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PARTNERSHIP INTRODUCTION
Partnerships : 2000 BC
Corporations: Industrial Revolution (1800's)
Partnership Definition:
Art 1767: By the contract of partnership 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.
1 It is a contract
2 Two or more persons (Corporation: 5 - 15)
3 Contribute money, property, or industry
Partner must have legal capacity (i.e. 18 years old)
4 Intention of dividing the profits among themselves
Should obtain profits through legal means to be recognized by the State
If illegal, the profits are confiscated by the State
Two or more persons may also form a partnership for the exercise of a profession.
Example law firms, accounting firms, etc.
Elements of a Partnership
1 Articles of partnership
2 Contract
3 Legal capacity
4 Legal means
5 Profits
Art 1768 The partnership has a judicial personality separate and distinct from that of each of the partners, even in cas
of failure to comply with the requirements of Article 1772, first paragraph. (n)
Characteristics of a Partnership
1 Co-ownership:
They cannot exclude anyone
2 Judicial personality
* It is an accounting entity with juridical personality
* We identify partnerships in the capacity of the owners
3 Mutual Agency
The act of one partner binds the partnership
4 Unlimited liability
Creditors can go the personal assets of the partners
5 Limited life
Partnership is dissolved once there is a change in the owners
1 Continuity
P Limited life
C Unlimited life (50 years - can be extended)
2 Formality
P Contract only; doesn't need a written contract; can be oral: binding if written only
C Heavily regulated
3 Liability
P Unlimited liability
C Limited liability (up to their capital contribution)
4 Management
P The partners are usually the managers
C The CEO must be a member of the BOD (i.e. must have a stock in the corporation; toke
5 Ability to attract capital
P
C More options to attract capital (e.g. stock market, banks)
1 As to object
Universal
As to all present property: you co-own everything (e.g. conjugal property)
For all profits: any income that they obtain needs to be shared among themselves
Particular - only for a single undertaking
2 As to liability
* In taxation, partnerships in the Philippines are taxed like a corporation (except for partnership for professio
* If the income is transferred out of the partner, the income is taxed (10%) = just like dividends)
Formation
1 Oral
2 Written need to contain name, provision, liability, rights and duties
by default, it is still okay without these provision since there are defaults in law
bute money, property, or
ng themselves
cy of the business
aults in law
January 19, 2018
Therefore:
1 FV
2 MV
3 AV
4 BV
Types of Partnership
1 New - starts from scratch
2 Conversion - from sole proprietorship to partnership
3 Dissolution - not necessarily to become "inexistent"; the composition of the partnership is change
Cash
AR
Inv
PPE
NP
Kate, Capital
Shiella, Capital
Camille, Capital
** Record at FV
n of the partnership is changed
Profit/Loss Sharing
Article 1797
1 What is written on the articles or agreed upon by the partners must be followed
2 Only profit sharing is given, we follow the same profit sharing scheme to distribute losses
3 No given at all, we will use the capital of partners (i.e. initial capital contribution)
* When a new partner is admitted, or a partner retires from the partnership (i.e. dissolution), it is not initial capital an
Example:
Camille withdraws from the partnership, and only Kate and Shiella remain as partners. At the time of withdrawal:
K S C TOTAL
Ratio 2 3 1
0.3333333 0.5 0.16666667
NI Dist 100000 150000 50000 300000
Case 2
K S C TOTAL
Ratio 2 3 1
0.3333333 0.5 0.16666667
Net Income 300000
OCC 300000 500000 200000
Interest 27000 45000 18000 90000
210000
P&L SS 70000 105000 35000 210000
NI Dist 97000 150000 53000 0
Case 3
Kate Shiella Camille
225000 300000 500000 200000
100000 25000 35000 100000
325000 325000 535000 300000
Case 1
K S C
NI 300000
Salaries 80000 50000 50000 180000
Interest 27000 45000 18000 90000
30000
Bonus 45000 45000
Remainder -5000 -5000 -5000 -15000
147000 90000 63000
Case 2
K S C
NI 300000
Salaries 80000 50000 50000 180000
Interest 27000 45000 18000 90000
30000
Bonus 39130.435 39130.435 B = 15%(NI-B)
Remainder -3043.478 -3043.4783 -3043.4783 -9130.435 B=45000-0.15B
NI Dist 143087 91956.522 64956.5217 39130.435
QUESTION:
What if Bonus is based on NI after salaries and interests but after subtracting it, the balance is already negative
Case 3
K S C
NL -300000
Salaries 80000 50000 50000 180000
Interest 27000 45000 18000 90000
Remainder -190000 -190000 -190000 -570000
-83000 -95000 -122000
* by default, this is a deduction from capital unless the capital can't absorb the loss.
