Partnership Dissolution

Saturday, 2 October 2021 12:07 am

Partnership Dissolution
→ Pertains to changes in ownership that does not result in
termination
→ 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

Capital interest
→ Claim against the net assets of the partnership as shown by the
balance in the partner's capital account
→ Initial investment + additional investment
→ The total capital of a partner

Profit and loss interest

→ Determines how the partner's capital interest will increase or
decrease as a result of subsequent operations
→ Depends on agreement
→ Doesn’t have to be equal to capital interest
→ Pertains to sharing of profit and loss

Assignment of an interest to a third party

• Partnership is not dissolved when a partner assigns his/her
interest in the partnership to a third party
• Such an assignment does not itself change the relationship of
the partners
• The assignee
○ does not become a partner
○ does not obtain the right to share in management of the
partnership
○ does not obtain the right to review transactions and
records of the partnership

Screen clipping taken: 02/10/2021 8:18 am

Methods of Partnership Dissolution

1. Admission of new partner
○ by purchase of interest - directly kay partner
○ By investment - in partnership
2. Withdrawal/retirement of a partner
3. Death of incapacity of a partner

Lecture Notes Page 1

 3. Death of incapacity of a partner
4. Incorporation of a partnership

Admission of new partner

→ A new partner can be admitted with the consent of all partners
in the business
→ Brings about a new association
→ Old partnership is considered dissolved by common consent
a. Admission by Purchase of Interest
▪ The purchase of interest is from one or more of
the partnership's existing partners is a personal
transaction between the incoming partner and the
selling partner
▪ No additional money or properties are invested in
the partnership
b. Admission by Investment
▪ Obtained partnership interest through investing
something in value to the partnership
▪ If not stated, bonus method is used
▪ If Total Agreed Capital and Total Contributed
Capital is equal, no revaluation is made

Withdrawal or Retirement of a partner

→ Required a determination of the fair value of the partnership
entity and a measurement of partnership income to the date
of withdrawal
→ In some case, if a partner withdraws in violation of the
partnership agreement and without approval of the remaining
partners, he is entitled only to his interest in the firm without
consideration of revaluation (goodwill)
• Before paying the interest, update before the net income

Death of a partner
→ In absence of specific provisions to the contrary profit or loss
should be summarized,
→ the partnership assets should be appraised,
→ and the descendant's interest in the partnership should be
established as of the date of death

Incorporation of Partnership
→ The shares of stock received by the partnership is distributed
to the partners in settlement of their equities
→ The corporation thus takes over the assets and assumes the
liabilities of the partnership
→ The partnership is dissolved and the partner now becomes the
shareholders in the newly organized corporation

• Adjustments
• Partnership books retained - remove the capital accounts then
record common stock
• New books - close partnership books and record new
corporation books with all the assets and liabilities and stocks
to be transferred

Lecture Notes Page 2