Chapter 3 Partnership Dissolution

AFAR 1 – Accounting for Special Transactions
Chapter 3 – Partnership Dissolution
Partnership Dissolution is defined as “the changes in the relation of the partner caused
by any partner ceasing to be associated in the carrying on as distinguished from the
winding up of the business.” Dissolution ends the association of partners for their original
purpose.
Accounting for Partnership Dissolution
Accounting for a partnership is influenced by the proprietary theory, which views the
partnerships not as a distinct entity, but, rather, as a group of individual investors.
Measuring the changes in the equity of the individual partners is a major aspect of
partnership accounting.
Capital Interest VS Profit and Loss Interest
A partner’s capital interest is a claim against the assets of the partnership as shown by
the balance in the partner’s capital account.
An interest in profit and loss determines how the partners’ capital interest will decrease
or increase as a result of subsequent operations.
Assignment of an Interest to a Third Party
A partnership is not dissolved when a partner assigns his/her interest in the partnership to
a third party, because such assignment does not itself change the relationship of the
partners.
Problems that Arise upon Dissolution
1. Admission of a new partner;

a. By purchase of Interest; and
b. By investment
2. Withdrawal or retirement of a partner
3. Death or incapacity of a partners; and
4. Incorporation of a partnership
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Partnership commonly deviates from GAAP in the following areas:
1. The use of cash basis instead of the accrual basis;
2. The use of prior period adjustments;
3. The use of current values instead of historical cost (usually in connection with a
change in ownership); and
4. The recognition of goodwill (usually in connection with a change in ownership)
Valuation – an Issue
1. Revaluation approach (usually referred to as goodwill procedure – non-GAAP).

Under this approach, the use of fair values provides an equitable measure of
each partner’s capital interest in the partnership.
2. Absence of Revaluation (usually referred to as the bonus procedure/book value
approach – GAAP). This approach would retain the historical cost carrying value.
The following should be observed in relation to valuation of assets and liabilities on

dissolution problems:
1. If there is an agreement among partners that revaluation is allowed, the reflect
the new necessary adjustments, before dissolution.
2. In the absence of an agreement:
a. Revaluation approach (or goodwill procedure non-GAAP) – the assets and
liabilities should be recorded at their fair value.
b. Absence of revaluation approach (or bonus procedure – GAAP) – Existing
book values should not be adjusted to fair values unless such adjustments
would have been allowed by GAAP:
b.1 Recognition of Decreases in Net Asset Revaluation (GAAP) – decreases or
write downs in the value of assets maybe recognized though not realized. b.2
Non-recognition of increases in Net Asset Revaluations (Non-GAAP) – the use
of absence of revaluation approach or bonus procedure does prevent the
recognition of asset appreciation, which would otherwise not be allowed by
GAAP.
ADMISSION OF A NEW PARTNER
Accounting problems in respect to the admission of a new partner are as

follows: • Recognition of accounting errors in prior periods
• Recognition of profit and loss from the beginning of the accounting period to the
date of admission
• Closing of Partnership Books
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• Recognition of net revaluations
I. Admission by Purchase of Interest from One or More Partners
Purchase of interest can actually convey the following rights:

• Right of co-ownership in the business property
• Right to share in profits and losses
• Right to participate in the management of the business
Illustration 1:
Assume the following information on LMN Partnership on December 31, 2013:

Partners Capital P&L Ratio
L Php 20,000 20%
M 20,000 30%
N 30,000 50%
On this date, O is admitted to the partnership.
Case 1. Purchase from one partner. Assume O purchase ½ of the interest of L.

Regardless of the amount paid to L, the only entry required in the partnership book is:
L, Capital 10,000
O, Capital 10,000
To record admission of O
Case 2: Purchase from all Partners. Assume the following: (1) O is admitted into the
partnership for a 50% interest in the profits and losses of the partnership; (2) the old
partners are to retain their original capital and profit sharing – sharing relationships to
each other and are to transfer sufficient amount of their own capital accounts to O in
order to accomplish admission as planned. If O agreed to pay total of Php50,000 to the
Old partners, the necessary entry is:
L Capital 10,000
M Capital 10,000
N Capital 15,000
O Capital 35,000
To record admission of O to the partnership with 50% interest in P&L.
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Distribution of the Php50,000 cash paid by O:
L M N Total
Amounts of Capital Transferred 10,000 10,000 15,000 35,000

Php15,000 excess divided using the P&L 3,000 4,500 7,500 15,000
ratio Total Php13,00 Php14,500 Php22,500 Php50,00
0 0
Alternative Method. The net assets of the partnership may be revalued when the
purchase of interest from all partners is for an amount more than the interest acquired.
Implied value of the partnership (Php50,000/50%) Php100,000 BV of the partnership
(total capital) 70,000 Undervaluation of identifiable asset (goodwill) Php 30,000
The entries would be:

Identifiable assets (or Goodwill) 30,000
L Capital 6,000
M Capital 9,000
N Capital 15,000
To record revaluation of net assets
L Capital 13,000
M Capital 14,500
N Capital 22,500
O Capital 50,000
Illustration 2:
FG Partnership has a book value of Php100,000 and P&L percentage on January as

follows:
Capital Balances P&L
F 60,000 70%
G 40,000 30%
Total 100,000 100%
On this date, H is admitted to the Partnership.
Case 1: Purchase of Interest from One Partner. H paid Php24,000 directly to F in

exchange for 1/3 interest.
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The entry to record the transaction:
F, Capital 20,000
H, Capital 20,000
To record admission of H
Case 2: Purchase of Interest from All Partners.
Assumption 1. Purchase at Book Value. H purchases a ¼ interest in the firm. ¼ of each

partner’s capital is to be transferred to the new partner. H pays the partners Php25,000.
The entry to record:
F Capital (60,000x ¼ ) 15,000

G Capital (40,000 x ¼ ) 10,000
H Capital 25,000
To record admission of H at book value.
Capital Balances after admission of H would be:

F G H Total
Capital before admission 60,000 40,000 Php25,000 100,000

Multiplied: Interest ¾ ¾
Remained Total Php45,00 Php30,00 Php100,000
0
Profit and Loss Ratio of the Partners after admission of H:
F Capital (70% x ¾ ) 52.50%
G Capital (30% x ¾ ) 22.50%
H Capital (Equivalent to interest acquired) 25.00%
Total 100%
Assumption 2. Purchase at More than Book Value. H purchased ¼ of F’s interest for
Ph18,000 and ¼ of G’s interest for 12,000, making payment directly to F and G. The new
partner will have a ¼ profit and loss ratio and the old partners continue to use their old
profit and loss ratio.
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Alternative 1. Book Value Approach.
Amount Paid (Php18,000+Php12,000) Php 30,000
Less: BV of interest acquired (Php100,000 x ¼ ) Php 25,000
Excess (Gain of F & G – personal in nature) Php5,000
The partnership does not record the gain because it does not benefit from
it. Alternative 2. Revaluation (Goodwill) Approach. The entry would be:
Asset (Goodwill) 20,000

F Capital 14,000 (20,000 x 70%) G Capital 6,000 (20,000 x 30%)
To revalue assets before admission of a new partner
Computed as follows:
Amount Paid (Php18,000+Php12,000) Php 30,000 / ¼ Php120,000 (100%) Less: BV of
interest acquired (Php100,000 x ¼ ) Php 25,000 Php100,000 (100%) Excess Php 5,000
Divided by Interest Acquired ( ¼ ) ¼
Revaluation of Asset Php 20,000 Php20,000 (100%)
F Capital [(60,000+14,000) x ¼ )] Php18,500
G Capital [(40,000+6,000) x ¼ )] Php11,500
H Capital Php 30,000
Capital Balances After Admission

F G H Total
(Amount Paid)
Capital before Admission Php Php Php30,000 Php

Revaluation 60, 40, 100,000
Capital Balance after 000 000 20,000
Revaluation Multiplied by 14, 6,0
interest remained Capital after 000 00 25%
Admission Php74,00 Php46,00 Php120,000
0 0
P & L Ratio: F ( ¾ x 70%) ¾ ¾
G ( ¾ x 30%) Php55,5 Php34,5
H(¼) 00 00
52.50%
22.50%
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Comparison of BV and Revaluation Approach
The BV and Revaluation approach will yield the same result if the two conditions are
met:
1. The new partner’s P&L ratio must be equal to his/her capital interest. 2. The old
partners continue to share profits and losses between themselves in the original
ratio.
The BV and Revaluation approach would not yield the same result if the incoming
partner’s share in P&L is not identical in the percentage allowed in the capital interest.
Therefore, the selection process for the new partner should be as follows:
1. Prefer the BV (Bonus) Approach IF, P&L Interest is > Capital Interest. 2. Prefer the
Revaluation (Goodwill) Approach IF, P&L Interest is < Capital Interest.
II. Admission by Investment – this method of admission is a transaction between the

partnership and the incoming partner.
Case 1. The new partner’s contributed capital = the new partner’s proportion
in the agreed capital.
Case 2. The new partner’s contributed capital > the new partner’s proportion
Case 2. The new partner’s contributed capital < the new partner’s proportion
Steps:
1. Compute the new partner’s proportion in the agreed capital:
Agreed Capital = Prior Capital of Old Partners + Investment of the New Partner x
Percentage of Capital to New Partner
2. Compare the new partner’s contributed capital with his/her agreed capital
to determine the procedures to be followed in accounting of his/her
admission.
3. Determine the specific admission method:

a. No Bonus or No Revaluation Approach
b. Bonus Approach
c. Revaluation Approach
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Illustration 1.
AB Partnership has a book value of Php300,000 and Profit Ratio on January 1,

