MODULE 7 - Partnership Dissolution

AE 112-
MODULE 7
(PARTNERSHIP
DISSOLUTION)
COURSE LEARNING OUTCOMES

At the end of the module, you should
be able to:
1. Define partnership dissolution;
2. Identify the reasons for the
dissolution of a partnership; and
3. Record changes to partner capital
accounts in relation to a dissolution.
FINANCIAL
ACCOUNTING AND
REPORTING
In the end, it is not the years in your life that count. It’s the life in your
years.
Abraham Lincoln
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COURSE INTRODUCTION
This course introduces accounting, within the context of business and business decisions.
Students explore the role of accounting information in the decision-making process and
learn how to use various types of accounting information found in financial statements and
annual reports. This course starts with a discussion of accounting thought and the theoretical
background of accounting and the accounting profession. The next topic is the accounting
cycle - recording, handling, and summarizing accounting data, including the preparation
and presentation of financial statements for merchandising and service companies.
Moreover, it continues with transactions, financial statements, and problems peculiar to the
operations of partnerships and corporations as distinguished from sole proprietorships. Topics
include accounting for partnership formation and operations; share capital issuances,
treasury shares, other related transactions affecting accumulated profits. Emphasis is placed
on understanding the reasons underlying basic accounting concepts and providing students
with an adequate background on the recording, classification, and summarization functions
of accounting to enable them to appreciate the varied uses of accounting data.
One of the basic characteristics of the partnership form of organization is its limited life. Any
change in the personnel of the membership results in the dissolution of the partnership.
Dissolution is defined in Article 1825 of the Partnership law as the change in the relation of
the partners caused by any partner ceasing to be associated in carrying of the business.
Dissolution refers to the termination of the life of an existing partnership. The dissolution of an
old partnership may be followed by:
a. The formation of a new partnership - This is known as dissolution by change in

ownership structure. The new partnership continues the business activities of the
dissolved partnership without interruption.
b. Liquidation - This refers to the termination of business activities carried on by the

partnership and the winding up of partnership affairs preparatory to going out of
business. This involves the sale or conversion of assets into cash, paying creditors, and
distributing the remaining cash to the partners.
Thus, a partnership may be dissolved without being liquidated. While dissolution may result
to the liquidation of a partnership, liquidation always results to dissolution. Article 1830 and
1831 of the Partnership Law states the following causes of dissolution:
1. Without violation of agreement - a partnership may, without violating the partnership

agreement, be dissolved:
a. By termination of the term or particular undertaking.
b. By express will of any partner, who must act in good faith, when no definite
term of particular undertaking is specified.
c. By the express will of all the partners.
d. By expulsion of any partner.
2. Violation of the partnership agreement.
3. The business becomes unlawful.
4. Loss of specific thing contributed to the partnership.
a. When ownership is transferred to the partnership.
i. Loss before delivery - the partnership is dissolved because the partner has
not given his contribution to the firm.
ii. Loss after delivery - the partnership is not dissolved because the risk of loss
is borne by the partnership.
b. When only the use of the thing is contributed to the partnership, the loss of the
specific thing contributed disinclines the partnership because the risk of loss is
on the partner who is the owner of the thing; as if he had not contributed
anything.
5. Death of a partner.
6. Insolvency- refers to the inability to pay all debts
a. Of any partner - insolvency modifies or limits capacity to act. It implies the
absence of all responsibility, hence the partnership is dissolved.
b. Of the partnership - insolvency of the partnership results in its inability to
continue its business and to meet the claims of creditors, hence it is dissolved.
7. By decree of court under the following circumstances:
a. Insanity of a partner.
b. Incapacity of a partner.
c. Partner guilty of such conduct to affect prejudicially the carrying on of
partnership business.
d. Willful violation of agreement.
e. Business can be carried on only at a loss.
f. Other circumstances rendering dissolution equitable.
i. Refusal to give the share of a partner in partnership profits
ii. Refusal of a partner's right to participate in the management of the
partnership affairs, unless otherwise agreed.
But accounting problems are usually encountered in the following:

A. Admission of a partner
B. Withdrawal or Retirement of a partner
C. Death of a partner
D. Incorporation of a Partnership
ADMISSION OF A PARTNER
A partner may be admitted in a partnership only with the consent of all the partners, for
reasons such as: (a) the need for additional capital; or (b) the need for skills or expertise
of a particular person; or (c) present partners may want to reduce interest. Upon
admission of a new partner, a new partnership agreement covering the partners' interest,
sharing of profit and loss and other considerations should be drawn because the dissolution
of the original partnership cancels the old agreement. New partners may be admitted either
by any of the following:
a. Purchase of an interest from present partners; or
b. Investment of assets in the partnership.
Regardless of the method of recording the admission of a new partner, an equitable
relationship in the new partnership ordinarily requires that the assets in the existing partnership
be adjusted to fair market value before admission of the new partner. The change in asset
values should be reflected in the existing partners' capital accounts according to their profit
and loss sharing ratio.
A. ADMISSION BY PURCHASE OF AN INTEREST

When a new partner purchases a portion or all of the interests of one or more of the
existing partners, the partnership assets remain unchanged. The sale of a partners’
interest in an existing partnership is a personal transaction between the selling or old
partners and the buying or new partner. The price paid for the interest is irrelevant and
not recorded in the partnership books because it is a private or personal transaction
between the buyer and the seller. The assets and liabilities of the partnership are not
affected.
The only entry required in partnership books is to record the transfer of capital from the
capital account of old or selling partner to that of the new or buying partner at an
amounts equal to book value of the interest purchased regardless to the payment made.
The partner in making the transfer of ownership can actually convey the following rights:
1. The right of co-ownership in the business property.
2. The right to share in profits and losses.
3. The right to participate in the management of the business.
KEY POINT
Any loans to from any existing partners should not be included in cases
of admission because it’s only the capital interest that is being acquired and not total
interest.
Illustrative Problem:
On June 30 of the current year, Bong and Jinggoy have capital balances of P120,000
and P180,000 and divide profits and losses in the ratio 6:4, respectively. On this date, Janet
is admitted as a new partner.
The entry to record the admission of Janet and the resulting capital balances and profit
and loss ratio of the partners immediately after the admission of Janet, under the
independent cases above is presented below:
Case A: Purchase of interest from one partner at book value.
➢ Assume Janet purchased one-half of the interest of Bong for P60,000.
Bong, Capital 60,000

Janet, Capital 60,000
To record admission of Janet.
➢ The resulting capital balances and profit and loss ratio of the partners will be:
Old New
Old Capital Transfer New Capital P/L Ratio Transfer P/L Ratio
Bong P 120,000 (60,000) P 60,000 60% (30%) 30%
Jinggoy 180,000 180,000 40% 40%
Janet 60,000* 60,000 30%* 30%
Total P 300,000 P 300,000 100% 100%
*Since Janet purchased one-half of the interest of Bong, she gets one-half of both the
capital and profit share of Bong.
Case B: Purchase of interest from all partners at book value.
➢ Janet purchased one-half of the interest in the partnership for P150,000.

