Special Transaction

Special Transaction: Partnership
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.
Art. 1767. By the contract of partnership of two more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among themselves.
Characteristics:
1. Ease of formation - requires less formality; perfected by mere consent
2. Separate legal personality
3. Mutual agency - as long as inclined with the partnership operations
4. Co-ownership of property
5. Co-ownership of profits
- A stipulation which excludes one or more partners from any share in the profits or losses is
void.
6. Limited life - easily dissolved
7. Transfer of ownership
- in case of dissolution, whether new or existing partner requires the approval of remaining
partners. Not easily transferred since it requires consent.
8. Unlimited liability
- applicable to general partnership - all partners are general partners
- limited partnership - at least one general partner and at least one limited partner
Accounting for Partnership

The following are the major considerations in the accounting for the equity of a partnership:
1. Formation - accounting for initial investments to the partnership
2. Operation - division of profits or losses
3. Dissolution - admission of a new partner and withdrawal, retirement or death of a partner
4. Liquidation - winding-up of affairs
Partnership Formation
Valuation of contributions of partners
All assets contributed to (and related liabilities assumed by) the partnership shall be measured at fair
value.
If non-cash assets (priority),
1. Agreed value of the property at the time of investment (theoretically, agreed value should be FMV)
2. Fair market value of the property at the time of investment
3. Book value or carrying value in case no available fair market value
4. Cost of property
If Cash and Cash Equivalent, measured at face amount

If Inventory, measured at LCNRV
Partners’ Ledger Accounts

1. Capital Accounts
2. Drawing Accounts
3. Receivable from/ Payable to a partner
Bonus on initial investments

A bonus exists when the capital account of a partner is credited for an amount greater than or less
than the fair value of his contributions. Capital Credited > Contributions
The bonus is treated as adjustments to the capital accounts of the others partners
- there is a transfer of capital from one partner to another
- although there’s a bonus to a partner or bonus from a partner, the total contributed capital
and total agreed capital is still equal. However, the amount contributed by a partner is not equal to
capital credit.
Variation to the bonus method
- technically no bonus or transfer of capital, instead there will be a:
Cash settlements among partners, and
Additional investment or withdrawal of investment of a partner
Valuation of contribution of partners

Ex. Mr Sun and Ms. Moon formed a partnership. Their contributions are as follows:
Particulars Mr. Sun Mr. Moon
Cash 400,000
AR 250,000 Only 80% of AR is deemed collectible
Land 750,000 The land is stated at original cost. FV is P1M.
The partnership assumes P250k unpaid
mortgage on the land.
Equipment 180,000 Ms. Moon acquired the equipment on a long-
term financial basis. She promised to pay the
unpaid principal balance of P80k* using her
personal fund. It is under-depreciated by P30k.
Total 650,000 1,130,000
First, compute the contributions of EACH partners to proceed with the Journal Entry.
Mr. Sun Ms. Moon

Cash 400,000 FV of land 1,000,000
Collectibe AR 250,000 * 80% = 200,000 Assumed Mortgage (250,000)
Total 600,000 CA of Equipment 180,000-30,000 = 150,000
Total 900,000
Total Contributions: 1,500,000
Notes:
AR contributions is based on collectible amount.
PPE is hierarchically, measured at (1)agreed value, (2)FV, (3)CA, (4)Cost.
If unpaid mortgage is assumed then include it as deduction.
If PPE is measured at CA, which happens when FV isn’t available, the deduct its depreciation.
And if it’s still payable and the contributor promise to pay it then ignore that payable
amount.
Cash 400,000
AR 200,000
Land 1,000,000
Equipment 150,000
Mortgage Payable 250,000
Sun, Capital 600,000
Moon, Capital 900,000
Partnership Operations
Division of Profits and Losses
 As a rule, profits and losses are to be allocated based on the partnership agreement.
 If no profit and loss sharing agreement is specified, partnership law states that the division of
profits will be based on original capital contributions. In the absence of original capital, beginning
capital for the year may be used.
 If the agreement specifies how profits are to be distributed, but is silent as to losses, losses are
to be shared in the same manner as profits.
Agreement may also stipulate any of the following:
a. Salaries - normally, an industrial partner receives salary addition to his share in the partnership
profits as compensation for his services to the partnership’s profts as compensation for his services to
the partnership.
b. Bonuses - the managing partner may be entitled to a bonus for excellent management
performance. Unlike for salaries, a partner is entitled to a bonus only if the partnership earns profit.
c. Interest on capital contribution - the partnership agreement may stipulate that capitalist partners
are entitled to an annual interest on their capital contributions.
Partnership Dissolution
Dissolution - is the change in the relation of the partners.
1. Admission
Affected either through:
a. Purchase of interest in the partnership - payment is not recorded, only the transfer of interest.
b. Investment in the Partnership - payment is recorded.
2. Withdrawal, Death, Retirement

