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PARTNERSHIP FORMATION

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by

Danielle Policarpio

on 10 November 2014

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Transcript of PARTNERSHIP FORMATION

Assumption 2
The partnership will open a new set of books
FORMATION A
TWO OR MORE PERSONS FORM A PARTNERSHIP FOR THE FIRST TIME: ALL PARTNERS ARE NEW IN THE BUSINESS
The partnership may either:
use the books of the sole proprietor
open new set of books
1. CASH CONTRIBUTIONS
(CAPITALIST PARTNERS)
Anna and Elsa agreed to form a partnership by contributing P500,000 cash each.
Cash 1,000,000
Anna, Capital 500,000
Elsa, Capital 500,000
2. CASH AND NON-CASH CONTRIBUTIONS
(CAPITALIST PARTNERS)
Anna and Elsa made the following contributions in the partnership:
Anna Elsa
Cash P100,000 P50,000
Inventories 50,000
Equipment 75,000
The entry to record the contributions of the partners follows:
The entry to record the contributions in the partnership is:
Cash 150,000
Inventories 50,000
Equipment 75,000
Anna, Capital 150,000
Elsa, Capital 125,000
3. CONTRIBUTIONS IN THE FORM OF CASH, NON- CASH ASSETS AND INDUSTRY
(CAPITALIST AND INDUSTRIAL PARTNERS)
Anna, Elsa and Olaf formed a partnership and made the following contributions:
Anna Elsa
Cash P50,000 P25,000
Equipment 50,000
Olaf is an industrial partner to contribute her special skills and talents to the partnership. Profit or loss is to be shared equally among the partners.
The entry to record the contributions of partners Anna and Elsa follows:
Cash 75,000
Equipment 50,000
Anna, Capital 50,000
Elsa, Capital 75,000
The entry to record the contribution of partner Olaf follows:
Olaf is admitted into the partnership as an industrial partner to share 1/3 in the partnership profit.
The partners agreed on the following conditions:

1. An allowance for uncollectible accounts of P22,000 is to be established.
2. The inventories are to be valued at their current replacement cost of P270,000.
3. Prepaid expenses of P12,000 and accrued expenses of P5,000 are to be recognized.
4. Sven is to be credited for an amount equal to the net assets transferred.
5. Kristoff is to contribute sufficient cash to have an equal interest in the partnership.
Illustrative Problem A:

Kristoff and Sven formed a partnership wherein Kristoff is to contribute cash while Sven is to transfer the assets and liabilities of his business, Account balances on the books of Sven are as follows:

Debit Credit
Cash 300,000
Accounts Receivable 450,000
Inventories 240,000
Accounts Payable 90,000
Sven, Capital 900,000
PARTNERSHIP FORMATION
A SOLE PROPRIETOR AND AN INDIVIDUAL FORM A PARTNERSHIP
FORMATION B
Assumption 1
The partnership will use the books of the sole proprietor
The following procedures should be followed in accounting for this type of formation:

1. Adjust the books of the sole proprietor to bring account balances to agreed values.

2. Record the investment of the other partner.
asset capital for increases in asset values
capital asset for decreases in asset values
capital liabilities for increases in liability bal.
liabilities capital for decreases in liability bal.
The following rules will be helpful in making the necessary adjusting entries:
Debit Credit Description
In case of contra asset accounts, the following rules shall apply:
-contra asset account
-capital
-for increase in asset
values
Dr.
Cr.
Des.
Dr.
Cr.
Des.
-capital
-contra asset account
-for decrease in asset
values
Hence, the information on the partnership of Kristoff and Sven will be accounted for as follows:
Step 1: Adjust the books of the sole proprietor Sven to agreed values

a. Sven, Capital 22,000
Allow. for Bad Debts 22,000

b. Inventories 30,000
Sven, Capital 30,000

c. Prepaid Expenses 12,000
Expense Payable 5,000
Sven, Capital 7,000

The balance of the capital account of Sven after the three adjusting entries are posted is P915,000.

(P900,000- P22,000+ P3,000+ P7,000)
Step 2: Record the investment of the other partner, Kristoff.

Cash 915,000
Kristoff, Capital 915,000
Opening entries on the new partnership books using the data given in Illustrative Problem A:

a. Cash 300,000
Accounts Receivable 450,000
Inventories 270,000
Prepaid Expenses 12,000
Allow. for Bad Debts 22,000
Accounts Payable 90,000
Expenses Payable 5,000
Sven, Capital 915,000
To record the investment of Sven

b. Cash 915,000
Kristoff, Capital 915,000
To record the investment of Kristoff

Entries to adjust and close the separate books of the sole proprietor are also made. Using the same illustrative problem, the adjusting and closing entries on the books of Sven are as follows:
a. Sven, Capital 22,000
Allow. for Bad Debts 22,000

b. Inventories 30,000
Sven, Capital 30,000

c. Prepaid Expenses 12,000
Expenses Payable 5,000
Sven, Capital 7,000

d. Sven, Capital 915,000
Expenses Payable 5,000
Accounts Payable 90,000
Allow. for Bad Debts 22,000
Cash 300,000
Accounts Receivable 450,000
Inventories 270,000
Prepaid Expenses 12,000
To close the books of Sven
FORMATION C
TWO OR MORE SOLE PROPRIETORS FORM OF PARTNERSHIP
The partnership may either:
use the books of one of the sole proprietors
open new set of books for the partnership
Illustrative Problem B:

