FLOWERS & FRUITS, Ltd.

by
Marivic Valenzuela-Manalo, DBA, CPA

On December 1, 2016, Josie Galang came home to the Philippines after residing and
working for three years in San Diego, California. She was granted immigrant visa by the US
government because of her father Florencio, who was a World War II veteran. Although
living in USA was one of her childhood dreams, she realized that she belongs to her native
land.

Josie finally settled in Nuvali, Sta. Rosa, Laguna and decided to open a flower and
fruit shop. After a few weeks, she drafted a plan for a small-scale partnership business and
invited her brother Romy and his wife Maria to be her business partners, hoping that the
couple would provide additional financial support. Romy accepted the offer as a limited
partner for an initial investment of P250,000, an amount equal to the initial investment of
Josie as the managing partner. Romys wife Maria opted to be a creditor by offering the
partnership a 2-year 5% loan of P50,000.

On January 2, 2017, Josie sought the help of her lawyer-friend Evelyn in formulating
the Articles of Partnership and in preparing the necessary legal documents for the
registration of Flowers and Fruits, Ltd. with the Securities and Exchange Commission.

As soon as the new partnership was formed on January 3, Josie opened an account
with Bank of Laguna under the newly-registered name of the partnership and deposited
their initial investments including the loan amount obtained from Maria. On the same day,
Josie signed a lease contract with her former classmate Pearly for a store space along
Nuvali Boulevard at P7,500 per month. The contract would cover a two-year period
starting January 3, 2017 and would require payment of two-month advance rental and
monthly rental thereafter payable on the last day of every month. Josie paid the two-month
advance rental of P15,000 on the same day.

Over the next few days, Josie was busy with the various operations of the business.
She ordered fruits for the stores opening inventory, bought flowers from well-known
growers from nearby Tagaytay City, purchased some store supplies from a nearby grocery
store, purchased a cash register with credit card charge processing capability from Casio
Corporation, and acquired a desktop computer installed with basic accounting and
business software. For his part, Romy signed service agreements with Globe Telecom
Company, Laguna Waters, and MERALCO for the shops utility needs. Maria suggested to
Josie and Romy to maintain a Petty Cash Fund for small payments that will not require
issuance of checks. Josie set up the fund at P10,000.
 Josie contracted another friend who works in an advertising company. She placed
and paid in advance the advertisement regarding the opening on January 9, 2017 of
Flowers & Fruits, Ltd. This ad would come out on the January 9, 2017 issue of the local
newspaper. She also advertised to her other friends her newly formed business using her
internet blog.

On January 8, a day before the opening of the shop, Josie reviewed the transactions
in the partnerships Cash in Bank account and noted that after the initial deposit of their
initial investments and the loan, the partnership paid for the following:

January 2017 Transaction Amount

3 Two-month advance rental P 15,000
4 Opening merchandise inventory 23,500
5 Cash register from Casio Corporation 22,000
6 Advertisement with local newspaper 1,500
7 Various store supplies 8,700
8 Computer with business software and printer 40,000

After reviewing the above cash payments, Josie prepared a list of the shops assets,
liabilities, and partners equity as of January 8, 2017 (shown below as Exhibit I) with the
help of Maria who is a CPA:

Exhibit I: January 8 List of Assets and Equities

ASSETS LIABILITIES & PARTNERS EQUITY

Cash in Bank P 429,300 Liabilities
Petty Cash Fund 10,000 Loan Payable to Maria P 50,000
Merchandise Inventory 23,500
Store Supplies 8,700 Partners Equity
Prepaid Rent 15,000 Josie, Capital 250,000
Prepaid Advertising 1,500 Romy, Capital 250,000
Cash Register 22,000
Computer 40,000
TOTAL ASSETS P 550,000 TOTAL EQUITIES P 550,000

Flowers & Fruits, Ltd. formally opened on January 9, 2017. Josie hired one
full-time shop assistant and one part-time employee who will assist her in the floral
arrangements and deliver the flowers and fruits ordered by customers via internet or
phone call.

Maria is a CPA and had been helping the partnership with its accounting needs.
Later that year at a family Christmas gathering, she reminded the two partners to prepare
the financial reports for the partnership covering the year 2017. The next day after the
party, Josie and Romy together with Maria reviewed the ships various business
transactions over the last twelve months. Maria was able to come up with the following
updated list as of December 31, 2017.

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Exhibit 2: December 31 List of Assets, Liabilities, Equity, Revenues, and Expenses

Account Titles Debit Credit

Petty Cash Fund P 10,000
Cash in Bank 571,000
Accounts Receivable 75,000
Merchandise Inventory, December 31, 2017 24,800
Store Supplies 2,700
Store Equipment 66,000
Loans Payable P 50,000
Josie, Capital 250,000
Romy, Capital 250,000
Sales 725,000
Cost of Sales 290,000
Freight-Out 5,200
Store Salaries Expense 136,500
Utilities Expense 54,000
Advertising Expense 5,200
Repairs and Maintenance Expense 3,100
Taxes and Licensing Expense 6,500
Store Supplies Expense 25,000

Josie believed that the initial year of Flower & Fruits, Ltd. had been profitable. But
she was also concerned about how she should reflect the following in the business financial
reports.

1. No interest was paid on the loan extended by Maria.

2. Interest earned on the Cash in Bank account with Laguna Bank amounting to P9,800
was not recorded.
3. Josie believes that expenditures made for the cash register will benefit not only the
current period. She estimated that the cash register (store equipment) would last
for five years with no salvage value at the end of its useful life. This same estimate is
also true for the computer (store equipment).
4. Josie also estimated that 5% of Accounts Receivable is doubtful of collection.
5. Josie had not paid herself a salary for managing the business full-time these past 12
months. Had she decided to be employed instead of embarking into this business
venture, she would receive an average monthly salary net of withholding tax of
P15,000.

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 6. Romy should be remunerated 1/3 of the amount to be given to Josie since he works
in the shop 2 days out of the 6-day work week.
7. Both Josie and Romy agreed that they should earn 10% interest per annum on their
original capital contributions.
8. Remaining profits is to be divided between Josie and Romy at 60% and 40%,
respectively.

REQUIRED:

1. How would you report on the initial year operations of Flowers & Fruits, Ltd. Is the
company profitable? Prepare the income statement of the partnership for the year
ended December 31, 2017. How would you divide the net income/loss between the
two partners?

2. Do you think the shops first year of operation could be described as successful?
Explain your answer.

- End -

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