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K.B.

ADVANCED FINANCIAL ACCOUNTING and REPORTING

PARTNERSHIP
By the contract of Partnership, two or more persons
bind themselves to contribute money property and
industry to a common fund with the intention of
dividing the profits among themselves
Advantages:

Goodwill Method
1.

Easy to Form
Higher Capital than Sole

2.

decrease in Capital

Proprietorship

3.

Disadvantages: Liability of Partner (Unlimited)


High Tax Rate (Same as
Corporation 30%)

4.

4.

Total Contributed Capital [TCC] < [TAC] Total


Agreed Capital [Partner CC/AC%]
Partner used as the Basis of Goodwill is never
the recipient the Goodwill

TCC

Life of a Partnership
1.
2.
3.

Unidentified Assets (Goodwill) is Recorded for


the increase in
Individual [Partner CC Partner AC] No

TAC
Goodwill
CONTRIBUTIO
Capital
NS
A:200k
Non-Cash
Assets 300k,
Capital B
Liabilities 100k
400k
40k
B: Cash=360K
Capital
C: Non-Cash
Assets
400k410k, 10k
liabilities 20k

Formation
Operation
Dissolution
a. Admission of new Partner/s
b. Retirement of existing partner/s
Liquidation

FORMATION

1M Capital50k
AGREED
Ratio

ABC

Cash
@Face
Value

Non-Cash
Assets

(Liabilitie
s)

(1) @Agreed
Value
(2) @Fair Value

(1) @Agreed

TCC

360k
C

B Capital

C Capital

TCC*AC%

TCC*AC%

TCC*AC%

40%

390k

40%

950k <

Cash---------------------------------------------360k
Non-Cash Assets (300k+410k)
------------710k
Goodwill (40k+10k)
---------------------------50k
Liabilities (100k+20k)
---------------- 120k

Basis of Goodwill ( Partner A )


Test 1: TCC < TAC

Partner A

Partner B (950k >

TAC

900k) x
Partner C

Value

A Capital

20%

(950k < 1M)

Value

(2)
@Fair/Present

200k

Journal Entry:

After formation
A=20% B=40%

(950k < 975)


*both Partner Bs and
Cs TCC < TAC

Test 2: Individual Partner CC AC


Contributed Assets and Assumed Liabilities are
revalued at agreed amount (Partnership Contract), or if
not available, at fair value or as given.

[BOG=C] Partner A 200k > 195k


(390k/40%*20%)

[BOG=A] Partner C 200k = 200k


(200k/20%*20%) x

Unidentifiable Asset (Goodwill)


Special Asset Contributions such as Business
Connections to Suppliers, Government, Bankers,
Lenders, etc. and/or Specific Skills or Reputation
that are essential for the Business.

Bonus Method
1.
2.

No recording of Unidentified Assets (Goodwill)


Transfer of Capital (Bonus) [
increase/decrease in capital

If Recorded
Goodwill
Method

If Not Recorded
Bonus Method
Used if the Problem is

Silent

CONTRIBUTIO
3. Total Contributed Capital [TCC] = [TAC] Total
NS
Agreed Capital
A: Non-Cash
4. All Bonuses(to/from Partners) always offsets to
Assets 300k,
ZERO
Liabilities 100k
B: Cash=360K,
Goodwill 40k
C: Non-Cash
TCC
Assets 420k
TAC
Bonus
(including
Goodwill of
10k), liabilities
20k
AGREED Capital

K.B.
ADVANCED FINANCIAL ACCOUNTING and REPORTING

Capital A
190k

200k

2.

