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Chapter 3
Partnership Dissolution

NAME: Date:
Professor: Section: Score:

QUIZ
1. Which of the following transactions or events does not affect the total assets of a partnership?
a. An old partner retires and his capital balance is settled by the partnership at a lower amount.
b. An incoming partner purchases interest from an existing partner.
c. A partnership is dissolved and its assets and liabilities are revalued to fair value.
d. A new partner is admitted in a partnership when he invested noncash asset to the partnership.

Fact pattern for the next four independent questions:

Partners A and B had the following profit-sharing percentages and capital balances: A (40%) ₱300,000
and B (60%) ₱500,000.

2. C was admitted to the partnership when he purchased half of A’s capital interest for ₱200,000. How
much is A’s capital balance after the admission of C?
a. 100,000 c. 150,000
b. 125,000 d. 200,000

3. C was admitted to the partnership when he purchased 20% of A’s and B’s capital interests for
₱200,000. If the book value method was used to record C’s admission, how much would be the
capital balance of A after C’s admission?
a. 180,000 b. 220,000 c. 240,000 d. 280,000

4. C was admitted to the partnership when he invested ₱150,000 cash for a 20% interest in the
partnership. The partnership’s net assets are fairly valued on C’s admission date. The partners used
the bonus method to record C’s admission. How much is the capital balance of A after the
admission of C?
a. 304,000 b. 296,000 c. 288,000 d. 284,000

5. C was admitted to the partnership when he invested ₱250,000 cash for a 20% interest in the
partnership. Immediately prior to C’s admission, the carrying amounts and fair values of the assets
and liabilities of the partnership are as follows:
Carrying
Fair value
amount
Cash 100,000 100,000
Equipment 750,000 870,000
Accounts payable 50,000 50,000
Provision for pending
litigation - 20,000
A, Capital (40%) 300,000 N/A
B, Capital (60%) 500,000 N/A

How much is the capital balance of B after the admission of C?

a. 572,000 b. 582,400 c. 548,400 d. 594,200
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6. Dunn and Grey are partners with capital account balances of ₱60,000 and ₱90,000, respectively.
They agree to admit Zorn as a partner with a one-third interest in capital and profits for an
investment of ₱100,000 after revaluing the assets of Dunn and Grey. Goodwill to the original
partners should be (use PFRSs in answering this problem)
a. 0. b. 33,333. c. 50,000. d. 66,667.

7. The statement of financial position of AB Partnership as of December 31, 20x1 is as follows:

Cash 789,038 Payable to B 37,000
Receivable from A 49,000 A, Capital (30%) 689,173
Equipment 1,698,962 B, Capital (70%) 1,810,827
Totals 2,537,000 Totals 2,537,000

On Jan. 1, 20x2, the partners decide to admit C as a new partner with a one-third interest in the net
assets and profits of the partnership. The partnership’s assets and liabilities as of this date approximate
their fair values. If no bonus shall be allowed, how much should C invest into the partnership?
a. 1,140,000 b. 1,250,000 c. 1,390,000 d. 1,400,000

8. Partner C decided to retire when the partners’ capital balances were: A, capital, ₱600,000; B, capital,
₱600,000; and C, capital, ₱400,000. It was agreed that Partner C is to take the partnership’s fully
depreciated equipment with a fair value of ₱24,000 and a note for the balance of his interest. The
historical cost of the equipment is ₱36,000. The partners share in profits and losses equally. Which
of the following statements is correct?
a. A’s capital balance after the retirement of C exceeds that of B’s.
b. B’s capital balance after the retirement of C exceeds that of A’s.
c. A’s capital balance is decreased due to C’s retirement.
d. A and B would have equal capital balances after the retirement of C.