2016 as follows:
Capital Balance P&L Ratio
A Php200,000 60%
B 100,000 40%
Total Php300,000 100%
On January 2, 2016, C is to invest cash into the partnership. C is to have ¼ interest

and a 25% share of profits. A and C will share the remaining 75% of profits in the
ratio of 60:40, resulting in A – 45% share, and B – 30% share in profits.
Case 1. Investment = Agreed Capital
C invests Php100,000. After investment:

Investment in Partnership Php100,000
New Partner’s agreed capital
(Php300,000 + Php100,000) x 25% Php100,000
Difference Php 0
Journal Entry:
Cash 100,000
C Capital 100,000
To record admission of C for ¼ interest upon investment of Php100,000
Old New New Total New
Partners’ Partner’s Partner’s resulting Partner’s
Capital Investment Agreed Capital Share of
Capital Total
Resulting
Capital
New Partner’s Investment = Php300,000 Php100,000 Php100,000 Php400,00 Php100,000

Agreed Capital 0
No revaluations, goodwill, or bonus
Case 2. New Partner’s Investment > Agreed Capital
C invests Php110,000 for ¼ capital interest in the partnership.

Investment in Partnership Php110,000 New Partner’s agreed capital (Php300,000 +
Php110,000) x 25% Php102,500 Difference Php 7,500
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Case 2.1 Revaluation of Assets Approach. Assume that C paid Php7,500 excess over
proportionate book value because the partnership owns land with a book value of
Php40,000 but has a market value of Php70,000. Before recording the admission of C,
the land should be revalued:
Land 30,000
A Capital 18,000
B Capital 12,000
To revalue partnership land to market value.
Partnership’s Total Resulting Capital:

Total Capital of Old Partnership Php300,000 Revaluation of Land 30,000 C’s Investment
110,000 Total Resulting Capital of ABC Partnership Php440,000
After revaluation, C’s contributed capital is equal to the agreed capital (Php440,000 x ¼
= Php110,000). Journal Entry:
Cash 110,000
C Capital 110,000
To record admission of C for ¼ capital interest in ABC Partnership.
Case 2.2 Goodwill Recognition.

Estimated Total Resulting Capital (Php110,000 / 25%) Php440,000 Total Net Assets
(Php300,000 + Php110,000) Php410,000 Goodwill Php 30,000
In order to have goodwill to old partners, total resulting capital (agreed capital) should
be more than the total contributed capital.
Entries to record admission of C:
Goodwill 30,000
A Capital 18,000
B Capital 12,000
To record unrecognized goodwill
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Cash 110,000
C Capital 110,000
Case 2.3 Bonus Approach. Under this method, portion of the investment of the new
partner is transferred to old partners to align the capital balances properly at the time
of admission.
Investment in Partnership Php110,000 New Partner’s agreed capital (Php300,000 +
Php110,000) x 25% Php102,500 Bonus to Old Partners Php 7,500
Journal Entry:
Cash 110,000
A Capital (7,500 x 60%) 4,500
B Capital (7,500 x 40%) 3,000
C Capital 102,500
To record admission of C with bonus to A and B
Summary:
Capital Total
Resulting
Capital (25%)
New Partner’s Investment > Php300,000 Php110,000 Php102,500 Php440,00 Php110,000

Agreed Capital 0
a. Revalue assets by increasing Php110,000
php30,000 Php440,00
0 Php102,500
b. Recognize Php30,000 goodwill
to old partners
Php410,00
c. Bonus of Php7,500 to old
0
partners
Case 3. New Partner’s Investment < Agreed Capital
C invests Php80,000 for ¼ capital interest in the partnership.

Investment in Partnership Php 80,000 New Partner’s agreed capital (Php300,000 +
Php80,000) x 25% Php 95,000 Difference Php 15,000
Case 3.1 Revaluation of Assets Approach. Assume that the inventory of the partnership
with a book value of Php140,000 has a fair market value of Php80,000 because some
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items are obsolete. Before recording the admission of C, the inventory should be
revalued at its fair value:
A Capital (Php60,000 x 60%) 36,000

B Capital (Php60,000 x 40%) 24,000
Inventory 60,000
After inventory write-down, C’s contributed capital is equal to the agreed capital
(Php320,000 x ¼ = Php80,000). Journal Entry:
Cash 80,000
C Capital 80,000
Case 3.2 Goodwill Recognition.

