PARTNERSHIP DISSOLUTION

Another occurrence which may bring about the change in partnership ownership is the
removal of an old partner which is caused by his voluntary withdrawal, retirement, his death, or
incapacity of a partner. .

Death, Withdrawal, Retirement or Incapacity of a Partner

This chapter focuses on the accounting for the withdrawal or retirement of a partner. The
books of the partnership, at the date of the retirement or death of a partner should be adjusted
to identify partnership profit or loss during the reporting period up until the date of death or the
retirement of the partner. Similar to the previous chapter in Formation of a Partnership, when
there is a change in the capital structure of a partnership, assets and liabilities are brought to their
fair market value to arrive at the adjusted partner’s equity. The equity of the retiring or
deceased partner should be settled.

For a partner withdrawing or retiring from the partnership, he may, with the consent of
the remaining partners sell his interest to an outsider (new partner), to the remaining partners or
to the partnership. The purchase price or amount of settlement by the partnership to the retiring
partner may be (a) at book value – equal to the interest of the retiring partner; (b) less than the
book value; (c) more than the book value.

Two methods are used to account for the settlement to the retiring partner when the
payment is not equal with the book value or interest of the retiring partner, the (a) Bonus
method, and the (b) Asset Revaluation Method.

ILLUSTRATIVE PROBLEM

KNT Partnership
Statement of Financial Position
September 30, 2019

Assets Liabilities & Capital

Cash P 150,000 Liabilities P 50,000
Other Assets 130,000 Keri, Capital 100,000
Neri, Capital 90,000
Teri, Capital 40,000
Total Assets P 280,000 Total Liabilities & Capital P 280,000

a. Profit and Loss are divided in the ratio 5: 4 : 1

b. Teri decided to withdraw from the partnership.
c. Net Income for January – September 2019 amounted P50,000
d. Each partner withdrew P5,000 each as of September 30, 2019.
e. After the retirement of Teri, the remaining partners will divide profit and loss
equally.

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The first step is to compute for the book value of the retiring partner’s (Teri) Capital.

Keri, Neri, Teri, Total

Capital Capital Capital Capital
Profit and Loss ratio 50% 40% 10%
Capital Balance before retirement P100,000 P 90,000 P 40,000 P 230,000
Share in Net Income 25,000 20,000 5,000 50,000
Withdrawals (5,000) (5,000) (5,000) (15,000)

Adjusted Capital Balances P120,000 P105,000 P40,000 P265,000

Case A –Teri withdraws from the partnership. The remaining partners did not take in any
more partner/s. Teri is paid P40,000 equal to his capital interest.

Teri, Capital 40,000

Cash 40,000

Case B – Teri sells his interest to Beri for P38,000.

Teri, Capital 40,000

Beri, Capital 40,000

The loss of P2,000, which is a personal loss of Teri will not be recorded in the company
books. After the retirement of Teri, the total capital would remain the same.

Case C –Teri withdraws from the partnership and sells his interest to the partnership and is
to be paid P45,000, which is P5,000 more than his capital interest.
(BONUS TO RETIRING PARTNER)

Teri, Capital 40,000

Keri, Capital 2,778
Neri, Capital 2,222
Cash 45,000
P5,000 x 5/9 = P2,778
P5,000 x 4/9 = P2,222

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 Case D –Teri withdraws from the partnership and sells his interest to the partnership and is
paid P45,000 which is P5,000 MORE than his capital interest.
(ASSET REVALUATION METHOD)
The entry to record the Revaluation of Assets
cash settlement Other Assets 50,000
Keri, Capital 25,000
Neri, Capital 20,000
Teri, Capital 5,000
Revaluation P5,000÷ 10% = P50,000
P50,000 x 5/10 = P25,000
P50,000 x 4/10 = P20,000
P50,000 x 1/10 = P 5,000

The P5,000 difference between Teri’s Capital interest and the cash settlement
is his share in the calculated Asset Revaluation, thus by dividing it with his profit and loss
share of 1/5, we get the total Asset revaluation, which is P50,000.

