PARTNERSHIP DISSOLUTION

The dissolution of a partnership is the change in relation of the partners caused by any partner ceasing
to be associated in the carrying on as distinguished from the winding up of the business of the
partnership (Civil Code of the Philippines, Article 1828).

CAUSES OF DISSOLUTION:

● Admission of a partner
● Withdrawal or retirement of a partner
● Death of a partner
● Incorporation of a partnership

ADMISSION OF A PARTNER

A new partner can only be admitted into a partnership with the consent of all the continuing partners.
This is based on the principle of DELECTUS PERSONAE

*A person may become a partner in an existing partnership by either of the following:

● Purchase of an interest from one or more of the existing partners.
● Investment of assets in the partnership by the new partner.

PURCHASE OF AN INTEREST FROM EXISTING PARTNERS

With the consent of all the partners, a new partner may be admitted in an existing partnership by
purchasing a capital equity interest directly from one or more of the old partners.

Pro-Forma Entry:

(Name of Seller), Capital xxx

(Name of Buyer), Capital xxx

The purchase price of the interest sold to a new partner may be:

1. Equal to the book value of the interest sold.

2. Less than the book value of the interest sold.
3. More than the book value of the interest sold.

ILLUSTRATIVE PROBLEM:

Bianca and Shaira are partners with capital balances of P100,000 and P50,000 respectively. They share
profits and losses equally. Jam is a new partner.
Case 1a: Purchase at book value from one partner only.

Jam purchased a 1/5 interest from Bianca by paying P20,000.

ENTRY:

Bianca, Capital 20 000

Jam, Capital 20 000

Case 1b: Purchase at book value from more than one partner.

Jam purchased 1/5 interest from the old partners by paying P30 000.

ENTRY:

Bianca, Capital 20 000

Shaira, Capital 10 000

Jam, Capital 30 000

Case 2: Purchase at less than book value. Jam purchases 1/5 interest from the old partners by paying
P25, 000.

ENTRY:

Bianca, Capital 20 000

Shaira, Capital 10 000

Jam, Capital 30 000

Case 3: Purchase at more than book value. Jam pays P 40, 000 for a 1/5 interest of the old partners.

ENTRY:

Bianca, Capital 20 000

Shaira, Capital 10 000

Jam, Capital 30 000

Asset Revaluation upon Admission of a New Partner by Purchase

Bianca and Shaira are partners with capital balances of P100,00 and P50,000 respectively. They share
profits and loses equally. Jam is a new partner who purchase a 1/5 interest from Bianca and Shaira
paying P40,000. However, before the admission of Jam, partnership assets are to be revalued using as
basis amount to be paid by Jam.

Step 1- The new partnership capital is equal to the amount paid by the incoming partner divided by his
fraction of interest.

New partnership Capital = P40,000 / 1/5

= P200,000

Step 2 - the amount of asset revaluation is equal to the new partnership capital less old partnership
capital.

Asset revaluation = P200,000 – P150,000

= P50,000

Step 3 – the allocation of the amount of the asset revaluation among the old partners is as follows:

P50,000 / 2 = 25, 000 per partner (old)

Step 4 – the capital balances of the old partners after asset revaluation is equal to their old capital
balances plus their share on asset revaluation.

Bianca Shaira

Capital balances before revaluation P100,000 P50,000

Share on asset revaluation 25,000 25,000

Capital balances after revaluation P125,000 P75,000

Step 5 – the amount of interest transferred by the old partners to the new partner is based on the new
capital balances (capital balances after asset revaluation).

Bianca Shaira

Capital balances after revaluation P125,000 P75,000

Interest transferred 1/5 1/5

Capital transferred after revaluation P25,000 P15,000

Step 6 – the journal entries to record the revaluation of asset and admission of Jam are as follows:

ENTRY:
Asset 50 000 Bianca, Capital 25 000

Bianca, Capital 25 000 Shaira, Capital 15 000

Shaira, Capital 25 000 Jam, Capital 40 000

GOODWILL METHOD

*Same procedure with the positive asset revaluation*

ENTRY

Goodwill 50 000 Bianca, Capital 25 000

Bianca, Capital 25 000 Shaira, Capital 15 000

Shaira, Capital 25 000 Jam, Capital 40 000

INVESTMENT OF ASSETS IN A PARTNERSHIP

It is a transaction between the original partnership and the new partner. A person may be admitted into
a partnership by investing cash or other assets in the business (Invests /Contributes). Increase in Total
Assets and Total Partner’s Equity.

