PARTNERSHIP FORMATION D.

Mutual Agency
E. Unlimited Liability
Partnership is a contract between two or more
F. Limited Life
people who bind themselves to contribute money,
G. Division of profits or losses among partners
property, or industry to a common fund with the
H. Income Taxes
intention of dividing the profits among themselves.
I. Partner’s Equity Accounts
According to the Civil Code of the Philippines,
A Partnership may be perfected in any form;
Article 1767, in a contract of a partnership, two or
however, it is always preferable to have the
more people bind themselves to contribute money,
contract in writing.
property, or industry to a common fund, with the
intention of dividing the profit among themselves.
Partnership distinguished from a corporation:
Two or more people may also form a partnership
A. Manner of Creation. A partnership is created
for the exercise of a profession. Under the New
by mere agreement of the partners while a
Civil Code, the partnership contract is required to
corporation is created by operation of law.
be in writing when:
B. Number of Persons. 2 or more persons may
A. Immovable property or real rights are
form a partnership; in a corporation, it should
contributed or;
not exceed 15 persons.
B. Partnership capital is at least ₱3,000.00.
C. Commencement of Juridical Personality. In
a partnership, juridical personality commences
Advantages and Disadvantages of a Partnership
from the execution of the articles of
Advantages vs. Sole Proprietorships
partnership; In a corporation, from the issuance
1. Brings greater financial capability to the
of certificate of incorporation by the Securities
business.
and Exchange Commission.
2. Combine special skills, expertise, and
D. Management. In a partnership, every partner
experiences of the partners.
is an agent of the partnership if the partners did
3. Offers relative freedom and flexibility of action
not appoint a managing partner; In a
in decision making.
corporation, management is vested on the
Board of Directors.
Advantages vs. Corporations
E. Extent of Liability. Every partner, expect
1. Easier and less expensive to organize.
limited partner is liable to the extent of personal
2. More personal and informal.
assets; In a corporation, stockholders are liable
only to the extent of investment.
Disadvantages
F. Right of Succession. In a partnership, there is
1. Easily dissolved.
no right of succession; In a corporation, it is
2. Mutual Agency and Limited Liability may
with capacity.
create personal obligation to partners.
G. Terms of Existence. In a partnership, there is
3. Less effective than a corporation in raising
no term of existence or any time period; In a
large amounts of capital.
corporation, it is perpetual.
Characteristics of a Partnership:
Articles of Co-Partnership
A. Voluntary Agreement
It is the written contract of a partnership. It
B. Mutual Contribution of Money, Property, or
contains:
Industry to a common fund.
• Name of the Partnership
C. Co-ownership of Property or Contributed
Assets • Names and addresses of the partners

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• Effective date of the contract D. Dormant Partner – a partner who is not
• Nature of Business, Purpose, and Principal known by third parties to be a partner but does
Office of business. not take active part in the business.
• Capital of the Partnership, stating the E. Ostensible Partner – a partner who is known
contributions of the partners, description and to the public as a partner and takes active part
agreed values. in the management of the business, whether or
• Rights and duties of each partner. not he has an actual interest in the firm.
• Provisions for additional investments and F. Liquidating Partner – a partner who is
withdrawals designated to wind up the business after
• The manner in which profits or losses are to be dissolution.
shared. G. Nominal Partner or Partner by Estoppel – a
partner who is actually not a partner by who
• The manner of keeping the partnership book of
represents himself as one.
accounts
• The procedures for dissolving the partnership.
Classification of Partnership
• The provision for arbitration in settling
As to liability of partners:
disputes.
A. General Partnership – a partnership wherein
all partners are general partners.
Kinds of Partners
B. Limited Partnership – a partnership wherein
As to nature of contributions:
it is composed of one of more general partners
A. Capitalist Partner – A partner who contributes
and one or more limited partners. This type of
money or property into the partnership.
partnership bears the word “Limited” in its
B. Industrial Partner – who contributes only his
partnership name.
industry or services to the partnership.
C. Capitalist & Industrial Partner – A partner
As to object:
who contributes money or property as well as
A. Universal Partnership of All Present
his industry or service to the partnership.
Property – a partnership wherein all partners
contribute all the property which actually
As to liabilities to third persons:
belongs to them to a common fund with the
A. General Partner – a partner whose liability to
intention of dividing the same among
partnership creditors extends to his personal
themselves as well as the profits which they
assets.
may acquire therewith.
B. Limited Partner – a partner whose liability to
B. Universal Partnership of profits – a
partnership creditors is limited only to his
partnership wherein all that partners may
capital contributions.
acquire by their industry or work during the
existence of the partnership will be divided
As to their obligations to the business:
among themselves.
A. Managing Partner – a partner who manages
C. Particular Partnership – a partnership
the affairs of the business.
wherein it has for its object determinate things,
B. Secret Partner – a partner who is not known
their use or fruits or a specific undertaking, or
by third parties to be a partner but takes active
the exercise of a profession of vocation.
part in the business.
C. Silent Partner – a partner who is known by
As to duration:
third parties to be a partner but does not take
A. Partnership at will – a partnership wherein no
active part in the business.
time or period is specified for its existence and

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 is not formed for a particular undertaking or A partner may lend amounts to the partnership in
venture. excess of his intended permanent investment.
B. Partnership with a fixed term – a partnership These advances should be credited to Loans
wherein its existence is fixed and agreed upon. Payable to Partner account and not to Partner’s
Capital account classified among the liabilities but
As to purpose: separate from liabilities to outsiders.
A. Commercial or Trading Partnership – a
partnership that is organized for the purpose of Recording of Non-cash Assets
delivery of goods. Examples are First is Agreed Value. If Agreed Value is absent, it
Merchandising and Manufacturing Businesses. will be recorded by using its Fair Market Value.
B. Professional or Non-Trading Partnership – a
partnership that is organized for the practice of Valuation of Investments by Partners
profession or provision of services. Examples Partners may invest cash or non-cash assets to the
are Audit and Law firms. partnership. Non-cash assets are to be recorded in
the following order of priority:
As to legality of Existence: 1. Values agreed upon by the partners;
A. De Jure Partnership – Compliant with legal 2. In the absence of agreement, it will be
requirements for its establishment. recognized at their fair market values.
B. De Facto Partnership – Noncompliant with
legal requirements for establishment. Adjustment of Accounts prior to Formation
In cases when the prospective partners have
Owner’s Equity Accounts existing businesses, their respective books will
For Partner’s Capital Accounts have to be adjusted to reflect the fair market values
Debit Credit of their assets or to correct misstatements in the
1. Permanent 1. Original and accounts.
Withdrawals Additional
2. Debit balance of Investment. Opening Entries of a Partnership upon
the drawing 2. Credit balance of Formation
account at the end the drawing A partnership may be formed in any of the
of the period. account at the end
following ways:
of the period.
1. Individuals with no existing business form a
partnership.
For Partner’s Drawing Accounts
2. Conversion of a sole proprietorship to a
Debit Credit
1. Temporary 1. Share in profit partnership.
Withdrawals (this may be a. A sole proprietorship and an individual
2. Share in loss (this credited directly to without an existing business form a
may be debited Capital) partnership.
directly to Capital) b. Two or more sole proprietors form a
partnership.
Loans Receivable from or Payable to Partners
If a partner withdraws a substantial amount of
money with the intention of repaying it, the debit
should be to Loans Receivable-Partner instead of
Partner’s Drawing Account.

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 PARTNERSHIP OPERATIONS 3. By allowing interest on partner’s capital and
the balance in an agreed ratio.
RULES FOR THE DISTRIBUTION OF
4. By allowing salaries to partners and balance in
PROFITS OR LOSSES
an agreed ratio.
Profits
5. By allowing bonus to managing partner based
The profits will be divided according to the
on Profit and Loss and the balance in an agreed
partnership agreement. If there is no agreement:
ratio.
• Profit for Capitalist Partners shall be divided
6. By allowing salaries, interest on partner’s
according to the capital contribution or
capital, bonus to the managing partner and the
according to the ratio of original capital
balance in an agreed ratio or the combination
investments or in its absence, the ratio of
of 3 to 5.
capital balances at the beginning of the year.
• Profit for Industrial Partners such share at be Profit and Losses can be shared in many ways
just and equitable under the circumstances,
among partners of a partnership. Most profit and
provided that the industrial partner shall
loss sharing formula includes one or more of the
receive such share before capitalist partners
following features or techniques:
divide the profits. 1. Equally – this method may be proper when the
capital or service contribution of the partners
Losses
are considered to be the same.
The losses will be divided according to partnership
agreement. If there is no agreement as to
For example, a partnership of X and Y is to
distribution of losses but there is an agreement to
record the allocation of net income of ₱288,000
profits, the losses shall be distributed according to
equally would be as follows:
the profit-sharing ratio. In the absence of any Income Summary ₱288,000
agreement: X, Drawing ₱144,000
• Losses for Capitalist Partners shall be divided Y, Drawing ₱144,000
according to the capital contribution or to the
ratio of original capital investments. If its 2. Arbitrary Ratio – when the capital and service
absence, the ratio of capital balances at the contribution of the partners are unequal, this
beginning of the year. method may be employed to recognize their
• Losses for Purely Industrial Partners shall differences.
not be liable for any losses.
Assume that, since the expertise, ability and
DISTRIBUTION OF PROFIT AND LOSSES reputation of X are factors of special
BASED ON PARTNERSHIP AGREEMENT significance to the success of the partnership,
The partners may agree on any of the following X and Y agree to allocate net income on the
scheme in distributing profits or losses: ratio of 3:2. The entry to record the allocation
1. Equally or in another agreed ratio of net income of ₱288,000 is:
2. Based on partner’s capital contribution:
a. Ratio of original capital investment. Income Summary ₱288,000
b. Ratio of capital balances at the X, Drawing (60%) ₱172,800
beginning of the year. Y, Drawing (40%) ₱115,200
c. Ratio of capital balances at the end of
the year.
d. Ratio of average capital balances.

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 X’s Share of Net Income: Income Summary ₱288,000
₱288,000 x 3/5 or 60% = ₱172,800 X, Drawing ₱120,000
Y’s Share of Net Income: Y, Drawing ₱168,000
₱288,000 x 2/5 or 40% = ₱115,200
Total Net Income = ₱288,000 X, Capital (January 1) ₱300,000
Y, Capital (January 1) ₱420,000
3. Capital Balance – many firms allocate profit Total Capital ₱720,000
and losses solely on the basis of capital
balance. In these cases, each partner must X’s Share of Net Income: (Rounded off)
maintain a specified capital balance that is 300,000/720,000 of 288,000 ₱120,000
correlated to the level of responsibility Y’ Share of Net Income:
assumed in the partnership. This method is not 420,000/720,000 of 288,000 ₱168,000
only easy to apply but can also prevent certain Total ₱288,000
inequities from occurring among partners if the
partnership is liquidated. This allocation of 3.3. Ending Capital
profits is most likely found in limited A similar problem exist when ending
partnership in which substantial investment is capital balances are used. Year-end
the principal ingredient for success. investments are encouraged by their
inclusion in determining each partner's
3.1. Original Capital share of profit, but no incentive exists for a
If the agreement between X and Y provides partner to make any investments before
the allocation of net income shall be based year-end. Also, no penalty exist for
upon original capitals, reference will be withdrawals if the amounts withdrawn are
made to the amounts originally invested by reinvested before the period's end. If the
the partners. partnership agreement provides for an
allocation of net income based upon
Share in Net partner's capital at the end of each year, the
Original
Income of entry to record the allocation of net income
Capital
288,000 of 288,000 for the year is:
X 100,000 96,000
Y 200,000 192,000 Income Summary ₱288,000
Total 300,000 288,000 X, Drawing ₱128,000
Y, Drawing ₱160,000
3.2. Beginning Capital
When beginning capital balances are used X, Capital (January 1) ₱360,000
in allocation partnership profit, additional Y, Capital (January 1) ₱450,000
investments during the accounting period Total Capital ₱810,000
may be discouraged because the partners
making such investments are not X’s Share of Net Income: (Rounded off)
compensated in the division of profit until a 360,000/810,000 of 288,000 ₱128,000
later period. Usage of this will prove to be Y’ Share of Net Income:
inequitable. Assuming this agreement for X 450,000/810,000 of 288,000 ₱160,000
and Y, the entry to record the allocation of Total ₱288,000
net income of 288,000 for the year is:

