Advanced Accounting - Summary - Z.V.Millan x J.B.Salvador Partnership Formation ‘* Apartnership is an unincorporated association of two or more individuals to carry on, as co-owners, a business, with the intention of dividing the profits among themselves. «Characteristics of a Partnership: (a) Ease of formation; (b) Separate legal personality; (c) Mutual agency; (d) Co-ownership of property; (e) Co-ownership of profits; (f) Limited life; (g) Transfer of ownership; and (h) Unlimited liability (this is applicable to a general partnership) The major considerations in the accounting for the equity of partnerships are: (a) Formation; (b) Operation; (c) Dissolution; and (d) Liquidation. ‘+ The net contributions (assets and related liabilities assumed by the partnership) of the partners to the partnership are measured at fair value. partner's capital balance is normally credited for the fair value of his net contribution to the partnership. If a partner’s capital balance is credited for an amount greater than or less than the fair value of his net contribution, there is bonus. « Under the bonus method, any increase or decrease in the capital credit of a partner is deducted from or added to the capital credits of the other partners. The total partnership capital remains equal to the fair value of the net contributions to the partnership. Partnership Operations + The profits or losses of a partnership shall be shared by the partners in accordance with the partnership agreement. «IF only the share of each partner in the profits has been agreed upon, the share of each in the losses shall be the same proportion. «In the absence of 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 shall not be liable for the losses (Art. 1797 of the Philippine Civil Code). «The designation of losses and profits cannot be entrusted to one of the partners (Art. 1798). ‘+ Astipulation which excludes one or more partners from any share in the profits or losses is void (Art, 1799). + Before allocation of profit, the following items are allocated first, if they are stipulated in the partnership agreement: (a) Salaries, (b) Bonuses to partners (allocated only if there is profit), and (c) Interest on capital. After allocating these items, any remaining profit is allocated based on the stipulated profit or loss ratio. Partnership Dissolution Dissolution is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business. + The following are examples of events thet result to partnership tion: (a) Admission of a partner, (b) Withdrawal, retirement or death of a partner, and (c) Incorporation of a partnership. JSLVDR Page 10f 47 ADVACC-2016Advanced Accounting - Summary - Z.V.Millan x J.B.Salvador In all cases of dissolution, the partnership assets and liabilities at date of dissolution may need to be revalued to their fair values. Any revaluation increase or decrease is allocated to all of the existing partners as at the date of dissolution. ‘Admission of a partner: Purchase of Interest Investment in the partnership ‘* The incoming partner’s contribution is not The incoming partner's contribution is recorded in the partnership books. recorded in the partnership books. The transaction is recorded by a transfer within equity. The incoming partner's capital account is credited with a corresponding debit to the selling partner's capital account. The transaction is recorded in the regular manner. The incoming partner's capital account is credited with corresponding debit to the asset invested. Partnership capital remains the same before and after admission of the incoming partner. Partnership capital is increased by the incoming partner's contribution. No gain or loss is recognized in the partnership books. No gain or loss is recognized in the partnership books. Withdrawal, retirement or death of a partner: When a partner withdraws, retires or dies, his interest may he purchased (a) hy ane ar all of the remaining partners or (b) by the partnership. ‘The interest of the withdrawing, retiring, or deceased partner shall be adjusted for the following: ‘his share of any profit or loss curing the period up to the date of his withdrawal, retirement or death; and his share of any revaluation gains or losses as at the date of his withdrawal, retirement, or death. Purchase by remaining partners Purchase by partnership The payment to the outgoing partner is not recorded in the partnership books. The payment to the outgoing partner is recorded in the partnership books. The transaction is recorded by a transfer in equity. The outgoing partner's account is debited with a Corresponding credit Ww Une purchasing partner's capital account. The transaction is recorded in the regular manner. The outgoing partner's capital account is debited with a corresponding ‘credit to the payment made. Partnership capital remains the same before and after the withdrawal, retirement or death of the outgoing partner. Partnership capital is decreased by the payment for the outgoing partner's capital balance. No gain or loss is recognized in the partnership books. No gain or loss is recognized in the partnership books. JSLVDR Page 2 of 47 ADVACC-2016Advanced Accounting - Summary - Z.V.Millan x J.B.Salvador Incorporation of a partnership: When a partnership is incorporated, the corporation acquires and assumes the assets and liablities of the partnership in exchange for shares of stocks issued as settlement of the partners’ respective interests. On date of incorporation: © The partners’ capital balances are adjusted for their respective shares in any profit or lossand revaluation gains or losses as at the date of incorporation. The adjusted capital balances may be used in cetermining the number of shares to be issued to each partner. © Normally, the books of the partnership are closed and new books are set-up for the corporation, ‘Any excess of the fair value of the net assets of the partnership over the aggregate par value of shares issued is credited to share premium. Partnership Liquidation Liquidation is the termination of business operations or the winding up of affairs. It is a process by which (a) the assets of the business are converted into cash; (b) the liabilities, of the business are settled; and (c) any remaining amount is distributed to the owners. There are two methods of Liquidation: © Lump-sum Liquidation - the partners’ claims are settled in a single, lump-sum payment after all non-cash assets are realized and after all liabilities are ccttled o Installment Liquidation — the partners’ claims are settled on an installment basis as non-cash assets are realized and as cash becomes available, but only after all liabilities are fully settled. ‘The available cash of the partnership is used to settle claims in the following descending order: (1) First, to outside creditors; (2) Second, to inside creditors; and (3) Third, to owner's interests. In case of partnership insolvency, the rule of marshalling of assets is applied. Under this rule, only the excess of a partner's personal assets over his personal liabilities can be used to settle partnership debt. A partner who is solvent, shall be required to make additional contributions to settle any deficiency in his capital balance, subject to the following order of priority over his personal assets: (1) The partner's separate creditors; (2) The partnership creditors; and (3) Te the other partners by way of contribution. Any capital deficiency of an insolvent partner is absorbed by the other partners who are solvent. ‘The following are the accounting procecures when computing for the settlement of the partner's interests in cases of liquidation: Step #1: Compute for the net proceeds. It doesn't matter if non-cash assets are wholly or partially sold, Liquidation expenses, whether paid or not, are deducted when computing for the net proceeds. Step #2: Compute for any gain or loss by comparing the net proceeds with the total carrying amount of all non-cash assets. JSLVDR Page 3 of 47 ADVACC-2016