INTRODUCTION TO PARTNERSHIP ACCOUNTING
Partnership
– a contract whereby two or more persons bind themselves to contribute money, property or industry into a common fund with the intention of dividing the profit among themselves (Article 1767 of the Civil Code of the Philippines).Characteristics of a Partnership
1. Mutual agency – any partner may act as an agent of the partnership in
conducting its affairs. Each partner has an equal right to act for the partnership and to enter into contracts binding upon it, as long as he acts within the normal scope of business operations.
2. Limited life – a partnership may be dissolved at any time by action of the partners or by operation of law. The withdrawal, death, retirement, bankruptcy, incapacity of a partner and the admission of a new partner dissolves the
partnership.
3. Unlimited liability – the personal assets of a general partner may be used to satisfy the claims of the creditors of the partnership if the partnership assets are not enough to settle the liabilities to outsiders upon liquidation.
4. Co-ownership of property – properties contributed to the partnership are owned by the partnership. Properties invested by a partner cease to be his own
personal property.
5. Co-ownership of profit – a partner has the right to share in partnership profits. The partners are entitled to share in the firm’s profits as a return on their
investment.
6. Legal entity – a partnership has a legal personality separate and distinct from that of each of the partners. A partnership may, therefore, acquire property in its own name and may enter into contracts.
Advantages of a Partnership
1. It is easy to form and to dissolve. A partnership is ended whenever there are changes in the ownership structure such as withdrawal of a partner or admission of a new partner.
2. Greater amount of capital may be raised compared to a sole proprietorship. The source of capital investment comes from 2 or more persons.
3. There is relative freedom and flexibility in decision-making compared to a corporation. Decisions are effected simply by agreement among the partners without the formalities necessary under a corporation.
4. It is better managed because business affairs are supervised by more than one person. Better management results from the combined experience and ability of several individuals.
5. The unlimited liability of a general partner makes it reliable from the point of view of creditors.
Disadvantages of a Partnership
1. The unlimited liability of a partnership deters many from investing in a partnership.
2. There is lack of business continuity because it can be easily dissolved.
3. There is difficulty in transferring ownership interest because ownership interest in the partnership cannot be transferred without the consent of all the partners. 4. Limited amount of capital may be raised compared to a corporation.
5. There is likelihood of dissension and disagreement when each of the partners has the same authority in the management of the firm.
Kinds of Partnerships
1. According to activity
a. Service – main activity is the rendering of services
b. Merchandising or Trading – main activity is the purchase or sale of goods c. Manufacturing – main activity is the production of goods
a. General – one consisting of general partners who are liable prorate and sometimes solidarily with their separate property for partnership liabilities. b. Limited – one consisting of one or more general partners and one or more
limited partners. “LTD” is added to the name of the partnership.
3. According to object
a. Universal partnership of all present property – one in which the partners contribute all the property which actually belong to each of them, at the time of the constitution of the partnership, to a common fund with the intention of dividing the same among them as well as the profits which they may acquire therewith. All assets contributed to the partnership and subsequent acquisitions become common partnership assets.
b. Universal partnership of profits – one which comprises all that the partners may acquire by their industry or work during the existence of the
partnership and the usufruct of movable or immovable property which each of the partners may possess at the time of the institution of the contract. The original movable or immovable property contributed do not become common partnership assets.
c. Particular partnership – one which has for its object determinate things, their use or fruits or a specific undertaking or the exercise of a profession of vocation.
Kinds of Partners
a. According to Investment
1. Capitalist – one who contributes capital in money or property. 2. Industrial – one who contributes industry, labor, skill or service.
3. Capitalist-Industrial – one who contributes money, property and industry
b. According to Liability
1. General – one whose liability to third persons extends to his private property 2. Limited – one whose liability to third persons is limited only to the extent of his
capital contribution to the partnership.
c. According to Participation
1. Nominal- a partner in name only.
2. Secret – one who takes active part in the business but whose connection with the partnership is concealed or unknown to the public.
3. Silent – one who does not participate actively in the management of partnership affairs.
4. Managing Partner – one who manages actively the business of the partnership
Articles of Co-Partnership
– agreement in writing among the partners governing the nature and terms of the partnership contract. This agreement is the framework within which the partners are to operate or conduct partnership business – from formation to operations then to the eventual dissolution and liquidation of the partnership. Observations of these details will help minimize, if not eliminate, the confusion and disputes that may arise between or among the partners.The written agreement among the partners governs the formation, operation and dissolution of the partnership and is required to be registered with SEC. It contains the following information:
1. The name of the partnership;
2. The names, addresses of the partners, classes of partners stating whether the partner is a general or a limited partner;
3. The effective date of the contract;
4. The purpose and principal place of business of the business; 5. The capital of the partnership stating the contributions of each of the partners;
6. The rights and duties of each of the partners;
7. The manner of dividing profit or loss among the partners; 8. The conditions under which the partners may withdraw money or other assets;
9. The manner of keeping the books of accounts;
10. The causes for dissolution and the provision for arbitration in settling disputes.
Features of Partnership Accounting
1. Plurality of capital and drawing accounts – there will be as many capital accounts and as many drawing accounts as there are partners
2. Partner’s loans – partners may advance money to the partnership in the form of loans when the business is in need of additional funds.
3. Partner’s borrowings – the partnership may advance money to partners other than withdrawals in the form of loans.
4. Partner’s salaries – partners are paid salaries for services rendered in the conduct of partnership business.
5. Interest on investment – interest is allowed to earn on the asset investment of the partners.
6. Division of profit and losses – net profit or net loss is to be divided among the partners based on their agreement.
PARTNERSHIP FORMATION
Accounting entries to record the formation of a partnership will depend upon how the partnership is formed. A partnership may be formed in the following ways, namely:
1. Formation of a partnership for the first time by individuals. 2. Conversion of a sole proprietorship to a partnership
a. A sole proprietor allows another individual who has no business of his own to join the business.
b. Two or more sole proprietors form a partnership.
General Guidelines
1. Cash investments are recorded using their face values.
2. Non-cash asset investment is recorded at the current fair value of the property at the time of investment. Independent professional appraisals should be made to determine the fair value. Fair value is the amount to be obtained when the asset is sold at the present time in its present condition.
3. Accounts receivable are recorded in the books of the partnership at gross amount. Allowance for bad debts is carried forward to the partnership. 4. Depreciable property assets are recorded in the books of the partnership at
carrying value. Accumulated depreciation is not carried forward to the partnership.
5. When a sole proprietorship is converted into a partnership, the following books may be used:
a. Books of the sole proprietorship may be used as books of the partnership. b. Books of the sole proprietorship will be closed and a new set of books will
be used for the partnership.
