AFAR-01: partnership formation

PARTNERSHIP
— is an association of two or more persons who bind themselves to contribute money, property
or industry to a common fund with the intention of dividing the profits among themselves.

CHARACTERISTICS OF A PARTNERSHIP
1. Separate legal personality – A partnership has a juridical personality separate and distinct
from that of each of the partners. It may acquire a property in its own name and may enter
into contracts.
2. Ease of formation – The formation of a partnership does not require as many formalities as
a corporation.
3. Co-ownership of partnership property and profits – All assets invested in the partnership
become the property of the partnership. Each partner has a proprietary interest in the
partnership.
4. Limited life – Any change in the agreement or relation (death, withdrawal, incapacity,
admission) of the partners terminates the partnership.
5. Mutual agency – Each partner has an equal right to act for the partnership and to enter into
contracts binding upon it, as long as he acts within the normal scope of business
operations.

PARTNER’S LEDGER ACCOUNTS

6. Capital account – is the main equity account where the overall ownership interest
(excluding loan balances) of a partner is contained.
7. Drawing account – a temporary contra equity account used to record the temporary
withdrawals of cash or other assets made by a partner from the partnership for its personal
use during a reporting period. The share of a partner in the net income is also closed to the
drawing account before the latter is finally closed to the partner’s capital account.
8. Loan to partner/Receivable from partner/Partner loan (debit balance) – is used to record a
withdrawal by a partner of a substantial amount with the assumption of its repayment to
the firm.
— Note: Not recorded to the partner’s drawing account.
9. Loan from partner/Payable to partner/Partner loan (credit balance) – is used to record an
advance to the partnership by a partner with the assumption of its ultimate repayment by
the partnership.
— Note: Not recorded as an increase in the partner’s capital account.

TRANSACTIONS RELATED TO PARTNER’S LEDGER ACCOUNTS

ACCOUNT DEBITED FOR CREDITED FOR

Capital account 1. Permanent withdrawal of
capital
2. Debit balance of the
drawing account at the
end of the period
1. Original investment
2. Additional investment
3. Credit balance of the
drawing account at the
end of the period

RRVD 1
 AFAR-01: partnership formation

ACCOUNT DEBITED FOR CREDITED FOR

Drawing account 1. Partnership obligations 1. Withdrawal of assets by
assumed or paid by the the partners in
partner anticipation of net
2. Personal funds or claims income
of partner collected and 2. Partner’s personal
retained by the indebtedness paid or
partnership assumed by the
3. Periodic partner’s partnership
salaries depending on the 3. Funds or claims of
accounting and partnership collected or
disbursement procedures retained by the partner
agreed upon
PARTNERSHIP FORMATION
― All contributed assets must be valued at the agreed value.
― In the absence of agreed value, use the fair market value (FMV) or appraisal/appraised value.
― Assessed value is never used in partnership accounting (only for tax purposes).
― Any liability assumed by the partnership is included in the books of the partnership.
― If the problem is silent, liabilities are not assumed by the partnership.

Contributed asset (@ agreed value/FMV/appraisal value) (xxx

Liabilities assumed by the partnership (xxx)
Contributed capital (xxx

INITIAL CAPITAL CREDIT (TO PARTNER)

― is the capital balance of each partner after formation.
― is always based on agreed capital.
― If there is no agreed capital (or the problem is silent), use contributed capital.

Total agreed capital (xxx

Multiplied by: Initial capital ratio (xxx
Initial capital credit (xxx

RRVD 2
 AFAR-01: partnership formation
PROBLEM #1

SOLUTION – PROBLEM #1
A B C Total
Equipment 300,000 300,000
Land and building 1,500,000 1,500,000
Mortgage payable (300,000) (300,000)
Cash 500,000 500,000
Initial capital credit 300,000 1,200,000 500,000 2,000,000
Divided by: 60%
Total agreed capitalization 2,000,000

ANSWERS – PROBLEM #1
1. B
2. A

RRVD 3
 AFAR-01: partnership formation
PROBLEM #2

SOLUTION – PROBLEM #2
Charlie Delta Total
Cash 85,000 55,000 140,000
Machine 113,000 S S 113,000
Equipment 107,000 107,000
Initial capital credit 198,000 [1] 162,000 [2] 360,000

