Partnership Formation

CHAPTER 17
Introduction

Partnerships are a popular form of business because they are easy to form and they allow
several individuals to combine their talents and skills in a particular business venture. In
addition, partnerships provide a means of obtaining more equity capital than a single
individual can obtain and allow a sharing of risks rapidly growing businesses. Partnerships
are fairly common in the service of professions including law, medicine, and accounting.
Historically, these professions have generally not adopted the corporate form of business
because of their long-standing tradition of close professional association with clients and
the total commitment of the professional business and personal assets to the propriety
of the advice and service to clients

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Partnership Defined

A partnership is an association of two or more persons who contribute money, property, or industry to a common fund
with the intention of dividing the profits among themselves. The term “persons” refers to natural or juridical which
may either be an individual, a corporation, and even other partnerships. Typical example of partnership includes
professional services, such as the practice of law or accountancy, real estate development companies and a variety of
small manufacturing concerns.

Reasons for Forming a Partnership

The basic consideration of prospective owner(s) of a business is the various attributes of the different forms of
business organizations as their basis in selecting the one that they believe best meet their organizational objectives and
personal goals. A form suitable for one set of business objectives may not be appropriate for another. It is possible for
a firm to start as a sole proprietor and, as the business and personal environments change, to move to a partnership
form, and ultimately, to incorporate.

One of the major advantages of a partnership is that it permits the pooling of capital and other resources without the
complexities and formalities of a corporation. A partnership is easier and less costly to establish than a corporation and
is generally not subject to much governmental regulation. In addition, the partners may be able to operate with more
flexibility because they are not subject to the control of a board of directors.

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Types of Partnerships

There are two types of partnerships: (1) general partnerships and (2) limited partnerships:

General Partnerships

General partnerships are those in which each partner is personally liable to the partnership’s creditors if
partnership assets are not sufficient to pay such creditors. Such partners are referred to as general
partners. Chapters 19 to 23 of this book focus on this kind of partnership.

Limited Partnerships

In this kind of partnerships, only one partner needs to be a general partner. The remaining partners can be
limited, which means that their obligations to creditors are limited to their capital contributions. Thus, their
personal properties are not put into risk and they play no role in the partnership management, which is full
responsibility of the general partner

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Features of General Partnerships

General Partnerships have the following unique features:

1. Ease of Formation. The partners merely put their agreement into writing concerning who contributes assets or
services, their role and functions, and how profits and losses are allocated. This written document is called the
partnership agreement. In some cases, partnership may also be created by oral agreement between two or more
persons or maybe implied by their agreement
2. Limited Life. The possibility that the operations of a partnership could not continue after the withdrawal or death
of a partner was considered a major pitfall of this form of business organization
3. Assignment of Partner’s Interest. Assignment of partner’s interest does not automatically dissolve a partnership.
Since a partner’s relationship to the other partners is a personal one, an assignment of a partner’s interest does
not automatically admit the assignee into the partnership. The assignee has no right to participate in managing the
affairs of the partnership, their right are only limited in the allocation of profit and loss and the right to receive
assignor’s interest in the event of dissolution.
4. Unlimited Liability. The term “general partnership” as previously discussed refers to a firm in which all the partners
are responsible for liabilities and have all the authority to act on his behalf. Partnership creditors having difficulty in
collecting from the partnership may request payment from any partner who has personal assets in excess of
personal liabilities.
5. Mutual Agency. Every partner is an agent and has the authority to act for the partnership and to enter into
contracts on its behalf. However, acts beyond the normal scope of business operations such as obtaining loan by a
partner, generally do not bind the partnership unless specific authority has been given to the partner.
6. Separate Legal Personality. Partnership law provides that partnership has a juridical personality separate and
distinct from that of each partner.
7. Sharing Profits and Losses. Profit and losses are shared among the partners in any manner to which they TREYagree 5
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Underlying Equity Theories (Proprietary and Entity Theories)

Equity theories relate to how an entity can be viewed from the accounting and legal point of view. These theories deal
with the question of who the entity is. Partnerships then had affected and influenced by the following theories:
1. Proprietary theory looks at the entity through the eyes of the owner. It views the assets of a business as belonging
to the proprietor. The liabilities of a business are debts of the proprietor. The profits generated there from are
viewed as an increase in the proprietor’s capital. Characteristics of this theory can be demonstrated by the
following:
a. Salaries to partners are considered as distribution of income rather as a determinant of net income (treated as
expenses in computing net income).
b. Unlimited liability of general partners extends beyond the entity to the individual partners.
c. Original partnership is dissolved upon the admission or withdrawal of a partner.

In practice, proprietorships are treated as separate entities, even though, in theory, they are not. It should be
noted, that this type of theory primarily affected most partnerships.

