Accounting for Special
Transactions
Mr. Leonard D. Dela Cruz Jr., CPA
PARTNERSHIP
According to article 1767 of the civil code, by the
contract of partnership, two or more persons bind
themselves to contribute money, property or industry
to a common fund, with the intention of dividing the
profits among themselves.
Characteristics & Elements of
Partnership
• Mutual Contribution
• Division of Profits and Losses
• Limited Life
• Mutual Agency
• Unlimited Liability
• Income Taxes
• Co – Ownership of Contributed Property
• Legal Entity
Mutual Contribution
• Money – it must be a currency which is legal tender in
the Philippines.
• Property – the property contributed may be real
property or personal property, tangible or intangible
property.
• Industry – it means the work or services of the party
associated, which may either be personal mutual efforts
or intellectual, and for which he receives a share in the
profits of the business. (11 Manresa)
Advantages of Partnership
1. It is easy to establish, as it is formed by mere agreement
between two or more persons.
2. Unlimited liability of the partners make it more attractive
from the viewpoint of creditors.
3. The sharing of the skills and expertise of the partners in the
business provides moral support and will allow for more
creative brainstorming.
4. Less expensive to organize than a corporation.
5. With more than one owner, the ability to raise funds ma be
increased, both because two or more partners ma be able to
contribute more funds and because their borrowing capacity
may be greater.
Disadvantages of Partnership
1. It is unstable because it is easy to dissolve. (Limited
life)
2. Business partners are jointly and individually liable
for the actions of the other partners. (Mutual agency)
3. The liability of the partnership will extend to the
personal property of the partners. (Unlimited liability)
4. Since decisions are shared, disagreements can occur
which may lead to dissolution.
5. The partner must consult other partner and negotiate
more as you cannot make decisions by yourself.
Kinds of Partnership
A. As to extent of its subject matter.
1. Universal Partnership.
i. Universal partnership of all present property.
ii. Universal partnership of all profits.
2. Particular Partnership.
B. As to liability of the partners.
1. General Partnership.
2. Limited Partnership.
C. As to duration.
1. Partnership at will.
2. Partnership with a fixed term.
Kinds of Partnership
D. As to legality of existence.
1. De Jure Partnership.
2. De Facto Partnership.
E. As to representation to others.
1. Ordinary or Real Partnership.
2. Ostensible Partnership or Partnership by Estoppel.
F. As to publicity.
1. Secret Partnership.
2. Open Partnership.
G. As to purpose
1. Commercial or Trading Partnership
2. Professional or Non-Trading Partnership
Kinds of Partners
1. Capitalist Partner
2. Industrial Partner
3. Capitalist – Industrial Partner
4. General Partner
5. Limited Partner
6. Managing Partner
7. Liquidating Partner
8. Ostensible Partner
9. Partner by Estoppel
10. Continuing Partner
11. Surviving Partner
Partnership Formation
VALUATION OF PARTNER’S CONTRIBUTION
1. Cash = Face Value
2. Non-cash (in order of priority):
a. Agreed Value Agreed/Fair Value/Appraised/Book XXX
b. Fair Market Value Less: Liability Assumed by the partnership XXX
c. Appraised Value Contributed Capital XXX
d. Carrying/Book Value
3. Liabilities = Fair Value (considered assumed if the problem is silent)
4. Inventory = Lower of cost and net realizable value (LCNRV)
• Assessed Value is ignored (for tax purposes only)
• Annotated means mortgage is to be assumed by the partnership.
Total Contributed Total Agreed Capital
= Bonus Method
Capital (TCC) (TAC)
Total Contributed Total Agreed Capital Withdrawal of investment / Impairment of asset /
>
Capital (TCC) (TAC) Revaluation Downwards
Total Contributed Total Agreed Capital Additional investment / Revaluation Upwards /
<
Capital (TCC) (TAC) Goodwill
Partnership Formation
New sets of books is opened Books of the sole proprietor are retained
1. Adjust the books of the sole proprietor at 1. Adjust the books of the sole proprietor at
its agreed or current fair values. its agreed or current fair values.
2. Closed the books of the sole proprietor. 2. Record the investment of other partner/s.
3. Record the investment of the partners. 3. Consolidate the investments.
4. Consolidate the investments
U & V are combining their separate business to form a partnership. Cash and non-cash assets are to be
contributed for a total capital of P600,000. The contributed liabilities are to be assumed by the
partnership. They further agreed that their capital balances after formation must be equal.
The following are the assets and liabilities to be contributed by each entity:
U V
Book Value Fair Value Book Value Fair Value
Accounts receivable 40,000 40,000 - -
Inventories 60,000 80,000 40,000 50,000
Equipment 120,000 90,000 80,000 100,000
Accounts payable 30,000 30,000 20,000 20,000
What is the amount of the additional cash to be contributed by U in accordance with their agreement?
Agreed capital, U (600,000 X 50%) 300,000 Agreed capital, V (600,000 X 50%) 300,000
Contributed capital, U 180,000 Contributed capital, V 130,000
Additional cash contribution 120,000 Additional cash contribution 170,000
What is the amount of capital credit to V after formation? 300,000
Aljur and AJ formed a partnership. Aljur invested cash worth P85,000 and a machine. On the other hand,
AJ contributed cash worth P55,000 and an equipment which has a mortgage of P35,000 which Delta will
pay personally. The total capital after formation was P360,000. They also further agreed to reflect 55:45
ratio as to their capital balances, respectively. No other investment or withdrawal occurred other than
mentioned to reflect their capital ratio agreement.
How much is the fair value of the machine?
