PARTNERSHIP

 DISSOLUTION  
The  partnership  law  of  the  civil  code  of  the  Philippines  defined  dissolution  as  the  change  in  the  relationship  of  the  partners  
caused  by  any  partner  ceasing  to  be  associated  in  the  carrying  out  of  the  business.  
 
Hence,  any  change  in  the  relationship  between  or  among  partners  will  result  in  the  partnership’s  dissolution.  
 
The  following  are  changes  in  the  ownership  structure  that  results  in  partnership  dissolution:  
1.   Admission  of  a  new  partner  
2.   Retirement,  withdrawal  or  death  of  a  partner  
3.   Incorporation  of  a  partnership  
 
Assignment  of  interest  to  a  third  party  does  not  result  to  partnership  dissolution.  
 
ADMISSION  OF  A  NEW  PARTNER  
A  new  partner  may  be  admitted  by  investment  in  the  partnership  or  purchase  of  interest  from  existing  partner/s.  
 
Investment  of  new  partner  in  the  partnership  
If  the  new  partner  invests  in  the  partnership,  the  invested  asset  is  valued  at  agreed  value  or  fair  market  value.    If  the  capital  of  
the  new  partner  is  equal  to  the  net  assets  invested,  there  is  no  accounting  issue.    However,  if  the  new  partner’s  capital  is  not  
equal  to  the  net  assets  invested,  it  may  either  accounted  under  the  bonus  method  or  goodwill  method  or  a  possible  revaluation  
of  assets.  
 
Under  the  bonus  method  if  the  new  partner’s  capital  balance  is  greater  than  the  investment,  there  is  bonus  to  new  partner  from  
the  old  partners.    If  the  capital  balance  is  less  than  the  investment,  there  is  bonus  to  the  old  partners  from  the  new  partner.  
 
In  the  bonus  method,  the  total  contributed  capital  is  always  equal  to  the  total  agreed  capital.  
 
If  the  partners’  records  the  admission  under  the  goodwill  method,  the  total  agreed  capital  is  more  than  the  contributed  capital  
since  goodwill,  an  asset  is  to  be  recognized.  
 
Purchase  of  interest  from  old  partners  
Purchase  of  interest  from  partner/s  is  a  transaction  between  partners.    No  additional  asset  is  invested  and  hence  only  a  transfer  
of  capital  from  the  selling  partner  to  the  new  partner  is  recorded  unless  goodwill  is  to  be  recognized.  
 
Any  difference  in  the  purchase  price  and  the  capital  interest  of  the  new  partner  is  a  personal  gain  or  loss  of  the  partners.  
 
The  partners  may  revalue  assets  prior  to  admission  by  purchase.    The  revaluation  may  result  in  the  increase  of  the  value  of  
assets  (positive  asset  revaluation)  or  decrease  the  value  of  assets  (negative  asset  revaluation).  
   
The  decreases  or  increases  in  asset/s  are  adjusted  to  the  capital  of  the  old  partners  based  on  their  profit  and  loss  ratio.  
 
RETIREMENT/WITHDRAWAL  OR  DEATH  OF  A  PARTNER  
The   capital   account   of   the   withdrawing   partner   must   be   adjusted   at   the   date   of   retirement,   withdrawal   or   death.     The   share   in  
net  income/or  loss  and  asset  revaluation  as  of  the  date  retirement/withdrawal  or  death  is  added/deducted  to  the  interest  of  the  
partner.      
 
INCORPORATION  OF  A  PARTNERSHIP  
When   a   partnership   is   incorporated,   the   assets   and   liabilities   are   adjusted   at   their   fair   market   values   and   the   difference   is  
allocated  to  the  partners’  capital  based  on  their  profit  and  loss  ratio.  
 
Any   net   income   or   loss   is   closed   to   the   partner’s   capital   and   then   the   book   of   the   partnership   is   closed   since   new   book   will   be  
used  in  the  new  entity.  
 
