Module 3 - Acctg for AST PDF

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St. Joseph College of BulacanSan Jose Patag, Sta. Maria BulacanLesson ModuleCourse Title : Accounting for Special Transactions Level : Third YearCourse Code: Pre - 6 Lesson No .: 3Objectives :At the end of this Module, the student will be able to:1. Define and describe partnership dissolution2. Iden...

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St. Joseph College of Bulacan San Jose Patag, Sta. Maria Bulacan

Lesson Module Course Title: Accounting for Special Transactions Course Code: Pre - 6

Level: Third Year Lesson No.: 3

Objectives: At the end of this Module, the student will be able to: 1. Define and describe partnership dissolution 2. Identify the different reasons of partnership dissolution 3. Account for the admission of a new partner by purchase of interest 4. Account for the admission of a new partner by investment Subject Matter:

Accounting for Partnership Dissolution - Admission of a New Partner

Procedures: A. Motivation – the instructor will show slides for students to answer

B. Lesson Presentation 1|Page

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 Case 1 – Perez purchases a ½ interest from Tomas for P200,000 Tomas, Capital Perez, Capital 300,000 x ½ = 150,000

150,000 150,000

The difference between the amount paid (200,000) and the interest acquired (150,000) which is 50,000 is a personal gain of Tomas which is not recorded in the partnership books.

 Case 2 – Perez purchase 1/5 interest from the old partners for P120,000 Tomas, Capital Torres, Capital Perez, Capital 300,000 x 1/5 = 150,000

60,000 60,000 120,000

 Case 3 – Perez purchases 1/5 interest from the old partners for P100,000 Tomas, Capital Torres, Capital Perez, Capital 300,000 x 1/5 = 150,000

60,000 60,000 120,000

The difference between the amount paid (100,000) and the interest acquired (120,000) which is 20,000 is a personal loss of Tomas and Torres which is not recorded in the partnership books.

 Case 4 – Perez purchases a 1/5 interest from the old partners for P150,000 Tomas, Capital Torres, Capital Perez, Capital 300,000 x 1/5 = 150,000

60,000 60,000 120,000

The difference between the amount paid (150,000) and the interest acquired (120,000) which is 30,000 is a personal gain of Tomas and Torres which is not recorded in the partnership books.

 Summary Partners Tomas Torres Perez Total

Beginning Capital 300,000 300,000 600,000

Case 1 150,000 300,000 150,000 600,000

Case 2 240,000 240,000 120,000 600,000

Case 3 240,000 240,000 120,000 600,000

Case 4 240,000 240,000 120,000 600,000

Note: In any case, Total Capital of the Partnership did not change and there is no change in total assets also as cash payments was directly made to the partners. Any personal gains and losses was not recorded in the books as it is a transaction between the selling parties and the buying partners and is to be shared by the old partners in accordance with their profit and loss ratio

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Suggested Solution  Case 1 – Perez purchases a 1/5 interest from the old partners for P150,000 Amount paid by Perez Divided by Interest Acquired New Capital Less Old Capital Positive Asset Revaluation

150,000 1/5 750,000 600,000 150,000

To record asset revaluation (positive) Asset

150,000 Tomas, Capital Torres, Capital

75,000 75,000

To record admission of Perez Tomas, Capital

95,00 0 55,00 0

Torres, Capital Perez, Capital (400,000+75,000) x 1/5 = 95,000 (200,000+75,000) x 1/5 = 55,000

150,000

After the admission of Perez, the capital structure will be:

Capital before Admission of Perez Share in Asset Revaluation Total Less Interest acquired by Perez Capital after admission of Perez New Profit and Loss ratio

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Tomas 400,000 75,000 475,000 (95,000 ) 380,000

Torres 200,000 75,000 275,000 (55,000)

Perez

150,000

Total 600,000 150,000 750,000 -

220,000

150,000

750,000

2/5 or 40%

2/5 or 40%

1/5 or 20%

-

 Case 2 – Perez purchases a 1/5 interest from the old partners for P100,000 Amount paid by Perez Divided by Interest Acquired New Capital Less Old Capital Negative Asset Revaluation

100,000 1/5 500,000 600,000 (100,000)

To record asset revaluation (positive) Tomas, Capital Torres, Capital Assetl

50,000 50,000 100,000

To record admission of Perez Tomas, Capital

70,00 0 30,00 0

Torres, Capital Perez, Capital (400,000 - 50,000) x 1/5 = 70,000 (200,000 - 50,000) x 1/5 =30,000

100,000

After the admission of Perez, the capital structure will be:

Capital before Admission of Perez Share in Asset Revaluation Total Less Interest acquired by Perez Capital after admission of Perez New Profit and Loss ratio

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Tomas 400,000 (50,000 ) 350,000 (70,000 ) 280,000

