Accounting for Special Transactions (ACG017)

Partnership Dissolution

A. Admission by purchase without revaluation

1. Personal Transaction
2. No gain or loss
3. Total assets and capital will remain unchanged
4. Purchase price given by new partner is ignored.

B. Admission by partner with revaluation

2 steps to determine adjusted capital of all partners after admission

Step 1 – Determine the revaluation whether overvalued or undervalued and distribute using P/L
Step 2 – Transfer Capital of new partner

*Note: If the problem is silent as to what method will be used, use Bonus Method

Examples:
P/L ratio
A, Capital 100,000 60%
B, Capital 200,000 40%

Partner C will be admitted in the partnership.

Situation 1 – Purchased 20% of both partner’s capital by paying P 50,000 (A=P 30,000, B=P 20,000)

Bonus Method
Total
Total Agreed
Contributed Adjustment
Capital
Capital
A 100,000 (20,000) 80,000
B 200,000 (40,000) 160,000
C - 60,000 60,000 20%
Total 300,000 300,000

Partnership Asset Revaluation Method

Paid Difference Capital Interest

P 50,000 (P 10,000) P 60,000
/ .20
(P50,000)
Total
Total Agreed
Contributed Adjustment Adjusted Capital
Capital
Capital
A 100,000 (30,000) 70,000 56,000
B 200,000 (20,000) 180,000 144,000
C - - 50,000 20%
Total 300,000 (P50,000) 250,000 250,000

Situation 2 – Invested cash of P 100,000 to partnership to have an interest of 20%

Bonus Method
Total
Contributed Adjustment Total Agreed Capital
Capital
A 100,000 12,000 60% 112,000
B 200,000 8,000 40% 208,000
C 100,000 (20,000) 80,000 20%
Total 400,000 - 400,000

1
 Partnership Asset Revaluation Method
Invested Total Agreed Capital
P 100,000 / .20 P 500,000

Total
Contributed Adjustment Total Agreed Capital
Capital
A 100,000 60,000 60% 160,000
B 200,000 40,000 40% 240,000
C 100,000 - 100,000 20%
Total 400,000 100,000 500,000

C. Retirement/ Withdrawal

Total interest of the retiring partner

1. Capital Balance (Additional Investment and Withdrawal)

2. Loans/Advances
Loan to Partner (Loans payable of Partnership) – Add
Loan by Partner (Loans Receivable of Partnership) – Deduct
3. Share in Asset Revaluation
4. Share in Profit

Example:
ABC Partnership
Asset P 100,000 Loan, B P 10,000
Loan, A 50,000 A, Capital (20%) 20,000
B, Capital (20%) 50,000
C, Capital (60%) 20,000
Total P 150,000 P 150,000

* Fair Value of Asset is P 120,000

* Partner A will retire from Partnership

* Partnership will pay A P 24,000(inclusive of Loan)

Capital Balance P 70,000 Entry :

Loan Receivable (50,000) A, Capital P 24,000
Share in Asset Cash P 24,000
Revaluation 4,000
Total Interest (A) P 24,000

What if?

Scenario 1 – P 30,000 to Partner A

Scenario 2 – P 20,000 to Partner A

We are going to illustrate how to compute for:

1. Bonus Method

2. Partnership Asset Revaluation Method

1
Solution:

1. Bonus Method

Scenario 1 – P 30,000 to Partner A

P 30,000 payment – P 24,000 total interest = P 6,000 bonus to Partner A

B (2/8) x P 6,000 = P 1,500 deduction C (6/8) x P 6,000 = P 4,500 deduction

Adjustments
Journal Entry Partners B C
P
A, Capital 24,000 Capital Balance 50,000 20,000
Share in Asset
B, Capital 1,500 Revaluation 4,000 12,000
C, Capital 4,500 Bonus to Partner A (1,500) (4,500)
Cash P 30,000 Adjusted Capital P 52,500 P 27,500

Scenario 2 – P 20,000 to Partner A

P 20,000 payment – P 24,000 total interest = P 4,000 bonus to Partner B and C

B (2/8) x P 4,000 = P 1,000 addition C (6/8) x P 4,000 = P 3,000 addition

Adjustments
Journal Entry Partners B C
P
A, Capital 24,000 Capital Balance 50,000 20,000
Cash P 20,000 Share in Asset Revaluation 4,000 12,000
B, Capital 1,000 Bonus to Partner A 1,000 3,000
C, Capital 2,000 Adjusted Capital 55,000 35,000

