FINANCIAL AC

COUNTING AN
D REPORTING
AE 102
Prof. Justiniano L. Santo
s, CPA, MBA
0
3
PARTNERSHIP
FORMATION
VALUATION ADJUSTMENT OPENING ENTRIES
 Partnership Formation
In the absence of agre
ement, investment is b Investment is based o
ased on fair market val n values agreed upon
ue by the partners

VALUATION

Net contributions of th Investment may be cas

e partner h or non-cash

Fair value is the price at which an asset or liability could be exchanged in a current transaction
between knowledgeable, unrelated willing parties.
Financial Accounting and Reporting – JL Santos, CPA, MBA
 Partnership Formation

OR TO CORRECT MISST BOOKS WILL HAVE TO B

ATEMENTS IN THE ACC E ADJUSTED
OUNTS ADJUSTMEN
T
OF THE ASSETS TO REFLECT THE FAIR
MARKET VALUES

Financial Accounting and Reporting – JL Santos, CPA, MBA

 Illustration
 A reconditioned printing equipment invested by Agapito Rubio
was recorded incorrectly in the partnership books at P730,000
—its book value from the proprietor’s records. If the partnersh
ip immediately sold the printing equipment for its fair market v
alue of P800,000, the resulting P70,000 would increase the ca
pital balances of both partners Agapito Rubio and Nora Bisan
a. The printing equipment should have been recorded at P80
0,000, and Rubio’s capital credited with P800,000.
 VALUATION ADJUSTMENT OPENING ENTRIES
 net contributions of the partners  books will have to be adjusted t  Individual with no existing busines
 Investment may be cash or on-cash as o reflect the fair market values o s
sets f their assets or to correct misst  Conversion of sole proprietorship
 Investment is based on the fair market atements in the accounts
 Admission or retirement of a partn
value of the asset
er
 Partnership Formation
A partnership may be formed in any of the following ways:

Admission or retirement of a partner 03  To be discussed later

Conversion of sole proprietors  Sole proprietor and individual with no existing bu

02 siness
hip
 Two or more sole proprietor form a partnership

Individual with no business 01  The books of partnership are opened

Financial Accounting and Reporting – JL Santos, CPA, MBA

 9
Partnership Formation
ASSETS = LIABILITIES + OWNER’S EQUITY

DEBIT CREDIT
1. Increase in Asset 1. Decrease in Asset
2. Increase in Expense 2. Decrease in Expense
3. Increase in Drawing 3. Decrease in Drawing
4. Decrease in Liability 4. Increase in Liability
5. Decrease in Owner’s Equity 5. Increase in Owner’s Equity
6. Decrease in Revenue 6. Increase in Revenue

Financial Accounting and Reporting – JL Santos, CPA, MBA

 1
Partnership Formation 0
Conversion of a sole proprietorship to a partnership
 A sole proprietor and an individual without an existing business form a p
artnership

Emerita Geron and Emerita Modesto formed a general professional partnersh

ip . Emerita Geron will invest sufficient cash to get an equal interest in the pa
rtnership while Emerita Modesto will transfer the assets and liabilities of her
business. The account balances on the books of Modesto prior to partnershi
p formation follows:

Financial Accounting and Reporting – JL Santos, CPA, MBA

 1
Partnership Formation 1

DEBIT CREDIT
Cash 180,000
Accounts Receivable 300,000
Office Equipment 1,500,000
Accumulated Depreciation 600,000
Accounts Payable 155,000
Salaries Payable 25,000
Emerita Modesto, Capital 1,200,000
Financial Accounting and Reporting – JL Santos, CPA, MBA
 1
Partnership Formation 2
Illustration:

 It is agreed that for purposes of establishing Emerita Geron’s interest, the f

ollowing adjustments shall be made in the books of Emerita Modesto:
1. An allowance for uncollectible accounts of 5% of accounts receivable is to
be established.
2. Prepaid expenses amounting to P30,000 were omitted by the accountant.
This is to be recognized.
3. Additional salaries payable in the amount of P10,000 is to be established.