The entry to record the Retirement of Teri

Teri, Capital 45,000
Cash 45,000

Teri receives cash settlement of P45,000 which comprises his capital interest of
P40,000 plus his P5,000 share in the revaluation.

A compound journal entry can be used instead–

Other Assets 50,000
Teri Capital 40,000
Keri, Capital 25,000
Neri, Capital 20,000
Cash 45,000

Case E –Teri withdraws from the partnership and sells his interest to the partnership and is
paid P38,000 which is P2,000 LESS than his capital interest.
(BONUS TO REMAINING PARTNERS)

Teri, Capital 40,000

Keri, Capital 1,111
Neri, Capital 889
Cash 38,000
P2,000 x 5/9 = P1,111
P2,000 x 4/9 = P 889

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 Case F–Teri withdraws from the partnership and sells his interest to the partnership and is
paid P38,000 which is P2,000 LESS than his capital interest.
(NEGATIVE ASSET REVALUATION)

The entry to record the Revaluation of Assets and settlement (compound entry)
Teri, Capital 40,000
Keri, Capital 10,000
Neri, Capital 8,000
Other Assets 20,000
Cash 38,000
Revaluation P2,000÷ 10% = P20,000
P20,000 x 5/10 = P10,000
P20,000 x 4/10 = P 8,000
P20,000 x 1/10 = P 2,000
B. Bonus Method
A. Bonus Method
Teresa, capital 180,000
Teresa, capital 180,000 Maria, Capital 30,000
Maria, Capital 15,000

1
Leonora, Capital 30,000
Lenora, Capital 15,000 Other Asset 90,000
Cash 150,000 Cash 150,000
Maria (30,000 x 1/2) = 15,000 Asset Revaluation (30,000/ 1/3) = 90,000
Leonora (30,000 x 1/2) = 15,000 Teresa (90,000 x 1/3) = 30,000 + 150,000 = 180,000
Maria (90,000 x 1/3) = 30,000
Leonora (90,000 x 1/3) = 30,000

Mercedes Melinda Julieta

Julieta, Capital 376,500
Capital Capital Capital
Cash 376,500
P&L 40% 30% 30%

2
Capital Bal. before Retirement P450,000 P425,000 P400,000
Share in Net Loss (18,000) (13,500) (13,500) 1) ADJUSTMENTS
Withdrawals (10,000) (10,000) (10,000)
a. Merchandise Inventory 4,500
Adjusted Capital Balances P422,000 P401,500 P376,500 LamAng, Capital 1,350

4
Lakandula, Capital 1,125
Lakambini, Capital 1,035
Mercedes (45,000 x 40%) = 18,000 LaLuna, Capital 990
Melinda (45,000 x 30%) = 13,500
Julieta (45,000 x 30%) = 13,500 LamAng, Capital (P4,500 x 30%) = 1.350
Lakandula, Capital (P4,500 x 25%) = 1,125
Lakambini, Capital (P4,500 x 23%) = 1,035

3
LaLuna, Capital (P4,500 x 22%) = 990
Santino, Capital 100,000
Macario, Capital 60,000 b. Allowance for bad Debts 2,100
Policarpio, Capital 40,000 LamAng, Capital 630
Lakandula, Capital 525
Lakambini, Capital 483
LaLuna, Capital 462

LamAng, Capital (P2,100 x 30%) = 630

Lakandula, Capital (P2,100 x 25%) = 525
Lakambini, Capital (P2,100 x 23%) = 483
LaLuna, Capital (P2,100 x 22%) = 462

c. Insurance Expense 1,200

Prepaid Insurance 1,200

2) BONUS TO THE RETIRING PARTNER

Lakambini, Capital 41,518

LamAng, Capital 3,896
Lakandula 3,247
LaLuna 2,857
Cash 51,518

LamAng, Capital (P10,000 x 30/77) = 3,896

Lakandula, Capital (P10,000 x 25/77) = 3,247
LaLuna, Capital (P10,000 x 22/77) = 2,857