PROBLEM   1:   Jim,   Brickman   and   John   are   partners   with   present   capital   balances   of   P393,750,   P472,500   and   P157,500,  
respectively.    The  partners  share  profits  and  losses  as  follows;  P60%  for  Jim,  20%  for  Brickman  and  20%  for  John.    Waller  is   to  
be   admitted   to   the   partnership   upon   contributing   P157,500   cash,   and   an   equipment   with   a   fair   value   of   P315,000   to   the  
partnership  in  exchange  for  a  25%  interest  in  the  capital  and  a  20%  interest  in  the  profits  and  losses.    The  existing  assets  of  the  
original  partnership  are  overvalued  by  P96,250.    The  original  partners  will  share  the  balance  of  the  profits  and  losses  in  their  
original  ratios.  
 
Calculate  the  capital  balances  of  each  partner  in  the  new  partnership.  
  
PROBLEM  2:    The  capital  accounts  of  the  MJ  partnership  on  September  30,  2014  were:  
Marvin,  capital  (75%  profit  percentage)   140,000  
Jayson,  capital  (25%  profit  percentage)   60,000  
Total   200,000  
 
The  partnership  assets  and  liabilities  have  book  values  equal  to  their  fair  values.  On  October  1,  2014,  Christian  was  admitted  to  
a  40%  interest  in  the  partnership,  when  he  purchased  40%  of  each  existing  partner’s  capital  for  P120,000,  paid  directly  to  
Marvin  and  Jayson.  

What  is  the  capital  balance  of  each  partner  after  Christian’s  admission  assuming  no  asset  revaluation  is  recorded?  

PROBLEM  3:    The  items  below  are  based  on  the  following  information:  
Charlie,  Jodie  and  Cholo  have  the  following  capital  balances;  P40,000;  P50,000  and  P30,000  respectively.  The  partners  share  
profits  and  losses  20%,  40%  and  40%  respectively.  

a)  Jodie  retires  and  is  paid  P80,000  based  on  the  terms  of  the  original  partnership  agreement.  If  the  bonus  method  is  used,  
what  is  the  capital  of  the  remaining  partners?    

b)  What  is  the  total  partnership  capital  after  Jodie  retires  and  she  receives  P80,000  and  using  the  bonus  method?    

PROBLEM  4:    Diamond,  Sapphire  and  Ruby  are  partners  of  DSR  Jewelers.     They  decided  to  incorporate  as  of  January  1,  2014.    
On  that  date  the  partnership’s  trial  balance  was  as  follows:  
 
DSR  Jewelers  
Trial  Balance  
1-­‐‑Jan-­‐‑14  
     
Debits   Book  Values   Market  Values  
Cash  in  Bank    200,000      200,000    
Accounts  Receivable    130,000      130,000    
Inventories    170,000      300,000    
Land    100,000      300,000    
Building    250,000      350,000    
Equipment    400,000      300,000    
Total    1,250,000      
     
Credits      
Accounts  Payable    150,000      
Accumulated  Depreciation  -­‐‑  Building    100,000      
Accumulated  Depreciation  -­‐‑  Equipment    150,000      
Loan  Payable  to  Sapphire    200,000      
Diamond,  Capital    300,000      
Sapphire,  Capital    100,000      
Ruby,  Capital    250,000      
Total    1,250,000      
 
Ordinary  share  in  the  amount  of  P1,250,000  is  to  be  issued  in  the  ratio  of  4:3:3  for  Diamond,  Sapphire  and  Ruby.    The  partners  
are  either  to  receive  cash  or  to  pay  amounts  of  cash  into  the  partnership  sufficient  to  bring  their  capital  accounts  into  the  ratio  
of  4:3:3  for  a  total  capital  of  P1,250,000  after  any  required  revaluation  of  assets.  
 
Prepared  the  journal  entries  to  close  the  book  of  the  partnership  and  the  entries  in  the  new  corporation’s  books.  
 
PROBLEM  5:    On  August  1,  2014,  the  business  accounts  of  Juan  and  Karlos  appear  below:  
 
Assets   Juan   Karlos  
 Cash    11,000      22,354    
Accounts  Receivable    84,536      217,890    
Inventories    100,035      240,102    
Land      603,000      428,267    
Building    200,345      384,789    
Other  Assets    22,000      23,600    
     
Liabilities  and  Capital      
Accounts  Payable    178,940      243,650    
Notes  Payable    200,000      345,000    
Juan,  Capital    641,976      
Karlos,  Capital      728,352    
 
Juan  and  Karlos  agreed  to  form  a  partnership  contributing  their  respective  assets  and  liabilities  subject  to  the  following  
adjustments:  
•   Accounts  Receivable  of  P20,000  and  P35,000  are  uncollectible  in  Juan  and  Karlos  respective  books.  
•   Inventories  of  P5,500  and  P6,700  are  worthless  in  Juan  and  Karlos’s  respective  books.  
•   Other  assets  of  P2,200  and  P3,600  in  Juan  and  Karlos  books  are  written  off.  
 
