Partnership Formation Notes PDF

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PARTNERSHIP FORMATION Partnership -

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unincorporated association of two or more individuals to carry on, as coowners, a business, with the intention of dividing the profits among themselves.

Characteristics of a Partnership (1) (2) (3) (4) (5) (6)

Ease of formation Separate legal personality Mutual agency Co-ownership of a property Co-ownership of profits Limited life (a) by the express will of any partner (b) by the termination of a definite term stipulated (c) by any event which makes it unlawful to carry out the partnership (d) when a specific thing which a partner had promised to contribute to the partnership perishes before the delivery (e) expulsion, death, insolvency or civil interdiction of a partner (7) Transfer of ownership - requires the approval of the remaining partners. (8) 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.

general partnership: all partners are individually liable limited partnership: at least one partner is personally liable (includes at least one general partner who maintains unlimited liability and limited partners who may limit their liability up to the extent of their contributions to the partnership. Note: Has LLP in its name.

Accounting for Partnerships -

Conceptual Framework for Financial Reporting and the PFRSs Civil Code of the Philippines

Major Considerations: (a) Formation – accounting for initial investments to the partnership (b) Operations – division of profits and losses (c) Dissolution – admission of a new partner and withdrawal, retirement or death of a partner (d) Liquidation – winding-up of affairs.

Formation -

consensual, created by mere consent or agreement. may be constituted in any form, oral or written.

Note: Articles 1771 and 1772 -

requirement that a partnership agreement be in public document and recorded with the SEC when: (a) immovable property or real rights are contributed (b) the partnership has a capital of Php3,000 or more.

Note: Article 1773 – requires an inventory of any immovable property contributed to the partnership, signed by the parties and attached to the public instrument, otherwise the partnership is void. Note: A partnership’s legal existence begins from the execution of the contract, unless otherwise stipulated.

Capital Account -

real account and has a normal credit balance.

Debit Balance: (a) Permanent withdrawals of capital (b) Share in losses (c) Debit balance of drawings account Credit Balance:

Valuation of contributions of partners GR: All assets contributed to (and related liabilities assumed by) the partnership are initially measured at fair value. Fair Value – 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. Guidelines from the PFRSs: Type of contribution Measurement Cash and cash equivalents Face amount (PAS 7) Inventory Lower of Cost and realizable value (PAS 2)

(a) Initial investment (b) Additional investments (c) Share in profits Drawings Account -

nominal account closed to the related capital account at the end of the period (contra equity account)

Debit Balance: (a) Temporary withdrawals during the period Net (b) Temporary funds held to be remitted to the partnership Credit Balance:

Each partner’s capital account is credited for the fair value of his net contribution. No contribution shall be valued at an amount that exceeds the contributions recoverable amount.* *Recoverable amount – the higher between an asset’s fair value less cost to sell and value in use.

(a) Recurring reimbursable costs paid by the partner

Receivable from/Payable to a partner -

Partner’s share in profits (losses) – credited (debited) to his capital account Permanent withdrawals of capital – debited to the partner’s capital account Temporary withdrawals – debited to the partner’s drawings account

loan extended by the partnership to a partner – receivable from the partner loan obtained by the partnership from a partner – payable to the partner.

Bonus on Initial Investments -

capital account is credited for an amount greater than the fair value of his contributions (accounted for as

deduction from the capital of the other partners) Note: After applying the bonus method, the total capital of the partnership is still equal to the fair value of the partners’ contributions. Only the amounts credited to the partner’s capital accounts have varied. Variations to the bonus method -

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stipulate a certain ratio maintained by the partners representing their specific interests in the equity of the partnership give rise to adjustments to the initial contributions of the partners capital adjustment is accounted either: (a) cash settlement among the partners (b) additional investment or withdrawal of investment of a partner...