His purchases may be:
1. Purchase by one or all of the remaining partners
- settlement is not recorded in the book, only the transfer
2. Settled by the partnership

- settlement is recorded in the book
3. Incorporation
In this case, the corporation acquires the assets and assumes the liabilities of the partnership
and, in return, issues shares of stocks to the owners.
If the fair value of net assets exceeds the aggregate part value of the shares issued, the
excess is credited to share premium.
Problem 1: Admission of a new Partner
Partnership Liquidation
Liquidation - is the termination of business operations or the winding up of affairs.
Process:
1. Assets are converted into cash.
2. Liabilities are settled.
3. Any remaining amount is distributed to the owners.
Methods
1. Lump-sum liquidation
All the non-cash assets of the partnership are sold simultaneously, or within a very
short period of time, and the proceeds are sued to settle first all the liabilities and any
remaining amount is paid to the partners under a lump-sum payment.
2. Installment liquidation
It would take time to convert all the non-cash assets into cash. In such case, the
partners’ claims are settled on an installment basis as cash becomes available, but only after
all the partnership liabilities are fully settled.
Settlement of Claims
1st. Outside creditors
2nd Inside creditors
3rd Owner’s capital balances
Right of Offset
The legal right of offset allows a deficit in a partner’s capital account to be offset by a loan
payable to that partner.
Problem:
Case 1: Lump-sum Liquidation
The non-cash assets were realized as follows:
a. Only 70% of the AR was collected; the balance is uncollectible.
b. P20,000 was received for the entire inventory.
c. The equipment was sold for P310,000.
d. P12,000 liquidation expenses were paid.
- Requirement: Compute for the cash distributions to the partners.
1st Step: Compute for Net Proceeds and its Loss
2nd Step: Allocated the Loss based on their P/L ratio and Compute for the amount they’ll receive
3rd Step: Check if it’s correct
Case 2: Installment liquidation

Done will be liquidated on installment basis. Cash distributions to the partners will be made as cash
becomes available. In the first month of the liquidation process, the non-cash assets were realized as
follows:
a. Half of the accounts receivable was collected. Of the remaining half, P10,000 accounts are deemed
worthless.
b. 75% of the inventory was sold at 80% of cost
c. Equipment with carrying amount of P200,000 was sold for P185,000.
d. P12,000 liquidation expenses were paid. Additional P5,000 liquidation expenses are expected to be
incurred in subsequent periods.
Requirement: Compute for the cash distributions to the partners.
1st step: Compute for the net proceeds and then its loss
2nd Step: Allocated the Loss based on their P/L ratio and Compute for the amount they’ll receive
Case 3: Gain on settlement of liability

All the non-cash assets, except the receivable from A, were realized for P250,000. The accounts
payable was settled for P24,000, after offset of a P6,000 credit memorandum.
1st step: Compute for the net proceeds and then its loss.
(It states that the non-cash assets were realized for P250k)
2nd Step: Allocate the Loss based on their P/L ratio and Compute for the amount they’ll receive

Marshalling of Assets
Applies during partnership insolvency or some of the partners are insolvent.
Insolvent is when Assets exceeds the Liabilites.
Case 4: Marshalling of Assets

