UBALOBAO-ADV1-PRELIM-BSA3-BD.pdf

ST. VINCENT COLLEGE OF SCIENCE AND TECHNOLOGY Cagamutan Norte, Leganes, Iloilo - 5003 Tel. # (033) 396-2291 ; Fax : (033) 5248081 Email Address : svcst_...

ST. VINCENT COLLEGE OF SCIENCE AND TECHNOLOGY Cagamutan Norte, Leganes, Iloilo - 5003 Tel. # (033) 396-2291 ; Fax : (033) 5248081 Email Address : [email protected] COO – FORM 12 SUBJECT TITLE: ACCOUNTING FOR BUSINESS COMBINATION INSTRUCTOR: KURT ROJIE UBALOBAO, CPA SUBJECT CODE: ADV1 MODULE 1 (PRELIM) Topic 1: Partnership Accounting LEARNING OBJECTIVES: At the end of this topic, the students are expected to: 1. Prepare the journal entry to record the initial capital investment made by a partner. 2. Understand the impact that the allocation of partnership income has on the partners’ individual capital balances. 3. Allocate income to partners when interest and/or salary factors are included. 4. Discuss the meaning of partnership dissolution and understand that a dissolution will often have little or no effect on the operations of the partnership business. 5. Prepare journal entries to record the acquisition by a new partner of either all or a portion of a current partner’s interest. 6. Prepare journal entries to record a new partner’s 7. admission by a contribution made directly to the partnership. 8. Prepare journal entries to record the withdrawal of a current partner. 9. Determine the amount partners received after lump-sum liquidation. 10. Determine the amount partners received under methods of installment liquidation. PARTNERSHIP Definition ARTICLE 1767. By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Two or more persons may also form a partnership for the exercise of a profession. (1665a) Types of Partnerships  1. General Partnerships - Are those in which each partner is personally liable to the partnership’s creditors if partnership assets are not sufficient to pay such creditors. 2. Limited Partnerships - Their obligations to creditors are limited to their capital contributions. Characteristics of a Partnership 1. Separate Legal Personality 2. Ease of Formation 3. Co-ownership of Partnership Property and Profits 4. Limited Life 5. Mutual Agency 6. Unlimited Liability Major Considerations in Partnership Accounting: a. Partnership Formation b. Partnership Operations c. Partnership Dissolution d. Partnership Liquidation A. PARTNERSHIP FORMATION A contract of partnership is consensual. It is created by the agreement of the partners which may be constituted in any form, such as oral or written. a.1. Valuation of Contributions of Partners When the following are contributed, they are valued at: Cash Face amount Inventory Lower of Cost and NRV Non-cash assets other than Priority: inventory 1. Agreed amount 2. Fair value at the DATE OF CONTRIBUTION 3. Book value Partners’ ledger accounts a. Capital accounts b. Drawings accounts c. Receivable from /Payable to a partner Illustrations: The initial transaction is the contribution the original partners make to begin the business. In the simplest situation, the partners invest only cash amounts. For example, assume that Carter and Green form a business to be operated as a 2 partnership. Carter contributes $50,000 in cash and Green invests $20,000. The initial journal entry to record the creation of this partnership follows: Cash....................................... 70,000 Carter, Capital................................ 50,000 Green, Capital..................................20,000 To record cash contributed to start new partnership. Noncash contributions are recorded at its FAIR VALUE To demonstrate, assume that Carter invests $50,000 in cash to begin the previously discussed partnership and Green contributes the following assets: The initial journal entry to record the creation of this partnership follows: CASH 50,000 INVENTORY 10,000 LAND 11,000 BUILDING 46,000 Carter Capital 50,000 Green Capital 67,000 Liabilities assumed by the partnership are recorded at its Present amount Using the example above assume that, In addition to Greens contributions is a Mortgage payable attached to its building with the amount of 23,600 but with fair value of 20,000 and partnership agreed to assume this liability The initial journal entry to record the creation of this partnership follows: Green’s net investment is equal to $43,400 ($67,000 less $23,600). 3 If the partnership did not assume the liability, then the original entry will be recorded as follows: CASH 50,000 INVENTORY 10,000 LAND 11,000 BUILDING 46,000 Carter Capital 50,000 Green Capital 67,000 4 B. Partnership Operations Division of Profits and Losses General Rule: The partners share in partnership profits or losses in accordance with their partnership agreement. Additional Rules: If only the share of each partner in the profits has been agreed upon, the share of each in the losses shall be in the same proportion. In the absence of the stipulation, the share of each partner in the profits and losses shall be in proportion to what he may have contributed, but the industrial partner not be liable for the losses. As for the profits, the industrial partner shall receive such share as may be just and equitable under the circumstances. If besides his services he has contributed capital, he also shall receive a share in the profits in proportion to his capital. The designation of losses and profits cannot be entrusted to one of the partners. (Art. 1798). A stipulation which excludes one or more partners from any share in the profits or losses is void. (Art. 1799). In addition to profit or loss sharing, the partnership agreement may also stipulate any of the following: a. Salaries – normally, an industrial partner receives salary in addition to his share in the partnership’s profits as compensation for his services to the partnership. b. Bonuses – the managing partner may be entitled to a bonus for excellent management performance. Unlike for salaries, a partner is entitled to a bonus only if the partnership earns profit. The partner is not entitled to any bonus if the partnership incurs loss. c. Interest on capital contributions – the partnership agreement may stipulate that capitalist partners are entitled to an annual interest on their capital contributions. 