-AFAR- CSD - 01 Partnership Accounting.pdf

01 Partnership Accounting AFAR By CSD AFAR BY CSD AFAR BY CSD Partnership Contract = mere agreement; oral or written “persons” = natural or juridical: Type of...

01 Partnership Accounting AFAR By CSD AFAR BY CSD AFAR BY CSD Partnership Contract = mere agreement; oral or written “persons” = natural or juridical: Type of Partner as to Contribution: PARTNERSHIP ACCOUNTING XPN: contribute immovable properties or Natural = individual human beings 1. Capitalist = money or property real right, p’ship is VOID if: Juridical = persons created by law: 2. Industrial = industry (services) 1. Not in a public instrument E.g., partnerships, corporations 2. No inventory of properties attached Thus, other partnerships and corporations Type of Partner as to Liability: XPN: contribute ≥ P3,000 (money/prop) = may form another partnership as 1. General = liable up to personal properties 1. Should be in a public instrument “partners” 2. Limited = only up to extent of contribution 2. Submitted to SEC Cannot manage business (cannot be ^however, incompliance = does not industrial) affect liability to third parties Partnership – a contract between 2/more persons who contribute money, property, or industry to a common fund with the intention of dividing profits among themselves Law on Partnership = governed by Type of Partnership as to Liability: As a contract, partnership must have COC: Ar. 1767 – 1867 of the New Civil 1. General Partnership = ALL are Consent = agreement between all partners Code of the Philippines general partners Object = contribution 2. Limited Partnership = at least 1 Cause = dividing the profits among limited partner (and at least 1 themselves general partner) AFAR BY CSD AFAR BY CSD Partnership Formation Partnership Formation A. Net investment method – no add’l invest A. Net investment – add’l investment PARTNERSHIP ACCOUNTING Cash XX Noncash assets XX CC AC Diff CC AC Add’l Inv Liabilities (assumed) XX A 60 60 0 A 60 60 0 A, Capital XX B, Capital XX B 40 40 0 B 40 60 20 Total 100 100 0 Total 100 120 20 Basis (level of priority): 1st Agreed Value 2nd Fair Market Value B. Bonus method – A to B B. Bonus method – B to A 3rd Book Value or Carrying Value 4th Cost CC AC Bonus CC AC Bonus A 60 50 (10) A 60 65 5 Notes: 1. Cash B 40 50 10 B 40 35 (5) Peso currency = always face value Total 100 100 0 Total 100 100 0 Foreign currency = current exchange rate 2. Inventory = book value is LCNRV: C. Goodwill method (goodwill is debited) D. Revaluation method (asset/s are revalued) a. Cost b. NRV = SP-CTS CC AC Goodwill CC AC Reval. 3. Liabilities = deducted only if assumed by the partnership A 60 90 30 A 60 78 18 Silent = assumed by partnership B 40 60 20 B 40 52 12 Total 100 150 50 Total 100 130 30 AFAR BY CSD AFAR BY CSD Partnership Operation Partnership Operation Net Income Net Loss PARTNERSHIP ACCOUNTING Distribution of net income for the year to ✓ Profit-sharing given the capital accounts of each partner Use profit-sharing Use loss-sharing ✓ Loss-sharing given Distribution Methods ✓ Profit-sharing given Use profit-sharing Use profit-sharing 1st Agreement X No loss-sharing given a. Profit = profit sharing agreement X No profit-sharing given X Do NOT use loss-sharing b. Loss = loss sharing agreement; if ✓ Loss-sharing given (use 2nd priority = capital Use loss-sharing none = profit sharing agreement balance ratio) c. Industrial partner = if no agreement = just and equitable; X No profit-sharing given X (use 2nd priority = capital X (use 2nd priority = capital no share in loss X No loss-sharing given balance ratio) balance ratio) 2nd Capital balance ratio a. Original capital (initial investment) b. Beginning capital for the year Salary Interest Bonus ---nothing follows per the Civil Code--- Purpose For work or services to the For use of capital Based on good performance c. Other capital ratio partnership i. Average capital: weighted Prorated ✓ Prorated (generally) ✓ Prorated (generally) X Not prorated (generally) or simple average ? Annually, monthly, etc. P*R*T d. Other methods Equally, P&L ratio, ending If no ✓ Given even if loss (generally) If profit and basis is positive = capital, after bonus, salaries, profit or G: If NI insufficient = distribute first → then any ✓ given and/or interests, negative remainder (even if loss) distributed using P&L ratio If loss: combination of others basis? XPN: “in order of priority” or “insofar/up to extent G: Not given X of profit” XPN: Stipulated otherwise ✓ AFAR BY CSD AFAR BY CSD Partnership Operation Salary, Interest, and Bonus (SIB) *Bonus: Formula to Use How to compute weighted average capital: PARTNERSHIP ACCOUNTING Silent: not expense (but are treated as Step 1 – create an equation to compute B ✓ Beginning * months outstanding/12 profit sharing) “after” means “after deducting” that item + Additional investment * months outs./12 XPN: unless otherwise stated from net income (before multiplying rate) − Withdrawals (permanent) * months (expensed) = then expensed Example: outs./12 (deducted before arriving NI “bonus is 10% based on net income = weighted average capital NI if silent: net income is before BIS after salaries, interest but before XPN: unless otherwise stated (after bonus” → B = 10% (NI – S – I) Notes on drawings: already) bonus is 15% based on NI after S, I, ~ Drawings B” → B = 15% (NI – S – I – B) “personal drawings” *Interest: Principal to Use Step 2 – isolate B on the one side “temporary drawings” 1st Agreement Example: “regular/periodic drawings” 2nd If silent: average capital B = 10% (NI – S – I – B) “drawings in anticipation of profits” If silent as to what kind of average cap: B = 10% (100k – 20k – 10k – B) weighted capital first B = 10% (70k – B) G: X (not part of weighted computation) if none (i.e., no info for wac), use B = 7k – 10%B XPN: ✓ if in excess of maximum amount simple average (beg+end over 2) B + 10%B = 7k – 10%B + 10%B (e.g., max of 1k per week, any excess will be 3rd Any other capital given 1.1B = 7k treated as permanent withdrawal) Beginning capital B = 6,363.64 Ending capital Original capital If bonus is based on NI after ALL bonuses (in cases where 2/more partners receive B) Equation: B = (6%+4%)*(NI – S – I – B) Then split the B into B1 (6%) and B2 (4%) using the ratio of the % (i.e., 6:4) AFAR BY CSD AFAR BY CSD Partnership Dissolution Partnership Dissolution I. Admission by purchase I. Admission by investment (no bonus) PARTNERSHIP ACCOUNTING Change in the relation of the partners CC AC Diff CC AC Diff Reasons for Dissolution Existing 150 100 (50) Existing 150 150 0 I. Admission of a New Partner 1. Purchase (outside transaction) New 0 50 50 New 50 50 0 2. Investment Total 150 150 0 Total 200 200 0 a. No bonus/adjustment b. Bonus to old c. Bonus to new I. Admission by investment (bonus) I. Admission by investment (reval to exiting) d. Adjustment of capital account Note: prorated based on P&L ratio CC AC Bonus CC AC Adj among existing/all partners (as Existing 150 140 (10) Existing 150 170 20 the case may be) New 50 60 10 New 50 50 0 II. Withdrawal/Death of a Partner Total 200 200 0 Total 200 220 20 Retirement, death, incapacity Accounting: II. Withdrawal by purchase of outsider/ II. Withdrawal by purchase of partnership 1. Sold to outsider remaining partners 2. Sold to remaining partners Before After Diff Before After Diff 3. Sold to partnership (more details on next page) Remain. 150 200 50 Remain. 150 150 0 Outgoing 50 0 (50) Outgoing 50 0 (50) Total 200 200 0 Total 200 150 (50) AFAR BY CSD AFAR BY CSD Partnership Dissolution Reason and transaction Indicators Methods III. Incorporation PARTNERSHIP ACCOUNTING Partners’ capital accounts converted to → I. Admission of a new partner shareholders’ equity (SHE): (1) Purchase of an @ Book value Book value method (no adj) interest Steps: @ Fair value R/GW method (to existing only) 1. Adjust (assets, liabilities) to FMV If each CC = AC → Net investment 2. Close partnership (old books) TCC = TAC If each CC ≠ AC → Bonus method (2) Investment Liabilities XX TCC > TAC or Revaluation ↓/↑/goodwill Accum. Dep’n XX TCC < TAC (to existing partners only) A, Capital XX II. Withdrawal (Retirement)/Death/Incapacity B, Capital XX Cash XX (1) Sold to outsider Similar to purchase above BV method (if @ BV) PPE XX (2) Sold to rem. partner (either BV or FV) R/GW method ( if @ FV) A/R XX BV = PP Book value method 3. Open corporation (new books) Bonus (to outgoing partner) BV < PP Cash XX (3) Sold to partnership Revaluation ↑/goodwill (to all part.) PPE, net XX Bonus (to remaining partner) A/R XX BV > PP Allow. for DA XX Revaluation ↓ (to all partners) Liabilities XX Ordinary share capital (@ par) XX PP = purchase price (or amount of settlement to outgoing partner); Ordinary share prem. (excess) XX BV = book value (or current balance before bonus/adjustment of outgoing partner's capital) AFAR BY CSD AFAR BY CSD Partnership Liquidation Partnership Liquidation CSD Co. PARTNERSHIP ACCOUNTING Process of winding up the partnership Statement of Realization and Liquidation January 31, 20x1 (in thousands) Steps: Assets = Liabilities & Equity 1. Realization of noncash assets 2. Payment of liabilities A, Cap B, Cap Cash Noncash Liabilities A, Loan 3. Elimination of deficiency (50%) (50%) a. Right of offset (loans) Beginning 50 150 = 50 10 30 110 b. Additional investments c. Absorption of partners Realization of noncash 50 (150) = (50) (50) 4. Distribution to partners Balance 100 - = 50 10 (20) 60 Priority claims: Payment of liabilities (50) = (50) Partnership assets Balance 50 - = - 10 (20) 60 1st External creditors 2nd Internal creditors Right of offset = (10) 10 3rd Partner’s capital, profits Balance 50 - = - - (10) 60 Personal assets Additional investment 10 = 10 1st Personal creditors Balance 60 - = - - - 60 2nd Partnership creditors Distribution (60) - = - - - (60) Balance - - = - - - - AFAR BY CSD AFAR BY CSD Partnership Liquidation Partners’ Personal Status (Personal Assets CSD Co. PARTNERSHIP ACCOUNTING vs Personal Liabilities) Cash Priority Program 1. Solvent partner = PA > PL January 31, 20x1 (in thousands) (If silent as to extent of solvency: Capital balances Cash Priority Program assume unlimited solvency) 2. Insolvent partner = PA < PL A (20%) B (30%) C (50%) A B C ^GR (if silent: assume insolvent) Loan balances 20 XPN: stated (or implied) solvent Capital balances 100 150 200 Types of Liquidation Total interests 100 170 200 I. Lumpsum liquidation Distribution only done when all Divided by: P&L percentage 20% 30% 50% noncash assets are converted Loss absorption capacity 500 566,667 400 II. Piece-meal (installment) liquidation Asset is realization is piece-meal Equalize B (1st) to A (2nd) (66,667) *% 20 and distribution done periodically Balance 500 500 400 as cash becomes available Equalize B, A (1st, 2nd) to C (100) (100) *% 20 30 Methods of Determining Cash Distribution Balance 400 400 400 in Advance: I. Cash Priority Program Remaining income = P&L % 20% 30% 50% Determination of which partner shall be paid first, next, last Can be prepared even prior to realization of NCAs AFAR BY CSD AFAR BY CSD Partnership Liquidation II. Safe Payment Schedule CSD Co. PARTNERSHIP ACCOUNTING Shows how much cash can be “safely” Safe Payment Schedule distribution during installment and avoid January 31, 20x1 (in thousands) overpayment A (20%) B (30%) C (50%) Total Prepared every time there’s realization of noncash assets Loan balances 20 20 Worst Case Scenario #1: Maximum Capital balances 100 150 200 450 Possible Loss: Unsold NCA = all losses Also, expected future liquidation Total interests 100 170 200 470 costs and potential unrecorded Alloc. of loss on realization (actual loss) (23,4) (35,1) (58,5) (117) liabilities = losses Worst Case Scenario #2: if there’s any Balance 76,6 134,9 141,5 353 deficiency after WC1, assume all are Alloc. of maximum possible loss (WC1) (37) (55,5) (92,5) (185) insolvent Thus, the other partners will Balance 39,6 79,4 49 168 absorb the loss Elimination of deficiency – if any (WC2) 0 0 0 0 Illustration: First installment payment 39,6 79,4 49 168 Carrying amount of unsold NCA 175,000 Estimated future liquidation costs 1,000 Cash set aside for potential Balance (actual balance after 1st install.) 37 55,5 92,5 185 unrecorded liabilities 9,000 Maximum possible loss (first) 185,000 Alloc. of maximum possible loss (25) (37,5) (62,5) (125) Maximum possible loss (second) 125,000 Elimination of deficiency – if any 0 0 0 ^assumed amount only Second installment payment 12 18 30 60