COURSE AFAR 2: ADVANCED FINANCIAL ACCOUNTING AND REPORTING 1

This module is prepared by professor Venus L. Catacutan. She’s an

associate professor in the College of Business and Accountancy-
DEVELOPER AND THEIR Accountancy department at Tarlac State University . Being a Certified
BACKGROUND Accountant, in addition to her teaching profession, shes’ likewise involve in
public practice which brings to this module some experiences on
specialized accounting concerns of different industries.

This course is designed to provide fundamental knowledge to students

concerning accounting for special transactions and advanced financial
reporting issues likely to be encountered in practice. It deals with the sthe
study of fundamental valuation accounting theory as applied to special
income and expense recognition methods and expanded business
COURSE DESCRIPTION operations. The course includes specialized problems in partnership
accounting, revenue from contract with customers (PFRS 15) and
accounting for domestic branches. The other topics deal with accounting for
the effect of changes in foreign exchange rates and other similar current
issues. Likewise discussed are debt restructuring and accounting for
financially distressed corporations.
1. Partnership Formation
2. Partnership Operations
3. Partnership Dissolutions
4. Partnership Liquidation (lump-Sum and Installment method)
5. Corporate Liquidation
6. Revenue Recognition- contract with customers (PFRS 15)
7. Revenue Recognition- contract with customers (Construction
Contract)
COURSE OUTLINE 8. Renenue Recognition- contract with customers ( Franchise and
Consignment)
9. Home Office, Branch, and Agency Accounting (General
Procedures)
10. Home Office, Branch, and Agency Accounting (Special
Procedures)
11. Foreign Currency Transactions
12. Hedging and Derivatives (FOREX)
13. Foreign Currency Translation
CHAPTER # 3

TITLE PARTNERSHIP DISSOLUTION

This module covers the detailed discussion on Partnership dissolution. It

provides information regarding the nature, concept and the effects of
dissolution on the operation of the partnership. It gives facts, figures and
I. RATIONALE
other relevant data concerning the accounting procedures in dissolving a
partnership which are relevant for accounting students in the event of
encountering the same accounting concerns in the practice of profession.
Another topic for this courses is about partnership dissolution, the expected
learning to be achieved by the student are properly disclosed in the
learning objectives stated below. Prior to taking this course, a student
must have already a concrete knowledge on basic accounting concepts ,
and skills in preparing financial statements otherwise the user of this
module must review the basic and financial accounting undertaken in
previous courses. knowledge on the concept of partnership in general, and
accounting for partnership formation and operation in particular , will be
taken into consideration since this is still a part and parcel of accounting for
INSTRUCTION TO THE USERS
partnership t (preparatory activities)
The developmental activities section provides the comprehensive and
vital information concerning accounting for partnership dissolution and its
effect on the operation of the partnership For assessment of
learning,closure activities like theoretical questions and problem solving
with different degree in terms of difficulty were provided. For evaluation ,
see the evaluation section for details, and lastly for activities and
preparation to be undertaken for next topic this module provides the
student/s the details.
 At the end of the chapter, the student shall be able to:
✓ Explain the nature of partnership dissolution and its effect on
business operation.
✓ Describe and enumerate the different causes of dissolution.
✓ Identify the accounting procedures in recording the different cases
II. LEARNING OBJECTIVES of dissolution.
✓ Prepare statement of partners’ equity after recording the
dissolution
✓ Evaluate the advantages and disadvantages of dissolving a
partnership

III. CONTENT
In partnership dissolution, several factors and steps are taken into
considerations thus, a user or student must:
1. have a knowledge on nature, scope and concept of partnership in
A. PREPARATPORY ACTIVITIES
general
2. be familiar with the legal and accounting considerations relating to
formation and operation of partnership

B. DEVELOPMENTAL ACTIVITIES

NATURE OF PARTNERSHIP DISSOLUTION

As mentioned in Chapter one, partnership has limited life in as much as any change in the original agreement of the
partners terminates the partnership contract. Any circumstance which causes the termination of a partnership may lead
to either dissolution or liquidation.
Dissolution and liquidation are two different things. Dissolution is defined in Article 1828 of the Civil Code of the
Philippines as a change in the relation of the partners caused by any partner ceasing to be associated in carrying out of
the business.
Dissolution of the old partnership may be followed by a formation of a new partnership. This called the dissolution by
change in ownership.

Liquidation refers to termination of business activities carried on by the partnership and winding up of partnership
affairs preparatory to going out of the business.
Therefore, dissolution does not necessarily imply that business operations will be terminated. A partnership may be
dissolved without being terminated but liquidation is always preceded by dissolution.
The legal provisions of Article 1830 and 1831 of the New Civil Code of the Philippines state the conditions that cause
partnership dissolution.

1. Dissolution by act of the parties – Certain acts by the partners of a partnership result in dissolution.
Partners’ mutual agreement to change the ownership and withdrawal of an existing partner are some of the
examples falling under this condition.
2. Dissolution by operations of the law – A partnership is automatically dissolved upon the occurrence of
certain incidents identified by law like death or insolvency of any partner, civil interdiction of any partner or any
event that makes the existing operations of the partnership unlawful.
3. Dissolution by judicial decree – The court may declare dissolution for some circumstances like insanity or
incapacity of a partner, deception or misconduct by one of the partners or internal dissension among partners.

CAUSES OF DISSOLUTION

The following are some of the reasons the result to partnership dissolution by change in the ownership structure:
1. Admission of a new partner
2. Withdrawal or retirement of a partner
3. Death of a partner
4. Incorporation of a partnership

ACCOUNTING FOR THE PARTNERSHIP DISSOLUTION

Prior to the recording of dissolution, the following should be accomplished to adjust and update partners’ capital
accounts.
➢ Determine the profit or loss from the operation and distribute the same to the partners as at the date of
dissolution.
 ➢ Correction of accounting errors in prior periods and revaluation of properties.

ADMISSION OF A NEW PARTNER

A partner, with consent of all partners, may be admitted in an existing partnership. When a partner is admitted, the
partnership is automatically dissolved and a new partnership is formed. New agreements will be devised in order to
administer the continuing business operation. Hence, a new Articles of Co-partnership should be drawn since the
dissolution of the old partnership terminates old agreements.

A new partner may be admitted into the partnership by:

1. Purchase of all or part of the interest from one or more of the existing partners.
2. Investment or asset contribution to the partnership.

Admission of a new partner by investment may fall under any of the following:
1. Total agreed capital is given
2. Total agreed capitalization is not given

Purchase of an Interest from One or More Partners

Take note of the following when an incoming partner purchases directly a portion or all of the interest of one or more the
existing partners.
➢ Since the new partner buys interest from the existing partner/s, the transaction is personal between the buying
and selling partner/s.
➢ The partnership assets remain unchanged, given that the amount paid by the new partner goes directly to the
selling partner and not to the partnership.
➢ The entry requires in the partnership book is to record the transfer of capital from the selling partner’s capital
account to buying partner’s capital account.
➢ A profit or loss arising from sale of interest is not to be recorded in the partnership books.
➢ A new profit or loss ratio of a new partnership should be agreed upon, in the absence of new agreement, the
new partner should be given a proportionate share of the profit or loss ratio of the original partners in
proportion to the interest acquired.

The purchase price of the interest sold to the new partner may be:
1. Equal to the book value of interest sold
2. Less than the book value of interest sold
3. More than the book value interest sold
4. Less than the book value of interest sold with express revaluation of assets
5. More than the book value of interest sold with express recognition of goodwill
6. More than the book value of interest sold with express revaluation of assets
Note: For items 4-6, the method to be used should be specifically provided in the dissolution agreement by the partners
before making the necessary adjustments.

Illustrative Problem
Assume the following data for ABC Partnership on December 31, 2020.