* if the latter is the case, the partner must pay additional capital; if she's insolvent, the other p
300000 NI overstatement
Case 1 K S C TOTAL
Ratio 2 3 1
0.3333333 0.5 0.16666667
Net Income 150000 225000 75000 450000
2009, should be 50000 75000 25000 150000
OS 100000 150000 50000
Case 2
K S C
K, Cap 126087.0
S, Cap 86,956.52
C, Cap 86,956.52
A/D 300000
e time of withdrawal:
B = 15%(NI-B)
B=45000-0.15B
is already negative
DISSOLUTION
1 Admission
- requires unanimous consent from all the existing partners (i.e. fiduciary relationship)
- mutual agency: actions of any partner bind the other partners
Ways of Admission
Case 3 100000 * this is the perceived value of the partnership from Kris' POV
70000 * book value of the partnership
30000 * there might be goodwill or revaluation
Cash 100000
J, Capital 100000
A Revaluation Method
- J thinks that the 300000 old capital is undervalued, so he is willing to invest more tha
Land 30000
H, Capital 18000
I, Capital 12000
330000
110000
440000 110000 * now equal with what he paid
Cash 110000
J, Capital 110000
B Goodwill
- same computation as (A)
Goodwill 30000
H, Capital 18000
I, Capital 12000
Cash 110000
J, Capital 110000
Cash 110000
J, Capital 102500
H, Capital 4500
I, Capital 3000
A Revaluation Method
320000
80000
240000 FV before admission from partners' POV
H, Capital 36000
I, Capital 24000
Inventory 60000
300000
60000
240000
80000
320000
Cash 80000
J, Capital 80000
B Goodwill
- J will bring goodwill into the partnership
400000
300000
100000 * should be contributed by J
80000 * contributed by J
20000
Cash 80000
Goodwill 20000
J, Capital 100000
Cash 80000
H, Capital 9000 * use original ratios
I, Capital 6000 * use original ratios
J, Capital 95000
2 Withdrawal or Retirement
H 200000 50%
I 100000 30%
J 80000 20%
H, Capital 200000
Cash 200000
H, Capital 200000
H, Settlement 210000
-10000
A Revaluation
H, Capital 200000
H, Settlement 210000
-10000 * assets that are undervalued
H, Capital 210000
Cash 210000
B Goodwill
- since we view the partnership using the personalities of the partners (i.e. proprietary
H, Capital 200000
Goodwill 10000
Cash 210000
OR
Goodwill 20000
* to bring the capital balance of H
H, Capital 10000
I, Capital 6000
J, Capital 4000
H, Capital 210000
Cash 210000
H, Capital 200000
I, Capital 6000
J, Capital 4000
Cash 210000
A Revaluation Method
H, Settlement 180000
H, Capital 200000
20000 * due to overvaluation
H, Capital 20000
I, Capital 12000
J, Capital 8000
Inventory 40000
H, Capital 180000
Cash 180000
H, Capital 200000
I, Capital 12000
J, Capital 8000
Cash 180000
C Goodwill
H, Capital 200000
Cash 180000
NGW 20000
NGW 20000
I, Capital 12000
J, Capital 8000
H, Capital 20000
I, Capital 12000
J, Capital 8000
NGW 40000
NGW 40000
H, Capital 20000
I, Capital 12000
J, Capital 8000
* Observe that we just reversed the entries.