Estimated Total Resulting Capital (Php300,000 / 75%) Php400,000 Total Net Assets
(Php300,000 + Php80,000) Php380,000 Goodwill Php 20,000
The amount of goodwill brought in by the new partner may be estimated from the
amount of the total capital being retained by the old partners.
Entries to record admission of C:
Cash 80,000
Goodwill 20,000
C Capital 100,000
Note: Use new partner’s investment to estimate goodwill to old partners, use old partners’ total
capital to estimate goodwill to new partner.
Case 3.3 Bonus Approach. C’s investment of only Php80,000 for a ¼ interest maybe
accounted by recognizing bonus from old partners.
Investment in Partnership Php 80,000 New Partner’s agreed capital (Php300,000 +
Php 80,000) x 25% Php 95,000 Bonus to New Partner Php 15,000
Journal Entry:
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Cash 80,000
A Capital (15,000 x 60%) 9,000
B Capital (15,000 x 40%) 6,000
C Capital 95,000
To record admission of C
Summary:
Capital Total
Resulting
Capital (25%)
New Partner’s Investment < Php300,000 Php80,000 Php95,000 Php320,00 Php80,000

Agreed Capital 0
d. Revalue assets by decreasing Php100,000
inventory by Php60,000 Php400,00
0 Php95,000
e. Recognize Php20,000 goodwill
to new partner
Php380,00
f. Bonus of Php15,000 to new partner
0
Illustration 2. Assume the following data for MN Partnership:

Assets Liabilities and Capital
Cash 2,500 Noncash Assets 32,500 M Loan Liabilities 7,500 M Capital (60%) 20,000 N
2,500 TOTAL 37,500 Capital (40%) 10,000 TOTAL 37,500
The percentages represent the partners’ P&L ratio. The partners agreed to admit O in
the partnership.
Case 1. Bonus to New Partner. O invests Php10,000 for a 35% interest in the firm. The total
agreed capital (TAC) after admission is Php40,000.
a. Total contributed capital (TCC) is equal to total agreed capital (TAC), so no
revaluation (goodwill) should be recognized as follows:
TAC (given) Php40,000 Less: TCC (20,000+10,000+10,000) Php40,000
Difference 0
b. The new partner’s TCC is less than the agreed capital, the difference is
attributable to bonus to new partner:
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O Contributed Capital Php10,000 O Agreed Capital (Php40,000 x 35%)
Php14,000 Difference (Bonus to New Partner) Php4,000
Entry to record:
Cash 10,000
M Capital (4,000x60%) 2,400
N Capital (4,000x40%) 1,600
O Capital 14,000
Case 2. Revaluation (Goodwill) to New Partner. O invests Php10,000 for q 1/3 interest in
the firm and is allowed a credit pf Php15,000 for his capital.
a. Total contributed capital (TCC) is less than the total agreed capital (TAC), so
TAC (Php15,000/ 1/3) Php45,000 Less: TCC (20,000+10,000+10,000)
Php40,000 Difference (revaluation/goodwill) Php 5,000
b. The new partner’s contributed capital is less than the agreed capital, the
difference of Php5,000 is attributable to revaluation (goodwill) to new partner:
O Contributed Capital Php10,000 O Agreed Capital Php 15,000 Difference
(Revaluation/Goodwill) to New Partner) Php 5,000
Entry to record:
Cash 10,000
Asset (goodwill) 5,000
O Capital 15,000
Case 3. Bonus to Old Partner. O conveyed tangible asset with a fair value of Php25,000
with an assumed mortgage of Ph5,000 in exchange for a 30% interest in capital with
bonus to be recognized, keeping in mind that O would be acquiring a ¼ interest in
profits. Before admission of O, MN partnership had an equipment of Php 4,000 with a
fair value of Php7,000.
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a. Total contributed capital (TCC) is equal to the total agreed capital (TAC), so no
TAC (should be equal to TCC since it’s bonus method) Php50,000 Less: TCC
(20,000+10,000+(25,000-5,000)) Php50,000 Difference Php 0
b. The new partner’s TCC is greater than his agreed capital, the difference of
Php5,000 is attributable to bonus to old partners:
O Contributed Capital Php20,000 O Agreed Capital Php15,000 Difference
(Bonus to Old Partners) Php 5,000
Entry to record:
Tangible Asset 25,000