20%

150k
Capital B
(50k)
Capital C

380k
380k

360k

40%

390k

Bonus Provided to Partner/s ONLY if

the company has profit


o Basis of Bonus
1. Agreement (as stipulated)
NI before SIB ------ b=b%(NI)
NI before B after SI b=b%(NI-SI)
NI before IB after S b=b%(NI-S)
NI before SB after I b=b%(NI-I)

NI before SI after B b=b%

40%

(100k)
950k

950k

Ending Capital before Share in Net


Income

0
Journal Entry:
Cash---------------------------------------------360k
Non-Cash Assets (300k+410k)
------------710k
Liabilities (100k+20k)
---------------- 120k
A Capital---------------------------------

(NI/1+b %)

NI before S after IB

b=b%(NI-

I/1+b%)

NI before I after SB
S/1+b%)

NI after SIB

--------

b=b%(NIb=b%(NI-

SI/1+b%)

Peso Amount or other Basis

2. Silent [NI before SIB]

--- b=b%(NI)

OPERATION

Profit or Loss Ratio (priority)


1. Profit and Loss Agreement (P&L Ratio)
2. Profit Agreement Only
a.

b.

Industrial Partner/s Just and


Reasonable Share in the
Partnership Profit as Agreed (Liable
to losses unless stipulated
otherwise)
Capitalist Partner/s Losses

ABC Partnership began operations on

(remainder)

1. Profit = Profit Ratio as Agreed


2. Loss = Profit Ratio

3. Loss Agreement Only


b.

b.

Industrial Partner Just and


Reasonable Share in the
Partnership Profit (Can be
Exempted in Losses if Stipulated)
Capitalist Partner (remainder)
3. Profit = Original Capital Ratio, if
4.

4.

Comprehensive Problem

not given then equally


Loss = Loss Ratio as Agreed

May 1, 20xA
During the year, A invested the
Machinery he purchased for 100k
and has an AD of 30k. FV of
Machinery is 60k. C invested Cash for
50k. A and B withdrew 50k and 20k
cash respectively.
Their Profit and Loss Ratio is 1:2:1
respectively. Their agreement includes
the following :

no Profit and Loss Agreement


c.

b.

Industrial Partner Just and


Reasonable Share in the
Partnership Profit
Capitalist Partner (remainder)

[Profit and Loss]

Net Income before


Salaries after Interest and
Bonus

5. Original Capital Ratio


6. Equally if Original Capital is not
given.

Impairment Losses can be exempted


from Profit and Loss Distribution If
Agreed by Partners.
Industrial Partners can be exempted
from losses if agreed by the partners.

Basis = As Stipulated/given. If Silent =


1. Average Capital

Other information includes, Sales


of 2.2M and Cost of Sales 1.3M.

Find the Adjusted Ending Capital of


Each Partners assuming the following
cases.

CASE A Operating Expenses = 600k


CASE B Operating Expenses =

Salaries and Interest Provided


whether the company has profit or loss
unless there is an existing priority
agreement and the remaining profit is
insufficient to cover Salaries or Interests
or both (partial provision-by PL Ratio or
none at all)

Annual Salaries, 112.5k to A


and 75k to C
Interest to A and B, 30% of
Ending Capital Balance
Bonus to all Partners, 5% of

675k
CASE C Operating Expenses =
980k

A
C

25%
850k

Total

Capital
150k

25%

5/1

300k

400k

50%

K.B.
ADVANCED FINANCIAL ACCOUNTING and REPORTING
50k

Addl Investment
110k

60k

Withdrawals
-

(50k)

(20k)

310k

380k

Interest: (Case A & C)


Partner A = 310k*30%*8/12 = 62k
Partner B = 380k*30%*8/12 = 76k

(70k)
Unadj. Capital 12/31

200k

890k

CASE A

Salaries
50k

Interest
-Bonus

--

62k

76k

138k
1,333 2,667
138,333

Total
51,333

75k

125k

1,333
78,667

5,333

268,333

Remaining

7,917

15,833

7,917

31,667
146,250

59,250

Share in Net Income


300k
Unadj. Capital 12/31

310k

200k

890k__
Adj. Capital 12/31

259,250

456,250

94, 500

380k

Salaries

75k

--

125k

Interest

--

--

--

--

--

--

(insufficient)

--

Bonus

(insufficient)

75k
(Interest ratio)