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3.4. Average Capital The average capital balances for the year
It must have provided the fairest basis for can be computed using the following
allocating partnership profit because it approach:
reflects the capital actually available for use A. Simple Average
by the partnership during the year. An This method is not so widely used by
agreement for the use of average capital accountants in view of its failure to take
also acts as an incentive for additional into consideration the periods.
investments when these can be profitably
employed. B. Weighted Average
The partners may wish to recognize all
The problem with the average capital the changes in their capital as well as in
computation is that withdrawal or drawing their drawing accounts in determining
accounts are to be considered to reduce the capital in ratio to be used in
capital necessary to compute the average distributing the profits or losses in the
amount. The following guidelines should operation of partnership. The
be considered: partnership contract should state
whether weighted capital account
An agreement should indicate clearly what balances are to be computed to the
withdrawals or drawing accounts are to be nearest day (using daily balances/peso-
recognized. day approach) or the nearest month
(beginning-of-month balances or end-
A partnership agreement may state that only of-month balances/ peso-month
withdrawals above a certain limit are to be approach).
viewed as offsets (reduction) against capital
balances. It means that drawing account For the peso-month approach,
balances up to the amounts specified in the investments and withdrawals made at
agreement would not be deducted in the beginning of the month are to be
determining the partners' average or year- considered as made at the beginning of
end capital balances. For purposes of the following month if made after the
allocating partnership profit, drawing in middle of the month.
excess of allowable amounts are deducted
from the partner's capital accounts in If the allocation of net income is to be
computing average or ending capital based upon average (weighted) capital
balances. for the year, the entry to record the
allocation of net income of 288,000 for
Typically, either personal withdrawals or the year is:
temporary withdrawals or drawing
accounts (which are withdrawal against Income Summary ₱288,000
share in anticipated profit) are not X, Drawing ₱132,480
recognized in the computation of average Y, Drawing ₱155,520
capital. Conversely, capital withdrawals or
permanent withdrawals (which are Capital
withdrawal against original or additional Balance x
investments) are recognized. X No. of Total
Month/s
Unchanged

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 January 1 300,000 x 3 ₱900,000 technique for sharing partnership profit equitably
April 1 360,000 x 9 3,240,000 has no effect on the measurement of net income or
Total ₱4,140,000 loss of partnership.
Average ₱345,000
Assume that X and Y agree to allow interest on
Capital average capital at 6%; any net income or loss
Balance x balance is to be allocated 3:7. Assuming no entries
Y No. of Total for interest during the course of the year, entries to
Month/s record the allowance of interest and the remaining
Unchanged allocation of net income follow:
January 1 420,000 x 2 ₱840,000
Income Summary ₱45,000
April 3 390,000 x 8 3,120,000
X, Drawing ₱20,700
November
450,000 x 2 900,000 Y, Drawing ₱24,300
11
Total ₱4,860,000 X’s Interest of Average Capital:
Average ₱405,000 6% of 345,000 ₱20,700
Y’ Interest of Average Capital:
X’s Average Capital ₱345,000 6% of 405,000 ₱24,300
Y’s Average Capital ₱405,000 Total ₱45,000
Total Average Capital ₱750,000
X Y Total
X’s Average Capital ₱345,000 Interest
Y’s Average Capital ₱405,000 on
₱20,700 ₱24,300 ₱45,000
Average
Total Average Capital ₱750,000
Capital
Balance
X’s Share of Net Income: (Rounded off) 72,900 170,100 243,000
(3:7)
345,000/750,000 of 288,000 ₱132,480 Total ₱93,600 ₱194,400 ₱288,000
Y’ Share of Net Income:
405,000/750,000 of 288,000 ₱155,520 The allocation of net income may be summarized
Total ₱288,000 in a single entry as follows:
Income Summary ₱288,000
INTEREST ON CAPITAL BALANCES X, Drawing ₱93,600
The purpose of allowing interest on capital is to Y, Drawing ₱194,400
give recognition to differences on capital
contributions by partners. It also recognizes the INTEREST ON CAPITAL ACCOUNTS WITH
contribution of the partners’ capital contribution to RESULTANT NET LOSS
the partnership’s profit-generating capacity. The If the partnership contract provides for allowing
use of interest on capital as a means of allocating interest on capital accounts, this provision must be
profits would be appropriate when the business is enforced regardless of whether operation is
capital intensive versus labor intensive or if the profitable or unprofitable.
partners were not significantly involved in the day-
to-day operations. In case of loss, the interest allowed to the partners
shall be added to the net loss and the total resulting
Interest on Capital as a Distribution or loss shall be distributed in the ration agreed upon
Allocation of Net Income. Using interest by the partners for the distribution of balance after
allowances on partners’ capital account as a allowance of interest.

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Further, when the partnership agreement also the payment of interest are made in the usual
provides without qualification that the interest is to manner.
be allowed on capital, interest must be allowed
even though the operations have resulted in net When settlement is not to be made in cash but by
income that are less than the allowable interest or adjustments to partners’ capitals, interest on an
loss. advance to a partner is recorded by a charge to
partner’s drawing account and a credit to Interest
For example, assume that operations X and Y prior Income. Interest on a loan made by a partner to the
to recognition of interest had resulted in a net loss partnership by a charge to Interest Expense and a
of 80,000 and any balance will be allocated into 1:4 credit to the partner’s drawing account.
ratio. Entries to close the income summary account
would have been as follows: In summary, interest on loans from partners is
Income Summary ₱45,000 recognized as expense and as a factor in the
X, Drawing ₱20,700 measurement of net income or loss of the
Y, Drawing ₱24,300 partnership. Similarly, interest earned on loans is
Interest allowed based on averaged capitals. recognized as partnership revenue. This consistent
with the principle that loans from partners are
X Y Total assets and liabilities, respectively.
Interest
on PERSONAL SERVICES RENDERED IN NET
₱20,700 ₱24,300 ₱45,000
Average INCOME AND LOSS SHARING
Capital AGREEMENTS
Balance Partners may wish to provide an allocation of net
-25,000 -100,000 -125,000
(1:4) income that recognizes differences in their abilities
Total -₱4,300 -₱75,700 -₱80,000 and experience or in the time devoted by them to
the business. Partners may agree to an arbitrary
The allocation of net loss may be summarized in a
ratio for this purpose.
single entry as follows:
X, Drawing ₱4,300
Salary Allowances
Y, Drawing ₱75,700
A partner who devotes time to the partnership
Income Summary ₱80,000
business while the other partners work elsewhere
may receive a salary allowance. Salary Allowances
Interest on temporary advances or loans. When
are also used to compensate for differences in the
a partnership makes a temporary advance to a
fair value of the talents for partners, all of whom
partner or receives an amount as a temporary loan
devote their time to the partnership.
from a partner and their transactions are
recognized as creating debtor – creditor
To illustrate the effect of salary agreement, assume
relationships between the partner and partnership,
that X and Y agree to the allowance of monthly
interest charges and credits on such transactions
salaries of ₱10,000 and ₱9,000 respectively; any
are recognized as interest-expense-interest-
net income or loss balance to be allocated in the
income.
ratio of beginning capital. Amounts actually
withdrawn by partners during the year were
Interest Accruals are recognized periodically on
recorded in their drawing accounts as presented in
these items just as other receivable and payable
the problem. The net income of ₱288,000 before
balances. When settlement for interest is made
cash, entries to record the collection of interest or

BAFACR1X REVIEWER
recognition of salaries is allocated to the partners minimum profit to be earned before bonus is
by the following entries: calculated.

Income Summary ₱228,000 Allocation of Net Income with Bonus

X, Drawing ₱120,000 The net income of A and B partnership for 20x4
Y, Drawing ₱108,000 amounted to 420,000. A, as the managing partner,
is allowed as bonus based on the following
X’s Salary for 12 months at ₱10,000 per month: assumptions:
12 x ₱10,000 ₱120,000
Y’ Interest of Average Capital: A. A bonus of 20% of Net Income before the
12 x ₱9,000 ₱108,000 bonus is deducted, the bonus would be
Total ₱228,000 computed as follows:

The net effect of the foregoing on capital is: Let B = Bonus

X Y Total B = 20% of Net Income
Salaries ₱120,000 ₱108,000 ₱228,000 B = 20% of ₱420,000
Balance B = ₱84,000
25,000 35,000 60,000
(300:420)
Total ₱145,000 ₱143,000 288,000 B. A bonus of 20% of Net Income after the bonus
is deducted, the bonus would be computed as
The allocation of net income may be summarized follows:
in a single entry as follows: Let B = Bonus
Income Summary ₱288,000 B = 20% of Net Income after Bonus
X, Drawing ₱145,000 B = 20% (₱420,000 – B)
Y, Drawing ₱143,000 B = ₱84,000 – 0.2B
B + 0.2B = ₱84,000
Salary Allowances with Resultant Net Loss 1.2B = ₱84,000
When an agreement provides for salaries without 1.2 = 1.2
qualification, salary allocations must be made even B = ₱70,000
though profit is inadequate to cover salaries or
there is a loss. After salaries are recorded, the As a general rule, when the partnership provides
income summary account shows a debit balance without qualification that bonus is to be allowed,
that is transferred to the partners’ accounts as bonus should be based on net income before
agreed. deduction of bonus.

BONUSES Basis of Computations for Bonus

Bonuses are sometimes used as a means of As long as the basis for bonus will be a positive
providing additional compensation to partners who amount, the resulting bonus should always be
have provided services to the partnership. Bonuses allocated to partners entitled to it, regardless of the
are typically stated as a percentage of profit their availability of the residual amount.
before or after the bonus.
Allocation of Net Income with Bonus, Salaries,
As with interest on capitals and salary allowances, Interest and Income Tax
a bonus should be considered as a distribution of Bonus of 20% to A; Salaries to A amounting to
profit and not to be charged to an expense account. ₱40,000 and to B amounting to ₱60,000; Interest
Sometimes the partnership agreement requires a

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on Average Capital Balances to A with an amount
Balance 164,444.45 82,222.22 246,666.67
of ₱12,000 and B with an amount of ₱8,000;
Residual Balance in net income to be allocated to Total ₱269,777.78 ₱150,222.22 ₱420,000
A and B in the ratio of 2:1 ratio. The following
assumptions for bonus are considered:
4. A bonus is based on net income after bonus,
1. A bonus is based on net income before bonus, salaries, and interest.
salaries, and interest. Let B = Bonus; S = Salaries; and I = Interest
A B TOTAL B = 20% of Net Income after Bonus, Salaries,
Bonus ₱84,000 ₱84,000 and Interest.
Salaries 40,000 ₱60,000 100,000 B = 20% (₱420,000 – B – S – I)
Interest 12,000 8,000 20,000 B = 20% (₱420,000 – B – 100,000 – 20,000)
Balance 144,000 72,000 216,000 B = 20% (₱300,000 – B)
Total ₱280,000 ₱140,000 ₱420,000 B = ₱60,000 – 0.2B
B + 0.2B = ₱60,000
2. A bonus is based on net income after bonus, 1.2B = ₱60,000
but before salaries, and interest. 1.2 = 1.2
A B TOTAL B = 50,000
Bonus ₱70,000 ₱70,000
Salaries 40,000 ₱60,000 100,000 A B TOTAL
Bonus ₱50,000 ₱50,000
Interest 12,000 8,000 20,000
Salaries 40,000 ₱60,000 100,000
Balance 153,333.33 76,666.67 230,000
Interest 12,000 8,000 20,000
Total ₱275,333.33 ₱144,666.67 ₱420,000 Balance 166,666.67 83,333.33 250,000

Total ₱268,666.67 ₱151,333.33 ₱420,000

3. A bonus is based on net income after bonus
and salaries, but before interest.
Let B = Bonus; S = Salaries; and I = Interest 5. A bonus is based on net income after salaries
B = 20% of Net Income after Bonus and but before bonus and interest.
Salaries before Interest Let B = Bonus; S = Salaries; and I = Interest
B = 20% (₱420,000 – B – S) B = 20% of Net Income after Salaries but
B = 20% (₱420,000 – B – 100,000) before Bonus and Interest
B = 20% (₱320,000 – B) B = 20% (₱420,000 – S)
B = ₱64,000 – 0.2B B = 20% (₱420,000 – 100,000)
B + 0.2B = ₱64,000 B = 20% (₱320,000)
1.2B = ₱64,000 B = ₱64,000
1.2 = 1.2
B = 53,333.33 6. A bonus is based on net income after interest
but before bonus and salaries.
A B TOTAL Let B = Bonus; S = Salaries; and I = Interest
Bonus ₱53,333.33 ₱53,333.33 B = 20% of Net Income after Interest but before
Bonus and Salaries
Salaries 40,000 ₱60,000 100,000
B = 20% (₱420,000 – I)
Interest 12,000 8,000 20,000 B = 20% (₱420,000 – 20,000)

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 B = 20% (₱400,000) Insufficient Income to Cover Allocation
B = ₱80,000 In some cases, the partnership net income may be
less than the interest, salary and/or bonus provided
7. Bonus is based on net income before bonus for in the partnership agreement. If the partners fail
but after income tax (tax rate is 35%). to provide for such an occurrence in the profit and
Let B = Bonus; T = Tax loss formula, the established practice is to allocate
B = 20% of Net Income before bonus after the interest, salary and/or bonus as if sufficient
Income Tax income had been earned. The amount by which the
B = 20% (₱420,000 – T) interest, salary and/or bonus exceeds the net
B = ₱84,000 – 0.2T income is allocated to the individual partners in
their agreed ratio for allocating residual income.
T = 35% of ₱420,000 Therefore, it is simply satisfying all provisions of
T = ₱147,000 the profit and loss agreement. This procedure
Substitute the equation for T in the equation for should also be followed by partnership which has
B: an overall loss.
B = ₱84,000 – 0.2(147,000)
B = ₱84,000 – 29,400 PARTNERSHIP DISSOLUTION
B = ₱54,600 Laws on Dissolution of a Partnership
Art. 1828
8. A bonus is based on net income after bonus • The change in the relation of the partners
and income tax. caused by any partner ceasing to associate in
Let B = Bonus; T = Tax the carrying on as distinguished from the
B = 20% of Net Income before bonus after winding-up of the business of partnership.
Income Tax • It ends the association of individuals for their
B = 20% (₱420,000 – B – T) original purpose but does not mean the
B = ₱84,000 –0.2B – 0.2T termination of the business nor an interruption
in its operation.
T = 35% of ₱420,000
Art. 1829
T = ₱147,000
• Upon dissolution, the partnership is not
terminated but continues until the winding-up
Substitute the equation for T in the equation for of the partnership affairs is completed.
B: • The new set of partners will just prepare new
B = ₱84,000 – 0.2B – 0.2(147,000) Articles of Partnership to be submitted to the
B = ₱84,000 – 0.2B – 29,400 SEC.
B + 0.2B =54,600 • Partnership Dissolution due to changes in
1.2B = ₱54,600 ownership interest occurs for a variety of
1.2 = 1.2 reasons which can be summarized as follows:
B = ₱45,500 1. Admission of a New Partner by:
a. Purchase of Interest
Bonus with Resultant Net Loss b. Admission of Investment
The concept of a bonus is not applicable to a net 2. Withdrawal of a Partner
loss. When a partnership operates at a loss, the 3. Retirement of a Partner
bonus provision is disregarded because it defeats 4. Death of a Partner
5. Incorporation of a Partnership
the purpose of giving bonus.