Mortgage Payable 5,000
O Capital 15,000
M Capital (5,000x60%) 3,000
N Capital 2,000
Case 4. Bonus and Revaluation (Goodwill) to New Partner. O invests Php10,000 for a 45%
interest in the firm. The total agreed capital after admission is Php50,000.
TAC Php50,000 Less: TCC (20,000+10,000+10,000) Php40,000 Difference
(revaluation/goodwill) Php10,000
b. The new partner’s TCC is less than the agreed capital, the difference of Php12,500
is composed of revaluation of Php10,000 in (a) above and the balance
attributable to bonus to new partner:
O Contributed Capital Php10,000 O Agreed Capital (Php50,000x45%)
Php22,500
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Difference (Total Bonus & Revaluation) Php12,500 Less: Revaluation (Goodwill)
to a partner (Php10,000) Bonus to New Partner Php 2,500
Entry to record:
Cash 10,000
M Capital (2,500x60%) 1,500
N Capital (2,500x40%) 1,000
O Capital 22,500
Case 5. Bonus and Revaluation (Goodwill) to Old Partners. O invests Php15,000 for a 20%
interest in the firm. The total agreed capital after admission is Php60,000.
TAC Php60,000 Less: TCC (20,000+10,000+15,000) Php45,000 Difference
(revaluation/goodwill) Php15,000
b. The new partner’s TCC is greater than the agreed capital, the difference of
Php3,000 is bonus to old partners since there is already a revaluation indicated in
(a) above:
O Contributed Capital Php15,000 O Agreed Capital (Php60,000x20%)
Php12,000 Difference (Bonus to old Partners) Php 3,000 Less: Revaluation
(Goodwill) to old partners Php15,000 Total Bonus & Revaluation to Old
Partners Php18,000
Entry to record:
Cash 15,000
M Capital (18,000x60%) 10,800
N Capital (18,000x40%) 7,200
O Capital 12,000
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III. Withdrawal of a Partner
The interest of the retiring partner is usually measured by his capital balance,
increased or decreased by his share in the following adjustments:
1. Profit or loss from partnership operations from the last closing date to the date
of his/her retirement.
2. Changes in the valuation of all assets and liabilities (book values to fair values).
Illustration 1
On January 2, 2016, the capital balances and P&L ratio of B, C, and D are as follows:
Partners Capital balances P&L Ratio
B Php10,000 50%
C Php15,000 30%
D Php20,000 20%
On April 30, 2016, B withdraws from the partnership. The net income of the partnership
for 4 months ended April 30, 2016 is Php14,000. It is agreed that the inventory costing
Php5,000 has a market value of Php7,000 on April 30, 2016.
Case 1. Settlement equals withdrawing partner’s interest. Assume that B agrees to

accept payment equal to his interest. Entries are:
Income Summary 14,000

B Capital 7,000
C Capital 4,200
D Capital 2,800
To record distribution of profit.
Inventory 2,000
B Capital 1,000
C Capital 600
D Capital 400
To adjust the inventory.
B Capital 18,000
Cash 18,000
To record settlement to B equal to his adjusted capital balance.
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Case 2. Settlement more than withdrawing partner’s interest. Assume that B is paid
Php19,500 for his withdrawal, entries are:
a. Partial Goodwill Method

Goodwill 1,500
B Capital 18,000
Cash 19,500
b. Total goodwill Method

Goodwill (1,500/50%) 3,000
B Capital 18,000
Cash 19,500
C Capital (3,000x30%) 900
D Capital (3,000x20%) 600
c. Bonus Method
B Capital 18,000
C Capital (3/5x1,500) 900
D Capital (2/5x1,500) 600
Cash 19,500
Case 3. Settlement less than withdrawing partner’s interest. Assume that B is paid
Php17,000 for his withdrawal, entries are:
B Capital 18,000
Cash 17,000
Identifiable Asset 1,000
If the difference is not determinable or cannot be assigned to specific assets – the

bonus method shall be used. The entry would be:
B Capital 18,000
Cash 17,000
C Capital 600
D Capital 400
To record retirement of B and to divide resulting bonus between C and D in the ratio of 3:2.
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Illustration 2.
Assume the following data for NOP Partnership:

Assets Liabilities and Capital
Cash 50,000 Noncash Assets 40,000 Loan Liabilities 10,000 N Capital (30%) 30,000 O
Rec. – N 5,000 Capital (50%) 40,000 P Capital (20%) 15,000
TOTAL 95,000
TOTAL 95,000
On May 1, N retires from the partnership. The net income of the partnership to date of
retirement amounted to Php20,000. The partnership paid cash to the retiring partner
also on the retirement date.
The following entries are necessary on the partnership books before paying the interest
of the retiring partner:
Income Summary 20,000

N Capital 6,000
O Capital 10,000
P Capital 4,000
To record distribution of profit.
N Capital 5,000
Loan Receivable – N 5,000
To close Loan Rec. account of the retiring partner
Total interest of N, the retiring partner:

Capital Interest Php30,000
Add (deduct):
Share in Net Income 6,000
Loan Receivable (5,000) Total interest of N before
retirement Php31,000
Case 1. Settlement price > the retiring partner’s interest. Partnership paid N Php35,000.
Included in the noncash assets is an inventory costing Php6,000 with a fair value of
Php10,000. The remaining partners continue to use their old P&L ratio.
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Assumption 1. Bonus to retiring Partner. The excess is considered chargeable to O and P.
Entry would be:
N Capital 31,000
O Capital (4,000x5/7) 2,857
P Capital (4,000x2/7) 1,143
Cash 35,000
To record retirement of N
Capital Balances of Partners after N’s retirement:
O Capital (40,000 + 10,000 - 2,857) Php47,143