* Therefore, no goodwill method if settlement is less than interest.
ppened between two individuals
ppened between two individuals
* Goodwill
- IFRS 3: only recognized in the consolidated F/S when there is an excess of the:
* use the new ratios (i.e. ratios withouth the withdrawing partner)
* use the new ratios (i.e. ratios withouth the withdrawing partner)
* recognized upon his withdrawal
INCORPORATION
- the conversion of a partnership into a corporation
Partnership Books
Winding up of Partnership
if FV of stocks NOT given
4 H, Capital 132000
I, Capital 93000 No misbalance; no GW no
Investment in Corporation 225000
50000
250000 General Rule:
300000 NCA - FV of assets
BC - FV of stocks
95000
What is BC?
Valued at vs Recorded at
50000
350000
Liabilities 125000
C/S 150000
APIC 75000
50000
300000
Liabs 125000
C/S 150000
APIC 60000
Gain on BP 15000
* closed out to retained earnings
January 26, 2018
LIQUIDATION
1 Lumpsum liquidation
- all the noncash assets are sold at once
2 Installment
- all the noncash assets are sold one by one
- how we distribute or payoff the liabilites given the amount of cash available is the main concern
- noncash assets cannot be sold as one
Partnership is Insolvent
1 Creditors not partners
2 Credtor partners
Partners Insolvent
1 Personal creditors * concerning the assets of the partner
2 Partner creditors
3 Contribute - debit (deficit)
Lumpsum Liquidation
Case 1
50% 30% 20%
Cash NCA OL Py to J J, Cap V, Cap S, Cap
50,000 700,000 350,000 60,000 150,000 100,000 90,000
Sale of NCA 500,000 (700,000) (100,000) (60,000) (40,000)
550,000 - 350,000 60,000 50,000 40,000 50,000
Other liabs (350,000) (350,000)
200,000 - - 60,000 50,000 40,000 50,000
Pay to J (60,000) (60,000)
140,000 - - - 50,000 40,000 50,000
Ret of Cap (140,000) (50,000) (40,000) (50,000)
- - - - - - -
Case 2
50% 30% 20%
Cash NCA OL Py to J J, Cap V, Cap S, Cap
50,000 700,000 350,000 60,000 150,000 100,000 90,000
Sale of NCA 280,000 (700,000) (210,000) (126,000) (84,000)
330,000 - 350,000 60,000 (60,000) (26,000) 6,000
* Additional Capital 86,000 60,000 26,000
416,000 - 350,000 60,000 - - 6,000
Other liabs (350,000) (350,000)
66,000 - - 60,000 - - 6,000
Pay to J (60,000) (60,000)
6,000 - - - - - 6,000
Ret of Cap (6,000) (6,000)
- - - - - - -
Case 3 Partnership is insolvent. One partner is insolvent
INSOLVENT
50% 30% 20%
Cash NCA OL Py to J J, Cap V, Cap S, Cap
50,000 700,000 350,000 60,000 150,000 100,000 90,000
Sale of NCA 250,000 (700,000) (225,000) (135,000) (90,000)
300,000 - 350,000 60,000 (75,000) (35,000) -
Absorption (25,000) 35,000 (10,000)
300,000 - 350,000 60,000 (100,000) - (10,000)
Additional Capital 110,000 100,000 10,000
410,000 - 350,000 60,000 - - -
Other liabs (350,000) (350,000)
60,000 - - 60,000 - - -
Pay to J (60,000) (60,000)
- - - - - - -
Ret of Cap - -
- - - - - - -
INSOLVENT
50% 30% 20%
Cash NCA OL Py to J J, Cap V, Cap S, Cap
50,000 700,000 350,000 60,000 150,000 100,000 90,000
Sale of NCA 250,000 (700,000) (225,000) (135,000) (90,000)
300,000 - 350,000 60,000 (75,000) (35,000) -
Absorption 75,000 (45,000) (30,000)
300,000 - 350,000 60,000 - (80,000) (30,000)
Additional Capital 95,000 - 80,000 15,000
395,000 - 350,000 60,000 - - (15,000)
Additional Capital (15,000) 15,000
Other liabs (350,000) (350,000)
45,000 - - 60,000 - (15,000) -
Pay to J (60,000) (60,000)
(15,000) - - - - (15,000) -
Ret of Cap - -
(15,000) - - - - (15,000) -
100000 15000
50% 30% 20%
Cash NCA OL Py to J J, Cap V, Cap S, Cap
50,000 700,000 350,000 60,000 150,000 100,000 90,000
Sale of NCA 250,000 (700,000) (225,000) (135,000) (90,000)
300,000 - 350,000 60,000 (75,000) (35,000) -
Pay to J (60,000) 60,000
300,000 - 350,000 - (15,000) (35,000) -
Absorption 15,000 (9,000) (6,000)
300,000 - 350,000 - - (44,000) (6,000)
Additional Capital 50,000 44,000 6,000
350,000 - 350,000 - - - -
Other Liabs (350,000) (350,000)
- - - - - - -
Installment Liquidation
Assumption: We lump already the interst of the partners into one single amount (payables to)
We want to avoid the scenario we encountered in the previous case
Biggest issue: If the P has a partnership balance, who among the partners will be paid first?