BAFACR1X REVIEWER
Circumstances resulting to dissolution. Delectus Personae – is that no one becomes a
A. By Acts of the Partner member of the partnership without the consent of
• Expiration of the life of the Partnership all the members. This is because a partnership is
• Accomplishment of Purpose based on mutual trust and confidence.
• By Mutual Agreement
• Retirement or Withdrawal of a Partner If the Old Partnership is dissolved, and a new
agreement is formulated to govern the continuing
B. By Operation of Law business operation. A person may become a partner
• Death of a Partner in an existing partnership thru:
• Bankruptcy of a Partner 1. Purchase of Interest (from one or more of
the existing partners)
• Unlawful Act of a Partner or the Partnership
• Method of acquiring an interest in the
C. By Judicial Decree partnership.
• Insanity/Incapacity/Conduct of a Partner • Personal transaction between the partner
who sells his interest and the buyer who
• Dissension among the Partners
became a partner.
• Impossibility of Profitable Operations
• No cash involved between the buyer and
• Fraud
the partnership.
Dissolution is the end of the partnership contract, • Payment is between the selling partner and
but it does not necessarily imply that business the incoming partner.
operations will come to an end. Most changes in • Payment is made personally to the partner
ownership are accomplished without the from whom the interest is obtained.
interruption of its normal operations. • DR to the account of the Selling Partner and
CR to the account of the Buyer.
Liquidation is the final conclusion of a
partnership which calls for the winding-up of 2. Investment of Assets
business affairs. When a business is terminated, it • A person is admitted to the partnership by
is always preceded by dissolution. A partnership investing cash or other assets.
may be dissolved without being terminated. • This will increase the Total Assets and Total
Partners’ Equity.
Winding-Up is the process of settling the business • New Partner is liable for all the existing
of a partnership affairs after dissolution. It involves obligations of the Partnership.
the:
1. Realization of assets, Admission of new partner by Purchase of an
2. Settlement with creditors and Interest
3. Distribution of the remaining assets of the Assume that after operations and partner’s
partnership. withdrawals during 20x4 and 20x5. DE
Partnership has a book value of ₱100,000 and a
Termination is the point in time when all profit and loss (P&L) percentage on January 1,
partnership affairs are wound up or completed and 20x6 as follows:
is the end of the partnership life. Capital P&L
Balances Percentage
DISSOLUTION BY ADMISSION OF A NEW D ₱60,000 70%
PARTNER E 40,000 30%
A new partner is admitted into a partnership with TOTAL ₱100,000 100%
the consent of all the continuing partners based on
the principle of “delectus personae.” On this date, F is admitted to the partnership.

BAFACR1X REVIEWER
 Case 1: Purchase of Interest from One Partner. interest. There, the profit and loss ratio of the
F paid ₱24,000 directly to D in exchange for one- partners after the admission of F would be as
third (1/3) interest. The entry to record the follows:
transaction in the book follows:
D, Capital (70% x ¾) 52.50%
D, Capital ₱20,000 E, Capital (30% x ¾) 22.50%
F, Capital ₱20,000 F, Capital 25%
Total 100%
The purchase price paid by F is completely Assumption 2: Purchase at More than Book Value.
irrelevant to the entry recorded on the partnership F purchased one-fourth of D’s Interest for ₱18,000
books, regardless of why F paid more than the and one-fourth of E’s Interest for ₱12,000, making
book value of the partnership interest. Simply, the payment directly to D and E. The new partner will
excess of ₱4,000 is a personal gain of partner D. have a ¼ profit and loss ratio and the old partners
The above entry shows that no cash is transferred continue to use their old profit and loss ratio. There
to the partnership. The new profit and loss ratio are alternatives to reflect the above transaction:
will be set by the new set of partners.
Alternative 1: Book Value (BV) Approach. The
Case 2: Purchase of Interest from All Partners. positive excess of ₱5,000 represents a personal
The situation gives rise to assumptions: gain of D and E, computed as follows:

Assumption 1: Purchase at Book Value. Amount Paid (₱18,000 +

₱30,000
F purchases one-fourth (1/4) interest in the firm. ₱12,000)
One-fourth of each partner’s capital is to be Deduct: BV of Interest
(₱25,000)
transferred to the new partner. F pays partner’s Acquired (₱100,000 x ¼)
₱25,000. The entry to record the transaction in the Excess (Gain of D and E
books follows: ₱5,000
– Personal in Nature)

D, Capital (₱60,000 x ¼) ₱15,000 The partnership does not record the gain because it
E, Capital (₱40,000 x ¼) ₱10,000 was not benefited from it.
F, Capital ₱25,000 Alternative 2: Revaluation (Goodwill) Approach.
The Capital Balances of the partners after the Under this approach, the positive excess of the
admission of F would be as follows: amount paid over book value acquired will be
F capitalized to determine the revaluation of assets.
D E (Book Total The entry to record the transaction in the books
Value) follows:
Capital
Before ₱60,000 ₱40,000 ₱100,000 Assets (Goodwill) ₱20,000
Admission D, Capital (₱20,000 x 70%) ₱14,000
Interest E, Capital (₱20,000 x 30%) ₱6,000
3/4 3/4
Remained
Capital Amount
After ₱45,000 ₱30,000 ₱25,000 ₱100,000 Paid
₱30,000 ÷ 1/4 ₱120,000 100%
Admission (₱18,000 +
₱12,000)
It should be observed that the total capital balance Deduct: BV
before and after admission is the same, since the of Interest
book value of the partnership was preserved. Since Acquired (₱25,000) ₱100,000
the interest acquired is ¼ it is presumed that this (₱100,000
interest represented the capital and profit and loss x ¼)

BAFACR1X REVIEWER
 Excess ₱5,000 Assumption 3: Purchase at Less than Book Value.
Divided by F purchased one-fourth of DE’s interest by paying
(capitalized ₱22,000 directly to D and E. The new partner will
¼ have a ¼ profit and loss ratio and the old partners
at): interest
acquired continue to use their old profit and loss ratio. There
Revaluation are alternatives to reflect the transaction:
of Asset ₱20,000 ₱20,000 100%
Upward Alternative 1: Book Value (BV) Approach.
Amount Paid ₱22,000
D, Capital [(60,000 + 14,000) x ¼] ₱18,500 Deduct: BV of Interest
(₱25,000)
E, Capital [(40,000 + 6,000) x ¼] ₱11,500 Acquired (₱100,000 x ¼)
F, Capital ₱30,000 Excess (Loss of D and E
-₱3,000
– Personal in Nature)
The capital balances of the partners after the
admission of F would be as follows: Alternative 2: Revaluation (Goodwill) Approach.
F Under this approach, the negative excess of the
D E (Book Total amount of paid over book value acquired will be
Value) acquired will be capitalized to determine the
Capital revaluation of assets. The entry to record the
Before ₱60,000 ₱40,000 ₱100,000 transaction in the books follows:
Admission
Revaluation D, Capital (₱12,000 x 70%) ₱8,400
14,000 6,000 20,000 E, Capital (₱12,000 x 30%) ₱3,600
Upward
Capital Assets ₱12,000
Balance
74,000 46,000 ₱120,000 Amount
After ₱22,000 ÷ 1/4 ₱88,000 100%
Revaluation Paid
Multiplied Deduct: BV
by the of Interest
x 3/4 x 3/4 Acquired (₱25,000) (₱100,000)
Interest
Remained (₱100,000
Capital x ¼)
After ₱55,500 ₱34,500 ₱30,000 ₱120,000 Excess -₱3,000
Admission Divided by
(capitalized
¼
New Capital Interest at): interest
D (3/4 x 70%) 52.50% acquired
E (3/4 x 30%) 22.50% Revaluation
F (1/4) 25% of Asset -₱12,000 -₱12,000 100%
Total 100% Downward

It should be observed that the total capital balance D, Capital [(60,000 – 8,400) x ¼] ₱12,900
after the admission increases equivalent to the E, Capital [(40,000 – 3,600) x ¼] ₱9,100
revaluation of assets amounting to ₱20,000. The F, Capital ₱22,000
reason for such adjustments is to equalize the
capital of the new partner to the amount paid.

BAFACR1X REVIEWER
 The capital balances of the partners after the
admission of F would be as follows: The Partner’s agreed to admit J as a member of the
F firm.
D E (Book Total
Value) Case 1: No bonus or revaluation.
Capital J invests ₱10,000 for a ¼ interest in the firm. The
Before ₱60,000 ₱40,000 ₱100,000 total firm capital is to be ₱40,000.
Admission A. The total agreed capital is equal to total
Revaluation contributed capital:
-8,400 -3,600 -12,000
Downward Total Agreed Capital ₱40,000
Capital Less Total Contributed Capital
₱40,000
Balance (₱20,000 + ₱10,000 + ₱10,000)
51,600 36,400 ₱88,000 Total 0
After
Revaluation
Multiplied B. The new partner’s capital is the same with his
by the actual investment, therefore, no bonus or
x 3/4 x 3/4
Interest revaluation to be recognized.
Remained
Capital To record the admission of J computed as follows:
After ₱38,700 ₱27,300 ₱22,000 ₱88,000
Admission Cash ₱10,000
J, Capital ₱10,000
New Capital Interest
D (3/4 x 70%) 52.50% The following should be observed:
E (3/4 x 30%) 22.50% • The one-fourth (1/4) interest acquired by J is
F (1/4) 25% presumed to be the capital interest and profit
Total 100% and loss interest ownership.
• Any loans to/from any existing partners should
It should be observed that the total capital balance not be included in cases of admission because
after the admission decreases equivalent to the it’s only the capital interest that is being
revaluation of assets amounting to ₱12,000. The acquired not total interest.
reason for such adjustments is to equalize the
capital of the new partner to the amount paid. Case 2: Bonus to New Partner.
J invest ₱10,000 for a 35% interest in the firm. The
Admission by Investment total agreed capital after admission is ₱40,000.
Assume the following data for GH Partnership had
the following condensed balance sheet: A. The total contributed capital is equal to total
ASSETS agreed capital, so no revaluation (goodwill)
Cash ₱2,500 should be recognized as follows:
Non-cash Assets ₱32,500 Total Agreed Capital ₱40,000
*G, Loan ₱2,500 Less Total Contributed Capital
₱40,000
Total ₱37,500 (₱20,000 + ₱10,000 + ₱10,000)
*May utang ang partnership sa Partner. Total 0
LIABILITIES AND CAPITAL
Liabilities ₱7,500 J, Agreed Capital (₱10,000 x 35%) ₱14,000
G, Capital (60%) ₱20,000 J, Contributed Capital ₱10,000
H, Capital (40%) ₱10,000 Difference or Bonus to J ₱4,000
Total ₱37,500

BAFACR1X REVIEWER
B. The new partner’s contributed capital is less Total Agreed Capital (should be equal ₱50,000
than agreed capital, the difference is to total contributed capital)
attributable to bonus to new partner: Less Total Contributed Capital
[(₱20,000 + ₱10,000) + (₱25,000 - ₱50,000
Cash ₱10,000 ₱5,000)]
G, Capital (₱4,000 x 60%) ₱2,400 Difference ₱0
H, Capital (₱4,000 x 40%) ₱1,600
J, Capital ₱14,000 B. The new partner’s contributed capital is
Greater than his agreed capital. The difference
Case 3: Revaluation (Goodwill) to New Partner. is attributable to bonus to old partners.
J invests ₱10,000 for a 1/3 interest in the firm and J, Contributed Capital (₱25,000 - ₱20,000
is allowed a credit of ₱15,000 for his capital. ₱5,000)
J, Agreed Capital (₱50,000 x 30%) ₱15,000
A. The total contributed capital is less to total Difference or Bonus to Old Partners ₱5,000
agreed capital, so revaluation (goodwill)
should be recognized as follows: The entry to record the transaction in the books
Total Agreed Capital (₱15,000 ÷ 1/3) ₱45,000 follows:
Less Total Contributed Capital
₱40,000
(₱20,000 + ₱10,000 + ₱10,000) Tangible Asset ₱25,000
Difference or Revaluation/Goodwill ₱5,000 Mortgage Payable ₱5,000
J, Capital ₱15,000
B. The new partner’s contributed capital is less G, Capital (₱5,000 x 60%) ₱3,000
than agreed capital, the difference of ₱5,000 in H, Capital (₱5,000 x 40%) ₱2,000
(A) is attributable to revaluation/goodwill to
new partner. The following should be observed:
J, Agreed Capital ₱15,000 • Since there is no agreement as to the
Less: J, Contributed Capital ₱10,000 recognition of fair value, the recognition of
Difference or Revaluation to J ₱5,000 understatement of assets under the bonus
(book-value) approach is not allowed under
The entry to record the transaction in the books GAAP.
follows: • The Capital Interest of 30% of the new partner
is different from this profit and loss ratio of 1/4.
Cash ₱10,000 This item is so significant in comparing bonus
Assets (Goodwill) ₱5,000 approach and revaluation (goodwill) of net
J, Capital ₱15,000 asset approach. Consequently, the new capital
interest percentage is computed as follows:
Case 4: Bonus to Old Partners. New Capital Interest
J conveyed a tangible asset with a fair value of D (60 x 70%) 42%
₱25,000 with an assumed mortgage in exchange E (40 x 70%) 28%
for a 30% interest in capital with bonus to be J 30%
recognized, keeping in mind that J would be Total 100%
acquiring a ¼ interest in profits. Before the
admission of J, GH Partnership had an equipment Case 5: Revaluation (Goodwill) of Old
of ₱4,000 with a fair value of ₱7,000. Partners.
J must invest or contribute cash of ₱24,000
A. The total contributed capital is equal to total equivalent to a 37.50% interest in a total agreed
agreed capital, so no revaluation (goodwill) capital of ₱64,000 included in the noncash
should be recognized as follows: assets is an equipment undervalued by ₱7,000.