44,928

Share in Net Income


225k

--

119,928

Inc&Exp Summary------300k
A Capital------------------

Inc&Exp Summary------225k
A Capital------------------

380k

429,928

Adj. Capital 12/31

CASE C
75k

--

62k

76k

125k
138k
--

Total

-137k

B Capital------------------55,072

C Capital--------------------

-76k

Closing Entries: Case C

Fair

435,072

1.115M

Salaries

119,928

Sales------------------------2.2M
Inc&Exp Summary--------80k
Cost of
Sales------------------1.3M

55,072

890k__

Interest
-Bonus

Expenses----------------------675k
Inc&Exp
Summary-----------225k

59,250

55,072

310k

Unadj. Capital 12/31

50k

Expenses----------------------600k
Inc&Exp
Summary-----------300k

C Capital--------------------

--

125k

Remaining

250k

Sales------------------------2.2M
Cost of
Sales------------------1.3M

B Capital-------------------

100k

200k

Sales------------------------2.2M
Cost of
Sales------------------1.3M

94, 500

Total

50k

Closing Entries: Case B

146,250

--___
50k

Closing Entries: Case A

474,500

1.19M

CASE B
50k

Remaining (Balancing Figure):


Case A (300k-268,333) * PL% (Partner A, B, &C)
Case B (225k-125k) * (A 62/138)/(B 76/138)
Case C (-80k-263k) * PL% (Partner A, B, &C)
Bonus: b = b%(NI-i)/(1+b%)
b = 5%(250k 138k)/1.05
b = 5,600/1.05
b = 5,333
*PL%

-50k

Expenses----------------------- Value----------------------------------------xx
980k
Book Value of Net
Assets-------------------------- (xx)
B Capital--------------------95.5k
Fair Value
C Capital--------------------35.75k
Inc&Exp
Summary-----------80k
A
Capital---------------------51.25k

263k
Unadj.

(85,750)
(35,750)

Loss

Unadj. Capital 12/31

200k

(171,500)

51,250

310k

(95, 500)

380k

890k__
Adj. Capital 12/31

164,250

(85,750)

(bal.fig.)

(343k)
Share in Net Loss
(80k)

361,250

284,500

810k

DISSOLUTION
Change in Partnership Ownership
Interest. New Partner Joins, or existing Partner
Leaves the Partnership, or Dies. Capital
Accounts of Existing Partners should be
Adjusted (if in-between B/S date) before
Dissolution as if the Partnership is closing and
starting again as a New Partnership.

SOLUTIONS
Gross Income: 2.2M 1.3M = 900k
Net Income/Loss:
Case A: 900k 600k = 300k
Case B: 900k 675k = 225k
Case C: 900k 980k = (80k)
Salaries: (Case A, B, & C)
Partner A = 112.5k*8/12 = 75k
Partner C = 75k*8/12 = 50k

a.

Admission of new Partner/s


1. Admission by Purchase of
Interest

Personal Transaction
Payment of New Partner to the
Existing Partner/s
Cash received by partner/s and
gain/loss from the purchase of

K.B.
ADVANCED FINANCIAL ACCOUNTING and REPORTING
capital interest are not
recorded in the Partnership
Books, only the transfer of
capital from existing partner/s
to the new partner.

A Capital (old) --------------------xx


B Capital (old) --------------------xx
C Capital (old) --------------------xx
D Capital (new)
-----------------xx
Cash received by existing partner/s
who sold their capital interest/s to a
new partner is distributed accordingly:
1. the amount of the Capital
2.

Partner depending on the


agreement or the absence of such
(Problem is Silent)
Existing Partners Capital Accounts
are adjusted/closed before the
acceptance of the New Partner.
Capital Adjustments include
Capital Transactions (If
Any)
Loans, Withdrawals and
Investments

Share in Net Income/Loss

Revaluation of Net Assets


(If Agreed)

In-between BS Date

Transferred
Excess(BTO)/Deficiency(BTN)

