Partnership Dissolution

Learning Objectives
1. Define partnership dissolution and identify the
conditions give rise to it
2. Understand the accounting procedures to
record the admission of new partner by
purchase
3. Understand the accounting procedures to
record the admission of a new partner by
investment
Partnership Dissolution
• Change in the relation of the partners caused by any
partner ceasing to be associated in the carrying out of
the business (Article 1825, Civil Code of the
Philippines)
• Termination of the life of an existing partnership
• Dissolution of an old partnership may be followed by:
1. The formation of a new partnership. This is
known as dissolution by change in ownership
structure. The new partnership continues the
business activities of the dissolved partnership
without interruption.
Partnership Dissolution
2. Liquidation. This refers to the termination of the
business activities carried on by the partnership
and the winding up of partnership affairs
preparatory to going out of business.

Note: Dissolution does not always result to liquidation

although liquidation is always preceded by dissolution.
Conditions Resulting to
Partnership Dissolution
• The following conditions will result to
partnership dissolution by a change in
ownership structure:
1. Admission of new partner
2. Retirement or withdrawal of a partner
3. Death, incapacity or bankruptcy of a
partner
4. Incorporation of a partnership
Admission of a New Partner
Accounting problems:
1. 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.
2. Correction of accounting errors in prior
periods like overstatement or
understatement of inventories, excessive
depreciation charges and failure to provide
adequately for doubtful accounts.
Admission of a New Partner
3. Revaluation of accounts which may call for
the restatement of the existing assets of
the partnership to appraised or fair market
values and recognition of unrecorded
liabilities of the firm. All adjustments to the
accounts give rise to profit or loss; such
adjustments are recorded in the
partnership books as increase or decrease
in capital shared according to the partners’
profit or loss ratio.
4. Closing of the partnership books.
Types of Admission of a
New Partner
A new partner may be admitted into a
partnership by:
1. Purchase of interest from one or more of the
original (old) partners; or
2. Investment or asset contributions to the
partnership
Admission by Purchase
• A new partner may be admitted in an existing
partnership by purchasing a capital equity interest
directly from one or more of the old partners.
• Terms such as purchases, sells, pays, bought, sold
and transferred indicate admission by purchase.
• Personal transaction between the selling partner
and the buying partner.
• The only entry required on the partnership books is
the recording of the transfer of capital account of
the selling partner to that of the buying partner.
Admission by Purchase
• The amount of capital transferred will be
equal to the book value of the interest sold
regardless of the amount paid.
• The proforma entry is:
(Name of seller), Capital xxx
(Name of buyer), Capital xxx
Admission by Purchase
• The purchase price of the interest sold to the
new partner may be:
1. equal to the book value of interest sold
2. less than the book value of interest sold
3. more than the book value of interest sold
• The gain or loss is a personal gain or loss of
the selling partner and not of the partnership.
• No gain or loss is recognized in the
partnership books.
Illustrative Problem A
• Coloma and Claudio are partners with capital
balances of P100,000 and P50,000,
respectively. They share profits or losses
equally. Cordero is a new partner.
 Case 1a – Purchase at book value from
one partner only. Cordero purchases a 1/5
interest from Coloma by paying P20,000.
Coloma, Capital 20,000
Cordero, Capital 20,000
P100,000 x 1/5 = 20,000
Illustrative Problem A
 Case 1b – Purchase at book value from
more than one partner. Cordero purchases
a 1/5 interest from old partners by paying
P30,000.

Coloma, Capital 20,000

Claudio, Capital 10,000
Cordero, Capital 30,000
P100,000 x 1/5 = 20,000
P50,000 x 1/5 = 10,000
Illustrative Problem A
 Case 2 – Purchase at less than book
value. Cordero purchases a 1/5 interest
from old partners by paying P25,000.

Coloma, Capital 20,000

Claudio, Capital 10,000
Cordero, Capital 30,000
P100,000 x 1/5 = 20,000
P50,000 x 1/5 = 10,000
Illustrative Problem A
 Case 3 – Purchase at more than book
value. Cordero pays P40,000 for a 1/5
interest of the old partners.