Jinggoy, Capital 90,000
Old New Old P/L New

Capital Transfer Capital Ratio Transfer P/L Ratio
Bong P 120,000 (60,000) P 60,000 60% (30%) 30%
Jinggoy 180,000 (90,000) 90,000 40% (20%) 20%
Janet 150,000 150,000 50% 50%
Total P 300,000 P 300,000 100% 100%
*Since Janet purchased one-half of the interest of both partners, he gets one-half of both
the capital and profit shares of both partners.
Case C: Purchase of interest from one partner at more than book value.
➢ Janet purchased one-half of the interest of Bong for P72,000.
➢ The journal entry to record the admission of Janet as well as the new capital balances
and profit and loss ratio of the partners will be the same as in Case 1. Bong shall enjoy
the gain of P12,000 since this is a personal transaction between Bong and Janet. Only
the transfer of capital is to be reflected in partnership books.
Case D: Purchase of interest from all partners at more than book value.
➢ Janet purchased one-half of the interest in the partnership for P175,000
and profit and loss ratio of the partners will be the same as in Case 2. The difference
of P25,000, between the purchase price of P175,000 and book value of interest
purchased of P150,000, is considered a personal profit to Bong and Jinggoy, and
therefore not recognized by the partnership. Only the transfer of capital is to be
reflected in partnership books.
The excess of P25,000 is to be divided between Bong and Jinggoy based on the
original partners’ profit and loss ratio, computed as follows:
Bong JInggoy Total

Interest sold P 60,000 P 90,000 P 150,000
Excess (6:4) 15,000 10,000 25,000
Total Payment P 75,000 P 100,000 P 175,000
Alternative Method
The net assets of the partnership may be revalued when the purchase of interest from all
the partners is for an amount more than the interest acquired. Thus, if Janet buys one-
half interest in Bong and Jinggoy Partnership for P175,000 and it is agreed that the net
assets should be revalued, the computation would be:
Implied value of the partnership (P175,000 ÷ 50%) P 350,000

Book value of the partnership (Total Capital of old Partners) (300,000)
Undervaluation of identifiable assets (or goodwill)* P 50,000
*Use the appropriate account when specified (e.g. When the problem states the
undervaluation relates to an equipment, then the debit should be to the Equipment
account). The revaluation of P50,000 is to be divided between Bong and Jinggoy based
on the original partners’ profit and loss ratio. The updated capital balances would be
computed as follows:
Bong Jinggoy Total
Capital balance before revaluation P 120000 P 180000 P 300,000
Revaluation (50000x60%; 50000x40%) 30,000 20,000 50,000
Total Payment P 150,000 P200,000 P 350,000
➢ The entries to record the admission of Janet into the partnership would then be:
Identifiable Assets (or Goodwill) 50,000

To record revaluation of net assets.
Bong, Capital [(150000) x ½] 75,000

Jinggoy, Capital [(200000) x ½] 100,000
➢ The resulting capital balances of the partners will be:
Capital after New

Revaluation Transfer Capital
Bong P 150,000 (75,000) P 75,000
Jinggoy 200,000 (100,000) 100,000
Janet 175,000* 175,000
Total P 350,000 P 350,000
Old New
P/L Ratio Transfer P/L Ratio
Bong 60% (30%) 30%
Jinggoy 40% (20%) 20%
Janet 50%* 50%
Total 100% 100%
Note, however, that goodwill should only be recorded after all identifiable assets have
been fully adjusted to their fair value. The debits to the old partners’ capital accounts
are exactly equal to the distribution of cash as shown in the previous page. Thus, when
it is decided to revalue the net assets, it is necessary to prepare a cash distribution
schedule since the division of cash coincides with the partners’ charges to their capital
accounts.
Case E: Purchase of interest from one partner at less than book value.
➢ Janet purchased one-half of the interest of Bong for P54,000.
and profit and loss ratio of the partners will be the same as in Case 1. Bong shall bear
the loss of P 6,000 since this is a personal transaction between Bong and Janet. Only
the transfer of capital is to be reflected in partnership books.
Case F: Purchase of interest from all partners at less than book value.
➢ Janet purchased one-half of the interest in the partnership for P140,000.
and profit and loss ratio of the partners will be the same as in Case 2. The loss
amounting to P10,000, is considered a personal loss to Bong and Jinggoy and
therefore not recognized by the partnership. Only the transfer of capital is to be
reflected in partnership books.
The excess of P10,000 is to be divided between Bong and Jinggoy based on the
original partners’ profit and loss ratio, computed as follows:
Bong Jinggoy Total
Interest sold P 60,000 P 90,000 P 150,000
Deficit (6:4) (6,000) (4,000) (10,000)
Total Payment P 54,000 P 86,000 P 140,000
Alternative Method
The net assets of the partnership may be revalued when the purchase of interest from all
the partners is for an amount less than the interest acquired. Thus, if Janet buys one-half
interest in Bong and Jinggoy Partnership for P140,000 and it is agreed that the net assets
should be revalued, the computation would be:
Implied value of the partnership (P140,000 ÷ 50%) P 280,000

Book value of the partnership (Total Capital) (300,000)
Overvaluation of identifiable assets (P20,000)
➢ The entries to record the admission of Janet into the partnership would then be:

Identifiable assets 20,000
To record revaluation of net assets.
Bong, Capital [(120,000 - 12,000) x ½] 54,000

Jinggoy, Capital [(180,000 - 8,000) x ½] 86,000
➢ The resulting capital balances of the partners will be:
Share in Capital after New

