DISSOLUTION – Changes in

Ownership
 Dissolution of a partnership
The change in the relation of the partners
caused by any partner ceasing to be associated
in the carrying on as distinguished from
winding up of the business of the partnership
The partnership is not terminated, but
continues until the winding up of partnership
affairs is completed
Any change in the membership of this form of
business organization will result to dissolution
Winding up is the process of settling the
business or partnership affairs after dissolution

Termination is that point in time when all

partnership affairs are wound up or completed,
and is the end of the partnership life
 Dissolution distinguished from
liquidation
 A partnership is said to be liquidated
when the business is terminated
 A partnership may be dissolved
without being terminated but
liquidation is always preceded by
dissolution
CAUSES OF DISSOLUTION
1. Admission of a partner
2. Withdrawal or retirement of a
partner
3. Death of a partner
4. Incorporation of the partnership
ADMISSION OF A PARTNER
A new partner can only be admitted into a
partnership with the consent of all the
continuing partners
By admission of a new partner, the old
partnership has been dissolved and it is
important that a new agreement be formulated
to govern the continuing business operations
ADMISSION OF A PARTNER
A person may become a partner in an existing partnership
by either of the following:
1. Purchase of an interest from one or more of the
existing partners
2. Investment of assets in the partnership by the new
partner

The partnership receives no new resources when a third

party purchases an interest directly from existing partners,
but it does receive new resources when a third party
becomes a partner by investing in the partnership
 Liability of Incoming Partner for
Existing Obligation
A person admitted as a partner into an existing
partnership is liable for all the obligations of
the partnership incurred before his admisssion
as though he had been a partner when such
obligations were incurred. Such liability is
limited to his capital contribution, unless
otherwise agreed.
 Liability of Incoming Partner for
Existing Obligation
Illustration: Nazario, Penaco and Pangan formed
NPP, a general professional partnership with a
capital of P50,000 each on Feb. 1, 2017. On
April 8, the partnership incurred an obligation
on P200,000 to Buenaflor which will be
payable on Dec. 16, 2017. Alvaro was
admitted into the partnership; she contributed
P20,000
Even if the obligation was incurred before
alvaro’s admission into the partnerhsip, she is
still liable to Buenaflor but only to the extent
of her contribution. Total partnership capital
upon admission is P170,000 leaving a balance
of P30,000 which will be shared by the old
partners equally
 Purchase of an interest from existing
partners
 A person may be admitted into an existing partnership
by purchasing an interest directly from one or more of
the existing partners
 Payment is made personally to the partner from whom
interest is obtained resulting to mere transfers among
capital accounts.
 Will only result to a debit to the capital account of the
selling partner for the interest sold and a credit to the
capital account of the buying partner for the interest
purchased
 Total assets, total liabilities and total partner’s equity of
the partnership are not affected upon admission.
 Purchase of an interest from existing
partners
Illustration: Sarah Salavador and Rey San Mateo
are partners with capital balances of P400,000
and P200,000, respectively. They share profits
in the ratio of 3:1. Their business has been
very successful. All indications show that it
will continue to be.
Purchase of an interest from existing
partners
Case 1: Payment to old partners is equal to
interest purchased. Partners Sarah Salvador
and Rey San Mateo received an offer from
Janet to purchase directly one-fourth of each of
their interest in the partnership for P150,000.
The partners agreed to admit Janet into the
firm.
Sarah Salvador, Capital P100,000
Rey San Mateo, Capital 50,000
Janet, capital P150,000
To record admission of Janet

Computation
Salvador P400,000x1/4 P100,000
San Mateo P200,000 x 1/4 50,000
Interest transferred to Janet P150,000

No cash received because the transaction is between Janet and partners

Salvador and San Mateo personally, not between Janet and the
partnership
Purchase of an interest from existing
partners
Case 2: Payment to old partners is less than
the interest purchased. Assume that Janet
directly purchased one-third of each partner’s
interest in the business. Janet paid P160,000
for 1/3 of each partner’s capital