After  five  days,  JK  was  offered  to  join  Juan  and  Karlos  and  will  contribute  for  a  20%  interest  in  the  firm.    They  also  agreed  to  
divide  profit  and  loss  in  the  ratio  of  40:40:20,  same  ratio  based  on  their  capital  credit  as  agreed  upon  formation.    As  a  result  of  
the  said  agreement,  as  a  personal  transition,  how  much  should  the  cash  settlement  be  between  Juan  and  Karlos?  
 
PROBLEM  6:    Alicia  and  Nicki  are  partners  with  present  capital  balances  of  P500,000  and  P400,000,  respectively.    The  partners  
share  profit  and  losses  according  to  the  following  percentages:  60%  for  Alicia  and  40%  for  Nicki.    Minaj  is  to  join  the  original  
partnership  upon  contribution  of  P250,000  to  the  partnership  in  exchange  for  a  20%  interest  in  capital  and  15%  interest  in  
profits  and  losses.    Minaj’s  contribution  consists  of  P170,000  of  cash  and  equipment  having  a  fair  value  of  P80,000.    The  assets  
of  the  original  partnership  have  a  book  value  equal  to  their  fair  value  except  that  the  land  has  a  book  value  of  P15,000  and  fair  
value  of  P55,000.  
 
1.   Calculate  the  capital  balance  of  Minaj  in  the  new  partnership,  assuming  the  use  of  the  bonus  method.  
a.   P238,000   b.   P250,000   c.   P230,000   d.   P178,500  
 
2.   Calculate  the  capital  balance  of  Minaj  in  the  new  partnership,  assuming  the  use  of  the  goodwill  method.  
a.   P238,000   b.   P250,000   c.   P230,000   d.   P178,5000  
 
PROBLEM  7:    The  balance  sheet  of  Calvin  and  Harris  Partnership  at  December  31,  2016  appears  bellows:  
ASSETS     LIABILITIES  AND  CAPITAL  
Cash   15,000   Accounts  payable    35,000    
Other  Assets   45,000   Notes  payable    25,000    
Inventories   75,000   Accrued  liabilities    40,000    
Property,  plant  and  equipment,  net   225,000   Mortgage  payable    110,000    
    Calvin,  Capital    60,000    
    Harris,  Capital    90,000    
Total  Assets   360,000   Total  Liabilities  and  Capital   360,000  
 
Determine  the  capital  balances  of  partners  immediately  after  the  admission  of  Trent  under  the  following  independent  
situations:  
3.   Trent  acquired  a  25%  interest  in  partnership  capital  directly  from  Calvin  and  Harris  for  P50,000.    Trent  paid  P18,750  
directly  to  Calvin  and  P31,250  directly  to  Harris.    Total  assets  of  the  partnership  after  the  admission  of  Trent  were  
P360,000.    How  much  must  be  the  capital  balance  of  Calvin  immediately  after  the  admission  of  Trent?  
a.   P45,000   b.   P67,500   c.   P37,500   d.   P60,000  
 
4.   Assume  the  same  facts,  except  that  total  assets  of  the  partnership  were  P410,000  after  the  admission  of  Trent.    At  January  
1,  2017,  inventories  had  a  fair  value  of  P85,000,  while  property,  plant  and  equipment  (net)  had  a  fair  value  of  P265,000.    
Both  Calvin  and  Harris  decided  to  revalue  the  partnership’s  assets  before  the  admission  of  Trent.    Determine  the  capital  
balance  of  Harris  immediately  after  the  admission  of  Trent.  
a.   P60,000   b.   P90,000   c.   P50,000   d.   P67,500  
 
5.   Trent  acquired  a  25%  interest  in  capital  by  investing  P50,000  of  cash  into  the  partnership.  Total  capital  of  the  Calvin-­‐‑
Harris-­‐‑Trent  Partnership  on  January  1,  2017,  amounted  to  P200,000.    Determine  the  capital  balance  of  Trent  immediately  
after  his  admission.  
a.   P60,000   b.   P90,000   c.   P50,000   d.   P37,500  
 