Old Capital Revaluation Revaluation Transfer Capital
Bong P 120,000 (P 12,000) P 108,000 (54,000) P 54,000
Jinggoy 180,000 (8,000) 172,000 (86,000) 86,000
Janet 140,000* 140,000
Total P 300,000 (P 20,000) P 280,000 P 280,000
➢ The resulting profit and loss ratio of the partners will be:
Old New
P/L Ratio Transfer P/L Ratio
Bong 60% (30%) 30%
Jinggoy 40% (20%) 20%
Janet 50%* 50%
Total 100% 100%
B. ADMISSION BY INVESTMENT
When a new partner is admitted by means of an investment of cash or other assets, there
is an increase in the partnership tangible assets. If assets are invested, the admission is
recorded by debiting the assets invested and adjusting the net capital interest in the
partnership by a corresponding amount. It is important that the assets invested be fairly
valued. Any gain or loss recognized on sales subsequent to recording the admission will
be allocated on the basis of the new profit or loss ratio.
The following terms are useful in accounting for partnership dissolution by means of
investment:
- Contributed Capital is the investment of partners, both old and new, to the
partnership.
- Agreed Capital is the amount of new capital set by the partners for the partnership.
- Total Contributed Capital is the sum of the capital balances of the old partners (net
asset investment) and the contribution of the new partner.
- Total Agreed Capital is the new total capital of the partnership. Other terms for this
are: New Firm Capital, Total Capital and Agreed Capitalization. The terms of
admission of a new partner may indicate the agreed capital.
An incoming partner may acquire an interest in the partnership based on the following
situations:
1. The new partner’s investment (contributed capital) EQUALS the new partner’s
proportion of the partnership’s book value (agreed capital).
2. The new partner’s investment (contributed capital) is MORE than the new partner’s
proportion of the partnership’s book value (agreed capital).
3. The new partner’s investment (contributed capital) is LESS than the new partner’s
proportion of the partnership’s book value (agreed capital)
Case A: CC = AC
➢ The new partner’s investment (contributed capital) EQUALS the new partner’s
➢ Assume that after its first year of operations in 2019, OK Partnership had the following
information as of January 1, 2020:
Profit & Loss
Capital Balance Ratio
Olga P400,000 60%
Karina 200,000 40%
On January 1, 2020, Sandra is admitted into the partnership and is willing to invest
P200,000 cash into the partnership. Sandra will have a 25% interest and share in the
profits of the new partnership.
Agreed Contributed
Capital Computation Capital Difference
Old P 600,000 P 600,000 -
New 200,000 200,000 -
200,000  25% =
Total P 800,000 800,000 P 800,000 -
➢ The entry to record the admission of the new partner is simply a debit to cash and
credit to the new partner's capital account. Sandra is admitted into the partnership
and contributes enough cash for a 25% interest in the new firm’s capital. If the interest
of the new partner is 25%, then the interest of the old partners is equivalent to 75%.
The total capital of the new partnership is P800,000 [(P600,000 ÷ 75%].
➢ The entry to record the admission of Sandra will be:
Cash 200,000
Sandra, Capital 200,000
To record the admission of Sandra.
Case B: CC >AC
➢ The new partner’s investment (contributed capital) is MORE than the new partner’s
Profit & Loss
Capital Balance Ratio
Olga P400,000 60%
Karina 200,000 40%
On January 1, 2020, Sandra is admitted into the partnership and is willing to invest
Given the information, if the new partner’s investment (contributed capital) is more
than the new partner’s proportion of the partnership’s book value (agreed capital)
indicates that the partnership’s prior net assets are undervalued or that the
partnership has some unrecorded goodwill. In this case, three (3) possible
assumptions may be used:
Assumption 1: Use Bonus Approach (Bonus to Old Partners)
Agreed Contributed
Old P 615,000 820,000 – 205,000 P 600,000 P15,000
New 205,000 820,000 x 25% 220,000 (15,000)
Total P 820,000 P 820,000 -
This approach is basically a transfer of capital balances among partners (old and new).
This approach is used when the partners do not wish to record adjustments in asset
accounts or recognize goodwill. The bonus approach generally follows the book value
method, that is, existing book values should not be adjusted to current values unless such
adjustments would have otherwise been allowed by Generally Accepted Accounting
Principles or GAAP.
The new partner’s contributed capital is greater than her agreed capital. The difference
is attributable to bonus to old partners. The excess paid by Sandra is a bonus allocated
to the old partners in their old profit and loss ratio. Sandra may dislike the bonus approach
because her capital balance is P100,000 less than her investment in the partnership.
Using bonus approach, the entry to record the admission of Sandra will be:
Cash 220,000
Olga, Capital (P15,000 x 60%) 9,000
Karina, Capital (P15,000 x 40%) 6,000
Analyzing the entry shown above:

a. The old partner’s capital accounts are increased for their respective shares of the
bonus paid by the new partner.
b. The partnership’s total resulting capital equals the prior capital balances plus the
new partner’s investment.
Assumption 2: Use Revaluation Approach (Undervaluation of Assets)
Agreed Contributed
Old P 660,000 880,000 – 220,000 P 600,000 P 60,000
New 220,000 220,000 -
Total P 880,000 220,000 ÷ 25% P 820,000 P 60,000
Under this approach, the historical cost bases of the partnership’s net assets are adjusted
during admission of the new partner. Some partners’ may object to this departure from
historical cost and prefer to use bonus method, which involves capital transfers among
the partners to align the total resulting capital of the partnership.
Using revaluation approach, the entry to record the admission of Sandra will be:
Cash 220,000
Assets 60,000
Olga, Capital (P60,000 x 60%) 36,000
a. Asset book values are increased to their fair values.
b. The old partners’ capital accounts are increased for their respective shares of
increase in the book values of the assets.
c. The partnerships total resulting capital reflects the prior capital balances plus the
amount of asset revaluation plus the new partner’s investment.
Assumption 3: Use Goodwill Approach (Unrecognized Goodwill)
Agreed Contributed
Old P 660,000 880,000 – 220,000 P 600,000 P 60,000
New 220,000 220,000 -
Total P 880,000 220,000 ÷ 25% P 820,000 P 60,000
Under this approach, the new partner may be paying an excess because of
unrecognized goodwill, indicated by the partnership’s high profitability. This is an
opportunity to record unrecognized goodwill created by the old partners. Recording
unrecognized goodwill is allowed for partnership accounting because of the need to
establish appropriate capital equity among the partners. This is an exception to the
general rule established in PAS 38 (see page 97 for the discussion). The partner’s
information needs, and specific purposes of the partnership’s financial statements justify
this exception.
This approach is similar to Assumption 2, instead of asset book values being increased to
their fair values, unrecognized goodwill is recorded.
Using goodwill approach, the entry to record the admission of Sandra will be:
Cash 220,000
Goodwill 60,000
Olga, Capital (P60,000 x 60%) 36,000
Analyzing the entry shown in the previous page:

a. Unrecognized goodwill is recorded.
b. The old partners’ capital accounts are increased for their respective shares of the
goodwill.
c. The partnerships total resulting capital is now equal to the prior capital balances
plus the goodwill recognized plus the new partner’s investment.
Case C: CC<AC
➢ The new partner’s investment (contributed capital) is LESS than the new partner’s
Capital Profit & Loss
Balance Ratio
Olga P400,000 60%
Karina 200,000 40%
➢ On January 1, 2020, Sandra is admitted into the partnership and is willing to invest
Given the information, if the new partner’s investment (contributed capital) is less than
the new partner’s proportion of the partnership’s book value (agreed capital) indicates
that the partnership’s prior net assets are overvalued or that the new partner is
contributing additional value in the form of expertise or skills he possesses. In this case,
three (3) possible assumptions may be used:
Assumption 1: Use Bonus Approach (Bonus to New Partner)
Agreed Contributed
Old P 570,000 760,000 – 190,000 P 600,000 (P30,000)
New 190,000 760,000 x 25% 160,000 30,000
Total P 760,000 P 760,000 -
This approach is basically a transfer of capital balances among partners (old and new).
This approach is used when the partners do not wish to record adjustments in asset
accounts or recognize goodwill. The bonus approach generally follows the book value
method, that is, existing book values should not be adjusted to current values unless such
adjustments would have otherwise been allowed by Generally Accepted Accounting
Principles or GAAP.
Using bonus approach, the entry to record the admission of Sandra will be:
Cash 160,000
Olga, Capital (P30,000 x 60%) 18,000
Analyzing the entry shown in the previous page:
a. The new partner is assigned a bonus from the old partners’ capital accounts,
which are decreased for their respective shares of the bonus paid to the new
partner.
b. The partnership’s total resulting capital is equal to the old partner’s capital
balances plus the new partner’s investment.
Assumption 2: Use Revaluation Approach (Overvaluation of Assets)
Agreed Contributed
Old P 480,000 640,000 – 160,000 P 600,000 (P120,000)
New 160,000 160,000 -
Total P 640,000 160,000 ÷ 25% P 760,000 (P120,000)
Under this approach, the historical cost bases of the partnership’s net assets are adjusted
during admission of the new partner. Some partners may object to this departure from
historical cost and prefer to use bonus method, which involves capital transfers among
the partners to align the total resulting capital of the partnership.
Using revaluation approach, the entry to record the admission of Sandra will be:
Cash 160,000
Olga, Capital (P120,000 x 60%) 72,000
Assets 120,000

a. Asset book values are decreased to their fair values.
b. The old partners’ capital accounts are decreased for their respective shares of the
decrease in the book values of the assets.
c. The partnerships total resulting capital reflects the old partner’s capital balances
less the amount of asset revaluation write-down plus the new partner’s investment.
Assumption 3: Use Goodwill Approach (Goodwill Brought in by the New Partner)
Agreed Contributed
Old P 600,000 P 600,000 -
New 200,000 800,000 – 600,000 160,000 P 40,000
Total P 800,000 600,000 ÷ 75% P 760,000 P 40,000
Under this approach, the new partner may be paying an excess because of
unrecognized goodwill, indicated by the partnership’s high profitability. This is an
opportunity to record unrecognized goodwill created by the old partners. Recording
unrecognized goodwill is allowed for partnership accounting because of the need to
establish appropriate capital equity among the partners. This is an exception to the
general rule established in PAS 38 (see page 97 for the discussion). The partner’s
information needs, and specific purposes of the partnership’s financial statements justify
this exception.
This approach is similar to Assumption 2, instead of asset book values being increased to
their fair values, goodwill brought in by the new partner is recorded.
Using goodwill approach, the entry to record the admission of Sandra will be:
Cash 160,000
Goodwill 40,000

a. Goodwill brought in by the new partner is recorded and included in the new
partner’s capital account.
b. The old partners’ capital accounts remain unchanged.
c. The partnerships total resulting capital reflects the old partner’s capital balances
plus the new goodwill brought in plus the new partner’s cash investment.
Note:
The partnership may use any one of the assumptions. The decision is usually a result of
agreements between the old partners and the new partner. Some accountants
criticized the revaluation of assets or recognition of goodwill because it results in a
departure from the historical cost principle and differs from the accepted principles in
Philippine Accounting Standards (PAS) No. 38 “Intangible Assets,” which prohibits
corporations from recognizing goodwill that has not been acquired by purchase.
Accountants who support the recognition of goodwill point out that when a new partner
is admitted to the partnership, the old partnership is legally dissolved, and a new
partnership is formed. Therefore, the basis of valuation for the new partnership is the fair
value of the assets acquired by the newly formed partnership. Consequently, assets
should be recorded at their fair values and should include previously unrecognized
goodwill. Finally, accountants who use goodwill or asset revaluation approaches argue
that the purpose of partnership accounting is to state fairly the relative capital equities
of the partners and this may require different accounting procedures from those used in
corporations
WITHDRAWAL/RETIREMENT OF A PARTNER
The withdrawing or retiring partner is entitled to the value of his interest in the partnership as
of the date of withdrawal or retirement. To arrive at the fair amount of what is due to the
retiree, adjustments may be made on the books such as: (1) correction of accounting errors
affecting income, (2) revaluation of assets to market value, and (3) recognition of
partnership goodwill.
If accounting errors are discovered and all nominal accounts are already closed, they
should be treated as prior period adjustments and corrected by adjusting the capital
balances of the partners. The errors should be allocated to partners' capital balances
according to the profit and loss sharing ratios that existed when the error was committed.
A withdrawing/retiring partner may sell his interest to any of the following:
1. An outsider – with the consent of the remaining partners, the withdrawing partner may
sell his interest to an outsider. The accounting procedures for the admission of a
partner by purchase shall be followed whereby the partnership recognizes only the
transfer of capital interest from the withdrawing partner to the new partner. Any gain
or loss from the sale is a personal gain or loss of the withdrawing partner.
2. Another partner - regardless of the purchase price paid by the purchasing partner to
the selling partner, this being a personal transaction between the two, there is only a
transfer of capital from the withdrawing partner to the buying partner.
3. Partnership – the withdrawing partner sells his right to the remaining partners through
the partnership. The settlement with the withdrawing partners may be:
a. At book value – settlement price is equal to the interest of retiring partner.
b. At more than book value – settlement price is greater than the interest of
retiring partner.
c. At less than book value – settlement price is less than the interest of retiring
partner.
KEY POINT
Number 1 has been discussed in earlier in admission by purchase. The only
difference is that, in admission by purchase, it should be capital interests only unlike
retirement wherein it should be total interest of the retiring partner.
ILLUSTRATION:
Assume the following balances on December 31, 2020 (before any adjustments and
partnership income for the year):
Mang Ina Sal

Capital Balances P 600,000 P 800,000 P 300,000
Profit and loss ratio 50% 30% 20%
On December 31, 2020, Mang withdraws from the partnership. The net income of the
partnership for the year ended December 31, 2020 is P120,000. It was discovered that
depreciation in the amount of P6,000 has not been recorded last year (when Sal is not yet
admitted as a partner and Mang and Ina share profits and losses in the ratio 6:4). Inventories
were also undervalued by P14,000.
Case A: Settlement price is equal to the interest of retiring partner
Income Summary 120,000

Mang, Capital (50%) 60,000
Ina, Capital (30%) 36,000
Sal Capital (20%) 24,000
To close the summary account.
Inventories 14,000
Sal Capital (20%) 2,800
To adjust the value of partnership asset.

