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PARTNERSHIP CONCEPTS

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.

Characteristics:

1. Ease of formation - a partnership may be formed by mere agreement


2. Separate legal personality - partnership has a separate personality from the partners
3. Mutual agency - each partner has the authority to the partnership
4. Co-ownership of property
5. Co-ownership of profits
6. Limited life - easy to dissolve due to admission of a new partner, retirement, death of a partner, etc.
7. Unlimited liability

Kinds of Partners:

As to contribution

1. Capitalist partner - contributes money or property


2. Industrial partner - contributes service
3. Capitalist-industrial partner - contributes money or property and service

As to liability

1. General partner - liable up to the extent of his personal properties


2. Limited partner - liable only up to the extent of his contribution to the partnership

Notes:

1. Limited Partner cannot be an Industrial Partner.


2. Industrial Partner do not share in partnership loss unless there is loss agreement that includes
the industrial partner.

PARTNERSHIP FORMATION - accounting for initial investments

Key Notes:

*Hierarchy of valuation of assets:

1. Agreed Value - value based on agreements of partners


2. Fair Value - value based on an orderly transaction between a seller and a buyer.
3. Carrying amount - value as reflected in a company's book.

*Liabilities are only recognized when only assumed by the partnership.


*Adjustment of accounts are charged to capital account.
*Bonus Method - transfer of capital to or from the partners. Used when investment or
contribution of a partner is greater than the capital credited or recorded for him in partnership books or
vice versa.

SAMPLE PROBLEMS:

1. On April 30, 2010, Alex, Benjie, and Cesar formed a partnership by combining their separate business
proprietorships. Alex contributed cash of P500,000. Benjie contributed property with a P360,000 carrying amount, a
P400,000 original cost, and P800,000 fair market value. The partnership accepted responsibility for the P350,000
mortgage attached to the property. Cesar contributed equipment with a P300,000 carrying amount, a P750,000
original cost, and P550,000 fair value. The partnership agreement specifies that profits and losses are to be shared
equally but is silent regarding capital contributions. What are the capital balances of the partners at April 30, 2010?

Alex Benjie Cesar


A. 500,000 800,000 550,000
B. 500,000 450,000 550,000
C. 500,000 360,000 300,000
D. 500,000 400,000 750,000

ANS: B
> Alex Benjie Cesar
Contributions @ fair value P500,000 P800,000 P550,000
Less liabilities assumed - 350,000 -
Capital balance, 4/30/06 P500,000 P450,000 P550,000

Again, any noncash asset contributed into the partnership should be valued at the agreed value but if
none, sholud be at fair value of the noncash asset contributed, any liabilities assumed by the partnership,
reduces the partners' capital balance. As a general guideline, what is to be recorded as a credit to partners'
capital is the fair value of the net assets contributed.

2. On January 1, 2010, Atta and Boy agreed to form a partnership contributing their respective assets and equities
subject to adjustments. On that date, the following were provided;

Atta Boy
Cash P28,000 P62,000
Accounts receivable 200,000 600,000
Inventories 120,000 200,000
Land 600,000
Building 500,000
Furniture & fixtures 50,000 35,000
Intangible assets 2,000 3,000
Accounts payable 180,000 250,000
Other liabilities 200,000 350,000
Capital 620,000 800,000
The following adjustments were agreed upon:
A. Accounts receivable of P20,000 and P40,000 are uncollectible in A's and B's respective books.
B. Inventories of P6,000 and P7,000 are worthless in A's and B's respective books.
C. Intangible assets are to be written off in both books.
What will be the capital balances of the partners after adjustments?
Atta Boy
A. 592,000 750,000
B. 600,000 700,000
C. 592,000 756,300
D. 600,000 750,000

ANS: A
Capital balances before adjustments 620,000 800,000
a. Uncollectible accounts receivable (20,000) (40,000)
b. Worthless inventories ( 6,000) ( 7,000)
c. Intangible assets written off ( 2,000) ( 3,000)
Adjusted capital balances 592,000 750,000

When assets other than cash are invested into the partnership, it is necessary for the partners to agree upon the value
of such assets. The assets are recorded in accordance with the agreement, and the partners' capital accounts are
credited or recorded for the amounts of the respective investments. The effects of the adjustments to the capital
accounts should be in accordance with the accounting equation (Asset - Liabilities + Capital).

3. Aldo, Bert, and Chris formed a partnership on April 30, with the following assets, measured at their fair
values, contributed by each partner:

Aldo Bert Chris


Cash P10,000 P12,000 P30,000
Delivery trucks 150,000 28,000
Computers 8,500 5,100
Office furniture 3,500 2,500
Totals P168,500 P48,600 P32,500

Although Chris has contributed the most cash to the partnership, he did not have the full amount of
P30,000 available and was forced to borrow P20,000. The delivery truck contributed by Aldo has a
mortgage of P90,000 and the partnership is to assume responsibility for the loan. The partners agreed to
equalize their interest. Cash settlement among the partners are to be made outside the partnership. Using
the Bonus Method:
a. Bert and Chris should pay Aldo, P4,600 and P20,700 respectively.
b. Aldo should pay Bert and Chris, P25,300.
c. Bert should pay Aldo, P2.5,300 and Chris, P20,700.
d. Chris should pay Aldo, P25,300 and Bert, P4,600.