BAFACR1X REVIEWER
 A. The total contributed capital is less than the A. The total contributed capital is less than the
total agreed capital, so revaluation should total agreed capital, so revaluation should be
be recognized as follows: recognized as follows:
Total Agreed Capital ₱64,000 Total Agreed Capital ₱50,000
Less Total Contributed Capital Less Total Contributed Capital
₱40,000
(₱20,000 + ₱10,000 + ₱7,000, ₱61,000 (₱20,000 + ₱10,000 + ₱10,000)
₱24,000) Difference or Revaluation/Goodwill ₱10,000
Difference or Revaluation/Goodwill ₱3,000
B. The new partner’s contributed capital is less to
B. The new partner’s contributed capital is the agreed capital, the difference of ₱12,500 are
equal to the agreed capital, the difference of composed of revaluation of ₱10,000 in (A)
₱3,000 in (A) is attributable to above and the balance is bonus to new partner.
revaluation/goodwill to old partner. J, Contributed Capital ₱10,000
J, Contributed Capital ₱24,000 Less the J, Agreed Capital (₱50,000
₱22,500
Less the J, Agreed Capital (₱64,000 x 45%)
₱24,000
x 37.5%) Difference ₱12,500
Difference ₱0 Less the Revaluation/Goodwill to ₱10,000
new partner
The entries to record the transaction in the Bonus to New Partner ₱2,500
books follows:
The entries to record the transaction in the books
Equipment ₱7,000 follows:
G, Capital (₱7,000 x 60%) ₱4,200
H, Capital (₱7,000 x 40%) ₱2,800 Cash ₱10,000
Assets (Goodwill) ₱10,000
Cash ₱24,000 G, Capital (₱2,500 x 60%) ₱1,500
Other Assets ₱3,000 H, Capital (₱2,500 x 40%) ₱1,000
G, Capital (₱3,000 x 60%) ₱1,800 J, Capital ₱22,500
H, Capital (₱7,000 x 40%) ₱1,200
J, Capital ₱24,000 Case 7: Bonus and Revaluation to the Old
Partners.
It should be observed that under the revaluation J invests ₱15,000 for a 20% interest in the firm.
(goodwill) approach, the practices of recognizing The total agreed capital after admission is ₱60,000.
increases in partnership's net assets or recognizing
previously unrecorded goodwill are not in A. The total contributed capital is less than the
compliance with GAAP. total agreed capital, so revaluation should be
recognized as follows:
Partnerships using this non-GAAP method argue Total Agreed Capital ₱60,000
that revaluing assets and liabilities at the time of Less Total Contributed Capital
the change in partnership membership states fully ₱45,000
(₱20,000 + ₱10,000 + ₱15,000)
the true economic condition of the partnership at Difference or Revaluation/Goodwill ₱15,000
that point in time, and properly assigns changes in
asset and liability values. B. The new partner’s contributed capital is greater
than the agreed capital, the difference of ₱3,000
Case 6: Bonus and Revaluation (Goodwill) to is bonus to old partners since there is already a
New Partner. revaluation (goodwill) as indicated above.
J invest ₱10,000 for a 45% interest in the firm. The
total agreed capital after admission is ₱50,000.

BAFACR1X REVIEWER
 J, Contributed Capital ₱15,000 The entry to record the transaction in the books
Less the J, Agreed Capital (₱60,000 follows:
₱12,000
x 20%)
Difference or Bonus to Old Partners -₱3,000 Cash ₱15,000
Less the Revaluation/Goodwill to ₱15,000 Assets (Goodwill) ₱15,000
new partner G, Capital (₱12,000 x 60%) ₱7,200
Bonus to New Partner ₱18,000 H, Capital (₱12,000 x 40%) ₱4,800
J, Capital ₱18,000
The difference is considered as a bonus since there
was a transfer of capital (as indicated by the Withdrawal/Retirement of a Partner
decrease in capital of the new partner) made by the Assume the following data on January 1, 20x4 for
new partner to the old partners. KLM Partnership had the following condensed
balance sheet:
The entries to record the transaction in the books
follows: ASSETS
Cash ₱50,000
Cash ₱15,000 Non-cash Assets ₱40,000
Assets (Goodwill) ₱15,000 *Loan Receivable - K ₱5,000
G, Capital (₱18,000 x 60%) ₱10,800 Total ₱95,000
H, Capital (₱18,000 x 40%) ₱7,200 *May matatanggap na amount ang Partnership
J, Capital ₱12,000 kay Partner K.

Case 8: Revaluation (Goodwill) to the New and LIABILITIES AND CAPITAL

Old Partners. Liabilities ₱10,000
J invests ₱15,000 for a 30% interest in the firm. K, Capital (30%) ₱30,000
The total agreed capital after admission is ₱60,000. L, Capital (50%) ₱40,000
M, Capital (20%) ₱15,000
A. The total contributed capital is less than the Total ₱95,000
total agreed capital, so revaluation should be
recognized as follows: The percentages in parenthesis after the partner’s
Total Agreed Capital ₱60,000 capital balances represent the profit and loss ratio.
Less Total Contributed Capital
₱45,000
(₱20,000 + ₱10,000 + ₱15,000) On May 1, 20x4, K retires from the partnership.
Difference or Revaluation/Goodwill ₱15,000 The net income of the partnership to date of
retirement is amounted ₱20,000. The partnership
B. The new partner’s contributed capital is less to paid cash to the retiring partner also on the
the agreed capital, the difference of ₱15,000 in retirement date. The following entries are
(A) is attributable to revaluation (goodwill) to necessary to the partnership books before paying
new partner and old partners. the interest of the retiring partner:
J, Contributed Capital ₱15,000
Less the J, Agreed Capital (₱50,000 Income Summary ₱20,000
₱18,000
x 45%) K, Capital (₱20,000 x 30%) ₱6,000
Difference ₱3,000 L, Capital (₱20,000 x 50%) ₱10,000
Less the Revaluation/Goodwill to ₱15,000 M, Capital (₱20,000 x 20%) ₱4,000
new partner
Bonus to New Partner ₱12,000 K, Capital ₱5,000
Loan Receivable – K ₱5,000

BAFACR1X REVIEWER
 2. The Capital Balances of the Partners after the
The total interest of the retiring partner K retirement of K are as follows:
amounted to: L, Capital
Capital Interest ₱30,000 (₱40,000 + ₱10,000, profit - ₱2,857, ₱47,143
Add Share in Net Income ₱6,000 Bonus)
Deduct Loan Receivable ₱5,000 M, Capital
Total Interest of K before his (₱15,000 + ₱4,000, profit - ₱1,143, ₱17,857
₱31,000
Retirement Bonus)
Case 1: Payment at Book Value (Settlement
Price is equal to the interest of retiring partner). Assuming the same data, expect that by mutual
The partnership paid K, ₱31,000. The entry to agreement, the inventory is to be adjusted to their
record the transaction in the books follows: value. Then, the undervalued asset should be
recorded first before the statement. The entries to
K, Capital ₱31,000 record the transaction in the books follow:
Cash ₱31,000 Inventory ₱4,000
K, Capital (₱4,000 x 20%) ₱1,200
Case 2: Payment at More than Book Value L, Capital (₱4,000 x 50%) ₱2,000
(Settlement price is greater than the interest of M, Capital (₱4,000 x 20%) ₱800
retiring partner).
The partnership paid K, ₱35,000. Included in the K, Capital ₱32,200
non-cash assets is an inventory costing ₱6,000 with L, Capital (₱2,800 x 5/7) ₱2,000
a fair value of ₱10,000. The remaining partners M, Capital (₱2,800 x 2/7) ₱800
continue to use their old profit and loss ratio. Cash ₱35,000
Assumption 1: Bonus to Retiring Partner. The
excess is considered bonus chargeable to L and M. Amount Paid ₱35,000
Amount Paid ₱35,000 Less Book Value of K’s Total
₱32,200
Less Book Value of K’s Total Interest (30%) – (₱31,000 + ₱1,200)
₱31,000
Interest (30%) Bonus to Retiring Partner ₱2,800
Bonus to Retiring Partner ₱4,000 Assumption 2: Partial Revaluation (Goodwill) to
Retiring Partner. The excess is considered as
The entry to record the transaction in the books revaluation (goodwill) to be recognized. The
follows: entries to record the transaction in the books
follows:
K, Capital ₱31,000
L, Capital (₱4,000 x 5/7) ₱2,857 Inventory ₱4,000
M, Capital (₱4,000 x 2/7) ₱1,143 K, Capital (₱4,000 x 20%) ₱1,200
Cash ₱35,000 L, Capital (₱4,000 x 50%) ₱2,000
M, Capital (₱4,000 x 20%) ₱800
The following items should be observed:
1. Under the bonus approach, undervaluation of Amount Paid ₱35,000
net assets should not be recorded because this Less Book Value of K’s Total
₱32,200
will be in contradiction of current accounting Interest (30%) – (₱31,000 + ₱1,200)
standards. Goodwill in Part of K ₱2,800
Divided by (Capitalized at): Profit
30%
and Loss % of K
Total Revaluation (Goodwill) ₱9,333

BAFACR1X REVIEWER
Assets (Goodwill) ₱9,333 K, Capital ₱31,000
K, Capital (₱9,333 x 20%) ₱2,800 L, Capital (₱5,000 x 5/7) ₱3,571
L, Capital (₱9,333 x 50%) ₱4,666 M, Capital (₱5,000 x 2/7) ₱1,499
M, Capital (₱9,333 x 20%) ₱1,867 Cash ₱26,000

K, Capital (₱32,200 + ₱2,800) ₱32,200 The Capital Balances of the Partners after the
Cash ₱35,000 retirement of K are as follows:
L, Capital
The Capital Balances of the Partners after the (₱40,000 + ₱10,000, profit + ₱3,571, ₱53,571
retirement of K are as follows: Bonus)
L, Capital M, Capital
(₱40,000 + ₱10,000, profit + ₱2,000, ₱56,666 (₱15,000 + ₱4,000, profit + ₱800, ₱20,429
Adjustment + ₱4,666) Adjustment + ₱1,867)
M, Capital
(₱15,000 + ₱4,000, profit + ₱800, ₱21,667 Assumption 2: Partial Revaluation/Write-down of
Adjustment + ₱1,867) Specific Assets (Share of Retiring Partner). The
excess is considered as partial revaluation/write-
Case 3: Payment at Less than Book Value down specific assets to be recognized. The entries
(Settlement price is less than the interest of to record the transaction in the books follows:
retiring partner). Amount Paid ₱26,000
The partnership paid K, ₱26,000. A partner who is Less Book Value of K’s Total
₱31,000
anxious to dispose of his/her interest in the Interest (30%)
partnership may agree to accept less than his/her Partial Revaluation/Write-Down of ₱5,000
book value interest in the partnership. When a Specific Assets
withdrawing partner agrees to accept less than the
amount reported in his/her capital account, such a K, Capital ₱31,000
difference may be viewed (1) as a bonus accruing Specific Assets ₱5,000
to remaining partners, or (2) revaluation approach Cash ₱26,000
(in case, there is an existing goodwill, as an offset
against goodwill balance). The Capital Balances of the Partners after the
The partner may do so for a number of reasons, retirement of K are as follows:
such as (1) he/she may view the future of the L, Capital (₱40,000 + ₱10,000,
company negatively, (2) he/she may need ₱50,000
profit)
operating capital for personal reason, or (3) the M, Capital (₱15,000 + ₱4,000, profit) ₱19,000
business association may no longer be acceptable
to the partner and, in his or her opinion, a forced Assumption 3: Total Revaluation/Write-Down of
liquidation of the firm might be detrimental to Assets (Entire Entity). The excess is considered as
his/her interest. In such cases, use of the bonus a revaluation/write-down of assets for the entire
approach is justified, since the settlement may not entity. The entries to record the transactions in the
be based on economic value of the firm. books follows:
Amount Paid ₱26,000
Assumption 1: Bonus to Remaining Partners. The Less Book Value of K’s Total
excess is considered bonus chargeable to L and M. ₱31,000
Interest (30%)
Partial Revaluation/Write-Down of ₱5,000
Amount Paid ₱26,000 Specific Assets
Less Book Value of K’s Total Divided by (Capitalized at): Profit
₱31,000 30%
Interest (30%) and Loss % of K
Bonus to Remaining Partners ₱5,000 Total Revaluation (Goodwill) ₱16,667

