PARTNERSHIP DISSOLUTION

Dissolution is the change in the relation of the partners caused by any partner being disassociated
from the business or by change in agreements of the partners. This may include:
1. Admission of a new partner
2. Retirement of a partner
3. Death of a partner
4. Assignment of interest by a partner
5. Incorporation of the partnership

Admission of a new partner

1. Admission by purchase – this is a personal transaction between the new and existing
partner(s).

Methods:
a. No adjustment or book value method – assets are not adjusted regardless of the
amount paid by the new partner
b. With adjustment or revaluation method – assets of the existing partnership are
adjusted based on the amount paid by the new partner.

2. Admission by investment – this is a transaction between the new partner and the partnership.

Methods:
a. Bonus method – bonus to old or new partner(s)
b. Revaluation method – revaluation of existing partnership
c. Goodwill method – goodwill to new or existing partners
d. Withdrawal – withdrawal of assets as a result of-realignment
e. Additional investment – as a result of re-alignment

Retirement/Withdrawal
Procedures:
1. Adjust the capital for share in profit or loss during the period up to date of withdrawal or
retirement
2. Adjust the capital for share in revaluation as at the date of withdrawal or retirement

Scenarios:
Retiring or withdrawing partner’s interest is sold to
1. One or more of the remaining partners
a. No adjustment or book value method – assets are not adjusted regardless of the
amount paid to the retiring/withdrawing partner
b. With adjustment or revaluation method – assets of the existing partnership are adjusted
based on the amount paid to the retiring/withdrawing partner
2. Outside party (with the consent of all partners)
a. No adjustment or book value method - assets are not adjusted regardless of the
amount paid to the retiring/withdrawing partner
b. With adjustment or revaluation method – assets of the existing partnership are adjusted
based on the amount paid to the retiring/withdrawing partner
3. Partnership
a. Settlement > Net interest
  Bonus to retiring partner
 Goodwill to retiring partner
a. Total goodwill approach
b. Partial goodwill approach
 Revaluation upwards of the partnership
b. Settlement < Net interest
 Bonus to remaining partners
 Revaluation downward or write-down of assets of the partnership
c. Settlement = Net Interest

Death of a partner
This results in automatic dissolution of the partnership at the point of death.

Procedures:
1. Adjust the capital of a deceased partner for share in profit ort loss during the period up to the
date of death
2. Adjust the capital for share in revaluation (if any) as at the date of death
3. The adjusted capital of the deceased partner shall be transferred to a liability account.
4. Interest payable to the estate is a real expense on the books of the continuing partners.

Incorporation
Procedures:
1. Adjust the capital of the partners for share in profit or loss during the period up to the date of
incorporation
2. Adjust the capital of the capital for share in revaluation (if any) as at the date of incorporation
3. The adjusted capital shall be transferred to share capital. Excess of the aggregate capital
accounts over the par value or stated value of shares of stocks issued to the partners is
treated as share premium.

Assignment of interest
A partner’s interest may be assigned to:
1. Partnership – rules of retirement applies
2. Other partners – reclassification of capital
3. Third party
a. With consent of other partners – rules on formation apply
b. Without consent of other partners – no accounting issue

SOURCE:
Prof. Mark Alyson B. Ngina, CPA, CMA

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