ANS: A
Total contributed capital:
Aldo (P168,500-P90,000) P 78,500
Bert 48,600
Chris 32,500
Total P159,600
Divided by 3
Agreed capital of each partner P 53,200

Capital adjustment:
Aldo (P78,500-P53,200) (P25,300)
Bert (P53,200-P48,600) P4,600
Chris (P53,200 - P32,500) P 20,700
Therefore, Bert and Chris should pay Aldo P4,600 and P20,700 respectively outside the partnership.

PARTNERSHIP OPERATION - division of profit or loss

Key Notes:

Capital ratio - ratio of how the capital of each partner is recorded

Profit or loss ratio (P/L) - how the profit or loss is to be divided among the partners

Hierarchy of P/L ratio:

1. Agreement - ratio agreed upon by the partners


2. No agreement - equal to capital contribution which may be based on initial
investment, beginning capital, ending capital or weighted average capital.

*If loss ratio is not given, loss ratio is the same as profit ratio
*If profit ratio is not given, profit ratio is based on capital structure
*The share of an industrial partner is just and equitable. If the ratio is not given, the smallest profit ratio.

Allocation of Profits:

1. Interest on capital - (given rate of interest multiplied by the capital balance)

2. Salaries - (monthly salary multiplied by the number of months of operation)

3. Bonus - usually given to the managing partner

a. bonus on net income before salary, interest and bonus

Bonus rate x Net Income = Bonus

b. bonus on net income before salary, interest but after bonus

Bonus rate x (Net Income/100% + Bonus rate) = Bonus

c. bonus on net income after salary, interest and bonus

Bonus rate x ((Net Income-Salary-Interest)/100% + Bonus rate) = Bonus

d. bonus on net income after salary, interest but before bonus

Bonus rate x (Net Income-Salary-Interest) = Bonus

4. Remainder - excess of net income after allocation of interest, salaries and bonus. Distributed based on
profit or loss ratio.
SAMPLE PROBLEMS:

1. Downs, Frey, and Vick formed the DFV general partnership to act as manufacturer's
representatives. The partners agreed Downs would receive 40% of any partnership profits and
Frey and Vick would each receive 30% of such profits. It was also agreed that the partnership
would not terminate for 5 years. After the fourth year, the partners agreed to terminate the
partnership. At that time, the partners capital accounts were as follows: Downs, P20,000; Frey,
P15,000; and Vick P10,000. There also were undistributed losses of P30,000. Vick's share of the
undistributed losses will be

A. 0
B. 1,000
C. 9,000
D. 10,000

ANS: C
30,000 loss X 30% profit ratio
If the partners agree to distribute profits based on profit sharing ratio but are silent on loss sharing, partnership losses
will be divided based on the agreed profit sharing proportions.

2. If the partnership agreement does not specify how income is to be allocated, profits and loss should be allocated

A. Equally.
B. In proportion to the weighted average of capital invested during the period.
C. Equitably so that partners are compensated for the time and effort expended on behalf of the partnership.
D. In accordance with their capital contribution.

ANS: D
The ratio in which partnership profits and losses are divided is known as profit and loss ratio. Profits and losses are
divided in accordance with the agreement of the partners. In the absence of any agreement, profits and losses are
divided in accordance with the partners' contributed capital.

3. Partners AA and BB have profit and loss agreement with the following provisions: salaries of P30,000
and P45,000 for AA and BB, respectively; a bonus to AA of 10% of net income after salaries and bonus;
and interest of 10% on average capital balances of P20,000 and P35,000 for AA and BB, respectively.
One-third of any remaining profits will be allocated to AA and the balance to BB. If the partnership had
net income of P102,500, how much should be allocated to Partner AA?

A. 44,250
B. 47,500
C. 41,000
D. 41,167

ANS: C AA BB TOTAL
Salaries 30,00.0 45,000 75,000
Bonus (after bonus)
NY before Bonus 27,500
NY after Bonus
(27,500/110%) 25,000 2,500 2,500
10% interest 2,000 3,500 5,500
Balance (1/3:2/3) 6,500 13,000 19,500
Total 41,000 61,500 102,500
One of the alternatives in profit allocations if the net income is not sufficient is to completely satisfy all provisions
of the profit and loss agreement and use the profit and loss ratios to absorb any deficiency or additional loss caused
by such action.

-END OF HANDOUT-

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