ACP 311 – Accounting for Special Transactions – Hand-out 1.1.

2
Topic: Partnership Formation – Part 2
Instructor: Marj Jules Lorain V. Juntilla, CPA
REV: 0

PARTNERSHIP FORMATION

Accounting for Partnership Formation

• All properties brought into the partnership or acquired by the partnership
are partnership property.
CASH INVESTMENT NONCASH INVESTMENT
o Cash – recorded at fair value (face o Property other than cash – recorded
value as far as cash valuation is at agreed value which is normally the
concerned). fair value of the property at the
o If in foreign currency, it is valued time of the investment.
at current exchange rate. ✓ The fair value should be
determined by independent
valuations.
o Services – a memorandum entry is
essential if no value was assigned.
o Liabilities (assumed by partnership)
– valued at present value (fair
value) of the remaining cash flows.
• The individual partners must agree to the percentage of equity that each
will have in the net assets of the partnership.
• A partnership may be formed in numerous ways, to wit:
1. For the first time:
a. Individual versus Individual
2. Conversion of a sole proprietorship to a partnership:
a. Individual versus Sole Proprietor
b. Sole Proprietor versus Sole Proprietor
3. Conversion of an old partnership to a new partnership:
a. Partnership versus Sole Proprietor
b. Partnership versus Partnership
4. Admission of new partners

Illustration 1.1.2.1 – Individual vs. Individual

F and G wants to form AB Partnership. The following items are being invested to
form AB Partnership:
Accounts Agreed Values
Investment by F Investment by G
Cash 100,000 100,000
Inventory 100,000 -
Land - 200,000
Building - 400,000
Equipment 200,000
Total 400,000 700,000
Mortgage on building assumed by
partnership 200,000
500,000
Assumption 1: Assuming that F and G agree that each of them will receive a
capital credit equal to the agreed values of the net assets that each partner
invested.
Assumption 2: Assuming that F and G agree that each partner is to receive an
equal capital interest.
• Bonus Approach
• Revaluation (Goodwill) Approach

Requirement: Record the investment in partnership books.

Illustration 1.1.2.2 – Individual vs. Sole Proprietor

Below is the balance sheet of H on November 30, 2024 before accepting I as his
partner to form HI Partnership:

Page 1 of 3
Sources:
Advanced Financial Accounting and Reporting (Theories and Problems) – Dayag, A. (2019)
Advanced Financial Accounting and Reporting – Vol. 1 – Dayag, A. (2018)
ACP 311 – Accounting for Special Transactions – Hand-out 1.1.2
Topic: Partnership Formation – Part 2
Instructor: Marj Jules Lorain V. Juntilla, CPA
REV: 0

H Company
Balance Sheet
November 30, 2024
Assets
Cash 100,000
Accounts receivable 40,000
Less: Allowance for doubtful accounts 2,500 37,500
Notes receivable 50,000
Merchandise inventory 22,500
Equipment 60,000
Less: Accumulated depreciation 5,000 55,000
Total assets 265,000
Liabilities and Capital
Accounts payable 10,000
Notes payable 50,000
H, Capital 205,000
Total liabilities and capital 265,000

It is agreed that for purposes of establishing H’s interest, the following

adjustments shall be made:
a. The accounts receivable is estimated to be 90% realizable.
b. Interest at 8% on notes receivable dated March 1, 2024 is to be accrued.
c. The merchandise inventory is to be valued at 17,500.
d. The equipment is under-depreciated by 4,000.
e. Prepaid expenses of 2,000 and accrued expenses of 6,000 are to be
recognized.

I is to invest cash to obtain a one-third interest in the partnership.

Assumption 1: Assuming the books of H is to be retained by the new partnership,

record the adjustments and initial investment.
Assumption 2: Assuming the partners decided to open new set of books, record
the adjustments, closing, and initial investment.

Illustration 1.1.2.3 – Sole Proprietor vs. Sole Proprietor

On October 1, 2024, J and K decided to pool their assets and form a partnership.
They allocate profit and loss in the ratio of 44:56 for them, respectively. The
firm is to take over the business assets and assume business liabilities, and
capitals are to be based on net assets transferred after the following
adjustments:
a. J’s inventory amounting to 10,000 is worthless, while K’s agreed value of
inventory amounted to 125,000.
b. Uncollectible accounts of 6,000 for J is to be provided; a 5% allowance is
to be recognized in the books of K.
c. Accrued rent income of 10,000 on J, and accrued salaries of 8,000 on K
should be recognized on their respective books.
d. Interest at 16% on Notes Receivable dated August 17, 2024 should be accrued.
e. The office supplies unused amounted to 20,000.
f. The equipment’s agreed value amounted to 50,000.
g. The furniture and fixtures has a market value of 90,000.
h. Interest at 12% on Notes Payable dated July 1, 2024 should be accrued. Use
360 days a year.
i. K has an unrecorded patent amounting to 40,000 and is to invest the
additional cash necessary to have a 60% interest in the new firm.

Page 2 of 3
Sources:
Advanced Financial Accounting and Reporting (Theories and Problems) – Dayag, A. (2019)
Advanced Financial Accounting and Reporting – Vol. 1 – Dayag, A. (2018)
ACP 311 – Accounting for Special Transactions – Hand-out 1.1.2
Topic: Partnership Formation – Part 2
Instructor: Marj Jules Lorain V. Juntilla, CPA
REV: 0

Balance sheet for J and K on October 1, 2024 before adjustments are given below:
Accounts J K
Cash 75,000 45,000
Accounts receivable 180,000 150,000
Allowance for doubtful accounts (4,000) (5,000)
Notes receivable 50,000
Merchandise inventory 160,000 120,000
Office supplies 27,000
Equipment 100,000
Accumulated depreciation – equipment (45,000)
Furniture and fixtures 120,000
Accumulated depreciation – F&F (20,000)
Total assets 493,000 460,000

Accounts payable 133,000 100,000

Notes payable 50,000
Capitals 310,000 360,000
Total liabilities and Capital 493,000 460,000

Assumption 1: Assuming the books of K is to be retained by the new partnership,

record the adjustments, closing, and initial investments.

Assumption 2: Assuming the partners decided to open new books, record the
adjustments, closing, and initial investment.
• How much is the total asset of the partnership?
• How much is the total liability of the partnership?
• The value of J, Capital is:
• The value of K, Capital is:

END OF HANDOUT

Page 3 of 3
Sources:
Advanced Financial Accounting and Reporting (Theories and Problems) – Dayag, A. (2019)
Advanced Financial Accounting and Reporting – Vol. 1 – Dayag, A. (2018)