5 Examples: 6  1. Beginning balances Share of A= 200,000 x (50k/50k+100k)= 66,667 Share of B= 200,000 x (100k/50+100k)=133,333 2. Ending balances Share of A= 200,000 x (40k/40k+120k)= 50,000 Share of B= 200,000x (120k/40k+120k)= 150,000 3. Simple average= ( beg + end)/ 2 Share of A = 200,000 x (45k/ 45k+110k)= 58,065 Share of B= 200,000 x (110k/45k=110k)= 141,935 4. Weighted average- according to months outstanding A capital B capital January 1 50,000 12/12 50,000 January 1 100,000 12/12 100,000 March 31 30,000 9/12 22,500 March 31 80,000 9/12 60,000 September (40,000) 3/12 (10,000) September 31 (60,000) 3/12 (15,000) 31 Weighted bal 145,000 Weighted bal. 62,500 Share of A= 200,000 x (62.5k/ 62.5k+145k)=60,240 share of B= 200,000 x ( 145k/ 62.5k+ 145k)= 139,760 7 C. Partnership Dissolution Dissolution is the change in the relation of the partners caused by any partner being disassociated from the business. Reasons for Dissolution: a. Admission of a partner b. Withdrawal, Retirement or Death of a partner c. Incorporation of a partnership A. Admission of a partner The admission of a new partner may be effected either through: a. Purchase of interest in the partnership, or b. Investment in the partnership Purchase of Interest Investment in the Partnership The incoming partner’s contribution The incoming partner’s is not recorded in the partnership’s contribution is recorded in the books. partnership’s books. Partnership’s capital remains the Partnership’s capital is increased same before and after the by the incoming partner’s admission of the incoming partner. contribution. No gain or loss is recognized in the No gain or loss is recognized in partnership’s book. the partnership’s books. Journal Entry Journal Entry Selling Partner’s Capital. (Dr) Asset Invested. (Dr) Incoming Partner’s Capital Incoming Partner’s Capital (Cr) (Cr) Admission through Direct Purchase of Interest To demonstrate the accounting procedures applicable to the transfer of a partnership interest, assume that the following information is available relating to the partnership of Scott, Thompson, and York: each of these three partners elects to transfer a 20 percent interest to Morgan, interested to the partnership for a total payment of $30,000. According to the sales contract, the money is to be paid directly to the owners. The journal entry is as follows: Scott, Capital (20% of capital balance)......................10,000 8  Thompson, Capital (20%)................................6,000 York, Capital (20%).....................................4,000 Morgan, Capital (20% of total)................. 20,000 To reclassify capital to reflect Morgan’s acquisition. Money is paid directly to partners. Another method of recording Morgan’s admission to the Partnership is Goodwill approach. Because Morgan is paying $30,000 for a 20 percent interest in the partnership, the implied value of the business as a whole is $150,000 ($30,000/20%). However, the book value is only $100,000; thus, a $50,000 upward revaluation is indicated. This adjustment is reflected by restating specific partnership asset and liability accounts to fair value with any remaining balance recorded as goodwill. After the implied value of the partnership is established, the reclassification of ownership can be recorded based on the new capital balances. Goodwill (Revaluation) Approach Goodwill (or specific accounts)...............................50,000 Scott, Capital (20% of goodwill)...................... 10,000 Thompson, Capital (50%)............................ 25,000 York, Capital (30%)................................. 15,000 To recognize goodwill and revaluation of assets and liabilities based on value of business implied by size of Morgan’s purchase price. Scott, Capital (20% of new capital balance)........................ 12,000 (60,000 x.2) Thompson, Capital (20%)...................................... 11,000 (55,000 x.2) York, Capital (20%)........................................... 7,000 (35,000 x.2) Morgan, Capital (20% of new total)........................... 30,000 To reclassify capital to reflect Morgan’s acquisition. Money is paid directly to partners. Admission by a Contribution Made to the Partnership Bonus to Original Partners Assume that King and Wilson maintain a partnership and presently report capital balances of $80,000 and $20,000, respectively. According to the articles of partnership, King is entitled to 60 percent of all profits and losses with the remaining 40 percent credited each year to Wilson. By agreement of the partners, Goldman is allowed to enter the partnership for a payment of $20,000 with this money going into the business. Based on negotiations that preceded the acquisition, all parties have agreed that Goldman receives an initial 10 percent interest in partnership property. Capital before Admission = 100,000 Goldman’s Payment= 20,000 Total Capital 120,000 x 10% = 12,000 credit to Goldman Capital 9 Cash............................................. 20,000 Goldman, Capital (10% of total capital)................12,000 King, Capital (60% of bonus).........................4,800 Wilson, Capital (40% of bonus)....................... 3,200 To record Goldman’s entrance into partnership with $8,000 extra payment recorded as a bonus to the original partners. Bonus to New Partner Supposedly the same case but instead of 10% the partnership decided to credit 20% capital to Goldman Capital before Admission = 100,000 Goldman’s Payment= 20,000 Total Capital 120,000 x 20% = 24,000 credit to Goldman Capital Cash....................................... 20,000 King, Capital (60% of total bonus to new)............2,400 Wilson, Capital (40% of bonus) to new)............. 1,600 Goldman, Capital (20% of capital).......... 24,000 To record Goldman’s entrance into partnership with $4,000 extra payment recorded as a bonus to the new partner. Revaluation of Assets The assets and liabilities are carried over to the new partnership should be restated to fair values. The adjustment to the assets and liabilities is allocated first to the existing partners before recording the admission of the new partner. The revaluation method views Goldman’s payment as evidence that the partnership as a whole possesses an actual value of $200,000 ($20,000/10%). Because, even with the new partner’s investment, only $120,000 in net assets is reported, a valuation adjustment of $80,000 is implied. Over the previous years, unrecorded gains have apparently accrued to the business. This $80,000 figure might reflect the need to revalue specific accounts such as inventory or equipment, although the entire amount, or some portion of it, may simply be recorded as goodwill. Cash..................................................20,000 Goldman, Capital........................................ 20,000 To record Goldman’s admission into partnership. Goodwill (or specific accounts)...............................80,000 King, Capital (60% of goodwill)............................48,000 Wilson, Capital (40%)................................... 32,000 To recognize goodwill based on Goldman’s purchase price. 