PARTNERSHIP DISSOLUTION

EMPV
 DISSOLUTION

• Change in the relationship of the partners caused by any of the following:

I. Admission of a new partner
II. Withdrawal or retirement of a partner
III. Death of a partner
• Dissolution is not always followed by liquidation. As distinguished to liquidation, liquidation is the stage wherein
there is already a termination of the business activities of the partnership and winding up of the affairs of the
business.
• Before a dissolution occurs, the partnership books shall be adjusted first for any of the following:
I. revaluation of assets
II. profit or loss for the period
 ADMISSION OF A NEW PARTNER

I. PURCHASE OF INTERESTS
- New partner directly purchases all or a portion of one or more of the existing partners interest.
- When a new partner purchases , the total partnership assets and capital is remained unchanged. There is
only a transfer of capital between the existing partner and the new partner. The amount paid by the new partner
is not recorded in the books because it is only a personal transaction between the existing partner and the new
partner. So if the purchased price is greater/less than the capital credited to the new partner at the time of
admission, no gain or loss will be recognized in the partnership books.
- If the assets are not fairly valued, assets and the capital accounts of the old partners shall be adjusted first before
admission of the new partner. Based on the amount paid by the partner to purchase the interest, the total
implied capital is computed and compared to total contributed capital of the partnership. Any difference pertains
to the over or under valuation of the assets.
PROBLEM :
On January 1,2019, AB partnership wants to expand their business by admitting new partners in the partnership. Presented
below is the statement of financial position as of January 1,2019:
ABC Partnership
Statement of Financial Position
January 1,2019

ASSETS LIABILITIES AND EQUITY

Cash 60,000 Accounts payable 95,000

Accounts Receivable,net 150,500 Notes payable 235,000

Inventory 80,000 A, Capital 115,500

Land 255,000 B, Capital 100,000
TOTAL ASSETS 545,500 TOTAL LIABILITIES 545,500
AND EQUITY

A and B share in the profits and losses in the ratio of 60:40. A and B agreed to admit C and will retain their original share in
the net income.
REQUIRED:
Under the following independent cases, compute the capital balances of each partner after admission of C and give the
entries in the books of the partnership.
CASE 1 : C is to have a 30% interest as well as in the share net income in the
partnership and paid 64,650.

Partner’s Capital Interest acquired by C Partner’s Capital

balance before balance after admission
admission of C of C
A – 115,500 (34,650) 80,850
B– 100,000 (30,000) 70,000
C 34,650 + 30,000 64,650

ENTRIES:

A, Capital 34,650
B, Capital 30,000
C, Capital 64,650
CASE 2 : C is to have a 30% interest as well as in the share net income in the
partnership and paid 75,000. All the assets are fairly valued.

Partner’s Capital Interest acquired by C Partner’s Capital

balance before balance after admission
admission of C of C
A – 115,500 (34,650) 80,850
B– 100,000 (30,000) 70,000
C 34,650 + 30,000 64,650

ENTRIES:

A, Capital 34,650
B, Capital 30,000
C, Capital 64,650
 CASE 3 : C is to have a 30% interest as well as in the share net income in the
partnership and paid 75,000. The land is not fairly valued.
TOTAL IMPLIED CAPITAL = 250,000 ( 75,000 / 30%)
TOTAL CONTRIBUTED CAPITAL= 215,500
Undervaluation in equipment 34,500
Partner’s Capital Adjustment to Adjusted capital Interest acquired Partner’s Capital
balance before the capital of old balance before by C balance after
admission of C partners due to admission of C admission of C
undervaluation of
equipment
A – 115,500 +20,700 136,200 (40,860) 95,340
B– 100,000 +13,800 113,800 ( 34,140) 79,660
C 40,860 + 34,140 75,000
ENTRIES:

Land 34,500 A, Capital 40,860

A, Capital 20,700 B, Capital 34,140
C, Capital 13,800 C, Capital 75,000
CASE 4 : C is to have a 30% interest as well as in the share net income in the
partnership and paid 45,000. All assets are fairly valued.

Partner’s Capital Interest acquired by C Partner’s Capital

balance before balance after admission
admission of C of C
A – 115,500 (34,650) 80,850
B– 100,000 (30,000) 70,000
C 34,650 + 30,000 64,650

ENTRIES:

A, Capital 34,650
B, Capital 30,000
C, Capital 64,650
 CASE 5 : C is to have a 30% interest as well as in the share of net income in the
partnership and paid 45,000. The inventory is not fairly valued.
TOTAL IMPLIED CAPITAL = 150,000 ( 45,000 / 30%)
TOTAL CONTRIBUTED CAPITAL= 215,500
overvaluation of inventories 65,500

Partner’s Capital Adjustment to the Adjusted capital Interest acquired Partner’s Capital
balance before capital of old balance before by C balance after
admission of C partners due to admission of C admission of C
overvaluation of
inventories
A – 115,500 (39,300) 76,200 (22,860) 53,340
B– 100,000 (26,200) 73,800 (22,140) 51,660
C 22,860 + 22,140 45,000
ENTRIES:

A, Capital 39,300 A, Capital 22,860

B, Capital 26,200 B, Capital 22,140
Inventories 65,500 C, Capital 45,000
 ADMISSION OF A NEW PARTNER

I. INVESTMENT OF ASSETS
- New partner invests assets in the partnership.
- When a new partner invests, the asset invested by the new partner is recorded in the books and there is a credit to
the new partner’s capital account and in effect it increases the total assets and total capital of the partnership.
- If the assets are fairly valued, and the capital credited to the new partner is different from the capital contributed, any
difference pertains to a bonus given to the new or old partners.

