Try this!

Recall your lesson in Basic Accounting part II on Partnership. Fill in as many information as you
can to complete the concept map.

a.
a. Mutual
Mutual Agency
Agency
b.
b. Unlimited
Unlimited liability
liability
c. Limited
c. Limited life
life
Characteristics
Characteristics d.
d. Mutual
Mutual participation
participation inin profits
profits
e. Legal
e. Legal entity
entity
f. Co-ownership
f. Co-ownership of of contributed
contributed assets
assets
g.
g. Income
Income tax
tax

It
It is
is easy
easy and
and inexpensive
inexpensive to to organize,
organize, asas it
it is
is formed
formed by by aa simple
simple contract
contract between
between twotwo or
or
more
more persons.
persons.
The
The unlimited
unlimited liability
liability of
of the
the partners
partners makes
makes it it reliable
reliable from
from the
the point
point of
of view
view of
of
creditors.
creditors.
The
The combined
combined personal
personal credit
credit of
of the
the partners
partners offers better opportunity
offers better opportunity for
for obtaining
obtaining
Advantages
Advantages additional
Nature
Nature of
of a
a additional capital than does
capital than does a sole proprietorship.
a sole proprietorship.
Partnership
Partnership The
The participation
participation in
in the
the business
business by more than
by more than one one person
person makes
makes it
it possible
possible for
for a
a closer
closer
supervision
supervision ofof all
all the
the partnership
partnership activities.
activities.
The
The direct
direct gain
gain to the partners
to the partners is
is an
an incentive
incentive to to give
give close
close attention
attention toto the
the business.
business.
The
The personal element in
personal element in the characters of
the characters of the
the partners
partners is
is retained.
retained.

The
The personal liability of
personal liability of aa partner
partner for
for firm
firm debts
debts deters
deters many
many from
from investing
investing capital
capital in
in a
a
partnership.
partnership.
A
A partner
partner maymay be
be subject
subject to to personal
personal liability
liability for
for the
the wrongful
wrongful acts or omissions
acts or omissions of
of
his/her
his/her associates.
associates.
Disadvantages
Disadvantages It
It is
is less
less stable
stable because
because it it can
can easily
easily be
be dissolved.
dissolved.
There
There is is divided authority among
divided authority among the
the partners.
partners.
There
There is is constant likelihood of
constant likelihood of dissension
dissension and
and disagreement
disagreement when
when each
each of
of the
the partners
partners
has
has the same authority
the same authority inin the
the management
management of of the
the firm.
firm.

1.
1. As
As to
to Activity
Activity
PARTNERSHIP
PARTNERSHIP
2.
2. As
As to
to Object
Object
(Nature
(Nature and
and
Formation)
Formation) 3. As
3. As to
to Liability
Liability of
of Partners
Partners
Kinds
Kinds of
of 4.
4. As
As to
to Duration
Duration
Partnership
Partnership 5. As
5. As to
to Representations
Representations to to Others
Others
6.
6. As
As to
to legality of existence
legality of existence
7. As
7. As to
to Publicity
Publicity
Formation of
Formation of
a Partnership
a Partnership
1.
1. As to Contribution
As to Contribution
Classes
Classes of
of 2.
2. As to Liability
As to Liability
Partners
Partners 3. As
As to
to Management
Management
3.
4.
4. Other
Other Classification
Classification

Cash
Cash
Contributions
Contributions Face Value

Accounting
Accounting
for
for Partner's
Partner's Non-Cash
Non-Cash
Initial Contributions
Contributions
Agreed Value or Fair Market Value
Initial
Investment
Investment

Contribution
Contribution
of
of Industry
Industry
Memorandum Entry
Think ahead!
Provide the details below by answering each question and identifying what is being asked. Fill-
out your answers on the spaces provided.

Questions Answer

What is a partnership? A partnership is a contract whereby two or more

persons bind themselves to contribute money,
property, of industry into a common fund with the
intention of dividing profits among themselves.

How does a partnership differ from a sole A partnership is different from sole proprietorship
proprietorship? because partnership has two or more owners while
sole proprietorship has only one owner.

Explain the meaning of unlimited Unlimited liability means that the business owners
liability of a partnership debts. Is this an are personally liable for any loss the business makes.
advantage or a disadvantage on the part I think that it is an advantage on the part of the
of the partnership? partnership.

What is the basis for measuring the Non-cash assets such as equipment and prepaid
contributions or investments of partner in expenses should be recorded at current
form of non-cash assets? market values.

