Partnership Dissolution

- The dissolution of a partnership is the change in the 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. (Art. 1828)
- Refers to the termination of the life of an existing partnership but not necessarily the
business.
- Dissolution is not necessarily followed by liquidation but liquidation is always preceded by
dissolution.

Circumstances Resulting to Dissolution

A. Dissolution by Act of the Partners

1. Expiration of the life of the partnership
2. Accomplishment of the purpose
3. By mutual agreement:
a. Admit new partner/s
b. Convert the partnership into a corporation
c. Liquidate the business
4. Retirement or withdrawal of a partner

B. Dissolution by Operation of Law

1. Death of a partner
2. Bankruptcy of any partner or the partnership itself
3. Any event that will make it unlawful for a partner or the partnership to continue

C. Dissolution by Judicial Decree

1. Insanity of a partner
2. Incapacity of a partner
3. Conduct of a partner which is grossly prejudicial to the interest of the partnership or
business
4. Dissention among the partners
5. Impossibility of profitable operations
6. Other reasons such as fraud or misrepresentation in the formation of the partnership

Accounting for Partnership Dissolution

Dissolution by Admission of New Partner/s

- The consent of all the partners must be secured before a new partner is admitted.
- Upon admission, the original partnership is automatically dissolved and a new one is formed
although the daily operation of the business generally is not affected.
- The admission of a new partner gives rise to the following accounting problems:
 a. Determination of the profit or loss from the beginning of the accounting period to the
date of admission of a new partner and the distribution of such profit or loss to the old
partners.
b. Closing of the partnership books.
c. Correction of accounting errors in prior periods, if there is any.
d. Revaluation of accounts which may call for the re-statement of the existing assets of the
partnership to appraised or fair market values.

Types of Admission of a New Partner

1. Admission by Purchase
- Purchase of interest from one or more of the original partners
- A personal transaction between the incoming partner and the selling partner/s
- The amount paid by the new partner goes personally to the selling partner and not to the
partnership
- Any gain or loss is recognized by the selling partner and not by the partnership
- The admission of the new partner will result in the following:
a. Change in the capital structure
b. Change in the interest of the old partners in the new partnership
c. Change in the profit and loss sharing agreement

Problem 1:
The adjusted capital balances of Cayli and Aldyur as well as their profit and loss sharing ratio
prior to the admission of Eyjey are shown below:

Cayli Aldyur Total

Capital 30,000 20,000 50,000
P/L ratio 70% 30% 100%

The books of the old partnership will be retained.

Case 1: Eyjey buys ½ the interest of Cayli for ₱16,000.

Cayli, Capital (30,000 x ½) 15,000

Eyjey, Capital 15,000
To record the admission of Eyjey.

Cayli Aldyur Eyjey Total

Old Partnership 30,000 20,000 - 50,000
New Partnership 15,000 20,000 15,000 50,000
 Cayli Aldyur Eyjey Total
Old Partnership 60% 40% - 100%
New Partnership 30% 40% 30% 100%

 Assuming Eyjey bought ½ the capital of Cayli and ½ of her share in the profits and losses, the
old and new profit and loss sharing ratio is shown below:
Cayli Aldyur Eyjey Total
Old Partnership 70% 30% - 100%
New Partnership 35% 30% 35% 100%
 If there is no agreement as to the new profit and loss sharing ratio, future profits and losses will
be distributed based on their new capital ratio.

Case 2: Eyjey buys ¼ the interest of Aldyur for ₱4,500.

Cayli, Capital (20,000 x ¼) 5,000

Eyjey, Capital 5,000
To record the admission of Eyjey.

Cayli Aldyur Eyjey Total

Old Partnership 30,000 20,000 - 50,000
New Partnership 30,000 15,000 5,000 50,000

Cayli Aldyur Eyjey Total

Old Partnership 60% 40% - 100%
New Partnership 60% 30% 10% 100%

 Assuming Eyjey bought ¼ the capital and share in the profits and losses of Aldyur, the old and
new profit and loss sharing ratio is shown below:
Cayli Aldyur Eyjey Total
Old Partnership 70% 30% - 100%
New Partnership 70% 22.5% 7.5% 100%
 If there is no agreement as to the new profit and loss sharing ratio, future profits and losses will
be distributed based on their new capital ratio.

Case 3: Eyjey buys 1/5 the interest of Cayli for ₱8,000 and ½ the interest of Aldyur for ₱14,000.