* 2 all partners4 are insolvent
3
Cash NCA Other Liabs Cyn Daph Ei * Assum
Balance 10,000 490,000 165,000 100,000 160,000 75,000
Other Liabs (10,000) (10,000)
- 490,000 155,000 100,000 160,000 75,000
July 31 63,000 (90,000) (6,000) (12,000) (9,000)
63,000 400,000 155,000 94,000 148,000 66,000
Other Liabs (63,000) (63,000)
- 400,000 92,000 94,000 148,000 66,000
August 4 124,000 (205,000) (18,000) (36,000) (27,000)
124,000 195,000 92,000 76,000 112,000 39,000
Other Liabs (92,000) (92,000)
32,000 195,000 - 76,000 112,000 39,000
C&D (32,000) (24,000) (8,000)
- 195,000 - 52,000 104,000 39,000
Sept 5 60,000 (105,000) (10,000) (20,000) (15,000)
60,000 90,000 - 42,000 84,000 24,000
(60,000) (20,000) (40,000)
- 90,000 - 22,000 44,000 24,000
Oct 1 45,000 (90,000) (10,000) (20,000) (15,000)
45,000 - - 12,000 24,000 9,000
(45,000) (12,000) (24,000) (9,000)
CDE - - - - - -
* Sometimes, the litigator may not follow the cash distribution plan
2 4 3
Cash NCA Other Liabs Cyn Daph Ei
Balance 10,000 490,000 165,000 100,000 160,000 75,000
Other Liabs (10,000) (10,000)
- 490,000 155,000 100,000 160,000 75,000
July 31 63,000 (90,000) (6,000) (12,000) (9,000)
63,000 400,000 155,000 94,000 148,000 66,000
Other Liabs (63,000) (63,000)
- 400,000 92,000 94,000 148,000 66,000
August 4 124,000 (205,000) (18,000) (36,000) (27,000)
124,000 195,000 92,000 76,000 112,000 39,000
Other Liabs (92,000) (92,000)
32,000 195,000 - 76,000 112,000 39,000
C&D (32,000) (30,000) (2,000)
- 195,000 - 46,000 110,000 39,000
Sept 5 60,000 (105,000) (10,000) (20,000) (15,000)
60,000 90,000 - 36,000 90,000 24,000
(60,000) (14,000) (46,000)
- 90,000 - 22,000 44,000 24,000
Oct 1 45,000 (90,000) (10,000) (20,000) (15,000)
45,000 - - 12,000 24,000 9,000
CDE (45,000) (12,000) (24,000) (9,000)
- - - - - -
main concern
* we can only offset if the other liabilities are already paid off
* Creditors of V can run after the latter's interest in the partnership as long as other creditors and partner creditors are already
C
First 18000 Sept. 5 60000 18000
Next 60000 42000 14000
14000
Oct. 1 45000 18000 6000
Excess 27000 27000 6000
12000
tner creditors are already paid
Order
1
2
3
D E
2/3
4/9 3/9
D E
100%
2/3
4/9 3/9
D E
18000
28000
46000
12000
12000 9000
24000 9000
1
20000 90000
20000 Aug 4 112000 C 4000 Aug 4 124000 C
20000 D 8000 D
C 20000 Sept 5 60000 E
D 40000
C 6000 Oct 1 18000
D 12000
90000
27000
6000 Oct 1 45000
12000
9000
27000
February 2, 2018
QUIZ 2
PROBLEM 2
30%
* in correcting
30% the error,
40% you still use th
2007 2008 2007 C D E
44000 42000 NI
2007 A -5000 B 4400
B 3000 -3000
C 0 0 Rem 13200 13200 17600
D -2000 2000 NI Dist 17600 13200 17600
E 8400 -8400
2008 A 4000 2008 35% 35% 30%
B -8600