P Capital (15,000 + 4,000 – 1,143) Php17,857
Assuming the same data, except that by mutual agreement, the inventory is to be
adjusted to its fair value. The undervalued asset should be adjusted first, before
settlement. Entries would be:
Inventory 4,000
N Capital (4,000x 30%) 1,200
O Capital (4,000x 50%) 2,000
P Capital (4,000x 20%) 800
To increase value of inventory.
N Capital 32,200
O Capital (2,800x5/7) 2,000
P Capital (2,800x2/7) 800
Cash 35,000
Amount Paid Php35,000 Less: BV of N’s total interest
(Php31,000+Php1,200) Php32,200 Bonus to retiring partner Php
2,800
Assumption 2. Partial Revaluation (Goodwill) to Retiring Partner. The excess is considered
as revaluation (goodwill) to be recognized. Entries would be:
Inventory 4,000
N Capital (4,000x 30%) 1,200
O Capital (4,000x 50%) 2,000
P Capital (4,000x 20%) 800
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N Capital 32,200
Assets (Goodwill) 2,800
Cash 35,000
(Php31,000+Php1,200) Php32,200 Goodwill to retiring partner
Php 2,800
Assumption 3. Total Revaluation (Goodwill) to Retiring Partner. The excess is considered

as revaluation (goodwill) to be recognized. Entries would be:
Inventory 4,000
N Capital (4,000x 30%) 1,200
O Capital (4,000x 50%) 2,000
P Capital (4,000x 20%) 800
Assets (Goodwill) (2,800/30%) 9,333

N Capital (9,333x 30%) 2,800
O Capital (9,333x 50%) 4,666
P Capital (9,333x 20%) 1,867
To record total revaluation (goodwill)
(Php31,000+Php1,200) Php32,200 Php 2,800 Divided by: P&L
interest of N 30% Total Revaluation Php9,333
N Capital 35,000
Cash 35,000
Case 2. Settlement price < the retiring partner’s interest. Partnership paid N Php26,000.
Assumption 1. Bonus to remaining Partner. The excess is considered chargeable to O

and P. Entry would be:
N Capital 31,000
O Capital (5,000x5/7) 3,571
P Capital (5,000x2/7) 1,429
Cash 26,000
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Amount Paid Php26,000 Less: BV of N’s total interest Php31,000
Bonus to remaining partners Php5,000
O Capital (40,000 + 10,000 + 3,571) Php 53,571

P Capital (15,000 + 4,000 + 1,429) Php 19,429
Assumption 2. Partial Revaluation / Write-down of specific assets (Share of Retiring

Partner). The excess is considered as partial revaluation/ write-down of specific assets to
be recognized. Entries would be:
N Capital 31,000
Specific Assets 5,000
Cash 26,000
Write-down of assets (Php 5,000)
O Capital (40,000 + 10,000) Php 50,000

P Capital (15,000 + 4,000) Php 19,000
Assumption 3. Total Revaluation / Write-down of assets (Entire Entity) The excess is
considered as revaluation/ write-down of assets for the entire entity to be recognized.
Entries would be:
N Capital (16,667x 30%) 5,000

O Capital (16,667x 50%) 8,334
P Capital (16,667x 20%) 3,333
Assets 16,667
To record write down of assets.
Php 5,000
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Divided by: P&L interest of N 30% Total Revaluation Php16,667
N Capital 26,000
Cash 26,000
Capital Balances of the Partners after retirement of N
O Capital (40,000 + 10,000 – 8,334) Php41,666

P Capital (15,000 + 4,000 – 3,333) Php15,667
IV. Death of A Partner
In the event of the death of a partner, the estate of the deceased partner is
entitled to receive the amount of his interest, in the partnership at the date of his
death. The deceased partner’s capital is adjusted using his P&L share
percentage for changes in asset values arising from revaluation of assets, and
for the profit from the date the books were last closed.
V. Incorporation of a Partnership
1. Partnership Books Retained. Entries are necessary to report:

a. Changes in asset and liability values in the partners’ interest prior to
incorporation, and
b. The change in the form of proprietorship.
2. New Books Opened for the Corporation. All the accounts of the partnership
are closed.
a. Transfer of assets and liabilities to the corporation
b. The receipts of the shares of stocks in payment of net assets transferred,
and c. Distribution of shares to the partners.
Illustration 1. R and C partnership who shares in profits with a ratio of 80% and 20%
respectively, organized, RC Corporation. RC Corporation is authorized to issue 10,000
shares, Php20 par value capital stock, of which 5,500 shares are issued to the partners at
Php30 in accordance with their adjusted capital accounts. RC Corporation also issued
1,000 shares for cash to the other incorporators at P30/share.
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R C Partnership
Statement of Financial Position
June 30, 2016
Assets
Cash Php 24,000 Accounts Receivable Php56,200
Less: Allowance for Doubtful Accounts (Ph1,200) 55,000 Inventories 51,000
Equipment Php 120,000
Less: Accum. Dep’n. (Ph 52,000) 68,000 Total Assets Php198,000
Liabilities and Partner’s Equity

