Financial Accounting > COURSE NOTES > Advanced Financial Accounting and Reporting (AFAR) | PINNACLE CPA REVIEW SCHOOL - Notes, Study Guide (All)

Advanced Financial Accounting and Reporting (AFAR) | PINNACLE CPA REVIEW SCHOOL - Notes, Study Guide plus Q&A

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Advanced Financial Accounting and Reporting (AFAR) | PINNACLE CPA REVIEW SCHOOL - Study Guide plus Q&A PARTNERSHIP PARTNERSHIP FORMATION: • Governed by the Partnership Law [Philippine Civil Code Articles 1767 to 1867]. • Article 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. Characteristics of Partnership ✓ Ease of formation ✓ Limited life ✓ Mutual agency ✓ Separate legal entity ✓ Sharing of profit and losses ✓ Unlimited liability Types of Partnership • General Partnership ✓ Each partner is personally liable to the partnership’s creditors if the partnership assets are not enough to pay such creditors. ✓ There is at least one general partner in each partnership. • Limited Partnership ✓ Partners are liable only up to the extent of their capital contributions. Accounting for Partnership Activities • Capital Account (normal balance: credit) ▪ Increases ✓ Initial investment ✓ Additional investment ✓ Share in net income ▪ Decreases ✓ Permanent withdrawal ✓ Drawings in excess of a specific amount ✓ Share in net loss • Drawing Account (normal balance: debit) ▪ Increases ✓ Regular drawings • Loan Accounts ▪ Transactions between the partners and the partnership. ▪ Must be reported as separate balance sheet items. ✓ Loan from partners – presented as a liability. ✓ Loan to partners – presented as other receivable (current asset). ▪ The capital ratio is a claim against the net asset of the partnership as shown by the balance in the partner’s capital account. ▪ The profit and loss ratio (P&L ratio) determines how much will the income or loss be distributed among the partners. Accounting for Partnership Formation • Cash investment ✓ Local currency is valued at face value. ✓ Foreign currency is valued at the current exchange rate. • Noncash investment ✓ Recorded at agreed value which is normally the fair value of the properties at the time of investment. • Liabilities assumed by the partnership should be value at the present value (fair value) of the remaining cash flows. • The difference between the fair value of the assets contributed by the partners and the liabilities assumed by the partnership is credited to the partners’ capital accounts. ✓ If the partners’ initial investment is not equal to that partner’s agreed capital, the bonus approach will be used. ✓ Under the bonus approach, one partner’s capital account decreases, while the other partner’s capital account increases at the same amount. Bonus Approach Pro-forma Entry A, Capital xx B, Capital xx Total agreed capital xx x Capital interest xx% Partner’s individual capital interest xx Less: B, capital interest xx Bonus to B

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