PARTNERSHIP FORMATION

Definition
Partnership – form of business where 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 of Partnership
✔ Separate Legal Personality – Partnership has a juridical personality separate and distinct from
that of each of the partners.
✔ Ease of Formation – Partnership may be created by oral or written agreement between two or
more persons, or merely by inferences from the implication of their conduct.
✔ Co-ownership of Partnership Property and Profits – All assets invested in the partnership
become the property of the partnership.
✔ Limited Life – Any change in the agreement of the partners terminates the partnership contract.

✔ Mutual Agency – Each partner has an equal right to act for the partnership and to enter
contracts binding upon it, if he acts within the normal scope of business operations.
✔ Unlimited Liability – Each partner may be held personally liable for all the debts of the
partnership.

LECTURE DRILLS
Theories.

1. This is the framework within which the partners are to operate or conduct partnership business.
a. Partnership agreement
b. Partnership virtue
c. PFRS
d. Mutual agency

2. The following are true regarding the characteristics of a general partnership except,
a. Separate legal entity
b. Ease of formation
c. Unlimited liability
d. Unlimited life

3. If the partnership assumes a liability of a partner, in recording in the new partnership books, it
involves
a. Credit to the asset
b. Credit to the capital account of that partner
c. Debit to drawing account of that partner
d. Debit capital account of that partner

4. If a certain asset is contributed to the partnership, and in the absence of the agreed value, when
recording that certain asset in the partnership books, it is valued at
a. Fair market value

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 b. Assessed value
c. Original cost
d. Promised value

Problems.

1. A and B will form a new partnership, and the following are ascertained:
● A will invest P300,000 in cash for 60% interest in the capital and profits of the partnership.

● B will contribute land with an original cost of P40,000 and fair market value of P70,000.

● B will also contribute a building which has an assessed value of P50,000 and an appraised
value of P90,000. The building is also subject to a mortgage of P40,000 which the
partnership will assume.
● B will contribute sufficient cash for his interest in the capital of the partnership.

A. What is the total capital after formation?

a. 500,000
b. 420,000
c. 460,000
d. 350,000

B. What is the amount of cash to be contributed by B for his interest in the capital of the
partnership?
a. 40,000
b. 80,000
c. 110,000
d. 150,000

2. On January 01, 2023, A and B decided to form a partnership. They have the following statement
of financial positions:
A B

Cash 1,500 3,750

Accounts receivable 54,000 22,500

Inventory - 20,250

Equipment 15,000 27,000

Total Assets 70,500 73,500

Accounts payable 13,500 24,000

A, Capital 57,000 -

B, Capital - 49,500

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 Total Liabilities and Capital 70,500 73,500

The following were agreed to be adjusted:

● The equipment of both A and B are under-depreciated by P1,500 and P4,500 respectively.

● Both A and B need to set up an allowance for doubtful accounts amounting to P12,000 and
P4,500 respectively.
● Upon formation, the partnership will have a 60:40 profit and loss ratio for A and B
respectively.
● All liabilities will be assumed by the partnership.

● A must invest to bring the partner’s capital balances in proportion to their profit and loss
ratio.

A. What is the total capital after formation?

a. 106,500
b. 123,750
c. 101,250
d. 72,500

B. What is the capital credit of A upon formation?

a. 57,000
b. 60,750
c. 43,500
d. 74,250

C. What is the amount of cash to be contributed by A based on their agreement?

a. 14,250
b. 5,250
c. 10,250
d. 17,250

3. A and B are partners, sharing profits 60:40. The following is the statement of financial position of
the partnership:

Cash 48,000

Accounts receivable 92,000

Inventory 165,000

Equipment, net 25,000

Total Assets 330,000

Accounts payable 89,000

A, Capital 133,000

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 B, Capital 108,000

Total Liabilities and Capital 330,000

The existing partners agreed to admit C as partner to form a new partnership ABC. The terms of
their agreement are as follows:
● An allowance for doubtful accounts amounting to P4,500 is to be established.

● Inventories are to be restated at the agreed value of P170,000.

● Accrued expenses of P4,000 are to be recognized.

● The accounts payable will be assumed by the new partnership.

A, B and C will divide profits [Link] and the capital balances after formation of the new
partnership will reflect the said ratio. A and B will make personal cash settlements between
themselves to adjust their capital balances. C on the other hand, will invest additional cash in his
investment in the capital interest in the new partnership.

What is the amount of cash to be invested by C for his capital interest in the new partnership?
a. 50,000
b. 60,250
c. 59,375
d. 47,500

4. A and B decided to combine their businesses and form a partnership. The following are the
statement of financial position before formation:

A B

Cash 2,048,400 1,098,360

Accounts receivable 1,031,960 2,498,716

Inventory 528,160 1,144,448

Equipment, net 613,380 852,224

Other assets 8,800 15,840

Total Assets 4,230,700 5,609,588

Accounts payable 787,336 1,072,060

Notes payable 1,000,000 -

Mortgage payable - 1,440,000

A, Capital 2,443,364 -

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 B, Capital - 3,097,528

Total Liabilities and Capital 4,230,700 5,609,588

The partners agreed that the equipment of A is under-depreciated by P80,000 and B’s
equipment is over-depreciated by P200,000. Accounts receivable of P108,000 in A’s books and
P140,000 in B’s books are deemed uncollectible. The partnership decided to assume all liabilities
of A and B. The partnership agrees to have a 60:40 capital interest and profit and loss ratio. B is
willing to invest or withdraw cash from the partnership to comply with the agreement.

A. What are the capital balances of A and B respectively after formation?

a. 2,255,364 and 1,503,576
b. 2,255,364 and 3,157,528
c. 6,896,292 and 4,597,528
d. 6,896,292 and 3,157,528

B. What is the total asset after formation?

a. 8,058,336
b. 5,618,336
c. 9,712,288
d. 9,840,288

END

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