3. Positive Asset Revaluation

Other Assets
Lakambini, Capital 5,000
LamAng, Capital 6,522
Partnership Dissolution – Death, Withdrawal or Retirement of a Lakandula
LaLuna
Page4,783
4
5,435

Partner Cash

5,000/23% = 21,739
 EXERCISES

5.1 Maria, Leonora and Teresa are partners with adjusted capital balances of P165,000,
P150,000 and P180,000 respectively and divide profit and loss equally. At the end of the
year, Maria decides to withdraw from the partnership. Maria will receive cash settlement
of P150,000
Instruction: Give the entry to record the withdrawal of Maria assuming –

a. Bonus Method is used

b. Revaluation of Asset method is used

A. Bonus Method

Teresa, capital 180,000

Maria, Capital 15,000
Lenora, Capital 15,000
Cash 150,000

Maria (30,000 x 1/2) = 15,000

Leonora (30,000 x 1/2) = 15,000

B. Asset Revaluation Method

Teresa, capital 180,000

Maria, Capital 30,000
Leonora, Capital 30,000
Other Asset 90,000
Cash 150,000

Asset Revaluation (30,000/ 1/3) = 90,000

Teresa (90,000 x 1/3) = 30,000 + 150,000 = 180,000
Maria (90,000 x 1/3) = 30,000
Leonora (90,000 x 1/3) = 30,000

5.2 Mercedes, Melinda and Julieta are partners sharing profit and loss 40%, 30% and 30%
respectively. Capital balances of the partners before the retirement of Mercedes were at
P450,000, P425,000 and P400,000. The company sustained a net loss of P45,000 during
the year. The partners were allowed to withdraw P10,000 each.
Instruction: Give the entry to record the retirement of Mercedes, assuming no
Bonus or Revaluation will be recorded

a) Journal ENTRY

Mercedes, Capital 422,000 LamAng

Capital
Lakandula
Capital
Lakambini
Capital
LaLuna
Capital
Cash 422,000 P&L 30% 25% 23% 22%

Capital Bal. before Retirement P50,000 P65,000 P40,000 P45,000

Share in Merchandise Inventory 1,350 1,125 1,035 990
Share in decrease in Allowance 630 525 483 462
for bad debts
Partnership Dissolution – Death, Withdrawal or Retirement of a Page 5
Adjusted Capital Balances P51,980 P66,650 P41,518 P46,452
Partner
Mercedes (45,000 x 40%) = 18,000
Melinda (45,000 x 30%) = 13,500
Julieta (45,000 x 30%) = 13,500
 Mercedes Melinda Julieta
Capital Capital Capital
P&L 40% 30% 30%
Capital Bal. before Retirement P450,000 P425,000 P400,000
Share in Net Loss (18,000) (13,500) (13,500)
Withdrawals (10,000) (10,000) (10,000)

Adjusted Capital Balances P422,000 P401,500 P376,500

Mercedes (45,000 x 40%) = 18,000

Melinda (45,000 x 30%) = 13,500
Julieta (45,000 x 30%) = 13,500

5.3 Santino is to withdraw from Mariposa Partnership, owned by partners Macario, Policarpio
and Santino, with capital balances of P200,000, P250,000 and P100,000. Macario
purchased 60% of Santino’s interest for P65,000 while Policarpio paid Santino P50,000
for the remainder.
Instruction: Give the entry to record the withdrawal of Santino from the
Partnership.

Santino, Capital 100,000

Macario, Capital 60,000
Policarpio, Capital 40,000

Macario (100,000 x 60%) = 60,000

Policarpio (100,000 x 40%) = 40,000

5.4 After closing the books of the partnership of Mutya and Associates, Lakambini announced
his retirement of from the partnership. Shown below are the partners’ capital
balances and the profit and loss ratio:
Capital Balance P/L ratio
LamAng, Capital P 50,000 30%
Lakandula, Capital 65,000 25%
Lakambini, Capital 40,000 23%
LaLuna, Capital 45,000 22%

The partners agreed to the following before the cash settlement to Lakambini.
a. The merchandise inventory will be increased by P4,500
b. Allowance for bad debts will be decreased by P2,100
c. Prepaid insurance worth P1,200 have expired.