Accumulated depreciation 6000
To record prior period adjustment.
Mang, Capital* 183,400

Cash 183,400
To record retirement of Mang.
*Computation:
Capital -Unadjusted P 120,000
Adjustments:
Share in Net Income P 60,000
Adjustment of assets 7,000
Prior period adjustment (3,600) 63,400
Capital – adjusted P 183,400
Case B: Settlement price is greater than the interest of retiring partner
When the withdrawing partner is paid an amount more than his interest, the excess
payment can be viewed as follows:
a. Bonus to the retiring partner (Bonus Approach)
b. Partial revaluation (goodwill) of partnership assets - Partial Revaluation (Goodwill)
Approach
c. Total revaluation (goodwill) of partnership assets - Total Revaluation (Goodwill)
Approach
When the problem is silent regarding any indication for revaluation of assets, then the
bonus method shall be applied. Otherwise, use the revaluation method to the extent of
revaluation and then apply bonus method for the balance.
Thus, if Mang is paid P185,000 for her interest, the related entries under the above-
mentioned approaches shall be:
Assumption 1: Record Bonus to the Retiring Partner (Bonus Approach)
Mang, Capital 183,400

Ina, Capital (3/5 x 1,600) 960
Sal, Capital (2/5 x 1,600) 640
Cash 185,000
To record the settlement with Mang.
Assumption 2: Partial revaluation (goodwill) of partnership assets
Partial revaluation happens when assets and liabilities are revalued only to the extent of
the excess payment. If the difference is attributable to undervaluation of the
partnership’s fixed assets, the related entries would be:

Accumulated depreciation 1,600
Cash 185,000
To record settlement with Mang.
Assumption 3: Total revaluation (goodwill) of partnership assets
Accumulated depreciation (Goodwill) 3,200

Ina, Capital (30%) 960
Sal Capital (20%) 640

Cash 185,000
Case C: Settlement price is less than the interest of retiring partner

A partner who is anxious to dispose of his/her interest in the partnership may agree to
accept less than his/her book value interest in the partnership. The partner may do so for
a number of reasons, such as: (a) he/she may view the future of the company negatively
(b) he/she may need operating capital for personal reasons or (c) the business
association may no longer be acceptable to the partner and, in his or her opinion, a
forced liquidation of the firm might be detrimental to his/her interest. In such cases, use
of the bonus approach is justified, since the settlement may not be based on the
economic value of the firm.
When a withdrawing partner agrees to accept less than the amount reported in his/her
capital account, such a difference may be viewed as:
a. Bonus to the remaining partners (Bonus Approach)
b. Partial revaluation/write-down of specific partnership assets (Partial Revaluation
Method)
c. Total revaluation/write-down of specific partnership assets (Total Revaluation
Method)
On the other hand, if Mang is paid P180,000 for her interest, the related entries under
each of the foregoing approaches are as follows:
Assumption 1: Bonus to the Remaining Partners (Bonus Approach)

Cash 180,000
Ina, Capital (3/5 x 3,400) 2,040
Sal Capital (2/5 x 3,400) 1,360
To record settlement with Mang.
Assumption 2: Partial revaluation of partnership assets (Partial Revaluation Approach)

Partial revaluation happens when assets and liabilities are revalued only to the extent of
the excess payment. If the difference is attributable to undervaluation of the
partnership’s fixed assets, the related entries would be:

Accumulated depreciation 3,400
Cash 180,000
To record the settlement with Mang
Assumption 3: Total revaluation of partnership assets (Total Revaluation Approach)

Sal, Capital (20%) 1,360
Accumulated depreciation (3,400 ÷50%) 6,800

Cash 180,000
KEY POINT
The most satisfactory method to record any excess payment (over or
underpayment) of a retiring partner is the BONUS APPROACH. Therefore, if there is no
agreement regarding the method to be used, it is advisable to use bonus approach
because it reflects the legal change in ownership but avoids the theoretical problems
associated with revaluation. On the other hand, if the partners agreed to use
revaluation approach and are silent whether the partial or total approach is to be used,
use PARTIAL REVALUATION APPROACH.
DEATH OF A PARTNER
The death of a partner legally dissolves the old partnership since a partner ceases to be
associated in carrying on of the business. The remaining partners may continue operations
based on a new Articles of Partnership. In such case, the accounting procedures to be
followed are similar to those discussed in the case of withdrawal of a partner. The deceased
partner may be considered to have withdrawn from the partnership and his heirs or estate is
paid the amount of his interest in the firm.
The following agreement should be provided for between the partners, in case of death of
a partner:
1. Closing of the Books

The articles may provide that upon the death of any partner, the books will not be closed
until the end of the regular fiscal period. In the absence of this agreement, the books
should be closed on the date of death.
2. Amount of profits on which the dead partner may share