Cayli, Capital (30,000 x 1/5) 6,000

Aldyur, Capital (20,000 x 1/2) 10,000
Eyjey, Capital 16,000
To record the admission of Eyjey.
 Cayli Aldyur Eyjey Total
Old Partnership 30,000 20,000 - 50,000
New Partnership 24,000 10,000 16,000 50,000

Cayli Aldyur Eyjey Total

Old Partnership 60% 40% - 100%
New Partnership 48% 20% 32% 100%

 Assuming Eyjey bought 1/5 and ½ the capital and share in the profits and losses of Cayli and
Aldyur, respectively, the old and new profit and loss sharing ratio is shown below:
Cayli Aldyur Eyjey Total
Old Partnership 70% 30% - 100%
New Partnership 56% 15% 29% 100%
 If there is no agreement as to the new profit and loss sharing ratio, future profits and losses will
be distributed based on their new capital ratio.

Problem 2:
Assume the following capital balances and profit and loss sharing ratio prior to the admission of
Cassy into the partnership of Babes and Aby:

Babes Aby Total

Capital 40,000 60,000 100,000
P/L ratio 25% 75% 100%

The books of the old partnership will still be used.

Case 1: Cassy buys ½ the interest of both partners for ₱60,000. No goodwill is to be recognized.

Babes, Capital (40,000 x ½) 20,000

Aby, Capital (60,000 x ½) 30,000
Cassy, Capital 50,000
To record the admission of Cassy.

The ₱60,000 paid by Cassy will be distributed as follows:

Babes Aby Total
Capital transferred 20,000 30,000 50,000
Gain: 25% ; 75% 2,500 7,500 10,000
22,500 37,500 60,000
 Babes Aby Cassy Total
Old Partnership 40,000 60,000 - 100,000
New Partnership 20,000 30,000 50,000 100,000

Babes Aby Cassy Total

Old Partnership 40% 60% - 100%
New Partnership 20% 30% 50% 100%

 Assuming Cassy bought ½ the interest and profits of both partners, the old and new profit and
loss sharing ratio is shown below:
Babes Aby Cassy Total
Old Partnership 25% 75% - 100%
New Partnership 12.5% 37.5% 50% 100%

Case 2: Cassy buys ½ the interest of both partners for ₱60,000. The implied total goodwill is to be
recognized.

Goodwill 20,000
Babes, Capital (25% x 20,000) 5,000
Aby, Capital (75% x 20,000) 15,000
To record total goodwill.

Babes, Capital (45,000 x ½) 22,500

Aby, Capital (75,000 x ½) 37,500
Cassy, Capital 60,000
To record the admission of Eyjey.

Babes Aby Cassy Total

Old Partnership 40,000 60,000 - 100,000
New Partnership 22,500 37,500 60,000 120,000

Babes Aby Cassy Total

Old Partnership 40% 60% - 100%
New Partnership 18.75% 31.25% 50% 100%

Babes Aby Cassy Total

Old Partnership 25% 75% - 100%
New Partnership 12.5% 37.5% 50% 100%

Case 3: Cassy buys ½ the interest of both partners for ₱60,000. Only the implied partial goodwill is
to be recognized.
 Goodwill 10,000
Babes, Capital (25% x 10,000) 2,500
Aby, Capital (75% x 10,000) 7,500
To record partial goodwill.

Babes, Capital (42,500 x ½) 21,250

Aby, Capital (67,500 x ½) 33,750
Cassy, Capital 55,000
To record the admission of Eyjey.

Computation of implied partial goodwill:

Amount paid by Cassy 60,000
Capital bought (100,000 x ½) (50,000)
Goodwill 10,000

Babes Aby Cassy Total

Old Partnership 40,000 60,000 - 100,000
New Partnership 21,250 33,750 55,000 110,000

The ₱60,000 paid by Cassy will be distributed as follows:

Babes Aby Total
Capital transferred 21,250 33,750 55,000
Gain: 25% ; 75% 1,250 3,750 5,000
22,500 37,500 60,000

Babes Aby Cassy Total

Old Partnership 40% 60% - 100%
New Partnership 19.3% 30.7% 50% 100%

Babes Aby Cassy Total

Old Partnership 25% 75% - 100%
New Partnership 12.5% 37.5% 50% 100%

2. Admission by Investment
- Asset contribution to the partnership
- A transaction between the original partnership and the new partner/s
- The investment of the new partner increases the assets of the partnership and its total
capital
- The admission of the new partner will result in the following:
a. Increase in the total assets and in the capital of the new partnership
b. Change in the capital structure
 c. Change in the interest of the old partners in the new partnership
d. Change in the profit and loss sharing agreement
e. Goodwill or bonus or both may be allowed to either the old partners or to the incoming
partner
 Goodwill – refers to the ability of the business to earn above normal income
 Bonus – portion of the capital of the old partners that will be transferred to the new
partner or vice versa (or simply the capital transfer among partners)

The following rules and procedures may be followed to determine whether goodwill or bonus or
both are to be recognized or allowed. Before bonus can be allowed however, determine first
whether there is goodwill to be recognized.