2. Entity theory views the business as a separate and distinct entity possessing its own existence apart from the
individual partners. Profits earned by the partnership are usually viewed as profit to the “entity” with each partner
entitled to a distributive share of the profit. The legal life of firms in this fashion transcends the death or admission
of a partner. In partnership agreements for instance, the so-called big accounting firms usually provide for the
continued existence of the partnership beyond the death of a partner
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Written Partnership Agreements (Articles of Partnership)

While it is perfectly acceptable to have an oral partnership agreement, it is preferable to commit such
agreement in writing. Lapses in memory and future misunderstandings are usually avoided when
agreements are written. A written agreement is called the articles of partnership and usually provides for
the following:
1. Name of the partnerships;
2. The name, addresses of the partners, classes of partners, stating whether the partners are general or
limited;
3. The effective date of the contract;
4. The purpose/s and principal office of the business;
5. The capital of the partnerships, stating the contribution of individual partners, their description and
agreed values;
6. The rights and duties of each partner;
7. The manner of dividing net income or loss among the partners including salary allowance and interest
on capital;
8. The conditions under which the partners withdraw money or other assets for partnership use;
9. The manner of keeping the book of accounts;
10. The causes of dissolution; and
11. The provision for arbitration in settling disputes.
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Accounting and Financial Reporting Requirements for Partnership
• Most partnerships are small or medium-sized entities, although there are some large partnership
entities.
• Partnership does not issue stock and thus the information needs of a partnership are typically
different those of corporations that have stockholders.
• A partnership has much more flexibility to select specific accounting measurement and recognition
methods and specific financial reporting formats.
• If a partnership wishes to issue general-purpose financial statements for external users such as
credit grantors, vendors, or others, then the partnership should use generally accepted accounting
principles (GAAP) as promulgated by the International Accounting Standards Board (IASB) and
other standard-setting bodies, and the independent auditor can issue an opinion that the
statements are in accordance with GAAP.
• If a partnership has only internal reporting needs, then the accounting and financial reporting
should meet those internal information needs of the partners. In this case, the partnership may use
non-GAAP accounting methods and have financial reports in a format different from those required
under GAAP.
• And other partnerships may use accounting methods that are close to GAAP, with some other
adjustments that fit the information needs of the partners, such as recognizing increases in the fair
value of nonfinancial assets at the time of the admission of a new partner.
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In these cases, if the financial statements are presented to users external to the partnership, such as banks, vendors, or
regulatory bodies, it should be clearly identified on the statements what specific accounting methods were used by the
entity so that the users are informed that the information presented in the financial statements does not conform to
GAAP.

An independent accountant’s opinion on these financials would also have to disclose the specific accounting methods
used or the deviations from GAAP that affected the amounts reported in the financial statements. It is up to the
partners to determine their financial information needs and then the partnership accountant applies the necessary
accounting measurement, recognition, and reporting methods that meet the partners’ financial information needs.

Accounting for Partnership Activities

Accounting for partnership differs from accounting for a sole proprietor or a corporation as far as sharing of profit and
loss and the maintenance of the partner’s ledger accounts. To maintain partnership accounting records, it might be
possible to have one ledger account for each partner, and the usual practice is to maintain three types of accounts.
These partnership accounts consist of:
1. Capital accounts,
2. Drawings or personal accounts, and
3. Accounts for loans to and from partners.

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Capital Accounts

The initial investments by each partner is recorded by debiting the assets contributed, crediting any liabilities assumed by the firm, and crediting the
partner’s capital account at the fair value of the net assets (assets minus liabilities) contributed.

Partner’s equity is increased by additional investments at fair value at the time of investment and any share of net income.

Partner’s equity is decreased by withdrawal of cash or other assets and share of net losses. Withdrawals of large and irregular accounts are ordinarily
charged directly to the withdrawing partner’s capital account. The entry for such a withdrawal is:
A, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxx  
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   xxx
Withdrawal of cash.
Following are the items that affect capital account:
Capital Accounts
Permanent or capital withdrawal Initial/Original Investment
Drawings in excess of a specified amount Additional investment
Withdrawal of large and irregular accounts Share in net income
Share in net losses (this may be credited to drawing accounts)
(this may be debited to drawing accounts)
Closing of a net debit balance in the
partner’s drawing account

At the end of each accounting period, the net income or loss in the partnership’s Income Summary ledger account is transferred to the partners’ capital
accounts in accordance with the partnership contract.

On occasion, a partner’s capital account may have a debit balance, called a deficiency or sometimes called a deficit, which occurs when the capital
accounts debit balance is greater than the credit balance. A deficiency is usually eliminated by additional capital contributions

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Drawings or Personal Accounts versus Capital Withdrawals

Partnership profits are the business rewards of partners, so partners do have take-home pay as do the employees of the partnership
business. So, partners generally make withdrawal of assets from the partnership in anticipation of profits or drawings that are
considered salary allowances. Noncash drawings should be valued at their market values at the date of the withdrawals. A few
partnerships make an exception to the rule of market value for partners’ withdrawals instead record it at cost, thereby not recording a
gain or loss on these drawings.

