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! Dissolution -
Admission by Purchase

Partnership dissolution happens

when the ownership structure or
composition changes. Examples are:

Admission of a new partner – there is

an additional partner

Retirement/Death of a partner –
there is a reduction in the number of
partners

Incorporation of a partnership – the

partnership is ended, a different
company in the form of a corporation
is created

In the case of incorporation, the

partnership is dissolved and
liquidated.

Dissolution pertains to a change in

ownership, but not necessarily the
end or closure of the partnership.

Liquidation pertains to closing or end

of the partnership. This is also called
winding up of business.

Let’s focus now on the different cases

of partnership dissolution.

Alright, so there are two types of

Partnership Admission. A new
partner may join an existing
partnership by 1) Purchasing interest
from the partners, or 2) Investing in
the partnership. It’s also possible to
Purchase interest AND Invest to be
admitted as a partner.

Let’s go over these one by one.

Let’s have a simple example for the

above statements.

Lily and Daisy are partners of

FLOWERS PARTNERSHIP. Lily has
40% interest ownership for P120,000,
while Daisy has 60% interest
ownership for P180,000.

Rose wanted to join the partnership

by having 20% interest. She is willing
to give P100,000. Lily and Daisy
agreed to let her purchase the 20%
from Daisy. After admission,
ownership interest would be 40% to
Lily, 40% to Daisy and 20% to Rose.

Her capital credit would be computed

as:

180,,000 / 60% x 20% = P60,000

Her interest purchase is from Daisy,

so our basis was Daisy’s capital of
180,000, which is currently 60%.
After getting the partnership capital
(180,000 / 60%), we multiply that by
20%, which is the interest purchased
by Rose.

The difference between the payment

(P100,000) and the capital credit
(recorded capital of P60,000) is a
personal gain of Daisy, and a
personal loss of Rose.

Entry to record the purchase is:

Debit Daisy, Capital 60,000

Credit Rose, Capital 60,000

Notice that the payment (in cash or

in kind) is not reflected on the books
of the partnership. Again, this is
because admission by purchase is a
personal transaction between the
selling partner and the person to be
admitted. Also, the total capital of
the partnership remains the same at
P300,000 even after the admission.

After admission of Rose, the capital

balances of the partners are as
follows:

Lily – 40% at P120,000

Daisy – 40% at P120,000 (This is

computed as P180,000 – P60,000
purchased by Rose.)

Rose – 20% at P60,000

Let’s have another example.

Purchase can also be made from more
than one partner.

Say, Lily and Daisy agreed to let Rose

purchase 10% interest from Lily and
10% interest from Daisy, for a total
payment of P100,000.

This would be computed as follows:

From Lily = P120,000 / 40% x 10% =

P30,000

From Daisy = P180,000 / 60% x 10% =

P30,000

The capital credit to Rose is P60,000.

The capital balances of Lily and Daisy

are as follows:

Lily – P120,000 – P30,000 = P90,000

Daisy – P180,000 – P30,000 =

P150,000

To record the admission,

Debit Lily, Capital 30,000

Debit Daisy, Capital 30,000

Credit Rose, Capital 60,000

The payment of Rose is distributed

between Lily and Daisy based on the
following: (Please note that there is
no established rule, this one is the
suggested method for fair
distribution.)

1. The amount of capital credit

transferred to the new partner

2. The excess is allocated using the

P/L ratio of the selling partners

That would mean, P30,000 to Lily,

P30,000 to Daisy, and the excess of
P40,000 is to be allocated using their
P/L ratio. Suppose the P/L agreement
is 40:60 to Lily and Daisy,
respectively, the P40,000 excess is
distributed as follows:

To Lily – P40,000 x 40% = 16,000

To Daisy – P40,000 x 60% = 24,000

The total distribution of Rose’s

payment amounting to P100,000 is:

To Lily – P30,000 + P16,000 = P46,000

To Daisy – P30,000 + P24,000 =

P54,000

Got them? Alright, this one is the

simplest. Moving on…

There is another method, wherein

the new partner’s contribution is
perceived and taken as the basis of
his interest purchase. Any difference
is considered an asset revaluation.
Practically, the existing partnership
capital is NOT EQUAL to partnership
capital AFTER ADMISSION of a new
partner.

Example: Rose is to purchase 20%

interest in the partnership, from
both Lily and Daisy, for P80,000.

We compute first for the TOTAL

CAPITAL of the Partnership after
admission by using Rose’s purchase
of interest and payment as basis.

P80,000 / 20% = P400,000

Before the admission, the total

capital is [Lily P120,000 + Daisy
P180,000 = P300,000]

Here we have a positive asset

revaluation of P100,000. The asset
revaluation is relative to the assets of
the company. It may be that the PPE
are undervalued, so the adjustment
of P100,000 may be applied to those
accounts.

Also, this revaluation is only

applicable to the existing/old
partners (before the admission), and
allocated using their P/L ratio.

To record that,

Debit to Asset accounts 100,000

Credit to Lily, Capital 40,000

Credit to Daisy, Capital 60,000

And then, the admission of Rose:

Debit to Lily, Capital P32,000

(P120,000 + P40,000) x 20%

Debit to Daisy, Capital P48,000

(P180,000 + P60,000) x 20%

Credit to Rose, Capital P80,000 (As is

the payment)

After the admission of Rose, capital

balances of the partners are:

Lily - P120,000 + P40,000 – P32,000

= P128,000

Daisy – P180,000 + P60,000 –

P48,000 = P192,000

Rose = P80,000

Total capital is P128,000 + P192,000 +

P80,000 = P400,000.

Still following?

There are a lot of possible questions

for Partnership Dissolution. (I’m
talking about exam questions, by the
way.)

1. Purchased capital from each

partner (if more than one)

2. Distribution of payment to
selling partners

3. Recording of transactions (some

asks how much is the debit to a
partner’s account)

4. Capital balances after admission

(of old partners or new partner)

5. Total capital of the partnership

after admission

The most difficult one is when all of

the above are involved, in “which of
the following statements is true?”
questions. The choicees are: A
provides the total capital of
partnership after admission, B
provides the capital balance of a
partner after admission, C provides
the distribution of payment to a
partner, and D provides the debited
amount to one of the partners.

I reviewed in CPAR, and it’s true that

the items from the actual board are
nothing like the ones on the
handouts (except for the theories),
but the logic was this (and I’m a
believer of this, too):

IF YOU CAN ANSWER DIFFICULT

QUESTIONS THAT REQUIRE THE
BASICS AND THE UNDERSTANDING
OF CONCEPTS, ONES THAT ARE
SUPPOSED TO TRICK YOU, THEN YOU
CAN PROBABLY ANSWER ANY TYPE
OF QUESTION IN THE ACTUAL
BOARD.

The point was: If you’ve been

practicing and answering difficult
questions, and you’ve been able to,
without getting tricked, you’ll
definitely feel like SOME or MOST of
the questions in the actual board are
easy. You might find yourself smiling
while taking the exams. And again,
that takes A LOT of practice, which
requires HARD WORK AND DILIGENT
EFFORT on your part.

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Daniza Rose

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