Financial Accounting and Reporting – JL Santos, CPA, MBA

 1
Partnership Formation 3
Illustration:

ASSETS = LIABILITIES + OWNER’S EQUITY

-P15,000 = + -P15,000

+30,000 = + +30,000

= +P10,000 + -10,000

+P15,000 = +P10,000 + +P5,000

+P15,000 = +P15,000

Financial Accounting and Reporting – JL Santos, CPA, MBA

 1
Partnership Formation 4
DEBIT CREDIT
Cash 180,000
Accounts Receivable 285,000
Prepaid Expenses 30,000
Office Equipment 1,500,000
Accumulated Depreciation 600,000
Accounts Payable 155,000
Salaries Payable 35,000
Emerita Modesto, Capital 1,205,000
Financial Accounting and Reporting – JL Santos, CPA, MBA
 1
Partnership Formation 5
Individuals with no existing business form a partnership
Illustration:

On July 1, 2017, Nilo Burgos and Helenita Ruiz agreed to form a partnership. The p
artnership agreement specified that Burgos is to invest cash of P700,000 and Ruiz is t
o contribute land with a fair market value of P1,300,000 with P300,000 mortgage to b
e assumed by the partnership.
Solution
Cash 700,000
Land 1,300,000
Mortgage Payable 300,000
Nilo Burgos, Capital 700,000
Helenita Ruiz, Capital 1,000,000
to record the initial investment of Burgos
Financialand Ruizand Reporting – JL Santos, CPA, MBA
Accounting
 1
Partnership Formation 6
BURGOS AND RUIZ
Statement of Financial Position
July 1, 2017

Assets
Cash 700,000
Land 1,300,000
Total Assets 2,000,000
Liabilities and Owner’s Equity
Mortgage Payable 300,000
Nilo Burgos, Capital 700,000
Helenita Ruiz, Capital 1,000,000
Total Liabilities and Owner’s Equity 2,000,000
Financial Accounting and Reporting – JL Santos, CPA, MBA
 1
Partnership Formation 7
A Sole Proprietor and Another Individual form a partnership

Illustration:

The statement of financial position of Galicano Del Mundo on Oct. 1, 2017,

before accepting Christine Resultay as partner is shown as follows:

Financial Accounting and Reporting – JL Santos, CPA, MBA

 1
Partnership Formation 8
A Sole Proprietor and Another Individual form a partnership
GALICANO DEL MUNDO
Statement of Financial Position
October 1, 2017
Assets
Cash 60,000
Notes Receivable 30,000

Accounts Receivables 240,000

Less: Allowance for Impairment Loss 10,000 230,000

Merchandise Inventory 80,000

Furniture and Fixtures 60,000

Less: Accumulated Depreciation 6,000 54,000

Total Assets 454,000
Financial Accounting and Reporting – JL Santos, CPA, MBA
 1
Partnership Formation 9
A Sole Proprietor and Another Individual form a partnership
GALICANO DEL MUNDO
Statement of Financial Position
October 1, 2017

Liabilities and Owners' Equity

Notes Payable 40,000
Accounts Payable 100,000
Galicano Del Mundo, Capital 314,000
Total Liabilities and Owners' Equity 454,000

Christine Resultay offered to invest cash to get a capital credit equal to one-half of Galicano
Del Mundo’s capital after giving effect to the adjustments below. Del Mundo accepted the
offer.
Financial Accounting and Reporting – JL Santos, CPA, MBA
 Partnership Formation 2
0
A Sole Proprietor and Another Individual form a partnership

1. The merchandise is to be valued at P74,000

2. The accounts receivable is estimated to be 95% collectible.
3. Interest accrued on the notes receivable will be recognized: P10,000, 12% dated
July 1, 2017 and P20,000, 12% dated August 1, 2017.
4. Interest on notes payable to be accrued at 14% annually from April 1, 2017.
5. The furniture and fixtures are to be valued at P46,000.
6. Office supplies on hand that have been charged to expense in the past amounte
d to P4,000. These will be used by the partnership.

Financial Accounting and Reporting – JL Santos, CPA, MBA

 Partnership Formation 2
1
A Sole Proprietor and Another Individual form a partnership

New books for the Partnership (required per NIRC)

The following procedures may be used in recording the formation of the partnership:
Books of Galicano Del Mundo
1. Adjust the assets and liabilities of Galicano Del Mundo in accordance with the agreement. Adjus
tment are to be made to his capital account.
2. Close the books
Books of the Partnership:
3. Record the investment of Galicano Del Mundo
4. Record the investment of Christine Resultay

Financial Accounting and Reporting – JL Santos, CPA, MBA

 Partnership Formation 2
2
A Sole Proprietor and Another Individual form a partnership