Partners Capital P & L ratio

A P 100,000 50%
B 60,000 30%
C 40,000 20%

On this date, D is admitted to the partnership.

Case 1: Partnership price is equal to the book value of the interest acquired from one of the partners.
D purchase one-half of the interest of A, by paying P50,000.

A, Capital P50,000
B, Capital P50,000
to record the admission of D for purchasing ½ of the interest of A

The partners’ equity before and after the admission appears as follows:

Partner’s Equity Partner’s

Partners Before Transfer of Equity After P & L Ratio
Admission the interest admission
A P100,000 (P50,000) P50,000 25%
 B 60,000 60,000 30%
C 40,000 40,000 20%
D 50,000 50,000 25%
TOTAL P200,000 P200,000 100%

Take note of the following:

• ½ of the capital of partner A is transferred to the capital of the new partner, D.
• The partnership did not receive the cash paid since the transaction is between A&D personally.
• Since 50% of the interest of A, which is equal to 25%, was transferred to D, the new P&L of A right after
admission is now equal 25% ( ½ of 50%)
Case 2: Purchase price is equal to the book value of two or more partners.

D pays P50,000 for a ¼ interest from all the partners.

A, Capital P25,000
B, Capital 15,000
C, Capital 10,000
D, Capital P50,000
to record the admission of D for a ¼ interest into the partnership

The partners’ equity before and after the admission appears as follows:
Partner’s Equity Partner’s
Partners Before Transfer of Equity After P & L Ratio
Admission the interest admission
A P100,000 (P25,000) P75,000 37.5%
B 60,000 (15,000) 45,000 22.5%
C 40,000 (10,0000 30,000 15%
D 50,000 50,000 25%
TOTAL P200,000 P200,000 100%

Take note of the following:

• ¼ of the capital of partners A, B and C were transferred to the capital of D, the new partner.
• The entry shows that no cash is transferred to the partnership therefore, the total capitalization of the
partnership remains the same before and after the admission.
• The P&L ratio was adjusted, 25% of each partners’ interest was transferred to the new partner.

Case 3: Purchase price is less than the book value of interest acquired.
Assume that the old partners agreed to receive the amount of P90,000 from D in exchange for ½ interest in the total
capitalization of the partnership. No express revaluation of assets was agreed upon by the partners as at the date of
admission.

A, Capital P50,000
B, Capital 30,000
C, Capital 20,000
D, Capital P100,000
to record the admission of D for a ½ interest into the partnership

The partners’ equity before and after the admission appears as follows:

Partner’s Equity Partner’s

Partners Before Transfer of Equity After P & L Ratio
Admission the interest admission
A P100,000 (P50,000) P50,000 25%
B 60,000 (30,000) 30,000 15%
C 40,000 (20,0000 20,000 10%
D 100,000 100,000 50%
TOTAL P200,000 P200,000 100%

Take note of the following:

• The above entry shows that regardless of the amount paid by D, the new partner, the amounts debited to the
old partners’ capital account are still equal to the interest being transferred.
• Since the partnership did not receive any cash, the difference of P10,000 (P100,000 – P90,000) is a personal
loss of a selling partners, hence not recorded as a partnership loss.
• ½ of the interest of the old partners are transferred to the new partner.
• The P&L ratio was adjusted, 50% of each partners’ interest was transferred to the new partner.
Case 4: Purchase price is more than the book value of interest acquired.
D agreed to pay a total of P75,000 for 30% interest in the profits or losses of the partnership. No express revaluation of
assets was agreed upon by the partners as at the date of admission.

A, Capital P30,000
B, Capital 18,000
C, Capital 12,000
D, Capital P60,000
to record the admission of D for a ½ interest into the partnership

The partners’ equity before and after the admission appears as follows:
Partner’s Equity Partner’s
Partners Before Transfer of Equity After P & L Ratio
Admission the interest admission
A P100,000 (P30,000) P70,000 35%
B 60,000 (18,000) 42,000 21%
C 40,000 (12,0000 28,000 14%
D 60,000 60,000 30%
TOTAL P200,000 P200,000 100%

Take note of the following:

• The above entry shows that regardless of the amount paid by D, the new partner, the amounts debited to the
old partners’ capital account are still equal to the interest being transferred.
• Since the partnership did not receive any cash, the difference of P15,000 (P75,000 – P60,000) is a personal
loss of a selling partners, hence not recorded as a partnership loss.
• 30% of the interest of the old partners was transferred to the new partner.
• The P&L ratio was adjusted,30% of each partners’ interest was transferred to the new partner.

Case 5: Purchase price is less than the book value of interest acquired with express revaluation of assets.
Assume that the old partners agreed to receive the amount of P90,000 from D in exchange for ½ interest in the total
capitalization of the partnership. The partners agreed that a revaluation of assets should be made before admission of
D.

Cash to be paid by partner D P90,000

Divided by interest acquired ½
Implied total capitalization of the partnership 180,000
Less total capitalization of partnership before revaluation 200,000
Decrease in asset/ decrease in capitalization P20,000

Entry no. 1
A, Capital P10,000
B, Capital 6,000
C, Capital 4,000
Assets P20,000
to record the downward revaluation of assets prior to D’s admission

Entry no. 2
A, Capital P45,000
B, Capital 27,000
C, Capital 18,000
D, Capital P90,000
to record the admission of D for a ½ interest into the partnership

The partners’ equity before and after the admission appears as follows:

Partner’s Partner’s Partner’s

Partners Equity Assets Equity after Transfer of Equity After P&L
Before Revaluation Revaluation the interest admission Ratio
Admission
A P100,000 (P10,000) P90,000 (P45,000) P45,000 25%
B 60,000 (6,000) 54,000 (27,000) 27,000 15%
C 40,000 (4,000) 36,000 (18,0000 18,000 10%
D 90,000 90,000 50%
 TOTAL P200,000 (P20,000) P180,000 P180,000 100%

Take note of the following:

• Entry No. 1 shows the downward revaluation of assets indicated by the amount paid by D which is less than
the interest being acquired. The same is used to adjust the current capitalization. The entry recognizes the
decrease in both the partnership assets and the capital accounts of the old partners in proportion to their
original profit or loss ratio.
• Entry No. 2 shows that half of the interest of each partners, after revaluation, was transferred to the new
partner.
• The P&L ratio was adjusted, 50% of each partners’ interest was transferred to the new partner.
• There being only a personal transaction among the partners, notice that the total partnership capitalization
after revaluation did change after admission.

Case 6: Purchase price is more than the book value of interest acquired with express revaluation of assets.
D agreed to pay a total of P75,000 for 30% interest in the profits or losses of the partnership. The partners agreed that a
revaluation of assets should be made before admission of D.

Cash to be paid by partner D P75,000

Divided by interest acquired 30%
Implied total capitalization of the partnership 250,000
Less total capitalization of partnership before revaluation 200,000
Increase in asset/ increase in capitalization P50,000

Entry no. 1
Assets P50,000
A, Capital P25,000
B, Capital 15,000
C, Capital 10,000
to record the upward revaluation of assets prior to D’s admission

Entry no. 2
A, Capital P37,500
B, Capital 22,500
C, Capital 15,000
D, Capital P75,000
to record the admission of D for a 30% interest into the partnership

The partners’ equity before and after the admission appears as follows:

Partner’s Partner’s Partner’s

Partners Equity Assets Equity after Transfer of Equity After P&L
Before Revaluation Revaluation the interest admission Ratio
Admission
A P100,000 P25,000 P125,000 (P37,500) P87,500 35%
B 60,000 15,000 75,000 (22,500) 52,500 21%
C 40,000 10,000 50,000 (15,000) 35,000 14%
D 75,000 75,000 30%
TOTAL P200,000 P50,000 P250,000 P250,000 100%

Take note of the following:

• Entry No. 1 shows the upward revaluation of assets indicated by the amount paid by D which is more than the
interest being acquired. The same is used to adjust the current capitalization. The entry recognizes the
increase in both the partnership assets and the capital accounts of the old partners in proportion to their
original profit or loss ratio.
• Entry No. 2 shows that 30% of the interest of each partner, after revaluation, was transferred to the new
partner.
• The P&L ratio was adjusted, 30% of each partners’ interest was transferred to the new partner.
• There being only a personal transaction among the partners, notice that the total partnership capitalization
after revaluation did change after admission.

