ILLUSTRATIVE PROBLEMS: Partnership Dissolution – Change in Ownership Structure

I. ADMISSION OF A NEW PARTNER IN AN EXISTING PARTNERSHIP

A. Purchase of Interest

Assume that A and B are partners with capital balances of P60,000 and P80,000
respectively. They share profit and losses equally.

Case 1 – Purchase of a portion of interest from one partner only.

C is admitted in the partnership by allowing her to purchase 1/3 of A’s interest

Assumption : C pays P20,000 ( at book value )
C pays P15,000 ( less than its book value )
C pays P25,000 ( more than book value )
Book value of A’s interest : P60,000 x 1/3 = P20,000

Journal Entry : A, Capital 20,000

C, Capital 20,000
To transfer 1/3 of A’s interest to C.

Capital Balances Capital Balances

Before Admission After Admission
A P 60,000 P 40,000
B 80,000 80,000
C ________ 20,000
P140,000 P140,000

Case 2 - Purchase of one whole interest from one partner.

C is admitted in the partnership by purchasing the whole “interest” of A in the

partnership.

A, Capital 60,000
C, Capital 60,000
To transfer the whole interest of A to C.

Capital Balances Capital Balances

Before Admission After Admission
A P 60,000 -
B 80,000 P 80,000
C _______ 60,000
P140,000 P140,000

Case 3 – Purchase of a portion of interest from more than one partner.

C is admitted in the partnership by allowing her to purchase ½ of A and ¼ of B’s

interests.
A, Capital ( 60,000 x ½ ) 30,000
B, Capital ( 80,000 x ¼ ) 20,000
C, Capital 50,000
To transfer ½ of A and ¼ of B’s interest to C.
 Capital Balances Capital Balances
Before Admission After Admission
A P 60,000 P 30,000
B 80,000 60,000
C _______ 50,000
P140,000 P140,000

Case 4 - Purchase of whole interest from all partners

C purchase the whole interest of A and B.

A, Capital 60,000
B, Capital 80,000
C, Capital 140,000
#
In this case, the partnership business is converted into a sole proprietorship.

B. ADMISSION BY INVESTMENT

The capital account balances of partners A and B who shared profit and loss of 70% and
30% respectively were as follows:
A , Capital P 60,000
B , Capital 40,000
P100,000

Case 1 - The new partner invested cash in the partnership.

C is admitted in the partnership by allowing her to invest cash of P30,000.

Cash 30,000
C, Capital 30,000
To record the admission of C.

Capital Balances Capital Balances

Before admission after admission
A P60,000 P60,000
B 40,000 40,000
C _______ 30,000
P100,000 P130,000

Case 2 - The new partner is allowed a certain percentage of interest in the new firm

C is to make an investment that will give her a 20% interest in the new firm.

Cash 25,000
C, Capital 25,000
To record the investment of Lada.

The combined capital of the original partners of P100,000 represents 80% of the new
capital ( 100,000 / 80% = P125,000). Therefore the incoming partner should be required
to invest P25,000 for a 20% interest.
 Case 3 - Bonus to new partner

C is to be admitted in the partnership of A and B by investing 50,000 for a one-half

interest in the total agreed capitalization of P150,000.
A 60,000
B 40,000
C 50,000
150,000 X ½ = 75,000 Capital credit of C
50,000 Capital contribution of C
25,000 Bonus to C

Cash 50,000
A, Capital ( 25,000 x 70%) 17,500
B, Capital ( 25,000 x 30% ) 7,500
C, Capital 75,000
To record investment and bonus of C.

Capital Balances Capital Balances

Before admission after admission
A 60,000 42,500
B 40,000 32,500
C ______ 75,000
100,000 150,000

Case 4 – Bonus to old partners

C is to be admitted in the partnership of A and B by investing 50,000 for a ¼ interest in

the new firm.
A 60,000
B 40,000
C 50,000
150,000 x ¼ = 37,500 Capital credit of C
50,000 Capital contribution of C
12,500 Bonus to A and B

Cash 50,000
C, Capital 37,500
A, Capital ( 12,500 x 70% ) 8,750
B, Capital ( 12,500 x 30% ) 3,750
To record the investment of C and bonus
To A and B.

II. WITHDRAWAL OR RETIREMENT OF A PARTNER

The partners’ capital account balances after adjustments in preparation for the withdrawal of one
of the partners are shown below:
D 40,000
E 20,000
F 30,000
90,000
They shared profit and loss equally.
Case 1 – Sale of interest to an outsider.

F decides to withdraw from the partnership and that his interest is sold to G, an outsider
with the consent of the other partners.
F, Capital 30,000
G, Capital 30,000
Case 2 – Sale of Interest to One or More of the remaining partners

F , the withdrawing partner sells his interest to the remaining partners; ½ to D and the
other half to E.
F, Capital 30,000
D, Capital 15,000
E, Capital 15,000
#

Case 3 – Sale of Interest to the Partnership

F withdraws from the partnership and his interest being sold to the partnership itself.

Assume:
1. The partnership pays P30,000 which is equal to F’s interest being sold for P30,000.
( At book value )
F, Capital 30,000
Cash 30,000
#
Capital Balances Capital Balances
Before F’s Withdrawal After F’s withdrawal
D 40,000 40,000
E 20,000 20,000
F 30,000 ______
90,000 60,000

2. The partnership pays P35,000 which is more than F’s interest being sold for P30,000.
( More than book value ).

F, Capital 30,000
D, Capital 2,500
E, Capital 2,500
Cash 35,000
#

3. The partnership pays P25,000 which is less than F’s interest being sold at P30,000.
( Less than Book value )

F, Capital 30,000
Cash 25,000
D, Capital 2,500
E, Capital 2,500
#
III. DEATH, BANKRUPTCY OR INCAPACITY OF A PARTNER

Ba, Ka and Da are partners who shared profit and losses equally. Da died on June 1, 20B.
Da’s capital balance as of December 31, 20A , the last closing date was P45,000. After
closing all the nominal accounts, the Income and Expense Summary account showed a credit
balance of P15,000 which represents Profit from January 1, 20B to June 1, 20B.
Income & Expense Summary 15,000
Ba, Capital 5,000
Ka, Capital 5,000
Da, Capital 5,000
To distribute profit.
 DA, CAPITAL
45,000 Dec. 31, 20A
5,000 June 1, 20B ( as of his death)
50,000

If DA’s interest in the partnership is given to his heirs:

DA, Capital 50,000

Cash 50,000
#

Assuming that GA is his heir and that he doesn’t want to withdraw DA’s share in the
partnership:
DA, Capital 50,000
GA, Capital 50,000
#

IV. INCORPORATION OF A PARTNERSHIP

Since this topic deals more on corporation, this will be discuss at the start of our study in
Accounting for Capital Share Transaction.