Retirement or Death of Partner

Illustration
Assume that A, B and C are partners operating their business for more than 10 years
and been sharing profits and losses in the ratio of 3:2:1. C will retire from the
partnership. Their capital balances after adjustment but before settlement of C shows
the following:
A         P400,000
B           300,000
C           200,000
 

1. Settlement at carrying amount

Assume that the partnership agreed on a cash settlement to C for P200,000

Entry:
                C, Capital                                             P200,000
                     Cash                                                                                 P200,000
                           Withdrawal of C
 

1. Settlement above carrying amount

Assume that the partnership agreed on a cash settlement to C for P250,000. The
excess of cash settlement over the carrying amount of C may indicate that some assets
were undervalued or some liabilities were overvalued, hence an adjustment need to be
made:
Entry:
Land (asset)                                       P   50,000
                A Capital (3/6xP50K)                                                       P25,000
                B Capital(2/6xP50K)                                                           16,667
                C Capital(1/6xP50K)                                                             8,333
 
 
C, Capital                                                250,000
Cash                                                                                      P250,000
     Withdrawal of C
 

1. Settlement below carrying amount

Assume that the partnership agreed on a cash settlement to C for P150,000. The
settlement of a retiring partner below his carrying amount may indicate that goodwill is
impaired due to a partners’ retirement. In such case, goodwill attributable to the retiring
partner is to be written off. Hence the P50,000 excess will be accounted as follows:
        Z, Capital                                                              P50,000
              Goodwill (Accumulated Impairment Loss)                       P50,000
                        Write off of goodwill
        Z, Capital                                                              P150,000
                                Cash                                                                                     
P150,000
                                   Withdrawal of C