Presented by: Ms. Rheichelle C.

Antonio, CPA MBA

Reference: Partnership and Corporation Accounting 3rd Edition 2009-2010 by Valencia, Roxas and Asuncion

The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on the business
Civil Code of the Philippines, Art. 1828

Dissolution stops the partners original association Liquidation converts all noncash assets into cash to pay all claims against the partnership as a consequence of partnership dissolution

Is there always a dissolution if there is liquidation? Is there always a liquidation after dissolution? ANSWER IS:
YES AND NO respectively

Dissolution

Admission or withdrawal of a partner Insolvency of a partner Incorporation of partnership

Formation of a New Partnership

Remaining partners continue the business operation under a new partnership agreement

Dissolution Partnership activities are terminated and noncash assets are converted into cash to pay creditors and distribute remaining assets to partners.

Liquidation

Closing of temporary accounts to partners respective capital account must be made. According to their respective profit and loss ratio.

ABC Partnership Trial Balance March 31, 200x in PHP Debit 68,000 120,000 720,000 Credit

Closing Entries: Date 31-Mar Description Professinal fee Rent income Income Summary to close revenue accounts Income Summary Salaries expense Supplies expense Depreciation expense Miscellaneous expense to close expense accounts Debit 250,000 50,000 Credit

Cash Acccounts receivable Equipment Accumulated depreciation-Equipment Accounts payable A, Capital B, Capital C, Capital Professional fee Rent income Salaries expense Supplies expense Depreciation expense Miscellaneous expense

300,000

141,000 136,000 300,000 250,000 50,000 250,000 50,000 120,000 47,000 72,000 30,000 1,177,000 1,177,000

31-Mar

269,000 120,000 47,000 72,000 30,000

31-Mar

P&L Ratio: A 25% B 25% C 50%

Income Summary 31,000 A, Capital{31,000 x 25%} B, Capital{31,000 x 25%} C, Capital{31,000 x 50%} to close net income to the capital accounts

7,750 7,750 15,500

Assets and liabilities of the partnership should be restated at their fair market values to determine the fair and equitable capital balances of the existing partners. Increases or decreases of assets are allocated based on the profit and loss ratios or capital ratios

1. 2.

Negative Asset Revaluation Positive Asset Revaluation

Example: In the given example earlier, suppose partner C is withdrawing from the partnership and also they agreed that the equipment shall have a fair value of P558,000.

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Closing Entries:
ABC Partnership Trial Balance March 31, 200x in PHP Debit 68,000 120,000 720,000 Credit

Date 31-Mar

Description Professinal fee Rent income Income Summary to close revenue accounts Income Summary Salaries expense Supplies expense Depreciation expense Miscellaneous expense to close expense accounts

Debit 250,000 50,000

Credit

300,000

Cash Acccounts receivable Equipment Accumulated depreciation-Equipment Accounts payable A, Capital B, Capital C, Capital Professional fee Rent income Salaries expense Supplies expense Depreciation expense Miscellaneous expense

31-Mar
141,000 136,000 300,000 250,000 50,000 250,000 50,000

269,000 120,000 47,000 72,000 30,000

120,000 47,000 72,000 30,000 1,177,000

31-Mar

1,177,000

Income Summary 31,000 A, Capital{31,000 x 25%} B, Capital{31,000 x 25%} C, Capital{31,000 x 50%} to close net income to the capital accounts

7,750 7,750 15,500

P&L Ratio: A 25% B 25% C 50%

Computation: Cost of equipment Less: recorded depreciation Book Value per record Less: agreed FMV increase in accumulated depreciation

720,000 141,000 579,000 558,000 21,000

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Computation: Cost of equipment Less: recorded depreciation Book Value per record Less: agreed FMV increase in accumulated depreciation

720,000 141,000 579,000 558,000 21,000

Adjusting Entries to effect the negative asset revaluation: Date 31-Mar Description Debit A, Capital{21,000 x 25%} 5,250 B, Capital{21,000 x 25%} 5,250 C, Capital{21,000 x 50%} 10,500 Accumulated Depreciation- Equipment to record adjustment in value of equipment Credit