2. Partnership Asset Revaluation

Excess deficiency
Asset Revaluation =
P/L ratio of the retiring partner

Scenario 1 – P 30,000 to Partner A

P 30,000 payment – P 24,000 total interest = P 6,000 / 20% = P 30,000 (revaluation to Asset)

Adjustments
Journal Entry Partners B C
P
Asset 30,000 Capital Balance 50,000 20,000
Share in Asset
A, Capital P 6,000 Revaluation 4,000 12,000
B, Capital 6,000 Additional revaluation 6,000 18,000
C, Capital 18,000 Adjusted Capital 60,000 50,000
A, Capital 30,000
Cash 30,000

1
Scenario 2 – P 20,000 to Partner A

P 20,000 payment – P 24,000 total interest = P 4,000 / 20% = P 24,000 (Decrease in Asset)

Adjustments
Journal Entry Partners B C
A, Capital (20%) P 4,000 Capital Balance 50,000 20,000
B, Capital (20%) 4,000 Share in Asset Revaluation 4,000 12,000
Deduction due to
C, Capital (60%) 12,000 revaluation (4,000) (12,000)
Asset P 20.000 Adjusted Capital 50,000 20,000
A, Capital 20,000
Cash 20,000

Other Illustrative Problems (Partnership Dissolution)

Problem 1
On December 31, 2020, the Statement of Financial Position of DEL Partnership shows the following data
with profit or loss sharing of 1:3:6:

Cash P5, 000, 000 Total Liabilities P10, 000, 000

Noncash Asset 15, 000, 000 Diane 5, 000, 000
Ellen 3, 000, 000
Liz 2, 000, 000
On January 1, 2021, Ana will be admitted to the new partnership named ADEL Partnership by investing
P4, 000, 000 for 30% capital interest in the new partnership which has total agreed capitalization of P20,
000, 000. What is the new capital balance of Liz upon admission of Ana in ADEL Partnership?

Solution:

*Note: Unlike from the previous illustrations, this problem is quite complex since it is a combination of
Bonus Method and Partnership Asset Revaluation Method.

Total Partnership
Bonus to New Total Agreed
Contributed Asset
Partner Capital
Capital Revaluation
D 5,000,000 600,000 (200,000) 5,400,000
E 3,000,000 1,800,000 (600,000) 4,200,000
Liz 2,000,000 3,600,000 (1,200,000) 4,400,000 Answer
A (New) 4,000,000 2,000,000 6,000,000 30% Interest
Total 14,000,000 6,000,000 - 20,000,000

Problem 2
On December 31, 2016, the Statement of Financial Position of OVE Partnership shows the following data
with profit or loss sharing of 5:3:2:

Cash P10, 000, 000 Total Liabilities P20, 000, 000

Noncash Asset 40, 000, 000 Ona 10, 000, 000
Vina 15, 000, 000
Ena 5, 000, 000
On January 1, 2017, Lina is admitted to the new partnership named LOVE by investing P20, 000, 000 for
50% capital interest in the new partnership. What is the new capital balance of Ena after Lina’s admission
inLOVE Partnership?

1
Solution: (Bonus Method)

Total Contributed Bonus to New Total Agreed

Capital Partner Capital
Ona 10,000,000 (2,500,000) 7,500,000
Vina 15,000,000 (1,500,000) 13,500,000
Ena 5,000,000 (1,000,000) 4,000,000 Answer
Lina (New) 20,000,000 5,000,000 25,000,000 50% Interest
Total 50,000,000 - 50,000,000

Problem 3
On December 31, 2020, the unadjusted Statement of Financial Position of UFC Partnership shows the
following data with profit or loss sharing agreement of 2:3:5:

Total Assets of P100, 000, 000 Total Liabilities P40, 000, 000
Umber 10, 000, 000
Fritz 20, 000, 000
Carol 30, 000, 000
On December 31, 2020, Umber decided to retire from the partnership. However, before the distribution
of cash to Umber, the following data errors were discovered during the pre-retirement audit:
 During 2020, the property, plant and equipment has not be subject to revaluation surplus by P15,
000, 000.
 The 2020 net income is overstated by P5, 000, 000.
After the adjustment, Umber received retirement pay of P15, 000, 000 for his capital interest.

What is the capital balance of Fritz after the retirement of Umber?

Solution:

Total Umber Fritz Carol

Unadjusted Capital 60,000,000 10,000,000 20,000,000 30,000,000
Adjustment 10,000,000 2,000,000 3,000,000 5,000,000
Adjusted Capital 70,000,000 12,000,000 23,000,000 35,000,000
Bonus to retiring Partner 3,000,000 (1,125,000)
15,000,000 21,875,000
3,000,000 x 3/8 = P 1,125,000 deduction to Fritz