10 B. Withdrawal, Retirement or Death of a Partner The interest of the withdrawing, retiring, or deceased is adjusted for the following: a. His share of any profit or loss during the period up to the date of his withdrawal, retirement or death; and b. His share of any revaluation gains or losses as at the date of his withdrawal, retirement, or death. C. Incorporation of a Partnership When a partnership is converted into a corporation, the corporation acquires the assets and assumes the liabilities of the partnership and in return issues shares of stocks to the owners. On the date of incorporation: a. The partners’ capital balances are adjusted for their respective shares in any profit or loss and revaluation gains or losses as of the date of incorporation. The adjusted capital balances may be used to determine the number of shares to be issued to each partner. b. Normally, the books of the partnership are closed and new books are opened for the corporation. When a partnership is incorporated, the corporation acquires the net assets of the partnership and in return issues shares of stocks to the owners. If the fair value of the net assets exceeds the aggregate par value of the shares issued, the excess is credited to share premium. D. Partnership Liquidation Liquidation is the termination of business operations or the winding up of affairs. It is the process by which 1. Assets are converted into cash, 11 2. Liabilities are settled, and 3. Any remaining amount is distributed to the owners. **Winding up process starts with the conversion of non-cash assets into cash. As such, the timing of “realization” of non-cash assets determines the manner on which the “liquidation” (payment of claims) is carried out. Methods of Liquidation a. Lump-sum Liquidation All the non-cash of the partnership are sold simultaneously, or within a very short period of time, and the proceeds are used to settle first all the liabilities and any remaining amount is paid to the partners under a lump-sum payment. (i.e., one-time or single payment). Lump-sum Liquidation is possible when there is a contracted buyer of all the non-cash assets or the assets are sold on a “package deal” basis. b. Installment Liquidation It would take some time before all the assets of a business are converted into cash. In such case, the partners’ claims are settled on an installment basis as cash becomes available, but only after all partnership liabilities are fully settled. When financial statements are prepared during the liquidation process, all of the assets of the partnership are restated to their realizable values (estimates selling price – estimated cost to sell) and all liabilities to their expected settlement amounts. The use of historical cost, fair value, present value or other measurement basis is appropriate only when the entity is a going concern. Two Methods in Installment Liquidation a. Schedule of Safe Payments b. Cash Priority Program (CPP) The basic purpose of these schedules is to prevent overpayments to partners during installment liquidation. Schedule of Safe Payments The safe payment schedule shows how much cash can be “safely” paid to the others during installment liquidation, which avoids any overpayment. The preparation of this schedule requires the application of the following concepts: a. Unsold non-cash assets are treated as a loss; and b. Expected future liquidation costs and potential unrecorded liabilities are recognized immediately as losses. 12  Cash Priority Program It is in installment distribution plan prepared before the actual liquidation, which permits the partners to determine how cash should be distributed safely if and when it becomes available. Under this method, to determine the order of distributions and amount of payments( per priority), the loss absorption balance or in some books, loss absorption power of each partner must be computed. Loss Absorption Power represent the maximum loss that the partners can absorb without reducing their equity below zero. The partner with the biggest capital exposure or loss absorption balance should be prioritized in a cash distribution. A partner with a relatively low loss absorption balance can be wiped out by a material realization loss. Settlement of Claims The available cash of the partnership is used to settle claims in the following order of priority: 1. Outside creditors 2. Inside creditors (e.g., payables to partners) 3. Owners’ capital balances Marshalling of Assets The legal doctrine of marshalling of assets is applied when the partnership and some of the partners are insolvent. The following are the rules when applying this doctrine: 1. First, any available assets of the partnership are used to settle the partnership’s liabilities. 2. Second, in case the assets of the partnership are insufficient to pay all liabilities (insolvency), the solvent general partners are required to provide additional funds from their personal assets. The claims of the personal assets of a partner are ranked in the following order: a. Those owing to personal creditors of the partner. b. Those owing to partnership creditors. c. Those owing to partners by way of contribution. 3. Third, in case some partners are insolvent (or limited partners), their capital deficiency is offset to the capital balances of other partners. If after allocating the capital deficiency of an insolvent (or limited) partner, a solvent partner’s capital balance results to a negative amount, the solvent partner is required to provide additional contribution. 13  EXERCISES A. Partnership Formation Theory 1. Which of the following is not a characteristic of most partnership? a. Limited liability b. Limited life c. Mutual agency d. Ease of formation 2. When the property other than cash is invested in a partnership, at what amount should the noncash property be credited to the contributing partner’s capital account? a. Fair value at the date of contribution. b. Contributing partner’s original cost. c. Assessed valuation for property tax purposes. d. Contributing partner’s tax basis. 3. Which of the following statements is correct with regards to the contribution of assets and associated liabilities to a partnership? a. Liabilities associated with assets contributed to a partnership remain the liability of the contributing partner. b. Liabilities associated with assets contributed a partnership become the liability of the partnership. c. Liabilities associated with assets contributed to a partnership become the liability of both the contributing partner and the partnership. d. Assets may not be contributed to a partnership if there is a liability associated with the asset Problem- Solving 1. On January 1, 2024 , Atta and Boy agreed to form a partnership contributing their respective assets and equities subject to adjustments. On that date, the following were provided: Atta Boy Cash P 28,000 P 62,000 Accounts Receivable 200,000 600,000 Inventories 120,000 200,000 Land 600,000 Building 500,000 Furnitures & fixtures 50,000 35,000 Intangible Assets 2,000 3,000 Accounts payable 180,000 250,000 Other liabilities 200,000 350,000 Capital 620,000 800,000 The following adjustments were agreed upon: a. Accounts receivable of P20,000 and P40,000 are uncollectible in Atta’s and Boy’s respective books. b. Inventories of P6,000 and P7,000 are worthless in Atta’s and Boy’s respective books. c. Intangible assets are to be written off in both books. 