Partnership Formation notes and sample problems PDF

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Financial Accounting and Reporting Partnership Formation Partner’s Capital Account A partnership has two or more owners thus, separate capital and drawings accounts are established for each partner.

Partner's Capital Account Debit Credit 1. Permanent Withdrawals 1. O riginal investment 2. Debit balanc e of the drawing ac c ount at the end of the period 2. A dditional Investment 3. C redit balanc e of the drawing ac c ount at the end of the period

Partner's Drawing Account Debit 1. Temporary Withdrawals 2. Share in loss (this maybe debited direc tly to C apital)

Credit 1. Share in profit (this may be c redited direc tly to C apital)

Permanent Withdrawals vs Temporary Withdrawals Permanent withdrawals are made with the intention of permanently decreasing capital while temporary withdrawals are regular advances made by the partners in anticipation of their share in profit. Loans Receivable from or Payable to Partners If a partner withdraws a substantial amount of money with the intention of repaying it, it should be debited to Loans Receivable-partner instead of the drawings account. On the other hand a partner may lend amounts to the partnership in excess of his intended permanent investment. These advances should be credited to Loans Payable-partner. This account is classified as liability but should be separated from outside liabilities. Such distinction is important during partnership liquidation. Valuation of Investment by Partners Cash- face value Non-Cash Assets- to be recorded at values agreed upon by the partners, in the absence of sunch then the fair market value at the date of transfer to the partnership * if liabilities are attached to assets invested to partnership and was assumed by the partnership it will be recognized and will be a reduction of the capital account A partnership may be formed in any of the following ways: 1. Individuals with no existing business. 2. Conversion of a sole proprietorship to a partnership: 

A sole proprietor and an individual without an existing business form a partnership.



Two or more sole proprietors form a partnership.

Sample Problems:

Problem 1 Neil and Justin agreed to form a partnership and contribute certain assets. Neil contributes cash amounting to P250,000 and a land which he purchased 3 years ago for P250,000 but currently has a fair market value of P500,000. Justin on the other hand contributes cash of P100,000 a building with a carrying amount of 500,000 but both agreed to value it at P600,000. The said building has a mortgage payable which the partnership will assume, P350,000. The partners will share profits and losses equally. Required: Prepare the journals entries to account the investment made by the partners. Problem 2 Dexter Contributed land, inventory and P250,000 cash to a partnership. The land has a book value of P500,000 and a market value of P1,250,000. The inventory has a book value of P600,000 and a market value of P480,000. The partnership assumed a P300,000 note payable owed by Dexter that was used to purchase the land. Waylon agreed to put up cash equivalent to Dexter’s net investment. Required: Prepare the journals entries to account the investment made by the partners. Problem 3 On April 10 2019, Vanessa who has her own retailing business and Jordan, agreed to fom a partnership wherein they will divide profits in the ratio 70:30, respectively. The statement of financial position of Vanessa is as follows: Vanessa Merchandising Statement of Financial Position As of April 10, 2019 ASSETS Cash

4,000.00

Accounts Receivable

160,000.00

Less: Allowance for Uncollectible Accounts 16,000.00

144,000.00

Inventory

200,000.00

Equipment

50,000.00

Less: Accumulated Depreciation

10,000.00

40,000.00 388,000.00

Total Assets

LIABILITIES AND CAPITAL Accounts Payable

36,000.00

Vanessa Capital

352,000.00

Total Liabilities and Capital

388,000.00

Conditions agreed upon before the formation of the partnership are as follows: a.

The accounts receivable of Vanessa is estimated to be 75% realizable.

b.

The accumulated depreciation of the equipment will be increased by P12,500.

c.

The accounts payable will be assumed by the partnership.

d.

The inventory will be decreased to P190,000.

e.

The capital of the partnership is based on the adjusted capital balance of Vanessa. Jordan is to contribute cash in order to make the partner’s capital balances proportionate to the profit and loss ratio.

Required:  Prepare the necessary journal entries in the books of Vanessa.  Prepare the opening journal entries in the books of the partnership.

Problem 4 A and B agreed to form a partnership contributing their assets and equity from their previous sole proprietorship business. The balance sheet of A and Bare as follows: A

B

Cash

11,000.00

22,000.00

Accounts Receivable

235,000.00

565,000.00

Inventories

120,000.00

260,000.00

Land

600,000.00

Building

- 428,000.00

Furnitures and Fixtures

50,000.00

35,000.00

Other Assets

2,000.00

3,600.00

Total

1,018,000.0 1,313,600.0 0 0

Accounts Payable

180,000.00

245,000.00

Notes Payable

200,000.00

325,000.00

A, Capital

638,000.00

743,600.00

B, Capital

Total

1,018,000.0 1,313,600.0 0 0

Both partners agreed to the following conditions:

a. Accounts receivables amounting to P25,000 and P35,000 in the books of A and B respectively are uncollectible. b. Inventories of P5,000 and P6,7000 are worthless in A and B’s respective books. c. Other assets of P2,000 for A and P3,500 for B are to be written off. d. All liabilities in the respective books of A and B will be assumed by the partnership. Required: Prepare all necessary journal entries in the books of the partners and in the books of the partnership.

QUIZZER 1. On May 1, 201B, Gonzaga and Balance farmed a partnership and agreed to share profits and losses in the ratio of 3:7, respectively. Gonzaga contributed a parcel of land that cost P10,000. Balance contributed P40,000 cash. The land was sold for P18,000 on May 1, 2018 immediately after formation of the partnership. What amount should be recorded in Gonzaga’s capital account on formation of the partnership? A. P15,000 C. P10,000 B. P17,400 D. P18,000 2. On Mar. 1, 2018, Sarabia and Abad decided to combine their businesses and form a partnership. Their statement of financial position on Mar. 1. before adjustments, showed the following: Cash Accounts receivable Inventories Furniture and Fixtures (net) Office Equipment (net) Prepaid Expenses Total

Sarabia P 9,000 18,500 30,000 30,000 11,500 6,375 P105,375

Abad P 3,750 13,500 19,500 9,000 2,750 3,000 P51,500

Accounts Payable 45,750 18,000 Capital 59,625 33,500 Total P105,375 P51,500 They agreed to have the following items recorded in their books: a. Provide 2% allowance for doubtful accounts. b. Sarabia's furniture and fixtures should be P31,000, while Abad's office equipment is under-depreciated by P250. c. Rent expense incurred previously by Sarabia was not yet recorded amounting to P1.000, while salary expense incurred by Abad was not also recorded amounting to P800. d. The fair market values of inventory amounted to: For Sarabia P 29,500 For Abad 21,000 Compute the net (debit) credit adjustment for Sarabia and Abad respectively: A. P2,870/ P2,820 B. P(2,870)/ P(2,820)

C. P(870)/ P180 D. P870/ P(180)

3. Using the same information in the previous number, what is amount of total liabilities after the formation? A. P63.750 B. P61,950

C. P63,950 D. P65,550

4. Using the same information is #2, what is the amount of total assets after the formation? A. P157,985

C. P160,765...