Two Kinds of Partnership Formation
Cash Cash xxx
investment X, Capital xxx
Non-cash Asset xxx
asset X, Capital xxx
investment
Note: Use the fair market value of the asset. Non-cash Asset xxx asset Liability xxx investment X, Capital xxx with assumption of liability
Note: Debit the asset account using its fair market value; credit the liability account using the loan balance to be assumed by the partnership; and credit the capital account of the partner using the net amount.
Service or Memo Entry
Industry Mr. X is admitted as an industrial partner with a ____ share in profits.
2. Sole proprietorship(s) converted into a partnership –
accounting procedures are as follows:
a. Adjust the books of the sole proprietorship(s).
Increase in value Asset xxx
of an asset X, Capital xxx
without a contra-asset account
Decrease in value X, Capital xxx
of an asset Asset xxx
without a contra asset account
Increase in value Contra- asset xxx
of an asset X, Capital xxx
asset account
Decrease in value X, Capital xxx
of an asset Contra- asset xxx
with a contra asset account
Increase in value X, Capital xxx
of a liability Liability xxx
Decrease in value Liability xxx
of a liability X, Capital xxx
Note: These adjustments are similar to the year-end adjusting entries. Only, replace the nominal accounts with the Owner, Capital account.
b. Close the books of the sole proprietorship(s).
Closing entry Contra-asset xxx
Liabilities xxx
X, Capital xxx
Assets xxx
c. Record the investment of the partners in the books of the partnership –
assume new set of books.
To record Allowance for Bad Debts xxx
investment of Liabilities xxx
sole proprietor X, Capital xxx
Notes:
1. Accounts receivable is taken at gross amount; allowance for bad debts is carried over in the books of the partnership.
2. Depreciable property assets are recorded at carrying value; accumulated depreciation is not carried over in the books of the partnership.
Classroom Exercises
1. A partnership is formed by four (4) individuals who make the following investments:
Partner A Cash of P100,000
Partner B Land costing P150,000 with a fair market value of P200,000
Partner C Delivery van costing P350,000 on which there is an outstanding liability of P50,000 to be assumed by the new business.
Partner D Labor/skills with a 10% share in profits.
Prepare journal entries to record the investment of the partners.
2. Joey is operating an ice cream parlor. She admits Audi as a partner in her business. Accounts in the ledgers of Joey’s business as of December 31, 20x8 show the following balances:
Cash P 6,000 Accounts receivable 120,000 Merchandise Inventory 180,000 Office equipment 20,000 Total assets P326,000 Accounts Payable P32,000 Notes Payable 30,000 Joey, Capital 264,000
Total liabilities and owner’s equity P326,000
For purposes of establishing the interest of Audi, the following adjustments are agreed upon.
a. An allowance for bad debts of 2% of accounts receivable is to be set up. b. The merchandise inventory is to be valued at P202,000.
c. Office equipment is to be depreciated by 10% of its cost.
d. Prepaid expense of P6,500 and accrued expenses of P4,000 are to be recognized.
Audi will invest cash to give her a 1/3 interest in the partnership.
Prepare all necessary journal entries in the books of Joey. Prepare all necessary entries in the books of the partnership. Assume new set of books.
PARTNERSHIP OPERATIONS
Accounting Cycle of a Partnership
– same as in sole proprietorship1. Prepare journal entries 2. Post to ledgers
3. Prepare a trial balance 4. Prepare adjusting entries 5. Prepare financial statements 6. Prepare closing entries
7. Prepare a post-closing trial balance 8. Prepare reversing entries
Special Concerns
I. Journal entries – same as in sole proprietorship except for the following transactions which are peculiar to a partnership:
a. Partners’ loans – partner lends money to partnership
Cash xxx
Accounts/Loans/ xxx
Notes Payable or Due to Partner or Loan from Partner
b. Partners’ borrowings from partnership – partnership lends money to partners
Accounts/Loans/ xxx
Notes Receivable or Due from Partner or Loan to Partner
Cash xxx
II. Financial statements – the same as in sole proprietorship except:
a. Balance Sheet or Statement of Financial Position– the owner’s equity section is labeled Partners’ Equity
b. Income Statement – an additional section called Division of Profit and Loss is included. This profit distribution provides a full analysis of the distribution of earnings which is presented at the bottom of the partnership income statement.
c. Statement of Changes in Partners’ Equity – a statement that reports the changes that have taken place in partners’ equity during the period. Each
partner is provided a column heading which explains details of the changes in their equity account.
III. Closing entries – drawing accounts are not automatically closed to the capital accounts; drawing accounts are closed to the capital accounts only if agreed upon in the articles of co-partnership.
Rules for Dividing Profit and Loss
1. As to Capitalist Partner a. Division of Profit
1. In accordance with agreement.
2. In the absence of an agreement, division of profits is in accordance with capital contributions.
b. Division of Loss
1. In accordance with agreement.
2. If only the division of profits is agreed upon, then the division of losses will be the same as the agreement on division of profits.
3. In the absence of an agreement, division of losses is in accordance with capital contribution.
2. As to Industrial Partner a. Division of Profit
1. In accordance with agreement.
2. In the absence of an agreement, the industrial partner shall receive a just and equitable share of the profits.
b. Division of Loss
1. In accordance with agreement.
2. In the absence of an agreement, the industrial partner shall have no share in the losses.
Net income is viewed as a return for
1. services rendered (salaries) 2. capital investment (interest)
3. entrepreneurial ability or managerial skills (bonus)
Methods of Dividing Net Income 1. Equally
2. Arbitrary Ratio
a. Fractions b. Percentages
c. Ratio and Proportion
3. Capital Ratio
a. Original/Initial investment b. Beginning capital balance c. Ending capital balance
d. Average capital – most equitable method
4. Allowing Salaries, Interest and Bonus – considered as part of the distribution of net income
a. Salaries – to give recognition to the ability, experience or time devoted by a partner to the business.
b. Interest - to give recognition to differences in the capital contribution given in proportion to the period such capital was actually used.
c. Bonus – incentive/special compensation given to a partner for superior income realized. It is usually based on net income.
General Guidelines
1. Partner salary allowances, interest allowances on capital account balances and bonus are not expenses in the determination of
partnership net income.
2. The provision on salaries and interest must be enforced regardless of whether operating results is a profit or loss.
3. The provision on bonus is enforced only when operating results is a profit.
4. If the partnership agreement specifies that income is to be divided based on partners’ capital balances but fails to specify how capital balances are to be computed, the average capital balances should be used if it can be computed. If not, the original capital balances should be used.
