OPENING PRAYER Oratio Imperata

for the people who are sick because of the COVID19 coronavirus
(SARS-CoV-2) and for the prevention of a global outbreak

God our Father, we come to you in our need
to ask your protection against the COVID 19,
that has claimed lives and has affected many.
We pray for your grace, for the people tasked
with studying the nature and cause of this
virus and its disease and of stemming the
tide of its transmission.
Guide the hands and minds of medical
experts that they may minister to the sick
with competence and compassion, and of
those governments and private agencies that
must find cure and solution to this epidemic.
We pray for those afflicted. May they be
restored to health soon. Protect those who
care for them. Grant eternal rest to those who
have died. Grant us the grace to work for the
good of all and to help those in need.
We implore you to stop the spread of this
virus and to save us from our fears. Grant this
through our Lord, Jesus Christ, your Son, Who
lives and reigns with You, in the unity of the
Holy Spirit, God forever and ever. Amen.
We fly to Your protection, oh Holy Mother of
God. Do not despise our petition in our
necessities, but deliver us always from all
dangers, oh Glorious and blessed Virgin.
Amen.
Our Lady, health of the sick, pray for us.
St. Raphael the Archangel, pray for us.
St. Roch, pray for us.
St. Lorenzo Ruiz, pray for us.
St. Pedro Calungsod, pray for us.
 Partnership Dissolution:
Change in Capital Structure
– Withdrawal, Retirement
Death or Incapacity of a
Partner
Partnership and Corporation Accounting
Second Semester • Fourth Grading
Learning Objectives
1. Discuss and understand the accounting procedure
in recording the retirement or withdrawal of a
partner by sale of interest to a new partner or to
the continuing partners.
2. Discuss and understand the accounting
procedures in recording the retirement or
withdrawal of a partner by sale of interest to the
partnership.
3. Discuss and understand the accounting
procedures in recording the dissolution of a
partnership due to death or incapacity of a partner.
Change in Capital Structure by
Withdrawal or Retirement of a
Partner
The interest of the retiring or withdrawing partner
may be:
1. Sold to a new partner (outsider)
2. Sold to the continuing (remaining) partners
3. Sold to the partnership
Sale of Interest to a New
Partner
• The partnership recognizes only the
transfer of capital interest from the
retiring partner to the new partner.
• Any gain or loss from the sale is a
personal gain or loss of the retiring
partner.
Sale of Interest to
Continuing Partners
• Recorded in the same manner as in the
sale of interest to a new partner
• Partnership recognizes only the transfer
of capital interest from the retiring
partner to the acquiring partner or
partners
Sale of Interest to the
Partnership
The partnership has the obligation to make
payment to the retiring partner by either by:
1. payment in cash;
2. transfer of noncash assets; or
3. recognition of a liability for the full or the
balance of the unpaid interest of the
retiring partner
Sale of Interest to the
Partnership
The purchase price or amount of settlement
by the partnership to the retiring partner may
be:
1. equal to the interest of the retiring partner
(at book value)
2. less than the interest of the retiring
partner (at less than book value)
3. more than the interest of the retiring
partner (at more than book value)
Sale of Interest to the
Partnership
Payment to the retiring partner is less than
or more than his capital interest the
difference between the purchase price and
the capital interest may be accounted for
using:
1. bonus method
2. asset revaluation method
Accounting Problems Involved
in the Retirement of a Partner
• Interest of the retiring partner must be established
upon retirement
• Retiring partner’s interest is affected by his
investments, withdrawals, share on profits or losses to
the partnership and loans from the partnership
• The accounting problem involved in determining the
capital interest of the retiring partner:
1. Determination of the profit or loss from the
beginning of the accounting period to the date of
withdrawal or retirement and the distribution of such
profit or loss
Accounting Problems Involved
in the Retirement of a Partner
2. Closing of the partnership books
3. Correction of accounting errors in prior periods like
overstatement or understatement of inventories,
excessive depreciation charges and failure to
provide adequately for doubtful accounts
4. Revaluation of partnership assets to current values
5. Recording of bonus brought about by the retirement
of a partner
6. Settlement of the interest of the retiring partner
Calculation of Retiring
Partner’s Interest