Coloma, Capital 20,000

Claudio, Capital 10,000
Cordero, Capital 30,000
P100,000 x 1/5 = 20,000
P50,000 x 1/5 = 10,000
Asset Revaluation Upon
Admission of a New Partner by
Purchase
Compute the new partnership capital using the basis of the amount
Step 1 to be paid by the incoming partner and his fraction of interest.

Deduct the capital of the old partnership from the capital of the new
Step 2 partnership. The difference is the asset revaluation.

Allocate the asset revaluation among the old partners in accordance

Step 3 with their residual profit and loss sharing ratio.
Asset Revaluation Upon
Admission of a New Partner by
Purchase
Add the share of each partner on the asset revaluation to their
Step 4 capital balances after the asset revaluation.

Compute the amount of interest transferred by the old partners to

Step 5 the new partner based on their capital after the asset revaluation.

Prepare entry to record the admission of the new partner.

Step 6
Illustrative Problem A
Coloma and Claudio are partners with capital
balances of P100,000 and P50,000, respectively.
They share profits or losses equally. Cordero is a
new partner who purchases a 1/5 interest from
Coloma and Claudio paying P40,000. However,
before the admission of Cordero, partnership assets
are to be revalued using as basis the amount to be
paid by Cordero.
 STEP 1. New partnership capital = P40,000 ÷
1/5 = P200,000.
 STEP 2. Asset revaluation = P200,000 –
P150,000 = P50,000.
Illustrative Problem A
 STEP 3. The allocation of the amount of the
asset revaluation among the old partners is
as follows: P50,000 ÷ 2 partners = P25,000
per partner.
 STEP 4. The capital balances of the old
partners after asset revaluation is equal to
their old capital balances plus their share on
asset revaluation.
Coloma Claudio
Capital balances before revaluation P100,000 P50,000
Share on asset revaluation 25,000 25,000
Capital balances after revaluation P125,000 P75,000
Illustrative Problem A
 STEP 5. The amount of interest transferred by the
old partners to the new partner based on the new
capital balances (capital balances after revaluation)
Coloma Claudio
Capital balances after revaluation P125,000 P75,000
Interest transferred 1/5 1/5
Capital transferred to Cordero P25,000 P15,000

 STEP 6. Journal entry

Asset 50,000
Coloma, Capital 25,000
Claudio, Capital 25,000
Illustrative Problem A
 STEP 6. Journal entry (Cont’d)

Coloma, Capital 25,000

Claudio, Capital 15,000
Cordero, Capital 40,000

Capital balances after the admission of Cordero shall be:

Coloma (P100,000 + P25,000 — P25,000) P100,000
Claudio (P50,000 + P25,000 — P15,000) 60,000
Cordero 40,000
Admission by Investment
• Transaction between the original partnership
and the new partner
• The use of the terms like invests and
contributes represents admission of a new
partner by investment
• Increases the total assets and the total capital
of the partnership
• Entry depends upon the capital interest of
credited to the partners’ accounts
Definition of Terms
Agreed Capital (AC)
– amount of new capital set by the partners
for the partnership
– may be equal to, more than, or less than
total contributions of the partners
– other terms: new firm capital, total capital,
agreed capitalization
Definition of Terms
Agreed Capital (AC)
– If agreed capital is not indicated, it can be
computed in two ways:
1. Investment of the new partner divided by
the new partner’s fraction of interest; or
2. Investment of the old partners (equal to
the net assets or capital of the
partnership) divided by the old partners’
fraction of interest.
Definition of Terms
Agreed Capital (AC)
– Example: Corpus and Carlos are partners with
capital balances of P150,000 each. Cabral
invests P100,000 for a 2/5 interest in the new
partnership.
1. The new partner’s investment used as basis:
P100,000 ÷ 2/5 = P250,000
2. The old partners’ investment used as a basis:
P300,000 ÷ 3/5 = P500,000
Definition of Terms
Total Contributed Capital (CC)
– it is the investment of all the partners, both
old and new, to the partnership
– sum of the capital balances of the old
partners (net asset investment) and the
contribution of the new partner
– CC of the previous example is P400,000
(old – P300,000; new – P100,000)
Definition of Terms
Bonus
– transfer of capital from one partner to
another
– bonus to the old partner is given by the
new partner
– bonus to the new partner is given by
the old partners
Definition of Terms
Bonus
1. Multiply agreed capital (AC) by the fraction of
interest of the new partner. The result is the capital
credit of the new partner in the new partnership.
2. Compare the capital credit with the investment of the
new partner.
a. If the capital credit is more than the investment
of the new partner, the difference is bonus to the
new partner
b. If the capital credit is less than the investment of
the new partner, the difference is bonus to the
old partners
Definition of Terms
Asset Revaluation
– necessary adjustment in asset values upon
admission of a new partner
– may be determined as the difference
between the agreed capital and the total
contributed capital
– asset revaluations upon partnership
formation relate only to the partners of the
old partnership
Definition of Terms
• Capital Credit
– interest or equity of a partner in the firm
– computed by multiplying agreed capital by
the fraction of interest of a partner
Agreed Capital is Given
• Illustrative Problem B: Calma and Castro
are partners with capital balances of P200,000
and P100,000, respectively. They share profits
and losses equally. Conde is to be admitted in
the partnership.
• Case 1 – No bonus, no asset revaluation.
Conde invests P100,000 for a 1/4 interest in
the agreed capital of P400,000.
Cash 100,000
Conde, Capital 100,000
Agreed Capital is Given
• Case 2 – Bonus to the old partners, no
asset revaluation. Conde invests P100,000
for a 1/5 interest in the new firm capitalization
of P400,000.