Capital Account of a Partner
Partner, Capital
Debit Credit
Permanent Withdrawals Initial Investment
Pro-forma Entries
To distribute Income Summary xxx
net income A, Drawing xxx
B, Drawing xxx
To distribute A, Drawing xxx
net loss B, Drawing xxx
Income Summary xxx
Classroom Exercises
1. Assume ABC Partnership earned a net income of P120,000 for the year. Three partners A, B and C will share in the net income. Their capital accounts are as follows: A, Capital 9/1 30,000 1/1 50,000 6/1 10,000 B, Capital 3/1 20,000 1/1 70,000 C, Capital 1/1 30,000 4/1 10,000
Prepare the entry to distribute net income among the three partners assuming: a. Net income is divided equally.
b. Net income is divided as follows: A – ½; B – ¼; C – ¼.
c. Net income is divided as follows: A – 50%; B – 30%; C – 20%. d. Net income is divided as follows: 3:2:1
e. Net income is divided based on original/initial capital contribution which were as follows: A – P20,000; B – P30,000; C – P10,000.
f. Net income is divided based on beginning capital balances. g. Net income is divided based on ending capital balances. h. Net income is divided based on average capital.
2. Assume the same given information in No. 1. Prepare the entry to divide net income if net income is to be divided as follows:
a. Interest of 10% on beginning capital balances. b. Annual salaries of P5,000 to A and P4,000 to B. c. Bonus to Partner C amounting to P16,000. d. Remainder to be divided – 50:30:20.
3. Using the same given information in No. 2, prepare the entry to divide net income if net income is P35,000 only.
4. Using the same given information in No. 2, prepare the entry to close income summary if the partnership incurred a net loss of P60,000 for the year.
PARTNERSHIP DISSOLUTION WITHOUT LIQUIDATION
Dissolution
1. The change in the relation of the partners caused by any partner ceasing to be associated in the carrying out of the business.
2. The termination of the life of an existing partnership.
Dissolution of an old partnership may be followed by:
1. the formation of a new partnership – new partnership continues the business activities of the dissolved partnership without interruption.
2. liquidation – termination of business activities and winding up of partnership affairs preparatory to going out of business.
Conditions resulting to partnership dissolution
1. Admission of a new partner
2. Withdrawal of a partner due to retirement, death, incapacity, bankruptcy or voluntary withdrawal
3. Incorporation of a partnership
Admission of a New Partner
1. The consent of all the partners is necessary.
2. Upon the admission of a new partner, a new agreement covering partners’ interests, profit and loss sharing and other considerations should be drawn because the dissolution of the original partnership cancels the old agreement. 3. There is a need to update the capital balances of the partners by
a. determining profit share of each partner from the last balance sheet date to dissolution date.
b. revaluing/ adjusting partnership assets and liabilities using a temporary account called the Capital Adjustment account. The Capital Adjustment
account is closed to the partners’ capital accounts using their profit and loss ratio.
Pro- forma Entries
Determine profit Income Summary xxx
Share of partners A, Drawing xxx
B, Drawing xxx
A, Drawing xxx
B, Drawing xxx
A, Capital xxx
B, Capital xxx
Increase in value Asset xxx
of an asset Capital Adjustment xxx
without a contra-asset account
Decrease in value Capital Adjustment xxx
of an asset Asset xxx
without a contra asset account
Increase in value Contra- asset xxx
of an asset Capital Adjustment xxx
with a contra asset account
Decrease in value Capital Adjustment xxx
of an asset Contra- asset xxx
with a contra asset account
of a liability Liability xxx
Decrease in value Liability xxx
of a liability Capital Adjustment xxx
Note: These adjustments are similar to the year-end adjusting entries. Only, replace the
nominal accounts with the Capital Adjustment account.
Close the Capital Capital Adjustment xxx
adjustment A, Capital xxx account B. Capital xxx OR A, Capital xxx B, Capital xxx Capital Adjustment xxx
Note: The Capital Adjustment account is divided among the partners based on their profit and loss ratio.
Types of Admission of a New Partner
1. By purchase of interest from one or more of the old partners
a. It is considered as a personal transaction between the selling partner and the buyer who becomes a new partner.
b. The cash paid by the buyer is not recorded in the books of the partnership for this is a personal transaction between the selling partners and the buyer.
c. The gain or loss arising from the sale of interest is not recorded in the partnership books. It is considered as a personal gain or loss of the selling partner.
d. It merely involves a transfer of capital of the selling partner to the capital of the buying partner.
e. There is no increase in total assets and no increase in total partners’ equity.
2. By investment or asset contribution in the partnership
a. It is a transaction between the partnership and the incoming partner. b. It involves the investment of assets by new partner into the partnership. c. Total assets and total partners’ equity will increase.
d. Record the admission of the new partner based on the following procedures:
Record the investment (contributed capital) of the new partner. Determine the agreed capital of the new partner. This is computed
as follows:
Total Agreed Capital of the Firm x % of Interest of New Partner
Compare the contributed capital and the agreed capital of the new partner. Record goodwill or bonus, if there is any.
Pro-forma Entries
By purchase A, Capital xxx of interest C, Capital xxx By Investment Cash xxx Non-cash asset xxx C, Capital xxxBonus
1. It is an amount partners are willing to allow as additional credit to a partner’s capital in excess of his actual capital contribution.
2. It is a transfer of capital from one partner to another.
3. Bonus may be recognized only when total agreed capital of the firm is equal to its total contributed capital.
Pro-forma Entries
Bonus to old C, Capital xxx
partners A, Capital xxx
B, Capital xxx
Bonus to new A, Capital xxx
partner B, Capital xxx
C, Capital xxx
Note: Bonus is divided among the old partners using profit and loss ratio.
Vague Problems
1. New partnership agreement fails to specify the total agreed capital capitalization of the new partnership after the admission of a new partner. 2. In the absence of expressed agreements, either the bonus or the goodwill method may be used.
Special Terms
1. Agreed capital (AC) – new capitalization of the new partnership which will be equal to total contributed capital.
2. Contributed capital (CC) – the sum of the investments or contributions of the new and old partners.
3. Fraction of interest – this is the interest or equity of a partner expressed in fraction
4. Percentage of interest – this is the interest or equity of a partner expressed in percentage.
Withdrawal of a Partner
There is a need to update the capital balances of the partners by
1. determining profit share of each partner from the last balance sheet date to dissolution date.
2. revaluing/ adjusting partnership assets and liabilities using a temporary account called the Capital Adjustment account. The Capital Adjustment account is closed to the partners’ capital accounts using on their profit and loss ratio.