Case 7: Purchase price is more than the book value of interest acquired with express revaluation of assets
express recognition of goodwill.
D agreed to pay a total of P75,000 for 30% interest in the profits or losses of the partnership. The partners agreed that
goodwill should be made before admission of D.
The term goodwill refers to an intangible asset that is used to recognize the ability of the business to earn more than the
normal earning s of the businesses operating in the same industry. Goodwill cannot be internally generated. It only
results from transactions involving acquisitions. Goodwill for this particular case is computed as follows:

Cash to be paid by partner D P75,000

Divided by interest acquired 30%
Implied total capitalization of the partnership 250,000
Less total capitalization of partnership before revaluation 200,000
Goodwill P50,000

Entry no. 1
Goodwill P50,000
A, Capital P25,000
B, Capital 15,000
C, Capital 10,000
to record the recognition of assets prior to D’s admission

Entry no. 2
A, Capital P37,500
B, Capital 22,500
C, Capital 15,000
D, Capital P75,000
to record the admission of D for a 30% interest into the partnership

The partners’ equity before and after the admission appears as follows:
Partner’s Partner’s Partner’s
Partners Equity Goodwill Equity after Transfer of Equity After P&L
Before Goodwill the interest admission Ratio
Admission
A P100,000 P25,000 P125,000 (P37,500) P87,500 35%
B 60,000 15,000 75,000 (22,500) 52,500 21%
C 40,000 10,000 50,000 (15,000) 35,000 14%
D 75,000 75,000 30%
TOTAL P200,000 P50,000 P250,000 P250,000 100%

Take note of the following:

• Entry No. 1 shows the recognition of goodwill indicated by the amount paid by D which is more than the
interest being acquired. The same is used to adjust the current capitalization. The entry recognizes the
increase in both the partnership assets and the capital accounts of the old partners in proportion to their
original profit or loss ratio.
• Entry No. 2 shows that 30% of the interest of each partner, after the recognition of goodwill, was transferred to
the new partner.
• The P&L ratio was adjusted, 30% of each partners’ interest was transferred to the new partner.
• There being only a personal transaction among the partners, notice that the total partnership capitalization
after revaluation did change after admission.

INVESTMENT OR ASSET CONTRIBUTION TO THE PARTNERSHIP

The following are to be observed when admitting a new partner by investment:

➢ The new partner will be admitted by investing or contributing assets to the partnership, consequently,
transaction is between the partnership and the new partner.
➢ Since the partnership receives cash or other asset from the incoming partner, the transaction therefore
increases both the total assets and total equity of the partnership.
➢ The investment will be recorded in the books of the partnership.

Definition of Terms
o Total Contributed Capital (TCC) – it is the total of the capital balances of the old partners and the actual
contribution of the new partner.
o Total Agreed Capital (TAC) – it is the amount of the new capital set by the partners for the partnership. It may
be equal to, more than, or less than the total contribution of both the old partners and new partner/s.
o Bonus - it is the amount transferred from one partner to another partner. To record the bonus, the capital
account of the receiving partner will be credited, while the capital account of the partner transferring the capital
will be debited.
o Capital Credit – it is the interest or the equity of the partners in the firm. It is computed by multiplying the total
 agreed capital by the portion of interest of a partner.

In recording the investment of the new partner, the terms of the agreement with respect to the admission must be
observed. The following procedures may be used in analyzing and recording the transaction involving admission by
means of investments if the total agreed capitalization is given or specifically stated.

A. Compare the Total Agreed Capital (TAC) and the Total Contributed Capital (TCC)
a. If TAC is equal to TCC, no asset revaluation or goodwill recognition is to be made
b. If TAC is greater than TCC, the difference may be attributable to the understatement of the tangible
assets of the partnership or it may result to the recognition of goodwill depending on the agreement of
the partners.
c. If TAC is less than TCC, the difference may be attributable to the overstatement of the tangible assets
of the partnership or the required reduction in partners’ capital which can be effected by withdrawal.

B. Compare the New Partner’s Agreed Capital (NPAC) and the New Partner’s Contributed Capital (NPCC)
a. If NPAC is equal to NPCC, there is no capital transfer between the old and new partner/s. The old
partners’ capital account will be credited for asset revaluation or goodwill recognition, if any.
b. If NPAC is greater than NPCC, the additional capital credit is transferred from old partners to the new
partner as bonus.
c. If NPAC is less than NPCC, the difference in capital from new partner/s to old partners.

Illustrative Problems:

The partnership of R, S and T admitted Q as a new partner by investing cash in the firm. Capital balances and profit and
loss (P/L) sharing ratio of the old partners prior to admission were as follows:
Partners Capital P & L ratio
R P 100,000 30%
S 150,000 40%
T 90,000 30%
Total P340,000 100%

A. Total Agreed Capitalization is given

CASE 1: No goodwill, No asset revaluation, No bonus
Q invests P60,000 for a 15% interest in the firm. The total agreed capital after the admission of Q is P400,000.
Cash P60,000
Q, Capital P60,000
to record the investment of Q for a 15% interest in the partnership

Analysis
Actual Contribution New Partners’ Capital
Partners (Capital Credit)
R P100,000 P100,000
S 150,000 150,000
T 90,000 90,000
Q 60,000 60,000
TCC P400,000 TAC P400,000

Take note of the following:

• Since the transaction between the partnership and the new partner, the total partnership assets and partners’
equity increased by P60,000.
• Q’s capital is 15% of the total agreed equity of P400,000. (P400,000 x 15%)
• There is no goodwill or bonus or asset revaluation since TAC and TCC are equal and NPAC and NPCC are
likewise equal.
• The P&L will be revised following the investment of Q who is given a 15% interest in the total agreed
capitalization of the firm.

CASE 2: Bonus to old partners.

Q invests P60,000 for a 10% interest in the firm. The total agreed capital after the admission of Q is P400,000.
Cash P60,000
R, Capital P6,000
S, Capital 8,000
T, Capital 6,000
Q, Capital 40,000
to record the investment of Q for a 10% interest in the partnership
The analysis and the computation of bonus are as follows:
Actual Contribution New Partners’ Capital (Capital
Partners Bonus Credit)
R P100,000 P6,000 P106,000
S 150,000 8,000 158,000
T 90,000 6,000 96,000
Q 60,000 (20,000) 40,000
TCC P400,000 TAC P400,000

Take note of the following:

• The total partners’ equity was increased by P60,000 as well as total assets of the firm.
• Q’s capital is equal to 10% of the total agreed equity of P400,000. (P400,000 x 10%)
• Bonus is to be given to old partners based on the respective P&L ratio of the old partners since the TAC is
equal to TCC and NPAC is less than NPCC.
• The P&L will be revised following the investment of Q who is given a 10% interest in the total agreed
capitalization of the firm.

CASE 3: Bonus to new partner.