1. To determine whether there is goodwill to be recognized, compare the agreed new capital
(ANC) and the total capital contribution (TCC).
a. ANC = TCC - no goodwill
b. ANC < TCC - no goodwill
c. ANC > TCC - the difference is the implied goodwill to be recognized

2. If there is no goodwill, determine whether there is bonus to be allowed by comparing the

capital credit (CC) of the new partner and his actual investment (AI).
a. CC = AI - no bonus
b. CC < AI - bonus is allowed to the old partners
c. CC > AI - bonus is allowed to the new partner

3. If there is goodwill, determine the ownership of the goodwill and determine also whether there
is bonus to be allowed by comparing again the capital credit (CC) of the new partner and his
actual investment (AI).
a. CC = AI - goodwill belongs to the old partners; no bonus
b. CC < AI - goodwill belongs to the old partners; the difference between the CC and AI will
be treated as bonus to the old partners
c. CC > AI - if the excess is equal to the amount of goodwill, goodwill belongs to the new
partner; no bonus
d. CC > AI - if the excess is less than the amount of goodwill, goodwill belongs to all the
partners (old and new); no bonus
e. CC > AI - if the excess is more than the amount of goodwill, goodwill belongs to the
new partner; bonus to new partner

Problem 3
The agreed new capital, the interest of the new partner in the new partnership and his
investment are given.
 X and Y are partners with the following capital balances and profit and loss sharing ratio prior to
the admission of Z by investment.

Capital Profit & Loss ratio

X 30,000 40%
Y 50,000 60%
Total 80,000 100%

The new partnership will still use the books of the old partnership.

It will be assumed that the interest of the new partner in the new partnership is proportionate
to his profit and loss sharing ratio. It is likewise assumed that there is no provision as to the new
profit and loss sharing agreement.

Case 1 No Goodwill / No Bonus

Z invests ₱20,000 for a 1/5 interest in the agreed new capital of ₱100,000.

Analysis
ANC 100,000 x 1/5 20,000 CC
TCC (80,000 + 20,000) 100,000 20,000 AI
No Goodwill 0 0 No Bonus

Cash 20,000
Z, Capital 20,000
To record the admission by investment of Z.

The new capital structure, the interest or equity of the partners in the new capital, and the new
profit and loss sharing ratio are as follows:
X Y Z Total
Capital 30,000 50,000 20,000 100,000
Interest 30% 50% 20% 100%
P/L ratio 32% 48% 20% 100%

Case 2 Goodwill to Old / No Bonus

Z invests ₱15,000 for a 15% interest in the agreed new capital of ₱100,000.

Analysis
ANC 100,000 x 15% 15,000 CC
TCC (80,000 + 15,000) 95,000 15,000 AI
Goodwill to Old 5,000 0 No Bonus
 Goodwill 5,000
Cash 15,000
X, Capital (5,000 x 40%) 2,000
Y, Capital (5,000 x 60%) 3,000
Z, Capital 15,000
To record the admission by investment of Z.

The new capital structure, the interest or equity of the partners in the new capital, and the new
profit and loss sharing ratio are as follows:
X Y Z Total
Capital 32,000 53,000 15,000 100,000
Interest 32% 53% 15% 100%
P/L ratio 34% 51% 15% 100%

Case 3 Goodwill to New / No Bonus

Z invests ₱15,000 for a 1/5 interest in the agreed new capital of ₱100,000.

Analysis
ANC 100,000 x 1/5 20,000 CC
TCC (80,000 + 15,000) 95,000 15,000 AI
Goodwill to New 5,000 5,000 No Bonus

Goodwill 5,000
Cash 15,000
Z, Capital 20,000
To record the admission by investment of Z.

The new capital structure, the interest or equity of the partners in the new capital, and the new
profit and loss sharing ratio are as follows:
X Y Z Total
Capital 30,000 50,000 20,000 100,000
Interest 30% 50% 20% 100%
P/L ratio 32% 48% 20% 100%

Case 4 Goodwill to Old and New / No Bonus

Z invests ₱15,000 for a 16% interest in the agreed new capital of ₱100,000.

