be established.

Using the accounting equation approach of analysis, the adjustments are as follows:
Assets = Liabilities + Owner’s Equity
1. - P 17, 500 = + - P 17, 500
2. +P 45,000 = + +P 45, 000
3. = +P 20, 000 + - P 20, 000
P27, 500 P 20, 000 P 7, 500
P27, 500 P27, 500

Entries and Explanations:

Owner’s
1. An allowance of 5% of P350, 000 needs to be Equity Account
established.
ALB, Capital Dr.
17, 500 Cr.
Allowance for Doubtful Accounts 17, 500
1. Decrease in asset. 1. Increase in asset.
2. Increase
2. An omission to record in liability
the asset- prepaid expenses will denote2.that
Decrease in liability.
the expenses of the business are overstated.
Prepaid Expenses 3. Increase in contra-assert.
45, 000 3. Decrease in contra-assets.
ALB, Capital 45, 000

3. The establishment of additional salaries payable will increase liabilities.

ALB, Capital 20, 000
Salaries Payable 20, 000

The adjustments prior to formation will entail debits or credits to asset or liability accounts. To maintain
the double entry system of accounting, a corresponding debit or credit to owner’s equity account will be
made. The following T-account will serve to summarize the necessary adjustments to the capital account.

Opening Entries of a Partnership upon Formation

A partnership may be formed in any of the following ways:

1. Individuals with no existing business form a partnership.
2. Conversion of a sole proprietorship to a partnership.
a) A sole proprietor and an individual without an existing business form a partnership.
b) Two or more sole proprietors form a partnership.
3. Admission or retirement of a partner (to be covered in another accounting subject).

Individuals with No Existing Business Form A Partnership

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The opening entry to recognize the contributions of each partner into the partnership is simply to debit
the assets contributed, and to credit the liabilities assumed and the capital account of each partner.

Illustration. Aldo and Carolina agreed to form a partnership on November 1, 2020. The partnership
agreement specified that Aldo is to invest cash of P 980, 000 and Carolina is to contribute land with a fair
market value of P 2, 000, 000 with P 600, 000 mortgage to be assumed by the partnership. The entries
to record are as follows:

Cash 980, 000

Land 2, 000, 000
Mortgage Payable 600, 000
Aldo, Capital 980, 000
Carolina, Capital 1, 400, 000
To record the initial investments of Aldo
Carolina

After the formation of partnership, the statement of financial position will be:

DoLina Partnership
Statement of Financial Position
November 1, 2020

ASSETS
Current Asset
Cash P 980, 000
Total Current Asset 980, 000

Non Current Asset

Land 2, 000, 000
Total Non Current Asset 2, 000, 000
TOTAL ASSETS P2, 980, 000

LIABILITIES
Mortgage Payable 600, 000
Total Liabilities P 600, 000

OWNER’S EQUITY
Aldo, Capital P 980, 000
Carolina, Capital 1, 400, 000
Total Owner’s Equity P2, 380, 000

TOTAL LIABILITIES AND OWNER’S EQUITY P2, 980, 000

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Suppose that Aldo and Carolina formed partnership with Maxim- an industrial partner. The partnership
did not receive any asset from Maxim. In this case, only a memorandum entry in the general journal will
be made.

A Sole Proprietor and an Individual without an Existing Business Form a Partnership

A sole proprietor may consider forming a partnership with an individual who has no existing business.
Under this type of formation, the assets and the liabilities of the proprietorship will be transferred to the
newly formed partnership at values agreed upon by all the partners or at their current fair prices.

Illustration. Supposed that Aldo already have an existing business and agreed to form a partnership with
Carolina who has no existing business. The statement of financial position of Aldo on November 1, 2020,
before accepting Carolina as partner is shown as follows:

Aldo’s Shoe Lab

Statement of Financial Position
November 1, 2020

ASSETS
Cash P 980, 000
Notes Receivable 30, 000
Accounts Receivable P 240, 000
Less: Allowance for Uncollectible Accounts 10, 000 230, 000
Merchandise Inventory 80, 000
TOTAL ASSETS P1, 320, 000

LIABILITIES
Accounts Payable P 340, 000
Total Liabilities P 340, 000

OWNER’S EQUITY
Aldo, Capital P 980, 000
Total Owner’s Equity P 980, 000

TOTAL LIABILITIES AND OWNER’S EQUITY P1, 320, 000

Carolina offered to invest cash to get a capital equal to one-half of Aldo’s capital after giving effect to the
adjustments below.
a. The merchandise is to be valued at P70, 000.
b. The accounts receivable is estimated to be 94% collectible.
c. Office supplies on hand that have been charged to expense in the past amounted to P10, 000. These
will be used by the partnership.