[1] 360,000 * 55% = 198,000

[2] 360,000 * 45% = 162,000
ANSWERS – PROBLEM #2
1. A
2. B

RRVD 4
 AFAR-01: partnership formation
PROBLEM #3

SOLUTION – PROBLEM #3
Regina Jessica Nataly Total
Land 2,400,000 2,400,000
Mortgage payable (800,000) (800,000)
Building 800,000 800,000
Trading securities 3,000,000 3,000,000
Contributed capital 1,600,000 800,000 3,000,000 5,400,000
Additional capital investment 400,000 [S] 2,200,000 [S] 2,000,000 4,600,000
Initial capital credit 2,000,000 3,000,000 5,000,000 10,000,000

Total agreed capitalization 10,000,000 10,000,000 10,000,000

Multiplied by: Initial capital ratio 20% 30% 50%
Initial capital credit 2,000,000 3,000,000 5,000,000

ANSWER – PROBLEM #3
C

RRVD 5
 AFAR-01: partnership formation
PROBLEM #4

RRVD 6
 AFAR-01: partnership formation
SOLUTION PROBLEM #4
Len May Total
Unadjusted capital balance 80,000,000 30,000,000 110,000,000
Allowance for bad debts (2,000,000) [1] (6,000,000) [2] (8,000,000)
Loss on impairment of inventory (10,000,000) [3] [4] (10,000,000)
Depreciation expense (20,000,000) [5] (3,000,000) [6] (23,000,000)
Interest expense (2,250,000) [7] (1,250,000) [8] (3,500,000)
Adjusted capital balance 45,750,000 19,750,000 65,500,000
Divided by: 80%
Total contributed capital 81,875,000
Munltiplied by: 20%
Cash to be invested by Nancy 16,375,000

[1] 20,000,000 * 10% = 2,000,000

[2] 30,000,000 * 20% = 6,000,000
[3] 70,000,000 - 60,000,000 = 10,000,000
[4] No impairment since the cost is lower than net realizable value.
[5] 50,000,000 * 40% = 20,000,000
[6] 10,000,000 * 30% = 3,000,000
[7] 30,000,000 * 10% * (9/12) = 2,250,000
[8] 50,000,000 * 5% * (6/12) = 1,250,000

ANSWER – PROBLEM #4
A

RRVD 7
 AFAR-01: partnership formation
ADDITONAL PROBLEMS

RRVD 8
 AFAR-01: partnership formation
ADDITONAL PROBLEMS

RRVD 9
 AFAR-01: partnership formation
ADDITONAL PROBLEMS

RRVD 10
 AFAR-01: partnership formation
ADDITONAL PROBLEMS

RRVD 11
 AFAR-01: partnership formation
ADDITONAL PROBLEMS

RRVD 12
 AFAR-01: partnership formation
ADDITONAL PROBLEMS

RRVD 13
 AFAR-01: partnership formation
ADDITONAL PROBLEMS

RRVD 14
 AFAR-01: partnership formation
ADDITONAL PROBLEMS

RRVD 15
 AFAR-01: partnership formation
ADDITONAL PROBLEMS

5:3:2

RRVD 16
 AFAR-01: partnership formation
ADDITONAL PROBLEMS

RRVD 17
 AFAR-01: partnership formation
ADDITONAL PROBLEMS

RRVD 18
 AFAR-01: partnership formation
ADDITONAL PROBLEMS

RRVD 19
 AFAR-01: partnership formation
ADDITONAL PROBLEMS

RRVD 20
 AFAR-01: partnership formation
ADDITONAL PROBLEMS

RRVD 21
 AFAR-01: partnership formation
ADDITONAL PROBLEMS

RRVD 22
 AFAR-01: partnership formation
ADDITONAL PROBLEMS

RRVD 23
 AFAR-01: partnership formation
ADDITONAL PROBLEMS

RRVD 24
 AFAR-01: partnership formation
ADDITONAL PROBLEMS

RRVD 25
 AFAR-01: partnership formation
ADDITONAL PROBLEMS

RRVD 26