M3C4 – PARTNERSHIP DISSOLUTION (ASSET REVALUATION & BONUS)

ACCOUNTING PROCEDURES JUST BEFORE a.

DISSOLUTION Land 262,500
Alex, Capital 105,000
With the change in ownership, it is as if a “new” Amado, Capital 157,500
partnership is created hence all adjustments and
revaluation of the existing partnership assets should be Adjust for the undervaluation of land:
made before the new association of partners is to take Alex (400,000/1,000,000*262,500) = 105,000
over: Amado (600,000/1,000,000*262,500) = 157,500

1. Update the capital accounts of the existing

partners as of dissolution date by revaluing the b.
partnership assets, determining the profit share Income and Expense
300,000
of the partners from the last statement of Sum
financial position to dissolution date, and Alex, Drawing 120,000
closing their drawing accounts. Amado,
180,000
2. If the dissolution contemplated upon was not Drawing
provided for in the articles, the terms and
To record profit share of partners based on the capital
conditions for the dissolution should be contributions ratio 4:6, respectively
ascertained from the partners. Alex (300,000*.40) = 120,000
3. Record the dissolution or change in ownership Amado (300,000*.60) = 180,000
and revise the partners’ equity.

If the partners’ equity is given just before c.

dissolution without mention of a need to revalue assets Alex, Drawing 25,000
or record profit share, it is understood that the capital Amado, Drawing 25,000
accounts have already been updated and therefore Alex, Capital 25,000
ready for dissolution. Amado, Capital 25,000

To record cash withdrawals of 25,000 for each partner

for the first quarter
ARTICLES OF CO-PARTNERSHIP REDRAWN

It is important to redraw the Articles of Co-

Partnership upon distribution since some provisions will Alex, Drawing 95,000
be affected such as: the names of the partners and their Amado, Drawing 155,000
Alex, Capital 95,000
contributions, manner of management, duties and
Amado, Capital 155,000
responsibilities of each partner, their profit-sharing
ratio, and manner of dissolving or liquidating the
To close the drawing accounts: profit share less
partnership, to name a few. regular drawings made by the partners
Alex (120,000-25,000) = 95,000
Amado (180,000-25000) = 155,000
UPDATING PARTNERS’ EQUITY BEFORE DISSOLUTION

Assume that Alex and Amado of AA Tours and At dissolution date the updated partners’ capital
Travel decide to dissolve their partnership and admit balances are:
Adrian as a new partner on March 31. The following Alex, Capital
were agreed by the partners: (400,000+105,000+95,000) = 600,000 or
(400,000+105,000+120,000-25,000)= 600,000
a. Revalue the land by ₱262,500
b. Distribute the profit reported by the accountant Amado, Capital
for the first quarter amounting to ₱300,0000 (600,000+157,000+155,000) = 912,000 or
(600,000+157,000+180,000-25,000)= 912,000
Additionally, cash withdrawals made during the
first quarter of the year amounts to ₱25,000 for each
partner. As of January 1, three months before
dissolution date, records show their capital accounts as
ADMISSION OF A NEW PARTNER
₱400,000 for Alex, and ₱600,000 for Amado. The
articles of co-partnership provided profit distribution From the legal point of view, a new partner
based on capital contribution. The accountant prepared cannot be admitted without the unanimous consent of
the following entries:
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 M3C4 – PARTNERSHIP DISSOLUTION (ASSET REVALUATION & BONUS)

all partners. Admission of a new partner may take place Lucas did not invest in the firm, total partners’ equity
in one or two ways: should still be the same after admission.