14  What will be the capital balances of the partners after adjustments? Atta Boy a. 592,000 750,000 b. 600,000 700,000 c. 592,000 756,300 d. 600,000 750,000 2. Mary admits Jane as a partner in the business. Balance sheet accounts of Mary just before the admission of Jane show: Cash, P26,000, Accounts receivable, P120,000, Merchandise Inventory, P180,000, and Accounts payable, P62,000. It was agreed that for purposes of establishing Mary’s interest, the following adjustments be made: 1.) Allowance for doubtful accounts of 3% of accounts receivable is to be established; 2.) Merchandise Inventory is to be adjusted upward by P25,000; and 3.) Prepaid expenses of P3,600 and accrued liabilities of P4,000 are to be recognized. If Jane is to invest sufficient cash to obtain 2/5 interest in the partnership, how much would Jane contribute to the new partnership? a. 176,000 b. 190,000 c. 95,000 d. 113,980 3. On August 1, AA and BB pooled their assets to form a partnership, with the firm to take over their business assets and assume the liabilities. Partners capitals are to be based on net assets transferred after the following adjustments. (Profits and loss are allocated equally.) BB’s inventory is to be increased by P4,000; an allowance for doubtful accounts of P1,000 and P1,500 are to be set up in the books of AA and BB respectively; and accounts payable of P4,000 is to be recognized in AA’s books. The individual trial balances on August 1, before adjustments, follow: AA BB Assets 75,000 113,000 Liabilities 5,000 34,500 What is the capital of AA and BB after the above adjustments? AA BB a. 68,750 77,250 b. 75,000 81,000 c. 65,000 76,000 d. 65,000 81,000 4. The Grey and Redd Partnership was formed on January 2, 2024, Under the partnership agreement, each partner has an equal initial capital balance. Partnership net income or loss is allocated 60% to Grey and 40% to Redd. To form the partnership, Grey originally contributed assets costing P30,000 with a fair value of P60,000 on January 2, 2024, and Redd contributed by P20,000 cash. Drawings by the partners during 15  2020 totaled P3,000 by Grey and P9,000 by Redd. The partnership net income in 2024 was P25,000. What is the amount of bonus? a. 20,000 bonus to Grey b. 20,000 bonus to Redd c. 40,000 bonus to Grey d. 40,000 bonus to Redd B. Partnership Operation Theory 1. Which of the following is not a component of the formula used to distribute income? a. Salary allocation to those partners working. b. After all other allocation, the remainder divided according to the profit and loss sharing ratio. c. Interest on the average capital investments. d. Interest on notes payable 2. Which of the following is not considered a legitimate expense of a partnership? a. Interest paid to partners based on the amount of invested capital. b. Depreciation on assets contributed to the partnership by the partners. c. Salaries for management hired to run the business. d. Supplies used in the partners’ offices. 3. Which component of the partnership profit and loss allocation compensates partners for the routine time and effort expended in the business? a. Interest on capital balance. b. Bonus c. Salary d. Residual interest. 4. According to the Philippine Civil Code, in the absence of a stipulation on the sharing of profits or losses, partnership profits and losses shall be shared by partners a. Equally b. In accordance with the partnership agreement. c. In proportion to what the partners may have contributed. d. In proportion to what the partners may have contributed, but the industrial partner shall not be liable for the losses. 5. Which of the following transactions will decrease the capital balance of a partner? a. Additional investment by said partner b. Share in partnership’s profit c. Drawings by said partner d. Receipt of bonus from other partners 16 Problem- Solving 1. A partnership has the following accounting amounts: Sales P 700,000 Cost of goods sold 400,000 Operating expenses 100,000 Salary allocations to partners 130,000 Interest paid 20,000 Partners’ drawings 80,000 What is the partnership net income ? a. 200,000 b. 180,000 c. 50,000 d. (30,000) 2. Partners AAA and BBB are sharing profits and losses in the following manner: AAA BBB 20X1 60% 40% 20X2 70% 30% During 2024, the following errors committed in 2023 were discovered: Accrued salaries of P10,000 was not recognized as of December 31, 2023. Prepaid insurance of P25,000 was not recognized as of December 31, 2023. The partnership uses the expense method in recording prepayments. Depreciation of property and equipment was understated by P50,000. How much is the share in net loss/income by AAA? a. (21,000) b. (14,000) c. (35,000) d. 18,000 3. Red and White formed a partnership in 2023. The partnership agreement provides for annual salary allowances of P55,000 for Red and P45,000 for White. The partners share profits equally and losses in a 60/40 ratio. The partnership had earnings of P80,000 for 2023 before any allowances to partners. What amount of these earnings should be credited to each partner’s capital account? Red White a. 40,000 40,000 b. 43,000 37,000 c. 44,000 36,000 d. 45,000 35,000 17 4. Maxwell is trying to decide whether to accept a salary of P40,000 or salary of P25,000 plus a bonus of 10% of net income after salaries and bonus as a means of allocating profit among partners. Salaries traceable to the other partners are estimated to be P100,000. What amount of income would be necessary so that Maxwell would consider choices to be equal? a. 165,000 b. 290,000 c. 265,000 d. 305,000 5. The partnership agreement of Reid and Simm provides that interest at 10% per year is to be credited to each partner on the basis of weighted- average capital balances. A summary of Simm’s capital account for the year-ended December 31, 2024, is as follows: Balance, January 1 P 140,000 Additional investment, July 1 40,000 Withdrawal , August 1 (15,000) Balance , December 31 165,000 What amount of interest should be credited to Simm’s capital account for 2024? a. 15,250 b. 15,375 c. 16,500 d. 17,250 6. On January 2, 2024, Abel, Cain and Josuah formed a partnership. Abel contributed cash of P100,000 and delivery equipment that originally costs him P120,000, but with a second-hand value of P50,000. Cain contributed P160,000 in cash. Josuah, whose family sells office equipment, contributed P50,000 in cash and office equipment that cost his family’s dealership P100,000 but with a regular selling price of P120,000. In 2024, the partnership reported net income of P120,000. On December 31, 2024, what would be the capital balance of the partners? Abel Cain Josuah a. 257,500 200,000 192,500 b. 190,000 200,000 210,000 c. 260,000 200,000 190,000 d. 187,500 200,000 212,500 7. Fox, Greg and Howe are partners with average capital balances during 2024 of P120,000, P60,000, and P40,000, respectively. Partners receive 10% interest on their average capital balances. After deducting salaries of P30,000 to Fox and P20,000 to Howe, the residual profit and loss is divided equally. In 2024, the partnership sustained a P33,000 loss before interest and salaries to partners. By what amount should Fox’s capital change? 