Sarah Salvador, Capital P133,333

Rey San Mateo, Capital 66,667
Janet, capital P200,000
To record admission of Janet
 Computation
Salvador P400,000 x 1/3 P133,333
San Mateo P200,000 x 1/3 66,667
Interest transferred to Janet P200,000

The negotiated price of P160,000 does not

affect the entry because the exchange is
between Janet and the old partners and does
not involve partnership assets
 Purchase of an interest from existing
partners
Case 3: Payment to old partners is more than the
interest puchased. Partners Sarah Salvador and
Rey San Mateo received an offer from Janet to
purchase directly 30% each of their interest in the
partnership for P200,000. The partners agreed to
admit Janet as a member of the firm
Sarah Salvador, Capital P120,000
Rey San Mateo, Capital 60,000
Janet, capital P180,000
To record admission of Janet
Computation
Salvador P400,000 x 30% P120,000
San Mateo P200,000 x 30% 60,000
Interest transferred to Janet P180,000
 Investment of Assets in a Partnership
• A person may be admitted into a partnership
by investing cash or other assets in the
business. The assets are invested into the
partnership and not given to the individual
partners.
• The investment will increase total assets and
total partner’s equity
 Investment of Assets in a Partnership
Definition of terms
Total Contributed Capital – it is the sum of the capital balances of
the old partners and the actual investment of the new partner
Total Agreed Capital – It is the total capital of the partnership after
considering the capital credits given to each of the partners.
Under the bonus method, total agreed capital is equal to the
total contributed capital though the capital credits to each partner
may be equal to, or greater than or less than his capital contribution
Bonus - is the amount of capital of equity transferred by one
partner to another partner.
Capital Credit – is the equity of a partner in the new partnership
and is obtained by multiplying the total agreed capital by the
applicable percentage interest of the partner
 Bonus to Old Partners
A partnership may be exceptionally attractive
because of superior earning records such that
the old partners may demand a premium from
a new partner. This premium increases the old
partners’ capital interest
 Bonus to Old Partners
Illustration: Rebecca Miranda and Stephanie
Calamba are partners with capital balances of
P400,000 and P200,000, respectively. They
share profits in the ratio 3:1. The partners
agreed to admit Rey Daug as a member of the
firm. The foregoing formation will be the
basis of the following cases.
Case 1: Total agreed capital is stated. Assume
that Rey Daug invested P250,000 for a ¼
interest in the business. The partners decided
not to revalue the assets of the partnership and
that the total agreed capital is P850,000.
Contributed Bonus Agreed
Rebecca Miranda P400,000 P28,125 P428,125
Stephanie Calamba 200,000 9,375 209,375
Total P600,000 P37,500 P637,500
Rey Daug 250,000 (37,500) 212,500
Total P850,000 P0 P850,000
P850,000 x ¼ = P212,500
Distribution of Bonus:
Miranda: P37,500 x ¾ = P28,125
Calamba: 37,500 x ¼ = 9,375

The investment of Daug resulted to a bonus

because the total contributed capital of P850,000
is equal to the total agreed capital. The
partnership new assets are increased only by the
amount of the new investment
Cash P250,000
Rey Daug, Capital P250,000
To record the investment of Rey Daug

Rey Daug, capital 37,500

Rebecca Miranda, Capital P28,125
Stephanie Calamba, Capital 9,375
To record bonus to old partners
Case 2: Total agreed capital is not explicity
stated. Assume that Rey Daug invested
P400,000 in the business. Out of the total cash
investment, P100,000 is considered as a bonus
to Partners Rebecca Miranda and Stephanie
Calamba. The investment of Daug resulted to
a bonus as stated. Under the bonus method,
the total contributed capital is equal to the total
agreed capital. It is also clearly specified that
the old partners will receive the bonus
 Contributed Bonus Agreed
Rebecca Miranda P400,000 75,000 475,000
Stephanie Calamba 200,000 25,000 225,000
Total P600,000 P100,000 700,000
Rey Daug 400,000 (100,000) P300,000
Total P1,000,000 P0 P1,000,000