Revaluation Method is

of the Purchase Price over the


total transferred capital to the
new partner via P&L %

Used

3. TCC=TCC

Purchase Price pd. By D


ABC Co.
--------------------------->
---------------------xx
ABCD Co.
A Capital (Transferred to D) ---------xx
(D is Accepted as a Partner)
B Capital (Transferred to D) ---------xx
C Capital (Transferred to D) ---------xx
(xx)
Beg. L/W/I SNI/L
R
Excess/Deficiency--------------------------xx/
TCC
TAC
B
/
GW
(xx)
Capital A
xx
xx
xx
xx
xx
xx
xx/(xx)
Cash Received by Old Partners
CapitalorB
xx
xx
xx
xx
A = Capital Transferred to D + Excess(PL%)
xx
xx
xx/(xx)
Capital C
xx
xx
xx
xx
Revaluation Method
xx
xx
xx/(xx) Total/Net
xx xx
The Existing Partners can revalue
xx xx = xx
xx
xx/(xx)
the Net Assets of the Partnership
Capital
D
xx
to their Fair Values (if agreed)
xx
xx/(xx)
before accepting a Partner, or
Capital After Admission
xx
before a Partner leaves the
xx
0 / xx
Partnership
The Revaluation of Net Assets to
their Fair Values are recorded as
adjustments to each Partners
3. Retirement, Withdrawal or
Capital Account allocated by their
PL %
Death of a Partner
If the Under/(Over)valuation
Settlement of Leaving Partners
differs from the Net Assets Fair
Capital Interest
Value Adjustment, or is completely
Partnership Capital Accounts are
unrelated to it, the Excess/Full
Amount can be recorded as:
adjusted/closed before Settlement
Undervaluation
Overvaluation

Goodwill (If Agreed)


Adjustment
or

Capital

(Impairment Loss)

Capital Adjustment
(Bonus to Capital)

of the Leaving Partners Capital


Interest.

Silent Problems:
Agreement: Non-Revaluation

(Similar to Admission of new partner)

ABCD Co.

--------------------------->

BCD Co.
(A is Leaving the Partnership)

Method

Undervaluation: Bonus
Method

2. Admission by Direct
Investment

Contribution/Investment of the
New Partner to the Partnership
Similar to Partnership Formation,
Admission by Direct Investment
also uses Goodwill or Bonus
Method in Accepting the new

D__
Capital Beg.
xx
xx
Loans/Investment/Drawings
xx
Share in NI/(NL)
xx
xx
Under/(Over)valuation
xx_
Adj. Capital Balance
xx
xx

xx
xx
xx
xx
xx

xx
xx

xx

xx
xx
xx

xx

K.B.
ADVANCED FINANCIAL ACCOUNTING and REPORTING

Settlement to A (Leaving Partner)


- _
Balance
xx
xx
Bonus to Old / (New)
xx
xx_
Remaining Capital Balance
xx

(xx)____ -

xx

xx

(xx)

xx

xx

xx

RETIREMENT/WITHDRAWAL/DE
ATH
ADMISSION
Closing
Entries
Closing
Entries

Share
in in
Net
Income/Loss
Share
Net
Income/Loss
In In
Between
B/S
Date
Between
B/S
Date
Sales---------------------------------------xx
Sales---------------------------------------xx
Cost
of of
Sales--------------------------------------------xx
Cost
Sales--------------------------------------------xx
Expenses------------------------------------------------xx
Expenses------------------------------------------------xx
Inc&Exp
Summary------------------------------------xx
Inc&Exp
Summary------------------------------------xx
Inc&Exp
Summary-------------------xx
Inc&Exp
Summary-------------------xx
A Capital-----------------------------------------------xx xx
A Capital-----------------------------------------------B Capital-----------------------------------------------xx xx
B Capital-----------------------------------------------C Capital-----------------------------------------------xx xx
C Capital-----------------------------------------------D Capital------------------------------------------------xx

Additional Investment
Additional Investment

Net Asset (Contribution)-----------xx


Net Asset
(Contribution)-----------xx
A/B/C
Capital------------------------------------------xx
A/B/C/D Capital----------------------------------------xx

Withdrawals
Withdrawals

A/B/C Capital--------------------------xx
A/B/C/DA/B/C
Capital-----------------------xx
Drawings----------------------------------------xx
A/B/C/D Drawings-------------------------------------xx