New books for the Partnership

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The following procedures may be used in recording the formation of the partnership:
Books of Aldo:
a. Adjust the assets and liabilities of Aldo in accordance with the agreement. Adjustments are to be made
to his capital account.
b. Close the books.

Books of the Partnership:

a. Record the investment of Aldo.
b. Record the investment of Carolina.

Following the procedures, the entries are:

Books of Aldo (1)

Aldo, Capital P 4, 400

Office Supplies P 10, 000
Merchandise Inventory 10, 000
Allowance for Uncollectible Accounts 4, 400
To record adjustments to restate
Aldo’s capital

(2)
Accounts payable P 340, 000
Allowance for Uncollectible Accounts 14, 400
Aldo, Capital 975, 600
Cash 980, 000
Notes Receivable 30, 000
Accounts Receivable 240, 000
Office Supplies 10, 000
Merchandise Inventory 70, 000
To close the books of Aldo

Books of the Partnership (1)

Cash 980, 000

Notes Receivable 30, 000
Accounts Receivable 240, 000
Office Supplies P 10, 000
Merchandise Inventory 70, 000
Accounts payable P 340, 000
Allowance for Uncollectible Accounts 14, 400
Aldo, Capital 975, 600
To record the investment of Aldo

(2)

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Cash P 487, 800
Carolina, Capital P 487, 800
To record the investment of Carolina

Computations:
1. Merchandise Inventory, per ledger P80, 000
Merchandise Inventory, as agreed 70, 000
Decrease in Merchandise Inventory P10, 000

2. Accounts Receivable, net per ledger P230, 000

Accounts Receivable, net as agreed 225, 600
Increase in Allowance P 4,400

3. Net effect of adjustments on Capital:

Decrease in Merchandise Inventory P (10, 000)
Increase in Allowance for Uncollectible ( 4, 400)
Increase in Office Supplies 10, 000
Decrease in Aldo, Capital P (4, 400)

4. Aldo, Capital before adjustment P980, 000

Net adjustments to Capital 4, 400
Aldo, Capital after adjustment P975, 600
Agreed Capital credit for Carolina 50%
Cash investment of Carolina P487, 800

After the formation, the statement of financial position of the newly formed partnership is:

DoLina Partnership
Statement of Financial Position
November 1, 2020

ASSETS
Cash P1, 467, 800
Notes Receivable 30, 000
Accounts Receivable P 240, 000
Less: Allowance for Uncollectible Accounts 14, 400 225, 600
Office Supplies 10, 000
Merchandise Inventory 70, 000
TOTAL ASSETS P1, 803, 400

LIABILITIES
Accounts Payable P 340, 000
Total Liabilities P 340, 000

OWNER’S EQUITY
Aldo, Capital P 975, 600
Carolina, Capital 487, 800
Total Owner’s Equity P1, 463, 400

TOTAL LIABILITIES AND OWNER’S EQUITY CARD-MRI Development Institute, Inc.

P1, 803, 400
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The accounts receivable is still recorded at gross amount of P240, 000 with a related allowance for
uncollectible accounts of P14, 400. The P 14, 400 is only a provision for possible uncollectibles.