Q invests P60,000 for a 20% interest in the firm. The total agreed capital after the admission of Q is P400,000.
Cash P60,000
R, Capital 6,000
S, Capital 8,000
T, Capital 6,000
Q, Capital P80,000
to record the investment of Q for a 20% interest in the partnership

The analysis and the computation of bonus are as follows:

Actual Contribution New Partners’ Capital (Capital
Partners Bonus Credit)
R P100,000 P(6,000) P94,000
S 150,000 (8,000) 142,000
T 90,000 (6,000) 84,000
Q 60,000 20,000 80,000
TCC P400,000 TAC P400,000

Take note of the following:

• The total partners’ equity was increased by P60,000 as well as total assets of the firm.
• Since the agreement provides that 20% of the total partners equity should be given to the new partner, then
P80,000 should be credited to his account. (P400,000 x 20%)
• There is a transfer of interest from the old partners to the new partner in an amount of P20,000 representing
bonus from the old partners since the TAC is equal to TCC and NPAC is more than NPCC.
• The distribution of bonus is based on the respective P&L ratio of the old partners.
• The P&L will be revised following the investment of Q who is given a 20% interest in the total agreed
capitalization of the firm.

CASE 4: Asset Revaluation.

Q invests P60,000 for a 12% interest in the firm. The total agreed capital after the admission of Q is P500,000. Asset
revaluation is to be made in relation to the admission.
Assets P100,000
R, Capital P30,000
S, Capital 40,000
T, Capital 30,000
to record upward adjustment for asset in the amount of P100,000

Cash P60,000
Q, Capital P60,000
to record the investment of Q for a 12% interest in the partnership

The investment of Q results to an asset revaluation. The amount of the asset adjustment may be determined as the
difference between the total agreed capitalization and the total contributed capital. The total amount of revaluation and
the distribution of the same are shown in the following table:
 Actual Contribution Asset New Partners’ Capital (Capital
Partners Revaluation Credit)
R P100,000 P30,000 P130,000
S 150,000 40,000 190,000
T 90,000 30,000 120,000
Q 60,000 60,000
TCC P400,000 P100,000 TAC P500,000

Take note of the following:

• The total agreed capitalization is greater than the total contributed capital, so there is an asset revaluation as
expressly stated in the problem.
• The new partner’s interest is equal to his capital contribution, therefore the amount of asset revaluation will be
credited in favor of the old partners
• The distribution of asset revaluation is based on the respective P&L ratio of the old partners before the
admission of Q.
• The P&L will be revised following the investment of Q who is given a 20% interest in the total agreed
capitalization of the firm.

CASE 5: Asset Revaluation and Bonus to old partners.

Q invests P60,000 for a 10% interest in the firm. The total agreed capital after the admission of Q is P500,000. Asset
revaluation is to be made in relation to the admission.
Assets P100,000
R, Capital P30,000
S, Capital 40,000
T, Capital 30,000
to record upward adjustment for asset in the amount of P100,000

Cash P60,000
R, Capital P3,000
S, Capital 4,000
T, Capital 3,000
Q, Capital 50,000
to record the investment of Q for a 10% interest in the partnership

The analysis and the computation of asset revaluation and bonus are as follows:
Actual Contribution Asset New Partners’ Capital
Partners Revaluation Bonus (Capital Credit)
R P100,000 P30,000 P3,000 P133,000
S 150,000 40,000 4,000 194,000
T 90,000 30,000 3,000 123,000
Q 60,000 (10,000) 50,000
TCC P400,000 P100,000 TAC P500,000

Take note of the following:

• The investment of Q resulted to the revaluation of assets and the recognition of bonus.
• Bonus is to be given to old partners based on the respective P&L ratio of the old partners since the TAC is
equal to TCC and NPAC is less than NPCC.
• The allocation of asset revaluation is based on the respective P&L ratio of the old partners before the
admission of Q.
• The modification of P&L ratio will go along with the admission of the new partner.

CASE 6: Negative Asset Revaluation

Q invests P60,000 for a 16% interest in the firm. The total agreed capital after the admission of Q is P375,000.
R, Capital P7,500
S, Capital 10,000
T, Capital 7,500
Assets P25,000
to record downward adjustment for asset in the amount of P25,000

Cash P60,000
Q, Capital P60,000
 to record the investment of Q for a 16% interest in the partnership

The analysis and the computation of asset revaluation are as follows:

Actual Contribution Asset New Partners’ Capital (Capital
Partners Revaluation Credit)
R P100,000 P(7,500) P92,500
S 150,000 (10,000) 140,000
T 90,000 (7,500) 82,500
Q 60,000 60,000
TCC P400,000 P(25,000) TAC P375,000

Take note of the following:

• The total agreed capitalization f the partnership is less than the actual contributions of the partners, this can be
attributed to some partnership assets that are overvalued or it could be due to the impairment of some
partnership assets.
• The negative asset revaluation decreases the old partnership assets and the capital of old partners.
• The new partner’s capital credit is equal to his actual contribution.
• Under this method the agreed capitalization is computed in the same manner as in positive asset revaluation.
• The reduction in the value of the assets of the partnership was distributed based on the original profit and loss
ratio of the old partners.
CASE 7: Goodwill to old partners
Q invests P60,000 for a 12% interest in the firm. The total agreed capital after the admission of Q is P500,000. Goodwill
is to be recognized in relation to the admission.
Assets P100,000
R, Capital P30,000
S, Capital 40,000
T, Capital 30,000
to record recognition of goodwill in the amount of P100,000

Cash P60,000
Q, Capital P60,000
to record the investment of Q for a 12% interest in the partnership

The investment of Q resulted in the recognition of goodwill. The amount of the recognized goodwill may be determined
as the difference between the total agreed capitalization and the total contributed capital. The total amount of goodwill
and the distribution of the same are shown in the following table:
Actual Contribution New Partners’ Capital (Capital
Partners Goodwill Credit)
R P100,000 P30,000 P130,000
S 150,000 40,000 190,000
T 90,000 30,000 120,000
Q 60,000 60,000
TCC P400,000 P100,000 TAC P500,000

Take note of the following:

• The total agreed capitalization is greater than the total contributed capital, so there is recognition of goodwill as
expressly stated in the problem.
• The new partner’s interest is equal to his capital contribution, therefore the amount of asset revaluation will be
credited in favor of the old partners
• The distribution of goodwill is based on the respective P&L ratio of the old partners before the admission of Q.
• The P&L will be revised following the investment of Q who is given a 12% interest in the total agreed
capitalization of the firm.

CASE 8: Goodwill to new partners

Q invests P60,000 for a 32% interest in the firm. The total agreed capital after the admission of Q is P500,000. Goodwill
is to be recognized in relation to the admission.
Goodwill P100,000
Q, Capital P100,000
to record recognition of goodwill in the amount of P100,000

Cash P60,000
Q, Capital P60,000
to record the investment of Q for a 32% interest in the partnership
The investment of Q resulted in the recognition of goodwill. The amount of the recognized goodwill may be determined
as the difference between the total agreed capitalization and the total contributed capital. The total amount of goodwill
and the distribution of the same are shown in the following table:
Actual Contribution New Partners’ Capital (Capital
Partners Goodwill Credit)
R P100,000 P100,000
S 150,000 150,000
T 90,000 90,000
Q 60,000 100,000 160,000
TCC P400,000 P100,000 TAC P500,000

Take note of the following:

• The total agreed capitalization is greater than the total contributed capital, so there is recognition of goodwill as
expressly stated in the problem.
• The new partner’s interest is more than his capital contribution; therefore the amount of goodwill will be
credited in favor of the new partner.
• The P&L will be revised following the investment of Q who is given a 12% interest in the total agreed
capitalization of the firm.

B. Total Agreed Capitalization is not given (implied)

CASE 9: Bonus to Old Partners
Q invests P60,000 for 10% interest of the firm.