6.   Trent  acquired  25%  interest  in  capital  by  investing  P80,000  of  cash  into  the  partnership.    Total  capital  of  the  Calvin-­‐‑
Harris-­‐‑Trent  Partnership  after  Trent’s  admission  amounted  to  P320,000.    The  fair  value  of  the  inventories  was  P85,000  
and  the  fair  value  of  the  property,  plant  and  equipment  (net)  was  P305,000  on  January  1,  2017.    Determine  the  capital  
balance  of  Calvin-­‐‑Harris-­‐‑Trent  immediately  after  Trent’s  admission?  
a.   Calvin,  P45,000;  Harris,  P67,500;  Trent,  P37,500  
b.   Calvin,  P60,000;  Harris,  P90,000;  Trent,  P50,000  
c.   Calvin,  P96,000;  Harris,  P144,000;  Trent,  P80,000  
d.   Calvin,  P60,000;  Harris,  P90,000;  Trent,  P170,000  
 
PROBLEM  8:    Atticus,  of  Atticus  and  Ross,  partners  sharing  profits  in  the  ratio  of  60%  and  40%  wants  to  retire.    The  partners  
agree  that  the  fixes  assets  are  undervalued  by  P20,000,  that  goodwill  is  worth  P15,000,  and  that  Atticus’  share  of  these  
increases  shall  be  recorded  and  creditable  to  his  capital  account.    Since  the  working  capital  is  only  P70,000,  it  is  decided  that  
Atticus  shall  receive  only  one-­‐‑third  of  his  adjusted  capital  credit  in  cash.    For  the  remainder,  he  accepts  securities,  which  have  
been  carried  as  other  assets  at  their  book  value  and  market  value  of  P12,000,  and  a  six-­‐‑month  note  payable.    The  balance  
sheet,  which  is  then  prepared,  appears  as  follows:  
 
Current  assets   53,000   Current  liabilities    52,000    
Other  assets   3,000   Ross,  Capital    50,000    
Fixed  assets   37,000      
Goodwill   9,000      
  102,000     102,000  
 
1.   Current  assets  before  Atticus’  retirement  must  be:  
a.   P97,000   b.   P80,000   c.   P53,000   d.   P63,000  
 
2.   Current  liabilities  before  Atticus’  retirement  must  be:  
a.   P52,000   b.   P10,000   c.   P42,000   d.   None  
 
3.   Fixed  assets  before  Atticus’  retirement  must  be:  
a.   P25,000   b.   P17,000   c.   P37,000   d.   P12,000  
 
4.   Other  assets  before  Atticus’  retirement  must  be:  
a.   P3,000   b.   P12,000   c.   P15,000   d.   none  
 
5.   Atticus’  adjusted  capital  balance  must  be:  
a.   P38,000   b.   P60,000   c.   P81,000   d.   P64,000  
 
PROBLEM   9:     Jack   Marquez,   a   partner   in   a   law   firm,   decided   to   withdraw   from   the   partnership.     Marquez’s   share   in   the   profit  
and   losses   was   20%.     Upon   withdrawal   from   the   partnership   he   was   paid   cash   in   final   settlement   for   his   interest.     The   total   of  
the   partners’   capital   accounts   before   the   recognition   of   the   revaluation   prior   Marquez’s   withdrawal   was   315,000.     After   his  
withdrawal  the  remaining  partners’  capital  accounts  excluding  their  share  of  revaluation,  totaled  240,000,  but  including  their  
share  of  revaluation  totaled  384,000.    What  is  the  total  amount  of  cash  paid  to  Jack  Marquez?    
a.   111,000   b.   96,000   c.   99,000   d.   384,000  
 
PROBLEM  10:    On  January  1,  2017,  Lana,  Bina  and  Mara  formed  LBM  Partnership  with  original  contribution  of  P4,000,000;  
P1,000,000   and   P5,000,000,   respectively.     The   articles   of   co-­‐‑partnership   provides   that   profit   or   loss   shall   be   distributed   under  
the  following  terms:  
•   Lana,  Bina  and  Mara  shall  ne  entitled  to  monthly  salary  of  P10,000,  P20,000  and  P30,000,  respectively.  
•   10%  interest  on  original  capital  contribution.  
•   As  managing  partner,  Bina  shall  receive  bonus  equal  to  10%  of  net  income  after  salaries  and  interest  but  before  bonus.  
•   The  remainder  shall  be  distributed  on  the  basis  of  original  capital  contribution  ratio.  
 