Active partners commonly withdraw regular amounts of money on a weekly or monthly basis. Such withdrawals are called drawings,
drawing allowances, or sometimes salary allowances and they are usually charged to the partners’ drawing accounts. For example, if B
and C withdraw P10,000 from the partnership each month, they would record the monthly withdrawals as follows:
B, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000  
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10,000
Drawing allowance for January
C, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000  
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10,000
Drawing allowance for January

Drawing accounts provide a record of each partner’s drawings during an accounting period. These drawings may be compared with
drawings allowed in the partnership agreement in order to establish an accounting control over excessive drawings. (Drawings are also
a factor in many profit and loss sharing agreements, refer to Chapter 2.) If B draws P10,000 each month during the year, the drawing
account is closed at the end of he year by the following entry:
B, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000  
B, drawing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   120,000
Close drawing account.

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Following are the items that affect drawing account
Drawing Accounts
Personal withdrawals in anticipation of profits
(temporary withdrawal)
Periodic withdrawal

Regardless of the name given to regular withdrawals by partners, such withdrawals are disinvestments of essentially
the same nature as large and irregular withdrawals. Drawing accounts should be closed to the capital accounts at the
end of each accounting period before a partnership balance sheet is prepared

Considering the above discussions, there are two classes of withdrawal:

1. Capital withdrawal or permanent withdrawal – They directly affect the capital account balance because they
arise mostly from withdrawals of investment be it original or additional.
2. Personal withdrawal or temporary withdrawal or drawing accounts. These are initially recorded in a drawing
account. More often these are drawings from share of profits which will eventually be closed to capital account

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Loan Accounts

Rarely, a partner may receive cash from the partnership with the intention of repaying this amount. Such a transaction may be debited
to the Loans Receivable from Partners ledger account rather than to the partner’s drawing account. Unless all partners agree
otherwise, these loans should bear interest, and the interest income is recognized on the partnership’s income statement.

On the other hand, a partner may make a cash payment to the partnership that is considered a loan rather than an increase in the
partner’s capital account balance. This transaction is recorded by a credit to Loans Payable to Partners and normally is accompanied by
the issuance of a promissory note.

Again, unless all partners agree otherwise, the partnership is obligated to pay interest on the loan to the individual partner. Note that
interest is not required to be paid on capital investments unless the partnership agreement states that capital interest is to be paid . The
partnership records interest on loans as an operating expense. The following entry is made to record a P50,000, 10 percent, one-year
loan from C to the partnership on March 1, 20x6:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000  
Loan Payable to C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   50,000
Sign loan agreement with partner C.

Loan receivable from partners are displayed as assets in the partnership balance sheet and loans payable to partners are displayed as
liabilities. The classification of these items as current or non-current usually depends on the maturity date. Since these accounts are
related-party transaction for which separate footnote disclosure is required, and it must be reported as a separate balance sheet item.

If sizeable unsecured loan has been made by a partnership to a partner and settlement appears doubtful, it is proper to offset the
receivable against the partner’s capital account balance. If this is not done, partnership total assets and total partners’ equity may be
deceptive
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Capital Interest Opposed to Profit Interest

In partnership agreement, the partners must identify that there is a difference between a
partner’s capital interest and his/her interest in profits and losses subsequently reported by the
partnership. A partner’s capital interest is a claim against the net assets of the partnership as
shown by the balance in the partner’s capital accounts; an interest in profit and loss determines
how the partner’s capital interest will increase or decrease as a result of subsequent operations.
For example, partners may agree that an individual partner is to receive a one-fourth capital
interest and a profit and loss interest of one-third

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Accounting for Partnership Formation

Cash Investments

All properties brought into the partnership or acquired by the partnership are partnership
property.

Cash investments in accordance with the current standards being a financial asset are recorded at
fair value most often known as face value as far as cash valuation is concerned, which is the
amount payable on demand or to be collected at the balance sheet date.

Cash denominated in foreign currency is valued at the current exchange rate, while cash in bank
under receivership should be shown at its estimated recoverable amount

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Noncash Investment

As soon as property other than cash is invested in a partnership, noncash property is recorded at the agreed value
which is normally the fair value of the property at the time of investment.

Theoretically, the fair value should be determined by independent valuations, but as far as practicability is concerned,
the fair value of noncash assets is determined by agreement of all partners. The amounts involved should be specified in
the written partnership agreement.

It should be noted that in case there is a conflict between agreed value and fair value, agreed value prevails.

Once services are contributed to the partnership, a memorandum entry is essential if it were no value agreed upon,
otherwise a journal entry would be required.