Cash P60,000
R, Capital P6,000
S, Capital 8,000
T, Capital 6,000
Q, Capital 40,000
to record the investment of Q for a 10% interest in the partnership

The analysis and the computation of bonus are as follows:

Actual Contribution New Partners’ Capital (Capital
Partners Bonus Credit)
R P100,000 P6,000 P106,000
S 150,000 8,000 158,000
T 90,000 6,000 96,000
Q 60,000 (20,000) 40,000
TCC P400,000 TAC P400,000

Take note of the following:

• Since bonus method is to be used, it is assumed that total agreed capital is equal to total contributed capital.
• The total partners’ equity was increased by P60,000 as well as total assets of the firm.
• The TAC is equal to TCC, but Q is credited with P20,000 less than his capital contribution, thus indicating a
transfer of interest or bonus from Q to the old partners.
• The distribution of bonus is based on the respective P&L ratio of the old partners.
• The P&L of the partners was based on the new credited interest of the partners.

CASE 10: Bonus to New Partners

Q invests P60,000 for 25% interest of the firm.
Cash P60,000
R, Capital 12,000
S, Capital 16,000
T, Capital 12,000
Q, Capital P100,000
to record the cash investment of Q and the transfer of interest from the old partners
to the newly admitted partner.

The analysis and the computation of bonus are as follows:

Actual Contribution New Partners’ Capital (Capital
Partners Bonus Credit)
R P100,000 P(12,000) P88,000
S 150,000 (16,000) 134,000
T 90,000 (12,000) 78,000
Q 60,000 40,000 100,000
 TCC P400,000 TAC P400,000

Take note of the following:

• The total agreed capitalization is is equal to the total contributed capital, so there is neither asset revaluation
nor recognition of goodwill.
• The investment of Q resulted to the recognition of a bonus.
• Since the capital credit to the new partner is more than his actual investment, old partners transferred part of
their capital balance to the new partner in the form bonus.
• The transfer of interest by the old partners is based on their original P&L ratio.

CASE 5: Asset Revaluation or Goodwill to old partners.

Q invests P60,000 for 10% interest of the firm.

Assets P200,000
R, Capital P60,000
S, Capital 80,000
T, Capital 60,000
to record upward adjustment on partnership assets

Cash P60,000
Q, Capital P60,000
to record the investment of Q for a 10% interest in the partnership

Actual Contribution Asset New Partners’ Capital (Capital

Partners Revaluation Credit)
R P100,000 P60,000 P160,000
S 150,000 80,000 230,000
T 90,000 60,000 150,000
Q 60,000 60,000
TCC P400,000 P200,000 TAC P600,000

The agreed capitalization of the new partnership is computed by dividing the new partner’s contribution by his interest
(P60,000/10% = P600,000)

Take note of the following:

• Under this method, to test and determine the TAC (which includes an asset revaluation), the total interest of
the old partners and the interests of the newly admitted partner must be considered by using the trial and error
process to determine which will yield a higher amount to use as basis for agreed capitalization.)
• The formula to be used is:
o TAC = TCC of old partners divided by total agreed interest for old partners; OR
o TAC = Capital contribution by the new partner divided by the agreed interest for the new partner
• Assets are to be revalued prior to the admission of the new partner.
• The investment of Q resulted to an upward or positive asset revaluation
• Although the agreed capital is not explicitly stated, it can be obtained by using the formula: TAC =P60,000/10%
• Old partners’ capital credit of P540,000 is P200,000 more than their actual contribution, therefore, assets are
revalued in favor of the old partners.

Alternatively, if there is no express agreement on the valuation of the partnership assets, the difference is then recorded
as goodwill. Accordingly, the following entries and contribution will be made:

Goodwill P200,000
R, Capital P60,000
S, Capital 80,000
T, Capital 60,000
to record upward adjustment on partnership assets

Cash P60,000
Q, Capital P60,000
to record the investment of Q for a 10% interest in the partnership
 Actual Contribution New Partners’ Capital (Capital
Partners Goodwill Credit)
R P100,000 P60,000 P160,000
S 150,000 80,000 230,000
T 90,000 60,000 150,000
Q 60,000 60,000
TCC P400,000 P200,000 TAC P600,000

WITHDRAWAL AND RETIREMENT OF A PARTNER

A partner may withdraw or retire from a partnership due to various reasons and this action is legal as long as it is
agreed upon by all partners, otherwise he will be held liable for any damages resulting from that action. The
retirement/withdrawal of a partner result in legal dissolution of the partnership. The dissolution does not require
termination of the operation of the partnership business; however, partnership has the obligation to pay the retiree the
amount due to him. To properly measure the retiring partner’s capital account, adjustments to be made to update the
partners’ capital accounts and the partnership books as a whole.

When the partner retires, his interest in the partnership has to be established as of such date, the interest is affected by
the retiring partner’s investments, withdrawals and loan to and from the partnership, subject to the following
adjustments:
➢ Profit or loss from operations from the last closing date to the date of his retirement
➢ Changes in the valuation of all assets and liabilities, and
➢ If the net income or loss of prior years were inappropriately computed, these should also be corrected and any
discrepancy should be distributed to partners.

This type of dissolution may be carried out through any of the following alternatives:
➢ By selling his equity or interest to an outside party
➢ By selling his equity or interest to one or more remaining partners
➢ By selling his equity or interest to the partnership

Sale of interest to a partner or to an outsider (new partner)

With the mutual consent of the remaining partners, a withdrawing or retiring partner may sell his interest to one or more
of the remaining partners in the partnership or to an outsider. This change in the partnership is treated in the same
manner in the same manner as that of an admission of a new partner by purchase of interest of an existing partner. The
total asset of the partnership is not affected by the consideration involved. No gain or loss is recorded by the partnership
as a result of the transaction. The partnership only recognize the transfer of of interest of the retiring partner‘s capital
account and a credit to the buying partner’s capital account equal to the amount of interest transferred.

Sale of interest to the partnership

The interest of the withdrawing or retiring partner is paid out of the partnership assets. Hence, the total assets of the
partnership and the owners’ equity will decrease. The settle to the withdrawing partner is either:
➢ Payment in cash
➢ Payment by non-cash asset
➢ Recognition of a liability for the full or balance of the unpaid interest of the retiring partner

The withdrawing partner’s interest may be settled by the partnership and the payment may be:
✓ Equal to his adjusted capital credit
✓ More than his adjusted capital credit
o Bonus to the retiring partner
o Asset Revaluation, increase creditable to all partners
o Goodwill creditable to all partners
✓ Less than his adjusted capital credit
o Bonus to remaining partners
o Asset revaluation, decrease or asset impairment chargeable to all partners.
Illustration:

On January 1, 2020, the capital balances and profit and loss ratio of A, B and C are as follows
Partners Capital P & L ratio
A P 100,000 25%
B 150,000 25%
C 200,000 50%

On July 01, 2020, B withdraws from the partnership. The semi-annual net income of the partnership for six months is
P60,000. It was also found out that the inventory costing P120,000 has a fair market value of P200,000.
The following entries will be prepared prior to the retirement of B from the partnership.
Entries:
Income Summary P60,000
A, Capital (P60,000 x 25%) P15,000
B, Capital (P60,000 x 25%) 15,000
C, Capital (P60,000 x 50%) 30,000
To record the distribution of profit to partners

Inventory P80,000
A, Capital (P80,000 x 25%) P20,000
B, Capital (P80,000 x 25%) 20,000
C, Capital (P80,000 x 50%) 40,000
To record the adjustment of inventory

After profit adjustment and revaluation, the capital balance of B is shown below:
Computation:
Capital of B before his withdrawal P150,000
Add: Share in profit P15,000
Profit adjustment 20,000 35,000
B, Capital, adjusted P185,000

CASE 1: Settlement is equal to the withdrawing partner’s interest

Assume that B agrees to accept payment equal to his interest.