The articles may provide that, regardless of the date of death, the deceased partner will
share in the total profits in the year of death. Otherwise, he should share on the
proportionate amount of profits or loss up to the date of death only.
Assume that partner Cruz of XYZ Company died on June 30 of the current year. The
partners share profits and losses equally. The profits for the year amounted to P 240,000.
If the deceased partner shares in the "whole" profits, then he is entitled to P 80,000
(P240,000 profit x 1/3) . However, if he is sharing in the proportionate amount of profits
or in the absence of an agreement as to what period's profits he should share in, his
share is P 40,000 which is one-third of P 120,000 (P240,000 x 6/12).
3. Valuation of assets
Upon the death of a partner, an inventory of the assets is taken for the determination of
the interest of the deceased partner. The estate of the deceased partner is entitled to
receive as an ordinary creditor an amount equal to the value of his interest. His interest
is based on the appraised values of the assets of the partnership. The result of the assets’
adjustment is closed to the partners' capital accounts in their profit and loss ratios before
payment of the deceased partner's capital.
4. Terms of payment
The terms of payment of the deceased partner's interest are subject to the provisions of
the articles of partnership. In default thereof, the surviving partners may enter into an
agreement with the representatives of the deceased partner. Where the capital is not
paid immediately, such amount is transferred to a payable account. This has to be done
because the deceased partner is no longer a co-owner of the firm, neither is he a
member of the new partnership formed.
The partnership contract may allow interest (expense) on the capital of the deceased
partner which the business continues to use after the date of death. Thus, in the given
example, interest may be allowed on the deceased partner’s capital which remains
invested in the firm from July 1 to the date of settlement. When no interest is allowed on
the deceased partner’s capital balance, the partnership contract may provide that the
deceased partner will share in the net income for the whole fiscal period in accordance
with the old profit and loss sharing ratio.
5. Insurance on Partners’ Lives

Partnerships may carry insurance on the lives of the partners, with either the partnership
or the surviving partners as beneficiaries. Upon the death of the insured, the insurance
proceeds may be used to pay the heirs or the estate of the deceased partner. In this
way, the partnership working capital is not so seriously impaired as to disrupt the
operations of the business.
ILLUSTRATION:
Assume that Papa, Daddy, Erpat and Ama are partners sharing profits and losses in the
ratio of 5:3:2:5, respectively. On January 1 of the current year, their capital balances are:
Papa P 440,000
Daddy 344,000
Erpat 288,400
Ama 200,000
Ama, the managing partner, died on September 1. The books were closed on this date
and net profits for the eight-month period amounted to P135,864. After negotiations with
the remaining partners, the estate of the deceased partner agreed to accept as full
settlement a one-year 12% note for P200,000 and the balance in cash.
➢ Assuming an immediate settlement of the estate is desired, the entries are prepared
as:
Income summary 135,864

Papa, Capital (5/15) 45,288
Daddy, Capital (3/15) 27,173
Erpat, Capital (2/15) 18,115
Ama, Capital (5/15) 45,288
To close net income.
Ama, Capital 245,448
Cash 45,448
Notes payable 200,000
To record settlement with estate of Ama.
➢ Assuming that the firm continued operations until December 31 which is the end of
the fiscal period and realized a net profit of P207,000, the following entries are
prepared:
Income summary* 138,000

Ama, Capital (5/15) 46,000
To record distribution of profit prior to
death of Ama.
*Computation:
Total net profit P 207,000
x Fraction of year (Jan 1 – Sept 1) 8/12
Net profit prior to death P 138,000
Income summary* 69,000

To record distribution of profit after the
death of Ama.
*Computation:
Total net profit P 207,000
Net profit prior to death (138,000)
Net profit after death P 69,000
Ama, Capital 246,000

Cash 46,000
Notes payable 200,000
To record settlement with the estate of
Ama.
Practice Exercise 7-1: TRUE OR FALSE
On the space provided, write TRUE if the statement is correct, if incorrect, write FALSE.
___________1. When a new partner is admitted into the new partnership, the consent of the
other partners is not necessary.
___________2. When a partner retires from the partnership, anyone from the remaining partners
may purchase his interest.
___________3. The total assets of the partnership will increase upon admission of a new partner
by purchase of interest.
___________4. In the admission of a partner by purchase, any change in the value of assets and
liabilities from the last balance sheet to the date of dissolution shall be for the
account of the old partners.
___________5. Admission of a new partner by purchase of interest is a debit to the capital

account of the buying partner.
___________6. There is increase in assets with the corresponding increase in capital under
admission of a new partner by investment.
___________7. The retiring partner’s capital includes his share in the net income or net loss of
the partnership up to the date of retirement.
___________8. The sale of interest of the retiring partner to a new partner will require the
recognition of a gain or loss on the partnership books.
___________9. Upon death of one of the partners, the remaining partners may continue
operations based on the old Articles of Partnership.
___________10. The death of a partner transfers his entire interest to his estate prior to settlement
by the partnership.
___________11. There is increase in assets with the corresponding increase in capital in admission
of a new partner by investment.
___________12. When a retiring partner is paid more than his capital interest without revaluation
of assets, the excess payment is treated as a bonus by the retiring partner to the
remaining partners.
___________13. The sale of interest of the withdrawing partner to a new partner will require the
recognition of a gain or loss in the partnership books.
___________14. Upon death of one of the partners, the remaining partners may continue
operations based on the old articles of partnership.
___________15. A partnership maybe dissolved by mere expulsion of any partner.
Practice Exercise 7-2: MULTIPLE CHOICE – CONCEPTUAL
Select the letter of the best possible answer to each of the following items.
_______1. The following are indications of partnership dissolution except:

A. Two or more sold part of their interest to a third party
B. A new partner is admitted to the partnership by contributing cash to the
partnership
C. One partner withdrew from the partnership
D. One partner died and the remaining partners decided not to continue
partnership operations
E. Answer not given
_______2. Partners may admit a new partner in the partnership for the following reasons,
except:
A. Need for additional capital
B. Need for skills or expertise of the new partner
C. Partners want to reduce their interest in the partnership
D. All of the above
E. Answer not given
_______3. When a partnership is dissolved and total partnership assets after dissolution is
greater than total assets before dissolution, the dissolution might have been
accounted for as:
A. Admission by investment
B. Admission by purchase of interest – undervaluation of assets recognized
C. Neither a nor b
D. Either a or b
E. Answer not given
_______4. Which journal entry holds true for admission of a new partner by purchase of
interest?
A. Debit to the capital account of new partner equal to the purchase price
B. Debit to the capital account of selling partner equal to the purchase price
C. Credit to the capital account of new partner equal to the purchase price
D. Debit to the capital account of new partner equal to book value of interest
purchased
E. Credit to the capital account of new partner equal to book value of interest
purchased
_______5. Admission by investment will most probably result to the following, except:
A. Total agreed capital equal to total contributed capital
B. Total agreed capital greater than total contributed capital
C. Total agreed capital lesser than total contributed capital
D. all of the above
E. Answer not given
_______6. Admission of a new partner by investment, where the total agreed capital is greater
than total contributed capital, can result to:
A. Bonus to the old partners and undervaluation of assets closed to old
partners’ capital
B. Bonus to the new partner and undervaluation of assets closed to old
partners’ capital
C. Neither a or b
D. Either a or b
E. Answer not given
_______7. When a partner dies or withdraw from the partnership, his capital in the partnership
must be adjusted for the following, before settlement, except:
A. Share in the net income of the partnership till the date of death or
withdrawal
B. Share in the adjustment of partnership assets to their fair values at date of
death or withdrawal
C. Share in adjustment of partnership liabilities to their fair values at date of
death or withdrawal
D. None of the above
E. Answer not given
_______8. A mode of settling the interest of a retiring partner that affects the partnership assets.
A. Payment by an outsider
B. Payment by any of the remaining partners
C. Proportional payment by all of the remaining partners
D. Payment by the partnership
E. Answer not given
_______9. When Marlon retired from the partnership of Lara, Bella and Marlon, he was paid an
amount more than his adjusted capital balance. Under the bonus method, the
excess:
A. Was recorded as an expense
B. Was recorded as reduction to the capital balances of Lara and Bella.
C. Has no effect on the capital balances of Lara and Bella.
D. Was recorded as addition to the capital balance of Lara and Bella.
E. Answer not given
Practice Exercise 7-3: (Admission by Purchase of Interest)
Dally and Lily are partners with capital balances of P120,000 and P90,000, respectively. Profits and
losses are shared 75% to Dally and 25% to Lily. On May 18 of the current year, they agreed to
admit Chloe to the partnership under each of the following independent cases.
Instructions: Prepare journal entries to record the admission of Chloe in the partnership and
compute for the new profit and loss ratio after her admission for the following cases:
Case 1 - Chloe purchases one-half of the interest of Dally for P60,000.
GENERAL JOURNAL
DATE PARTICULARS PR DEBIT CREDIT
1 1
2 2
3 3
4 4
Computation of New Profit and Loss Ratio:

Old P/L Ratio Transfer of Interest New P/L Ratio
Case 2 - Chloe purchases one-half of the interest of Dally for P55,000.
GENERAL JOURNAL
1 1
2 2
3 3
4 4

Case 3 - Chloe purchases one-third of the interest in the partnership for P80,000.
GENERAL JOURNAL
1 1
2 2
3 3
4 4
5 5

Case 4 - Chloe purchases one-third of the interest in the partnership for P80,000 and it is agreed
that the net assets should be revalued.
GENERAL JOURNAL
1 1
2 2
3 3
4 4
5 5
6 6
7 7
8 8
9 9
10 10

Case 5 - Chloe purchases one-third of the interest in the partnership for P50,000 and it is agreed
that the net assets should be revalued
GENERAL JOURNAL
1 1
2 2
3 3
4 4
5 5
6 6
7 7
8 8
9 9
10 10
11 11

Practice Exercise 7-4: (Admission by Investment)

Brown and Yellow are partners with capital balances of P108,000 and P72,000, respectively. The
partners agreed to share profits and losses 70% to Brown and 30% to Yellow. They decided to
admit Green into the partnership.
Instruction: Give the entries to record the admission of Green under each of the following
independent cases:
Case 1 - Green contributes P150,000 cash into the partnership. Green will have 40% interest and
share in partnership profits. Bonus is recognized upon the admission of Green in the
partnership.
GENERAL JOURNAL
1 1
2 2
3 3
4 4
5 5
Agreed Capital Computation Contributed Capital Difference
Old
New
Total
share in partnership profits. Green paid a P45,000 excess over the proportionate book
value because the partnership owns land with a book value of P140,000 but a recent
appraisal indicates the land has a market value of P185,000.
GENERAL JOURNAL
1 1
2 2
3 3
4 4
5 5

Old
New
Total
share in partnership profits. Green paid a P45,000 excess because of unrecognized
goodwill as indicated by the partnership’s high profitability.
GENERAL JOURNAL
1 1
2 2
3 3
4 4
5 5
6 6

Old
New
Total
share in partnership profits. Bonus is recognized upon the admission of Green in the
partnership.
GENERAL JOURNAL
1 1
2 2
3 3
4 4
5 5
6 6

Old
New
Total
value because the inventories of the partnership, which is currently recorded at book
value of P90,000 has fair market value of only P60,000 because some items are obsolete.
GENERAL JOURNAL
1 1
2 2
3 3
4 4
5 5
6 6

Old
New
Total
value because they all agreed that Green should be given goodwill when he joined the
partnership in recognition of his anticipated excess contribution to the partnership’s future
earnings.
GENERAL JOURNAL
1 1
2 2
3 3
4 4
5 5
6 6

Old
New
Total
Practice Exercise 7-5: (Retirement/Withdrawal of a Partner)

The following data on January 1, 2020 for Barry, Manny and Lou Partnership is shown below:
Assets Liabilities and Capital

Cash P 60,000 Accounts Payable P 12,000
Non-cash Assets 48,000 Barry, Capital (30%) 36,000
Loan to Barry 6,000 Manny, Capital (50%) 48,000
Lou, Capital (20%) 18,000
Total P 114,000 Total Liabilities and Capital P 114,000
The percentages in parentheses after the partner’s capital balances represent their respective
interests in profits and losses. On May 1, 2020, Barry retires from the partnership. The net income
of the partnership as of the date of retirement amounted to P24,000. The partnership paid cash
to the retiring partner also on the retirement date.
Instruction: Prepare journal entries to record the retirement of Barry under each of the following
independent cases.
Case 1 - The partnership paid Barry, P37,200 (Settlement price is equal to the interest of retiring
partner).
GENERAL JOURNAL
1 1
2 2
3 3
4 4
5 5
Case 2 - The partnership paid Barry, P42,000. Included in the non-cash assets is an inventory
costing P7,200 with a fair value of P12,000. The remaining partners continue to use their
old profit and loss ratio. (Settlement price is greater than the interest of retiring partner –
Bonus to retiring partner).
GENERAL JOURNAL
1 1
2 2
3 3
4 4
Partial revaluation (goodwill) to retiring partner).
GENERAL JOURNAL
1 1
2 2
3 3
4 4
5 5
Total revaluation (goodwill) to retiring partner).
GENERAL JOURNAL
1 1
2 2
3 3
4 4
5 5
6 6
7 7
8 8
9 9
10 10
Case 5 - The partnership paid Barry, P31,200. (Settlement price is less than the interest of retiring
partner – Bonus to remaining partner).
GENERAL JOURNAL
1 1
2 2
3 3
4 4
5 5
partner – Partial revaluation/Write-down of Assets – Share of retiring partner only).
GENERAL JOURNAL
1 1
2 2
3 3
4 4
5 5
partner – Total revaluation/Write-down of Assets – Entire entity).
GENERAL JOURNAL
1 1
2 2
3 3
4 4
5 5
6 6
7 7
8 8
Summative Assessment: Partnership Dissolution – Admission by Investment