BAFACR1X REVIEWER
K, Capital (₱16,667 x 30%) ₱5,000 2. Installment Liquidation (Piecemeal
L, Capital (₱16,667 x 50%) ₱8,334 Liquidation)
M, Capital (₱16,667 x 20%) ₱3,333 • Liquidation process is done for a longer
Cash ₱16,667 period of time of difficulty converting non-
cash assets to cash.
K, Capital (₱31,000 - ₱5,000) ₱26,000 • Distributions are made to some or all of the
Cash ₱26,000 partners as it becomes available even before
all the non-cash assets are realized.
The Capital Balances of the Partners after the
retirement of K are as follows: Procedures in the Lump Sum Liquidation
L, Capital (₱40,000 + ₱10,000, profit The process of liquidation is summarized in the
₱41,666
- ₱8,334) Statement of Partnership Liquidation. This
M, Capital (₱15,000 + ₱4,000, profit statement serves as basis for the journal entries
₱15,667
- ₱8,333) during the liquidation process. The process of
liquidation is done by:
Comparison of Bonus and Revaluation 1. Realization of non-cash assets and allocation
Approach (Goodwill Procedure) of any gain or loss to the partners base on
Although either the bonus or revaluation their profit and loss ratio.
(goodwill) approach can be used to record the • Realization of non-cash assets is the
withdrawal of K, it should be observed that, as in process of converting it to cash thru the
the case of earlier examples involving problems of means of selling it.
bonus and revaluation (goodwill), the alternative • The effect of the realization of non-cash
approaches offer the same ultimate results only assets to the partnership is it increases the
when the remaining partners examples involving cash balance and it either increases or
problems of bonus and revaluation (goodwill), the decreases the capital balances of the
alternative approaches offer the same ultimate partners if there is a gain or loss on
results only when the remaining partners. realization.
• A gain or loss on realization is allocated to
PARTNERSHIP LIQUIDATION the partners based on their Profit and Loss
Liquidation is the process of winding up of the ratio, if the proceeds received is not equal
affairs of the business and termination of business to the book value of the non-cash assets
activities. Some reasons why a partnership is realized.
liquidated as follows:
If the proceeds are greater than the book
• Bankruptcy / Insolvency
value of the non-cash assets, a gain is
• Once a partnership with a fixed term of a
allocated to the partners based on their profit
particular undertaking has terminated or
and loss ratio. This gain directly increases the
accomplished.
capital balances of the partners.
• Court order
• Mutual agreement among the partners to close If the proceeds are less than the book value
the business. of the non-cash assets, a loss is allocated to the
partners based on their profit and loss ratio.
Types of Liquidation This gain directly decreases the capital
1. Lump Sum Liquidation (Total Liquidation) balances of the partners.
• Liquidation process is completed within a
reasonably short period of time. During the process of realization, there are
• No distributions are made to partners until instances wherein certain expenses may be
the realization process is completed. incurred which are called Liquidation
Expenses. Example of Liquidation Expenses

BAFACR1X REVIEWER
 are sales commissions, shipping cost and other investment to partnership to cover
expenses relating to the disposal of the assets. his deficiency.
The effect of these liquidation expenses in the o If the partner is insolvent (has no
process of liquidation is it decreases the cash excess personal assets over
balance and at the same time decreases the personal liabilities), the remaining
partner’s capital balances. Liquidation partners will absorb the capital
expenses increases the loss on realization and deficiency based on their profit and
decreases the gain on realization. loss ratios.

2. Payment of Liabilities to third parties 4. Payment of Liabilities to Partners.

(Partnership Creditors) • After settlement of the liabilities of the
• After realization of non-cash assets and partnership to third parties, the partnership
elimination of capital deficiencies if there will not settle its liabilities to the partners of
are any, the next step is the cash the partnership.
distribution. When it comes to cash
distribution it pertains to the settlement of 5. Payment of Capital Accounts to Partners.
the interests of the partnership creditors and • After settlement of the liabilities of the
also the interests of partners in the partnership to partners, the partnership will
partnership business. The order of priority not settle the capital interest of the partners.
when it comes to the cash distribution is the Take note that the final distribution of cash
settlement first of the liabilities of the to partners is based on partner’s capital
partnership to the partnership creditors / balances.
outside creditors.
The status whether a partner is solvent, or insolvent
3. Elimination of Capital Deficiencies. is sometimes not explicitly stated in the problem.
• After realization of non-cash assets, there The personal assets and personal liabilities of a
are instances wherein the capital balances partner is given and is used to know whether a
of the partners after the distribution of gain partner is solvent or not. If the personal asset of a
or loss on realization has a negative balance partner is greater than his personal liabilities, a
which means capital deficiency. If this is partner is said to be solvent but if the personal
the case, the elimination of the capital assets are less than personal liabilities, the partner
deficiency must be done by applying these is insolvent.
concepts in order of priority:
A. If the deficient partner has a loan ILLUSTRATIVE PROBLEM
balance (the partnership has a Shown below are the balances of the accounts of
liability to the deficient partner), the partnership before the liquation process:
exercise the offsetting of the loan to the ASSETS
capital deficiency. Cash ₱150,000
B. If the deficient partner does not have Accounts Receivable ₱200,000
a loan balance or the loan balance is Office Equipment ₱1,000,000
not enough to cover to capital Less: Accumulated Depreciation -₱350,000
deficiency, the deficient partner must LIABILITIES AND CAPITAL
be known whether he is solvent or Accounts Payable ₱100,000
insolvent. A, Loan ₱50,000
o If the deficient partner is solvent A, Capital (30%) ₱150,000
(has excess personal assets over B, Capital (20%) ₱250,000
personal liabilities), the partner C, Capital (50%) ₱400,000
should have an additional

BAFACR1X REVIEWER
Case 1: Non-cash Assets are sold at ₱950,000.

LIABILITIES
NON-CASH A, CAPITAL B, CAPITAL C, CAPITAL
CASH TO THIRD A, LOAN
ASSETS (30%) (20%) (50%)
PARTIES
Balances
before ₱150,000 ₱850,000 ₱100,000 ₱50,000 ₱150,000 ₱250,000 ₱450,000
Liquidation
Realization of
Assets and
950,000 -850,000 - - 30,000 20,000 50,000
Division of
Gain
Balances 1,100,000 - 100,000 50,000 180,000 270,000 500,000
Payment of
liabilities to -100,000 - -100,000 - - - -
third parties
Balances 1,000,000 - - 50,000 180,000 270,000 500,000
Payment of
liabilities to -50,000 - - -50,000 - - -
partners
Balances 950,000 - - - 180,000 270,000 500,000
Payment of
partners in
settlement of -950,000 - - - -180,000 -270,000 -500,000
their capital
balances
Balances - - - - - - -

Gain on Realization: ₱100,000

Share of each partner in the allocation of gain/loss on realization: A – ₱30,000, B - ₱20,000, C - ₱50,000.
Cash available for distribution to partners in settlement of their capital balances: A – ₱180,000, B - ₱270,000, C - ₱500,000.

BAFACR1X REVIEWER
Case 2: Non-cash Assets are sold at ₱950,000 with Liquidation Expense of ₱50,000.

LIABILITIES
NON-CASH A, CAPITAL B, CAPITAL C, CAPITAL
CASH TO THIRD A, LOAN
ASSETS (30%) (20%) (50%)
PARTIES
Balances
before ₱150,000 ₱850,000 ₱100,000 ₱50,000 ₱150,000 ₱250,000 ₱450,000
Liquidation
Realization of
Assets and
950,000 -850,000 - - 30,000 20,000 50,000
Division of
Gain
Payment of
Liquidation -50,000 - - - -15,000 -10,000 -25,000
Expenses
Balances 1,050,000 - 100,000 50,000 165,000 260,000 475,000
Payment of
liabilities to -100,000 - -100,000 - - - -
third parties
Balances 950,000 - - 50,000 165,000 260,000 475,000
Payment of
liabilities to -50,000 - - -50,000 - - -
partners
Balances 900,000 - - - 165,000 260,000 475,000
Payment of
partners in
settlement of -900,000 - - - -165,000 -260,000 -475,000
their capital
balances
Balances - - - - - - -

Gain on Realization: ₱50,000

Share of each partner in the allocation of gain/loss on realization: A – ₱15,000, B - ₱10,000, C - ₱25,000.
Cash available for distribution to partners in settlement of their capital balances: A – ₱165,000, B - ₱260,000, C - ₱475,000.

BAFACR1X REVIEWER
Case 3: Non-cash Assets are sold at ₱800,000.

LIABILITIES
NON-CASH A, CAPITAL B, CAPITAL C, CAPITAL
CASH TO THIRD A, LOAN
ASSETS (30%) (20%) (50%)
PARTIES
Balances
before ₱150,000 ₱850,000 ₱100,000 ₱50,000 ₱150,000 ₱250,000 ₱450,000
Liquidation
Realization of
Assets and
800,000 -850,000 - - -15,000 -10,000 -25,000
Division of
Gain
Balances 950,000 - 100,000 50,000 135,000 240,000 425,000
Payment of
liabilities to -100,000 - -100,000 - - - -
third parties
Balances 850,000 - - 50,000 135,000 240,000 425,000
Payment of
liabilities to -50,000 - - -50,000 - - -
partners
Balances 800,000 - - - 135,000 240,000 425,000
Payment of
partners in
settlement of -800,000 - - - -135,000 -240,000 -425,000
their capital
balances
Balances - - - - - - -

Loss on Realization: ₱100,000

Share of each partner in the allocation of gain/loss on realization: A – ₱15,000, B - ₱10,000, C - ₱25,000.
Cash available for distribution to partners in settlement of their capital balances: A – ₱135,000, B - ₱240,000, C - ₱425,000.

BAFACR1X REVIEWER
Case 4: Non-cash Assets are sold at ₱800,000 with Liquidation Expense of ₱50,000.

LIABILITIES
NON-CASH A, CAPITAL B, CAPITAL C, CAPITAL
CASH TO THIRD A, LOAN
ASSETS (30%) (20%) (50%)
PARTIES
Balances
before ₱150,000 ₱850,000 ₱100,000 ₱50,000 ₱150,000 ₱250,000 ₱450,000
Liquidation
Realization of
Assets and
800,000 -850,000 - - -15,000 -10,000 -25,000
Division of
Gain
Payment of
Liquidation -50,000 - - - -15,000 -10,000 -25,000
Expenses
Balances 900,000 - 100,000 50,000 120,000 230,000 400,000
Payment of
liabilities to -100,000 - -100,000 - - - -
third parties
Balances 800,000 - - 50,000 120,000 230,000 400,000
Payment of
liabilities to -50,000 - - -50,000 - - -
partners
Balances 750,000 - - - 120,000 230,000 400,000
Payment of
partners in
settlement of -750,000 - - - -120,000 -230,000 -400,000
their capital
balances
Balances - - - - - - -

Loss on Realization: ₱100,000

Share of each partner in the allocation of gain/loss on realization: A – ₱30,000, B - ₱20,000, C - ₱50,000.
Cash available for distribution to partners in settlement of their capital balances: A – ₱120,000, B - ₱230,000, C - ₱400,000.

BAFACR1X REVIEWER
Case 5: Non-Cash Assets are sold at ₱200,000; all partners are solvent.

LIABILITIES
NON-CASH A, CAPITAL B, CAPITAL C, CAPITAL
CASH TO THIRD A, LOAN
ASSETS (30%) (20%) (50%)
PARTIES
Balances
before ₱150,000 ₱850,000 ₱100,000 ₱50,000 ₱150,000 ₱250,000 ₱450,000
Liquidation
Realization of
Assets and
200,000 -850,000 - - -195,000 -130,000 -325,000
Division of
Gain
Balances 350,000 - 100,000 50,000 -45,000 120,000 -125,000
Elimination of
Capital
Deficiency – - - - -45,000 45,000 - -
Offset of
existing loan
Balances 350,000 - 100,000 5,000 - 120,000 125,000
Payment of
liabilities to -100,000 - -100,000 - - - -
third parties
Balances 250,000 - - 5,000 - 120,000 125,000
Payment of
liabilities to -5,000 - - -5,000 - - -
partners
Balances 245,000 - - - - 120,000 125,000
Payment of
partners in
settlement of -245,000 - - - - -120,000 -125,000
their capital
balances
Balances - - - - - - -
Loss on Realization: ₱650,000
Share of each partner in the allocation of gain/loss on realization: A – ₱195,000, B - ₱130,000, C - ₱325,000.
Cash available for distribution to partners in settlement of their capital balances: A – ₱0, B - ₱120,000, C - ₱125,000.