B, Capital P185,000
Cash P185,000
to record settlement with B

CASE 2: Settlement is more than the withdrawing partner’s interest

Assume that B was paid P200,000.

2a. Bonus to Retiring Partner

B, Capital P185,000
A, Capital 5,000
C, Capital 10,000
Cash P200,000
to record the retirement of B, with bonus from the remaining partners

Computation:
B, Capital interest P185,000
Less: cash received by B 200,000
Bonus P15,000

A, share P15,000 x 25/75 P5,000

B, share P15,000 x 50/75 10,000
P15,000

2b. Asset Revaluation (increase the capital accounts of the partners)

Assets (15,000/25%) P60,000
A, Capital (P60,000 x 25%) P15,000
B, Capital (P60,000 x 25%) 15,000
C, Capital (P60,000 x 50%) 30,000
To record the revaluation and its distribution to all partners

The total revaluation of partnership assets is measured by the amount implied by the excess payment. As shown in the
above computation, the excess payment of 15,000 (185,000 – 200,000) is divided by B’s interest, which is 25%, to
determine the total asset revaluation amounting to P60,000. After recording the asset revaluation, the capital balance of
B is now 200,000. Thus the settlement to his is recorded as follows:

B, Capital P200,000
Cash P200,000
 to record the retirement of B

2c. Goodwill Recognition (increase the capital accounts of the partners)

Goodwill (15,000/25%) P60,000
A, Capital (P60,000 x 25%) P15,000
B, Capital (P60,000 x 25%) 15,000
C, Capital (P60,000 x 50%) 30,000
To record the recognition of goodwill and its distribution to all partners

The total recognized goodwill of partnership assets is measured by the amount implied by the excess payment. As
shown in the above computation, the excess payment of 15,000 (185,000 – 200,000) is divided by B’s interest, which is
25%, to determine the total goodwill amounting to P60,000. After recording the asset revaluation, the capital balance of
B is now 200,000. Thus the settlement to his is recorded as follows:

B, Capital P200,000
Cash P200,000
to record the retirement of B

CASE 3: Settlement is less than the withdrawing partner’s interest

Assume that B was paid P155,000

3a. Bonus to remaining partners

B, Capital P185,000
A, Capital P10,000
C, Capital 20,000
Cash 135,000
to record the retirement of B, with bonus from the remaining partners

Computation:
B, Capital interest P185,000
Less: cash received by B 155,000
Bonus P30,000

A, share P15,000 x 25/75 P10,000

B, share P15,000 x 50/75 20,000
P30,000

3b. Asset Revaluation or Asset Impairment (decrease the capital accounts of the partners)
A, Capital (P120,000 x 25%) P30,000
B, Capital (P120,000 x 25%) 30,000
C, Capital (P120,000 x 50%) 60,000
Asset P120,000
To record the recognition of goodwill and its distribution to all partners

The total amount of asset revaluation which is P120,000 is calculated by dividing B’s share in the revaluation which is
30,000 by his profit and loss share of 25% OR 30,000/25%.Thus B’s capital of P185,000 will be decreased by 30,000.
The capital account B after the recording of asset impairment will amount to P155,000.

B, Capital P155,000
Cash P155,000
to record the retirement of B

DEATH OR INCAPACITY OF A PARTNER

The death or incapacity of a partner legally dissolves the original association of the old partnership since the deceased
partner to be associated in the carrying out of the business operation. If the interest of the deceased partner is
purchased by the remaining partner, the transaction is treated in the same manner as admission of a partner by
purchase of interest, hence the same will only require a transfer of interest from the deceased partner to the remaining
partners who bought the interest of the former in the partnership.
If the deceased partner’s share has been paid out of partnership funds, the accounting procedure will be similar to that
of the withdrawal of a partner. In case payment to the estate of the deceased partner cannot be made immediately, the
following procedures may be observed:
 1. Compute for the partner’s share in the profit or loss until the date pf the death.
2. The balance of the capital account of deceased partner should be transferred to the liability account “Payable
to the partner’s estate.”
3. From the date of settlement, pay the total amount due to his estate.

Illustration

On January 1, 2020, the capital balances and profit and loss ratio of A, B and C are as follows

Partners Capital P & L ratio

A P 100,000 25%
B 150,000 25%
C 200,000 50%

On July 01, 2020, B died. Estate of B is to be paid one year from the date of death including a 16% accrued interest.
The semi-annual net income of the partnership for six months is P60,000. It was also found out that the inventory
costing P120,000 has a fair market value of P200,000.

The following entries will be prepared prior to the retirement of B from the partnership.

Entries:
Income Summary P60,000
A, Capital (P60,000 x 25%) P15,000
B, Capital (P60,000 x 25%) 15,000
C, Capital (P60,000 x 50%) 30,000
To record the distribution of profit to partners

Inventory P80,000
A, Capital (P80,000 x 25%) P20,000
B, Capital (P80,000 x 25%) 20,000
C, Capital (P80,000 x 50%) 40,000
To record the adjustment of inventory

After profit adjustment and revaluation, the capital balance of B is shown below:

Computation:
Capital of B before his withdrawal P150,000
Add: Share in profit P15,000
Profit adjustment 20,000 35,000
B, Capital, adjusted P185,000

Entries:
July 01, 2020
B, Capital P185,000
Payable to B’s estate P185,000
to record transfer of B’s capital account to liability account

December 31, 2020

Interest Expense P14,800
Payable to B’s estate P14,800
to accrue 16% interest from July 01, 2020 to December 31, 2020

June 30, 2020

Interest Expense P14,800
Payable to B’s estate 199,800
Cash P214,600
to record full payment to B’s Estate
INCORPORATION OF PARTNERSHIP

In the event that partners come to a decision to incorporate the partnership due to different benefits of having a
corporate form of business organization, the corporation takes over the asset and assume all the liabilities of the
partnership in exchange for share of stocks. The shares will be distributed to the partnership in payment of their interest.
The accounting procedures in recording the incorporation of a partnership are as follows:

1. Record all necessary adjustments in accordance with the agreement of the partners.
2. Record the transfer of all assets and liabilities to the corporation and the receipt of share capital by the
partnership.
3. Close the partnership books by distributing the shares of stock to the partners in payment of their equity
interest.

Illustration.

Partners Rhene and Nath, who share equally in the profit and losses of the business, organized the RN Corporation to
take over the partnership business. RN Corporation authorized to issue 10,000 ordinary shares, P50 par value, of which
5,000 ordinary shares are issued to partners for their net assets. The statement of financial position of the partnership
appeared as follows:

Rhene and Nath

Statement of Financial Position
July 1, 2020

ASSETS
Cash P25,000
Accounts Receivable P150,000
Less: Allowance for bad debts 15,000 135,000
inventories 125,000
Equipment P200,000
Less: Accumulated Depreciation 25,000 175,000
TOTAL P460,000

LIABILITIES & EQUITY

Accounts payable P50,000
Notes Payable 150,000
Rhene, Capital 150,00
Nath, Capital 110,000
TOTAL P460,000

The partners agree to make the following adjustments before the corporation:
a. Increase the allowance for bad debts to P20,000.
b. The cost of inventories will be increased by P30,000.
c. The market value of equipment is P150,000.
d. Recognize accrued expenses of P10,000

On July 1, 2020 the following journal entries were prepared following the incorporation of the partnership.

Entries:

Inventories P30,000
Rhene, Capital 5,000
Nath, Capital 5,000
Allowance for bad debts P5,000
Accumulated Depreciation 25,000
Accrued expenses 10,000
To adjust the assets and liabilities of the partnership based on their agreement and distribute the
net adjustment to partners.
 Shares of RN Corporation P250,000
Accounts Payable 50,000
Notes Payable 150,000
Accrued Expenses 10,000
Allowance for bad debts 20,000
Accumulated depreciation 50,000
Cash P25,000
Accounts Receivable 150,000
Inventories 155,000
Equipment 200,000
To record transfer of assets and liabilities to RN Corporation and the receipts of 5,000 shares
of P50 par value stocks.