Investments
− Withdrawals
+ Share in partnership profits to date of retirement or
− Share in partnership losses to date of retirement
+ Loans and advances to the partnership or
− Loans and advances from the partnership
+ Revaluation of assets increasing their recorded values or
− Revaluation of assets decreasing their recorded values
Interest upon retirement
Illustrative Problem A
The statement of financial position of the
partnership Dy, David and Diaz on December
31, 2009 follows:
Assets Liabilities and Capital
Cash P110,000 Liabilities P20,000
Other assets 30,000 Dy, Capital 20,000
David, Capital 40,000
Diaz, Capital 60,000
Total Assets P140,000 Total Liabilities and Capital P140,000
Illustrative Problem A
• The partners share profits and losses in the ratio of
4:2:4.
• On July 1, 2010, Diaz asked to be allowed to withdraw
from the partnership.
• The partners decided to close the books as of this
date so as to determine the capital interest of Diaz.
• Profit for the six months ended amounted P60,000
while drawings of Dy, David and Diaz amounted to
P4,000, P6,000 and P2,000 respectively. Profits and
losses are to be shared equally after the retirement of
Diaz.
Illustrative Problem A
a. Income Summary 60,000
Dy, Capital 24,000
David, Capital 12,000
Diaz, Capital 24,000
Net income from Jan. 1 to
June 30 divided in the ratio
of 4:2:4

b. Dy, Capital 4,000

David, Capital 6,000
Diaz, Capital 2,000
Dy, Drawing 4,000
David, Drawing 6,000
Diaz, Drawing 2,000
 Illustrative Problem A
After considering the preceding entries, the
capital interest of the partners as of July 1, 2010
may be computed as follows:
Diaz Dy David
Capital balance, Dec. 31, 2009 P60,000 P20,000 P40,000
Share in profit from Jan. 1 - June 30 24,000 24,000 12,000
Withdrawals (2,000) (4,000) (6,000)
Capital balance, July 1, 2010 P82,000 P40,000 P46,000
Illustrative Problem A (Cont’d)
Assumption 1 – Sale of interest to new partner. Diaz
sold his interest to Duque for P100,000.

Diaz, Capital 82,000

Duque, Capital 82,000

The gain of P18,000 (P100,000 – P82,000) is a personal gain of

Diaz since the sale of the interest to outsider is a personal
transaction between the buying partner and Diaz.
Illustrative Problem A (Cont’d)
Assumption 2 – Sale of interest to the
continuing partners. Diaz sold his interest to
Dy and David for P75,000; the interest being
divided equally by the remaining partners. Profit
and losses after the retirement of Diaz will be
divided equally.

Diaz, Capital 82,000

Dy, Capital 41,000
David, Capital 41,000
Illustrative Problem A (Cont’d)
Assumption 3 – Sale of interest to the partnership.
Diaz sold his interest to the partnership. The partners
agreed to make immediate cash settlement to the retiring
partner. Profit and losses after the retirement of Diaz will
be divided equally.

Case A. Settlement to the retiring partner is equal to

his capital interest. The partnership paid Diaz
P82,000.

Diaz, Capital 82,000

Cash 82,000
Illustrative Problem A (Cont’d)
Case B. Settlement is less than the capital interest of
the retiring partner (at less than book value). The
partnership paid Diaz P76,000 which is P6,000 less
than his capital interest of P82,000.

a. Bonus Method
Diaz, Capital 82,000
Cash 76,000
Dy, Capital 4,000
David, Capital 2,000
P6,000 x 4/6 = P4,000
P6,000 x 2/6 = P2,000
Illustrative Problem A
Case B. Settlement is less than the capital interest of
the retiring partner (at less than book value). The
partnership paid Diaz P76,000 which is P6,000 less
than his capital interest of P82,000.
b. Asset Revaluation Method
Diaz, Capital 82,000
Dy, Capital 6,000
David, Capital 3,000
Cash 76,000
Other Assets 15,000
P15,000 x 4/10 = P6,000
P15,000 x 2/10 = P3,000
P15,000 x 4/10 = P6,000
Illustrative Problem A
Case C. Settlement is more than the capital interest of
the retiring partner (at more than book value). The
partnership paid Diaz P85,000 which is P3,000 more
than his capital interest of P82,000.

a. Bonus Method
Diaz, Capital 82,000
Dy, Capital 2,000
David, Capital 1,000
Cash 85,000
P3,000 x 4/6 = P2,000
P3,000 x 2/6 = P1,000
Illustrative Problem A
Case C. Settlement is more than the capital interest of
the retiring partner (at more than book value). The
partnership paid Diaz P85,000 which is P3,000 more
than his capital interest of P82,000.
b. Asset Revaluation Method
Diaz, Capital 82,000
Other Assets 7,500
Cash 85,000
Dy, Capital 3,000
David, Capital 1,500
Dy: P7,500 x 4/10 = P3,000
David: P7,500 x 2/10 = P1,500
Diaz: P7,500 x 4/10 = P3,000
Change in Capital Structure by
Death or Incapacity of a Partner
 The death or incapacity of a partner legally dissolves
the old partnership since a partner ceases to be
associated in the carrying on of the business.
 The interest of the deceased or incapacitated partner
must be determined by the partnership in order to
make the necessary settlement with his legal
representatives.
 In case the business is continued without immediate
settlement, the legal representative of the deceased is
considered as an ordinary creditor and is to receive
an amount equal to the interest and profits
attributable to this interest.
End of
Presentation!
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