Liabilities assumed by the partnership should be valued at the present value (fair value) of the remaining cash flows.

The individual partners must agree to the percentage of equity that each will have in the net assets of the partnership.
Generally, the capital balance is determined by the proportionate share of each partner’s capital contribution.

The valuation of net assets achieves equity among partners, an objective repeatedly stressed in partnership
accounting. If these valuation principles (for cash, noncash property and liabilities) were not followed, then, the
subsequent operations do not reflect the true earnings of the partnership, and certain partners are treated inequitably.
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In the final analysis of capital interest, the partnership must clearly distinguish between capital
contributions and loans made to the partnership by individual partners. Loan arrangements should be
evidenced by promissory notes or other legal documents necessary to show that a loan arrangement exists
between the partnership and an individual partner.

A partnership may be formed in numerous ways, to wit:

1. For the first time:
a. Individual versus Individual (two or more persons)
2. Conversion of a sole proprietor to a partnership:
a. Individual versus Sole Proprietor
b. Sole Proprietor versus Sole Proprietor
3. Conversion of an old partnership to a new partnership:
a. Partnership versus Sole Proprietor
b. Partnership versus Partnership
4. Admission of new partners (to be discussed in Chapter 21)

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The guidelines are to be strictly followed regarding formation:

Individual versus Individual

  Books of Partnership
Individual Books
Adjusting entries . . . . . . . . . . . . . . . . . . . . . . N/A  
Closing entries (real accounts). . . . . . . . . . . . N/A  
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .   Yes
Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . . .   Yes
Where: N/A – not applicable because there are no books of individual.

Individual versus Sole Proprietor (Old set of books is used; retain books of Sole Proprietor)
  Books of *Books of Sole
Individual Proprietor
Adjusting entries . . . . . . . . . . . . . . . . . . . . . . . N/A Yes
Closing entries (real accounts). . . . . . . . . . . N/A No
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . ...   Yes**
Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . .   Yes
* Partnership books
** Investments of individual; additional investments or withdrawals of sole proprietor.

Individual versus Sole Proprietor (New set of books is used)

Books of Books of *New Set of
Individual Sole Proprietor Books
Adjusting entries . . . . . . . . . . . . . . . . N/A Yes  
Closing entries (real accounts). . . . N/A Yes  
Investments . . . . . . . . . . . . . . . . . . . .   Yes**
Balance Sheet. . . . . . . . . . . . . . . . .     Yes
* Partnership books
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Sole Proprietor versus Sole Proprietor (Old set of books is used; retain books of one of the Sole Proprietors)
  Books of *Books of
Sole Sole
Proprietor Proprietor
Adjusting entries . . . . . . . . . . . . . . . . . Yes Yes
Closing entries (real accounts). . . . . Yes No
Investments. . . . . . . . . . . . . . . . . . . . .   Yes**
Balance Sheet. . . . . . . . . . . . . . . .   Yes
* Partnership books
** Additional investments or withdrawals of sole proprietors.

Sole Proprietor versus Sole Proprietor (New set of books is used)

  Books of Books of *New Set of
Sole Sole Proprietor Books
Proprietor
Adjusting entries . . . . . . . . . . . . . . Yes Yes  
Closing entries (real accounts). . Yes Yes  
Investments . . . . . . . . . . . . . . . . . .   Yes**
Balance Sheet . . . . . . . . . . . . . . .     Yes
* Partnership books
** Additional investments or withdrawals of sole proprietors

Partnership versus Sole Proprietor (Old set of books is used; retain books of Partnership)
  Books of *Books of
Sole Proprietor Partnership
Adjusting entries . . . . . . . . . . . . . . . . . . . . . . . . . Yes Yes
Closing entries (real accounts). . . . . . . . . . . . . Yes No
Investments. . . . . . . . . . . . . . . . . .. . . . . . . . . . . .   Yes**
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . .   Yes

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Partnership versus Sole Proprietor (New set of books is used)
  Books of Books of *New Set of
Sole Proprietor Partnership Books
Adjusting entries . . . . . . . . . . . . Yes   Yes
Closing entries (real accounts). Yes   Yes
Investments . . . . . . . . . . . . . . . . .   Yes**
Balance Sheet . . . . . . . . . . . . . . .     Yes
* Partnership books
** Additional investments or withdrawals of sole proprietor and partners

Partnership versus Partnership (Old set of books is used; retain books of one of the Partnership)
  Books of *Books of
Partnership Partnership
Adjusting entries . . . . . . . . . . . . . . . . . . . . . . . . . . Yes Yes
Closing entries (real accounts). . . . . . . . . . . . . . Yes No
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   Yes**
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . .   Yes
* Partnership books
** Additional investments or withdrawals of partners

Partnership versus Partnership (New set of books is used)

  Books of Books of *New Set of
Partnership Partnership Books
Adjusting entries . . . . . . . . . . . . . . Yes Yes  
Closing entries (real accounts). . Yes Yes  
Investments . . . . . . . . . . . . . . . . . .   Yes**
Balance Sheet . . . . . . . . . . . . . . .     Yes
* Partnership books
** Additional investments or withdrawals of partners
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Illustration 17-1: Individual vs. Individual
Illustrative examples are presented below to appreciate the different ways of forming a partnership.