Current Liabilities
Notes Payable Php 40,000 Accounts Payable 30,000 Total Liabilities Php 70,000
Equity
R Capital Php 95,980
C Capital Php 32,020 Php128,000 Total Liabilities and Capital Php198,000
The partners agree to make the following adjustments before

incorporation: • Increase the allowance for bad debts to Php2,000
• Increase the cost of inventories to its current market value of Php60,000 • Increase
the historical cost of the equipment to its reproduction cost of Php140,000 and the
accum. dep’n to Php61,000
• Recognize accrued expenses of Php2,200.
• Recognize goodwill of Php20,000
Case 1. Partnership Books Retained
Entries in the Books of the New Corporation:
Inventories 9,000
Equipment 20,000
Goodwill 20,000
Allowance for Doubtful Accounts 800
Accum. Depreciation 9,000
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Accrued Expenses 2,200
R Capital 29,600
C Capital 7,400
To adjust assets and Liabilities to agreed amounts and divide the net adjustment between the
partners.
R Capital 125,580
C Capital 39,420
Capital Stock 110,000
Paid in Capital in Excess of Par 55,000
To record issuance of 5,500 Php20 shares to partners at Php30.share
Php165,000 / 5,500:
R : Php125,580/Php30 = 4,186 shares
C : Php 39,420/Php30 = 1,314 shares
Case 2. New books Opened for the Corporation
Entries in the Books of the Partnership
Inventories 9,000
Equipment 20,000
Goodwill 20,000
R Capital 29,600
C Capital 7,400
partners.
Stocks of RC Corporation 165,000

Notes Payable 40,000
Accounts Payable 30,000
Allowance for Doubtful Accounts 2,000
Cash 24,000
Accounts Receivable 56,200
Inventories 60,000
Equipment 140,000
Goodwill 20,000
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To record transfer of assets and liabilities to RC Corp.
R Capital 125,580
C Capital 39,420
Stocks of RC Corp. 165,000
To record issuance of 5,500 Php20 shares to partners at Php30/share
Php165,000 / 5,500:
R : Php125,580/Php30 = 4,186 shares
C : Php 39,420/Php30 = 1,314 shares
Entries in the Books of the New Corp.
Cash 24,000
Inventories 60,000
Equipment (Net) 79,000
Goodwill 20,000
Notes Payable 40,000 Accounts Payable
30,000 Accrued Expenses 2,200
Capital Stock 110,000 Paid in Capital in excess of PAR 55,000
To record the acquisition of assets and Liabilities from the partnership
Cash 30,000
Capital Stock 20,000 Paid in Capital in excess
of PAR 10,000 To record issuance of 1,000 shares at
Php30/share
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R C Corporation
June 30, 2016
Assets
Equipment 79,000 Goodwill 20,000 Total Assets Php267,200
Liabilities and Stockholders’ Equity

Current Liabilities
Notes Payable Php 40,000 Accounts Payable 30,000 Accrued Expenses 2,200
Total Liabilities Php 72,200
Stockholders’ Equity
Capital Stock, Php10 par value, authorized 10,000 shares,
Issued and outstanding, 7,500 shares Php 130,000
Paid in Capital in Excess of par 65,000 Php195,000 Total Liabilities and Stockholders’
Equity Php267,200
Illustration 2. Assume that J and K of JK Partnership, with P&L ratio of 4:1, organize JK
Corporation to take over the net assets of the partnership.
JK Partnership
June 30, 2019
Assets
Less: Allowance for Doubtful Accounts (Ph600) 27,500 Inventories (FIFO cost)
25,500 Equipment Php 60,000
Less: Accum. Dep’n. (Ph26,000) 34,000 Total Assets Php 99,000
Liabilities and Partner’s Capital

Liabilities
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Partners’ Capital
J Capital Php47,990
K Capital Php 16,010 Php 64,000 Total Liabilities and Partners’ Capital Php
99,000
The partners agree that the following adjustments are required to restate the net assets
of the partnership to their current fair value.
• Increase the allowance for doubtful accounts to Php1,000
• Increase the cost of inventories to its current replacement cost of Php30,000 •
Increase the equipment to its reproduction cost of Php70,000 less the accum. dep’n
on this basis, Php30,500; that is to its current fair value Php39,500. • Recognize
accrued expenses of Php1,100.
• Recognize goodwill of Php10,000
JK Corp is authorized to issue 10,000 shares of Php10 par value common stock. It issues
7,500 shares of common stock at Php11/share to the partnership in exchange of the net
assets of the partnership. The 7,500 shares will be divided between the partners on the
basis of the adjusted balances of their capital accounts.
Case 1. Partnership Books retained
Entries in the Books of the New Corporation using the Partnership Books:
Inventories 4,500
Equipment 10,000
Goodwill 10,000
R Capital 14,800
C Capital 3,700
partners.
J Capital 62,790
K Capital 19,710
Capital Stock 75,000
Paid in Capital in Excess of Par 7,500
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Distribution:
J : Php62,790/Php11 = 5,708 shares
K : Php 19,710/Php11 = 1,792 shares
7,500 shares
Case 2. New books Opened for the Corporation
Entries in the Books of the Partnership
Inventories 4,500
Equipment 10,000
Goodwill 10,000
R Capital 14,800
C Capital 3,700
partners.
Receivable from JK Corp 82,500

