Partnership

1. FORMATION
1. All contribution must recognized at it's fair value
*If not given book value = fair value (except goodwill and prepaid expenses)
*Goodwill not recognized
*Prepaid expenses most of the time fair value is 0. But it must be expressly given

2. Two methods of formation:

a. Net Investment : no given capital ratio
fair value of contribution = capital credit
b. Bonus Method : with given capital ratio
fair value of contribution >< capital credit

TAC CNA DIFF

total agreed contributed net bonus
capital asset

partner 1 higher negative

partner 2 higher positive
total xx xx 0 net effect will always be zero

3. Liabilities must be assumed by the partnership to be recognized

note : Profit and Loss ratio is irrelevant information

2. OPERATIONS
1. Tools to properly allocate the net income : Salary, Interest & Bonus
Interest ratio (annual rate) always check the
Interest period allocate whatever the results of
the operation
Salary
Bonus only give a positive bonus if net loss : no bonus

GAAP WAY NON GAAP WAY

not EXPENSE not included in computing net income
default: net income is before S, I, and Bonus default: net income is after S, I, and Bonus
before : not deducted x after : not deducted x
after : deducted - before : deducted +

Bonus is 20% of the NI after S and I but before B

B = 20%( NI - S - I ) B = 20%( NI + B)
Bonus is 10% of the NI after S, I, and B
B = 10% (NI - S - I - B) B = 10%NI
 Bonus is 15% of the NI after S, I, and B
B = 15%NI B = 10% (NI + S + I + B)

Capital, Beginning
+ Additional Investment
- Withdrawals
- Drawings temporary no effect in the
closed to capital balance at the
changes in end of the year
+/- Share in Net Income or Loss capital
Capial, Ending

Profit and Loss Ratio

Partnership Profit - based on profit agreement of the partners
absence of agreement:
industrial partner shall first receive just and equitable share.
capitalist partners based on the following order of priority:
- capital contribution ratio
- equally

Partnership Losses - based on loss agreement

absence of agreement:
industrial partner exempted from sharing of losses
capitalist partners based on the following order of priority:
- profit agreement
- capital contribution ratio
- equally

3. DISSOLUTION
Prior to admission/ retirement: adjust the capital balances by revaluation of the net asset /
net income

A. By Admission of a new partner

note: do not include loans
1. Purchase Interest of the partner No cash recorded - personal transaction
directly to old partners

Net assets of the partnership and total capital remains the same.
Net income is adjusted up to the day you will dissolve
Old partner, capital xx
New partner, capital xx

2. Purchase by Investment
Net assets of the partnership & total capital increase by the amount contributed by new partner
Cash xx
New partner, capital xx

Investment Method without capital interest

contribution = capital credit
Bonus Method with interest ratio
contribution > < capital credit
Bonus to the Old Partners:
contribution > capital credit
Bonus to the New Partner:
contribution < capital credit
note: unahon pag compute ang capital sa newly admitted partner gamit iyang interest/capital ratio

B. Withdrawal or Retirement of a partner

goal : to zero out capital balance of retiring partner
Net income is adjusted up to the day you will dissolve
capital balance exclusive of loans = no adjustment needed
Bonus to the Retiring/Withdrawing Partner when
1. Fair value of partnership asset > their book value

Bonus to the Remaining Partner when

1. Recorded assets are overvalued

C. Incorporation
Dissolve existing partnership to create a corporation

4. LIQUIDATION
Winding up of partnership - Selling of its all noncash assets, payment of liabilities and final settlement

Limited Partners - limited partnership's liabilities but only up to the extent of their capital contribution

General Partners - liable pro-rata and subsidiarily to limited partnership's liabilities up to the extent of
their separate assets after the exhaustion of partnership's asset

Payments of Liabilities and Equity in General Partnership order of priority

1. Those owing to the creditors other than partners
2. Those owing to partners other than for capital and profits
3. Those owing to partners in respect of capital
4. Those owing to partners in respect of profits

Payments of Liabilities and Equity in Limited Partnership order of priority

1. Those owing to creditors, including limited partners for advances made
2. Those owing to limited partners by way of their share of profits
3. Those owing to limited partners in respect to capitals or contributions
4. Those owing to general partners other than for capital and profits
5. Those owing to general partners in respect to profits
6. Those owing to general partners in respect to capital

Order of priority of claims against separate property of a partner who is insolvent

1. Those owing to separate creditors of the partners
2. Those owing to partnership creditors
3. Those owing to partners by way of contribution

A. Lump Sum one time payment

B. Installment

Liquidation Procedure
1. SONCADOL / SONCADOG Sale of non cash asset & distribution of loss / gain
2. Payment of Liquidation Expense and Liabilities
Liability - paid in full (100%)
Liquidation expense - adjustment against capital balance
3. Elimination of Deficiencies
a. Right of Offset
b. Additional Investment used if last payment to partners na
c. Absorption
4. Payment to Partners - zero out all capital balances

Cumulative Losses
1. Loss on Realization - direct reduction to capital balance permanent loss
2. Theoretical loss - unsold noncash asset future loss on realization
3. Liquidation expenses permanent loss
4. Cash withheld - for future liquidation expenses

Loss Absorption Ability - maximum amount of loss para ilang balance is equal to zero
if ikaw pinaka gamay og LAA ikaw ang pinaka una ma defecient. so ikaw ang least likely maka dawat og cash
Home Office and Branches
Transactions Home Office Books Branch Books
Transfer of cash from the Investment in Branch xx Cash xx
home office Cash xx Home Office Equity xx
Transfer of cash from the Cash xx Home Office Equity xx
branch Investment in Branch xx Cash xx
Transfer of Inventory from Investment in Branch xx Shipment from HO xx
HO at cost Shipment to branch xx Home Office Equity xx
Investment in Branch xx
Transfer of Inventory from Shipment from HO xx
Allowance for OV xx
HO at above cost Home Office Equity xx
Shipment to branch xx

Payment of HO of branch Investment in Branch xx Expenses xx

expenses Cash xx Home Office Equity xx
Allocation of prev. paid Investment in Branch xx Expenses xx
branch expenses Expenses xx Home Office Equity xx
memo entry memo entry
(note: if all asset are (note: if all asset are
Transfer of Fixed asset from accounted in the HO) accounted in the HO)
HO to Branch Investment in Branch xx Fixed Asset xx
Acc. Depreciation xx Acc. Depreciation xx
Fixed Asset xx Home Office Equity xx

Investment in Branch xx Income Summary xx

Branch Income xx Home Office Equity xx
To take up branch profit/loss
Branch Loss xx Home Office Equity xx
Investment in Branch xx Income Summary xx
To adjust the reported
branch NI/NL for realized Allowance for OV xx no entry
allowance Branch Income xx

Billed Price Cost Price MarkUp on Cost

Branch Beg. Inventory (from xx xx xx
Current shipments (from HO) xx xx xx
Branch End Inventory (from (xx) (xx) (xx)
Cost of Goods Sold xx xx xx

Billed Price
Inventory AFOVBI
MI, beg xx xx
Shipments xx xx
TGAS xx xx year end balance
COGS (xx) (xx) adjustment
MI, end xx xx after adjustment

Home Office Net Income xx

True Branch Net Income xx
Combined Net Income xx

Reported Branch Net Income xx all inventories at billed price

Realized Deferred Profit xx
True Branch Net Income xx