Galicano Del Mundo, Capital 14,100

Office Supplies 4,000
Interest Receivable 700
Merchandise Inventory 6,000
Allowance for Impairment Loss 2,000
Interest Payable 2,800
Accumulated Depreciation 8,000
to record adjustments to restate Del Mundo, Capital
Financial Accounting and Reporting – JL Santos, CPA, MBA
 Partnership Formation 2
3
A Sole Proprietor and Another Individual form a partnership
Notes Payable 40,000
Accounts Payable 100,000
Interest Payable 2,800
Allowance for Impairment Loss 12,000
Accumulated Depreciation 14,000
Galicano Del Mundo, Capital 299,900
Cash 60,000
Notes Receivable 30,000
Interest Receivable 240,000
Merchandise Inventory 74,000
Office Supplies 4,000
Financial Accounting and Reporting – JL Santos, CPA, MBA
Furniture and Fixtures 60,000
 Partnership Formation 2
Cash 60,000 4
A Sole Proprietor and Another Individual form a partnership
Notes Receivable 30,000
Accounts Receivable 240,000
Interest Receivable 700
Merchandise Inventory 74,000
Office Supplies 4,000
Furniture and Fixtures 60,000
Notes Payable 40,000
Accounts Payable 100,000
Interest Payable 2,800
Allowance for Impairment Loss 12,000
Accumulated Depreciation 14,000
Galicano Del Mundo, Capital 299,900
Financial Accounting and Reporting – JL Santos, CPA, MBA
 Partnership Formation 2
5
A Sole Proprietor and Another Individual form a partnership

Cash 149,950

Christine Resultay, Capital 149,950

to record the investment of Resultay

Financial Accounting and Reporting – JL Santos, CPA, MBA

 Partnership Formation 2
6
A Sole Proprietor and Another Individual form a partnership
DEL MUNDO AND RESULTAY
Statement of Financial Position
October 1, 2019
ASSETS
Cash P209,950
Notes Receivable 30,000

Financial Accounting and Reporting – JL Santos, CPA, MBA

 Partnership Formation 2
7
A Sole Proprietor and Another Individual form a partnership
DEL MUNDO AND RESULTAY
Statement of Financial Position
October 1, 2019
LIABILITIES AND OWNERS’ EQUITY
Notes Payable P40,000
Accounts Payable

100,000

Financial Accounting and Reporting – JL Santos, CPA, MBA

 Partnership Formation 2
8
Two or More Sole Proprietor form a Partnership
DEOGRACIA CORPUZ
Statement of Financial Position
June 30, 2019
ASSETS
Cash P50,000
Accounts Receivable 100,000
Merchandise Inventory 80,000
Furniture and Fixtures 60,000
TOTAL ASSETS P290,000
LIABILITIES AND OWNERS’ EQUITY
Accounts Payable P30,000
Deogracia Corpuz, Capital 260,000
TOTAL LIABILITIES & OWNERS’ EQUITY P290,000
Financial Accounting and Reporting – JL Santos, CPA, MBA
 Partnership Formation 2
9
Two or More Sole Proprietor form a Partnership
ESTERLINA GEVERA
Statement of Financial Position
June 30, 2019
ASSETS
Cash P40,000
Accounts Receivable 80,000
Merchandise Inventory 100,000
Delivery Equipment 90,000
TOTAL ASSETS P310,000

LIABILITIES AND OWNERS’ EQUITY

Accounts Payable P60,000
Esterlina Gevera, Capital 250,000
TOTAL LIABILITIES & OWNERS’ EQUITY Financial Accounting and Reporting –P310,000
JL Santos, CPA, MBA
 Partnership Formation 3
0
Two or More Sole Proprietor form a Partnership

The conditions and adjustments agreed upon by the partners for purposes of
determining their interests in the partnership are:
1. Actual count and bank reconciliation on Corpuz proprietorship’s cash
account revealed cash short and unrecorded expenses of P3,500.
2. Establishment of a 10% allowance for uncollectible accounts in each book.
3. The merchandise inventory of Gevera is to be increased by P10,000.
4. The furniture and fixtures of Corpuz are to be depreciated by P6,000.
5. The delivery equipment of Gevera is to be depreciated by P9,000.

Financial Accounting and Reporting – JL Santos, CPA, MBA

 Partnership Formation 3
1
Two or More Sole Proprietor form a Partnership
New books for the Partnership (required per NIRC)
The following procedures may be used in recording the formation of the partnership:

Books of Deogracia Corpuz and Esterlina Gevera

1. Adjust the accounts of both parties in accordance with the agreement. Adjustment are to be made to
their respective capital account.
2. Close the books.