During  2017,  the  partners  regularly  withdrew  ¼  of  their  monthly  salary.    The  December  31,  2017  Statement  of  Financial  Position  
of  LBM  Partnership  shows  that  the  capital  of  Lana  is  P5,310,800.    On  January  1,  2018,  Mara  decided  to  retire  from  the  partnership  
and   it   was   agreed   that   Mara   shall   receive   P6,000,000.     The   retiring   agreement   provides   that   any   bonus   shall   be   distributed   on  
the  basis  of  original  capital  contribution.      
 
6.   What  is  the  net  income  of  the  partnership  for  the  year  ended  December  31,  2017?    
a.   3,772,000   b.   1,720,000   c.   2,872,000   d.   4,000,000  
 
7.   What  is  the  capital  balance  of  Bina  after  the  retirement  of  Mara  on  January  1,  2018?      
a.   1,872,400   b.   1,932,400   c.   1,890,400   d.   1,854,400  
 
PROBLEM  11:    Champagne,  Pink  and  Gold  are  partners  with  capital  balances  on  December  31,  2016  of  P300,000,  P300,000  and  
P200,000,  respectively.    Profits  are  shared  equally.    Gold  wishes  to  withdraw  and  it  is  agreed  that  she  is  to  take  certain  furniture  
and  fixtures  at  their  second  hand  value  of  P12,000  and  note  for  the  balance  of  her  interest.    The  furniture  and  fixtures  are  carried  
on   the   books   as   fully   depreciated.     Brand   new,   furniture   and   fixtures   may   cost   P20,000.     Gold’s   acquisition   of   the   second-­‐‑hand  
furniture  will  result  to:  
a.   Increase  in  the  capital  of  P4,000  each  for  Champagne,  Pink  and  Gold.  
b.   Increase  in  the  capital  of  P6,000  each  for  Champagne  and  Pink.  
c.   Increase  in  the  total  capital  of  P10,000  each  for  Pink  and  Gold.  
d.   Increase  in  the  capital  of  P8,000  for  Gold.  
 
PROBLEM   12:       On   June   1,   2016,   White   and   Blue   formed   a   partnership   with   cash   investment   of   P330,000   and   P420,000,  
respectively.    Upon  formation,  the  partners  agreed  to  bring  their  capital  ratio  in  proportion  with  their  profit  and  loss  ratio  which  
is  White,  30%  and  Blue,  70%  and  Blue  is  the  partner  who  has  to  invest  or  withdraw  sufficient  amount  of  cash  to  conform  with  
the  agreement.  
 
Profit  allocation  were  as  follows:    monthly  salaries,  White;  P36,000  and  Blue;  P30,000.    The  partners  will  be  allowed  with  interest  
of  12%  on  their  capital  balances  at  the  end  of  the  year  before  closing  the  income  summary  account  and  any  distribution  against  
net  income.    Blue  receives  a  bonus  of  20%  of  net  income  after  deducting  the  bonus  and  his  salary.  
 
On  August  1,  2016,  White  invested  additional  P80,000  cash  and  withdrew  P30,000  on  October  1,  2016.    On  September  1,  2016,  
Blue  invested  additional  P48,000  cash  and  withdrew  P18,000  on  December  1,  2016.  
 
In  2016,  the  partnership  reported  net  income  of  P450,000  before  any  deductions  and  each  partner  has  drawings  of  P150,000  
distributed  at  year-­‐‑end  against  share  in  net  income.  
 
On  January  1,  2013,  Ivy  was  admitted  as  partner  by  purchasing  1/3  interest  of  Blue,  paying  the  selling  partner  the  amount  of  
P276,000.    Ivy  also  invested  P230,000  cash  for  a  total  interest  of  20%  in  capital  of  the  partnership.  
 