The following items are being invested to form AB Partnership:

  Agreed Values
  Investment by F Investment by G
Accounts
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 100.000 P100,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 -
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 200,000
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 400,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 -
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 400,000 P 700,000
Mortgage on building assumed by the partnership . . . . . . . . . . . - _200,000
  P 400,000 P 500,000

Assumption 1: Assuming that F and G agree that each partner is to receive a capital credit equal to the agreed values of the net assets each
partner invested:
 
To record adjustments: nothing to adjust since both of them have no set of books.
To close the books: nothing to close since both of them have no set of books.
 
To record investments - Partnership books
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000  
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000  
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000  
F, capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   400,000
Initial Investment  

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000  
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000  
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000  
Mortgage payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   200,000
G, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   500,000
Initial investment.    
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Assumption 2: Assuming that F and G agree that each partner is to receive an equal capital interest.

To record adjustments: nothing to adjust since both of them have no set of books.

To close the books: nothing to close since both of them have no set of books.

To record investments - Partnership books:

Bonus Approach:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000  
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000  
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000  
F, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   400,000
Initial investment

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000  
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000  
Building. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000  
Mortgage payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   200,000
G, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   500,000
Initial investment

G, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000  
F, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   50,000
Bonus to F

Total agreed capital (P400,000 + P500,000) . . . . . . . . . P 900,000

Multiplied by: Capital interest (equal) . . . . . . . . . . . . . . 1/2
Partner’s individual capital interest . . . . . . . . . . . . . . . . P 450,000
Less: F’s capital interest . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000
Bonus to F . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 50,000 

TREY 22
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Revaluation (Goodwill) Approach:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000  
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000  
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000  
F, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   400,000
Initial investment

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000  
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000  
Building. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000  
Mortgage payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   200,000
G, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   500,000
Initial investment

Assets (or goodwill or intangible asset) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000  

F, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   100,000

Goodwill to F:
Total agreed capital (P500,000 / 1/2) . . . . . . . . . . . . . . . . P1,000,000
Less: Total contributed capital (P400,000 + P500,000). . 900,000
Assets (or goodwill or intangible asset) . . . . . . . . . . P 100,000
 

TREY 23
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Illustration 17-2: Individual vs. Sole Proprietor
Below is the balance sheet of H on November 30, 20x4 before accepting I as his partner to form HI Partnership:

H Partnership
Balance Sheet
November 30, 20x4
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .,   P 100,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 40,000  
Less: Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . 2,500 37,500
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   50,000
Merchandise inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   22,500
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 60,000  
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 55,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P 265,000
Liabilities and Capital
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P 10,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   50,000
H, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   205,000
Total liabilities and capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P 265,000

It is agreed that for purposes of establishing H’s interest the following adjustments shall be made:
a. The accounts receivable is estimated to be 90% realizable.
b. Interest at 8% on notes receivable dated March 1, 20x4 is to be accrued.
c. The merchandise inventory is to be valued at P17,500.
d. The equipment is under-depreciated by P4,000.
e. Prepaid expenses of P2,000 and accrued expenses of P6,000 are to be recognized.

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

TREY 24
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Assumption 1: Old set of books. Assuming the books of H is to be retained by the new partnership; the following
procedures are to be followed:
Individual vs. Sole Proprietor
  Books of *Books of
Individual Sole Proprietor
Adjusting entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N/A Yes
Closing entries (real accounts) . . . . . . . . . . . . . . . . . . . . . . N/A No
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   Yes**
Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   Yes
* Books of H; Partnership books
** Investments of individual; additional investments or withdrawals of sole proprietor

TREY 25
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Books of Sole Proprietor (H):

To record adjustments:
a. H, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500  
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . .   1,500
 Additional provision computed as follows:
  Required allowance: 10% x P40,000 . . . . . P 4,000    
  Less: Previous balance . . . . . . . . . . . . . . . . 2,500    
  Additional provision . . . . . . . . . . . . . . . . . . P 1,500    
b. Interest receivable or accrued interest income . . . . . . . . . . . . 3,000  
H, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3,000
  Interest income for nine months computed as follows:
  P50,000 x 8% x 9/12 = P3,000.      
c. H, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000  
Merchandise inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5,000
  Decline in the value of merchandise.
  P22,500 – P17,500 = P5,000.      
d. H, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000  
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . .   4,000
  Under depreciation.
e. Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000  
H, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2,000
  Expenses paid in advance.
f. H, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000  
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6,000
  Unrecorded expenses.