Why is it preferable to have a written It is preferable to have a written contract to protect

contract of a partnership? What are the the owner's investment in the company, govern how
contents of a typical partnership contract? the company will be managed, clearly define the
rights and obligations of the partners, and determine
the rules of engagement should a disagreement arise
among the parties. A partnership contract typically
contains percentage of ownership, division of profit
and loss, length of the partnership, decision making
 and resolving disputes, partner authority, and
withdrawal or death of a partner.

What is the major difference between a General partnership is consist of a general partner
general and a limited partnership? How whose liability extends to his separate property while
can they be distinguished? When a limited partnership is consist of a partner whose
partnership is a limited partnership, does obligation is only limited to his capital contribution.
the characteristic of “unlimited liability” When a partnership is a limited partnership, the
still apply? Why or why not? characteristic of “unlimited liability” still apply
because a limited partnership must have at least one
general partner.

Why are the capital accounts and drawing Capital accounts and drawings accounts are opened
accounts opened for each partner? for each partner because it is much easier
to account for special contributions, distributions,
allocations, and ownership changes.

What are the steps to be followed in 1. Adjust the books of the sole proprietor to
recording the formation of a partnership bring account balances to agreed value.
if the books of one of the previous sole 2. Then record the investment of the other
proprietors will be used? partner.

Why would a partnership decide to use Partnership decides to use the books of one of the
the books of one of the previous sole previous sole proprietors instead of opening new set
proprietors instead of opening new set of of books because it is more convenient. If they will
books? use the books of the previous sole proprietors they
just have to adjust their set of books to bring the
account balances to the agreed value and record the
investment of the other partner. They won’t have to
close the books and make a new set of books.

Why is the Accumulated Depreciation Accumulated depreciation accounts are not assumed

account not carried over to the new books by the partnership. The partnership establishes and
of the partnership? records the equipment at its current fair market value
and then begins depreciating the equipment over its
useful life to the partnership.
See if you can do this!
THEORIES: (TRUE or FALSE)

Encircle the letter T if the statement is true and the letter F if the statement is false.

T F 1. A written partnership contract is required to be prepared whenever a partnership is

formed.
T F 2. All partnerships are subject to income tax.
T F 3. A partner’s contribution in the form of industry or service is recorded by debiting the
account “Industry”.
T F 4. In the partnership books, there are as many capital and drawing accounts as there are
partners.
T F 5. A partner’s contribution in a form of non-cash assets should be at its fair market
value in the absence of an agreed value.
T F 6. A partnership is much easier and less expensive to organize than a corporation.
T F 7. A newly organized partnership should always open a new set of books.
T F 8. All partnership have at least one general partner.
T F 9. Each partner generally has the authority to enter into contracts which are binding
upon the partnership.
T F 10. The property invested in a partnership by a partner becomes the property of the
partnership.
T F 11. Contra accounts, like Allowance for Uncollectible Accounts and Accumulated
Depreciation, on non-cash assets invested by partners are always carried on the
partnership books.
T F 12. The unlimited liability of partnership debts makes the partnership more reliable
from the point of view of creditors.
T F 13. Goodwill may be recognized upon partnership formation when the capital credited
to a partner exceeds the fair value of the net assets transferred from previous sole
proprietorship business.
T F 14. Before a partnership can operate legally, it has to first comply with the registration
requirements of the SEC, DTI, BIR, SSS and mayor’s office.
T F 15. There is a required number of limited partners in a general co-partnership; in the
 same manner that, there is a required number of general partners in a limited
partnership.
T F 16. A partnership is always owned by at least two individuals.
T F 17. For financial reporting purposes, the personal assets and debts of a partner should
be combined with the assets and debts of the business.
T F 18. Partners are personally liable for the liabilities of the partnership if the partnership
is unable to pay.
T F 19.In a partnership, an owner’s equity account exists for each partner.
T F 20. Net asset adjustments are made on a sole proprietor’s books, when these are to be
used as partnership books, for the purpose of arriving at agreed values.