BAFACR1X REVIEWER
Case 6: Non-Cash Assets are sold at ₱100,000; all partners are insolvent.

LIABILITIES
NON-CASH A, CAPITAL B, CAPITAL C, CAPITAL
CASH TO THIRD A, LOAN
ASSETS (30%) (20%) (50%)
PARTIES
Balances
before ₱150,000 ₱850,000 ₱100,000 ₱50,000 ₱150,000 ₱250,000 ₱450,000
Liquidation
Realization of
Assets and
100,000 -850,000 - - -225,000 -150,000 -375,000
Division of
Gain
Balances 250,000 - 100,000 50,000 -75,000 100,000 75,000
Elimination of
Capital
Deficiency – - - - -50,000 50,000 - -
Offset of
existing loan
Elimination of
-7,142.86 -17,857.14
Capital
- - - - 25,000 (25,000 x (25,000 x
Deficiency –
20%/70%) 50%/70%)
Absorption
Balances 250,000 - 100,000 - - 92,857.14 57,142.86
Payment of
liabilities to -100,000 - -100,000 - - - -
third parties
Balances 150,000 - - - - 92,857.14 57,142.86
Payment of
partners in
settlement of -150,000 - - - - -92,857.14 -57,142.86
their capital
balances
Balances - - - - - - -
Loss on Realization: ₱750,000
Share of each partner in the allocation of gain/loss on realization: A – ₱225,000, B - ₱150,000, C - ₱375,000.
Cash available for distribution to partners in settlement of their capital balances: A – ₱0, B - ₱92,857.14, C - ₱57,142.86.

BAFACR1X REVIEWER
 CORPORATION Example of express power is the power to
extend or shorten corporate term of a private
A Corporation is an artificial being created by
corporation when approved by a majority
operation of law having the right of succession and
vote of the board of directors and ratified by
the powers, attributes and properties expressly
at least 2/3 of the outstanding shareholders
authorized by law or incident to its existence. (Sec.
indicated in the articles of incorporation.
2 of the Revised Corporation Code of the
Philippines)
b. Incidental Powers - powers which are
necessary for corporate existence, and which
Characteristics:
can be exercised. Example of incidental
1. Separate Legal Existence – A corporation has
power is the power to buy assets like land or
a *juridical personality of its own separate and
building to be used for the operations of the
distinct from the shareholders. It can act in its
business.
own name wherein it can enter into contracts
sue and sued, have its own assets and liabilities
c. Implied Powers - those derived from
under its own name.
express and incidental powers. Example of
*An entity that is created by law and granted
implied power is the power to hire employees
with rights and responsibilities.
to help in the fulfillment of the business’s
goals.
2. Created by Operation of Law – A corporation
is created by law (Revised Corporation Code or
Attributes:
R.A 11232) which authorizes and regulates its
1. It is an artificial being.
existence. It is not created by mere agreement
2. It has a legal personality.
by the parties who want to organize a
3. It has a perpetual existence.
corporation. In order for a corporation to be
4. It has only the powers, attributes and properties
established, the rules and regulations in the RA
expressly authorized by law or incident to its
11232 must be strictly followed.
existence.
5. It has corporate ownership - the management of
3. Right of Succession / Perpetual Life - A
the corporation is vested upon a group of
corporation can exist continuously regardless
shareholders which is called the Board of
there is a death, withdrawal or incapacity of
Directors (BOD). This group is elected by the
shareholders and regardless of the transfer or
shareholders. The BOD also elects their
sale of shareholder of its shares. Based on the
officers among its members.
Revised Corporation code the life of a
6. It is subject to limited liability - The owners of
corporation is perpetual, meaning it can exist
a corporation which are called the shareholders
continuously without any limitations unless
are liable to corporate creditors up to the extent
based on their articles of incorporation
of what they contributed only to the
otherwise.
corporation.
7. It has to follow Government Regulations -
4. Powers, Attributes and Properties expressly
Corporations are subject to strict government
authorized by law or incident to its existence
regulations from the time of its incorporation
– A corporation is granted by the Revised
through its yearly operations. This is to protect
Corporation Code the powers which are:
the interest of the owners since most of them do
a. Express Powers – powers granted by the
not actively participate in the day to day to
laws (R.A 11232 / Special laws) or
management of the business. Securities and
enumerated in the articles of incorporation.

BAFACR1X REVIEWER
 exchange commission is the government body Corporate Structure
who mostly strictly regulates the corporations.

Advantages and Disadvantages

Advantages of a Corporate Form of Business
Organization
1. The capacity to hold property, to contract, to
sue and be sued as a legal unit or distinct entity.
2. Exemption of shareholders from individual
liability.
3. Continuity of existence in spite of death or
changes of members. Kinds of Corporation
4. Transferability of Shares. A. Government-owned or controlled – are
5. Centralized management under a board of entities by the government or corporations of
directors. which the government is a majority
6. Standardized methods of organization, stockholder.
management and finance for the protection of B. Domestic – one incorporated under Philippine
shareholders and creditors under statutory laws.
regulations. C. Foreign – one formed, organized or existing
under any laws other than those of the
Disadvantages of a Corporate Form of Business Philippines.
Organization D. Corporation Aggregate – one composed of
1. The limited liability of the stockholders serves more than one member or corporator.
to limit the credit available to the corporation. E. Corporation sole – consists of one member or
2. The transferability of shares permits the uniting corporator and his successors.
of incompatible and conflicting interests in one F. Ecclesiastical – organized for religious
enterprise. purposes.
3. The minority stockholders are usually G. Eleemosynary – organized for charitable
subservient to the wishes of the majority. purposes.
4. In big corporations, the stockholders’ voting H. Close – one wherein all the outstanding stock
rights have become largely theoretical because is owned by few persons who are active in
of widespread ownership, disinterest in management and conduct of the business.
management, and inaccessible meeting places. I. Open – one in which stocks are available in the
5. In large corporations, management and control market for purchase.
has been separated from ownership. J. Multi-national – one having been created or
6. By and large corporations are subject to organized in one state conducts business
governmental restrictions, controls, and report activities across national boundaries and but
requirements not imposed on other forms of subject to legal sanctions of the countries in
business organizations. which they operate.
7. Corporate sphere of activity is limited in the K. Non-Profit – organized without contemplation
transaction of its business to the state of the of gains, profits or dividends to their members
organization. on invested capital.
8. The corporate form involves “double taxation” L. De Jure – one created in strict or substantial
on corporate income. conformity with the statutory requirements for
incorporation.

BAFACR1X REVIEWER
M. De Factot – one that exists in fact but not in 6. Subscribers – are persons who agreed to buy
law. It operates as a corporation but there are and pay for original, unissued shares of a
certain legal requirements that are not corporation.
complied. 7. Underwriters – persons who sell the shares in
N. Public - created for the purpose of governing a public for the corporation.
particular segment of the state, such as
municipalities and cities or to fulfill a Rights of Shareholders
government function. 1. Share in the corporate profits at the discretion
O. Private - organized for private purpose, aim or of the Board of Directors.
benefit. 2. Vote and attend annual stockholders’ meetings.
P. Quasi-Public - is a private corporation which 3. Share in the distribution of assets upon
was granted a franchise by the government to liquidation of the business.
perform public duties. 4. Sell or dispose of their shares.
Q. Stock - ownership is in the form of shares. This 5. Receive the same dividends given to all
type of corporation is normally profit oriented ordinary shareholders.
and are authorized to distribute dividends to its 6. Receive timely financial reports.
shareholders. 7. Purchase additional shares of stocks whenever
R. Non-Stock - this type of corporation is not there is an increase in the authorized share
organized for profit purposes and does not capital stock of the corporation: Pre-emptive
distribute dividends to its members. Normally Right.
non-stock corporations are established for the
purpose of religious, educational, social, Share of Stocks
scientific, civic or political. A “stock” or share of stock is one of the units into
which the capital stock has been divided. It
Components of a Corporation represents the interest or right that the holder of the
1. Corporators – are those who composed a stock or stockholder has in the corporation.
corporation, whether as stockholders or
members. This term includes incorporators, A stock certificate certifies that one is a holder or
stockholders or members. owner of a certain number of shares of stock in the
2. Incorporators – are those stockholders or corporation. It is a mere documentary evidence of
members mentioned in the articles of the holder’s ownership of shares and a convenient
incorporation as originally forming and instrument for the transfer of title.
composing the corporation and who are
signatories thereof. Kind of Stocks
3. Stockholders or shareholders – are those As to Value
owners in a stock corporation. A. Par Value Stock – is one in which there is a
4. Members – are those corporators in a non- given fixed or definite value of a share in the
stock corporation. articles of incorporation; minimum value.
5. Promoters – is a self-constituted organizer B. No Par Value Stock – is one without a
who finds an enterprise or venture and helps to designated value in the articles of
attract investors, form a corporation and launch incorporation.
it in business, all with a view to promotion
profits. As to Right
A. Common or Ordinary Stock – entitles the
owner to a pro rata dividend without any

BAFACR1X REVIEWER
 priority or preference over other stockholders. • If it be a stock corporation, the amount of its
These shares can be issued at par or no par. authorized capital stock in lawful money of the
B. Preferred or Preference Stock – one with Philippines, the number of shares which it is
preferential rights or claims over the common divided, and in case the shares are par value
stock. Only par value shares can be issued for shares, the par value of each, the names,
this stock. nationalities and residences of the original
subscriber, and the amount subscribed and paid
Incorporation and Organization by each on his subscription, and if some or all
Number of Qualifications of Incorporators of the shares are without par value, such fact
• Any number but not more than fifteen (15). must be stated.
• All of legal age. • If it be a non-stock corporation, the amount of
• Majority are residents of the Philippines. its capital, the names, nationalities and
residences of the contributors and the amount,
Capital Stock Requirements contributed by each.
No minimum capital stock requirement. But when
a capital stock is to be increased: By-laws
• At least twenty five percent (25%) of the • Filed with SEC and adopted within one month
increase of the capital stock must be after SEC issues a certificate of incorporation.
subscribed. • Rules of actions concerning internal
• At least twenty five percent (25%) of the total administration of the corporation and include
subscription must be paid. qualifications, manner of conducting meetings,
etc.
Articles of Incorporation
This shall be filed with the Securities and ACCOUNTING FOR CORPORATIONS
Exchange Commission in any of the official Shareholder’s Equity
languages, duly signed and acknowledged by all of 1. Contributed or Paid-in Capital
the incorporators. • Total Contributions made by the
shareholders.
Matters of the Articles of Incorporation • Divided into units called shares of stock.
• Name of Corporation. • These are the excess of the consideration
• The specific purpose/s for which the received from issuance of shares over their
corporation is being incorporated. par or stated value and others.
• The place where the principal office of the
corporation is to be located, which must be 2. Retained Earnings
within the Philippines. • Represents accumulated profits or losses.
• The term for which the corporation is to exist. • Decreased by distribution of profits upon
• The names, nationalities and residences of the declaration by Board of Directors.
incorporators. • If the Corporation earns more profit, it will
• The number of directors or trustees which shall have a credit balance of the retained
not be less than five (5) nor more than fifteen earnings account, but if the retained
(15). earnings have a debit balance or have
• The names, nationalities and residences of the accumulated more losses, it will be called
person who shall act as directors or trustees as deficit.
until the first regular directors or trustees are
duly elected and qualified.

BAFACR1X REVIEWER
Shares of Stocks Transactions Journal Entry Method
1. Authorization – Authorized Share Capital or 01/01 Unissued Share Capital 4,000,000
Authorized Capital Stock. Authorized Share Capital 4,000,000
2. Sale – Share Capital with/out Share Premium To record authorization of 40,000 shares at
or Paid-in Capital in Excess of Par. ₱100 par.
3. Subscription – Subscribed Share Capital and
Subscription Receivable. Sale of Shares AT PAR for Cash
4. Collection of Subscription On Jan. 5, ABC Company issued 3,000 shares at
5. Issuance of Certificate par value of ₱100.
6. Reacquisition of Shares – Treasury Shares Memorandum Entry
01/05 Cash 300,000
Shares of Stock Classification Share Capital 300,000
1. Authorized Shares – maximum number of Issued 3,000 shares at par for cash.
shares allowed to be issued as authorized by the
SEC. Journal Entry Method
2. Issued Shares – fully paid shares with stock 01/05 Cash 300,000
certificates. Unissued Share Capital 300,000
3. Subscribed Shares – shares that an investor Issued 3,000 shares at par for cash.
promised to buy. Usually under an installment
plan. Sale of Shares ABOVE PAR for Cash
4. Treasury Shares – previously issued shares On Jan. 7, ABC Company issued 480 Shares for
reacquired by the corporation. ₱50,000.
5. Outstanding Shares – issued shares still in the Memorandum Entry
hands of the shareholders. (Issued – Treasury) 01/07 Cash 50,000
*Share Capital 48,000
**Share Premium 2,000
Methods of Accounting for Stocks
Issued 480 shares for ₱50,000 cash.
a. Memorandum Entry
*480 shares x 100 = ₱48,000
• Authorized shares are recorded using
**₱50,000 – 48,000 = ₱2,000
memo entry.
• Share capital is credited for Issues Shares.
Journal Entry Method
01/07 Cash 50,000
b. Journal Entry Method *Unissued Share Capital 48,000
• Authorized Capital: **Paid-in Capital in 2,000
Debit Unissued Share Capital Excess of Par
Credit Authorized Share Capital Issued 480 shares for ₱50,000 cash.
• Unissued Share Capital is credited for *480 shares x 100 = ₱48,000
Issued Shares. **₱50,000 – 48,000 = ₱2,000

Authorization of Shares
On Jan. 1, ABC Company was authorized to issue
40,000 shares at ₱100 par.
Memorandum Entry
Jan. 1 | Authorized to issue 40,000 shares at
₱100 par.