Loan Offseting (Loan to/from Partnership)


Loan Offseting (Loan to/from Partnership)

Loans Payable--------------------------xx
Loans Payable--------------------------xx
A/B/C Capital-------------------------------------------xx
A/B/C/D
Capital----------------------------------------xx
A/B/C
Capital---------------------------xx
A/B/C/DLoans
Capital------------------------xx
Receivable--------------------------------------xx
Loans Receivable--------------------------------------xx

REVALUATION
REVALUATION

Revaluation (undervalued Net Assets)


Revaluation
Net Assets)
Net Asset/s(undervalued
(Adjustments) ----------xx
Net
Asset/s
(Adjustments) ----------xx
*Goodwill--------------------------xx
*Goodwill--------------------------xx
A Capital-----------------------A Capital-----------------------xx
xx
B Capital-----------------------B Capital-----------------------xx
xx
C Capital-----------------------C Capital-----------------------xx
xx
D Capital-----------------------Revaluation (overvalued
Net Assets/Impairment
xxLoss)
A Capital--------------------------xx
Revaluation
(overvalued Net Assets/Impairment
B Capital--------------------------xx
Loss)
C Capital--------------------------xx
A Capital--------------------------xx
Net Asset/s (Adjustments)
B ---------xx
Capital--------------------------xx
C Capital--------------------------xx
D Capital--------------------------xx
ADMISSION
by PURCHASE
of
Net Asset/s
(Adjustments)
INTEREST
---------xx

LIQUIDATION

Winding-Up/Closing of the Partnership. Liabilities

Transfer of Capital
(@Purchase Price)
SETTLEMENT
of
PARTNERS
are Settled
andRETIRING
Assets of the
Company are
A Capital
(old) --------------------xx
distributed toCAPITAL
the Partners.

B Capital (old) --------------------xx


C Capital (old) --------------------xx
a. Lump
Sum/Simple
D Capital (new) -----------------xx
Liquidation Single Realization
Distribution
of Partnership
Assets after
ADMISSION
by DIRECT
INVESTMENT
Settlements of Liabilities
Transfer of
Capital
(@FV of Contributed Net

Procedures
Asset/s)

Realization ofxx
Non-Cash Assets
Net Asset1.
(Contribution)--------Gain/Loss
is
Allocated
to each
D Capital (new)------------------xx
Partners Capital via their PL%. Unsold
Non-Cash
Assets
(incl.
Goodwill) are
Record Goodwill
or Bonus
to/from
Partners
Loss
also via their PL%
New Partnerdistributed
CC > AC as
(ABC
Capital
Undervalued)
Goodwill/D Capital (bonus from) ------------xx
A Capital (old) (bonus to) ----------------xx
B Capital (old) (bonus to) ----------------xx
C Capital (old) (bonus to) ----------------xx

New Partner CC < AC (ABC Capital

K.B.
ADVANCED FINANCIAL ACCOUNTING and REPORTING
2. Loan Offsetting Loan/s of the
Partnership from a Partner and vice
versa are offsetted on that Partners
Capital Account

3. Asset Distribution
a. Settlement of Partnership
Liabilities
Offsetted Loan/s to/from
Partner/s are not included in
Loan settlements
b. Settlement of Partnership
Capitals

After settling the


Partnership Liabilities,
Remaining Cash are then
distributed as Capital
Settlements to All
Partners
Partner/s with Deficient
Capital Accounts should
make additional
investments (to the
extent of their
personal Net Assets) to
offset their deficiency.
If after Deficient Partner/s
Invests all their remaining
Personal Net assets and
their Capital Account/s
still shows Deficit Amount,
they are considered
Insolvent
Deficit on an Insolvent
Partners Capital account
should be absorbed by the
Solvent Partners via their
(Solvent Partners) PL% even
it makes a deficit in their
own capital account/s; at
which point, they should
also invest to offset that
deficiency, also to the