Types of Withdrawal of a Partner
1. Purchase of interest by another partner or an outsider
a. It is considered a personal transaction between the buying and selling partners.
b. It involves the transfer of the withdrawing partners’ capital to the capital account of the buying partner.
2. Purchase of interest by the partnership
a. It is considered a transaction between the partnership and the outgoing partner.
b. It involves a decrease in partnership assets or increase in partnership liabilities.
Pro-forma Entries
By purchase C, Capital xxx of interest by A, Capital xxx another person By purchase of interest by the partnership(a) Equal to carrying C, Capital xxx
(b) More than A, Capital xxx
carrying amount B, Capital xxx
C, Capital xxx
C, Capital xxx
Cash/Liability xxx
(c) Less than C, Capital xxx
Carrying amount Cash/Liability xxx
A, Capital xxx
B, Capital xxx
Classroom Exercises
1. The records of ABC Partnership show the following balances at year-end: ABC Partnership
Trial Balance December 31, 200x
Cash P15,000
Accounts receivable 10,000
Allowance for bad debts P800
Office furniture 25,000 Accumulated depreciation 1,000 Accounts payable 3,200 A, Capital 10,000 B, Capital 15,000 C, Capital 20,000 Total P50,000 P50,000
A, B, C divide profit and loss equally. With the consent of all the partners, Mr. D is admitted as a new partner. The following adjustments are agreed upon:
a. Allowance for bad debts should be 10% of accounts receivable. b. Office furniture should be 10% depreciated.
c. Accrued expenses amounting to P1,300 should be recorded.
Prepare entries to adjust the accounts of the partnership. Prepare the entry to record the admission of Partner D under the following independent assumptions:
a. Mr. D purchases ½ of the interest of Partner B for P7,000
P5,000 P9,000
b. Mr. D invests P8,000 cash.
c. Mr. D invests sufficient cash to give him 25% interest in the firm.
2. Assume the adjusted capital balances of the following partners are as follows:
Partner A P50,000
Partner B 100,000
Assume A & B divide profit and loss equally.
Prepare the entry(ies) to record the admission of Mr. C under the following independent assumptions:
a. Mr. C is admitted by investing P 50,000 for a capital credit of 20% of the agreed capitalization of P200,000.
b. Mr. C is admitted by investing P50,000 for a capital credit of 30% of the agreed capitalization of P200,000.
c. Mr. C invests P60,000 for a ¼ interest in the firm. d. Mr. C invests P60,000 for a ½ interest in the firm.
3. Assume that the updated capital balances of the partners are as follows:
Partner A P50,000
Partner B 100,000
Partner C 150,000
A, B and C share profit and loss 3:2:3. Partner A withdraws from the partnership. Prepare all the necessary journal entries under the following independent
assumptions:
a. With the consent of Partners B and C, Partner A withdraws from the partnership by selling his entire interest to Partner D for P50,000 cash. b. Partnership purchases entire interest of Mr. A for P50,000.
c. Partnership purchases entire interest of Mr. A for P60,000. d. Partnership purchases entire interest of Mr. A for P35,000.
PARTNERSHIP DISSOLUTION WITH LIQUIDATION
Dissolution with Liquidation
1. A partnership is liquidated when its business operations are completely terminated or ended.
2. It may be caused by any of the following factors:
a. The purpose for which the partnership was organized has been accomplished.
b. The term/period covered by the partnership contract has terminated. c. The firm became bankrupt.
d. The partners mutually agree to close the business. 3. Partnership assets are sold.
4. Partnership creditors are paid.
5. Remaining assets are distributed to the partners as a return of their investments. 6. The purpose of accounting during this period is to have an equitable distribution
of partnership assets to creditors and partners.
Definition of Terms
1. Dissolution – the termination of the life of the partnership.
2. Liquidation – the process of winding up a business which normally consists of conversion of assets into cash, payment of liabilities and distribution of remaining among the partners.
3. Realization – the process of converting non-cash assets into cash. 4. Receiver – the person assigned to take care of liquidation.
5. Gain on realization – the excess of the selling price over the carrying amount of the assets sold through realization.
6. Loss on realization – the excess of the carrying amount over the selling price of the assets sold through realization.
7. Capital deficiency – the excess of a partner’s share on losses over his capital balance.
9. Right of offset – the legal right to apply part or all of the amount owing to a partner on a loan balance against a deficiency in his capital account resulting from losses in the process of liquidation.
10. Partner’s interest – the sum of a partner’s capital, loan balance net of advances to the partnership.
11. Solvent partner – personal assets of the partner exceed his personal liabilities. 12. Insolvent partner – personal assets of the partner are less than his personal
liabilities.
13. Statement of Liquidation – an accounting statement summarizing the winding up of the business affairs of the partnership.
Types of Liquidation
1. Lump-sum liquidation – This is a process whereby the distribution of cash to the partners is done only after all the non-cash assets have been realized, the total amount of gain or loss on realization is known, and all liabilities have been made. 2. Installment method – This is a process whereby assets are realized on a
piecemeal basis and cash is distributed to partners on a periodic basis as it becomes available even before converting all assets into cash.
Procedures in Lump Sum Liquidation
1. Finish the accounting cycle. a. Adjust the books.
b. Determine the net income and close the net income to partners’ capital accounts.
c. Close all nominal accounts.
2. Sell non-cash assets and distribute gain or loss on realization among partners using profit and loss ratio.
a. Any difference between the selling price and carrying amount of the sold assets shall be recorded in an account called Gain or Loss on
Realization.
b. The Gain or Loss on Realization account shall be closed to the partners’ capital accounts using profit and loss ratio.
c. Gain on realization increases the capital balance of a partner while a loss on realization decreases the capital balance of a partner.
3. If partner’s capital balance results in a debit balance (deficient balance), the following may happen:
a. If a partner has a loan balance – exercise the right of offset (apply the loan balance against the debit balance).
b. If there is no loan or if capital balance still results in a debit balance: If partner is solvent – deficient partner pays.
If partner is insolvent – deficient partner is unable to pay; the remaining partners will absorb the deficiency. The absorption of deficiency will be based on residual profit and loss.
4. Cash is to be distributed in the following order of priority: a. Those owing to partnership creditors.
b. Those owing to partners with respect to loans. c. Those owing to partners with respect to capital.
Note that the final distribution of cash to partners is made based on the partners’ capital balances and not on any ratio.
5. When cash is not sufficient to pay creditors, the solvent general partners shall contribute the difference using their loss ratio.