Note: All adjustment that reflect nominal accounts should be coursed through the capital account, because all nominal accounts are already
closed at the time of formation
TREY 26
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To close the books: nothing to close since the books of H will be retained.

To record investment:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,750  
I, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   96,750
Initial investment computed as follows:    
Unadjusted capital of H . . . . . . . . . . . . . . . . . . . . . . . . . . . . P205,000  
Add (deduct): adjustments:    
a. Doubtful accounts . . . . . . . . . . . . . . . . . . . . . . ( 1,500)  
b. Interest income . . . . . . . . . . . . . . . . . . . . . . . . 3,000)  
c. Decline in the value of merchandise . . . . . . . . ( 5,000)  
d. Under-depreciation . . . . . . . . . . . . . . . . . . . . . . ( 4,000)  
e. Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . 2,000)  
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . ( 6,000)  
Adjusted capital balance of H . . . . . . . . . . . . . . . . . . . . . . P193,500  
Divided by: Capital interest of H . . . . . . . . . . . . . . . . . . . . . . 2/3  
Total agreed capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P290,250  
Multiplied by: Capital interest of I . . . . . . . . . . . . . . . . . . . . 1/3  
Investment of I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 96,750  

Note: The initial investment of H is already recorded in as much as his books are already retained. No further entry is required because there are no
additional investments or withdrawals made by H.

TREY 27
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Assumption 2: New set of books. The following procedures are to be followed:
Individual vs. Sole Proprietor
  Books of Books of *New Set of Books
Individual Sole Proprietor
Adjusting entries . . . . . . . . . . . . . N/A Yes  
Closing entries (real accounts). N/A Yes  
Investments . . . . . . . . . . . . . . . . .   Yes**
Balance Sheet . . . . . . . . . . . . . . .     Yes
* Partnership books
** Investments of individual; additional investments or withdrawals of sole proprietor
Books of Sole Proprietor (H):
To record adjustments:
a. H, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500  
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . .   1,500
  Additional provision computed as follows:
  Required allowance: 10% x P40,000 . . . . . P 4,000    
  Less: Previous balance . . . . . . . . . . . . . . . . 2,500    
  Additional provision . . . . . . . . . . . . . . . . . . P 1,500    
 
b. Interest receivable or accrued interest income . . . . . . . . . . . . 3,000  
H, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3,000
  Interest income for nine months computed as follows:
  P50,000 x 8% x 9/12 = P3,000.      
c. H, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000  
Merchandise inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5,000
  Decline in the value of merchandise.
  P22,500 – P17,500 = P5,000.      
d. H, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000  
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . .   4,000
  Under depreciation.
e. Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000  
H, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2,000
  Expenses paid in advance.
f. H, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000  
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6,000
  Unrecorded expenses.
Note: All adjustment that reflects nominal accounts should be coursed through the capital account, since all nominal accounts are already closed at the time of formation TREY 28
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To close the books:
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . 4,000  
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000  
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000  
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000  
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000  
H, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193,500  
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Merchandise inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,500
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Closing of real accounts.  

TREY 29
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New Set of Books (Partnership Books):

To record investments:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000  
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000  
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000  
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000  
Merchandise inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,500  
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000  
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,000  
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . 4,000
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
H, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193,500
Initial investment.  

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,750
I, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,750
Initial investment.  

Note:
1. No further entries are required because there are no additional investments or withdrawals made by H.
2. It should be recognized that accumulated depreciation is not carried forward to the newly formed partnership in the same fashion with business
combination. The reason is that the net amount will be depreciated based on the remaining or revised life of the depreciable asset.

TREY 30
research
The balance sheet for both cases presented above is as follows:

HI Partnership
Balance Sheet
November 30, 20x4
Assets    
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P 196,750
Accounts receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 40,000  
Less: Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . 4,000 36,000
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   50,000
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3,000
Merchandise Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   17,500
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2,000
Equipment (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 60,000  
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000 51,000
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P 356,250
Liabilities and Capital    
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P 6,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   50,000
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P 66,000
Capital    
H, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P 193,500
I, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   96,750
Total Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P 290,250
Total Liabilities and Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P 356,250

