PARTNERSHIP

FORMATION
Partnership
 “By the contract of the partnership, two or
more persons bind themselves to contribute
money, property and industry to a common
fund with the intention of deviding the profits
among themselves.

 Two or more persons may also form a

partnership for the exercise of a profession.
 CHARACTERISTICS OF A
PARTNERSHIP
 Based on contract
 Limited Life
 Association of individuals
 Ease of Formation
 Unlimited Liability
 Assignment of Interest
 Co-Ownership
 Income Participation
 Mutual Agency
Advantages

 Ease of Formation

 Joint Resources

 Tax Exemption

 Less Government Supervision

Disadvantages

 Unlimited Liability

 Mutual Agency

 Consensual

 Limited Life
Partnership Formation
VALUATION:
1. Cash – Face Value
2. Land, Depreciable Asset, & NCA
a. Agreed Value
b. Fair Value
c. Appraised Value
d. Carrying Value/Book Value
3. Liabilities – are considered assumed if the problem is silent
4. Inventory – Lower of Cost and Net Realizable Value (LCNRV)
5. Capital
b. Bonus Method
c. b. Investment/Withdrawal Method
BONUS METHOD

 There would be a transfer of capital.

 There is no Asset Revaluation.

 The total asset and capital will remain

unchanged.
INVESTMENT/WITHDRAWAL

Agreed Capital is more than Unadjusted

Capital = Investment 

Agreed Capital is less than Unadjusted

Capital = Withdrawal
Notes
 To transfer the depreciable asset, it should be
in net amount.

 To transfer the accounts receivable to the new

book, it should not be in net amount.

 The juridical personality of the partnership

arises from the meeting of minds.
Owner’s Investments
 It is also important to note in the above examples
that the accounting terminology for partnerships
differs from that of corporations.

 Owners’ investments in partnerships are recorded in

capital accounts, which are parts of a general
classification called owners’ equity.

 Owners’ investments in corporations are recorded in

contributed capital accounts, which are parts of a
general classification called stockholders’ equity.
Accounting for Capital Contributions
 If one or more of the partners transfers noncash
assets, fair value is used to record the assets.

Assume that Carter invests P500,000 in cash to

and Green contributes the following assets:
Book Value Fair Value
Inventory 90,000 100,000
Land 140,000 110,000
Building 320,000 460,000
Accounting for Capital Contributions
Green’s building is encumbered by a
P236,000 mortgage that the partnership
has agreed to assume. Green’s net
investment is equal to P434,000 (P670,000
less P236,000).

The following journal entry records the

formation of the partnership created is?
Accounting for Capital Contributions
The determination of an appropriate valuation for each
capital balance is more than just an accounting exercise.
Over the life of a partnership, these figures serve in a
number of important capacities:

1. The totals in the individual capital accounts often influence

the assignment of profits and losses to the partners.
2. The capital account balance is usually one factor in
determining the final distribution that will be received by a
partner at the time of withdrawal or retirement.
3. Ending capital balances indicate the allocation to be made
of any assets that remain following the liquidation of a
partnership.
Bonus Method for Capital Contributions
 Contributed intangible assets require special
consideration

 Contributions made by one or more of the

partners may go beyond assets and liabilities,
for example, a particular line of expertise or
established clientele.
Bonus Method for Capital Contributions
To illustrate, assume that Romel and Jennie plan to open an
advertising agency and decide to organize the endeavor as a
partnership. Romel contributes cash of P700,000, and
Jennie invests only P100,000. Jennie, however, is an
accomplished graphic artist, a skill that is considered
especially valuable to this business. Therefore, in producing
the articles of partnership, the partners agree to start the
business with equal capital balances. Often such decisions
result only after long, and sometimes heated, negotiations.
Because the value assigned to an intangible contribution
such as artistic talent is arbitrary at best, proper reporting
depends on the partners’ ability to arrive at an equitable
arrangement.
Bonus Method for Capital Contributions
 The bonus method simply splits the P800,000 capital
evenly between the two partners. Jennie received a capital
bonus of P300,000 (the P400,000 recorded capital balance
in excess of the P100,000 cash contribution) from Romel in
recognition of her artistic abilities she contributed.

 The bonus method assumes that Jennie’s artistic abilities

do not constitute a recordable partnership asset with a
measurable cost.

 This approach recognizes only the assets that are physically

transferred to the business. Record any tangible assets
contributed.
Key Terms
Liquidation to settle the accounts and distribute the assets
of a business
Mutual Agency the legal ability of a partner to bind the
partnership to contracts within the scope of the partnership
Partnership a voluntary association of two or more legally
competent persons who agree to do business as co-owners
for profit
Profit-Loss ratio the method chosen by partners for
dividing the profits or losses; also called the income and
loss sharing ratio
Realization the conversion of noncash assets to cash
Unlimited Liability each partner is personally liable for the
business debts
Bonus Method for Capital Contributions
 The bonus method simply splits the P800,000 capital
evenly between the two partners. Jennie received a capital
bonus of P300,000 (the P400,000 recorded capital balance
in excess of the P100,000 cash contribution) from Romel in
recognition of her artistic abilities she contributed.

 The bonus method assumes that Jennie’s artistic abilities

do not constitute a recordable partnership asset with a
measurable cost.

 This approach recognizes only the assets that are physically

transferred to the business. Record any tangible assets
contributed.
Exercises
1. Bonnie and Clyde enters into a partnership agreement in which
Bonnie is to have 55% interest in the partnership and 35% in the
profits and losses, while Clyde will have 45% interest in the partnership
and 65% in the profits and losses. Bonnie contributed the following:
Cost Fair value
Building 235,000 255,000
Equipment 168,000 156,000
Land 500,000 525,000
The building and the equipment has a mortgage of 50,000 and 35,000
respectively. Clyde is to contribute 150,000 cash and equipment. The
partners agreed that only the building mortgage will be assumed by
the partnership.
1. How much is the fair market value of the equipment which Clyde
contributed?
2. How much is the total asset of the partnership upon formation?
Exercises
2. The Grey and Redd Partnership was formed
on January 2, 2020. Under the partnership
agreement, each partner has an equal initial
capital balance. Partnership net income or loss is
allocated 60% to Grey and 40% to Redd. To form
the partnership, Grey originally contributed
assets costing P30,000 with a fair value of
P60,000 on January 2, 2020, and Redd
contributed P20,000 cash. Under the bonus
method, what is the amount of bonus?
END