18  a. 7,000 increase b. 11,000 decrease c. 35,000 decrease d. 42,000 increase 8. XYZ Partnership provided for the following in their distribution of profits and losses: First: X to receive 10% of net income up to P100,000 and 20% of the amount in excess thereof. Then : Y and Z are each to receive 5% of the remaining income in excess of P150,000 after X’s share. Finally: the balance is to be distributed equally to the three partners. If the partnership earned a net income of P250,000, what is the total share of partner X? a. 100,000 b. 108,000 c. 110,000 d. 130,000 9. On January 1, 2024, A, B and C formed ABC Partnership with original contribution of P300,000 , P500,000 and P200,000. A is appointed as managing partner. During 2024, A, B, and C made additional investments P500,000, P200,000 and P300,000 respectively. At the end of 2024, A, B, and C made drawings of P200,000, P100,000 and P400,000, respectively. At the end of 2024, the capital balance of C is reported at P320,000. The profit or loss agreement of the partners is provided below: 10% interest on original capital contribution of the partners. Quarterly salary of P40,000 and P10,000 for A and B, respectively. Bonus to A equivalent to 20% of net income after interest and salary to all partners. Remainder is to be distributed equally among the partners. 11.a. What is C’s share in the partnership profit for the year ended December 31, 2024? a. 120,000 b. 320,000 c. 180,000 d. 220,000 11.b. What is the partnership profit for the year ended December 31, 2024? a. 900,000 b. 1,020,000 c. 1,050,000 19  d. 960,000 C. Partnership Dissolution Theory 1. Which of the following occurs every time a new partner is admitted to a partnership or an existing partner leaves the partnership? a. Dissolution b. Termination c. Dissolution and Termination d. None of the above occurs. 2. Which of the following results in dissolution of a partnership? a. The contribution of additional assets to the partnership by an existing partner. b. The receipt of a draw by an existing partner. c. The winding up of the partnership and the distribution of remaining assets to the partners. d. The withdrawal of a partner from a partnership. 3. Which of the following forms of new partner admission will not result in a change in the partnership’s net assets? a. Purchase of an ownership interest directly from the partnership. b. Purchase of an ownership interest directly from an existing partner. c. Either of the above. d. None of the above. 4. If a partner’s capital balance is credited for an amount greater than or less than the fair value of his net contribution, the excess or deficiency is called a a. Bonus b. Goodwill c. Discount d. Premium 5. What is the effect of admission of a new partner to an existing partnership through the purchase of interest of an existing partner? a. It will result to partnership gain or loss. b. It will increase the partnership total assets by the cash paid to the existing partner. c. It will not change the total capital of the partnership. d. It will decrease the capital of the partnership by the capital to be transferred to the new partner. 6. In admission of new partner by investment, the total contributed capital of all the partners is more than the total agreed capitalization of new partnership but the capital credit of new partner is less than his capital contribution. Which of the following statements is correct? a. There has been asset revaluation with bonus to new partner. b. There has been asset impairment with bonus to old partners. 20  c. There has been bonus given to old partners without any revaluation or impairment. d. There has been asset revaluation with bonus to old partners. Problem- Solving 1. The following information pertains to ABC Partnership of Amon, Bing, and Cora: Amon, Capital (20%)------------------------------------P 200,000 Bing, Capital (30%) ------------------------------------- 200,000 Cora, Capital (50%)------------------------------------- 300,000 On this date, the partners agreed to admit Dolly into the partnership. Assuming Dolly purchased fifty percent of the partners’ capital and pays P500,000 to the old partners, how would this amount be distributed to them? a. 100,000 150,000 250,000 b. 130,000 145,000 225,000 c. 166,667 166,667 166,666 d. 150,000 150,000 200,000 2. Blau and Rubi are partners who share profits and losses in the ratio of 6:4, respectively. On May 1, 2020, their respective capital accounts were as follows: Blau 60,000 Rubi 50,000 On that date, Lind was admitted as a partner with one -third in capital, and profits for investment of P40,000. The new partnership began with total capital of P150,000. Immediately after Lind’s admission, Blau’s capital should be: a. 50,000 b. 54,000 c. 56,667 d. 60,000 3. The capital balances of DEA Partnership are: D, capital P60,000; E, capital P50,000; and A, capital P40,000 and income ratios are: 5:3:2, respectively. The DEAR Partnership is formed by admitting R to the firm with cash investment of P60,000 for a 25% interest in capital. What is the amount of bonus to be credited to A capital in admitting R? a. 10,000 b. 7,500 c. 3,750 d. 1,500 4. Penny, Naty, and Mary are partners and share profits and losses equally. Each has a capital balance of P1,800,000. Naty retires from the 21  partnership and receives P1,500,000. Taking the partnership assets to fairly stated, the entry to record Naty’s retirement is: a. Naty, Capital-----------------------------------------------1,800,000 (dr) Goodwill ----------------------------------------------------300,000 (cr) Cash----------------------------------------------------------1,500,000 (cr) b. Naty, Capital------------------------------------------------1,800,000 (dr) Partnership assets-----------------------------------------300,000 (cr) Cash ----------------------------------------------------------1,500,000 (cr) c. Naty, Capital------------------------------------------------1,500,000(dr) Cash ----------------------------------------------------------1,500,000(cr) d. Naty, Capital------------------------------------------------1,800,000(dr) Mary, Capital-----------------------------------------------150,000 (cr) Penny, Capital----------------------------------------------150,000 (cr) Cash ----------------------------------------------------------1,500,000 (cr) 5. On December 31, 2023, the Statement of Financial Position of ABC Partnership provided the following data with