21,000

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See the beginning balances: A, Capital B, Capital C, Capital Closing Entries: 31-Mar Income Summary 31,000 A, Capital{31,000 x 25%} 7,750 B, Capital{31,000 x 25%} 7,750 C, Capital{31,000 x 50%} 15,500 to close net income to the capital accounts 300,000 250,000 50,000

A, Capital 5,250 300,000 7,750 5,250 307,750 302,500

B, Capital 5,250 250,000 7,750 5,250 257,750 252,500

Adjusting Entries: (Negative Asset Revaluation) 31-Mar A, Capital{21,000 x 25%} 5,250 B, Capital{21,000 x 25%} 5,250 C, Capital{21,000 x 50%} 10,500 Accumulated Depreciation- Equi

C, Capital 10,500 50,000 15,500 10,500 65,500 55,000 21,000

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The adjusted balance will be the basis for the payment of the withdrawing partners interest.
Payment to withdrawing partner equal to its adjusted capital balance: Date 31-Mar Description C, Capital Cash to record withdrawal of partner C Debit 55,000 Credit 55,000

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The partners agree that the equipment shall have a fair market value of P600,000.
Computation: Cost of equipment Less: recorded depreciation Book Value per record Less: agreed FMV increase in value of equipment 720,000 141,000 579,000 600,000 21,000

Adjusting Entries to effect the positive asset revaluation: Date 31-Mar Description Debit Accumulated Depreciation- Equipment 21,000 A, Capital{21,000 x 25%} B, Capital{21,000 x 25%} C, Capital{21,000 x 50%} to record adjustment in value of equipment Credit 5,250 5,250 10,500
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1. 2. 3.

4.

Admission of new partner Withdrawal, retirement or death of a partner Insolvency of a partnership or insolvency of a partner Incorporation of partnership

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2 Methods
1. By purchase of interest of existing partner(s) 2. By direct investment to partnership

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ADMISSION BY PURCHASE OF INTEREST Is Purchase Price = Book Value of Interest Sold? NO

Excess payment to be recorded

YES

NO

Record the transfer of capital at book value of interest sold as follows: Debit xxxx Credit xxxx

Capital of Selling Partner

YES

Capital of Buying Partner

Specific asset account to be revalued

YES

Adjust the specific asset as follows: Debit xxxx Capital of Old Partners (P&L ratio) Credit xxxx

Asset

Record the revaluation of specific asset prior to the transfer of old partner's capital to buying partner. Record the transfer of adjusted capital at book value of interest sold as follows: Debit xxxx Credit xxxx

Capital of Selling Partner Capital of Buying Partner

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Admission of additional partner(s) by purchase of interest of existing partner(s) does not fall under the description of a business combination applying the purchase method as contemplated in IAS/PAS 38. Accordingly, an agreement between and among the partners to recognized goodwill is not considered as an arms lengths transaction. Goodwill agreement between or among partners may involve an element of bias, and therefore should not be recognized. To be recognized, goodwill must be paid for in a business combination by purchase.

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personal transaction between the incoming partner and old partner Any gain or loss on the transaction is a personal gain or loss of the selling partner. No gain or loss is recorded in the partnership books

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Capital Balances and agreed profit and loss distribution of Ben and Margareth Partnership prior to dissolution. Partners Ben Margareth Capital Balances 250,000 750,000 P/L Ratio 25% 75%

Marion wants to buy 50% of the interest of Margareth to give her an interest of 37.50% in the partnership's asset and partnership's profit and loss. Margareth 750,000 x 50% = 375,000

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Case 1:

Purchase at Book Value Marion pay Margareth equal to the interest being purchase P375,000 Description Margareth, Capital Marion, Capital Debit 375,000 Credit 375,000

Case 2:

Purchase Lesser Than Book Value Marion pay Margareth less than the interest being purchase P350,000 Description Margareth, Capital Marion, Capital Debit 375,000 Credit 375,000

Case 3:

Purchase More Than Book Value Marion pay Margareth more than the interest being purchase P400,000 Description Margareth, Capital Marion, Capital Debit 375,000 Credit 375,000

In Purchase Method Case 1, 2 and 3 have the same entry to record the admission of the new partner.