TREY 31
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Illustration 17-3: Sole Proprietor vs. Sole Proprietor
On October 1, 20x4, J and K decided to pool their assets and form a partnership. They allocate profit and loss in the
ratio of 44:56 for them, respectively. The firm is to take over business assets and assume business liabilities, and
capitals are to be based on net assets transferred after the following adjustments:
a. J’s inventory amounting to P10,000 is worthless, while K’s agreed value of inventory
amounted to P125,000.
b. Uncollectible accounts of P6,000 for J is to be provided; a 5% allowance is to be
recognized in the books of K.
c. Accrued rent income of P10,000 on J, and accrued salaries of P8,000 on K should be
recognized on their respective books.
d. Interest at 16% on Notes Receivable dated August 17, 20x4 should be accrued.
e. The office supplies unused amounted to P20,000.
f. The equipment’s agreed value amounted to P50,000.
g. The furniture and fixtures has a fair market value of P90,000.
h. Interest at 12% on Notes Payable dated July 1, 20x4 should be accrued. Use 360 days a
year.
i. K has an unrecorded patent amounting to P40,000 and is to invest the additional cash
necessary to have a 60% interest in the new firm

TREY 32
research
Balance sheets for J and K on October 1, 20x4 before adjustments are given below:
Accounts J K
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 75,000) P 45,000)
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000) 150,000)
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . ( 4,000) ( 5,000)
Notes Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   50,000)
Merchandise Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,000) 120,000)
Office Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,000)  
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000)  
Accumulated depreciation – equipment . . . . . . . . . . . . . . . . ( 45,000)  
Furniture and Fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   120,000)
Accumulated depreciation – furniture and fixtures . . . . . . . . _________ ( 20,000)
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 493,000) P 460,000)
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 133,000) P 100,000)
Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000) -0-)
Capitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310,000) 360,000)
Total Liabilities and Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 493,000) P 460,000)
Assumption 1: Old set of books. Assuming the books of K is to be retained by the new partnership, the following
procedures are to be followed:

Sole Proprietor vs. Sole Proprietor

  (J) Books of (K) *Books of
Sole Proprietor Sole Proprietor
Adjusting entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yes Yes
Closing entries (real accounts) . . . . . . . . . . . . . . . . . . . . Yes No
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   Yes**
Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   Yes
* Partnership books
** Additional investments or withdrawals of sole proprietors.
TREY 33
research
 Books of Sole Proprietor -
To record adjustments

Books of J Books of K
a. J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000   a. Merchandise inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000  
Merchandise Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10,000 K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5,000
Worthless inventory.     Upward revaluation.    
b. J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000   b. K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500  
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . .   6,000 Allowance for doubtful    
Additional provision.     Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500
Additional provision.    
Required allowance:    
5% x P150,000. . . . . . P7,500  
Less: Previous  
Balance. . . . . . . 5,000
Additional Provision. . P2,500
c. Rent receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000  
c. K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000  
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10,000
Salaries payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   8,000
Income earned.    
Unpaid salaries.    
d. Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000  
K, capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1,000
Interest income from August    
17 to October 1.
P50,000 x 16% x 45/360
e. J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000  
Office supplies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   7,000
Expired office supplies.    
f. J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000  
Accumulated depreciation - equipment . . . . . . . . . . . . . . . . . .   5,000
Under-depreciated.    
g. K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000  
Accumulated depreciation-    
furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Under-depreciated.    
h. J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500  
Interest payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1,500
Interest expense from    
July 1 to October 1
P50,000 x 12% x 3/12 i. Patent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000  
K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   40,000
Unrecorded patent.    
Unadjusted capital of J . . . . . . . . P 310,000) Unadjusted capital of K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 360,000)
Add(deduct): adjustments:   Add(deduct): adjustments:  
a. Worthless merchandise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 10,000) a. Merchandise revaluation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000)
b. Doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 6,000) b. Doubtful accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 2,500)
c. Rent income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000) c. Salaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 8,000)
e. Office supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 7,000) d. Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000)
f. Additional depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 5,000) g. Additional depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 10,000)
h. Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 1,500) i. Patent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000)

TREY
Adjusted capital of J . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 290,500) Adjusted capital of K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 385,500)

34
research
 To close the books:

Books of J Books of K

Allowance for doubtful    

accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 Not applicable
Accumulated depreciation—    
equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133,000  
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000  
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500  
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290,500  
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   75,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . .   180,000
Merchandise inventory . . . . . . . . . . . . . . . . . . . . . .   150,000
Office supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   20,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   100,000
Rent receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10,000
Close the books of J.    