Pro-forma Entries
Realization of Cash xxx
asset at a gain Allowance for bad debts xxx Accumulated depreciation xxx
Gain or loss on realization xxx
Asset xxx
Realization of Cash xxx
asset at a loss Allowance for bad debts xxx Accumulated depreciation xxx Gain or loss on realization xxx
Asset xxx
Close gain or loss Gain or loss on realization xxx
on realization A, Capital xxx
B, Capital xxx
OR xxx
A, Capital xxx
B, Capital xxx
Note: Gain or loss on realization is closed to partners’ capital accounts using profit and loss ratio.
Payment of Liabilities xxx
partnership debts Cash xxx
Payment of Liability – Partner xxx
partner’s loan Cash xxx
Return of A, Capital xxx
partners’ capital B, Capital xxx
Cash xxx
Note: Return of capital is based on partners’ final capital balances.
Right of offset Liability – Partner xxx
A, Capital xxx
Payment of Cash xxx
deficient partner A, Capital xxx
Absorption of B, Capital xxx
deficiency C, Capital xxx
A, Capital xxx
Pro-forma Statement of Liquidation (Lump-Sum Method)
Name of Partnership Statement of Liquidation Date Covered by the Liquidation
Cash Non-cash assets Liabilities Loans Payable, Partner A A, Capital B, Capital C, Capital Profit & loss
ratio Balances before realization Realization of non-cash assets and distribution of gain or loss on realization
Balances Payment of liabilities Balances Payment of partner’s loan Balances Return of partners’ capital
Special Notes
1. Make sure that the balances before liquidation show equality of debits and credits. This will always be true after each liquidation transaction.
2. Maintain two columns for the debits – one for cash and one for non-cash assets. 3. Maintain separate columns for liabilities to outside creditors and liabilities to
partners.
4. Gain on realization increases capital while loss on realization decreases capital. 5. Figures in parentheses represent reduction in the account.
6. Double rule all columns when all columns are brought to zero balance.
Classroom Exercises
ABC Partnership has the following balance sheet: ABC PARTNERSHIP
Balance Sheet December 31, 200x Assets
Cash P40,000
Furniture and fixtures P250,000
Less: Acc. depreciation 50,000 200,000
Total Assets P240,000 Liabilities Accounts Payable P70,000 Loans Payable – A 20,000 Loans Payable – B 10,000 P100,000 Partners’ Equity A, Capital P40,000 B, Capital 50,000
C, Capital 50,000 140,000
Total Equities P240,000
P&L ratio is 5:3:2.
Prepare a statement of liquidation and journal entries under the following independent cases:
1. Case 1 – Furniture and fixtures is sold for P140,000. 2. Case 2 – Furniture and fixtures is sold for P110,000. 3. Case 3 – Furniture and fixtures is sold for P70,000.
INSTALLMENT LIQUIDATION
1. Frequently, partnership liquidation does not take place on a single date. 2. The sale of all of the assets of a partnership is not instantaneous but may extend over several months.
3. When this happens, the partners may prefer to receive the amounts due to them in a series of installments rather than wait until all assets have been
converted to cash.
4. Installment payments to partners are proper provided that measures are taken to insure that all creditors are paid in full and that there is no over distribution to one or more of the partners.
Nature of Installment Liquidation
1. Non-cash assets are sold on a piecemeal basis over an extended period of time. 2. Cash realized is immediately distributed to partners after fully satisfying creditors’
claims or after setting aside sufficient cash for these liabilities.
3. Cash distribution to partners is considered as if it were the last because total gain or loss on realization is not yet determined.
4. Remaining unsold assets must be treated as a complete loss.
5. Debit balances in capital and potential capital deficiencies are assumed uncollectible.
6. Partners’ interests are reduced by cash distributions to a balance proportionate to the partners’ profit and loss ratio.
Installment Liquidation Procedures
1. Cash is distributed to partners even before fully realizing non-cash assets and determining total gain or loss on realization.
2. Restricted interest, in the accompanying schedule to determine amounts to be paid to partners, shall consist of:
a. remaining unsold assets;
b. cash withheld for possible expenses; c. debit balances in capital.
3. Considerable care is required to insure an equitable distribution of cash to the partners. The Statement of Liquidation is usually supported by a Schedule of
Safe Payments. This schedule is prepared periodically based on the following
considerations.
a. Each installment of cash is distributed as if no more cash is forthcoming. b. Cash is distributed to a partner only if he has an excess credit balance in
his partnership interest (capital and loan balance) after absorption of his share of the maximum possible loss that may occur. The possible loss consists of the following:
total value of remaining non-cash assets
cash withheld to pay for liquidation expenses and unrecorded liabilities
a debit balance in a capital account.
c. Payments to partners based on a schedule of safe payments bring at some point in the liquidation, the partners’ capital to the profit and loss ratio.
Pro-forma Schedule of Safe Payments
ABC Partnership
Schedule of Safe Payments – Month Schedule 1
Partner A Partner B Partner C
Loan balance Total interest Possible loss
Payment to partners
Classroom Exercise
The partners of ABCD Partnership share profits and losses as follows: A – 50%; B- 20%; C – 20% and D – 10%. On December 31, 200x, the partners agree to liquidate the partnership. The balances of their accounts are as follows:
Cash P10,000
Non cash assets 80,000
Liabilities 6,000 B, loan 2,000 A, capital 20,000 B, capital 29,000 C, capital 23,000 D, capital 10,000
The following data relate to the realization of non-cash assets: Carrying amount Cash realized
January P54,000 P30,000
February 24,000 18,000
March 2,000 1,000
Prepare the statement of liquidation with supporting schedule of safe payments for ABCD Partnership.
INTRODUCTION TO CORPORATION ACCOUNTING
Corporation
–
an artificial being created by operation of law having the rights of succession and the power, attributes and properties expressly authorized by law or incident to its existence.Characteristics of a Corporation
1. Separate legal entity – A corporation is an artificial being with a personality separate from that of its individual owners.
2. Created by operation of law – A corporation is generally created by operation of law. The mere agreement of the parties cannot give rise to a corporation.
3. Rights of succession – A corporation continues to exist notwithstanding the withdrawal, death, insolvency or incapacity of the individual owners. Changes in the ownership structure do not dissolve a corporation.
4. Powers, attributes, properties expressly authorized by law – Being a creation of law, a corporation can only exercise powers provided by law and powers which are incidental to its existence.
5. Ownership divided into shares – Proprietorship in a corporation is divided into units known as shares of stocks.
6. Board of Directors (BOD) – Management of the business is vested in a board of directors elected by the stockholders. The BOD is the governing body or
decision-making body of the corporation.