Cash 100,000
Conde, Capital 100,000

Conde, Capital 20,000

Calma, Capital 10,000
Castro, Capital 10,000
Agreed Capital is Given
• Case 3 – Bonus to new partner, no asset
revaluation. Conde invests P60,000 for a 1/4
interest in the total capitalization of P360,000.
Cash 60,000
Calma, Capital 15,000
Castro, Capital 15,000
Conde, Capital 90,000
Agreed Capital is Given
• Case 4 – Positive asset revaluation, no
bonus. Conde invests P100,000 for a 1/5
interest in the agreed capital of P500,000.

Other Assets 100,000

Calma, Capital 50,000
Castro, Capital 50,000

Cash 100,000
Conde, Capital 100,000
Agreed Capital is Given
• Case 5 – Negative asset revaluation, no
bonus. Conde invests P60,000 for a 1/5
interest in the agreed capital of P300,000.

Calma, Capital 30,000

Castro, Capital 30,000
Other Assets 60,000

Cash 60,000
Conde, Capital 60,000
Agreed Capital is NOT Given
Contributions and the fraction of interest of
the new partner are given but the agreed
capitalization of the new firm is not specified,
the admission of the new partner is recorded
using any of these two methods:
1. Bonus method
2. Asset revaluation method
Agreed Capital is NOT Given
1. Bonus method (AC = CC)
No revaluation is recognized but there will be transfer
of capital called bonus.
2. Asset Revaluation Method
• made to properly value the assets of the
partnership prior to the admission of new partner
• will result either an increase or decrease in
recorded amount of the partnership asset and
partners’ capital
• adjustments must be recorded prior to admission of
new partner
Agreed Capital is NOT Given
2. Asset Revaluation Method (Cont’d)
a. Positive Asset Revaluation Method (AC > CC)
• increases the old partnership assets and the
capital accounts of the old partners based on
P&L ratio
AC = new partner’s CC ÷ new partner’s fraction
of interest
b. Negative Asset Revaluation Method (AC < CC)
• decreases the old partnership assets and the
capital accounts of the old partners based on
P&L ratio
Agreed Capital is NOT Given
Illustrative Problem C:
Conde invests P100,000 for a 1/5 interest in
the partnership of Calma and Castro. The
contributions of Calma and Castro are
P200,000 and P100,000, respectively, and
they share profits and losses in the ratio of
3:1. After the admission of Conde, profits and
losses will be divided equally.
Agreed Capital is NOT Given
1. Bonus Method