THEORIES: (IDENTIFICATION)

__Limited Partnership___ 1. A partner wherein all the partners have limited liability except
for at least one general partner.
Industry 2. The contribution of an industrial partner.
Capitalist-Industrial Partner 3. A partner who contributes money, property and industry.
____Mutual Agency___ 4. A characteristic of a partnership where in any partner can act in
behalf of the partnership as long as these acts are within the scope
of normal partnership activities.
___De Facto Partnership___ 5. A partnership which has failed to comply with one or more of the
legal requirements for its establishment.
_Memorandum Entry____ 6. An entry prepared when a partner contributes skill of industry
into the partnership.
Non-trading 7. A partnership organized for the purpose of rendering services.
______Partnership______ 8. A contract whereby two or more persons bind themselves to
contribute money, property, or industry to a common fund with the
intention of dividing profits among themselves.
_____Agreed Value_____ 9. The value assigned to the non-cash asset contributed into the
partnership.
__Nominal Partner___ 10. One who is not really a partner, not being a party to the
partnership agreement, but is made liable as a partner for the
protection of innocent third persons.
Articles of Co-Partnership 11. A written partnership contract which governs the formation,
operation and dissolution of the partnership.
___Secret Partner____ 12. A partner who has a financial interest in the firm, but not known
to be a partner, but takes active part in the management of the firm.
Securities and Exchange 13. The government body which is in charge with administration of
Comission various laws affecting partnership and corporation in the
Philippines.
__LIMITED or LTD____ 14. The word added to the name of the partnership to inform the
public that it is limited partnership.
___Limited Partner____ 15. A partner whose liability is limited to the extent of her/his
personal contribution into the partnership.
 ____Loan Payable_____ 16. Amounts advanced by partners to the partnership when the
business is in need of additional funds which are immediately
payable by the partnership and usually bear interest.
____Capital share______ 17. Each partner’s percentage of equity in the net assets of a
partnership.
__Bonus_/goodwill_ 18. The transfer of capital from one partner to another upon
partnership formation, in recognition of intangible factors such as
partner’s special expertise, established clientele or necessary
business connections.
Arrive at Agreed Value 19. The purpose of preparing adjustments on net assets contributed
by partners into the partnership.
General Professional 20. Partnership which are exempt from income tax.
Partnership

EXERCISES:

Exercise 1. (Cash and Non-Cash Contributions)

Give the entry to record the investment of Alonzo into the partnership under each of the
following independent assumptions.
a. Cash of P400,000
b. Accounts receivable of P500,000 with an allowance for uncollectible accounts of P50,000
c. Inventories that cost P300,000 using the moving average method accepted by the partnership
at its FIFO value of 80% of average cost.
d. Equipment that cost P900,000 with a book value of P300,000 after four years of use without
salvage value. The equipment should have been depreciated over a 10-year useful life.

Account Titles Debit Credit

a. Cash ...................................................................... 400,000
Alonzo, Capital............................................. 400,000

b. Accounts Receivable................................................. 500,000

Allowance for Uncollectible Accounts… 50,000
Alonzo, Capital............................................. 450,000

c. Inventories............................................................... 240,000
Alonzo, Capital............................................. 240,000

d. Equipment................................................................ 540,000
Alonzo, Capital............................................. 540,000

Exercise 2. (Cash and Net Asset Contributions)

Aquino and Asuncion have decided to form a partnership. Aquino invests the assets presented
below at their agreed valuation, and also transfers his liabilities to the new firm.

Ledger Balance Agreed Valuation

Cash P 450,000 P 450,000
Accounts Receivable 180,000 180,000
Allowance for Uncollectible Accounts 15,000 10,000
Merchandise Inventory 300,000 270,000
Equipment 180,000 125,000
Accumulated Depreciation 30,000
Accounts Payable 105,000 105,000
Notes Payable 90,000 90,000

Asuncion agrees to invest cash for a one-third interest in the firm.

Instructions:
1. Prepare the entries to record the investments of Aquino and Asuncion to the partnership’s
new set of books.
Account Titles Debit Credit
Cash.............................................................................................. 450,000
Accounts Receivable.................................................................... 180,000
Merchandise Inventory................................................................. 270,000
Equipment..................................................................................... 125,000
Allowance for Uncollectible Accounts...............................    10,000
Accounts Payable............................................................... 105,000
Notes Payable..................................................................... 90,000
Aquino Capital.................................................................... 820,000

Cash.............................................................................................. 410,000
Asuncion, Capital............................................................... 410,000

2. Prepare the entries to adjust and close the balances of accounts in the books of Aquino.
Account Titles Debit Credit
Allowance for Uncollectible Accounts......................................... 5,000
Aquino, Capital................................................................... 5,000

Merchandise Inventory................................................................. 30,000