Distribution of Bonus:
Miranda: P100,000 x ¾ = P75,000
Calamba: 100,000 x ¼ = 25,000
Cash P400,000
Rey Daug, Capital P400,000
To record the investment of Rey Daug

Rey Daug, capital 100,000

Rebecca Miranda, Capital P75,000
Stephanie Calamba, Capital 25,000
To record bonus to old partners
 Bonus to New Partner
A new partner may be admitted into the
partnership because of his vast financial
resources, extensive business network,
distinctive reputation, unique management
and/or technical skills. The old partners may
be willing to give a premium for all of these
exceptional qualifications by allowing a capital
credit greater than the prospective partner’s
investment just to ensure his association with
the partnership
Case 1: Total Agreed Capital is stated. Assume
that Rey Daug invested P240,000 for a 1/3
interest in the business. The total agreed
capital is P840,000. The investment of Daug
resulted to a bonus shown by the following
table
 Contributed Bonus Agreed
Rebecca Miranda P400,000 (30.000) 370,000
Stephanie Calamba 200,000 (10,000) 190,000
Total P600,000 (40,000) 560,000
Rey Daug 240,000 40,000 280,000
Total P840,000 P840,000

P840,000 x 1/3 = P280,000

Distribution of Bonus:
Miranda: P40,000 x ¾ = P30,000
Calamba: 40,000 x ¼ = 10,000
Cash P240,000
Rey Daug, Capital P240,000
To record the investment of Rey Daug

Rebecca Miranda, Capital 30,000

Stephanie Calamba,Capital 10,000
Rey Daug, capital 40,000
To record bonus to new partners
Case 2. Total agreed capital is not
explicity stated. Assume that Rey Daug
invested P300,000 for a 50% interest in the
business. Rebecca Miranda and Stephanie
Calamba transferred part of their capital
balance to that of Rey Daug as a bonus.
The investment of Daug resulted to a
bonus as stated. Under the bonus method,
the total contributed capital is equal to the
total agreed capital.
 Contributed Bonus Agreed
Rebecca Miranda P400,000 (112,500) 287,500
Stephanie Calamba 200,000 (37,500) 162,500
Total P600,000 (150,000) P450,000
Rey Daug 300,000 150,000 450,000
Total P900,000 P0 P900,000

P900,000 x 50% = P450,000

Distribution of Bonus:
Miranda: P150,000 x ¾ = P112,500
Calamba: 150,000 x ¼ = 37,500
Cash P300,000
Rey Daug, Capital P300,000
To record the investment of Rey Daug

Rebecca Miranda, Capital 112,500

Stephanie Calamba,Capital 37,500
Rey Daug, capital 150,000
To record bonus to new partners
 WITHDRAWAL OR
RETIREMENT OF A PARTNER
A partner may withdraw or retire from a
partnership for various reasons. Dispute with
other partners, old age, and pursuit for better
opportunities are among the possible
explanations.
May be accomplished by either of the following
ways:
1. By selling his equity interest to one or more of
the remaining partners
2. By selling his equity interest to an outsider
3. By selling his equity interest to the partnership
 Sale of Interest to a Partner or an
Outsider
The withdrawing partner is paid from the
personal assets of the buyer.
Accounting for this sale is similar to admission
by purchase of interest
The total assets of the partnership are not
affected by the consideration involved
 Sale of Interest to the Partnership
The partner is paid from the assets of the
partnership
He may receive an amount equal to, greater
than or less than the balance of his capital
account
The effect of withdrawal is to reduce the
assets and the owner’s equity of the
partnership
Illustration. Suppose that Remedios Palaganas is retiring
in midyear from the partnership of Selisana, Dela Cruz
and Palaganas because of family relocation. Physical
distance will prevent her from coping with the daily
rigors of their fashion and beauty consulting business.
After the books have been adjusted for the semi-annual
profits but before revaluation, their capital balances are
as follows.
Jessica Selisana, Capital P540,000
Daisy Dela Cruz, Capital 430,000
Remedios Palaganas, Capital 210,000
An independent appraiser revalued their cosmetics
inventory to P380,000 ( a decrease of P60,000) and
their Land to P1,010,000 ( an increase of P460,000).
The profit and loss ratio of the partners is 1:2:1
The entries to record the revaluation of assets:

Debit Credit
Jessica Selisana, Capital P15,000
Daisy Dela Cruz. Capital 30,000
Remedios Palaganas, Capital 15,000
Cosmetics Inventory P60,000
To revalue cosmetic inventory per appraisal

Computation
Selisana: P60,000 x 1/4 = P15,000
Dela Cruz: P60,000 x 2/4 = P30,000
Paraganas:P60,000 x 1/4 = P15,000
The entries to record the revaluation of assets:
Debit Credit
Land P460,000
Jessica Selisana, capital 115,000
Daisy Dela Cruz, capital 230,000
Remedios Palaganas, capital 115,000
To revalue land per appraisal

Computation
Selisana: P460,000 x 1/4 = P115,000
Dela Cruz: P460,000 x 2/4 = P230,000
Paraganas:P460,000 x 1/4 = P115,000
After revaluation, the capital balances of the
partners are shown below:

Jessica Selisana, capital P640,000

Daisy Dela Cruz, capital 630,000
Remedios Palaganas, capital 310,000

Computation
Selisana: P540,000-P15,000+P115,000 = P640,000
Dela Cruz: P430,000-P30,000+P230,000 = P630,000
Paraganas: P210,000-P15,000+P115,000 = P310,000
 Case 1: Withdrawal at book value. Assume
that Remedios Palagansa agreed to accept
payment equal to her interest. The entry to
record the payment of cash and the closing of
her capital account will be:
Debit Credit
Remedios Palaganas, Capital P310,000
Cash P310,000
To record retirement of Palaganas
Case 2. Withdrawal at more than book value.
Assume that Remedios Palaganas demanded a
P400,000 settlement for her interest because
she firmly believed that she has contributed so
much to the success of the business. The
remaining partners agreed for old time’s sake.
If the current fair value of the partnership’s net
assets exceeded book value, the settlement
price to the withdrawing partner will be greater
than his capital account balance. The excess
payment is treated either as a bonus to the
retiring partner from the continuing partners
 Debit Credit
Jessica Selisana, capital P30,000
Daisy Dela Cruz, capital 60,000
Remedios Palaganas, capital 310,000
Cash P400,000
To record retirement of Palaganas with bonus
from continuing partners
Computation
Selisana: P90,000 x 1/3 = P30,000
Dela Cruz: P90,000 x 2/3 = 60,000
P90,000
Case 3. Withdrawal at less than book value.
Assume that Remedios Palaganas is very eager
to retire and is willing to accept settlement at
P280,000. When Palaganas, the retiring
partner, received as settlement an amount less
than her capital balance, in effect, the partner
is giving a part of her equity interest to the
continuing partners as bonus. The amount of
the bonus is credited to the capital accounts of
the continuing partners in their profit and loss
ratio
 Debit Credit
Remedios Palaganas, capital P310,000
Daisy Dela Cruz, capital 20,000
Jessica Selisana, capital 10,000
Cash 280,000
To record retirement of Palaganas with bonus
to continuing partners
Computation
Selisana: P30,000 x 1/3 = P10,000
Dela Cruz: P30,000 x 2/3 = 20,000
P30,000
 DEATH OF A PARTNER
Dissolves a partnership
The deceased partner may be considered to
have retired from the partnership and his heirs
or estate can expect to receive the amount of
his interest from the business.
Exercise 03.02.08