Accounting 3 & 4

Module 2
PARTNERSHIP FORMATION

Who May Form a Partnership?

(1) Two or more persons, who are all new in the business venture, may form a partnership.
They may contribute cash, property and/or services.
(2) Two or more persons wherein one is already in the business may form a partnership.
a. A new set of books may be used; or
b. The books of the sole proprietorship may be used.
(3) Two or more sole proprietors may form a partnership
a. A new set of books may be opened for the partnership; or
b. One of the sole proprietorship’s books may be used by the partnership

Two or More Persons Form a Partnership

For example
1. A, B, and C, friends, decided to venture into business by establishing the ABC Store. A
contributed cash Php50,000 and merchandise Php150.000; B contributed cash Php80,000
and store equipment Php70,000. C agreed to manage the store. Required: Journal Entries

(1) Cash Php50,000

Merchandise 150,000
A, capital Php200,000

To record the initial investment of A.

(2) Cash 80,000

Store Equipment 70,000
B, capital 150,000
To record the initial investment of B.

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 (3) Memorandum Entry:
C manages the store for an equal share in the profit/loss.

Two or More Persons Wherein One is Already in the Business

2. Where one of the partners is already engaged in business before the formation of
partnership, both of them may agree that certain corrections or adjustments are to be
made in the books of accounts of the sole proprietorship. And since the books of the sole
proprietorship is already closed, adjustments are made through the owner’s
capital account.

For Example

D, owner of Dee’s Hair Salon, invited her friend, E, to join in her business. E accepted the
offer for a 40% interest in the partnership after adjustment of D’s assets. The following
accounts were made available in the books of Dee’s Hair Salon before the formation of
partnership:

Cash Php100,000
Accounts Receivable 30,000
Supplies 50,000
Furniture and Equipment 120,000
Accounts Payable Php 80,000
D, capital 220,000
Php300,000 Php300,000

Adjustment Data:
a. Only 90% of the account receivable can be collected;
b. Of the supplies balance, only Php30,000 remained on hand;
c. Furniture and equipment are depreciated at 10%;
d. Only Php50,000 of the liabilities will be absorbed by the partnership.

Required: Journal entries in the books of Dee’s Hair Salon

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Books of Dee’s Hair Salon

Adjusting Journal Entries:

(a) D, capital Php3,000
Allowance for Bad Debts Php3,000
To reflect the 10% uncollectible account. (30,000 x .10=3,000)

(b) D, capital 20,000

Supplies 20,000
To reflect the used supplies.

(c) D, capital 12,000

Accumulated Depreciation-F&E 12,000
To reflect the depreciation of assets.
(120,000x.10=12,000)

(d) Accounts Payable 30,000

Cash 30,000
To record the payment of accounts payable.

If a new set of books will be used by the partnership, so the books of the sole
proprietorship is no longer needed. Therefore, it is necessary to close the books of the sole
proprietorship.

Books of Dee’s Hair Salon – Closing Entries

Allowance for Bad Debts 3,000

Accumulated Depreciation-F&E 12,000
Accounts Payable 50,000
D, capital 185,000
Cash 70,000
Accounts Receivable 30,000
Supplies 30,000
Furniture and Equipment 120,000
To close the books of Dee’s Hair Salon.

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 Computation of D’s Adjusted Capital
D capital before adjustment 220,000
AJE (a ) 3,000
(b) 20,000
(c) 12,000 35,000
185,000

Computation of E’s Contribution

X = capital of new partnership

.6X= 185,000
X= 185,000/.6
X= 308,333
Contribution of E = 308,333-185,000
=123,333

Journal Entries in the Books of D and E Partnership

Cash Php70,000
Accounts Receivable 30,000
Supplies 30,000
Furniture and Equipment 108,000
Allowance for Bad Debts P hp3,000
Accounts Payable 50,000
D, capital 185,000
To record the contributions of D to the partnership.

Cash 123,333
E, capital 123,333
To record the investment of E.

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 If the books of the sole proprietorship will be used by the partnership, only the
investment of E will be recorded in the books to convert it to partnership books.

Journal Entry

Cash 123,333
E, capital 123,333
To record the investment of E.