Aquino, Capital................................................................... 30,000

Accumulated Depreciation........................................................... 30,000

Aquino, Capital............................................................................. 25,000
 Equipment........................................................................... 55,000

Allowance for Uncollectible Accounts......................................... 10,000

Accounts Payable......................................................................... 105,000
Notes Payable .............................................................................. 90,000
Cash.................................................................................... 450,000
Accounts Receivable.......................................................... 180,000
Merchandise Inventory....................................................... 270,000
Equipment........................................................................... 125,000

Exercise 3. (An Individual and a Previous Sole Proprietor)

Amores admits Andrada to a partnership interest in his business. Accounts in the ledger of
Amores on January 1, 2020, before the admission Andrade, show the following:

Debit Credit
Cash P 208,000
Accounts Receivable 460,000
Merchandise Inventory 1,440,000
Accounts Payable P 496,000
Amores, Capital 1,612,000

It is agreed that for the purpose of establishing the interest of Amore, the following adjustments
shall be made:
a. An allowance for uncollectible accounts of P25,000 is to be established.
b. The merchandise is to be valued at P1,600,000.
c. Prepaid expenses of P72,000 and unrecorded liability of P102,000 are to be recognized.

Instructions:
1. Assuming the new partnership will use the books of Amores, give the entries to adjust the
account balances of Amores and to record the investment of Andrade.
Account Titles Debit Credit
a. Amores, Capital....................................................... 25,000
Allowance for Uncollectible Accounts........ 25,000

b. Merchandise Inventory.............................................. 160,000

Amores, Capital............................................ 160,000

c. Amores, Capital....................................................... 30,000

 Prepaid Expenses………………………………. 72,000
Accounts Payable........................................... 102,000

d. Cash ..................................................................... 1,717,000

Andrada, Capital........................................... 1,717,000

2. Assuming the new partnership will open new set of books, give the entries to record the
investment of Amores and Andrade.
Account Titles Debit Credit
a. Cash ...................................................................... 208,000
Accounts Receivable................................................ 460,000
Merchandise Inventory............................................ 1,600,000
Prepaid Expenses………………………………. 72,000
Allowance for Uncollectible Accounts….. 25,000
Accounts Payable……………………….. 598,000
Amores, Capital…………………………. 1,717,000

b. Cash…...................................................................... 1,717,000
Andrada, Capital........................................... 1,717,000

3. Prepare a statement of financial position for the new partnership.

Amores and Andrada Company
Statement of Financial Position
January 1, 2020

Assets
Cash ……………………………………….………… P1,925,000
Accounts Receivable...………………………………… P460,000
Less Allowance for Uncollectible Accounts……….. 25,000 435,000
Merchandise Inventory………………………………… 1,600,000
Prepaid Expenses …………………………………….. 72,000
Total Assets P4,032,000
 Liabilities and Capital
Accounts Payable……………………………………….. P598,000
Amores, Capital…………………………………………. 1,717,000
Andrada, Capital………………………………………… 1,717,000 3,434,000
Total Liabilities and Capital P4,032,000

Exercise 4. (Cash and Non-Cash Contributions; Bonus)

Aguirre and Aranas have decided to form a partnership. Aguirre contributes cash of P1,000,000
and Aranas contributes Land with fair market value of P800,000 and a building with a fair
market value of P1,900,000. Aranas purchased the land and building five years ago for
P750,000. Aranas’ book value of the land is P175,000 and the book of value of the building is
P600,000. The P1,500,000 mortgage on the land and building is to be assumed by the
partnership. The partners agree to share profits and losses in the ratio of 3:2, respectively.

Instructions: Prepare the journal entries to record the formation of the partnership under each of
the following independent assumptions:

1. Each partner is credited for the full amount of net assets invested.

Account Titles Debit Credit

Cash ...................................................................... 1,000,000
Land …………………………………………. 800,000
Building................................................................... 1,900,000
Mortgage Payable………………………. 1,500,000
Aguirre, Capital…………………………. 1,600,000
Aranas, Capital………………………….. 1,200,000

2. Each Partner initially is to have equal interest in partnership capital.

Account Titles Debit Credit

Cash ...................................................................... 1,000,000
Land …………………………………………. 800,000
Building................................................................... 1,900,000
Mortgage Payable………………………. 1,500,000
Aguirre, Capital…………………………. 1,100,000
Aranas, Capital………………………….. 1,100,000