Problems relating to Admission of a new Partner by Investment

1. Agreed capital is given

a. No Bonus, No Asset Revaluation

b. Bonus to old Partners, No Asset Revaluation
c. Bonus to New Partner, No Asset Revaluation
d. Asset Revaluation (Positive & Negative), No Bonus

2. Agreed Capital is not given.

a. Bonus Method
b. Asset Revaluation method (Positive & Negative)

3. Agreed Capital is not given but basis for its computation is indicated in the terms of admission

4. The amount of the Contribution of the New partner is not given

5. Fraction of Interest is not given.

1. Agreed capital is given

Case 1– No Bonus, No Asset Revaluation

Ely invests P100,000 for a ¼ interest in the agreed capital of P400,000

Solution: Contributed Capital Agreed Capital

Jac P 200,000 P200,000

Cess 100,000 100,000

Ely 100,000 100,000

TOTAL P 400, 000 P 400,000

ENTRY:

Cash 100 000

Ely, Capital 100 000

Case 2 – Bonus to the old partners, no Asset revaluation

Ely invests P100, 000 for a 1/5 interests in the new firm capitalization of P400, 000.

Solution: Contributed Capital Agreed Capital Bonus

Jac P 200, 000 P 210, 000 P 10, 000

Cess 100, 000 110, 000 10, 000

Ely 100, 000 80, 000 (20, 000)

TOTAL P 400, 000 P 400, 000 ---

ENTRY:

Cash 100 000 Ely, Capital 20 000

Ely, Capital 100 000 Jac, Capital 10 000

Cess, Capital 10 000

Case 3 – Bonus to new partner, no asset revaluation

Ely invests P60,000 for a ¼ interest in the total capitalization of P360,000.

Solution: Contributed Capital Agreed Capital Bonus

Jac P 200, 000 P 185, 000 (P 15, 000)

Cess 100, 000 85, 000 (15, 000)

Ely 60, 000 90, 000 30, 000

TOTAL P360, 000 P 360, 000 ---

ENTRY:

Cash 60 000

Jac, Capital 15 000

Cess, Capital 15 000

Ely, Capital 90 000

Case 4 – Positive Asset Revaluation, no Bonus

Ely invests P100, 000 for a 1/5 interest in the agreed capital of P500, 000.

Solution: Contributed Capital Agreed Capital Asset Revaluation/Goodwill

Jac P 200, 000 P 250, 000 P 50, 000

Cess 100, 000 150, 000 50, 000

Ely 100, 000 100, 000 ---

TOTAL P 400, 000 P 500, 000 P 100, 000

ENTRIES:

Other assets 100 000 Cash 100 000

Jac, Capital 50 000 Ely, Capital 100 000

Cess, Capital 50 000

*GOODWILL METHOD

ENTRY

Goodwill 100 000 Cash 100 000

Jac, Capital 50 000 Ely, Capital 100 000

Cess, Capital 50 000

Case 5 – Negative Asset Revaluation, No Bonus

Ely invests P60,000 for a 1/5 interest in the agreed capital of P300,000.

Solution: Contributed Capital Agreed capital Asset Revaluation

Jac P 200,000 P170, 000 (P 30,000)

Cess 100,000 70, 000 (30, 000)

Ely 60,000 60, 000 ---

TOTAL P 360, 000 P 300, 000 (P 60, 000)

ENTRIES:

Jac, Capital 30 000 Cash 60 000

Cess, Capital 30 000 Ely, Capital 60 000

Other assets 60 000

2. Agreed Capital is not given.

Ely invests P100, 000 for a 1/5 interest

A. Bonus Method

Solution: Contributed Capital Agreed Capital Bonus

Jac P 200, 000 P 215, 000 P 15, 000

Cess 100, 000 105, 000 5,000

Ely 100, 000 80, 000 (20, 000)

TOTAL P 400, 000 P 400, 000 ---

ENTRY:

Cash 100 000

Ely, Capital 80 000

Jac, Capital 15 000

Cess, Capital 5 000

B. Positive Asset Revaluation Method

Solution: Contributed Capital Agreed Capital Asset revaluation

Jac P 200, 000 P 275, 000 P 75, 000

Cess 100, 000 125, 000 25,000

Ely 100, 000 100, 000 ---

TOTAL P 400, 000 P 500, 000 P 100, 000

ENTRIES:

Other Assets 100 000 Cash 100 000

Jac, Capital 75 000 Ely, Capital 100 000

Cess, Capital 25 000

C. Negative Asset Revaluation Method

Solution: Contributed Capital Agreed Capital Asset revaluation

Jac P 200, 000 P155, 000 (P 45, 000)

Cess 100, 000 85 , 000 (15,000)

Ely 80, 000 80, 000 ---

TOTAL P 380, 000 P 320, 000 (P 60, 000)

ENTRIES:
Jac, Capital 45 000 Cash 80 000

Cess, Capital 15 000 Ely, Capital 80 000

Other Assets 60 000

GOODWILL METHOD

*whichever is higher between new partner’s investment and old partners’ investment by dividing their
respective interest ratio to their capital investments.

New Partner (ELY) Old partners (JAC & CESS)

100 000 / 1/5 = 500 000 300 000/ 4/5 = 375 000

In goodwill method, agreed capital must be greater than the contributed capital. Therefore, agreed
capital is 500 000.

Solution: Contributed Capital Agreed Capital Goodwill

Jac P 200, 000 P 275, 000 P 75, 000

Cess 100, 000 125, 000 25,000

Ely 100, 000 100, 000 ---

TOTAL P 400, 000 P 500, 000 P 100, 000

ENTRIES:

Goodwill 100 000 Cash 100 000

Jac, Capital 75 000 Ely, Capital 100 000

Cess, Capital 25 000

WITHDRAWAL AND RETIREMENT OF A PARTNER

The partnership may allow any of its partners to withdraw or retire from the firm. The business may
continue after such withdrawals; on the other hand, the interest of the retiring or withdrawing partner
may be:

1. sold to a new partner (outsider)

2. sold to continuing (remaining) partners
 3. sold to the partnership

*The purchase price or amount of settlement by the partnership to the retiring partner may be:

a. Equal to the interest of the retiring partner (at book value)

b. Less than the interest of the retiring partner (at less than book value)
c. More than the interest of the retiring partner (at more than the book value)

* When the 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
3. goodwill method

CALCULATION OF RETIRING PARTNER’S INTEREST

Investment
- 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

of Bea, Biboy, and Bill on December 31, 2016 follows:
Asset Liabilities and Capital
Cash 110,000 Liabilities 20, 000
Other Asset 30,000 Bea , Capital 20, 000
Biboy, Capital 40, 000
Diaz, Capital 60, 000
P140,000 Total Liabilities and Capital P 140,000

The partners share profits and losses in the ratio of 4:2:4. On July 1, 2017, Bill asked to be allowed to
withdraw from the partnership. The partners decided to close the books as of these date so as to
determine the capital interest of Bill. Profit for 6 months ended amounted P60,000 while drawings of
Bea, Biboy and Bill amount to P4,000 , P6,000 and P2,000, respectively. Profits and losses are to be
shared equally after the retirement
of Bill.

The following entries will be prepared prior to the retirement of Bill from the partnership:

Income Summary 60,000 Bea, Capital 4,000

Bea, Capital 24,000 Biboy, Capital 6,000
Biboy, Capital 12, 000 Bill, Capital 2,000
 Bill, Capital 24, 000 Bea, Drawing 4,000
Biboy, Drawing 6,000
Bill, Drawing 2,000

 After considering the preceding entries, the capital interest as of the partners as of July 1,2017 may
now be computed as follows:
Bill Bea Biboy
Capital balance, Dec. 31,2016 P 60,000 P 20,000 P 40,000
Share in profit from Jan. 1 – June 30 24,000 24,000 12,000
Withdrawals ( 2,000 ) ( 4,000 ) ( 6,000 )
P 82,0000 P 40,000 P 46,000

Assumption 1- Sale of interest to a new partner. Bill sold his interest to Doque for P 100,000.