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 Instruction: Give the entries to record the following:
1) Adjustments in the books of the partnership
2) Withdrawal of Lakambini from the Partnership assuming the remaining partners
will give Lakambini a bonus of P10,000.
3) Withdrawal of Lakambini from the partnership assuming Lakambini receives
P5,000 share in asset revaluation.

1) ADJUSTMENTS

a. Merchandise Inventory 4,500

LamAng, Capital 1,350
Lakandula, Capital 1,125
Lakambini, Capital 1,035
LaLuna, Capital 990

LamAng, Capital (P4,500 x 30%) = 1.350

Lakandula, Capital (P4,500 x 25%) = 1,125
Lakambini, Capital (P4,500 x 23%) = 1,035
LaLuna, Capital (P4,500 x 22%) = 990

b. Allowance for bad Debts 2,100

LamAng, Capital 630
Lakandula, Capital 525
Lakambini, Capital 483
LaLuna, Capital 462

LamAng, Capital (P2,100 x 30%) = 630

Lakandula, Capital (P2,100 x 25%) = 525
Lakambini, Capital (P2,100 x 23%) = 483
LaLuna, Capital (P2,100 x 22%) = 462

c. LamAng, Capital 360

Lakandula, Capital 300
Lakambini, Capital 276
LaLuna, Capital 264
Prepaid Insurance 1,200

LamAng, Capital (P1,200 x 30%) = 630

Lakandula, Capital (P1,200 x 25%) = 525
Lakambini, Capital (P1,200 x 23%) = 483
LaLuna, Capital (P1,200 x 22%) = 462

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2) BONUS TO THE RETIRING PARTNER

Lakambini, Capital 41,518

LamAng, Capital 3,896
Lakandula, Capital 3,247
LaLuna, Capital 2,857
Cash 51,518

LamAng, Capital (P10,000 x 30/77) = 3,896

Lakandula, Capital (P10,000 x 25/77) = 3,247
LaLuna, Capital (P10,000 x 22/77) = 2,857

3)
Revaluation of Assets

Other Assets 21,739.13 COMPOUND ENTRY

LamAng, Capital 6,521.74
Lakandula, Capital 5,434.78 Lakambini, Capital 41,242.00
Lakambini, Capital 5,000.00 Other Assets 21,739.13
LaLuna 4,782.61 LamAng, Capital 6,521.74
Lakandula, Capital 5,434.78
Lakambini, Capital 46,242
Cash 46,242 LaLuna, Capital 4,782.61
Cash 46,242.00

5,000/23% = 21,739.13
LamAng, Capital (P21,739.13 x 30%) = 6,521.74
Lakandula, Capital (P21,739.13 x 25%) = 5,434.78
Lakambini, Capital (P21,739.13 x 23%) = 5,000.00
LaLuna, Capital (P21,739.13 x 22%) = 4,782.61

5.5 The partners Macopa, Sineguelas and Ashitaba have capital balances of P300,000,
P450,000 and P200,000 respectively, while profit and loss was divided in the ratio 4:4:2.

On December 1, 2017, Macopa announced his intention to leave the partnership

at the end of the year. During the year the partnership gained a Net Income of P250,000
which was distributed as follows: 5% interest on their individual capital, salaries of P6,000
to Partners Sineguelas and Ashitaba, 4% Bonus on Net income after salaries and interest
on capital was allowed to partner Macopa.

Instruction:
1) Compute for the distribution of Net Income at the end of the year.

2) Give the entry to record the withdrawal of Macopaat the end of the year assuming
a) Macopa cash settlement was P20,000 less than her capital interest and the bonus
method was used.
b) Macopa’s cash settlement was P10,000 more than her capital interest and the
asset revaluation method was used
c) Macopa’s cash settlement was equal to her capital interest.

