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ACTPACO Lecture Notes

ACTPACO Lecture Notes

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Dissolution

1.The change in the relation of the partners caused by any partner ceasing to be
associated in the carrying out of the business.

2.The termination of the life of an existing partnership.

Dissolution of an old partnership may be followed by:

1.the formation of a new partnership – new partnership continues the business
activities of the dissolved partnership without interruption.

2.liquidation – termination of business activities and winding up of partnership
affairs preparatory to going out of business.

Conditions resulting to partnership dissolution

1.Admission of a new partner

2.Withdrawal of a partner due to retirement, death, incapacity, bankruptcy or
voluntary withdrawal

3.Incorporation of a partnership

Admission of a New Partner

1.The consent of all the partners is necessary.

2.Upon the admission of a new partner, a new agreement covering partners’
interests, profit and loss sharing and other considerations should be drawn
because the dissolution of the original partnership cancels the old agreement.

3.There is a need to update the capital balances of the partners by

a.determining profit share of each partner from the last balance sheet date
to dissolution date.

b.revaluing/ adjusting partnership assets and liabilities using a temporary
account called the Capital Adjustment account. The Capital Adjustment

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account is closed to the partners’ capital accounts using their profit and
loss ratio.

Pro- forma Entries

Determine profit

Income Summary

xxx

Share of partners

A, Drawing

xxx

B, Drawing

xxx

A, Drawing

xxx

B, Drawing

xxx

A, Capital

xxx

B, Capital

xxx

Increase in value

Asset

xxx

of an asset

Capital Adjustment

xxx

without a contra-
asset account

Decrease in value

Capital Adjustment

xxx

of an asset

Asset

xxx

without a contra
asset account

Increase in value

Contra- asset

xxx

of an asset

Capital Adjustment

xxx

with a contra
asset account

Decrease in value

Capital Adjustment

xxx

of an asset

Contra- asset

xxx

with a contra
asset account

Increase in value

Capital Adjustment

xxx

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of a liability

Liability

xxx

Decrease in value

Liability

xxx

of a liability

Capital Adjustment

xxx

Note: These adjustments are
similar to the year-end adjusting
entries. Only, replace the
nominal accounts with the
Capital Adjustment account.

Close the Capital

Capital Adjustment

xxx

adjustment

A, Capital

xxx

account

B. Capital

xxx

OR

A, Capital

xxx

B, Capital

xxx

Capital Adjustment

xxx

Note: The Capital Adjustment
account is divided among the
partners based on their profit
and loss ratio.

Types of Admission of a New Partner

1.By purchase of interest from one or more of the old partners

a.It is considered as a personal transaction between the selling partner and
the buyer who becomes a new partner.

b.The cash paid by the buyer is not recorded in the books of the partnership
for this is a personal transaction between the selling partners and the
buyer.

c.The gain or loss arising from the sale of interest is not recorded in the
partnership books. It is considered as a personal gain or loss of the
selling partner.

d.It merely involves a transfer of capital of the selling partner to the capital of
the buying partner.

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e.There is no increase in total assets and no increase in total partners’

equity.

2.By investment or asset contribution in the partnership

a.It is a transaction between the partnership and the incoming partner.

b.It involves the investment of assets by new partner into the partnership.

c.Total assets and total partners’ equity will increase.

d.Record the admission of the new partner based on the following
procedures:

Record the investment (contributed capital) of the new partner.

Determine the agreed capital of the new partner. This is computed
as follows:

Total Agreed Capital of the Firm x % of Interest of New Partner

Compare the contributed capital and the agreed capital of the new
partner. Record goodwill or bonus, if there is any.

Pro-forma Entries

By purchase

A, Capital

xxx

of interest

C, Capital

xxx

By Investment

Cash

xxx

Non-cash asset

xxx

C, Capital

xxx

Bonus

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1.It is an amount partners are willing to allow as additional credit to a partner’s
capital in excess of his actual capital contribution.

2.It is a transfer of capital from one partner to another.

3.Bonus may be recognized only when total agreed capital of the firm is equal to its
total contributed capital.

Pro-forma Entries

Bonus to old

C, Capital

xxx

partners

A, Capital

xxx

B, Capital

xxx

Bonus to new

A, Capital

xxx

partner

B, Capital

xxx

C, Capital

xxx

Note: Bonus is divided among
the old partners using profit and
loss ratio.