Torres 200,000 (50,000)

Perez

150,000 (30,000)

100,000

500,000 -

120,000

100,000

500,000

2/5 or 40%

2/5 or 40%

1/5 or 20%

-

Total 600,000 (100,000)

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Case 1 – Carreon invests P100,000 for a ¼ interest in the agreed capital of P400,000 Partners

Contributed Capital (CC) 200,000 100,000 100,000 400,000

Camoral Caridad Carreon Total To record the admission of Carreon Cash

100,000 Carreon, Capital AC x ¼ = 400,000 x ¼

100,000

If AC = TCC, there maybe bonus, but in this case, there is no bonus, since ¼ of AC which is P400,000 x ¼ is P100,000 which is equal to the capital contribution of Carreon. After the admission the capital balances will be: Partners

Camoral Caridad Carreon Total

New P & L Ratio

Agreed Capital (AC)

37.5% 37.5% 25.0%

Contributed Capital (CC)

200,000 100,000 100,000 400,000

200,000 100,000 100,000 400,000

Difference

-

 Case 2 – Carreon invests P100,000 for a 1/5 interest in the new firm capital of P400,000 Partners Camoral Caridad Carreon Total

Contributed Capital (CC) 200,000 100,000 100,000 400,000

To record the admission of Carreon Cash

100,000 Carreon, Capital Camoral, Capital Caridad, Capital AC x 1/5 = 400,000 x 1/5

80,000 10,000 10,000

If AC = TCC, there maybe bonus, in this case, there is a bonus to the old partners of P20,000, which is to be shared by Camoral and Caridad according to their P%L which is equally.

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After the admission the capital balances will be: Partners

New P & L Ratio

Camoral Caridad Carreon Total

Agreed Capital (AC)

40.0% 40.0% 20.0%

Contributed Capital (CC)

210,000 110,000 80,000 400,000

200,000 100,000 100,000 400,000

Difference

10,000 10,000 (20,000) -

 Case 3 – Carreon invests P60,000 for a ¼ interest in the new firm capital of P360,000 Partners

Contributed Capital (CC) 200,000 100,000 60,000 360,000

Camoral Caridad Carreon Total To record the admission of Carreon Cash Camoral, Capital Caridad, Capital Carreon, Capital AC x 1/4 = 360,000 x ¼

60,000 15,000 15,000 90,000

If AC = TCC, there maybe bonus, in this case, there is a bonus to the new partner of P30,000, which is to be shared by Camoral and Caridad according to their P%L which is equally. After the admission the capital balances will be: Partners

New P & L Ratio

Camoral Caridad Carreon Total

37.5% 37.5% 25.0%

Agreed Capital (AC) 185,000 85,000 90,000 360,000

Contributed Capital (CC) 200,000 100,000 60,000 360,000

Difference

(15,000) (15,000) 30,000 -

 Case 4 – Carreon invests P100,000 for a 1/5 interest in the partnership of Camoral & Caridad. A. BONUS METHOD Partners Camoral Caridad Carreon Total

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Contributed Capital (CC) 200,000 100,000 100,000 400,000

To record the admission of Carreon Cash

100,000 Carreon, Capital Camoral, Capital Caridad, Capital AC x 1/5 = 400,000 x 1/5

80,000 10,000 10,000

Under Bonus Method AC = TCC, If TCC is P400,000 then AC should be P400,000 also and 1/5 of 400,000 is P80,000,therefore there is bonus to the old partner of P20,000, which is to be shared by Camoral and Caridad according to their P%L which is equally. After the admission the capital balances will be: New P & L Agreed Ratio Capital (AC) Partners Camoral Caridad Carreon Total

40.0% 40.0% 20.0%

Contributed Capital (CC)

210,000 110,000 80,000 400,000

200,000 100,000 100,000 400,000

Difference

10,000 10,000 (20,000) -

 B. Revaluation Method Partners Camoral Caridad Carreon Total

Contributed Capital (CC) 200,000 100,000 100,000 400,000

To record the admission of Carreon Cash Asset

100,000 100,00 Carreon, Capital Camoral, Capital Caridad, Capital AC x 1/5 = 500,000 x 1/5

100,000 50,000 50,000

Under Revaluation Method AC > TCC, in this case AC is not given. To determine AC we will divide the amount paid by Carreon to his interest acquired (100,000 divided by 1/5 is P500,000. Since AC = P500,000 and TCC = P400,000 there is a positive asset revaluation of 100,000 which is to be shared by Camoral and Caridad according to their P%L which is equally. After the admission the capital balances will be: New P & L Agreed Ratio Capital (AC) Partners Camoral Caridad Carreon Total