Cash 12,000
Inventories 30,000
Equipment 70,000
Goodwill 10,000
To record transfer of assets and liabilities to JK Corp.
Common Stock of JK Corp 82,500

Receivable from JK Corp 82,500
J Capital 62,790
K Capital 19,710
Common Stock of JK Corp 82,500
To record distribution of JK Corp Common stock to partners
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Distribution:
J : Php62,790/Php11 = 5,708 shares
K : Php 19,710/Php11 = 1,792 shares
7,500 shares
Entries in the Books of the New Corp.
Cash 12,000
Inventories 30,000
Equipment (Net) 39,500
Goodwill 10,000
Payable to JK Partnership 82,500
To record the acquisition of assets and Liabilities from the partnership
Payable to JK Partnership 82,500

Common Stock, 10 par 75,000
Paid in Capital in excess of PAR 7,500
To record issuance of 7,500 shares of common stock at Php11/share in payment of the net assets
of JK Partnership.
JK Partnership
June 30, 2019
Assets
Equipment (current fair value) 39,500 Goodwill 10,000
Total Assets Php118,600
Liabilities and Stockholders’ Equity

Liabilities
Accounts Payable Php 35,000 Accrued Expenses 1,100 Total Liabilities Php
36,100
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Stockholders’ Equity
Capital Stock, Php10 par value, authorized 10,000 shares,
Issued and outstanding, 7,500 shares Php 75,000
Paid in Capital in Excess of par 7,500 Php 82,500 Total Liabilities and Stockholders’
Equity Php118,600
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Chapter 3 Partnership Dissolution

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Chapter 3 Partnership Dissolution

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AFAR 1 – Accounting for Special Transactions

Chapter 3 – Partnership Dissolution

Accounting for Partnership Dissolution

Capital Interest VS Profit and Loss Interest

Assignment of an Interest to a Third Party

Problems that Arise upon Dissolution

1. Admission of a new partner;

1. Revaluation approach (usually referred to as goodwill procedure – non-GAAP).

The following should be observed in relation to valuation of assets and liabilities on

ADMISSION OF A NEW PARTNER

Accounting problems in respect to the admission of a new partner are as

I. Admission by Purchase of Interest from One or More Partners

Purchase of interest can actually convey the following rights:

Assume the following information on LMN Partnership on December 31, 2013:

L Php 20,000 20%

On this date, O is admitted to the partnership.

Case 1. Purchase from one partner. Assume O purchase ½ of the interest of L.

Amounts of Capital Transferred 10,000 10,000 15,000 35,000

The entries would be:

FG Partnership has a book value of Php100,000 and P&L percentage on January as

On this date, H is admitted to the Partnership.

Case 1: Purchase of Interest from One Partner. H paid Php24,000 directly to F in

Case 2: Purchase of Interest from All Partners.

Assumption 1. Purchase at Book Value. H purchases a ¼ interest in the firm. ¼ of each

F Capital (60,000x ¼ ) 15,000

Capital Balances after admission of H would be:

Capital before admission 60,000 40,000 Php25,000 100,000

it. Alternative 2. Revaluation (Goodwill) Approach. The entry would be:

Asset (Goodwill) 20,000

Capital Balances After Admission

Capital before Admission Php Php Php30,000 Php

II. Admission by Investment – this method of admission is a transaction between the

1. Compute the new partner’s proportion in the agreed capital:

3. Determine the specific admission method:

AB Partnership has a book value of Php300,000 and Profit Ratio on January 1,

On January 2, 2016, C is to invest cash into the partnership. C is to have ¼ interest

Case 1. Investment = Agreed Capital

C invests Php100,000. After investment:

New Partner’s Investment = Php300,000 Php100,000 Php100,000 Php400,00 Php100,000

Case 2. New Partner’s Investment > Agreed Capital

C invests Php110,000 for ¼ capital interest in the partnership.

Partnership’s Total Resulting Capital:

Case 2.2 Goodwill Recognition.

Entries to record admission of C:

New Partner’s Investment > Php300,000 Php110,000 Php102,500 Php440,00 Php110,000

Case 3. New Partner’s Investment < Agreed Capital

C invests Php80,000 for ¼ capital interest in the partnership.

A Capital (Php60,000 x 60%) 36,000

Case 3.2 Goodwill Recognition.

Entries to record admission of C:

New Partner’s Investment < Php300,000 Php80,000 Php95,000 Php320,00 Php80,000

Illustration 2. Assume the following data for MN Partnership:

Tangible Asset 25,000

Case 1. Settlement equals withdrawing partner’s interest. Assume that B agrees to

Income Summary 14,000

a. Partial Goodwill Method

b. Total goodwill Method

If the difference is not determinable or cannot be assigned to specific assets – the

Assume the following data for NOP Partnership:

Income Summary 20,000

Total interest of N, the retiring partner:

Capital Balances of Partners after N’s retirement:

O Capital (40,000 + 10,000 - 2,857) Php47,143