CAPITAL CONTRIBUTED = CAPITAL CREDITED → no bonus

CAPITAL CONTRIBUTED > CAPITAL CREDITED → with bonus coming from new partner to old partners
CAPITAL CONTRIBUTED < CAPITAL CREDITED → with bonus coming from old partners to new partner

- If the assets are not fairly valued, assets and the capital accounts of the old partners shall be adjusted first before
admission of the new partner. Based on the amount invested by the partner, the total implied capital is computed and
compared to total contributed capital of the partnership. Any difference pertains to the over or under valuation of the
assets.
 CASE 1 : C invests 53,875 cash for 20% interest as well as in the share in net
income in the partnership. All assets are fairly valued.
A B C
Partner’s Capital before admission 115,500 100,000
of C
Investment of C 53,875
Capital balances after 115,500 100,000 53,875
admission of C

TOTAL CONTRIBUTED CAPITAL → 115,500 + 100,000 + 53,875 = 269,375

ENTRIES :
Capital that should be credited to C → 269,375 x 20% interest = 53,875
Cash 53,875
CAPITAL CONTRIBUTED = CAPITAL CREDITED → No Bonus C, Capital 53,875

53,875 = 53,875
 CASE 2 : C invests 70,000 cash for 20% interest as well as in the share in net
income in the partnership. All assets are fairly valued.
A ( 60%) B (40%) C
Partner’s Capital before admission 115,500 100,000
of C
Investment of C 70,000
Bonus to old partners 7,740 5,160 (12,900)
Capital balances after 123,240 105,160 57,100
admission of C

TOTAL CONTRIBUTED CAPITAL → 115,500 + 100,000 + 70,000 = 285,500 ENTRIES :

Cash 70,000
Capital that should be credited to C → 285,500 x 20% interest = 57,100
C, Capital 70,000

CAPITAL CONTRIBUTED > CAPITAL CREDITED → bonus coming from new C, Capital 12,900
partner to old partners A, Capital 7,740
B, Capital 5,160
70,000 > 57,100 → 12,900
 CASE 3 : C invests 70,000 cash for 20% interest as well as in the share in net
income in the partnership. The land is not fairly valued.
A ( 60%) B (40%) C
Partner’s Capital before admission 115,500 100,000
of C
Investment of C 70,000
Undervaluation of land 38,700 25,800
Capital balances after 154,200 125,800 70,000
admission of C

ENTRIES :

TOTAL IMPLIED CAPITAL → 70,000/ 20% = 350,000 Land 64,500

TOTAL CONTRIBUTED CAPITAL → 115,500 + 100,000 + 70,000 = 285,500 A, Capital 38,700
Undervaluation in equipment 64,500 B, Capital 25, 800

Cash 70,000
C, Capital 70,000
 CASE 4 : C invests 40,000 cash for 20% interest as well as in the share in net
income in the partnership. All assets are fairly valued.
A ( 60%) B (40%) C
Partner’s Capital before admission 115,500 100,000
of C
Investment of C 40,000
Bonus to new partner (6,660) (4,440) 11,100
Capital balances after 108,840 95,560 51,100
admission of C

ENTRIES :
TOTAL CONTRIBUTED CAPITAL → 115,500 + 100,000 + 40,000 = 255,500
Cash 40,000
Capital that should be credited to C → 255,500 x 20% interest = 51,100 C, Capital 40,000

CAPITAL CONTRIBUTED < CAPITAL CREDITED → bonus coming from old A, Capital 6,660
partners to new partner B, Capital 4,440
C, Capital 11,100
40,000 > 51,100 → 11,100
 CASE 5 : C invests 40,000 cash for 20% interest as well as in the share in net
income in the partnership. The land is not fairly valued.
A ( 60%) B (40%) C
Partner’s Capital before admission 115,500 100,000
of C
Investment of C 40,000
Overvaluation of land (33,300) (22,200)
Capital balances after 82,200 77,800 40,000
admission of C

ENTRIES :

