Partnership Dissolution
Conduct of a partner which is
-It refers to the termination of the
partnership contract or the
partnership itself but not
necessarily the business.
Dissolution may result to:
1. Formation of a new
partnership – change of
capital structure
2. Liquidation – termination of
business activities.
Circumstances Resulting in
Dissolution
Dissolution by act of the
partners
1. Expiration of the life of the
partnership - partnership has
a fixed term as an agreed
upon by the partners at the
inception of the partnership
2. Accomplishment of the
purpose- if a partnership is for
a particular undertaking or for
a specific objective
3. By mutual agreement- at any
time, the partners may
mutually agree to:
a) Admit new partner/s.
b) Convert the partnership
into a corporation.
c) Liquidate the business.
4. Retirement or withdrawal of a
partner
Dissolution by operation of law
1. Death of partner
2. Bankruptcy of any partner of
the partnership itself
3. Any event that will make it
unlawful for a partner or the
partnership to continue
Dissolution by judicial decree
1. Insanity of the partner
2. Incapacity of a partner
3.
grossly prejudicial to the
interest of the partnership or
business.
4. Dissension among the
partners
5. Impossibility of profitable
operations
6. Other reasons such a fraud or
misrepresentation in the
formation of the partnership.
Process of Dissolution
1. Update the capital accounts of
the partners as of dissolution
date
a. Revaluation of partnership
assets
b. Determine the share of the
partners in the net income
or net loss
c. Close the drawing account
2. If the dissolution is not
mentioned in the article, the
partners must ascertain the
terms and conditions of the
dissolution
3. Record the dissolution
4. Revise the partners equity
ARTICLES OF CO-PARTNERSHIP
REDRAWN
It is important to redraw the
Articles of Co-Partnership upon
dissolution since some provisions
will be affected such as the names
of the partners, their contributions,
profit sharing ratio and managerial
positions and functions, to name a
few.
Admission of a New Partner
By Purchase of Interest
 a. Transaction is between the
new and the old partners and
not with the partnership.
b. The partners equity before
and after admission is still the
same.
c. Prior to admission of a new
partner, assets revalued or
recognition of goodwill or
bonus shall effect the
partner’s equity.
d. Profit and loss ratio will take
effect after acceptance of the
new partner.
Journal entry:
Seller’s, capital xxx
Buyer’s, capital
xxx
Total partnership equity will remain
the same before and after the
dissolution.
The selling price of the equity may
be:
1. Equal to book value of the
interest sold
2. More than the book value of
the interest sold
3. Less than the book value of
the interest sold
Example:
Phenny and Pokemon have capital
balances of P40,000 each and
share profit and loss equally.
Vangie was admitted by Phenny
and Pokemon based on the
following:
1. Vangie buys ¼ share from
Pokemon and pays P10,000
cash.
Pokemon, Capital 10,000
Vangie, Capital
10,000
2. Vangie buys 1/5 interest from
Pokemon by giving his
electronic gadgets worth
P15,000
Pokemon, Capital 8,000
Vangie, Capital
8,000
(40,000 x 1/5) =8,000
3. Vangie buys ½ interest from
the partners by paying cash of
P30,000.
Phenny, Capital 20,000
Pokemon, Capital 20,000
Vangie, Capital 40,000
(40,000 x ½) =20,000
Transfer of interest with
revaluation of assets or expressed
recognition of goodwill.
 
Example. Vangie buys ¼ interests
from Phenny by paying P12, 000. It
was further agreed that land which
was acquired by the partnership
five years ago be revalued. The
problem states that land should be
revealed but the amount was not
given. Use the new partner’s
payment as a basis for revaluing
land:
 
Journal Entry:

Land 16,000
Phenny, Capital 8,000
Pokemon, Capital 8,000

Phenny,Capital 12,000
Vangie, Capital 12,000