Cash 100,000
Conde, Capital 80,000
Calma, Capital 15,000
Castro, Capital 5,000

AC CC Bonus
Old (4/5) P320,000 P300,000 P20,000
New (1/5) 80,000 100,000 (20,000)
P400,000 P400,000 —
Agreed Capital is NOT Given
2. Positive Asset Revaluation Method
Other Assets 100,000
Calma, Capital 75,000
Castro, Capital 25,000

Cash 100,000
Conde, Capital 100,000
AC CC Revaluation
Old (4/5) P400,000 P300,000 P100,000
New (1/5) 100,000 100,000 -
P500,000 P400,000 P100,000
Agreed Capital is NOT Given
Illustrative Problem D
Conde invests P80,000 for a 1/4 interest in the
partnership of Calma and Castro. The
contributions of Calma and Castro are P200,000
and P100,000, respectively, and they share
profits and losses in the ratio of 3:1. After the
admission of Conde, profits and losses will be
divided equally.
Agreed Capital is NOT Given
1. Bonus Method
Cash 80,000
Calma, Capital 11,250
Castro, Capital 3,750
Conde, Capital 95,000
AC CC Bonus
Old (4/5) P285,000 P300,000 P15,000
New (1/5) 95,000 80,000 (15,000)
P380,000 P380,000 —
Agreed Capital is NOT Given
2. Negative Asset Revaluation Method
Calma, Capital 45,000
Castro, Capital 15,000
Other Assets 60,000

Cash 80,000
Conde, Capital 80,000
AC CC Revaluation
Old (4/5) P240,000 P300,000 (P60,000)
New (1/5) 80,000 80,000 -
P320,000 P380,000 (P60,000)
Agreed Capital is NOT Given but
Basis for its Computation is
Indicated in the Terms of Admission
Using the same data in Illustration Problem D
where Calma and Castro have capital balances
of P200,000 and P100,000, respectively and
sharing profits and losses in the ratio of 3:1,
Conde invests P100,000 in the firm and is
credited for P50,000 which is to be 1/8 of the
new firm capital.
Cash 100,000
Conde, Capital 50,000
Calma, Capital 37,500
Castro, Capital 12,500
Agreed Capital is NOT Given but
Basis for its Computation is
Indicated in the Terms of Admission
The agreed capital is not given but the basis for
its computation is indicated in the problem. The
new partner is to be credited for P50,000 which
is 1/8 of the new firm capital. Thus, P50,000 ÷
1/8 = P400,000 agreed capital.

AC CC Bonus
Old (7/8) P350,000 P300,000 P50,000
New (1/8) 50,000 100,000 (50,000)
P400,000 P400,000 —
The Amount of Contribution of
the New Partner is NOT Given
Example No. 1: Calma and Castro have capital
balances of P200,000 and P100,000,
respectively. They share profits and losses in the
ratio of 3:1. Conde invests sufficient amount for
a 1/3 interest.

Cash 150,000
Conde, Capital 150,000
P300,000 ÷ 2/3 = P450,000 x 1/3 = P150,000
The Amount of Contribution of
the New Partner is NOT Given
Example No. 2: Coral, Cielo and Camu are
partners with capital balances of P112,000,
P130,000 and P58,000, respectively, sharing
profits and losses equally. Cuevas is admitted as
a new partner bringing with him his expertise
and good reputation. He is to invest cash for a
25% interest in the assets of the partnership
which includes a credit of P18,750 for bonus
upon the admission.
The Amount of Contribution of
the New Partner is NOT Given

Cash 75,000
Coral, Capital 6,250
Cielo, Capital 6,250
Camu, Capital 6,250
Cuevas, Capital 93,750
P112,000 + P130,000 + P58,000 – P18,750 = P281,250
P281,250 ÷ 75% = P375,000
P375,000 x 25% = P93,750
P93,750 – P18,750 = P75,000
Fraction of Interest is NOT
Given
Example: Conde invests P50,000 in the firm.
However, upon his admission P10,000 bonus is
allowed by the old partners.

Cash 50,000
Calma, Capital 7,500
Castro, Capital 2,500
Conde, Capital 60,000
P10,000 x 3/4 = P7,500
P10,000 x 1/4 = P2,500
End of Presentation
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