BAFACR1X REVIEWER
 Issuance of Shares AT PAR in Exchange for 01/15 Cash 10,000
Service Subscription Receivable 10,000
On Jan. 10, 200 shares were issued to Atty. E for To record the 50% downpayment
legal services rendered.
Memorandum Entry Journal Entry Method
01/10 Organization Expenses 20,000 01/15 Subscription Receivable 20,000
Share Capital 20,000 Subscribed Share Capital 20,000
Issued 200 shares to Atty. E for services. Received subscription for 200 shares at Par

Journal Entry 01/15 Cash 10,000

01/10 Organization Expenses 20,000 Subscription Receivable 10,000
Unissued Share Capital 20,000 To record the 50% downpayment
Issued 200 shares to Atty. E for services.
Collection of Subscription Balance and
Issuance of Shares ABOVE PAR in exchange of Issuance
property On Jan. 20, the balance for the 200 shares
On Jan. 13, 6,000 shares were issued for an subscribed to on Jan. 15 were collected in full.
equipment valued at ₱750,000. Memorandum Entry
Memorandum Entry 01/20 Cash 10,000
01/13 Equipment 750,000 Subscription Receivable 10,000
*Share Capital 600,000 Collected subscription balance on Jan. 15 in
**Share Premium 150,000 full.
Issued 6,000 shares in exchange for equipment
valued at ₱750,000. 01/20 Subscribed Share Capital 20,000
*6,000 shares x 100 = ₱600,000 Share Capital 20,000
**₱750,000 – 600,000 = ₱150,000 Issuance of the fully paid subscribed shares on
Jan. 15
Journal Entry
01/13 Equipment 750,000 Journal Entry Method
*Unissued Share Capital 600,000 01/20 Cash 10,000
**Paid-in Capital in 150,000 Subscription Receivable 10,000
Excess of Par Collected subscription balance on Jan. 15 in
Issued 6,000 shares in exchange for equipment full.
valued at ₱750,000.
*6,000 shares x 100 = ₱600,000 01/20 Subscribed Share Capital 20,000
**₱750,000 – 600,000 = ₱150,000 Unissued Share Capital 20,000
Issuance of the fully paid subscribed shares on
Subscription of Shares AT PAR with Jan. 15
downpayment
On Jan. 15, 200 shares were subscribed with 50%
downpayment.
Memorandum Entry
01/15 Subscription Receivable 20,000
Subscribed Share Capital 20,000
Received subscription for 200 shares at Par

BAFACR1X REVIEWER
 Subscription of shares ABOVE PAR with Journal Entry Method
downpayment 01/25 Cash 27,500
On Jan. 22, 500 shares were subscribed at ₱110 Subscription Receivable 27,500
with a 50% downpayment. Collected subscription balance on Jan. 22 in
Memorandum Entry full.
01/22 Subscription Receivable 55,000
*Subscription Share 50,000 01/25 Subscribed Share Capital 50,000
Capital Unissued Share Capital 50,000
**Share Premium 5,000 Issuance of the fully paid subscribed shares on
Received subscription for 500 shares at ₱110. Jan. 22
*500 shares x 100 = ₱50,000
**₱55,000 – 50,000 = ₱5,000 Summary of Transactions

01/22 *Cash 27,500

Subscription Receivable 27,500
To record the 50% downpayment
*₱55,000 x 50% = ₱27,500

Journal Entry Method

01/22 Subscription Receivable 55,000
*Subscription Share 50,000
Capital
**Share Premium 5,000 Authorization of NO-PAR shares
Received subscription for 500 shares at ₱110. On Jan. 1, ABC Company was authorized to issue
*500 shares x 100 = ₱50,000 4,000 shares, no par, stated value at ₱25.
**₱55,000 – 50,000 = ₱5,000 Memorandum Entry
Jan. 1 | Authorized to issue 40,000 shares at
01/22 *Cash 27,500 ₱100 par.
Subscription Receivable 27,500
To record the 50% downpayment Sale of Shares, No Par, For Cash
*₱55,000 x 50% = ₱27,500 On Jan. 5, ABC Company issued 2,000 shares at
₱50.
Collection of Subscription Balance and 01/05 Cash 100,000
Issuance Share Capital 100,000
On Jan. 25, the balance for the 500 shares Issued 2,000 shares for cash at ₱50.
subscribed to on Jan. 22 were collected in full.
Memorandum Entry Alternately
01/25 Cash 27,500 01/05 Cash 100,000
Subscription Receivable 27,500 *Share Capital 50,000
Collected subscription balance on Jan. 22 in Additional Paid-in 50,000
full. Capital
Issued 2,000 shares for cash at ₱50.
01/25 Subscribed Share Capital 50,000 *2,000 shares x ₱25 = ₱50,000
Share Capital 50,000
Issuance of the fully paid subscribed shares on
Jan. 22

BAFACR1X REVIEWER
 Issuance of Shares, No Par, In Exchange for Alternately
Service 01/15 Subscription Receivable 40,000
On Jan. 10, 400 shares were issued to Atty. E for *Subscribed Share 25,000
legal services rendered worth ₱25,000. Capital
01/10 Organization Expenses 25,000 Additional Paid-in 15,000
Share Capital 25,000 Capital
Issued 400 shares to Atty. E for services. Received subscription for 1,000 shares at ₱40.
*1,000 shares x ₱25 = ₱25,000
Alternately
01/10 Organization Expenses 25,000 01/15 Cash 20,000
*Share Capital 10,000 Subscription Receivable 20,000
Additional Paid-in 15,000 To record the 50% downpayment
Capital
Issued 400 shares to Atty. E for services. Collection of Subscription Balance and
*400 shares x ₱25 = ₱10,000 Issuance
On Jan. 20, balance for the 1,000 shares subscribed
Issuance of Shares, No Par, In Exchange for on Jan. 15 were collected in full.
Equipment 01/20 Cash 20,000
On Jan. 13, 16,000 shares were issued for an Subscription Receivable 20,000
equipment valued at ₱500,000. Collected subscription balance on Jan. 15 in
01/13 Equipment 500,000 full.
Share Capital 500,000
Issued 16,000 shares in exchange for 01/20 Subscribed Share Capital 40,000
equipment valued at ₱500,000. Share Capital 40,000
Issuance of the fully paid subscribed shares on
Alternately Jan. 15
01/13 Equipment 500,000
*Share Capital 400,000 Alternately
Additional Paid-in 100,000 01/20 Cash 20,000
Capital Subscription Receivable 20,000
Issued 16,000 shares in exchange for Collected subscription balance on Jan. 15 in
equipment valued at ₱500,000. full.
*16,000 shares x ₱25 = ₱400,000
01/20 Subscribed Share Capital 25,000
Subscription of Shares, No Par, with Share Capital 25,000
downpayment Issuance of the fully paid subscribed shares on
On Jan. 15, 1,000 were subscribed at ₱40, with a Jan. 15
50% downpayment.
01/15 Subscription Receivable 40,000 ACCOUNTING FOR PREFERRED AND
Subscription Share 40,000 ORDINARY SHARES
Capital Ordinary Shares
Received subscription for 1,000 shares at ₱40. • It is the primary issue of shares, normally it
gives the holders of this stock basic rights to
01/15 Cash 20,000 the corporation. When there is only one class
Subscription Receivable 20,000 of shares being issued, it is presumed to be
To record the 50% downpayment ordinary shares whether designated or not. The

BAFACR1X REVIEWER
 ordinary shareholders normally have less stated value. A 25% downpayment is required for
priority when it comes to the distribution of both classes with the remainder due in two equal
assets upon corporate liquidation and installments on Feb 15 and March 15.
distribution of dividends. Memorandum Entry
Advantages of Ordinary Shares Jan. 1 | Authorized to issue 15%, cumulative
• Right to Vote and fully participating 10,000 preference
• Right over residue dividends and assets after shares at a par value of P100 and 20,000
the preferential claims has been satisfied. ordinary shares of no par but with a stated value
of ₱50.
Preference Shares
• This are shares which gives the holder Journal Entry
preference when it comes to distribution of 01/01 *Subscribed Receivable – 250,000
dividends and as to distribution of assets in the Preference
event of corporate liquidation. This type of **Subscribed Receivable - 300,000
share has a higher price compared to ordinary Ordinary
shares because the shareholders of this type of *Subscribed Share 250,000
Capital - Preference
share paid for the priority when it comes to
**Subscribed Share 300,000
distributions of asset in the event of corporate
Capital - Ordinary
liquidation and dividends. Dividends to be Subscription of 25% authorized preference
received are normally expressed in fixed shares and 30% authorized ordinary shares.
percentages or peso amount per share. *10,000 shares x ₱100 = ₱1,000,000 x 25% =
Investors believe that shares to be: ₱250,000
o Less risky than the ordinary shares. **20,000 shares x ₱50 = ₱1,000,000 x 30% =
o Have a higher rate of return than the ₱300,000
ordinary shares.
o Has a fixed rate of dividend amount. 01/01 *Cash 137,500
o Enjoy Preferential rights over distribution **Subscription 62,500
of dividends and assets. Receivable – Preference
***Subscription 75,000
Over Dividends: shares are given priority claims Receivable – Ordinary
in the distribution of dividends as against ordinary Payment of the required 25% paid
and carry privileges such as being cumulative or subscription for incorporation.
participating. *₱250,000 + ₱300,000 = ₱550,000 x 25% =
₱137,500
Over Assets: shares are given priority claims in the **₱250,000 x 25% = ₱62,500
distribution of corporate assets over the ordinary ***₱300,000 x 25% = ₱75,000
share once corporation is liquidated.
Sale of Ordinary Shares ABOVE STATED
Authorization of Shares VALUE
On Jan 1, DEF Company was authorized to issue On Jan. 5, DEF Company issued 200 ordinary
15%, cumulative and fully participating 10,000 shares for cash at ₱55.
preference shares at a par value of ₱100 and 20,000 01/05 *Cash 11,000
ordinary shares of no par but with a stated value of *Share Capital – 11,000
₱50. The incorporators subscribed to 25% of the Ordinary
preferred shares and 30% of the ordinary shares at Issued 200 ordinary shares at ₱55 for cash.

BAFACR1X REVIEWER
 *200 shares x ₱55 = ₱11,000 01/30 Subscription Share Capital– 24,000
Ordinary
Sale of Preference Shares in Exchange for *Share Capital – 24,000
Property Ordinary
On Jan. 10, DEF Company issued 400 preference Issuance of fully paid subscribed shares on
shares in exchange for a machinery worth ₱50,000. Jan .15
01/10 Machinery 50,000
*Share Capital – 40,000 Sale of Preference Shares above Par
Preference On Feb. 5, DEF Company issued 1,000 preference
**Share Premium – 10,000 shares for cash at ₱110.
Preference 02/05 *Cash 110,000
Issued 400 preference shares in exchange for **Share Capital – 100,000
machinery. Preference
*400 preference shares x ₱100 (par value of ***Share Premium– 10,000
preference shares) = ₱40,000 Preference
**₱50,000 - ₱40,000 = ₱10,000 Issued 1,000 preference shares at ₱110 for
cash.
Subscription of Ordinary Shares above stated *1,000 shares + ₱110 = ₱110,000
value with downpayment **1,000 shares x ₱100 = ₱100,000
On Jan. 15, 400 shares were subscribed at ₱60 with ***₱110,000 x ₱100,000 = ₱10,000
50% downpayment.
01/15 *Subscription Receivable – 24,000 Collection of Subscription Balance and
Ordinary Issuance (Jan. 1 Transaction)
*Subscription Share 24,000 On Feb. 15, first installment payment from the
Capital – Ordinary incorporators was received.
Received subscription for 400 shares at ₱60. 02/15 *Cash 206,250
*400 shares x ₱60 = ₱24,000 **Subscription 93,750
Receivable – Preference
01/15 *Cash 12,000 ***Subscription 112,500
*Subscription Receivable 12,000 Receivable – Ordinary
– Ordinary Collected first installment of incorporators’
To record the 50% downpayment subscription.
*₱24,000 x 50% = ₱12,000 *₱550,000 - ₱137,500 (25% downpayment) =
₱412,500 x 50% = ₱206,250
Collection of Subscription Balance and **₱250,000 - ₱62,500 (25% downpayment) =
Issuance ₱187,500 x 50% = ₱93,750
On Jan. 30, balance for the 400 shares subscribed ***₱300,000 - ₱75,000 (25% downpayment) =
on Jan. 15 were collected in full. ₱225,000 x 50% = ₱112,500
01/30 Cash 12,000
Subscription Receivable 12,000
– Ordinary
Collected subscription balance on Jan. 15 in
full.