C -3000 NI
48400 25000 B 2272.73
Problem 3
BV FV
523000 437000
-323000 -329000
200000 108000
92000
1 21600
50%
10800
2 108000
60.0%
180000
40%
72000
3 108000 S 43200
60000 2880
168000 40320
40%
67200
60000
7200
4 50000 43200
21600 14200
28400 29000
5 50000
43200
6800
0.666667
10200
43200
33000
C D E
25000
-2272.73
22727.27
XXX
XXX
XXX
XXX
COMPREHENSIVE
Exam: Middle of the year
Limit is salary
Weighted Average
08/01/10
Z Inv 300000
L Cash 250000
Land 1250000
1800000
2010
Z L
NI 100000
I 15000 22500 -37500 * beginning capital for the year (not from the original formation of the par
S 40000 -40000 * if silent, annual
22500
Rem 9000 13500 -22500
64000 36000 0
Z L
NI 150000 * if not distributed evenly, check if there's any way which you can trace (e.g
Interest 18975 27275 -46250
103750
S 48000 -48000
55750
R 22300 33450 -55750
89275 60725 0
L 879275
Z 1213225
S 697500
2790000
L Z S #4
879275 1213225 697500
NI 53894.375 55605.625 40500
WD 12000 12000 12000 -36000
921169.38 1256831 726000
e original formation of the partnership); use the latter for purposes of allocating profits
y way which you can trace (e.g. 300 000 - 2011; Zalora and Lazada Capital before partnership is dissolved)
ginning capital
February 9, 2018
If periodic:
5 AR 286875
Sales
COGS 127500
Inventory
6 Cash 100000
AR
8 AP 10000 HO 10000
IIB 10000 Cash
B IIB HO
283000 175000
1 75000
2 -25000
3 -10000
4 -23000
5 13000
6 8000
248000 248000
60000
210000
* normally, the receiving party pays the delivery expense (e.g. FOB shipping point)
* in this case, FOB destination
210000
* original cost plus markup (this is to maintain the cost relationship of the shipment (i.e. 150%))
* this becomes part of COGS at the end of the period; technically hindi dapat COGS sa combined since it didn't come from a 'th
217000
45000
* reduces the HO account
30000 * a yield cost (contra-account)
2000 * hindi siya expense ng branch since the defect is the fault of the HO
* return… will be 'inventory' under perpetual method
Perpetual
127500
100000
55000
10000 * if the transaction is between the HO and B, the total assets will not decrease
18000
HO B
IIB 25000
Cash 25000
Opex XXX
HO
ed since it didn't come from a 'third party' --> operating expense (since it is an avoidable cost)
XXX
XXX
23000
13000
XXX
Income Statement
HO SB E
Sales -675000
COGS 300000
OPEX 164000
Statement of RE
Cash 125000
AR 300000
Inv
Inv in SB
Allow for overval
SB
PPE and F&F
Ac Dep
Total Assets
TAP
HO
CS
RE
Total LSHE
* 1 HO 248000 HO
IIB 248000
* 3 AOI 5000
Inv, beg 5000
* this came from the BI; we have to eliminate
248000
IIB 248000
65000
COGS 65000
17500
Inv, end - BS 17500
January 31, 2018
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