Analysis
ANC 100,000 x 16% 16,000 CC
TCC (80,000 + 15,000) 95,000 15,000 AI
Goodwill to Old & New 5,000 1,000 No Bonus
 Goodwill 5,000
Cash 15,000
X, Capital (4,000 x 40%) 1,600
Y, Capital (4,000 x 60%) 2,400
Z, Capital 16,000
To record the admission by investment of Z.

The new capital structure, the interest or equity of the partners in the new capital, and the new
profit and loss sharing ratio are as follows:
X Y Z Total
Capital 31,600 52,400 16,000 100,000
Interest 31.6% 52.4% 16% 100%
P/L ratio 33.6% 50.4% 16% 100%

Case 5 No Goodwill / Bonus to Old

Z invests ₱20,000 for a 12% interest in the agreed new capital of ₱100,000.

Analysis
ANC 100,000 x 12% 12,000 CC
TCC (80,000 + 20,000) 100,000 20,000 AI
No Goodwill 0 (8,000) Bonus to Old

Cash 20,000
X, Capital (8,000 x 40%) 3,200
Y, Capital (8,000 x 60%) 4,800
Z, Capital 12,000
To record the admission by investment of Z.

The new capital structure, the interest or equity of the partners in the new capital, and the new
profit and loss sharing ratio are as follows:
X Y Z Total
Capital 33,200 54,800 12,000 100,000
Interest 33.2% 54.8% 12% 100%
P/L ratio 35.2% 52.8% 12% 100%

Case 6 No Goodwill / Bonus to New

Z invests ₱20,000 for a 25% interest in the agreed new capital of ₱100,000.

Analysis
ANC 100,000 x 25% 25,000 CC
 TCC (80,000 + 20,000) 100,000 20,000 AI
No Goodwill 0 5,000 Bonus to New

Cash 20,000
X, Capital (5,000 x 40%) 2,000
Y, Capital (5,000 x 60%) 3,000
Z, Capital 25,000
To record the admission by investment of Z.

The new capital structure, the interest or equity of the partners in the new capital, and the new
profit and loss sharing ratio are as follows:
X Y Z Total
Capital 28,000 47,000 25,000 100,000
Interest 28% 47% 25% 100%
P/L ratio 30% 45% 25% 100%

Case 7 Goodwill to Old / Bonus to Old

Z invests ₱18,000 for a 15% interest in the agreed new capital of ₱100,000.

Analysis
ANC 100,000 x 15% 15,000 CC
TCC (80,000 + 18,000) 98,000 18,000 AI
Goodwill to Old 2,000 (3,000) Bonus to Old

Cash 18,000
Goodwill 2,000
X, Capital (5,000 x 40%) 2,000
Y, Capital (5,000 x 60%) 3,000
Z, Capital 15,000
To record the admission by investment of Z.

The new capital structure, the interest or equity of the partners in the new capital, and the new
profit and loss sharing ratio are as follows:
X Y Z Total
Capital 32,000 53,000 15,000 100,000
Interest 32% 53% 15% 100%
P/L ratio 34% 51% 15% 100%

Case 8 Goodwill to New / Bonus to New

Z invests ₱14,000 for a 25% interest in the agreed new capital of ₱100,000.
 Analysis
ANC 100,000 x 25% 25,000 CC
TCC (80,000 + 14,000) 94,000 14,000 AI
Goodwill to New 6,000 11,000 Bonus to New

Cash 14,000
Goodwill 6,000
X, Capital (5,000 x 40%) 2,000
Y, Capital (5,000 x 60%) 3,000
Z, Capital 25,000
To record the admission by investment of Z.

The new capital structure, the interest or equity of the partners in the new capital, and the new
profit and loss sharing ratio are as follows:
X Y Z Total
Capital 28,000 47,000 25,000 100,000
Interest 28% 47% 25% 100%
P/L ratio 30% 45% 25% 100%

Problem 4
The agreed new capital is not stated. Only the investment of the new partner and his interest in
the new capital are given.

X and Y are partners with the following capital balances and profit and loss sharing ratio prior to
the admission of Z by investment.

Capital Profit & Loss ratio

X 10,000 20%
Y 30,000 80%
Total 40,000 100%

Case 1 No Goodwill / No Bonus

Z invests ₱10,000 for a 20% interest in the agreed new capital.

How to compute for the agreed new capital?

1. Divide the investment of the new partner by his interest in the agreed new capital:
10,000 / 20% = 50,000 ANC
2. Divide the combined capital of the old partners by their combined interest in the agreed
new capital: 40,000 / 80% = 50,000 ANC
3. Get the total contribution of all the partners (old and new):
X 10,000 + Y 30,000 + Z 10,000 = 50,000 ANC
 Analysis
ANC 50,000 x 20% 10,000 CC
TCC (40,000 + 10,000) 50,000 10,000 AI
No Goodwill 0 0 No Bonus

Cash 10,000
Z, Capital 10,000
To record the admission by investment of Z.