Books of K – To record investments

Books of J Books of K
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000  
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000  
Not applicable Merchandise inventory . . . . . . . . . . . . . . . . . . . . . . . . 150,000  
Office supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000  
Equipment (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000  
Rent receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000  
Allowance for doubtful    
accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . .   133,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . .   50,000
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . .   1,500
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   290,500

TREY 35
research
Assumption 2: New set of books. The following procedures are to be followed:

Sole Proprietor vs. Sole Proprietor

  (J) Books of (K) Books of New Set of

Sole Proprietor Sole Proprietor Books
Adjusting entries Yes Yes  
Closing entries (real accounts) Yes Yes  
Investments     Yes**
Balance Sheet     Yes

TREY
research
 Books of Sole Proprietor
To record adjustments:

Books of J Books of K
a. J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000   a. Merchandise inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000  
Merchandise Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10,000 K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5,000
Worthless inventory.     Upward revaluation.    
b. J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000   b. K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500  
Allowance for doubtful     Allowance for doubtful    
Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500
Additional provision.     Additional provision.    
Required allowance:    
5% x P150,000. . . . . . P7,500  
Less: Previous  
Balance. . . . . . . 5,000
Additional Provision. . P2,500
c. Rent receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000   c. K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000  
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10,000 Salaries payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   8,000
Income earned.     Unpaid salaries.    
d. Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000  
K, capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1,000
Interest income from August    
17 to October 1.
P50,000 x 16% x 45/360
e. J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000  
Office supplies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   7,000
Expired office supplies.    

f. J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000  
Accumulated depreciation    
- equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Under-depreciated.     g. K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000  
Accumulated depreciation-    
furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Under-depreciated.    
h. J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500  
Interest payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1,500
Interest expense from    
July 1 to October 1
P50,000 x 12% x 3/12 i. Patent . . . . . . . . . . . . . . . . . . . 40,000  
K, capital . . . . . . . . . . . . . . .   40,000
Unrecorded patent.    

Unadjusted capital of J . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 310,000) Unadjusted capital of K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 360,000)

Add(deduct): adjustments:   Add(deduct): adjustments:  
a. Worthless merchandise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 10,000) a. Merchandise revaluation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000)
b. Doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 6,000) b. Doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 2,500)
c. Rent income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000) c. Salaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 8,000)
e. Office supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 7,000) d. Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000)
f. Additional depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 5,000) g. Additional depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 10,000)
h. Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 1,500) h. Patent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000)
Adjusted capital of J . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 290,500) Adjusted capital of K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TREY P 385,500)

research
 To close the books:

Books of J Books of K
Allowance for doubtful    
Allowance for doubtful     accounts . . . . . . . . . . . . . . . . 7,500
accounts . . . . . . . . . . . . . . . . 10,000 Accumulated depreciation—    
Accumulated depreciation—     furnitures and fixtures. . . . . . . . . . 30,000
equipment . . . . . . . . . . . . . . . 50,000 Accounts payable . . . . . . . . . . 100,000  
Accounts payable . . . . . . . . . . 133,000   Salaries payable . . . . . . . . . . . . . . 8,000  
Notes payable . . . . . . . . . . . . . . 50,000   K, capital . . . . . . . . . . . . . . . . . . . 385,500  
Interest payable . . . . . . . . . . . . 1,500   Cash . . . . . . . . . . . . . . . . . . .   45,000
J, capital . . . . . . . . . . . . . . . . . . . 290,500   Accounts receivable . . . . . .   150,000
Cash . . . . . . . . . . . . . . . . . . .   75,000 Notes receivable . . . . . . . .   50,000
Accounts receivable . . . . . .   180,000 Interest receivable . . . . . . . . .   1,000
Merchandise inventory . . . .   150,000 Merchandise inventory . . . . . . .   125,000
Office supplies . . . . . . . . . . .   20,000 Furniture and fixtures . . . . . . . . .   120,000
Equipment . . . . . . . . . . . . . . .   100,000 Patent. . . . . . . . . . . . . . . . . .   40,000
Rent receivable . . . . . . . . . .   10,000 Close the books of K.    
Close the books of J.    

New Set of Books -

To record investments
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000  
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000  
Merchandise inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000  
Office supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000  
Equipment (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000  
Rent Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000  
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . .   10,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   33,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   50,000
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1,500
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   390,500
Investments of J.    
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000  
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000  
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000  
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000  
Merchandise inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,000  
Furniture and fixtures (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000  
Patent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000  
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . .   7,500
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   100,000

TREY
Salaries payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   8,000
K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   385,500
Investments of K.     38
research
The balance sheet after formation is as follows:
J and K Partnership
Balance Sheet
October 1, 20x4
Assets    
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P 120,000
Accounts receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P330,000  
Less: Allowance for doubtful accounts . . . . . . . . . . . . . . . . . 17,500 312,500
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   50,000
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1,000
Rent receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10,000
Merchandise Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   275,000
Office supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   20,000
Equipment (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   50,000
Furniture and fixtures (net) . . . . . . . . . . . . . . . . . . . . . . . . . . .   90,000
Patent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   40,000
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P 968,500
     
Liabilities and Capital    
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    
Salaries payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P 8,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   133,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   50,000
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1,500
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P 192,500
Capital    
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P 390,500
K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   385,500
Total Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P 776,000
Total Liabilities and Capital . . . . . . . . . . . . . . . . . . . . . . . . . .   P 968,500
  TREY
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