1) Purchasing an interest from one or more

existing partners
CASE 2: Transfer of Interest is Not Equal to the Amount
2) Investing cash or other assets in the partnership
Paid

Suppose in the previous case, Lucas pays 15,000

PURCHASING AN INTEREST FROM ONE OR MORE for half of Sarah’s interest of 10,000?
EXISTING PARTNERS

A new partner may purchase a partnership

interest from one or more existing partners. In this case,
a capital account is set up for the new partner by
transferring interest equal to the portion purchased
from the existing partner(s) and the new partner.
Partnership assets are not affected.
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CASE 1: Transfer of Interest is Equal to the Amount
Paid
Lucas paid Sarah 10,000 to purchase half of her
interest in the retail business owned by Angel and Sarah
whose capital balances are 30,000 and 20,000. Angel
and Sarah share profits and losses 3/5 and 2/5. Observe
the following:
Analysis will still be the same as in CASE 1. It is
emphasized that in admitting a new partner by
purchase, the payment does not affect the partnership
assets since the amount paid goes to the selling partner.
It is Sarah who will recognize either a personal gain or
personal loss. In this case, Sarah recognizes a personal
gain of 5,000. Record only a transfer of interest from
the selling partner to the buying partners. Entry for
CASE 1 or CASE 2 will be:
Sarah, Capital 10,000
Lucas, Capital 10,000
Admission of Lucas as a new partner with the
purchase of half of Sarah’s interest
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ASSET REVLUATION

When the current values of the partnership

The analysis will affect the following accounts in assets are greater/lesser than the recorded values
this manner: (books values), the partners may agree to revalue the
1) The payment goes to Sarah, not the assets. Asset revaluation is a requirement to update
partnership. Partnership assets will not change. capital accounts of partners before admitting a new
2) The purchase requires a transfer of capital from partner. Upward or downward adjustment of
Sarah to Lucas for 10,000. partnership assets should affect only the existing
3) Total partners’ equity 50,000 will not change partners. If partnership assets are undervalued, an
although there will be a change in the upward adjustment should be made to increase assets
composition of the partners’ equity. and partners’ equity. For asset impairment, if the
current fair values (less cost to dispose) of the assets
Existing Transfer of Revised are lower than their book values [overvalued], a
Equity Interest Equity downward adjustment should be made to decrease the
Angel, assets with a corresponding decrease in current
30,000 30,000
Capital partners’ capital
Sarah,
20,000 (10,000) 10,000
Capital
Lucas,
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Capital
Total CASE 3: Asset Revaluation (Upward Adjustment)
50,000 - 50,000
Equity
Refer to CASE 2. Lucas agrees to pay 15,000 for half of
Sarah’s interest but the assets must first be revalued.
Fundamental rule in accounting for the basic
How do we arrive at the revaluation? If the amount for
elements should always by applied: The relationship of
revaluation is not given, it can be inferred from the
balances expressed in an accounting equation between
amount the new partner is willing to give.
the assets, liabilities, and partners’ equity must always
be maintained. Net assets = Partners’ Equity. Since
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 M3C4 – PARTNERSHIP DISSOLUTION (ASSET REVALUATION & BONUS)

Assuming that land is the asset to be revalued,

two (2) entries will be required:
The analysis will affect the following accounts in this
manner: Land 25,000
Angel, Capital 15,000
1) Since the Payment is higher by 5,000 than the
Sarah, Capital 10,000
book value of the interest being purchased of To adjust the land based on the agreed value
10,000, the implication is that the assets of the fixed by the partners.
partnership are undervalued. Asset revaluation
will be based on the amount that the new
partner is willing to pay, thus:

Amount Lucas is willing to pay for

15,000 Sarah, Capital 15,000
50% of Sarah’s Equity
Lucas, Capital 15,000
Sarah’s Equity should be
30,000 Admission of Lucas as a new partner with the
(15,000/50%)
purchase of half of Sarah’s interest
Sarah’s Equity per books 20,000
Share of Sarah in the revaluation 10,000
Revaluation of assets cannot be implied in admission
Total asset revaluation (10,000/40% by purchase. This must be agreed upon by partners and
25,000 specifically mentioned in the problem
equity of Sarah)
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2) Adjust the existing partners’ equity by 25,000.
Partners’ equity will be 75,000 after the
revaluation with Sarah’s adjusted capital as REVISED PROFIT AND LOSS RATIO
30,000. This will now be the basis for
It is necessary that the articles of co-partnership
transferring capital to Lucas. Since the amount
is redrawn in consideration of the admission of a new
to be paid 15,000 was used as a basis for
partner. Likewise, a new agreement as to managerial
revaluation, it will also be the amount for the
functions, division of profit and loss, and the inclusion of
transfer of interest.
the new partner are to be considered.
3) Partners’ Equity after the revaluation will not
change anymore in recognizing transfer of
capital from the selling partner to the buying
partner. Thus: In the event that the revised profit and loss
ratio was not considered by the partners, the current
Existing Partners’ profit and loss ratio should be revised accordingly based
Asset
Partners’ Equity After on the percent of interest the existing partner is selling
Revaluation
Equity Revaluation to the buying partner. If there is no profit or loss
(60%) agreement from the start of the partnership operation,
Angel 30,000 45,000
15,000 distribution of profit and loss after the dissolution shall
be based on adjusted capital contributions. In all the
(60%)
Sarah 20,000 30,000 above cases, it can be inferred that with the half of the
10,000 interest purchased from Sarah, half of her profit ratio is
Lucas also purchased:
TOTAL 50,000 25,000 75,000 Original P Transfer of Revised P
Continuation>>> and L Interest and L
Angel 60% 60%
Transfer of Revised
Sarah 40% (20%) 20%
Interest Partners’ Equity
Lucas 20% 20%
Angel 45,000 TOTAL 100% 100%
Sarah (15,000) 15,000
Lucas 15,000 15,000
TOTAL 75,000

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 M3C4 – PARTNERSHIP DISSOLUTION (ASSET REVALUATION & BONUS)

3) New partner gets a 33.33% interest in the total

partners equity of 75,000
INTEREST OVER ASSETS AGAINST INTEREST OVER
4) Entry to record the investment will be:
PROFIT
Cash 25,000
The equity or capital account represents interest of a
Lucas, Capital 25,000
partner over partnership assets. Interest over profit may
Lucas invests cash for a 33.33% interest
also be based on the capital account if that is the
agreement. This is provided by law and was explained in
the preceding chapter: if there is no profit agreement,
profit or loss share should be based on what partners
CASE 5: New Partner’s Contribution is Equal to His
contributed. The point is, interest over profit may not
Capital Credit. Current Partners Agree to Revalue the
always be based on the capital contribution as there are
Assets
other factors which should be considered in
determining fair and equitable distribution of profit. Lucas will invest 30,000 cash for 30% interest in
the net assets of the partnership. Partnership assets
should be revalued first by 20,000

1) Partnership assets will increase twice: for

INVESTING IN A PARTNERSHIP revaluation and for cash investment.
2) Asset revaluation should be recorded first
A new partner may invest assets in the existing before admitting the new partner. It should be
partnership. The following rules should be applied: based on the agreed profit ratio for the existing
1) Since the new partner is contributing to the partners or the capital ratio if there is no agreed
partnership, the transaction is between the new profit ratio.
partner and the partnership 3) New partners’ equity is equal to what was
2) Contribution increases the partnership assets invested.
and the partners’ equity
Asset
Existing Equity
Revaluation
Angel 30,000 12,000
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Lucas
CASE 4: New Partner’s Investment is Equal to His
TOTAL 50,000 20,000
Capital Credit, Total Contributions Equal to Agreed or
Continuation>>>
Revised Equity
New
Assume that Lucas will invest 25,000 cash and Revised Equity
Contribution
will be given a 1/3 interest in the partnership agreed Angel 42,000
equity of 75,000. Sarah 28,000
Lucas 30,000 30,000
TOTAL 30,000 100,000
The analysis will affect the following accounts in
this manner:
Lucas Capital will be credited for 30% based on total
1) Partnership assets and partners’ equity will agreed or revised equity of 100,000.
increase by 25,000, thus:

Existing New Revised

Equity Contribution Equity Assuming land is to be revalued, two (2) entries will be
prepared:
Angel 30,000 30,000
Sarah 20,000 20,000 Land 20,000
Lucas 25,000 25,000 Angel, Capital 12,000
Sarah, Capital 8,000
TOTAL 50,000 25,000 75,000 To adjust the land based on contributed capital
ratio of the partners
2) Total contributions will be equal to total agreed
Cash 30,000
partners’ equity
Lucas, Capital 30,000

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 M3C4 – PARTNERSHIP DISSOLUTION (ASSET REVALUATION & BONUS)

Lucas invested cash for a 30% interest over the TOTAL 80,000
partnership
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Only one (1) entry is required:

Cash 30,000
BONUS Angel, Capital 6,000
Sarah, Capital 4,000
A bonus from the new partner may be Lucas, Capital 20,000
required by the existing partners as a privilege of Lucas invested cash for a 25% interest with bonus
joining the firm when current value of the partnership given to Angel and Sarah
is more than the stated amounts of equity of the
existing partners. The procedure is the same as in a
partnership formation where contribution of the new
partner is higher than the amount credited to the CASE 7: Capital Credit to New Partner is Higher Than
existing partners’ capital accounts. His Actual Contribution. Bonus is Given to the New
Partner

On the other hand, a bonus from the existing Lucas Contributed 30,000 for a 50% interest.
partners may be given to the new partner to entice the Bonus is given to the new partner.
new partner who has exceptional talents. The capital
credit of the new partner sill be higher than the amount
of contribution. The excess capital is taken from the Analysis and Computation:
capital of the existing partners and given to the new
1. Partnership assets will increase to 80,000 with
partner.
the new contribution of 30,000.
2. Total contribution should be equal to total
agreed equity.
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CASE 6: Capital Credit for the New Partner is Less Than computed as follows: 80,000*.5. Since this is
Actual Contribution. Bonus Capital for the Existing greater than his actual contribution, bonus
Partners capital is given to the new partner.
4. New partner’s equity will increase twice: for
Lucas will invest 30,000 cash for 25% interest in actual contribution and the bonus capital from
the net assets of the partnership. A bonus of 10,000 will the existing partners.
be given to the existing partners.
New
Existing Equity
1) Partnership Assets and Partners’ Equity will Contribution
increase because of the cash investment. Angel 30,000
2) Total contributed capital should be equal to Sarah 20,000
total agreed or revised equity. Lucas 30,000
3) Actual investment is 30,000 but new partner TOTAL 50,000 30,000
will be credited only for 20,000 based on total
agreed equity of 80,000*.25.
Bonus Revised Equity
4) A bonus capital will be given to the existing
Angel (6,000) 24,000
partners.
Sarah (4,000) 16,000
New Lucas 10,000 40,000
Existing Equity TOTAL 80,000
Contribution
Angel 30,000
Sarah 20,000
Only one (1) entry is required:
Lucas 30,000
TOTAL 50,000 30,000 Cash 30,000
Continuation>>> Angel, Capital 6,000
Sarah, Capital 4,000
Bonus Revised Equity
Lucas, Capital 40,000
Angel 6,000 36,000
To record cash contribution of Lucas and bonus
Sarah 4,000 24,000 from Angel and Sarah for ¼ equity
Lucas (10,000) 20,000
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 M3C4 – PARTNERSHIP DISSOLUTION (ASSET REVALUATION & BONUS)