Two or More Sole Proprietors Form a Partnership

Supposed that Aldo and Carolina are both proprietors and agreed to form a partnership, bringing their
individual sole proprietorships’ assets and liabilities into the partnership. Their statements of financial
position are shown as follows:

Carol’s Tie the Laces Aldo’s Shoe Lab

Statement of Financial Position Statement of Financial Position
November 1, 2020 November 1, 2020

ASSETS ASSETS
Cash P 487, 800 Cash P 980, 000
Accounts Receivable 70, 000 Notes Receivable 30, 000
Merchandise Inventory 85, 000 Accounts Receivable P 240, 000
TOTAL ASSETS P 642, 800 Less: Allowance for Uncollectible Accounts 10, 000 230, 000
Merchandise Inventory 80, 000
LIABILITIES TOTAL ASSETS P1, 320, 000
Accounts Payable P 250, 000
Total Liabilities P 250, 000 LIABILITIES
Accounts Payable P 340, 000
OWNER’S EQUITY Total Liabilities P 340, 000
Carolina, Capital P 392, 800
Total Owner’s Equity P 392, 800 OWNER’S EQUITY
Aldo, Capital P 980, 000
TOTAL LIABILITIES AND OWNER’S EQUITY P 642, 800 Total Owner’s Equity P 980, 000

TOTAL LIABILITIES AND OWNER’S EQUITY P1, 320, 000

The conditions and adjustments agreed upon by the partners for purposes of determining their interests
in the partnership are

1. Only 90% of Accounts Receivable are collectible in each book.

2. The merchandise inventory of Carolina is to be increased by P13, 500.
3. Actual count and bank reconciliation on Aldo proprietorship’s cash account revealed cash short of P 2,
800.
4. Office supplies on hand that have been charged to expense in the book of Aldo in the past amounted
to P10, 000. These will be used by the partnership.

New books for the Partnership

The following procedures may be used in recording the formation of the partnership:

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Books of Aldo and Carolina:

a. Adjust the accounts of both parties in accordance with the agreement. Adjustments are to be made to
their respective capital accounts.
b. Close the books.

Books of the Partnership:

a. Record the investment of Aldo.
b. Record the investment of Carolina.

Following the procedures, the entries are:

Books of Aldo (1)

Aldo, Capital P 1, 200

Cash 2, 800
Office supplies 10, 000
Allowance for Uncollectible Accounts 14, 000
To record adjustments to restate
Aldo’s capital
(2)
Accounts payable P340, 000
Allowance for Uncollectible Accounts 24, 000
Aldo, Capital 978, 800
Cash 982, 800
Notes Receivable 30, 000
Accounts Receivable 240, 000
Office Supplies 10, 000
Merchandise Inventory 80, 000
To close the books of Aldo

Books of Carolina (1)

Merchandise Inventory P 13, 500

Allowance for Uncollectible Accounts 7, 000
Carolina, Capital 6, 500
To record adjustments to restate
Carolina’s capital
(2)
Accounts payable P 250, 000
Allowance for Uncollectible Accounts 7, 000
Carolina, Capital 399, 300
Cash 487, 800
Accounts Receivable 70, 000
Merchandise Inventory 98, 500
To close the books of Carolina

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Books of the Partnership (1)

Cash 982, 800

Notes Receivable 30, 000
Accounts Receivable 240, 000
Office Supplies 10, 000
Merchandise Inventory 80, 000
Accounts payable P 340, 000
Allowance for Uncollectible Accounts 24, 000
Aldo, Capital 978, 800
To record the investment of Aldo

(2)
Cash P 487, 800
Accounts Receivable 70, 000
Merchandise Inventory 98, 500
Accounts payable P 250, 000
Allowance for Uncollectible Accounts 7, 000
Carolina, Capital 399, 300
To record the investment of Carolina

After the formation, the statement of financial position of the newly formed partnership is:

DoLina Partnership
Statement of Financial Position
November 1, 2020

ASSETS
Cash P1,470, 600
Notes Receivable 30, 000
Accounts Receivable P 310, 000
Less: Allowance for Uncollectible Accounts 31, 000 279, 000
Office Supplies 10, 000
Merchandise Inventory 178, 500
TOTAL ASSETS P1, 968, 100

LIABILITIES
Accounts Payable P 590, 000
Total Liabilities P 590, 000

OWNER’S EQUITY
Aldo, Capital P 978, 800
Carolina, Capital 399, 300
Total Owner’s Equity P1, 378, 100

TOTAL LIABILITIES AND OWNER’S EQUITY P1, 968, 100

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Bonus on initial investments

An accounting problem exists when a partner’s capital account is credited for an amount greater than the
fair value of his contribution.