profit or loss ratio of 1:6:3: Cash----------------------------P1,000,000 Total Liabilities---------------- P600,000 Non-current asset---------- 2,000,000 A, Capital----------------------- 900,000 B, Capital----------------------- 800,000 C, Capital----------------------- 700,000 On January 1, 2024, D is admitted to the partnership by purchasing 40% of the capital interest of B at a price of P500,000. What is the capital balance of B after the admission of D on January 1, 2024? a. 540,000 b. 480,000 c. 420,000 d. 300,000 6. On December 31, 2023, the Statement of Financial Position of ABC Partnership provided the following data with profit or loss ratio of 1:6:3: Cash----------------------------P1,300,000 Total Liabilities----------------P 300,000 Non-current asset---------- 2,000,000 A, Capital----------------------- 1,400,000 B, Capital----------------------- 700,000 C, Capital----------------------- 900,000 On January 1, 2024, D is admitted to the partnership by investing P1,000,000 to the partnership for 20% capital interest. 6.a. If all the assets of the existing partnership are properly valued, what is the capital balance of C after the admission of D? a. 960,000 b. 900,000 c. 840,000 22  d. 1,200,000 6.b. If an existing asset of ABC Partnership is not properly valued, what is the capital balance of B after the admission of D? a. 820,000 b. 1,300,000 c. 960,000 d. 780,000 7. On December 31, 2023, ABC Partnership’s Statement of Financial Positions shows that A, B and C have capital balances of P500,000, P300,000 and P200,000 with profit or loss ratio of 1:3:6. On January 1, 2024, C retired from the partnership and received P350,000. At the time of C’s retirement, an asset of the partnership is undervalued. What is the capital balance of A after the retirement of C? a. 462,500 b. 537,500 c. 562,500 d. 525,000 8. On December 31, 2023, the Statement of Financial Position of ABC Partnership provided the following data with profit or loss ratio of 5:1:4: Cash P 1,500,000 Total Liabilities P 500,000 Non-current 2,000,000 A, capital 1,100,000 asset B, capital 1,200,000 C, capital 700,000 On January 1, 2024, D is admitted to the partnership by investing P500,000 to the partnership for 10% capital interest. The total agreed capitalization of the new partnership is P3,000,000. a. What is the share of A in the asset impairment? a. 120,000 b. 80,000 c. 150,000 d. 250,000 b. What is the amount of bonus given by D to the existing partners? a. 200,000 b. 300,000 c. 100,000 d. 150,000 c. What is the capital balance of D after his admission to the partnership? a. 500,000 b. 300,000 23  c. 350,000 d. 400,000 d. What is the capital balance of C after the admission of D to the partnership? a. 580,000 b. 820,000 c. 500,000 d. 780,000 Partnership Liquidation Theory 1. Which statement below is false concerning liquidation of a partnership? a. All assets can be sold at fair value in a single transaction to a competitor or to others who wish to continue the business. b. Assets can be sold at distress prices in a single transaction to an interested party. c. Assets can be sold piecemeal over an extended period of time to interested party. d. Assets must be liquidated solely through sale transactions. 2. Which of the following is not part of the liquidation process? a. Allocation of any remaining profit or loss to partner’s capital accounts. b. Liquidation of noncash assets. c. Closing of the accounting records. d. Recognition of market value adjustments of assets and liabilities. 3. Which of the following describes a partnership lump-sum liquidation? a. Keeping the partnership assets and liabilities separate from the partners’ personal assets and liabilities. b. The sale of all noncash assets and payment of liabilities before a single distribution to partners. c. A series of interim distributions to partners while the sale of noncash assets and the payment of liabilities is occurring. d. The combining of a partner’s capital account with loans to/from the partnership. 4. Which of the following has the least priority of payment in case of partnership liquidation? a. Priority claims such as artisans, Government, liquidation expenses. b. Secured creditors to the extent of covered by the proceeds from the sale of pledged assets. c. Unsecured credit to the extent covered by proceeds from the sale of unpledged/free assets. 24  d. The partners’ capital balances. Problem- Solving 1. Cohen, Butler, and Davis are partners in a partnership and share profits and losses 50%, 30%, and 20%, respectively. The partners have agreed to liquidate the partnership and anticipate that liquidation expenses will total P14,000. Prior to the liquidation, the partnership balance sheet reflects the following book values: Cash 21,000 Non-cash assets 248,000 Notes payable to Davis 32,000 Other liabilities 154,000 Cohen, capital 60,000 Butler, capital (deficit) (10,000) Davis, capital 33,000 Assuming that the actual liquidation expenses are P14,000 and that non- cash assets are sold for P218,000, how would the assets be distributed to partners if Butler has net personal assets of P8,500? Cohen Butler Davis a. 15,500 - - b. 21,429 - 49,571 c. 30,650 - 53,260 d. 27,500 - 52,000 2. As of December 31, the books of AME Partnership showed capital balances of: A – P40,000; M – P25,000; and E – P5,000. The partners’ profit and loss ratio was 3:2:1, respectively. The partners decided to dissolve and liquidate. They sold all the non-cash assets for P37,000 cash. After settlement of all liabilities amounting P12,000, they still have P28,000 cash left for distribution. 2.a. The loss on the realization of the non-cash assets was a. 40,000 b. 42,000 c. 44,000 d. 45,000 2.b. Assuming that any partner’s capital debit balance is uncollectible, the share of A in the P28,000 cash for the distribution would be a. 19,000 b. 18,000 c. 17,800 d. 40,000 3. On December 31, 2019, the Statement of Financial Position of ABC Partnership with profit or loss ratio of 6:1:3 is presented as follows: 25  Cash P Total Liabilities P 2,000,000 1,000,000 Receivable from A 500,000 Payable to B 1,000,000 Other non-cash 2,000,000 Payable to C 100,000 asset A, capital 700,000 B, capital (650,000) C, capital 350,000 On January 1, 2020, the partners decided to liquidate the partnership. All partners are legally declared to be personally insolvent. The other noncash assets were sold for P1,500,000. Liquidation expenses amounting to P100,000 were incurred. How much cash was received by B at the end of the partnership liquidation? a. 250,000 b. 150,000 c. 290,000 d. 270,000 4. After incurring losses resulting from very unprofitable operations, Gong, Kong, Wong Partnership decided to liquidate when the partners’ capital balances were: Gong, capital (40%) P 80,000 Kong, capital (40%) 130,000 Wong, capital (20%) 96,000 The non-cash assets were sold in installment. Available