Two Sole Proprietors Forming a Partnership

Assume that on January 1, 200A, F and G, both sole proprietors, formed a partnership out of
their existing businesses. They agree to divide profits equally. Their statements of financial
position appear as follows:

F STORE
Statement of Financial Position
As of January 1, 200A

Assets

Current Assets:

Cash Php 60,000

Accounts Receivable Php 40,000
Less: Allowance for Bad Debts 2,000 38,000
Merchandise Inventory 120,000
Total Current Assets Php218,000

Properties and Equipment:

Store Furniture and Equipment Php 80,000

Less: Accumulated Depreciation 6,000 74,000
Total Assets Php292,000

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Liabilities and Capital

Current Liabilities:

Accounts Payable Php 40,000

Notes Payable 10,000
Total Current Liabilities Php 50,000

Capital:

F, capital 242,000
Total Liabilities and Capital Php 292,000

G STORE
Statement of Financial Position
As of January 1, 200A

Assets

Current Assets:

Cash Php 70,000

Accounts Receivable Php 50,000
Less: Allowance for bad Debts 3,000 47,000
Merchandise Inventory 100,000
Total Current Assets Php 217,000

Properties and Equipment:

Store Furniture and Equipment Php 90,000

Less: Accumulated Depreciation 5,000 85,000
Total Assets Php 302,000

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 Liabilities and Capital

Current Liabilities:
Accounts Payable Php 70,000
G, capital 232,000
Total Liabilities and Capital Php 302,000

Both F and G agreed on the following:

1. The allowance for bad debts should be equal to 10% of accounts receivable;
2. Merchandise inventory should be increased by 10%;
3. Store furniture and equipment should be depreciated at 10% more;
4. All liabilities will be absorbed by the partnership.

Required:
a. Necessary journal entries in the books of F Store and G Store;
b. Entries if a new set of books will be used by the partnership;
c. Entries if the books of F Store will be used;
d. Entries if the books of G Store will be used

Solutions:

Books of F Store – Adjusting Journal Entries

(1) F, capital 2,000

Allowance for Bad Debts 2,000

(2) Merchandise Inventory 12,000

F, capital 12,000
(3) F, capital 8,000
Accumulated Depreciation – SFE 8,000

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Books of G Store – Adjusting Journal Entries

(1) G, capital 2,000

Allowance for Bad Debts 2,000

(2) Merchandise Inventory 10,000

G, capital 10,000
(3) G, capital 9,000
Accumulated Depreciation – SFE 9,000

If a new set of books will be used by FG Partnership, it is necessary that the books of the sole
proprietorships, F Store and G Store, have to be closed since both of them will not be used by
the partnership.

Books of F Store – Closing Entries

Allowance for Bad Debts 4,000

Accumulated Depreciation – SFE 14,000
Accounts Payable 40,000
Notes Payable 10,000
F, capital 244,000
Cash 60,000
Accounts Receivable 40,000
Merchandise Inventory 132,000
Store Furniture and Equipment 80,000
To close the books of F Store.

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Books of G Store – Closing Entries

Allowance for Bad Debts 5,000

Accumulated Depreciation – SFE 14,000
Accounts Payable 70,000
G, capital 231,000
Cash 70,000
Accounts Receivable 50,000
Merchandise Inventory 100,000
Store Furniture and Equipment 90,000
To close the books of G Store.

Entries in the Books of FG Partnership

(1) Cash 60,000

Accounts Receivable 40,000
Merchandise 132,000
Store Furniture and Equipment 66,000
Allowance for Bad Debts 4,000
Accounts Payable 40,000
Notes Payable 10,000
F, capital 244,000
To record the contributions of F to the partnership.

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 (2) Cash 70,000
Accounts Receivable 50,000
Merchandise Inventory 110,000
Store Furniture and Equipment 76,000
Allowance for Bad Debts 5,000
Accounts Payable 70 ,000
G, capital 231,000
To record the contributions of G to the partnership.

Books of F Store to be used by the Partnership

If the books of F Store will be used by the partnership, close the books of G Store (since
it will not be used), then record in the books of F Store all the accounts of G Store to
convert the books of F Store to partnership books.

Books of G Store to be used by the Partnership

If the books of G Store will be used by the partnership, close the books of F Store (since
it will not be used), then record in the books of G Store all the accounts of F Store to
convert the books of G Store to partnership books.