investment of Lucas of 15,000 and

divide this by 15% interest to be
credited to him to come up with the
ASSET REVALUATTION OR BONUS MAY BE IMPLIED total agreed equity 100,000. Compare
100,000 total agreed equity against
Analyzing problems in admission by investment could total asset contributions of 65,000, the
be simple if asset revaluation or bonus is specified. difference represents asset revaluation.
What is problem does not specify that there should be
asset revaluation or bonus? If not given, its cannot 2) BONUS TO EXISTING PARTNERS
always be inferred that there is none. Bonus or asset  Assume total contributed capital is also
revaluation may be implied based on the following the total agreed equity. Lucas will be
rules: credited 15% interest of total agreed
1. There is no asset revaluation is total agreed equity of 65,000, which is 9,750.
equity is the same as total contributed capital, Compare this against his actual
no bonus if the new partner’s capital credit is investment of 15,000. Excess
the same as actual contribution made contribution is credited as bonus to
2. If total contributed capital is not equal to total existing partners
agreed equity, there is asset revaluation.
a) The assets are undervalued requiring
an upward adjustment when total CASE 8.1: Asset Revaluation (Upward Adjustment)
contributed capital is lesser than total Method. Total Contributions is Less Than Total Agreed
agreed equity. Equity
b) The assets are overvalued and will
Contributed Agreed Asset
require a downward adjustment when
Capital Equity Revaluation
total contributed capital is greater that Angel 30,000 (.6) 21,000
total agreed equity. Remember that Sarah 20,000 (.4) 14,000
total contributed capital represents Lucas 15,000 = 15,000
asset contributions, so if it is higher TOTAL 65,000 < 100,000 35,000
than agreed equity, it should be
decreased. [Asset Impairment].
3. If total agreed equity is the same as total  Total agreed equity is based on new partner’s
contributed capital but the new partner’s contribution and agreed capital ratio
capital credit is not the same as actual (15,000/.15 = 100,000)
contribution, there is bonus.  Since total agreed equity is higher than
a) Bonus is for the new partner if the contributed capital, there is asset revaluation.
capital credit for the new partner is Their equity will increase by a total of 35,000,
higher than the actual contribution and then divided based on their profit and loss
given. ratio.
b) Bonus is for existing partners if the
capital credit for the new partner is
lesser than the actual contribution Assets will increase twice: 15,000 for
given. contribution and 35 for asset revaluation. This will
require two (2) certain entries:

Land 35,000
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CASE 8: Asset Revaluation & Bonus to Existing Partners Sarah, Capital 14,000
To adjust the land based on the agreed value
Lucas will invest 15,000 cash and will be given a fixed by the partners
15% interest in the assets and in the profits of the
business. Cash 15,000
Lucas, Capital 15,000
This case may be viewed in two (2) ways: Lucas invested cash for a 15% interest over the
1) ASSET REVALUATION partnership
 Since asset revaluation belongs to
existing partners, use the actual
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 M3C4 – PARTNERSHIP DISSOLUTION (ASSET REVALUATION & BONUS)

TOTAL 65,000 < 60,000 (5,000)

CASE 8.1: Bonus Method. Total Contributions Is Also

the Total Agree Equity, but the Contribution of the  Total agreed equity is based on new partner’s
New Partner Is Greater Than His Capital Credit contribution and capital ratio (15,000/.25 =
60,000)
Contributed Agreed
Bonus  Since total agreed equity is lower than
Capital Equity
contributed capital, there is asset impairment.
Angel 30,000 (.6) 3,150
Equity of existing partners will decrease by
Sarah 20,000 (.4) 2,100
5,000 based on their profit and loss ratio
Lucas 15,000 > 9,750 (5,250)
TOTAL 65,000 = 65,000  Note the equality of the new partners’
contribution to his capital credit

 Since total agreed equity is equal to total

contributions, there is no asset revaluation. Assume that the land is overstated. This will
 Since Lucas will be credited for 9,750 require two (2) entries:
(65,000*.15) which is lesser than his actual
contribution, bonus capital is given to the Angel, Capital 3,000
existing partners based on their old profit and Sarah, Capital 2,000
loss ratio. Land 5,000
To adjust the land based on the agreed value
fixed by the partners
CASE 9: Asset Impairment & Bonus for New Partner
Cash 15,000
Lucas will contribute cash of 15,000 for a 25% Lucas, Capital 15,000
interest in the assets and profits of the partnership. Lucas invested cash for a 15% interest over the
partnership
This may be viewed in two (2) ways:

1) ASSET IMPAIRMENT
 Asset impairment is an adjustment for
the existing partners only. Since the
15,000 contribution of Lucas represents
the 25% interest over the partnership
assets, total agreed equity will be based
on this actual contribution and capital
credit: (15,000/.25 = 60,000). Compare
total agreed equity of 60,000 against
total contributed capital which is
65,000. The difference can be viewed as
asset impairment.
Not that in Cases 8 & 9 first view, since the new
partner’s capital credit is the same as his actual
contribution, there is no bonus. Recall that total agreed
equity was computed based on his actual contribution.
Since asset revaluation will only affect existing partners,
it is safe to assume that whatever is the actual
investment of the new partner is also his capital credit.
CASE 9.2: Bonus Method. Total Actual Contributions Is
the Same as Agreed Equity but the Investment Of the
New Partner Is Lesser Than His Capital Credit

2) BONUS FOR NEW PARTNER Contributed Agreed

Bonus
 View total contributed capital as also Capital Equity
the total agreed equity. Compute Angel 30,000 (.6) (750)
capital credit of Lucas based on this: Sarah 20,000 (.4) (500)
(65,000*.25 = 16,250). His actual Lucas 15,000 < 16,250
TOTAL 65,000 = 65,000
contribution is lower by 1,250.

 Agreed equity is equal to total contributed

CASE 9.1: Asset Revaluation Method. Total Agreed capital, there is no asset revaluation
Equity is Lesser Than Total Actual Contributions  Capital credit for Lucas, (65,000*.25) 16,250, is
greater than actual contribution. Bonus from
Contributed Agreed Asset
the existing partners
Capital Equity Impairment
Angel 30,000 (.6) (3,000)
Sarah 20,000 (.4) (2,000)
Lucas 15,000 = 15,000
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 M3C4 – PARTNERSHIP DISSOLUTION (ASSET REVALUATION & BONUS)

Lucas, Capital 30,000

To record cash contribution of Lucas for a 25%
equity and bonus for Angel and Sarah
Only one (1) entry is needed: ➴➵➶➴➵➶➴➵➶➴➵➶➴➵➶➴➵➶➴➵➶➴

Cash 15,000
Angel, Capital 750
Sarah, Capital 500
Lucas, Capital 16,250
Lucas invested cash for a 15% interest over the
partnership with a bonus given by Angel and
Sarah

CASE 10: Asset Revaluation & Bonus

Lucas contributed 40,000 for ¼ interest. Agreed

total partners’ equity should be 120,000.

Analysis and computation:

a) Total contributed capital is 90,000, but if agreed

total partners’ equity is 120,000, there is asset
revaluation (upward adjustment) of 30,000.
b) Lucas will be credited only for 30,000 computed
as follows: 120,000*.25 = 30,000. Since his
actual contribution is higher by 10,000, this
excess contribution will be credited as a bonus
capital to the existing partners
c) Assets and Partners’ Equity will increase twice:
asset revaluation and investment of Lucas

Contributions Agreed Equity

Angel 30,000
Sarah 20,000
Lucas 40,000 > 30,000
TOTAL 90,000 < 120,000
Continuation>>>

Asset
Bonus
Revaluation
Angel 18,000 (.6) 6,000
Sarah 12,000 (.4) 4,000
Lucas (10,000)
TOTAL 30,000

Entries:

Asset (such as land) 30,000

Angel, Capital 18,000
Sarah, Capital 12,000
Upward adjustment for asset revaluation

Cash 40,000
Angel, Capital 6,000
Sarah, Capital 4,000