cash were distributed to partners in every sale of non-cash asset. After the second sale of non-cash assets, the partners received the same amount of cash in the distribution. And from the third sale of non-cash assets, cash available for distribution amounts to P28,000, and unsold non-cash assets has a book value of P12,500. Using cash priority program, what amount did Wei received in the third installment of cash? a. 11,600 b. 8,000 c. 5,600 d. 0 5. The partners of the M & N Partnership started liquidating their business on July 1, 2023 at which time the partners were sharing profits and losses of 40% to M and 60% to N. The balance sheet of the partnership appeared as follows: Assets Liabilities and Equity Cash P 8,800 Accounts P 32,400 payable Receivable 22,400 M, capital 31,000 Inventory 39,400 M, (5,400) drawing 25,600 26  Equipment P 65,200 N, capital P 33,200 Accumulated N, (200) Depreciation (30,800) 34,400 drawing 33,000 N, loan 14,000 Total P 105,000 Total P 105,000 During the month of July, the partners collected P600 of the receivables with no loss. The partners also sold during the month the entire inventory on which they realized a total of P32,400. How much of the cash was paid to M’s capital on July 31, 2023? a. 25,600 b. 5,400 c. 320 d. 0 6. Partners Able, Baker, and Chapman, who share profit and loss equally, have the following personal assets, personal liabilities, and partnership capital balances: Able Baker Chapman Personal assets P 30,000 P 80,000 P 60,000 Personal liabilities 25,000 50,000 72,000 Capital balances 50,000 70,000 (32,000) After applying the doctrine of marshalling of assets, the capital balances of Able, Baker, and Chapman, respectively, would be, a. 50,000 (2,000) 58,000 b. 48,000 0 58,000 c. 49,000 0 57,000 d. 34,000 0 54,000 7. The condensed balance sheet of Adams & Gray, a partnership, at December 31, 2023, follows: Current assets P 250,000 Equipment (net) 30,000 Total assets 280,000 Liabilities P 20,000 Adams, capital 160,000 Gray, capital 100,000 Total liabilities and capital P 280,000 27 On December 31, 2023, the fair values of the assets and liabilities were appraised at P240,000 and P20,000, respectively, by an independent appraisers. On January 2, 2024, the partnership was incorporated and 1,000 shares of P5 par value common stock were issued. Immediately after the incorporation, what amount should the new corporation report as additional paid in capital? a. 275,000 b. 260,000 c. 215,000 d. 0 ---END OF TOPIC 1--- 28 Topic 2: Investment in Joint Arrangement, Associates and Joint Ventures At the end of this topic, the students are expected to: 1. To differentiate joint operations and joint venture; 2. To accounts for investment in joint operation; 3. To accounts for investment in a joint venture. Standard for Joint Arrangement IFRS 11 describes the accounting for a joint arrangement. The investor will be required to either apply the equity method of accounting or recognize, on a line- by-line basis, its share of the underlying assets, liabilities, revenues and expenses. The accounting treatment required will depend on the substance of the arrangement and the nature of the investor’s interest in it. The option to apply proportionate consolidation has been removed. IFRS 11 supersedes the requirements relating to joint ventures in IAS 31 and SIC 13. Defined terms IFRS 11 defines the following terms that form an integral part of this IFRS. Joint arrangement – An arrangement of which two or more parties have joint control. Joint control – The contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. Joint operation – A joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. Joint operator – A party to a joint operation that has joint control of that joint operation. Joint venture – A joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Joint venturer – A party to a joint venture that has joint control of that joint venture. Party to a joint arrangement – An entity that participates in a joint arrangement, regardless of whether that entity has joint control of the arrangement. Separate vehicle – A separately identifiable financial structure, including separate legal entities or entities recognized by statute, regardless of whether those entities have a legal personality. 29  parties, control (defined in IFRS 10) of the arrangement collectively? Outside the NO scope of IFRS 11 YES (Could still have significant Do decisions about the relevant activities that significantly affect the influence) returns of the arrangement require the unanimous consent of all parties, or group of the parties, that collectively control the arrangement? NO YES Investment in Joint Arrangements and Contractual Arrangements The arrangement is jointly controlled therefore the arrangement is a joint Joint arrangement arrangement A joint arrangement is an arrangement of which two or more parties have joint controlExample and the– following Joint Control characteristics are present: The parties Rain are bound by a contractual arrangement; and The contractual arrangement between Rain, Snow and Hail The contractual arrangement Snow gives two or more statesof thatthe parties at least joint control 75% is required of to make decisions about the the arrangement. 50% Hail A angemen ele an ac i i ie. 30% 20% Rain does not control the arrangement as it needs the Joint control agreement of Snow. The contractual arrangement therefore implies that Rain and Snow have joint control as decisions ARRANGEMENT abo he A angemen ele an ac i i ie canno be made Refer to definition above. The following diagram illustrates without the both Rain and key Snow criteria to be agreeing. met for an arrangement to be classified as a joint arrangement. Judgement Judgement will Judgement will need will need need to be be to betoapplied applied when applied whenwhen assessing whetherassessing assessingall the partieswhether whether or alla the allparties groupparties of the orhave a joint control parties over a joint arrangement. This assessment shall be made, by considering all facts and group ofor a group parties have jointof parties have control over jointarrangement. a joint control over a joint This assessment circumstances. If these facts and circumstances change, an entity shall reassess whether joint control of the arrangement. shall be made, This by assessmentallshall considering factsbe made, and by considering circumstances. If these allfacts factsand arrangement still exist. and circumstances. circumstances change, If these factsshall an entity and reassess circumstances whetherchange, an entity joint control of the shall reassess arrangement stillwhether exist. joint control of the an entity shall reassess Typesjoint whether andcontrol classification of a joint of the arrangement still arrangement exist. A joint arrangement can be classified as a joint operation or a joint venture (refer above for definitions). 