For instance, a partnership agreement may allow a certain partner who is bringing in expertise or special
skill to the partnership to have a capital credit greater than the fair value of his contributions. In such
case, the additional credit to the partner’s capital (i.e., the ‘bonus’) is accounted for as a deduction from
the capital of the other partners. This accounting method is called the “bonus” method.

Although, the credit to the partner’s capital may vary due to a ‘bonus’, the corresponding debit to the
asset account must still be equal to the fair value of the contribution. The difference between the
amounts credited and debited is treated as adjustment to the capital accounts of the other partners.

Illustration 1: Bonus method

F and G agreed to formed a partnership. F contributed P40, 000 cash while G contributed equipment with
fair value of P100, 000. However, due to the expertise that F will be bringing to the partnership, the
partners agreed that they should initially have an equal interest in the partnership capital.

Solution:

Additional contributions Bonus method

F 40, 000 (140, 000 x 50%) 70, 000
G 100, 000 (140, 000 x 50%) 70, 000
Total 140, 000 140, 000

Cash 40, 000

Equipment 100, 000
F, Capital (40, 000 + 30, 000 bonus) 70, 000
G, Capital (100, 000 - 30, 000 bonus) 70, 000

Notes:
- The bonus given to F, i.e., P30, 000 (P70, 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 still equal to the fair value of
the partners’ contributions. The debits to “Cash” and “Equipment” are equal to their fair values. Only the
amounts credited to the partner’s capital accounts have varied.

Variations to the Bonus Method

A partnership agreement may stipulate a certain ratio to be maintained by the partners representing their
specific interests in the equity of the partnership. This stipulation may give rise to adjustments to the

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initial contributions of the partners. Since technically there is no bonus being given to a certain partners,
any increase or decrease to the capital credit of a partner is not deducted from his co-partners’ capital
accounts. Instead, the capital adjustment is accounted for as either:

a. Cash settlement among the 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

F, G and H formed a partnership. Their contributions are as follows:

F G H
Cash 40, 000 10, 000 100, 000
Equipment 80, 000
Totals 40, 000 90, 000 100, 000

Additional information:
-The equipment has an unpaid mortgage of P20, 000, which the partnership assumes to repay.
-The partners agreed to equalize their interests. Cash settlements among the partners are to be made
outside the partnership.

Requirements:
a. Which partner(s) shall receive cash payment from the other partner(s)?
b. provide the entry to record the contributions of the partners.

Solutions:
Requirement (a):
F G H Partnership
Cash 40, 000 10, 000 100, 000 150, 000
Equipment 80, 000 80, 000
Mortgage payable (20, 000) (20, 000)
Net contribution 40, 000 70, 000 100, 000 210, 000
Equal interest (210 / 70, 000 70, 000 70, 000 210, 000
3)
Cash receipt (30, 000) - 30, 000
(payment)

Answer: H shall receive P30, 000 from F.

Requirement (b):

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Cash 150, 000

Equipment 80, 000
Mortgage Payable 20, 000
F, Capital 70, 000
G, Capital 70, 000
H, Capital 70, 000
Notes:
- The cash settlement among the partners is not recorded in the partnership’s books because this is not a
transaction of the partnership but rather a transaction among the partners themselves.
- The partnership’s capital of P210, 000 remains the same after the cash settlement. Again, what varied
are only the credits to the partner’s capital accounts.

Illustration 2: Additional investment (Withdrawal of investment)

F and G agreed to form a partnership. The partnership agreement stipulates the following:
- Initial capital of P 140, 000.
- A 60:40 interest in the equity of the partnership.

F contributed P100, 000 cash, while G contributed P40, 000 cash.

Requirement: Which partners should provide additional investment (or withdraw part of his investment)
in order to bring the partners’ capital credits equal to their respective interests in the equity of the
partnership?

Solution:
Agreed initial capital P140, 000
F’s require capital balance (140, 000x 60%) 84, 000
G’s require capital balance (140, 000x 40%) 56, 000

F G Total
Actual contributions 100, 000 40, 000 140, 000
Required capital balance 84, 000 56, 000 140, 000
Additional (Withdrawal) (16, 000) 16, 000 -

Answer: F shall withdraw P16, 000 from his initial contribution, while G shall make an additional
investment of P16, 000

Ready for the drill? Let’s have an application activity!