The new profit and loss of the new partnership of Ben, Margareth and Marion is computed as follows: Partners Ben Margareth Marion Total Old P/L Ratio 25% 75% x 50% 100% P/L Ratio 25.0% 37.5% 37.5% 100.0%
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Given: Capital Balances and agreed profit and loss distribution of Tiara and Xiela Partnership prior to dissolution. Partners Tiara Xiela Capital Balances 150,000 350,000 P/L Ratio 30% 70%

Christian wants to buy 20% of the interest the partnership's assets and partnership's profit and loss by paying directly each of the existing partners 20% of their respective interest in the partnership. Tiara 150,000 x 20% = 30,000 Xiela 350,000 x 20% = 70,000 100,000

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Case 1:

Purchase at Book Value Christian paid total amount of P100,000 directly to the partners Description Tiara, Capital Xiela, Capital Christian, Capital Debit 30,000 70,000 Credit

100,000

Case 2:

Purchase Lesser Than Book Value Christian paid total amount of P60,000 directly to the partners Description Tiara, Capital Xiela, Capital Christian, Capital Debit 30,000 70,000 Credit

100,000

In Purchase Method Case 1, 2 and 3 have the same entry to record the admission of the new partner.

Case 3:

Purchase More Than Book Value Christian paid total amount of P150,000 directly to the partners Description Tiara, Capital Xiela, Capital Christian, Capital Debit 30,000 70,000 Credit

100,000
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The new profit and loss of the new partnership of Tiara, Xiela and Christian is: computed as follows: Partners Tiara Xiela Christian Total Old P/L Ratio P/L Ratio 30% x (100%-20%) 24.0% 70% x (100%-20%) 56.0% 20.0% 100% 100.0%

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Cash Payment in Case 3: Tiara 30% 30,000 15,000 45,000 Xiela 70% 70,000 35,000 105,000 Total 100% 100,000 50,000 150,000

Amount of transferred capital Excess of cash payment (150,000 - 100,000 = 50,000) Total Cash Distribution

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Total Contributed Capital (TCC)

Total actual investment made by all partners (both existing and incoming partner/s) to the partnership

Total Agreed Capital (TAC)

Refers new amount of partnership capital as agreed by the partners which is indicated in the partnership contract Can be equal to, more than or less than the TCC. Other term for it is Agreed New Capital (ANC)

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ADMISSION BY INVESTMENT Partnership's Total Contributed Capital (TCC) = Partnership's Total Agreed Capital (TAC) Is the New Partner's Agreed Capital Credit equal to his Actual Contribution?

NO
There is Bonus Bonus to the NEW partner if his Capital Credit is GREATER THAN his actual contribution Bonus to the OLD partners if the new partner's Capital Credit is LESSER THAN his actual

YES

No Bonus

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Admission of additional partner(s) by investment in the partnership will not fall under the description of a business combination applying the purchase method as contemplated in IFRS 3. An agreement between and among the partners to recognized goodwill may involve bias and is not considered as an arms lengths transaction.

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1.

2.

In case there is no TAC, the TCC shall be followed by the partners If TAC is not mentioned in the partnership contract but an agreement is made for new partnership capitalization, the TAC is computed using the following formula:
a) b) New partners investment / New partners interest Old partners investment / Old partners interest

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Given: Triple A partnership has the following adjusted accounts prior to the acceptance of Nimrod as a new partner: (amounts in PHP) Assets: Cash Acccounts receivable Allowance of bad debts Merchandise inventory Total assets Liability and partner's Capital: Accounts payable Aaron, Capital Ahab, Capital Ananias, Capital Total liabilities and equities

10,000 200,000 -10,000 300,000 500,000

50,000 150,000 150,000 150,000 500,000

P&L distribution is equally. On May 31 the partners approve the admission of Nimrod provided that he will contribute the following to the partnership. Equipment with FMV of P100,000 and Cash worth P50,000 They agreed that they would received capital interest equal to their actual contributions to the partnership.