100,000 / (1/5)=500,000 10 | P a g e

40.0% 40.0% 20.0%

250,000 150,000 100,000 500,000

Contributed Capital (CC) 200,000 100,000 100,000 400,000

Difference

50,000 50,000 100,000

 Case 5 – Carreon invests P80,000 for a ¼ interest in the partnership of Camoral & Caridad  A. Bonus Method Partners Camoral Caridad Carreon Total

Contributed Capital (CC) 200,000 100,000 80,000 380,000

To record the admission of Carreon Cash Camoral, Capital Caridad, Capital Carreon, Capital AC x ¼ = 320,000 x ¼

80,000 7,500 7,500 95,000

Under Bonus Method AC = TCC, If TCC is P380,000 then AC should be P380,000 also and 1/5 of 380,000 is P95,000,therefore there is bonus to the new partner of P15,000, which is to be shared by Camoral and Caridad according to their P%L which is equally. After the admission the capital balances will be: New P & L Agreed Ratio Capital (AC) Partners Camoral Caridad Carreon Total

37.5% 37.5% 25.0%

Contributed Capital (CC)

192,500 92,500 95,000 380,000

200,000 100,000 80,000 380,000

 B. Revaluation Method

Partners Camoral Caridad Carreon Total

Contributed Capital (CC) 200,000 100,000 80,000 380,000

To record the admission of Carreon Cash Camoral, Capital Caridad, Capital Carreon, Capital Assets AC x ¼ = 320,000 x ¼

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80,000 30,000 30,000 80,000 60,000

Difference

(7,500) (7,500) 15,000 -

Under Revaluation Method AC > TCC, in this case AC is not given. To determine AC we will divide the amount paid by Carreon to his interest acquired (80,000 divided by ¼ is P320,000. Since AC = P320,000 and TCC = P380,000 there is a negative asset revaluation of P60,000 which is to be shared by Camoral and Caridad according to their P%L which is equally. After the admission the capital balances will be: New P & L Agreed Ratio Capital (AC) Partners Camoral Caridad Carreon Total

40.0% 40.0% 20.0%

80,000 / (1/4)=320,000

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170,000 70,000 80,000 320,000

Contributed Capital (CC) 200,000 100,000 80,000 380,000

Difference

(30,000) (30,000) (60,000)

C. Application EXERCISE 3-1 Rachel and Mhiko are partners with capital balances of P132,000 and P72,000 respectively. Profits and losses are shared equally. Prepare the entries to record the admission of Joana, under each of the following separate circumstances. 1. Joana purchases ½ of Rachel’s interest for P80,000 Rachel, Capital Joana , Capital (132,000 x ½ )

66,000

2. Joana purchases ⅓ of Mhiko’s interest for 20,000 Mhiko, Capital Joana , Capital (72,000 x 1/3)

24,000

66,000

24,000

3. Joana purchases ⅓ of both partner’s interest for P120,000 Rachel, Capital 44,000 Mhiko, Capital 24,000 Joana , Capital (132,000 x 1/3)

68,000

4. Joana purchases ⅓ interest in the firm. One third of each partner’s capital is to be transferred to Joana. Joana pays the partners P120,000, which is to be divided between them in proportion to the equities given up. Before Joana’s admission, asset revaluation is undertaken and recorded on the firm’s books so that Joana’s ⅓ interest will be equal to the amount of her payment. Asset Rachel, Capital Mhiko, Capital

156,000 78,000 78,000

Rachel, Capital (132,000 + 78,000 ) x 1/3 Mhiko, Capital (72,000 + 78,000) x 1/3 Joana, Capital Amount paid by Joana Divide Total new capital Less old Capital (132,000 + 72,000) Positive asset revaluation

70,000 50,000 120,000 120,000 1/3 360,000 204,000 156,000

5. Joana invests sufficient funds to receive ¼ interests in the new partnership. (Bonus Method) Partners

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New P & L Ratio

Agreed Capital (AC)

Contributed Capital (CC)

Difference

Rachel Mhiko Joana Total

¼

68,000 272,000

132,000 72,000 68,000 272,000

-

(132,000 + 72,000)/(3/4) = 272,000 Cash Joana, Capital

68,000 68,000

6. Joana invests P76,000 for a ⅕ interest, with any bonus distributed to the old partners Partners Rachel Mhiko Joana Total

New P & L Ratio

1/5

Agreed Capital (AC)

56,000 280,000

Cash Joana, Capital Rachel, Capital Mhiko, Capital

Contributed Capital (CC) 132,000 72,000 76,000 280,000

Difference

10,000 10,000 (20,000) -

76,000 56,000 10,000 10,000

7. Joana invests P52,000 for a ¼ interest, with any bonus credited to Joan’s capital Partners Rachel Mhiko Joana Total

New P & L Ratio

¼

Agreed Capital (AC)