Vague Problems

1.

New partnership agreement fails to specify the total agreed
capital capitalization of the new partnership after the admission of a new partner.

2.

In the absence of expressed agreements, either the bonus

or the goodwill method may be used.

Special Terms

1.Agreed capital (AC) – new capitalization of the new partnership which will be
equal to total contributed capital.

2.Contributed capital (CC) – the sum of the investments or contributions of the
new and old partners.

3.Fraction of interest – this is the interest or equity of a partner expressed in

fraction

4.Percentage of interest – this is the interest or equity of a partner expressed in
percentage.

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Withdrawal of a Partner

There is a need to update the capital balances of the partners by

1.

determining profit share of each partner from the last balance sheet date

to dissolution date.

2.

revaluing/ adjusting partnership assets and liabilities using a temporary
account called the Capital Adjustment account. The Capital Adjustment
account is closed to the partners’ capital accounts using on their profit and loss
ratio.

Types of Withdrawal of a Partner

1.Purchase of interest by another partner or an outsider

a.It is considered a personal transaction between the buying and selling
partners.

b.It involves the transfer of the withdrawing partners’ capital to the capital
account of the buying partner.

2.Purchase of interest by the partnership

a.It is considered a transaction between the partnership and the outgoing

partner.

b.It involves a decrease in partnership assets or increase in partnership
liabilities.

Pro-forma Entries

By purchase

C, Capital

xxx

of interest by

A, Capital

xxx

another person

By purchase of
interest by the
partnership

(a) Equal to carrying

C, Capital

xxx

Amount

Cash/Liability

xxx

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(b) More than

A, Capital

xxx

carrying amount

B, Capital

xxx

C, Capital

xxx

C, Capital

xxx

Cash/Liability

xxx

(c) Less than

C, Capital

xxx

Carrying amount

Cash/Liability

xxx

A, Capital

xxx

B, Capital

xxx

Classroom Exercises

1.

The records of ABC Partnership show the following balances at year-end:

ABC Partnership
Trial Balance
December 31, 200x

Cash

P15,000

Accounts receivable

10,000

Allowance for bad debts

P800

Office furniture

25,000

Accumulated depreciation

1,000

Accounts payable

3,200

A, Capital

10,000

B, Capital

15,000

C, Capital

20,000

Total

P50,000

P50,000

A, B, C divide profit and loss equally. With the consent of all the partners, Mr. D
is admitted as a new partner. The following adjustments are agreed upon:

a. Allowance for bad debts should be 10% of accounts receivable.
b. Office furniture should be 10% depreciated.
c. Accrued expenses amounting to P1,300 should be recorded.

Prepare entries to adjust the accounts of the partnership. Prepare the entry to
record the admission of Partner D under the following independent assumptions:

a.Mr. D purchases ½ of the interest of Partner B for
P7,000

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P5,000
P9,000

b.Mr. D invests P8,000 cash.

c.Mr. D invests sufficient cash to give him 25% interest in the firm.

2. Assume the adjusted capital balances of the following partners are as follows:

Partner A

P50,000

Partner B

100,000

Assume A & B divide profit and loss equally.

Prepare the entry(ies) to record the admission of Mr. C under the following
independent assumptions:

a.Mr. C is admitted by investing P 50,000 for a capital credit of 20% of the
agreed capitalization of P200,000.

b.Mr. C is admitted by investing P50,000 for a capital credit of 30% of the
agreed capitalization of P200,000.

c.Mr. C invests P60,000 for a ¼ interest in the firm.

d.Mr. C invests P60,000 for a ½ interest in the firm.

3.Assume that the updated capital balances of the partners are as follows:

Partner A

P50,000

Partner B

100,000

Partner C

150,000

A, B and C share profit and loss 3:2:3. Partner A withdraws from the partnership.
Prepare all the necessary journal entries under the following independent
assumptions:

a.

With the consent of Partners B and C, Partner A withdraws from
the partnership by selling his entire interest to Partner D for P50,000 cash.

b.Partnership purchases entire interest of Mr. A for P50,000.

c.Partnership purchases entire interest of Mr. A for P60,000.

d.Partnership purchases entire interest of Mr. A for P35,000.

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