Nath, Capital P105,000

Rhene, Capital 145,000
Share of RN Corporation P250,000

Entries in the books of RN Corporation

Cash P25,000
Accounts Receivable 150,000
Inventories 155,000
Equipment 150,000
Accounts Payable P50,000
Notes Payable 150,000
Accrued Expenses 10,000
Allowance for bad debts 20,000
Shares Capital 250,000
To record the acquisition of assets and liabilities from the partnership at their adjusted
values.

C. CLOSURE ACTIVITIES:

The following work exercises intend to evaluate what the learners have learned in this topic. Write your answers in your
portfolio journal.

A. REVIEW QUESTIONS:

1. What is dissolution?
2. Describe the possible effects of dissolution in the operation of the partnership.
3. What are the different causes of dissolution?
4. How can new partners be admitted into the partnership?
5. Differentiate total contributed capital and total agreed capital.

B. PROBLEMS

Problem 1. STAR-X Partnership, Night, Flare, and Air as members, has been in business for 15 years. On 12/31/20, Air
decided to retire from the partnership. The partnership balance sheet reported the following capital balances for each
partner at 12/31/20: P1,050,000; P1,400,000 and P840,000 for Night, Flare, and Air, respectively. The partners allocate
partnership and loss in the ratio of 2:3:5

Required: Record the withdrawal of Air under each of the following cases:

Case 1: Air interest was acquired for P1,050,000 by Flare in a personal transaction. Partnership assets were not
revalued and goodwill was not recognized.
Case 2: Assume the same fact as required in Case 1 except the partnership goodwill applicable to the entire business
was recognized by the partnership.
Case 3: Air was given P1,260 000 of partnership cash upon retirement.
Case 4: Air was given P420,000 of cash and partnership land with a fair value of P840,000. The carrying amount of the
land on the partnership books was P700,000,
Case 5: Air was given P 1,050,000 of partnership cash upon retirement. The portion of goodwill attributable to Air was
recorded by the partnership.
Case 6: Assume the same facts required in Case 5 except that the partnership goodwill attributable to all partners were
recorded.
Case 7: Due to limited cash in the partnership, Air was given land with a fair value of P700,000 and notes payable for
P350,000. The carrying amount of the land on the partnership books was P420,000.

Problem 2. Ari and Janco are partners in IXIA Partnership who have capitals of P 30 000 and P 20 000 and wih a profit
and loss ratio of 75% and 25% respectively. They agree to admit Yelena as a partner upon her payment of P 30 000.
What are the entries would be made on the firm book, assuming that:

a. One third of the capital balances of the old partners are transferred to the new partner, Ari and Janco dividing
the cash between themselves.

b. One third of the capital balances of the old partners are transferred to the new partner, Ari and Janco dividing
the cash among themselves. However, before recording the admission of Yelena, assets were positively
revalued that brings her capital may be equal to the amount paid for the interest.

c. The cash is invested in the business and Yelena is credited with a with a ¼ interest in the firm, the bonus
method being used in recording his investment.

d. The cash is invested in the business and Yelena is credited the full amount of her investment, which is to be
25% of the new firm.

e. The cash is invested in the business and Yelena credited for P 40 000, which is to be 33 1/3% of the new firm
capital.

Problem 3.L,M and N are partners sharing profits in the ratio of 3:2:1 respectively, Capital accounts are P500,000,
P300,000 and P200,000 on December 31, 2020, when N decides to withdraw. It is agreed to pay P300,000 for N’s
interest. Profits after the withdrawal of N are to be shared equally.

a. Using the bonus approach, how much are the capital balances of L and M after N’s withdrawal
b. Using assets revaluation approach, how much are the capital balances of L and M after N’s withdrawal?

Problem 4.On January 1, partners C , D and E who share profits and losses in the ration of 5:3: 2, respectively, decided
to dissolve their partnership. On this date, part of the partnership condensed balance sheet was as follow:

Liabilities and Partner’s Equity

Liabilities 60,000
C, Loan 20,000
C, Capital 60,000
D, Capital 90,000
E, Capital 70,000
300,000

You are given the following independent cases:

A) The partners decided to admit Fay under the following conditions:
1. 1/3 of D interest was to be purchased by F for P50,000,
2. F makes additional contribution to make her total capital credit 20%, and
3. No bonus is to be recognized.
How much should be invested by F?
What is the revised partner’s equity?
B) A new partner, F will be admitted to the partnership for a 20% interest and a P10,000 bonus.
How much should F invest?
What is the revised Partner’s equity?
C) F is admitted for a 20% interest in the partnership by paying P50,000 to D&E Interest is transferred in
proportion to their capital balances.
How much is the revised partner’s equity?
D) F wishes to invest cash for 20% interest based on old partner’s equity.
How much would F capital credit?
E) F, a new partner, will pay the partnership P60,000 for a 20% interest in the partnership. Old partners
agreed to recognize assets revaluation for the new partner.
 Given the above information, is the agreement valid? Prove it.
F) C wants to retire from the partnership. The partner decided to give her P100,000 for all her interest
knowing that the fair value of the real estate of the company has appreciated with the opening of
foreign investments in the area.
What would be the partner’s equity after C’s retirement?

C. MULTIPLE CHOICES:
1. Lorna and Aida are partners with profit and loss ratio of 75:25 and capital balances of P100,000 and P50,000,
respectively. Fe is to be admitted into the partnership by purchasing a 20% interest in the capital, profits and
losses for P60,000. Assuming that no asset is to be made, the capital balances of Lorna, and Aida after the
admission of Fe are:
a. Lorna, P80,000 and Aida, P40,000 c. Lorna, P112,000 and Aida, P38,000
b. Lorna, P120,000 and Aida, P60,000 d. Lorna, P100,000 and Aida, P50,000

2. Using the information in #1 and assuming that asset revaluation is to be made, the capital balances of Lorna,
Aida and Fe are:
a. P170,000; P70,000; P60,000 c. P192,500; P75,000; P30,000
b. P800,000; P40,000; P30,000 d. P100,000; P50,000; P60,000

3. Shawn, Justine and Blake are partners with capital balances of P224,000, P260,000 and P116,000
respectively, sharing profits and losses in the ratio of 3:2:1. Erik is admitted as a new partner bringing with him
expertise and reputation. He is to invest cash for a 25% interest in the assets of the partnership which includes
a credit of P70,000 for bonus upon his admission. How much cash should Erik contribute?
a. P130,000 c. P200,000
b. P185,000 d. P150,000

4. The partnership of Nano, Bondoc, and Espejo have capital account balances as follows; Nano, P35,0000;
Bondoc, P50,000; Espejo, P40,000. Their profit and loss ratios are 30%, 50%, 20% respectively. With the
consent and knowledge of Nano and Bondoc, Espejo sold his full interest to Dona. Espejo was paid P46,000 in
cash. The new capital balances would be:
NANO BONDOC ESPEJO
a. P35,000 P50,000 P46,000
b. P36,800 P53,000 P41,200
c. P35,000 P50,000 P40,000
d. P35,000 P50,000 P6,000

5. The total of the partners’ capital accounts was P110,000 before the recognition of partnership asset
revaluation in preparation for the withdrawal of partner whose profit and loss sharing ratio is 2/10. He was paid
P28,000 by the firm in final settlement for his interest. The remaining partners’ capital accounts excluding their
share of the asset revaluation, totalled P90,000 after his withdrawal. The total asset revaluation of the firm
agreed upon was:
a. P40,000 c. P20,000
b. P28,000 d. P8,000