Bill, Capital 82,000

Doque, Capital 82,000

Assumption 2 – Sale of interest to the continuing partners. Bill sold his interest to Bea and Biboy for
P75,000; the interest being divided equally by the remaining partners. Profits and losses after the
retirement of Bill will be divided equally.

Bill, Capital 82,000

Bea, Capital 41,000
Biboy, Capital 41,000

Assumption 3 – Sale of interest to the partnership. Bill sold his interest to the partnership. The partners
agreed to make immediate cash settlement to the retiring partner. Profits and losses after the retiring of
Bill will be divided equally.
Case A – Settlement to retiring partner is equal to his capital interest. The partnership paid Bill P82,000.

Bill, Capital 82,000

Cash 82,000
Case B – Settlement is less than the capital interest of the retiring partner (at less than book value).
The partnership paid Bill P76,000 which is P6,000 less than his capital interest of P82,000.

Bonus Method
Bill, Capital 82,000
Cash 76,000
Bea, Capital(6,000 x 4/6) 4,000
Biboy, Capital(6,000 x 2/6) 2,000

Negative Asset Revaluation Method

Bea, Capital (15,000 x 4/10) 6,000
Biboy, Capital(15,000 x 2/10) 3,000
Bill, Capital(15,000 x 4/10) 6,000
Other Assets 15,000
After the preceding entry, the capital balance of Bill is P76,000 and payment to him will be recorded as
follows:

Bill, Capital 76,000

Cash 76,000
Case C – Settlement is more than the capital interest of the retiring partner (at more than book value).
The partnership paid Bill P85,000 which is P3,000 more than his capital interest of P82,000.
Bonus Method
Bill, Capital 82,000
Bea, Capital 2,000
Biboy, Capital 1,000
Cash 85,000

Positive Asset Revaluation Method

Other Assets 7,500
Bea, Capital 3,000
Biboy, Capital 1,500
Bill, Capital 3,000
After the entry recording the asset revaluation, the capital balance of Bill is P85,000 and payment to him
will be recorded as follows:

Bill, Capital 85,000

Cash 85,000

Goodwill method

Adjusted Capital Balances Agreed Capital Balances Goodwill

Bill, Capital 82 000 85 000 3000
Bea, Capital 40 000 43 000 3 000
Biboy, Capital 46 000 47 500 1 500
TOTAL 168 000 175 500 *7 500

* 3000/ 40% = 7 500

Entry

Goodwill 7,500 Bill, Capital 85,000

Bea, Capital 3,000 Cash 85,000
Biboy, Capital 1,500
Bill, Capital 3,000

INCORPORTION OF PARTNERSHIP

Partners Barron and Britz, who share profits and losses equally, have the following balance sheet as of
December 31, 2016:
Cash 120 000 Accounts Payable 172 000
Accounts Receivable 100 000 Accumulated Depreciation 8 000
Inventory 140 000 Barron, Capital 140 000
Equipment 80 000 Britz, Capital 120 000
TOLTAL 440 000 TOTAL 440 000

They agree to incorporate their partnership with the new corporation absorbing the net assets after the
following adjustments: provisions of allowance for bad debts of 10 000; restatement of the inventory at
its current fair value of 160 000; and recognition of further depreciation on the equipment of 3 000. The
corporation’s capital stock to have a par value of 100, and the partners are to be issued corresponding
total shares equivalent to their adjusted capital balances.

Adjusting Entry

Inventory 20 000
Accumulated Depreciation 3 000
Allowance for Doubtful Account 10 000
Barron, Capital 3 500
Britz, Capital 3 500

Closing Entry

Accounts Payable 172 000

Accumulated Depreciation 11 000
Cash 120 000
Accounts Receivable 90 000
Inventory 160 000
Equipment 80 000

Recording the incorporation

Cash 120 000

Accounts Receivable 90 000
Inventory 160 000
Equipment 80 000
Accounts payable 172 000
Accumulated Depreciation 11 000
Barron, Capital 143 500
Britz, Capital 123 500

*267 000/ 100 = 2670 shares

Barron, Capital 143 500

Ordinary Share Capital 143 500

Britz, Capital 123 500

Ordinary share Capital 123 500