8.   Capital  balance  of  White  immediately  after  admission  of  Ivy.  
a.   P496,294   b.   P541,340   c.   P512,290   d.   P529,798  
 
9.   Capital  balance  of  Blue  immediately  after  the  admission  of  Ivy.  
a.   P718,202   b.   P724,306   c.   P702,220   d.   P698,440  
 
PROBLEM  13:    A,  B  and  C  are  partners  with  capital  balances  of  P67,200;  P108,000  and  P38,000  respectively,  sharing  profits  and  
losses  in  the  ratio  of  2:5:1.    D  is  admitted  as  a  new  partner  bringing  him  expertise  and  is  to  invest  cash  for  a  15%  interest  in  the  
partnership  considering  the  transfer  of  capital  from  him  of  P18,000  upon  his  admission.  
 
Upon  the  admission  of  D,  which  of  the  following  statements  is  false?  
a.   The  capital  account  of  C  will  be  credited  in  the  amount  of  P2,250  
b.   The  total  agreed  capital  of  the  old  partners  is  P18,000  greater  than  there  contributed  capital  
c.   The  capital  balance  of  B  amounts  to  P119,250.  
d.   Cash  will  be  debited  in  the  amount  of  P40,800.  
 
PROBLEM  14:    The  partnership  of  Maria  and  Andrea  began  business  on  January  1,  2016.    The  following  assets  were  contributed  
by  each  partner  (non  cash  assets  are  stated  at  their  fair  market  values  on  this  date).  
Maria   Andrea  
Cash    30,000      20,000    
Inventories    50,000      -­‐‑        
Land    -­‐‑          200,000    
Equipment    100,000      
  
The  land  was  subject  to  a  P65,000  mortgage,  which  the  partnership  assumed  on  the  same  date.    The  equipment  was  subject  to  
an  installment  note  payable  that  had  an  unpaid  principal  amount  of  P35,000  on  January  1,  2016.    The  partnership  also  assumed  
this  note  payable.    According  to  the  partnership  agreement,  each  partner  was  to  have  a  50%  capital  interest  on  January  1,  2016,  
with  total  partnership  capital  being  P300,000.    Maria  and  Andrea  agreed  to  share  partnership  income  and  losses  in  the  following  
manner:  
Maria   Andrea  
Interest  on  beginning  balances   4%   4%  
Salaries      15,000      10,000    
Remainder   60%   40%  
 
During  2016,  the  following  events  occurred:  
•   Inventory  was  acquired  at  a  cost  of  P30,000.    At  December  31,  2016,  the  partnership  owed  P6,000  to  its  suppliers.  
•   Principal  of  P10,000  was  paid  on  the  mortgage.    Interest  expense  incurred  on  the  mortgage  was  P4,000,  all  of  which  was  
paid  by  December  31,  2016.  
•   Principal  of  P7,500  was  paid  on  installment  note.    Interest  expense  incurred  on  the  installment  note  was  P2,500,  all  of  
which  was  paid  by  December  31,  2016.  
•   Sales  on  account  amounted  to  P115,000.    At  December  31,  2016,  customers  owed  the  partnership  P10,000.  
•   The  partnership  inventory  at  December  31,  2016,  was  P20,000.  
•   Selling  and  general  expenses,  excluding  depreciation,  amounted  to  P21,000.    At  December  31,  2016,  the  partnership  owed  
P3,000  of  accrued  expenses.    Depreciation  expense  was  P5,000.  
•   Each  partner  withdrew  P225  each  week  in  anticipation  of  partnership  profits.  
•   The  partners  allocated  the  net  income  for  2016  and  closed  the  accounts.  
 
On  January  1,  2017,  the  partnership  decided  to  admit  Nolia  to  the  partnership.    On  that  date,  Nolia  invested  P100,900  of  cash  
into  the  partnership  for  a  20%  capital  interest.  
 
10.   What  is  the  capital  balance  of  Andrea,  after  Nolia’s  admission?  
a.   P151,100   b.   P150,140   c.   P155,900   d.   P156,860  
 
11.   What  is  the  share  of  Andrea  on  the  net  income  for  2016?  
a.   P9,000   b.   P1,800   c.   P10,200   d.   P3,000  
 
12.   What  is  the  capital  balance  of  Maria  at  the  end  of  2016?  
a.   P139,800   b.   P150,600   c.   P148,800   d.   P138,000