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Date Description 31-May Cash Equipment Nimrod, Capital to record investment of new partner
Therefore: Aaron, Capital Ahab, Capital Ananias, Capital Nimrod, Capital Total TCC 150,000 150,000 150,000 150,000 600,000 TAC 150,000 150,000 150,000 150,000 600,000

Debit Credit 50,000 100,000 150,000

Each partners TCC = TAC therefore there is NO BONUS.

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The total contributed capital is equal to the total partnership agreed capital ` But some individual partners contribution is not equal to their respective capital credit ` Because there is a transfer of capital from one partner to another 1. Bonus to new partner 2. Bonus to old partner
`

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Given: The capital balance and agreed profit and loss distribution ratio of the partners prior to dissolution are as follows: Job Capital Balances 120,000 Profit and loss ratio 20% Noah 240,000 40% Seth 240,000 40% Total 600,000 100%

Enoch is admitted by investing cash of P200,000 for 30% interest in the partnership. Therefore: Job Noah Seth Enoch Total TCC 120,000 Old Partners 240,000 240,000 200,000 New Partner 800,000

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1. The BONUS is for the new partner. Agreed Capital for Enoch (P800,000 x 30%) Less: Actual Contribution of Enoch Excess Capital credit over capital contributed

240,000 200,000 40,000

2. The decrease of P40,000 will be shouldered by old partners using their Decrease in respective old partner's capital Job 20% 8,000 Noah 40% Multiply by P40,000 16,000 Seth 40% 16,000 40,000

3. Analysis of BONUS to new partner. TCC TAC Job 120,000 112,000 Noah 240,000 224,000 Seth 240,000 224,000 Enoch 200,000 240,000 Total 800,000 800,000

Bonus (8,000) (16,000) (16,000) 40,000 0

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The new profit and loss of the new partnership is computed as follows: Partners Job Noah Seth Enoch Total Old P/L Ratio 20% x (100%-30%) 40% x (100%-30%) 40% x (100%-30%) 100% P/L Ratio 14.0% 28.0% 28.0% 30.0% 100.0% Debit Credit 200,000 8,000 16,000 16,000 240,000

Date Description 31-May Cash Job, Capital Noah, Capital Seth, Capital Enoch, Capital to record admission of Enoch.

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Given: Assume the following data of A and S partnership: Partners A S Totals Capital Balances 600,000 400,000 1,000,000

1 Agreed Capital for Enoch (P1,200,000 x 20%) Less: Actual Contribution of Enoch P/L Ratio 60% Excess Capital credit over capital contributed

240,000 240,000 -

40% 2 100%

N is accepted in the partnership with the following agreement: Cash contribution P240,000 N will be given a 20% interest in the partnership TAC of the partnership is P1,200,000 Therefore: A S N Total TCC 600,000 400,000 Old Partners 240,000 New Partner 1,240,000

Entry to record N investment to the partnership. Date Description Debit 31-May Cash 240,000 N, Capital to record admission of Enoch.

Credit 240,000

3 The new profit and loss of the new partnership is computed as follows: Partners A S N Total Old P/L Ratio 60% x (100%-20%) 40% x (100%-20%) 100% P/L Ratio 48.0% 32.0% 20.0% 100.0%

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4 Partner's Capital balances and adjustments are to be computed as follows: Adjustment Contributed Agreed Increase Capital Capital (Decrease) A 600,000 {P1,200,000 x 48%} 576,000 (24,000) S 400,000 {P1,200,000 x 32%} 384,000 (16,000) N 240,000 {P1,200,000 x 20%} 240,000 Total 1,240,000 1,200,000 (40,000) 5 TAAC is computed as follows: N's capital Divided by: N's interest in the total capitalization TAC 6 Entry to record adjust the capital excess of the old partners. Date Description Debit 31-May A, Capital 24,000 S, Capital 16,000 Cash to adjust paartner's capital balances

240,000 20% 1,200,000

Credit

40,000

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Can occur at the same time when the partnerships assets are adjusted and the new partners capital credit is different from his actual contribution

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Given: Assume the following data of A and B Partnership: A (60%) B (40%) Capital balances before dissolution 600,000 400,000 C is accepted in the partnership with the following agreement: Cash contribution P500,000 for a P400,000 capital credit representing 20% interest in the new partnership's total capital C will also receive 20% P&L ratio. Value of partneship's existing land be adjusted for the difference of TAC and TCC. Required: 1. Compute the new partnership TAC. 2. Prepare an analysis of bonus and asset revaluation. 3. Make a compounded journal entry for the bonus and asset revaluation.