6. Malonzo, Magararo and Manaloto share partnership profits in the ratio of 2:3:5. On September 30, Manaloto
opted to retire the partnership. The capital balances on this date follow:
Malonzo P25,000
Magararo P40,000
Manaloto P35,000
How much is to be debited from Malonzo, assuming Manaloto is paid P39,000 in full settlement of his
partnership interest?
a. P2,4000 c. P3,000
b. P4,000 d. P1,600

7. Dalisay, Olegario and Cabrera are partners with capital balances on December 31, 2018 of P300,000,
P300,000, and P200,000 respectively. Profits are shared equally. Cabrera wishes to withdraw and it is agreed
that he is to take certain furniture and fixtures at their second-hand value of P12,000 and note for the balance
of his interest. The furniture and fixtures are carried on the books as fully depreciated. Brand new, furniture and
fixtures may cost P20,000. Cabrera acquisition of the second-hand furniture will result to:
a. Increase in the capital of P4,000 each for Dalisay, Olegario, and Cabrera
b. Increase in the capital of P6,000 each for Dalisay and Olegario
c. Increase in the capital of P10,000 each for Dalisay and Olegario
d. Increase in the capital of P8,000 for Cabrera
 8. Salgado, Tiangco and Umali are partners. Umali is permitted to withdraw from the partnership December 31. It
was agreed that the settlement is to be made by payments from the personal funds of the remaining partners
to Umali. Capital balances on December 31 show:
Capital Balances Profit Ratio
Salgado P 30,000 30%
Tiangco P 25,000 30%
Umali P 45,000 40%
If Salgado and Tiangco paid Umali P48,000, how much is the undervaluation of assets if the transaction will be
recorded using the revaluation of assets method?
a. P500 c. P5,000
b. P3,000 d. P7,500

9. Galang and Hizon are partners who have capitals of P600,000 and P480,000 sharing profits in the ratio of 3:2.
Isleta is admitted as a partner upon investigating P500,000 for 25% interest in the firm, profits to be shared
equally. Given the choice between asset revaluation and bonus methods, Isleta will
a. Prefer bonus method due to Isleta’s gain of P35,000
b. Prefer bonus method due to Isleta’s gain of P140,000
c. Prefer asset revaluation method due to Isleta’s gain of P140,000
d. Be indifferent because the asset revaluation and bonus methods are the same

10-14. On May 1, 2018, the business accounts of Campos and Centeno appear below:
Assets Campos Centeno
Cash P11,000 P22,354
Accounts receivable 234,536 567,890
Inventories 120,035 260,102
Land 603,000
Buildings 428267
Furniture and Fixtures 50,345 34,789
Other assets 2,000 3,600
Total P1,020,916 P1,317,002
Equities
Accounts Payable P178,940 P243,650
Note payable P200,000 P345,000
Campos, Capital P641,976
Centeno, Capital P728,352
Total P1,020,916 P1,317,002
Campos and centeno agreed to form a partnership contributing their respective assets and equities subject to
the following adjustments:
a. Accounts receivable of P20,000 in Campos books and P35,000 in Centeneo’s book are uncollectible.
b. Inventories of P5,500 and P6,700 are worthless in Campo’s and Centeneo’s respective books.
c. Other Assets of P2,000 and p3,600 in Campos’ and Centeneo’s respective books are to be written off.

10. The Capital accounts of the partners after the adjustments will be
Campos Centeneo
a. P614,476 P683,052
b. P615,942 P717,894
c. P640,876 P712,345
d. P613,576 P683,350

11. Using the above information, how much assets does the partnership have?
a. P2,337,918 c. P2,265,118
b. P2,237,918 d. P2,365,218

12. Using the above information and assuming Coronel offered to join for 20% interest in the firm, how much cash
should he contribute
a. P330,870 c. P344,237
b. P337,487 d. P324,382

13. Using the above information and assuming after Coronel’s admission, the profit and loss sharing ratio was
agreed to be 40:40:20 based on capital credits, how much should the cash settlement be between Campos
and Centeneo?
a. P33,602 c. P32,272
b. P32,930 d. P34,288
 14. Using the above information and assuming that during the first year of operations the partnership earned a
profit of P325,000 and that this was distributed in the agreed manner. Assuming further that drawings were
made in these amounts: Campos, P50,000; Centeneo, P65,000; and Coronel, P28,000, how much are the
capital balances of the partners after the first year ?

15. Jose and Andres are partners with capital balances of P30,000 and P40,000 and sharing profits and losses
40% and 60%, respectively. If Alberto is admitted as partner paying P20,000 in exchange for 50% OF Jose’s
equity. The entry in the partnership books should be as follows:
a. Jose Capital 15,000
Alberto, Capital 15,000
b. Cash 20,000
Alberto, Capital 20,000
c. Cash 20,000
Goodwill 5,000
Alberto, Capital 25,000
d. Cash 20,000
Jose, Capital 5,000
Alberto, Capital 15,000
IV. SYNTHESIS/ GENERALIZATION

CHAPTER SUMMARY:

• Dissolution is change in the relation of the partners caused by any partner being disassociated from the
business.
• Examples of the events that result to partnership dissolution: (a) admission of a partner; (b) Withdrawal,
retirement or death of a partner, and (c) incorporation of a partnership.
• In all cases of dissolution, the partnership assets and liabilities at date of dissolution may need to be revalued
to their fair values. Any revaluation increase or decrease is allocated to all of the existing partners’ capital
accounts as at the date of dissolution.
• Admission of a partner by purchase of a partner, the transaction is recorded as a transfer within equity: (Dr.)
selling partners’ capital; (Cr.) incoming partner’s capital
• Admission of a partner by investment in the partnership, the transaction is recorded in regular manner: (Dr.)
Asset Invested; (Cr.) Incoming partner’s capital.
• Withdrawal, retirement or death of a partner by purchase by remaining partners, the transaction is recorded as
a transfer within equity: (Dr.) Outgoing partner’s capital; (Cr.) Purchasing partner’s capital
• Withdrawal, retirement or death of a partner by purchase by partnership, the transaction is recorded as a
transfer within equity: (Dr.) Outgoing partner’s capital; (Cr.) payment made
• When a partnership is incorporated, the corporation acquires the assets and assumes the liabilities of the
partnership over the aggregate par value of shares issued is credited to share premium.
• Summary of rules to be observed when accounting for admission by way of investment:

TAC = TCC NPAC = NPCC No Bonus, Asset Revaluation nor Goodwill recognition
TAC = TCC NPAC > NPCC BONUS To New Partner
TAC = TCC NPAC < NPCC BONUS To Old Partner
TAC > TCC NPAC = NPCC GOODWILL or POSITIVE REVALUATION to Old Partners
TAC < TCC NPAC = NPCC DOWNWARD REVALUATION to Old Partners
TAC > TCC NPAC > NPCC GOODWILL to New Partner
V. EVALUATION

The student’s performance will be evaluated as follows:

20% Attendance, Poll Questioning and Oral Exercises

20% Portfolio Journal for work exercises
20% Formative Examination (One online/Offline written quiz covering this specific topic)
40% Summative Examination (This topic is one of the topics included in the Online/Offline Written Examination)

Read and understand and learn the following regarding the next topic which
is Partnership Liquidation:
VI. ASSIGNMENT/ AGREEMENT
a. The nature of Partnership Liquidation
b. State the order of priority in settlement of claims in cases of
liquidation
c. The different accounting problems concerning liquidation
 Millan, Accounting for Special Transactions 2018e
Dayag, Advanced Financial Accounting and Reporting 2019e
VII. REFERENCES
Guerrero, Advanced Accounting
Catacutan, et al, Fundamentals of Accounting Part II

END OF CHAPTER 3