Comparison between Partnership and Corporation
Partnership Corporation
Formed by 2 persons. Formed by 5 persons
Starts with agreement among partners; may be formed orally.
Starts with the issuance of a
certificate of incorporation issued by
SEC
Unlimited liability Limited liability
Limited life Unlimited life
Transfer of equity of a partner needs the consent of other partners.
Stocks can be transferred from one stockholder to another without getting
the consent of the other stockholders. Partner is an agent of the partnership. Stockholders do not act as agents of
the corporation.
Advantages of a Corporation
1. The corporation’s power of succession enables it to enjoy a continuous existence.
2. The continuity of corporate existence enables it to obtain a strong credit line. 3. Bigger source of capital may be raised because many individuals invest funds in
the corporation.
4. Stockholders enjoy limited liability. Their liability to corporate debts extends only to their investment in the corporation.
5. Shares of stocks may be transferred without the consent of the other stockholders.
Disadvantages of a Corporation
1. It is not easy to form because of complicated legal and documentary requirements.
2. The limited liability of the stockholders weakens or limits its credit capacity. 3. It is subject to more governmental requirements.
4. There is possibility of abuse of power by the Board of Directors. 5. It is subject to more taxes.
Types of Corporation
1. Public – a corporation formed to render government service 2. Private – a corporation formed for a private purpose, aim or benefit.
3. Quasi-public – a private corporation which is given a franchise to perform functions of a public character.
4. Domestic – a corporation that is organized under Philippine laws.
5. Foreign - a corporation that is organized under the laws of other countries.
6. Stock – a corporation in which the capital is divided into shares of stock and is authorized to distribute dividends to the holders of such shares. A stock certificate is a physical evidence of the shares of stock. Stock corporations are generally profit-oriented.
7. Non-stock - a corporation in which capital comes from fees or contributions given by individuals. No part of its income is distributed as dividends and any profit shall be used to further the purpose(s) of the corporation. Non-stock corporations are generally non-profit in nature.
8. Open – a corporation whose ownership is widely held by many investors.
9. Closely held or family – a corporation in which 50% or more of its stock is owned by five persons or less.
Components of a Corporation
1. Incorporators – persons who originally
formed the corporation and whose names appear in the Articles of Incorporation. They must be 5 but not more than 15 natural persons. They should not artificial persons.
2. Stockholders or shareholders – owners
of a stock corporation.
3. Members – persons who gave fees or
contributions to a non-stock corporation.
4. Corporators – persons who compose
the corporation whether as stockholders or members.
5. Promoters – persons who undertake the
necessary steps and procedures to organize the corporation.
6. Subscribers – persons who agreed to
buy shares of stock but will pay at a later date.
7. Underwriters – persons who undertake
to sell the shares of stocks to the general public.
The process of organizing a corporation consists of three stages:
1. Promotion – makes preliminary arrangements and solicits subscription to raise sufficient capital for the business. The following are the pre-incorporation requirements:
o At least 25% of the authorized capital stock must be subscribed. o At least 25% of total subscriptions must be paid.
2. Incorporation – formalizes organization of the corporation by filing with SEC the necessary documentary requirements such as articles of incorporation and treasurer’s affidavit attesting compliance to the pre-incorporation requirements. Upon approval, SEC issues a certificate of incorporation, the date of which is considered as the date of registration or incorporation.
3. Commencement of the business – the business should start its business within two years from the date of incorporation.
Costs incurred in connection with the formation of the corporation are recorded as
expense. Examples of organization costs are filing fees, cost of printing stock
certificates, promoters’ commission and legal fees. The following account titles may be used in recording organization costs:
Pre-operating Costs Pre-operating Expenses Organization Expense Organization Costs
Articles of Incorporation
The Articles of Incorporation enumerates the powers and limitations conferred upon the corporation by the government. It includes the following information:
1. The name of the corporation;
2. The purpose or purposes for which the corporation is formed; 3. The place of the principal office of the corporation;
4. The term of existence of the corporation, not exceeding 50 years; 5. The names, nationalities and addresses of the incorporators;
6. The names of the directors who will serve until their successors are duly elected and qualified in accordance with the by-laws;
7. The authorized capital stock, the classes of stocks to be issued and the number of each class of stock indicating the par value if there is any;
8. The amount of subscription to the capital stock, the names of the subscribers and the number of shares subscribed by each;
9. The total amount paid on the subscriptions and the amount paid by each subscriber on his subscription.
By-Laws
The by-laws of a corporation contain provisions for the internal administration of the corporation. The by-laws should be filed within one month from the date of issuance of the certificate of incorporation. The by-laws normally include the following:
1. The date, place and manner of calling the annual stockholders’ meeting; 2. The manner of conducting meetings;
3. The circumstances which may permit the calling of special meetings of the stockholders;
4. The manner of voting and the use of proxies; 5. The manner of electing the directors;
6. The term of office of the directors;
7. The authority and duties of the directors; 8. The manner of selecting the corporate officers;
9. The procedures for amending the articles of incorporation and by-laws.
Corporate Books and Records
The corporation generally maintains the following books of accounts and records: 1. Journals and Ledgers;
2. Minute books for meetings of stockholders; 3. Minute books for meetings of Board of Directors;
4. Stock and Transfer Book - contains records of all stocks, names of stockholders, amount paid and unpaid, any sale or transfer of stock.
1. Par Value –a share of stock that is given a definite or fixed value in the articles of incorporation.
2. No Par Value – a share of stock that has no fixed value; it may not be issued for less than P5.
3. Common or Ordinary shares –the basic issue of shares. The common or ordinary share entitles the holder to the following basic rights:
a. Right to vote in stockholders’ meeting;
b. Right to share in corporate profits (dividends); c. Right to share in corporate assets upon liquidation;
d. Right to purchase additional shares of stocks in the event that the corporation increases its capital stock (pre-emptive right).
4. Preferred or Preference share - entitles the holder to some specific preferences over the common or ordinary share such as
a. Preference as to payment of dividends;
b. Preference as to distribution of assets upon liquidation.
Terms Peculiar to a Corporation
1. Authorized shares – refers to the maximum number of shares which a corporation may issue (as set forth in the Articles of Incorporation).
2. Issued shares – shares which are issued to stockholders which at present may or may not be in the hands of the stockholder.
3. Unissued shares – shares which have never been issued and are available for issuance.
4. Outstanding shares – shares of stocks issued to stockholders or subscribers whether fully or partially paid except for treasury shares.
5. Treasury shares - shares which have been issued and fully paid for but subsequently reacquired by the issuing corporation.