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Partners:

TCC

TAC

Answers: 1 The new partnership agreed capital is computed as follows: Agreed Capital Credit of C 400,000 Divided by: capital interest and P/L ratio 20% New partnership agreed capital 2,000,000 2 the table analysis for bonus and asset revaluation would be: Partners: TCC 600,000 400,000 500,000 1,500,000 TAC Asset Bonus Revaluation New P/L Ratio

step 3

Asset Revaluation

Bonus

New P/L Ratio 48% 32% 20% 100%

A (60%) B (40%) C

600,000 400,000 500,000 1,500,000

960,000 640,000 400,000 2,000,000

Partners:

TCC

TAC

step 4

Asset Revaluation

Bonus

New P/L Ratio 48% 32% 20% 100%

ste p 1

A (60%) B (40%) C

A (60%) B (40%) C

600,000 400,000 500,000 1,500,000

960,000 640,000 400,000 2,000,000

60,000 40,000 (100,000) 0

Partners:

TCC

TAC

step 5

Asset Revaluation 300,000 200,000 500,000

Bonus

New P/L Ratio 48% 32% 20% 100%

Partners:

TCC

TAC

Asset Bonus Revaluation 0 0 0

New P/L Ratio 48% 32% 20% 100%

A (60%) B (40%) C

600,000 400,000 500,000 1,500,000

960,000 640,000 400,000 2,000,000

60,000 40,000 (100,000) 0

ste p 2

A (60%) B (40%) C

600,000 400,000 500,000 1,500,000

3 The compound entry to record the admission of C, bonus and asset revaluation method. Date Description 31-May Cash Land A, Capital B, Capital C, Capital Debit 500,000 500,000 Credit

360,000 240,000 400,000 41

`Any

questions?

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43

1. 2. 3.

Interest is sold to outside party Interest is sold to the remaining partners Interest is sold to the partnership
a. b. c. Book value (No Bonus) Less than book value (with bonus to the remaining partners) More than book value (with bonus to the withdrawing partner)

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INSOLVENT PARTNERSHIP DISSOLUTION PROCEDURES Are all general partners solvent? NO

The solvent general partner will absorb the required payment to outside creditors and will have existing claim against the general partners.

YES
The general partners must invest additional amount to pay the outside creditors.

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1.

2. 3. 4. 5.

Determine the deceased partners P and L share from the beginning of the accounting period to the date of death. Adjust the capital accounts (include profit and loss and asset revaluation as of time of death). Close the adjusted capital account of the deceased partner to the liability account. Accrue the interest on the said recognized liability from the date of death to the settlement date Close the liability account at the settlement date.

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Using Partnership Books

1. Adjust assets and liabilities directly to partners capital 2. Close (debit) partners capital and credit the appropriate capital stock accounts

Using New Sets of Books

In the Partnership Books
1. 2. 3. 1. Close all nominal accounts to the capital accounts. Adjust the assets and liabilities directly to the capital accounts Close the book of the partnership by closing all real accounts Transfer all assets and liabilities of the partnership to the books of the corporation and credit the appropriate capital stock accounts to the equity

In the Books of the Corporation

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ACCOUNTING FOR INCORPORATING A PARTNERSHIP Is revaluation of partnership asset to be recorded? NO

Issue equivalent number of shares of stock to the partners based on the book value of their respective share in the partnership

YES
Adjust the specific asset account in accordance with the valuation made by the apppraiser's expert opinion. Issue equivalent number of shares of stock to the partners based on their adjusted capital balance.

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