64,000 256,000

Cash Rachel, Capital Mhiko, Capital Joana, Capital

Contributed Capital (CC) 132,000 72,000 52,000 256,000

Difference

(6,000) (6,000) 12,000 -

52,000 6,000 6,000 64,000

8. Joan invests P120,000 for a ⅓ interest. Asset revaluation is recorded on the firm books prior to the admission. Partner s Rachel Mhiko Joana

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New P & L Ratio

1/3

Agreed Capital (AC)

120,000

Contributed Capital (CC) 132,000 72,000 120,000

Difference

18,000 18,000 -

Total

360,000

324,000

36,000

120,000 / (1/3) = 360,000 Cash Asset Rachel, Capital Mhiko, Capital Joana, Capital

120,000 36,000 18,000 18,000 120,000

9. Joana is to invest P120,000 for a ⅓ interest in an agreed partnership capitalization of P348,000 Partner s Rachel Mhiko Joana Total

New P & L Ratio

1/3

Agreed Capital (AC)

116,000 348,000

Cash Asset Rachel, Capital Mhiko, Capital Joana, Capital

Contributed Capital (CC)

Difference

132,000 72,000 120,000 324,000

14,000 14,000 (4,000) 24,000

120,000 24,000 14,000 14,000 116,000

10. Joana is to invest P100,000 for a ¼ interest in an agreed partnership capitalization of P320,000

Partners Rachel Mhiko Joana Total

Cash Asset Rachel, Capital Mhiko, Capital Joana, Capital EXERCISE 3-2

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New P & L Ratio

¼

Agreed Capital (AC)

80,000 320,000

Contributed Capital (CC) 132,000 72,000 100,000 304,000

Difference

18,000 18,000 (20,000) 16,000

100,000 16,000 18,000 18,000 80,000

See and Smell are partners who share profits and losses equally. And have equal capital balances. The net assets of the partnership have a carrying amount of P240,000. Feel is admitted to the partnership with a one-third interest in profits or losses and net assets. Feel invested P102,000 cash in the partnership. Required: Prepare the journal entries to record the admission of Feel under the

a. Bonus method b. Asset revaluation method, assuming partnership inventories are overstated.

EXERCISE 3-3 In 2010, Christine and Augustine established a partnership. Their operations have been very successful. They share profits and losses in the ratio of 4:1, respectively. At the beginning of 2013, Valentine expressed his interest of joining the partnership. The capital balances of Christine and Augustine on this date are P1,680,000 and P2,520,000, respectively. Required: 1. Prepare entries to record the admission of Valentine into the partnership under each of the following independent cases: a. Valentine invests P1,050,000 cash for a ⅕ interest in the partnership b. Valentine invests P1,500,000 cash for a ¼ interest in net assets (use bonus method) c. Valentine invests P2,100,000 cash for a ¼ interest in net assets (use asset revaluation method) d. Valentine pays Christine and Augustine a total of P1,650,000 for a ¼ of their respective capital interest. e. Valentine pays Christine and Augustine a total of P1,050,000 for a ⅕ of their respective capital interest; no asset revaluation is undertaken prior to the admission of Valentine. 2. Assuming Valentine paid a total of P1,800,000 to Christine and Augustine for ⅖ of their respective capital balances, prepare a schedule determining the amount of cash to be transferred to Christine and Augustine. EXERCISE 3-4 On January 31, 2013, Partners Janette, Julius, and Judy had the following loan and capital account balances (after closing entries for January): 16 | P a g e

Loan receivable from Janette Loan payable to Judy Janette, Capital Julius, Capital Judy, Capital

60,000 Debit 180,000 Credit 90,000 Debit 360,000 Credit 210,000 Credit

The partnership’s income-sharing ratio was 50:20:30 to Janette, Julius, and Judy respectively. On January 31, 2013, JC was admitted to the partnership for a 20% interest in total capital of the partnership in exchange for an investment of P120,000 cash. Prior to the admission of JC, the existing partners agreed to increase the carrying amount of the partnership’s inventories to a current market value, a P180,000 increase. Required: Prepare the journal entries for the increase in inventories and the admission of JC. EXERCISE 3-5 Fernandez, Hernandez and Lapidez are partners with profit and loss ratio of 30:50:20 respectively. Their capital balances are: Fernandez – P450,000, Hernandez – P900,000, Lapidez – P150,000. Mendez is admitted into the partnership by investing P450,000 Required: Compute the amount of asset revaluation or bonus in each of the following independent cases. Prepare the journal entries to record the admission of Mendez if he is allowed 1. ⅕ Interest in the partnership with capital credit equal to his investment. 2. ⅕ interest in the partnership with total agreed capital of P1,950,000 3. 30% interest in the partnership with total agreed capi...