CORPORATION ACCOUNTING
Capital Stock Transactions
Basic Capital Stock Transactions
There are 5 basic capital stock transactions:
1. Authorization –records the maximum number of shares a corporation is authorized to issue.
2. Sale – a stockholder buys stocks and pays immediately in full. Stock certificate is issued to the stockholder.
3. Subscription –a subscriber enters into a contract to buy shares of stock. 4. Collection – a subscriber pays his subscription.
5. Issuance of certificate – if a subscription is fully paid, a stock certificate is issued to the subscriber.
Capital Stock
Capital stock may be paid by the stockholder or subscriber in the form of 1. cash
2. property – record the value of the property using the following amounts: a. fair value of the property received
b. fair value of the shares of stock, whichever is clearly determinable; c. par value of the shares of stock
3. labor or services – record the cost of the labor or services using the fair value of the services rendered.
Capital stock may be issued 1. at par
2. at a premium – at an amount more than the par value
Capital stock cannot be issued at a discount or an amount less than par.
When the value assigned to the asset received is overstated, the stock issued is called
watered stock. The overstatement is done to comply with the requirement of the law
International Accounting Standards (IAS) Terms
Below is a table showing the elements of a shareholders’ equity with their equivalent IAS terms:
Old Terms New IAS Terms
Capital stock Share capital
Subscribed capital stock Subscribed share capital
Common stock Ordinary share capital
Preferred stock Preference share capital
Additional paid in capital Share premium
Retained earnings (deficit) Accumulated profits (losses) Retained earnings appropriated Appropriation reserve
Revaluation surplus Revaluation reserve
Treasury stock Treasury share
Stock dividends Bonus issue
Accounting Methods to Record Capital Stock Transactions
1. Memo entry method 2. Journal entry method
Pro-forma Entries – Par Value Share Subscribed or Sold at Par
Transaction Memo Entry Method Journal Entry Method
Authorization Authorized to issue _____ shares with a par value of P___.
Unissued share capital xxx Authorized share capital xxx Sale Cash xxx
Share capital xxx Cash xxx Unissued share capital xxx Subscription Subscriptions receivable xxx
Subscribed share capital xxx Subscriptions receivable xxx Subscribed share capital xxx Collection Cash xxx
Subscriptions receivable xxx Cash xxx Subscriptions receivable xxx Issuance of certificate Subscribed share capital xxx
Share capital xxx
Subscribed share capital xxx Unissued share capital xxx
Classroom Exercise
Journalize the following transactions under the memo entry method and the journal entry method.
1. ABC Corporation is authorized to issue 4,000 shares with a par value of P100. 2. Received subscription for 1,000 shares at par.
3. Collected the subscription in full.
4. Issued stock certificate for 1,000 shares. 5. Received subscription for 2,000 shares at par.
6. Received partial payment on the above subscription, P150,000. 7. Sold 500 shares at par.
Pro-forma Entries – Par Value Share Subscribed or Sold at a Premium
Transaction Memo Entry Method Journal Entry Method
Authorization Authorized to issue _____ shares with a
par value of P___. Unissued share capital xxx Authorized share capital xxx Sale Cash xxx
Share capital xxx Share premium xxx
Cash xxx Unissued share capital xxx Share premium xxx Subscription Subscriptions receivable xxx
Subscribed share capital xxx Share premium xxx
Subscriptions receivable xxx Subscribed share capital xxx Share premium xxx Collection Cash xxx
Subscriptions receivable xxx Cash xxx Subscriptions receivable xxx Issuance of certificate Subscribed share capital xxx
Share capital xxx Subscribed share capital xxx Unissued share capital xxx
Special Notes
1. Under sale and subscription, the debit to subscriptions receivable and cash is computed as follows:
Subscriptions receivable = subscribed shares x subscription price
Cash = sold shares x selling price.
3. Share Capital is always credited at par.
Classroom Exercise
Journalize the following transactions under the memo entry method and the journal entry method.
1. ABC Corporation is authorized to issue 100,000 shares with a par value of P10 per share.
2. Received subscriptions for 1,000 shares at P12 per share. 3. Received partial payment on the subscription, P5,000. 4. Sold 2,000 shares at P 11 per share.
5. Collected the subscription in full.
Accounting for Two Classes of Shares
1. The two classes of shares are common or ordinary shares and preferred or preference shares.
2. Ordinary shares entitle the holder to the four basic rights of a shareholder. 3. Preference share is generally issued with par value and with a dividend rate.
4. Voting right is frequently given exclusively to ordinary shareholders. 5. The pro-forma entries to record capital stock transactions for two classes of shares are the same. However, the account titles must be labeled as to whether it is ordinary or preference.
6. The following account titles may be used.
Ordinary Preference
Subscriptions receivable - ordinary Subscriptions receivable – preference Subscribed share capital - ordinary Subscribed share capital – preference Share premium- ordinary Share premium- preference
Accounting for No Par Shares
1. No par shares do not have a definite or fixed value.
2. No par shares are recorded using the memo entry method only.
3. The entire consideration received by the corporation for its no par value shares shall be treated as capital and shall not be liable for distribution as dividends.
4. Preference shares which are preferred as to assets can be issued only with par value.
5. Banks, trust companies, public utilities, buildings and loan associations, insurance companies cannot issue no-par shares.
6. No par value shares may not be issued at an amount less than P5 per share.
7. While no par value shares do not carry a nominal value in the certificate, a selling price may be assigned. This value is called stated value. Stated value should not be less than P5 per share.
Pro-forma Entries: No Par Value Shares (Memo Entry Method only)
Transaction No Stated Value With Stated Value
Authorization Authorized to issue _____ shares, no par.
Authorized to issue _____ shares, no par with a stated value of P___. Sale Cash xxx
Share capital, no par xxx
Cash xxx Share capital , no par xxx Share premium xxx Subscription Subscriptions receivable xxx
Subscribed share capital xxx Subscriptions receivable xxx Subscribed share capital xxx Share premium xxx Collection Cash xxx
Subscriptions receivable xxx Cash xxx Subscriptions receivable xxx Issuance of certificate Subscribed share capital xxx Subscribed share capital xxx
Share capital, no par xxx Share capital, no par xxx
Classroom Exercise
Journalize the following transactions assuming (a) there is no stated value; (b) there is a stated value of P10.
1. ABC Corporation was authorized to issue 100,000 shares, no par. 2. Received subscriptions for 70,000 shares at P12 per share.
3. Received full collection on the above subscription. 4. Issued stock certificates.
5. Sold for cash 10,000 shares at P11 per share.
Legal Capital
Legal capital is that portion of the paid in capital arising from issuance of capital stock which cannot be returned to the stockholders in any form during the lifetime of the corporation.