BAFACR1X REVIEWER
 Subscription of Ordinary Shares at stated Collection of Subscription Balance and
value (₱50) with downpayment Issuance (Feb. 22 Transaction)
On Feb. 22, 1,400 ordinary shares were subscribed On Mar. 05, ₱30,000 from Feb. 22 subscribers
at state value with ₱20,000 downpayment. were received.
02/22 *Subscription Receivable – 70,000 03/05 Cash 30,000
Ordinary *Subscription Receivable 30,000
*Subscription Share 70,000 – Ordinary
Capital – Ordinary Collected ₱30,000 from Feb. 22 subscriptions.
Received subscription for 1,400 ordinary
shares at stated value. Collection of Subscription Balance and
*1,400 shares x ₱50 = ₱70,000 Issuance
On Mar. 15, second installment payment from the
02/22 Cash 20,000 incorporators was received and stock certificates
Subscription Receivable 20,000 were issued.
– Ordinary 03/15 *Cash 206,250
To record the downpayment **Subscription 93,750
Receivable – Preference
Subscription of Preference Shares above Par ***Subscription 112,500
with downpayment Receivable – Ordinary
On Feb. 28, 1,000 shares were subscribed at ₱105 Collected second installment of
with 25% downpayment. incorporators’ subscription.
02/28 *Subscription Receivable 105,000 *₱550,000 - ₱137,500 (25% downpayment) =
– Preference ₱412,500 x 50% = ₱206,250
**Subscribed Share 100,000 **₱250,000 - ₱62,500 (25% downpayment) =
Capital – Preference ₱187,500 x 50% = ₱93,750
***Share Premium – 5,000 ***₱300,000 - ₱75,000 (25% downpayment) =
Preference ₱225,000 x 50% = ₱112,500
Received subscription for 1,000 shares at
₱105. 03/15 Subscribed Receivable – 250,000
*1,000 preference shares x ₱105 = ₱105,000 Preference
**1,000 preference shares x ₱100 (par value of Subscribed Receivable - 300,000
preference shares) = ₱100,000 Ordinary
***₱105,000 - ₱100,000 = ₱5,000 Share Capital - 250,000
Preference
02/28 *Cash 26,250 Share Capital - Ordinary 300,000
*Subscription Receivable 26,250 Issuance of the Original Subscription from
– Preference Incorporators.
To record the 25% downpayment
*₱105,000 x 25% = ₱26,250
Legal Capital
• This is the minimum amount that cannot be distributed to shareholders as this will serve as a protection for the
corporate creditors in accordance with the Trust Fund Doctrine.
• Trust fund doctrine is a principle of judicial invention which says that corporate assets are held as a trust
fund for the benefit of shareholders and creditors and that the corporate officers have a fiduciary duty to deal
with them properly.

BAFACR1X REVIEWER
Legal Capital • May be sold in a public auction to the highest
• Aggregate Value of the Par Value of all issued bidder.
par value shares. • The highest bidder is the one who is willing to
• Aggregate Value of the Par Value of all pay the unpaid balance of the subscription plus
subscribed par value shares. accrued interest plus all expenses related to the
• Aggregate of the Cash and the Value of any sale and is willing to receive the smallest
contributions paid for all issued No Par Value number of shares.
shares, including payments in excess of stated • Excess shares are issued to the defaulting
value. subscriber.

The Legal Capital of a Corporation is composed of: Subscription of Ordinary Shares at Par Value
1. If the corporation issues share with par value, with downpayment
the legal capital is composed of the total par On April 1, C subscribed to 200 ordinary shares at
value of share issued and subscribed (Ordinary par of ₱50 with a 25% downpayment. Balances
Share Capital + Preference Share Capital + will be paid on April 30 and May 31.
Subscribed Ordinary Shares + Subscribed 04/01 *Subscription Receivable – 10,000
Preference Shares) Ordinary
*Subscription Share Capital 10,000
2. If the corporation issues share with no par – Ordinary
value, regardless there is a stated value or no Received subscription for 200 ordinary shares
stated value, the legal capital is composed of at par value.
the total consideration received or receivable *200 ordinary shares x ₱50 = ₱10,000
from share issued and subscribed (Ordinary
Share Capital + Preference Share Capital + 04/01 *Cash 2,500
Subscribed Ordinary Shares + Subscribed *Subscription Receivable 2,500
Preference Shares + Paid in Capital in Excess – Ordinary
To record 25% downpayment
of Stated Value of Ordinary + Paid in Capital in
*₱10,000 x 25% downpayment = ₱2,500
Excess of Stated Value of Preference)
Collection of First Installment on Subscription
Computation for Legal Capital
On Apr. 30, first payment from April 1 subscribers
Share Capital, At Par ₱xxx
were received.
Subscribed Share Capital, At Par xxx
Total Value, No Par Shares xxx 04/30 *Cash 3,750
Total Legal Capital ₱xxx *Subscription Receivable 3,750
– Ordinary
Collected first payment from April 1
ACCOUNTING FOR OTHER CLASSES OF
Subscriptions.
SHARES
*₱10,000 x ₱2,500 (25% downpayment) = ₱7,500
Delinquent Shares
x 50% = ₱3,750
• Unpaid stock subscriptions upon call date or
date fixed by the Board of Directors.
• There is a 30-day window from subscription
date or call date within which subscriber should
pay before the whole subscription becomes
delinquent.

BAFACR1X REVIEWER
 Default on Subscription Payment Case 2: No Bidder
On May 31, C defaulted in payment. The shares In case there is no bidder, the corporation may bid
were offered in a public auction and the following and reacquire the shares.
bids were received: 06/30 Treasury Shares 4,550
AA made a bid for 180 shares. Due from the Highest 4,550
AB made a bid for 150 shares. Bidder
AC made a bid for 160 shares. Reacquisition of Delinquent Shares.
Selling costs for the Public Auction amounted to
₱800. 06/30 Subscribed Share Capital – 10,000
Therefore, the highest bidder will be AB. Since he Ordinary
is willing to pay for the least number of shares. He Share Capital – Ordinary 10,000
will now pay the defaulted amount plus interest Issued shares to the corporation.
and selling costs. In this case, no shares will be issued to the
defaulting subscriber.
Recording of Bid and Payment of Selling Costs
On June 30, delinquent shares were offered to the Treasury Shares
public. • Contra-equity account
06/30 Due from the Highest Bidder 3,750 • The number of shares sold in the hands of the
Subscription Receivable – 3,750 corporation.
Ordinary • Shares previously issued and subsequently
To close the balance of delinquent shares. reacquired.
• Reduces the Assets and Shareholder’s Equity
06/30 Due from the Highest Bidder 800 by the same amount.
Cash 800 • No voting and dividend rights.
Charge bidder for payment of selling costs at • Ways of Reacquiring:
the public auction. o Right of Redemption
o Purchasing the stock in an open market.
Collection of Bid and Issuance of Shares o Donation
On July 1, AB’s payment for the delinquent shares
• Reacquisition of shares is limited to only to the
were received and shares were issued.
available retained earnings. E.G. Retained
07/01 Cash 4,775 Earnings is ₱50,000, shares can only be
*Due from the Highest 4,550
reacquired up to ₱50,000.
Bidder
• Retained Earnings are appropriated for all
**Interest Income 225
To close the balance of delinquent shares treasury shares. This will be restricted and not
Interest is based on a 6% rate for delinquent available for dividend distribution. Such
shares. restriction will only be reversed if the treasury
*₱3,750 (Balance) + ₱800 (Selling Costs) = shares are resold or retired. If a total of 12,000
₱4,550 shares were reacquired, it will be as follows:
**₱3,750 x 6% = ₱225 Retained Earnings 12,000
Appropriated Retained Earnings 12,000
07/01 Subscribed Share Capital – 10,000 – Treasury
Ordinary Appropriation of Retained Earnings
Share Capital – Ordinary 10,000
Issued shares to C for 50 shares and 150
shares for AB.

BAFACR1X REVIEWER
 Why repurchases stocks? *100 shares x ₱20 = ₱2,000
• This can be resold at a reasonable price, below **100 shares x ₱30 = ₱3,000
or above par as fixed by the board.
• This can be used for compensation to Reselling below cost – Amount in difference of
employees. cost and resell price should be debited first to Share
• Rate of return may be improved because of Premium from Treasury Stocks until it is zero and
lesser outstanding shares. the remaining to Retained Earnings.
• It can be retired.
• It shows that the corporation has more than Example: Of the 400 shares reacquired, 100 shares
adequate resources to fund its own operations were retired.
without shareholder investment. *Share Capital 2,500
Share Premium – Treasury Shares 125
Recording of Treasury Shares Retained Earnings 375
Cost Method – Regardless of whether the shares **Treasury Shares 3,000
Retirement of 100 shares.
are par or no-par value shares, treasury shares are
*100 shares x ₱25 (Par Value) = ₱2,500
recorded at the amount paid by the corporation.
**100 shares x ₱30 (Reacquisition Price) = ₱3,000
AA Corp. has issued 40,000 shares for a total Share
Retirement
Capital of ₱1,000,000 and Share Premium of
₱50,000. Retained Earnings is at ₱20,000. 400 • Share Capital at Par is greater than Treasury at
Cost, credit difference to Share Premium –
shares with par value of ₱25 and issued for ₱35
Retired Shares.
were reacquired by the corporation at ₱30.
• Share Capital at Par is less than Treasury at
Treasury Shares 11,000 Cost, difference to:
Cash 12,000 o First to Share Premium of Original
Repurchase of 400 shares at ₱30 per share. Issuance, proportionately;
o Then to Share Premium – Treasury
Example: of the 400 shares reacquired, 200 shares Shares;
were sold again above cost for ₱32. o Lastly to Retained Earnings.
*Cash 6,400
**Treasury Shares 6,000 Recording of Treasury Shares
***Share Premium – Treasury 400 Par Method Value – Treasury shares are recorded
Shares at Par.
Resell of 200 shares at ₱32 per share.
*200 shares x ₱32 = ₱6,400 Example: 400 shares with Par Value of ₱25 and
**200 shares x ₱30 = ₱6,000 issued for ₱35 were reacquired by the corporation
***₱6,400 - ₱6,000 = ₱400 at ₱30.
*Treasury Shares 10,000
Example: Of the 400 shares reacquired, 100 shares **Share Premium 2,000
were sold again below cost for ₱20. ***Cash 12,000
*Cash 2,000 Repurchase of 400 shares at ₱30 per share.
Share Premium – Treasury Shares 400 *400 shares x ₱25 (Par Value) = ₱10,000
Retained Earnings 600 **₱12,000 (400 shares x ₱30) - ₱10,000 = ₱2,000
**Treasury Shares 3,000 ***400 shares x ₱30 = ₱12,000
Resell of 100 shares at ₱20 per share.

BAFACR1X REVIEWER
 Retired Shares Donated Capital
• Repurchased and canceled by a corporation. Shares
• The shares reduce the number of authorized • Refers to shares received by the corporation by
shares by the company. way of donation from shareholders.
• If the intention of the company in reacquiring • Memorandum entry upon receipt of donation.
its shares is to immediately retire or cancel the • Upon sale, a debit to cash and credit to Donated
shares, Share Capital should be debited instead Share Capital.
of Treasury Shares. • It represents an increase in Additional Paid-In
• If the treasury stock is no par with stated value, Capital when sold.
its acquisition as treasury shares is recorded at
cost price. Assets
• Refer to assets received by the corporation by
Recording of Retirement of Shares way of donation from shareholders of some
Example: There are 25,000 shares issued, ₱20 par, parties.
with a corresponding Share Premium of ₱75,000. • Recorded at Fair Market Value (FMV) at
The company purchased and immediately retired receipt of donation.
2,500 shares at ₱26. • All expenditures related to donation is a
*Share Capital 50,000 decreased to donated capital.
**Share Premium 7,500
Retained Earnings 7,500 Recording of Donated Shares
***Cash 65,000 Example: On June 25, there are 200 shares
Retirement of 2,500 shares. received from shareholder AC. On July 3, these
*2,500 shares x ₱20 = ₱50,000 were sold for ₱50 per share.
**Share Premium is computed based on the Jun. 25 | Received 200 shares in way of donation
proportion of retired shares to the issued shares: from Shareholder AC.
50,000 (2,500 shares x ₱ 20)/500,000 x 75,000 07/03 *Cash 10,000
(Share Premium). *Donated Share Capital 10,000
***2,500 shares x ₱26 = ₱65,000 Sold donated shares.
*200 ordinary shares x ₱50 = ₱10,000
Example: There are 25,000 shares issued, ₱20 Par,
with a corresponding Share Premium of ₱75,000. Example: On June 25, Love Foundation donated a
The company purchased and immediately retired piece of land to Heart Corporation. The land has a
6,000 shares at ₱16. FMV of ₱1,500,000 and taxes amounting to
*Share Capital 120,000 ₱45,000 were paid.
**Cash 96,000 06/25 Land 1,500,000
***Share Premium – Retired 24,000 Paid-in Capital from 1,500,000
Shares Donated Stock
Retirement of 6,000 shares. Received land as donation from Love
*6,000 shares x ₱20 = ₱120,000 Foundation.
**6,000 shares x ₱16 = ₱96,000
***₱120,000 - ₱96,000 = ₱24,000 07/03 Paid-in Capital from Donated 45,000
Stock
Cash 45,000
Paid taxed.

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