Books of the Partnership:

3. Record the investment of Deogracia Corpuz
4. Record the investment of Esterlina Gevera

Financial Accounting and Reporting – JL Santos, CPA, MBA

 Partnership Formation 3
2
Two or More Sole Proprietor form a Partnership
.
Deogracia Corpuz, Capital 19,500
Cash 3,500
Allowance for Impairment Loss 10,000
Accumulated Depreciation 6,000
to record adjustments to restate Corpuz’s capital

Financial Accounting and Reporting – JL Santos, CPA, MBA

 Partnership Formation 3
3
Two or More Sole Proprietor form a Partnership

Books of Deogracia Corpuz

Accounts Payable 30,000
Allowance for Impairment Loss 10,000
Accumulated Depreciation 6,000
Deogracia Corpuz, Capital 240,500
Cash 46,500
Accounts Receivable 100,000
Merchandise Inventory 80,000
Furniture and Fixtures 60,000
to close the books of Corpuz

Financial Accounting and Reporting – JL Santos, CPA, MBA

 Partnership Formation 3
4
Two or More Sole Proprietor form a Partnership

Books of Esterlina Gevera

Merchandise Inventory 10,000

Esterlina Gevera, Capital 7,000
Allowance for Impairment Loss 8,000
Accumulated Depreciation 9,000
to record adjustments to restate
Gevera’s capital

Financial Accounting and Reporting – JL Santos, CPA, MBA

 Partnership Formation 3
5
Two or More Sole Proprietor form a Partnership
Books of Esterlina Gevera
Accounts Payable 60,000
Allowance for Impairment Loss 8,000
Accumulated Depreciation 9,000
Esterlina Gevera, Capital 243,000
Cash 40,000
Accounts Receivable 80,000
Merchandise Inventory 110,000
Delivery Equipment 90,000
to close the books of Gevera

Financial Accounting and Reporting – JL Santos, CPA, MBA

Two or More Sole Proprietor Form a Partnership
Books of the Partnership
Cash 46,500
Accounts Receivable 100,000
Merchandise Inventory 80,000
Furniture and Fixtures 54,000
Accounts Payable 30,000
Allowance for Impairment Loss 10,000
Deogracia Corpuz, Capital 240,500
to record the investment of Corpuz
Two or More Sole Proprietor Form a Partnersh
ip
Books of the Partnership
Cash 40,000
Accounts Receivable 80,000
Merchandise Inventory 110,000
Delivery Equipment 81,000
Accounts Payable 60,000
Allowance for Impairment Loss 8,000
Esterlina Gevera, Capital 243,000
to record the investment of Gevera
 hip
CORPUZ AND GEVERA
Statement of Financial Position
June 30, 2019
ASSETS
Cash P86,500
Accounts Receivable P180,000
Less: Allowance for Impairment Loss 18,000 162,000
Merchandise Inventory 190,000
Furniture and Fixtures 54,000
Delivery Equipment 81,000
TOTAL ASSETS P573,500
LIABILITIES AND OWNERS’ EQUITY
Accounts Payable P90,000
Deogracia Corpuz, Capital 240,500
Esterlina Gevera, Capital 243,000
 LIMITED LIABILITY COMPANY

A limited liability company (LLC) is a hybrid form of business for it c

ombines the best features of a partnership and a corporation. LLC is
a form of legal entity that provides limited liability to its owners.
The owners of an LLC are called members. These owners may be i
ndividuals, partnerships, corporations or other entities. Many states e
ven allow one-person LLCs. The members have limited liability even if
they are active in the company.
 LIMITED LIABILITY COMPANY

This type of entity is attractive for professional service firms because the owners will
not have personal liability for the other owner’s malpractice.
A limited liability partnership (LLP) is very similar to an LLC except that investment in
LLP is restricted to professional.
The four major international accounting firms KPMG, Ernst & Young, Price Waterhouse
Coopers and Deloitte & Touche started as partnerships. As they grew and the risk incre
ased, these firms were allowed to change, by operation of law, to LLPs. The LLP concep
t is different from that of a limited partnership.
The accounting for LLCs is similar to partnerships. The term “member” and “member’
s equity” are used instead of “partner” and “partner’s equity.”
Thank you!!!
Any Questions???