All the non-cash assets, except receivable from A, were realized for P65,000. The personal assets and
liabilities of the partners are as follows:
A B
Personal Assets 200,000 380,000
Personal Liabilities (440,000) (240,000)
1st step: Determine who is the insolvent.
Partner A is insolvent.
2nd step: Compute for the net proceeds and then its profit/loss.
3rd Step: Allocate the Loss based on their P/L ratio and Compute for the amount they’ll receive
The capital deficiency of Partner A(insolvent) will be absorbed by Solvent Partners. No amount that
will be received the the insolvent partner.
4th Step: Check if it’s correct
Reconstruction of Information
We use the available information to work back for us to compute the requirements.
Case 5: Reconstruction of information
After all the assets (excluding the receivable from A) were realized and the liabilities to outside
creditors were settled, B received P140,000 in the cash distribution to the partners.
Requirement: Compute for the following :
a. Loss on Sale = 200,000 loss
b. Share of A in the cash distribution to the partners = 120,000
c. Cash available for distribution to the partners. = 260,000
d. Net proceeds from sale of the non-cash assets, excluding the receivable from A. = 270,000
1st step: Prepare pro-forma distribution table.

2nd step: Squeeze
3rd step: Work back
Case 6: Non-cash asset used as payment for claim

All the assets (excluding the receivable from A) were realized except for equipment with carrying
amount of P60,000 which will take at an equity set off price of P20,000. The remaining cash of
P35,000 is to be divided among the partners in a manner that will avoid the possible recovery of cash
from a partner.
Requirement: How much is the total payment to B in cash and in kind?
1st step: Compute for the Loss (which is due to imbalance of accounting equation
2nd Step: Allocate the Payment in Cash which already includes the Payment in Equipment.
3rd Step: Total the Payment of a partner

Cash priority Program
Maximum Loss Absorption Capacity - to know who are the partners that are prioritized to be paid.
The partner with highest MLAC is paid first, and vice-versa.
MLAC = Total partner’s interest in the partnership / partner’s P/L ratio
(Total partner’s interest is inclusive of Payables(Receivables) to Partners)
Case 7: Cash Priority Program
Done will be liquidated on installment basis. In the first month of the liquidation process, the non-
cash asset were realized as follows:
a. Half of the accounts receivable was collected.
b. 75% of the inventory was sold at 80% of cost.
c. Equipment with carrying amount of P200,000 was sold for P185,000.
d. P12,000 liquidation expenses were paid. Additional P5,000 liquidation expenses are expected to
be incurred in subsequent periods.
Requirement: Compute for the cash distributions to the partners using a cash priority program.
1st step: Compute for the MLAC and Rank them
2nd step: Equalize the MLAC balances
3rd step: Make a list of rank of Payment
4th step: Compute for the Cash Available to the partners
5th step: Compute for the Cash Distribution to the partners (apply the Cash Priority Program)

Special Transaction

Uploaded by

Copyright:

Available Formats

Special Transaction

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Special Transaction

Uploaded by

Copyright:

Available Formats

Special Transaction: Partnership

Partnership is an unincorporated association of two or more individuals to carry on, as co-owners, a

Accounting for Partnership

If Cash and Cash Equivalent, measured at face amount

Partners’ Ledger Accounts

Bonus on initial investments

Valuation of contribution of partners

Mr. Sun Ms. Moon

2. Withdrawal, Death, Retirement

2. Settled by the partnership

1st Step: Compute for Net Proceeds and its Loss

3rd Step: Check if it’s correct

Case 2: Installment liquidation

3rd Step: Check if it’s correct

Case 3: Gain on settlement of liability

3rd Step: Check if it’s correct

Case 4: Marshalling of Assets

1st step: Prepare pro-forma distribution table.

3rd step: Work back

Case 6: Non-cash asset used as payment for claim

3rd Step: Total the Payment of a partner

2nd step: Equalize the MLAC balances

3rd step: Make a list of rank of Payment

4th step: Compute for the Cash Available to the partners

You might also like