Chapter Accounting for Partnership Formation and Operating Transactions Review Questions The current market value of the assets contributed to a partnership determines the amount of the credit to the partner’s capital account Partner withdrawals of cash for personal use not affect the sharing of profits and losses by the partners Their shares of profits and losses are based on the profit-and-loss ratio, which is determined separately from their cash withdrawals Fair market values represent the realistic worth of the assets invested This means that if these assets were to be purchased at their particular date, they are being turned over to the partnership, the amount that would be needed is equivalent to the value determinable as of that date A written partnership contract is highly desirable to have a clear and definite basis in operating a partnership Future disagreements and confusion will be avoided The matters to be included in a typical partnership contract are found on pages 51-52 The accountant can use the contract in the recording of transactions involving financial matters such as the partners’ (a) investment and drawings (b) sharing of income or loss The contract will also be used as reference in determining the accounting period to be used, the nature of accounting records, financial statements, audit and so forth To have a separate and distinct accounting for each partner’s investment and drawings Noncash investments of partners should be recorded at their fair values in order to provide equitable treatment to the individual partners The recoding of noncash assets at less than fair value will result in allocating the amount of understatement between the partners in their relative profit and loss sharing Chapter ratios as the undervalued assets are used for partnership business or when they are sold by the partnership Conceptually, there is no difference between the drawings and the withdrawals of partners since both represent disinvestments of resources from the partnership entity From a practical viewpoint, the distinction between withdrawals and drawings may be important because allowable drawings are not usually deducted in determining the amount of partnership capital to be used for purposes of dividing profits among the partners Since withdrawals are deducted, the distinction can affect the division of profits and losses Three kinds of transactions affect the capital account of any partner: investments, withdrawals, and periodic closings of income, expense, and drawing accounts Capital invested represents permanent investment in the partnership and will only be returned to the partners upon withdrawal and liquidation of the partnership while loan represents resource made available to the partnership but which is expected to be repaid at some future date 10 Cash Land 5,000 7,500 X, Capital Y, Capital 5,000 7,500 The amounts used represent the fair value of the assets being invested in the partnership 11 To have a realistic and fair valuation of the assets to be transferred to the partnership 12 Refer to page 63 of the textbook Accounting for Partnership Formation and Operating Transactions Exercises Exercise Cash Delivery Equipment Cruz, Capital Gomez, Capital 200,000 75,000 100,000 175,000 Exercise Cash Land and Building Tools and Machinery Accounts Payable Tamano, Capital Santos, Capital 50,000 300,000 * 80,000 ** 30,000 330,000 70,000 * Should be allocated between land and building based on their fair market value ** Should be allocated between tools and machinery based on fair market value or acquisition cost Exercise Cash 2,100 Accounts Receivable 10,600 Office Furniture (P2,700 – P1,100) 1,600 Building 71,000 Allowance for Uncollectible Accounts Accounts Payable Note Payable Accrued Expenses Payable Torres, Capital To record Torres’ investment in the partnership Exercise 2,900 3,300 10,000 1,200 67,900 Chapter Cash Merchandise inventory Accounts receivable Store equipment and fixtures Allowance for uncollectible accounts Accumulated depreciation Benet, Capital Abad, Capital 200,000 160,000 20,000 40,000 15,000 24,000 200,000 181,000 Exercise Cash (25,000 + 30,000) Accounts receivable (150,000 + 100,000) Supplies inventory (199,500 + 161,500) Notes receivable Interest receivable Furniture, fixtures and equipment (95,000 + 70,000) Accumulate depreciation – furniture, fixtures and equipment (19,000 + 14,000) Allowance for bad debts (15,000 + 10,000) Accounts payable (185,000 + 160,000) J Joven, capital B Burgos, capital 55,000 250,000 361,000 45,000 400 165,000 33,000 25,000 345,000 250,500 222,900 Exercise Cash (19,000 + 86,600) Accounts receivable Notes receivable Interest receivable Merchandise inventory Store equipment Allowance for bad debts Accumulated depreciation – store equipment Accounts payable X, capital Z, capital Test Materials 105,600 85,000 30,000 200 122,000 35,000 12,750 12,250 93,000 173,200 86,600 Accounting for Partnership Formation and Operating Transactions Test Material 3-1 If the partners’ contributions were erroneously recorded at cost rather than fair market value, the account balances would be: Cash Delivery equipment Furniture inventory P 30,000 40,000 60,000 P130,000 Kitty, capital Snoopy, capital P 70,000 60,000 P130,000 Inequity is calculated as follows: Snoopy’s appreciation Kitty’s depreciation (P30,000) (P10,000) Actual appreciation Inequity 60% to Snoopy P18,000 (6,000) 12,000 30,000 (18,000) 40% to Kitty P12,000 (4,000) 8,000 (10,000) 18,000 Total P30,000 (10,000) 20,000 20,000 Test Material 3-2 Capital balance per books for each partner is equal to the fair market value of contributed net assets: Assets contributed to partnership Liabilities assumed by partnership Capital balance per books Test Material 3-3 Ju P162,000 (41,000) P121,000 Yoon P66,000 (28,000) P38,000 Chapter Requirement (1) GENERAL JOURNAL Date March 15 15 Accounts and Explanation Accounts Receivable Inventory Prepaid Expenses Store Equipment Allowance for Doubtful Accounts Accounts Payable Lazo, Capital To record Lazo’s investment in the partnership Post Ref Debit 12,000 31,220 2,400 26,600 Credit 1,360 22,300 48,560 Cash 48,560 Roman, Capital To record Roman’s investment in the partnership 48,560 Requirement (2) Roman and Lazo Statement of Financial Position March 15, 20xx ASSETS Cash Accounts receivable P12,000 Less: Allowance for doubtful accounts 1,360 Inventory Prepaid expenses Store equipment Total assets Test Material 3-4 LIABILITIES P 48,560 Accounts payable 10,640 31,220 2,400 26,600 P119,420 CAPITAL Roman, capital Lazo, capital Total liabilities and capital P 22,300 48,560 48,560 P119,420 Accounting for Partnership Formation and Operating Transactions Requirement (1) GENERAL JOURNAL Date June 30 30 Accounts and Explanation Accounts Receivable Inventory Prepaid Expenses Office Equipment Allowance for Doubtful Accounts Accounts Payable Azures, Capital To record Azures’ investment in the partnership Post Ref Debit 7,200 24,100 1,700 27,600 Credit 1,050 19,100 40,450 Cash 40,450 Roca, Capital To record Roca’s investment in the partnership 40,450 Requirement (2) Azures and Roca Statement of Financial Position June 30, 20xx ASSETS Cash Accounts receivable P7,200 Less: Allowance for doubtful accounts 1,050 Inventory Prepaid expenses Office equipment Total assets LIABILITIES P 40,450 Accounts payable 6,150 24,100 1,700 27,600 P100,000 CAPITAL Azures, capital Roca, capital Total liabilities and capital P 19,100 40,450 40,450 P100,000 ... determining the amount of partnership capital to be used for purposes of dividing profits among the partners Since withdrawals are deducted, the distinction can affect the division of profits and losses... value of the assets being invested in the partnership 11 To have a realistic and fair valuation of the assets to be transferred to the partnership 12 Refer to page 63 of the textbook Accounting. .. division of profits and losses Three kinds of transactions affect the capital account of any partner: investments, withdrawals, and periodic closings of income, expense, and drawing accounts Capital