Assume the following data for China and Philippines Partnership:
Assets Liabilities and Capital
Cash P 3,000 Liabilities P 9,000
Non-cash Assets 39,000 China, Capital 24,000
China, Loan 3,000 Philippines, Capital 12,000
Total Assets P 45,000 Total Liabilities & Capital P 45,000
China and Philippines share profits and losses in the ratio of 60:40. The partners agree to admit
America as member of the firm.
Instruction: Prepare journal entries to record the admission of America, assuming:

a. America invests P12,000 for a 35% interest in the firm. The total agreed capital after
admission is P48,000.
b. America invests P12,000 for a one-third interest in the firm and is allowed a credit of P18,000
for his capital.
c. America must invest or contribute cash of P28,800 equivalent to 37.50% interest in total
agreed capital of P76,800. Included in the non-cash assets is an equipment undervalued
by P8,400.
d. America must invest P12,000 for a 45% interest in the firm. The total agreed capital after
e. America invests P18,000 for a 20% interest in the firm. The total agreed capital after
f. America invests P7,200 for a 30% interest in the firm. China and Philippines transfer part of
their capitals to that of America as a bonus. An equipment used in the business with a
book value of P6,000 and a fair value of P3,600.
g. America invests P18,000 for a one-fourth interest in the firm. China and Philippines
Partnership’s had other assets with a book value of P6,600 and a fair value of P11,400.
Revaluation (Goodwill) approach is recorded on the firm books prior to America’s
admission.
h. America invests P18,000 for a 30% capital interest and a 40% interest in profits. Use bonus
approach.
i. America invests P18,000 for a 30% capital interest and a 40% interest in profits. Use
revaluation (goodwill) approach.
Summative Assessment: Partnership Dissolution – Death of Partner
Bart, Ton, Manuel and Ed share profits and losses 15%, 15%, 30% and 40%, respectively. Their
partnership agreement provides that in the event of death of a partner, the firm shall continue
until the end of the fiscal period. Profits shall be considered to have been earned proportionately
during the period, and the deceased partner’s capital shall be adjusted by the proper share of
the profit or loss until the date of death. The remaining partners shall continue to share profits in
the old ratio.
Bart dies on November 1, 2019. On this date, the office equipment is under-depreciated by
P12,000 and the inventories are to be revalued to P1,475,000. On December 31, account
balances on the partnership books before the income summary account is closed are as follows:
Cash P 112,500 Notes Payable P 225,000

Accounts Receivable 1,050,000 Accounts Payable 1,057,500
Inventories 1,425,000 Bart, Capital 337,500
Office Equipment, net 675,000 Ton, Capital 360,000
Store Furniture and Fixtures, net 247,500 Manuel, Capital 562,500
Ed, Capital 630,000
Income Summary 337,500
Total P 3,510,000 Total P 3,510,000
The estate of Bart agreed to accept a 60-day, 12% note amounting to P200,000 and the balance
in cash. The income summary account is closed on December 31.
Instructions: Prepare journal entries to record the following:

a. Adjustment of assets on the date of death
b. Distribution of net profit prior to death of Bart
c. Distribution of net profit after death of Bart
d. Settlement with the estate of Bart
e. Settlement of the note

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MODULE 7 - Partnership Dissolution

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AE 112-

COURSE LEARNING OUTCOMES

a. The formation of a new partnership - This is known as dissolution by change in

b. Liquidation - This refers to the termination of business activities carried on by the

1. Without violation of agreement - a partnership may, without violating the partnership

But accounting problems are usually encountered in the following:

a. Purchase of an interest from present partners; or

b. Investment of assets in the partnership.

A. ADMISSION BY PURCHASE OF AN INTEREST

Case A: Purchase of interest from one partner at book value.

➢ Assume Janet purchased one-half of the interest of Bong for P60,000.

Bong, Capital 60,000

Case B: Purchase of interest from all partners at book value.

➢ Janet purchased one-half of the interest in the partnership for P150,000.

Bong, Capital 60,000

Old New Old P/L New

➢ Janet purchased one-half of the interest of Bong for P72,000.

➢ Janet purchased one-half of the interest in the partnership for P175,000

Bong JInggoy Total

Implied value of the partnership (P175,000 ÷ 50%) P 350,000

Identifiable Assets (or Goodwill) 50,000

Bong, Capital [(150000) x ½] 75,000

Capital after New

➢ Janet purchased one-half of the interest of Bong for P54,000.

➢ Janet purchased one-half of the interest in the partnership for P140,000.

Implied value of the partnership (P140,000 ÷ 50%) P 280,000

Bong, Capital 12,000

Bong, Capital [(120,000 - 12,000) x ½] 54,000

➢ The resulting capital balances of the partners will be:

Share in Capital after New

➢ The entry to record the admission of Sandra will be:

Assumption 1: Use Bonus Approach (Bonus to Old Partners)

Analyzing the entry shown above:

Assumption 2: Use Revaluation Approach (Undervaluation of Assets)

Assumption 3: Use Goodwill Approach (Unrecognized Goodwill)

Analyzing the entry shown in the previous page:

Assumption 1: Use Bonus Approach (Bonus to New Partner)

Assumption 2: Use Revaluation Approach (Overvaluation of Assets)

Analyzing the entry shown above:

Assumption 3: Use Goodwill Approach (Goodwill Brought in by the New Partner)

Analyzing the entry shown above:

A withdrawing/retiring partner may sell his interest to any of the following:

Mang Ina Sal

Income Summary 120,000

Mang, Capital (60%) 3,600

Mang, Capital* 183,400

Case B: Settlement price is greater than the interest of retiring partner

Assumption 1: Record Bonus to the Retiring Partner (Bonus Approach)

Mang, Capital 183,400

Assumption 2: Partial revaluation (goodwill) of partnership assets

Mang, Capital 183,400

Assumption 3: Total revaluation (goodwill) of partnership assets

Accumulated depreciation (Goodwill) 3,200

Mang, Capital 185,000

Case C: Settlement price is less than the interest of retiring partner

Assumption 1: Bonus to the Remaining Partners (Bonus Approach)

Mang, Capital 183,400

Assumption 2: Partial revaluation of partnership assets (Partial Revaluation Approach)

Mang, Capital 183,400

Assumption 3: Total revaluation of partnership assets (Total Revaluation Approach)

Mang, Capital (50%) 3,400

Mang, Capital 180,000

1. Closing of the Books

2. Amount of profits on which the dead partner may share