Case 2 A Choice between Goodwill Method and Bonus Method

Z invests ₱12,000 for a 1/5 interest in the agreed new capital.

Goodwill Method
 To compute for ANC, use either the investment of the new partner or the combined
capital of the old partners as a basis whichever will exceed the total contribution.
 Using the investment of the new partner:
12,000 / 1/5 = 60,000 ANC
 Using the combined capital of the old partners:
40,000 / 4/5 = 50,000 ANC

Analysis
ANC 60,000 x 1/5 12,000 CC
TCC (40,000 + 12,000) 52,000 12,000 AI
Goodwill to Old 8,000 0 No Bonus

Cash 12,000
Goodwill 8,000
X, Capital (8,000 x 20%) 1,600
Y, Capital (8,000 x 80%) 6,400
Z, Capital 12,000
To record the admission by investment of Z.

The new capital structure, the interest or equity of the partners in the new capital, and the new
profit and loss sharing ratio are as follows:
X Y Z Total
Capital 11,600 36,400 12,000 60,000
Interest 19.33% 60.67% 20% 100%
P/L ratio 16% 64% 20% 100%
Bonus Method
 ANC = TCC of all the partners (old & new)

Analysis
ANC 52,000 x 1/5 10,400 CC
TCC (40,000 + 12,000) 52,000 12,000 AI
No Goodwill 0 (1,600) Bonus to Old

Cash 12,000
X, Capital (1,600 x 20%) 320
Y, Capital (1,600 x 80%) 1,280
Z, Capital 10,400
To record the admission by investment of Z.

The new capital structure, the interest or equity of the partners in the new capital, and the new
profit and loss sharing ratio are as follows:
X Y Z Total
Capital 10,320 31,280 10,400 52,000
Interest 19.85% 60.15% 20% 100%
P/L ratio 16% 64% 20% 100%

Comparison of the Goodwill Method and Bonus Method

 If the P/L ratio of the new partner is equal to his interest in the ANC and the remaining
profits will be divided by the old partners using their original P/L ratio, the goodwill and
bonus methods will produce the same capital balances later if after the admission of the
new partner, the goodwill will be immediately written off.

Using case 2 sample problem

Goodwill method
Goodwill Other Assets X, Capital Y, Capital Z, Capital
8,000 52,000 11,600 36,400 12,000
(8,000) (1,280) (5,120) (1,600)
0 52,000 10,320 31,280 10,400
 The goodwill is written off using the new profit and loss sharing ratio.

Bonus method
Goodwill Other Assets X, Capital Y, Capital Z, Capital
0 52,000 10,320 31,280 10,400
 After the goodwill is written off, the capital balances of all the partners will be the same
irrespective of the method used.
Case 3 A Choice between Goodwill Method and Bonus Method
Z invests ₱50,000 for a 60% interest in the agreed new capital.

Goodwill Method
 Using the investment of the new partner:
50,000 / 60% = 83,333 ANC
 Using the combined capital of the old partners:
40,000 / 40% = 100,000 ANC

Analysis
ANC 100,000 x 60% 60,000 CC
TCC (40,000 + 50,000) 90,000 50,000 AI
Goodwill to New 10,000 10,000 No Bonus

Cash 50,000
Goodwill 10,000
Z, Capital 60,000
To record the admission by investment of Z.

The new capital structure, the interest or equity of the partners in the new capital, and the new
profit and loss sharing ratio are as follows:
X Y Z Total
Capital 10,000 30,000 60,000 100,000
Interest 10% 30% 60% 100%
P/L ratio 8% 32% 60% 100%

Bonus Method
 ANC = TCC of all the partners (old & new)

Analysis
ANC 90,000 x 60% 54,000 CC
TCC (40,000 + 50,000) 90,000 50,000 AI
No Goodwill 0 4,000 Bonus to New

Cash 50,000
X, Capital (4,000 x 20%) 800
Y, Capital (4,000 x 80%) 3,200
Z, Capital 54,000
To record the admission by investment of Z.
The new capital structure, the interest or equity of the partners in the new capital, and the new
profit and loss sharing ratio are as follows:
X Y Z Total
Capital 9,200 26,800 54,000 90,000
Interest 10.22% 29.78% 60% 100%
P/L ratio 8% 32% 60% 100%