The amount of legal capital is determined as follows:
In the case of par value stock, legal capital is the aggregate par value of the shares issued and subscribed.
In the case of no par value stock, legal capital is the total consideration received from shareholders including the excess over the stated value.
Contributed Capital
Contributed capital represents the amount invested or contributed by owners. It is also known as paid in capital. This amount is composed of
Share capital
Represents the contribution equal to the par value or stated value of the stock purchased by the shareholders or
The total contribution by the shareholders in case of no par share, no stated value share capital
Share premium
Represents contribution in excess of the par or stated value of the share capital
Arises also from various share capital transactions and other transactions with shareholders
Stock dividends Donated shares
CORPORATION ACCOUNTING
Delinquent Subscription
When a subscriber fails to pay his subscription on the call date, the corporation sends several notices to remind him of his obligation. If these notices are ignored by the subscriber, his subscription is declared delinquent. The delinquent subscription is offered for sale in a public auction.
1. The sale of the delinquent subscription is issued to the highest bidder.
2. The highest bidder is the one who is willing to pay the unpaid balance of the subscription plus accrued interest plus all expenses related to the sale and is willing to receive the smallest number of shares.
3. Once the subscription is fully paid, all subscribed shares are issued. Shares are first given to the highest bidder. The excess shares are given to the defaulting subscriber.
4. If there is no bidder, all of the delinquent shares will be issued in the name of the corporation. Such shares are considered treasury shares. The defaulting
subscriber does not get any share of stock.
Pro-forma Entries – Short Method
Subscription Subscriptions receivable xxx
Subscribed share capital xxx
Partial collection Cash xxx
Subscriptions receivable xxx
Subscriber defaults No entry and corporation
declares the subscription as delinquent
Costs incurred Receivable from highest bidder xxx
in connection Cash xxx
with delinquency sale
Highest bidder Cash xxx
pays Receivable from highest bidder xxx
Subscriptions receivable xxx
Stock certificates Subscribed share capital xxx
are issued Share capital xxx
OR
If there is no Treasury shares xxx
bidder Receivable from highest bidder xxx
Subscriptions receivable xxx
Subscribed share capital xxx
Share capital xxx
Classroom Exercise
Journalize the following transactions:
1. Mr. A subscribed 1,000 shares of X Corporation common shares with a par value of P10.
2. Mr. A paid P6,000 cash as partial payment.
3. The corporation declared the above subscription as delinquent. 4. Incurred advertising costs of P300.
5. Bidders in the public auction were as follows: Mr. R – 450 shares
Mr. S – 455 shares Mr. T – 445 shares
The highest bidder paid the balance of the subscription plus advertising costs. 6. Stock certificates were issued.
CORPORATION ACCOUNTING
Incorporating a Partnership
A partnership may incorporate to enjoy the advantages of a corporation. It is good accounting practice that a new set of books is used by the new corporation.
Accounting Procedures
Books of the Partnership Books of the Corporation
1. Finish the accounting cycle. 1. Record authorized capital stock. 2. Revalue the assets and liabilities
using the Capital Adjustment account.
2. Record the subscription of incorporators.
3. Close the balance of the Capital Adjustment account to the partners’ capital accounts in accordance with their P&L ratio.
3. Record the transfer of the assets and liabilities of the partnership to the corporation. This serves as the payment of the subscription of the partners who became incorporators.
Accounts receivable is transferred at gross amount. Depreciable assets are
transferred at carrying amount. 4. Close the accounts of the
partnership except the capital accounts.
4. Record the issuance of shares to incorporators.
5. Record the receipt of shares. 6. Record distribution of shares.
Pro-forma Entries: Books of the Partnership
Increase in value Asset xxx
of an asset Capital Adjustment xxx
without a contra-asset account
Decrease in value Capital Adjustment xxx
of an asset Asset xxx
without a contra asset account
Increase in value Contra- asset xxx
of an asset with a contra Capital Adjustment xxx
Decrease in value Capital Adjustment xxx
of an asset with a contra Contra- asset xxx
asset account
Increase in value Capital Adjustment xxx
of a liability Liability xxx
Decrease in value Liability xxx
of a liability Capital Adjustment xxx
Note: These adjustments are similar to the year-end adjusting entries. Only, replace the nominal accounts with the, Capital
Adjustment account.
Close the Capital Capital Adjustment xxx
Adjustment A, Capital xxx account B. Capital xxx OR A, Capital xxx B, Capital xxx Capital Adjustment xxx
Note: The capital adjustment account is closed to the partners’ capital account using profit and loss ratio.
Close the accounts of the Allowance for bad debts xxx
partnership Accumulated depreciation xxx
Liabilities xxx
Receivable from ____Corporation xxx
Assets xxx
Receipt of shares of the Shares of ____ Corporation xxx
new corporation Receivable from ___ Corp. xxx
Record distribution of A, Capital xxx
shares and close B, Capital xxx
partners’ capital accounts. Shares of ____ Corp. xxx Note: The debits to the partners’
capital accounts represent their final capital balances.
Pro-forma Entries: Books of the New Corporation
Authorization Authorized to issue _____ shares with a par value of P ___.
Subscription Subscriptions receivable xxx
Subscribed share capital xxx
Transfer of partnership Assets xxx
assets and liabilities Liabilities xxx
Allowance for bad debts xxx
Subscriptions receivable xxx
Issuance of stock Subscribed share capital xxx
certificates Share capital xxx
Classroom Exercise
The trial balance of AB Partnership as of December 31, 200x is shown below:
AB Partnership Trial Balance December 31, 200x Debit Credit Cash P20,000 Accounts receivable 70,000
Allowance for bad debts P10,000
Merchandise inventory 190,000
Store equipment 40,000
Acc. depreciation – store equipment 20,000
Accounts payable 40,000
A, Capital (40%) 100,000
B, Capital (60%) 150,000
The following adjustments are agreed upon: 1. Accounts receivable is 80% collectible.
2. Merchandise inventory should be valued at P200,000. 3. Store equipment should be ¾ depreciated.
Other information:
1. AB Partnership decides to incorporate as ABC Corporation with authorized shares of 50,000 at P100 par value..
2. Partners A and B subscribes 2,460 shares at P100 par.
3. Mr. C subscribes 5,000 shares at par and makes a 25% down payment.
4. Mr. D exchanges a piece of land with a fair value of P304,000 for 3,040 shares. 5. Mr. E subscribes 2,000 shares at par and makes a 30% down payment.