How much is the fair value of the equipment?
Aljur, agreed capital (360,000 X 55%) 198,000.00
Cash (85,000.00)
Fair value of machine 113,000.00
AJ, agreed capital (360,000 X 45%) 162,000.00
Cash (55,000.00)
Fair value of equipment 107,000.00
W and X form a partnership. W is to invest certain business assets and his liabilities will be assumed by
the partnership. He will also contribute sufficient cash to bring his total capital to an agreed P360,000,
which is 60% of the total agreed capital of the partnership. X on the other hand will invest cash in the
amount of P60,000 and a certain merchandise valued at the current market price.
The following are the assets and liabilities of W to be contributed to the partnership:
Book Value Agreed Value
Accounts receivable 108,000.00 108,000.00
Allowance for doubtful accounts 7,200.00 12,000.00
Inventories 193,200.00 210,000.00
Store equipment 54,000.00 54,000.00
Accumulated depreciation - store equipment 36,000.00 26,400.00
Office equipment 36,000.00 36,000.00
Accumulated depreciation - office equipment 19,200.00 9,600.00
Accounts payable 96,000.00 96,000.00
What is the amount of additional cash to be invested by W in accordance with their agreement? 96,000
What is the current market value of the merchandise to be contributed by X? 180,000
Y and Z decided to form a partnership during 2023. The following are their statement of financial position
on the date of formation
Y Z
Cash 131,250 328,125
Accounts receivable 2,975,000 1,793,750
Inventories 1,750,000 1,771,875
Equipment 1,312,500 2,537,500
Total 6,168,750 6,431,250
Accounts payable 918,750 2,318,750
Y, Capital 5,250,000
Z, Capital 4,112,500
Total 6,168,750 6,431,250
The following are based on their agreement:
• Equipment of Y is under-depreciated by P175,000 and the equipment of Z is over-depreciated by P262,500
• Allowance for doubtful accounts is to be setup amount to P595,000 for Y and P393,750 for Z
• Inventories in the amount of P43,750 and P30,625 are worthless in the books of Y and Z, respectively
• The partnership agreement also provides a profit and loss ration and capital interest ratio of 70% and 30% for Y and
Z, respectively
• Y will invest or withdraw enough cash to be in accordance with their capital interest ratio.
Y Z
Book Value Agreed Value Book Value Agreed Value
Cash 131,250 131,250 328,125 328,125
Accounts receivable 2,975,000 2,380,000 1,793,750 1,400,000
Inventories 1,750,000 1,706,250 1,771,875 1,741,250
Equipment 1,312,500 1,137,500 2,537,500 2,800,000
Total 6,168,750 5,355,000 6,431,250 6,269,375
Accounts payable 918,750 918,750 2,318,750 2,318,750
Y, Capital 5,250,000 4,436,250
Z, Capital 4,112,500 3,950,625
Total 6,168,750 5,355,000 6,431,250 6,269,375
Contributed capital, Z 3,950,625.00
Divide: Capital interest, Z 30%
Total agreed capital 13,168,750.00
Multiply: Capital interest, Y 70%
Agreed capital, Y 9,218,125.00
Less: Contributed capital, Y 4,436,250.00
Cash to be invested 4,781,875.00
Mokang and Tanggol decided to form Monggol Partnership on December 31, 2023. Their statements of
financial position on this date were: Mokang Tanggol
Cash 65,625.00 164,062.50
Accounts receivable 1,487,500.00 896,875.00
Merchandise inventory 875,000.00 885,937.50
Equipment 656,250.00 1,268,750.00
Total 3,084,375.00 3,215,625.00
Accounts payable 459,375.00 1,159,375.00
Mokang, Capital 2,625,000.00
Tanggol, Capital 2,056,250.00
Total 3,084,375.00 3,215,625.00
The following are based on their agreement:
1. Equipment of Mokang is under-depreciated by P87,500 and that of Tanggol is over-depreciated by P131,250.
2. Allowance for doubtful accounts is to be setup amounting to P297,500 for Mokang and P196,875 for Tanggol.
3. Inventories of P21,875 and P15,312 are worthless in the books of Mokang and Tanggol, respectively.
4. The partnership agreement provides for a profit and loss ration of 70% to Mokang and 30% to Tanggol.
Upon the formation of the partnership, how much is the capital of Mokang and Tanggol respectively?
Assuming that the capital balances are to be equaled to their P&L ratio, how much is the capital balance of the
partners?
Compute for the total assets of the partnership.
Mokang Tanggol
Book Value Agreed Value Book Value Agreed Value
Cash 65,625.00 65,625.00 164,062.50 164,062.50
Accounts receivable 1,487,500.00 1,190,000.00 896,875.00 700,000.00
Merchandise inventory 875,000.00 853,125.00 885,937.50 870,625.50
Equipment 656,250.00 568,750.00 1,268,750.00 1,400,000.00
Total 3,084,375.00 2,677,500.00 3,215,625.00 3,134,688.00
Accounts payable 459,375.00 459,375.00 1,159,375.00 1,159,375.00
Mokang, Capital 2,625,000.00 2,218,125.00
Tanggol, Capital 2,056,250.00 1,975,313.00
Total 3,084,375.00 2,677,500.00 3,215,625.00 3,134,688.00
Total contributed capital 4,193,438
Mokang Capital ratio 70%
Mokang Asset 2,677,500.00
Mokang agreed capital 2,935,407
Tanggol Asset 3,134,688.00
Total Assets 5,812,188.00
Total contributed capital 4,193,438
Tanggol Capital ratio 30%
Tanggol agreed capital 1,258,031