Now, give yourself two big thumbs up for your effort!!!

Remarkable!!! I know you are capable of so much more!!!

Now let’s evaluate what you have learned throughout the topic!

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APPLICATION 1

1. On January 1, 20x1, Mr. A and Ms. B formed a partnership. Mr. A contributed cash of ₱500,000 while
Ms. B contributed a building with carrying amount of ₱400,000 and fair value of ₱800,000. The
building has an unpaid mortgage of ₱200,000 which is not assumed by the partnership.

Requirement: Provide the journal entry to record the contributions of the partners.

2. A and B formed a partnership. The following are their contributions:

A B
Cash 500,000 -
Accounts receivable 100,000 -
Building 700,000
Total 600,000 700,000
A, capital 600,000
B, capital 700,000
Total 600,000 700,000

Additional information:
 The accounts receivable includes a ₱20,000 account that is deemed uncollectible.
 The building is over-depreciated by ₱50,000.
 The building has an unpaid mortgage ₱100,000, which is assumed by the partnership.

Requirement: Provide the journal entry to record the contributions of the partners in the partnership
books.

3. A and B agreed to form a partnership. A contributed ₱40,000 cash while B contributed equipment
with fair value of ₱100,000. However due to the expertise that A will be bringing to the partnership, the
partners agreed that they should initially have an equal interest in the partnership capital.

Requirement: Provide the journal entry to record the initial investments of the partners.

ASSESSMENT

Assessment 1: In a clean yellow paper, answer the following. Show your solutions in good
form.

Problem No. 1

AA and BB agreed to form a partnership on July 1, 2020. AA contributed cash of P60, 000 while BB
contributed a machine costing P1, 700, 000 but with a current fair value of P1, 900, 000. The partners

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agreed that since AA will be bringing in his expertise and experience to the business, AA and BB shall
have a 70:30 interest, respectively. The initial credits to the partner’s respective capital accounts shall
reflect this agreement.

-What is the balance of BB’s capital account immediately after the formation of the partnership?

- Suppose that CC joined the partnership, how much cash should CC invest to equalize the 40:30:30
ratio?

Problem No. 2

K, L and M formed a partnership. Their contributions are as follows:

K L M
Cash 750, 000 1, 000, 000 500, 000
Accounts Receivable 1,500,000
Inventories 1,250,000
Building 1,875,000
Total 2,250,000 2,875,000 1,750,000

Additional information:
- Only P875, 000 of the accounts receivable are deemed collectible.
- The inventories have a net realizable value of P1, 125, 000 and related accounts payable of P375, 000
which the partnership assumes to repay.
- The building is under-depreciation by P125, 000.

Questions:
1. The partners agreed to equalize their interest. Cash settlements among the partners are to be made
outside the partnership. Will K and M pays L P250, 000 and P625, 000, respectively? Why or why not?

2. How much are the capital balances of partners’ K,L and M, respectively, right after the formation of the
partnership?

Assessment 2: Choose a partnership business and scrutinize their Articles of Partnership. In a clean
white long bond paper, determine the essential provisions that can be found in the Articles of
Partnership.

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Timeline!

Let’s be mindful to your deadline.

Activity Name of Activity Date of submission Remarks

Number

Activity 1 Activate Prior Knowledge Next module delivery

Activity 2 Application Next module delivery

Activity 3 Assessment 1 Next module delivery

Activity 3 Assessment 2 Next module delivery

References

1. Accounting Principles with International Financial Reporting Standards GE – Wiley Custom Edition
1, Jerry J. Weygant, Paul D. Kimmel, Donald E Kieso, Wiley
2. Basic Accounting Made Easy – Win Ballada 2020 Edition, Dynasty BookSource Asia (DBA)

3. Financial Accounting and Reporting - Nick L. Aduana

4. Fundamentals of Accounting- Dr. William Baltazar
5. Fundamentals of Accountancy, Business and Management 1- Rabu, Tugas, Salendrez

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