Computation of F adjusted capital

Beginning capital of F Php 242,000

AJE (2) 12,000
(1) (2,000)
(3) (8,000)
Adjusted capital of F Php 244,000

Computation of G adjusted capital

Beginning capital of G Php 232,000

AJE (2) 10,000
(1) (2,000)
(3) (9,000)
Adjusted capital of G Php 231,000

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Assignments:
1. A, B, and C are friends who decided to form the ABC PARTNERSHIP to practice their
profession. A agreed to contribute Php70,000 cash and office furniture worth
Php130,000. B agreed to contribute Php150,000 and office equipment of Php100,000. C
agreed to join as office administrator aside from her capital contribution of
Php1000,000.

Required: Journal entries in the books of the partnership.

2. D, E, and F decide to pool their resources and form the DEF Partnership. D invests cash
of Php100,000; merchandise with market value of Php450,000; and store equipment
with net book value of Php105,000 and with a fair value of Php80,000. E invests
merchandise with market value of Php350,000 and delivery equipment with fair value
of Php220,000. E has an account balance of Php50,000 to ABC Bank for the amount he
used to purchase for the delivery equipment. F agrees to manage the store aside from
his investment of Php150,000 and merchandise with market value of Php400,000. The
partners agree to an equal share in the profit of the business.

Required: Journal entries in the books of the partnership to record the contributions of
the partners.

3. K, owner of a mini store, invited his friend, L, to join him in business on June 30, 200A.
On said date, ledger balances in the books of K appear as follows:

Cash Php70,000
Accounts Receivable 35,000
Merchandise Inventory 58,000
Furniture and Fixtures Php100,000
Less: Accumulated Depreciation 20,000 80,000
Total Assets Php243,000

Accounts Payable Php21,000

Notes Payable 14,000
K, capital 208,000
Total Liabilities and Capital Php243,000

Before L accepts the offer, certain conditions are agreed upon as follows:

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 (1) Twenty percent (20%) of accounts receivable is assumed uncollectible;
(2) Merchandise inventory should be valued at Php65,000;
(3) The net book value of furniture and fixtures should be decreased to Php70,000;
(4) The note payable is a 60-day 6% note dated May 31, 200A;
(5) Profits will be divided in the ratio of 3:2, respectively.
(6) L must contribute an amount which is to be based on K’s adjusted capital balance
proportionate to the agreed profit and loss ratio.

Required:

(a) Journal entries to adjust the books of K;

(b) Journal entries if a new set of books will be used by the partnership;
(c) Journal entries if the books of K Store will be used by the partnership.

4. M and N, both store owners, agree to form a partnership out of their existing businesses.
They further agree that all liabilities will be assumed by the newly organized firm. The
statements of financial position of M and N on July 31, 200A are shown below:

M N
Cash Php50,000 Php68,500
Accounts Receivable Php60,000 Php40,000
Less: Allowance for Bad Debts 7,500 52,500 6,000 34,000
Merchandise Inventory 20,000 100,000
Building 500,000
Less: Accumulated Depreciation 50,000 450,000 ---------
Land -- ----- 300,000
Total Assets Php572,500 Php502,500
Accounts Payable Php42,500 Php20,000
Notes Payable 5,000 25,000
Taxes Payable 3,000 17,500
Wages Payable ------ 40,000
Mortgage Payable 150,000
M, capital 372,000 ------
N, capital ------ 400,000
Total Liabilities and Capital Php572,500 Php502,500

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M and N further agree on the following conditions:

(1) The allowance for bad debts is to be increased by 20% of accounts receivable;
(2) The merchandise inventory is to be recorded at its fair market value of Php35,000 and
Php120,000, respectively;
(3) The building is to be recorded at its fair market value of Php400,000;
(4) The profit or loss is to be divided between M and N in the ratio of 70% and 30%,
respectively.
(5) The new capital of the partnership is to be based on the adjusted capital of N so that M
may invest or withdraw in order to make his capital balance proportionate to the profit
or loss ratio.

Required:

a. Necessary adjusting and closing entries in the books of M and N;

b. Journal entries if a new set of books will be used by the partnership;
c. Journal entries if the books of M will be used by the partnership;
d. Journal entries if the books of N will be used by the partnership;
e. Computations of adjusted capital of M and N;
f. Computation of the new partnership capital

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