TOTAL IMPLIED CAPITAL → 40,000/ 20% = 200,000 A, Capital 33,300

B, Capital 22,200
TOTAL CONTRIBUTED CAPITAL → 115,500 + 100,000 + 40,000 = 255,500 Land 55, 500
Overvaluation in equipment 55,500
Cash 40,000
C, Capital 40,000
 RETIREMENT/ WITHDRAWAL/ DEATH OF
A PARTNER
- At the time of retirement/withdrawal/ death of a partner, the partnership has the obligation to settle the interest of
the partner by either:
a. Payment thru cash
b. Payment thru non-cash assets
c. By recognition first of a liability for the unpaid interest of the retiring partner.
• Before retirement/withdrawal, the partnership books shall be adjusted first for profit or loss for the period as well as
any asset revaluation.
• If Settlement value = Book value of capital → no bonus or no asset revaluation
• If Settlement value ≠ Book value of capital → with bonus or asset revaluation
Causes:
1. Assets are not fairly valued
2. Bonus given to remaining / retiring partner
→ Settlement value > Book value of capital = bonus to retiring partner/ asset is undervalued.
→ Settlement value < Book value of capital = bonus to remaining partners/ asset is overvalued.
- At the time of retirement/withdrawal/ death of a partner total assets and total equity decrease. If the settlement value
is not paid at the the time of retirement, the total liabilities of the partnership increases while the total equity decreases.
PROBLEM :
On January 1,2019, ABC partnership presented its statement of financial position below:
ABC Partnership
Statement of Financial Position
January 1,2019

ASSETS LIABILITIES AND EQUITY

Cash 260,000 Accounts payable 95,000

Accounts Receivable,net 150,500 Notes payable 235,000

Inventory 80,000 A, Capital 115,500

Land 255,000 B, Capital 100,000
C, Capital 200,000
TOTAL ASSETS 745,500 TOTAL LIABILITIES 745,500
AND EQUITY

A ,B, C share in the profits and losses in the ratio of 42:28:30.

REQUIRED:
Under the following independent cases, compute the capital balances of each partner after admission of C and give the
entries in the books of the partnership.
CASE 1 : B’s settlement is equal to his interest in the firm.

A (42%) B (28%) C (30%)

Partner’s Capital before retirement 115,500 100,000 200,000
of B
Settlement of interest of B (100,000)
Capital balances after 115,500 0 200,000
retirement of B

SETTLEMENT VALUE = BOOK VALUE OF CAPITAL→ no bonus/ asset revaluation

150,000 > 100,000 → 50,000

ENTRIES:

B, Capital 100,000
Cash/ Payable to B/ Payable to Estate of B 100,000
CASE 2 : B’s settlement is 150,000. All assets are fairly valued.
A ( 42%) B (28%) C (30%)
Partner’s Capital before retirement 115,500 100,000 200,000
of B
Bonus to retiring partner (29,166.67) 50,000 (20,833.33)
Capital balances after bonus 86,333.33 150,000 179,166.67
distribution to B
Settlement of interest of B (150,000)
Capital balances after 115,500 0 200,000
retirement of B

SETTLEMENT VALUE > BOOK VALUE OF CAPITAL→ bonus to retiring partner

150,000 > 100,000 → 50,000

ENTRIES:
A, Capital 29,166.67
C, Capital 20,833.33
B, Capital 50,000

B, Capital 150,000
Cash/ Payable to B/ Payable to Estate of B 150,000
 CASE 3 : B’s settlement is 150,000. The land is not fairly valued.
A ( 42%) B (28%) C (30%)
Partner’s Capital before retirement of 115,500 100,000 200,000
B
Adjustment due to undervaluation of 75,000 50,000 53,571.43
land
Capital balances after adjustment of 190,500 150,000 253,571.43
undervalued land
Settlement of interest of B (150,000)
Capital balances after retirement 190,500 0 253,571.43
of B

TOTAL UNDERVALUATION IN LAND → 50,000/ 28% = 178,571.43

ENTRIES:
Land 178,571.43
A, Capital 75,000
B, Capital 50,000
C, Capital 53,571.43

B, Capital 150,000
Cash/ Payable to B/ Payable to Estate of B 150,000
CASE 4: B’s settlement is 72,000. All assets are fairly valued.
A ( 42%) B (28%) C (30%)
Partner’s Capital before retirement 115,500 100,000 200,000
of B
Bonus to remaining partners 16,333.33 (28,000) 11,666.67
Capital balances after bonus 110,833.34 72,000 211,666.67
distribution to remaining partners
Settlement of interest of B (72,000)
Capital balances after 110,833.34 0 211,666.67
retirement of B

SETTLEMENT VALUE < BOOK VALUE OF CAPITAL→ bonus to remaining partners

72,000 > 100,000 → 28,000

ENTRIES:
B, Capital 28,000
A, Capital 16,333.33
C, Capital 11,666.67

B, Capital 72,000
Cash/ Payable to B/ Payable to Estate of B 72,000
 CASE 5 : B’s settlement is 72,000. The inventory is not fairly valued.
A ( 42%) B (28%) C (30%)
Partner’s Capital before retirement of 115,500 100,000 200,000
B
Adjustment due to overvaluation of (42,000) (28,000) (30,000)
inventory
Capital balances after adjustment of 73,500 72,000 170,000
overvalued land
Settlement of interest of B (72,000)
Capital balances after retirement 73,500 0 170,000
of B

TOTAL OVERVALUATION IN INVENTORY → 28,000/ 28% = 100,000

ENTRIES:
A, Capital 42,000
B, Capital 28,000
C, Capital 30,000
Inventory 100,000

B, Capital 72,000
Cash/ Payable to B/ Payable to Estate of B 72,000