PARTNERSHIP FORMATION Flashcards
A contract whereby 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.
Partnership
Characteristics of a Partnership (SECMULI)
- Separate legal personality
- Ease of formation
- Co-ownership of contributed assets
- Mutual Agency, Mutual participation in the profits
- Unlimited liability
- Limited life
- Income Tax
Stages in the Life if the Partnership
- Formation
- Operation
- Dissolution
- Liquidation
The first-time creation of the partnership
Formation
This is the reason why a partnership is formed, to operate and earned “profit”
Operation
Changes in the partnership agreement or relations among the partners
Dissolution
Realization of the assets of the partnership and settlement of partnership liabilities
Liquidation
Primary formation issues
- Valuation of contribution
- Re-alignment of contribution with partnership agreement
Assets contributed by the partners to the partnership should be valued, in what order of priority?
a. Agreed values (Art. 1787 Civil Code)
b. Fair Values (Art. 1787 Civil Code & PFRS 2)
Liabilities attached to assets contributed by the partners are recognized only in the partnership books the extent that they are assumed by the partnership. When assumed by the partnership, contributed liabilities operate to decrease the contributed capital of the contributing partner; otherwise the liabilities remain to be personal labilities of the contributing partner. Liabilities assumed by the partner is valued in the following order of priority:
a. Agreed Values (Art. 1787 Civil Code)
b. Fair Value or Present value (Art. 1787 Civil Code & PFRS 2)
This represents the net assets invested by a partner
Capital contributions
This represents the agreed capital for a partner
Capital credit
An accounting issue will arise when this two do not equal
Capital contributions and capital credit
Difference is accounted by either
- Bonus method
- Goodwill method
- Revaluation method
- Additional investment
- Withdrawal
A transfer of capital from one partner to another
Bonus method
An increase in the partner’s contributed contributed capital as a result of recording an identifiable. However this method is not allowed under PFRS
Goodwill method
An increase in the partner’s contributed capital as a result of an adjustment to an identifiable
Revaluation method
An increase in a partner’s contributed capital as a result of additional investment
Additional investment
A decrease in a partner’s contributed capital because of withdrawal
Withdrawal
If the partner’s agreed capital is known, the partners will contribute an amount that will be the same as their agreed capital
Net Investment Method
S1: Selling price of a property contributed in a partnership that was subsequently sold hours, days, or weeks after formation is an indication of its fair value.
S2: Valuation of inventories under PAS 2 is at LOCON / Lower of Cost or NRV
a. True, True
b. True, False
c. False, False
d. False, True
a. True, True
In determining the original capital / agreed capital of the partners, which of the following should be used?
a. Capital interest/ratio
b. P&L interest/ratio
c. Either A or B
d. The higher between the capital and P&L ratio
a. Capital interest/ratio