Hans, owner of Hans Variety Store, and Oaken, owner of Oaken Trading decided to combine their businesses on July 1, 2010. Each is to transfer business assets and liabilities at agreed values. Statements of financial position for the two proprietors are as follows..
Hans Variety Store
Statement of Financial Position
July 1, 2010

Assets
Cash P120,000
Accounts Receivable P72,000
Less: Allow. for Bad Debts 6,000 66,000
Merchandise Inventory 330,000
Store Equipment P600,000
Less: Accumulated Depr. 30,000 570,000
Total Assets P1,086,000

Liabilities and Capital
Accounts Payable P132,000
Hans, Capital 954,000
Total Liabilities and Capital P1,086,000
Oaken Trading
Statement of Financial Position
July 1, 2010

Assets
Cash P30,000
Accounts Receivable P300,000
Less: Allow. for Bad Debts 21,000 279,000
Merchandise Inventory 1,260,000
Delivery Equipment P480,000
Less: Accumulated Depr. 6,000 474,000
Total Assets P2,043,000

Liabilities and Capital
Accounts Payable P333,000
Oaken, Capital 1,710,000
Total Liabilities and Capital P2,043,000
The partners agreed on the following conditions:

1. Partners' capital in the partnership shall be equal to the net assets transferred.
2. Adjustments are to be made as follows:
a. Allowance for Uncollectible Accounts shall be
P7,200 and P30,000, respectively.
b. Inventories are to be valued at 120% of their
recorded values.
c. Both store and delivery equipment are 5%
depreciated
Assumption 1
The partnership will use the books of one of the sole proprietors
If the books of Oaken ding will be used by the partnership, the following procedures will be followed:

1. Adjust the books of Oaken Trading to bring the balances of accounts to agreed values.

2. Record the investment of Hans.
Step 1: Adjust the books of Oaken Trading

a. Oaken, Capital 9,000
Allow. for Bad Debts 9,000
30,000-21,000=9,000

b. Merchandise Inventory 252,000
Oaken, Capital 252,000
1,260,000x20%=252,000

c. Oaken, Capital 18,000
Accumulated Depr.- D. Equip. 6,000
Delivery Equipment 24,000
480,000x5%=24,000
474,000-(480,000x95%)=18,000
Step 2: Record the investment of Hans

a. Cash 120,000
Accounts Receivable 72,000
Merchandise Inventory 396,000
Store Equipment 570,000
Allow. for Bad Debts 7,200
Accounts Payable 132,000
Hans, Capital 1,018,800

(330,000x120%)
(600,000x95%)

a. Hans, Capital 1,200
Allow. for Bad Debts 1,200
7,200-6,000=1,200

b. Merchandise Inventory 66,000
Hans, Capital 66,000
330,000x20%=66,000

c. Allow. for Bad Debts 7,200
Accumulated Depr.-S.Equip. 30,000
Accounts Payable 132,000
Hans, Capital 1,018,800
Cash 120,000
Accounts Receivable 72,000
Merchandise Inventory 396,000
Store Inventory 600,000
Adjusting and closing entries prepared on the separate books of Hans Variety Store:
Assumption 2
The partnership will use or open new set of books
Opening entries on the new partnership books using the data given in Illustrative Problem B are shown below:

a. Cash 120,000
Accounts Receivable 72,000
Merchandise Inventory (330,000X120%) 396,000
Store Equipment 570,000
Allow. for Bad Debts 7,200
Accounts Payable 132,000
Hans, Capital 1,018,000
To record the investment of Hans

b. Cash 30,000
Accounts Receivable 300,000
Merchandise Inventory(1,260,000x120%) 1,512,000
Allow. for Bad Debts 30,000
Accounts Payable 333,000
Oaken, Capital 1,935,000
To record the investment of Oaken

Hans and Oaken
Statement of Financial Position
July 1, 2010

Assets
Cash P150,000
Accounts Receivable P372,000
Less: Allow. for Bad Debts 37,200 334,800
Merchandise Inventory 1,908,000
Store Equipment 570,000
Delivery Equipment 456,000
Total Assets P3,418,800
Liabilities and Capital
Accounts Payable P465,000
Hans, Capital 1,018,800
Oaken, Capital 1,935,000
Total Liabilities and Capital P3,418,800
A statement of financial position prepared immediately after the formation of the partnership of Hans and Oaken is shown below:
Goodwill Resulting form the Acquisition of a Sole Proprietorship by a Partnership
The acquisition of a sole proprietorship/s by a partnership or formation of a partnership by a sole proprietorship and an individual or among two or more sole proprietorships may involve the recognition of
GOODWILL.
THE END..
Thank you for listening :)
Group 2:
Policarpio, Danielle S.
Lopez, Anne Jealyn
Dizon, Rein John
Hernandez, Sherillei
Villanueva, Christian
Pamintuan, Cherry Mae
Full transcript