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 Macopa Sineguelas Ashitaba Total
Capital Capital Capital
P&L 4/10 4/10 2/10
Capital Bal. before Retirement P300,000 P450,000 P200,000 P950,000
Add: Net Income 90,848 104,888 54,264 250,000

Adjusted Capital balances 390,848 553,888 254,264 1,200,000

1) Allocation of Net Income of P250,000

Interest on their capital 5% 15,000 22,500 10,000 47,500

Salaries - 6,000 6,000 12,000
Net income after salaries and interest 15,000 28,500 16,000 59,500
on capital
Bonus (4%) 600 1,140 640 2,380
15,600 29,640 16,640 61,880
Remainder (4:4:3) 75,248 75,248 37,624 188,120

Net Income 90,848 104,888 54,264 250,000

2) Entry

a) Bonus Method (less than capital interest)

Macopa, Capital 390,848

Sineguelas, Capital 13,333
Ashitaba, Capital 6,666
Cash 370,848

Sineguelas (20,000 x 4/6) = 13,333

Ashitaba (20,000 x 2/6) = 6,666

b) Asset Revaluation Method (more than capital interest)

COMPOUND ENTRY
Other Asset 25,000
Macopa, Capital 10,000
Sineguelas, Capital 10,000 Macopa, Capital 390,848
Ashitaba, Capital 5,000 Other Asset 25,000
Sineguelas, Capital 10,000
Macopa, Capital 400,848 Ashitaba, Capital 5,000
Cash 400,848 Cash 400,848

AR = 10,000 / 4/10 = 25,000

Macopa (25,000 x 4/10) = 10,000
Sineguelas (25,000 x 4/10) = 10,000
Ashitaba (25,000 x 2/10) = 5,000

c) Equal to capital interest

Macopa, Capital 390,848

Cash 390,848
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 5.6 The following information was taken from the books of SAMPALOC and SONS
PARTNERSHIP.
Capital Balance Profit & Loss Ratio
Sampaloc, Capital P5,000,000 35%
Kamatchili, Capital 2,500,000 33%
Kaimito, Capital 1,500,000 32%

Kaimito is to withdrew from the partnership by selling 30% of his capital interest
to Sampaloc at 2% more than his capital interest, and will sell 70% of his capital to
Kamatchili at book value. After the withdrawal of Kaimito, the remaining partners will
divide their profit and loss equally.

Instruction:
1. Give the entry to record the retirement of Kaimito.
2. If the remaining partners were to have equal capital interest and share in profit
and loss, how much additional cash should one of the partners invest?

1. Kaimito, Capital 1,500,000

Sampaloc, Capital 450,000
Kamatchili, Capital 1,050,000

Sampaloc (1,500,000 x 30%) = 45,000

Kamatchili (1,500,000 x 70%) = 1,050,000

2. Sampaloc (5,000,000 + 450,000) = 5,450,000

Kamatchili (2,500,000 + 1,050,000) = - 3,550,000
P 1,900,000 – Kamatchili additional cash to invests

5.7 Nilupak, Biko andMaja Blancaare partners with capital balances of P324,300, P207,000
and P158,700. After being a partner for 30 years, Biko decided to withdraw from the
partnership. Upon his withdrawal, assets were revaluated, and Biko’s share was debited
for P27,000.

Instruction:
1. Give the entry to record the revaluation of the other assets
2. Give the entry to record the withdrawal of Biko from the partnership.

1. Nilupak, Capital 27,000

Biko, Capital 27,000
Maja Blanca, Capital 27,000
Other Assets 81,000

AR = 27,000 / 1/3 = 81,000

Nilupak, Capital (81,000 x 1/3) = 27,000
Biko, Capital (81,000 x 1/3) = 27,000
Maja Blanca, Capital (81,000 x 1/3) = 27,000

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2. Biko, Capital 207,000
Nilupak, Capital 27,000
Maja Blanca, Capital 27,000
Other Assets 81,000
Cash 180,000

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