3.3. Classification Classification of Joint Arrangement of Joint Arrangement Judgement will need to be exercised when making this classification. In arriving at the classification, the a ie igh and obliga ion a i ing f om he a angemen in he no mal co e of b ine must be Aassessed. joint arrangement can be classified as a joint operation or a joint venture (refer In making this assessment, the following shall be considered: above for definitions). Structure of the joint arrangement. When structured through a separate vehicle: Judgement will of - Legal form need to be exercised the separate vehicle; when making this classification. In arriving at -theTerms classification, the parties’ agreed by the parties rights arrangement; in the contractual and obligations and arising from the arrangement in theother - When relevant, normal facts course of business must be assessed. In making this and circumstances. assessment, the following shall be considered: IFRS Structure of the 11 Joint joint arrangement. Arrangements 2 When structured through a separate vehicle: - Legal form of the separate vehicle; - Terms agreed by the parties in the contractual arrangement; and - When relevant, other facts and circumstances. 3 30  The process of distinguishing joint operations from joint ventures is illustrated below. The The process processof distinguishingjoint ofdistinguishing jointoperations operations from from joint ventures joint ventures is illustrated below. is illustrated below. The process The process jointjoint of distinguishing of distinguishing operations operations joint fromfrom joint ventures ventures is illustrated is illustrated below. below. The process of distinguishing joint operations Identify from joint ventures all joint is illustrated below. arrangements Identify Identify all all joint arrangements joint arrangements IdentifyIdentify all joint all joint arrangements arrangements Identify all joint arrangements Is the arrangement structured through a separate vehicle? IsIsthe arrangement structured through a separate vehicle? the arrangement structured through a separate vehicle? NO Is theIsarrangement the arrangement structured YES a separate vehicle? through NO structured through YES a separate vehicle? NO Is the arrangement structured through YES a separate vehicle? NO Legal form of the Does the legal form of the vehicle give the YES investors direct rights to assets andNO Legal form of the Does the legal form of the vehicle giveYES the investors direct rights to assets andNO separate Legal form vehicle of the Does the legal obligations form offor vehicleYES theliabilities in relation give the investorsto the arrangement? direct rights to assets and YES separate Legal formvehicle of the Does the legal obligations form offortheliabilities vehicle give in relation to the arrangement? the investors direct rights to assets and YES Joint Legal separate form of the vehicle Does the legal form obligations for liabilities of the vehicle give theininvestors relation to the arrangement? direct rights to assets and Legal separate vehicle obligations for liabilities give theininvestors NO to relation the rights arrangement? YES Joint form of the separate vehicle Does the legal form of the vehicle obligations for liabilities in relation NO direct to the arrangement? to assets and YES Joint Operation Joint separate vehicle obligations for liabilities in relation to the NO arrangement? toYES YES Operation Joint Terms Termsof ofthe the Do the Do the terms terms of ofthe thecontract contractfor forthe thearrangement arrangement NO NO givegive thethe investors investors rights rights to the the JointOperation Operation agreement Terms Termsof ofthe Do the assets the terms terms and ofand obligations theobligations contractfor for for the NO the liabilities arrangement for the give arrangement? the investors rights to the YESOperation agreement the Do assets of the contract for the the liabilities arrangement forgivethe arrangement? the investors rights to the YESOperation Terms agreement of the Termsagreement of the Do the terms ofassets the Do the terms ofassets and contract obligations for the and obligations the contract for arrangementthe liabilities for the liabilities for the arrangement give give the for the the arrangement? investors for investors the arrangement? rights rights to the to the YESYES agreement assets and obligations for the NO liabilities NOfor the arrangement? YES agreement assets and obligations for the liabilities for the arrangement? NO YES Other Otherfactors factors and and Do any Do any other otherfactors factorsgivegivethe investorsofNO theinvestors of the arrangement the rights to the NO NO the arrangement the rights to the YES circumstances Other factors circumstances and Other factors and Do any other Do any other factors assets factors assets give give and and the the obligations investors obligations investors for for ofof the the the the liabilities? thethe arrangement liabilities? arrangement rights rights to the YES to the YESYES Othercircumstances Other factors factors and circumstances and Do any Do any other otherfactors factorsgive assets give assets the andobligations theinvestors investors and obligations ofofthethe for the arrangement for the arrangement liabilities? thethe liabilities? rights rights to the to the circumstances assetsand andobligations obligationsforfor NO NO the liabilities? YES YES circumstances assets the liabilities? NO NO Joint Joint NO Venture Venture NO JointVenture Joint Venture JointVenture Joint Venture Example –– Joint Example Joint venture venture versus versusJoint Jointoperation operation Example –– Joint Example Joint venture venture versus versusJoint Jointoperation operation Example –– Joint Example Joint venture venture versus versusJoint Jointoperation operation iFoneand iFone and Blakbery Blakbery structure structure aa joint joint arrangement arrangementininan anincorporated incorporatedentity, entity, Cell. Cell. They They each each havehave a 50% a 50% ownership ownership interest. interest. TheiFoneand iFone The andeBlakbery eBlakbery ff he structure he aa structure a ge a ge eeaa joint ii ff arrangement joint Ce arrangement Ce aa in fac in an fac anincorporated eincorporated e a a f f iFiF entity, ea entity,e aCell. d Cell. B BThey d akbe They akbe each eachhave a aafac have 50% a fac 50% ownership i gownership i g ce ce interest. e.interest. The e. The iFone iFone arrangement The Theand Blakbery arrangement and Blakbery ensures eeensures ff hehe aathat structure structure that aaage a the joint22 joint ge the parties ii ff operate eearrangement parties arrangement CeCe ininan operate the a facility fac ethat fac aincorporated the an facility incorporated a aproduces ethat f f iFCell. entity, produces entity, the e the iFCell. e parts a They dparts aThey B deachBtoeach