Priority of Partnerships Liability Settlements


General Partnership

Limited Partnership

1. Judicial Liquidation fees (court order) incl. Taxes


2. Liabilities to 3rd party incl. Salaries to Employees
3. Liabilities to Partner/s 3. Liabilities to 3rd
4.
5.

other than Capital


and Profit
Liabilities to General
Partner for His
Capital
Liabilities to General
Partner for his Share
in Profit

party
4. Liabilities to Limited
Partners other than
Capital and Profit
5. Liabilities to Limited
Partner for his Profit
6. Liabilities to Limited
Partner for his
Capital
7. Liabilities to General
Partner other than
Capital and Profit
8. Liabilities to General
Partner for his Profit
9. Liabilities to General
Partner for his
Capital

b. Installment Liquidation
Piecemeal / Multiple Realizations and
Distributions of Partnership assets.

Safe Payment Method


Determines whether currently
available cash can be safely
distributed to partners (or if it can,
to whom only, and how much)
using the Safe Payment Schedule.
1. Partner to Partnership loans are
offsetted to the Ending Capital
Account Balances,
2. Remaining Non-Cash Assets at
Full Amount Are Assumed as
Loss and Distributed to the
Partners
3. Contingent and Other losses are
also assumed and Distributed
to the partners
4. All Partners are assumed to be
Insolvent, so all capital deficits
are absorbed by partners with
positive capital balances.

Under/Overvaluation of
Distributed Non-Cash Asset/s
(Book Value vs Fair Value)
Distributed to All Partners as
Gain/Loss adjustment to Capital via
PL% before the distribution of the

Lump Sum Liquidation


ASSETS - LIAB. =
CAPITAL______
Cash
NCA
L
B
C
D__ Safe Payment Schedule
Ending Balances
xx
xx
xx
Possible
Losses
B xx
xx
xx
C
D__
Loan
Offsets
-xx
-Capital
End
xx xx
(xx)
-xx
xx
Realization
xx
(xx)
-Loan
Offsetsof Assets
xx(xx)
(xx)
(xx)
-Balance loss on:
Possible
xx
-xx
xx
(xx)Realization
xx of Assets
xx
xx
Paymentxx
xx
of Liabilities (xx)
(xx)
--- Contingencies
-xx
xx
C Addl Investment
xx
xx
xx
--xx Others
-_xx
xx
Balance xx__
xx
xx
--xx
-Balance
xx
-xx
Settlement
(xx)
xx of Capital
(xx)
--(xx)
-Deficiency
(xx) Absorption (B & D PL%)
(xx)
Balance(xx)_
xx
-----(Max)
Safe
-- Payments to Partners
xx
-xx
If Cs Personal Net Assets are not Sufficient to Cover
up hisCurrently
Cash
Capital Deficit,
at hand
B --------------xx
& D will Absorb the remaining
Deficit and
Priority
Liabilities---------------------(xx)
distribute the Loss via B & D s PL%
(recompute
Cash
available
PL%
forwithout
distribution-----xx
C)

extent of their personal


net assets, and if they
became insolvent because
of it, then the deficit is
absorbed, again, by the
remaining solvent
partners and so on.
If silent, Partner = Solvent

K.B.
ADVANCED FINANCIAL ACCOUNTING and REPORTING

Asset, not just the partner who


receives the Under/Overvalued
Asset

Cash Distribution Plan/Cash


Priority Program Priority for
Cash Distribution is determined
based on each partners
vulnerability to losses. The more
vulnerable a partners capital is to
loss the higher the priority rank.
Procedure
1. Partner to Partnership loans
are offsetted to the Capital
Account Balances,
2. Loss Absorption Balance
(LAB) is computed by
Dividing the Capital Balance
with Individual Partners PL%
3. Rank each partners LAB from
Highest to Lowest.
4. Priority Payments Are
Computed by Subtracting the
Highest Rank LAB with the
Next One and multiplying the
Difference by the PL% of the
Partner/s with the Highest
LAB.
5. The Remaining Distributable
Cash after the Priority
Payments are Distributed via
PL%

K.B.
ADVANCED FINANCIAL ACCOUNTING and REPORTING