9. C, D and E are partners with capital balances of ₱300,000 and ₱200,000, respectively, on December
31, 20x1. Profits are shared equally. E wishes to withdraw and it is agreed that she is to take certain
furniture and fixtures with second hand value of ₱50,000 and a note for the balance of her interest.
The furniture and fixtures are carried in the books at ₱65,000. Brand new, the furniture and fixtures
may cost ₱80,000. E’s acquisition of the second-hand furniture will result to:
a. Reduction in capital of ₱15,000 each for C and D.
b. Reduction in capital of ₱10,000 for E.
c. Reduction in capital of ₱5,000 each for C and D and E.
d. Reduction in capital of ₱7,500 each for C and D.

10. Jay & Kay partnership’s balance sheet at December 31, 2003, reported the following:
Total assets 100,000
Total liabilities 20,000
Jay, capital 40,000
Kay, capital 40,000
On January 2, 2004, Jay and Kay dissolved their partnership and transferred all the assets and liabilities
to a newly formed corporation. At the date of incorporation, the fair value of the net assets was ₱12,000
more than the carrying amount on the partnership’s books. Jay and Kay were each issued 5,000 shares
of the corporation’s ₱1 par value common stock. Immediately following incorporation, additional paid-
in capital in excess of par (share premium) should be credited for
a. 68,000. b. 70,000. c. 77,000. d. 82,000.
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“So do not fear, for I am with you; do not be dismayed, for I am your God. I will strengthen you and help you; I will uphold you with
my righteous right hand.” (Isaiah 41:10)
- END –
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SOLUTIONS:
1. B

2. C (300,000 x ½) = 150,000

3. C
Date A, Capital (300,000 x 20%) 60,000
B, Capital (500,000 x 20%) 100,000
C, Capital 160,000

300,000 before admission – 60,000 debit = 240,000 after admission

4. D
A B C Total
Capital before admission 300,000 500,000 800,000
C's investment 150,000 150,000
Bonus to C (16,000) (24,000) 40,000 -
Capital after admission 284,000 476,000 190,000 950,000

* Net assets before admission 800,000

Investment of C 150,000
Net assets after admission 950,000
C's interest in net assets 20%
C's capital credit 190,000
Investment of C 150,000
Bonus to C 40,000

5. A
Solution:
Increase/
Carrying amount Fair value
(Decrease)
Cash 100,000 100,000 -
Equipment 750,000 870,000 120,000
Accounts payable 50,000 50,000 -
Provision - 20,000 20,000

Date Equipment 120,000

Provision for warranty obligation 20,000
A, Capital (100,000 x 40%) 40,000
B, Capital (100,000 x 60%) 60,000

A B C Total
Unadjusted capital 300,000 500,000 800,000
Adjustment 40,000 60,000 100,000
Capital before admission 340,000 560,000 - 900,000
C's investment 250,000 250,000
Bonus to A and B 8,000 12,000 (20,000) -
Capital after admission 348,000 572,000 230,000 1,150,000
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* Total capital, adjusted 900,000

Investment of C 250,000
Net assets after admission 1,150,000
C's interest in net assets 20%
C's capital credit 230,000
Investment of C 250,000
Bonus to A and B 20,000

6. A Recognition of goodwill from non-business combination transactions is prohibited under PFRSs.

7. B [(689,173 + 1,810,827) ÷ 2/3] x 1/3 = 1,250,000

8. D
Solution:
A B C Total
Before retirement 600,000 600,000 400,000 1,600,000
Revaluation of equipt.
(24K ÷ 3) 8,000 8,000 8,000 24,000
Adjusted 608,000 608,000 408,000 1,624,000
Debit for FV of equipment (24,000) (24,000)
Balance – note (384,000) (384,000)
After retirement 608,000 608,000 - 1,216,000

9. C 65,000 – 50,000 = 15,000 impairment loss ÷ 3 = 5,000 reduction to each of the partners’ capital
accounts

10. D (40K + 40K + 12K) = 92K fair value of net assets – [(5,000 x 2) x 1 = 10,000 aggregate par value of shares
issued] = 82,000 credit to share premium