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    PARTNERSHIP DISSOLUTION 2

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    Partnership Dissolution 2

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    Chapter 19 - Partnership Dissolution: Changes in Ownership Inroduction business cond port ee pant dics jeship usualy has changes in ownershio dung its extence. In this ¢perations of of the partnership sin ownership that do not result in the termination of the partnership os OSOIHON Peo eerae buses: and accouning ently. Such change a ‘ownership a cy pete cece, dscluion i defined as “he chenge in the rlofion ofthe partners cote bushes "DBsoliion ence to be associated in the carying on as distinguished from the winding up othe: fon ends the association of partners for their original purpose. nite corporation, changes in ownership structure are events that requite special accounting treatment. Accounting for Partnership Dissolution Accounting for a partnership is influenced by the propriety theory, which views partnership not as a distinct entity, but rather, as a ‘group of individual investors.” Measuring changes in the equity of the individual partners is a major aspect of partnership accounting. Because owne’ship changes result in the dissolution of the partnership, this provides an excelent opportunity for structure of the partnership which is presumed to be arm's length transactions that reflect the current value of the partnership. Capttal Interest versus Profit and Loss Interest ‘n preparing partnership agreement, the partners must recognize that there is a dsinction between a partner's capital interest and his/her interest in income and losses subsequently reported in the partnership. Apartner's capital interest is a claim against the net assets of the partnership as shown ty the balance in the partner's capital account. An interest in profit and loss determines how the partner's capital interest will increase or decrease as a result of wbsequent operations. hhsome cases, the relationship of the capital accounts fo one another does not corespond with the partner's profit and loss ratio. Capital balances are historical cost figures, As describe earlier, a partner's capital interest may change over time because ey result from contributions ond withdrawals made throughout the life of the business % well as from the allocation of partnership income. Therefore, any correlation between a partner's recorded capital at a particular point in time and the profit and fs percentage would probably coincidental. Fr example, Mr, X became a pariner by having a capital of P40,000 out of a total SOpital of P100,000. Mr. X received o forty-percent (40%) capital interest in the Satheship, but he was given a thirty-five percent (35%) interest in profit and loss. ‘adgnment of an interest foo Third Party A assigns his/her interest In the Partnership Is not dissolved when a partner partnership otha party, because such an assignment does nof fiself change the relationship of e pariners. Such assignment only entitles the assignee to recelve the assigning enn A SS ‘sreced Fraandal Aakounting ~ A comprehensive: Conceptual & Procedural Approach Ne 1290 Ci mean ig. Partner's Interest in future partnership profits and partnership assets in the event liquidation, “ The assignee does not become a parner and does not obtain the right to shore i management of the partnership or fo review transactions ond records of we Partnership, Because the assignee does not become a partner, the only change required on the partnership books isto ranser the Interest of the assignor partners the assignee. Mustration 19-1: - The capital balances (and profit and loss ratio) of A and B in the AB partnership is Presented gs follows: ‘A capital (75%). vee P7500 8, capital (25%) . cesses, 60000 A assigns 30%, of his interest to C (C pold P26,000 forthe interest assigned]. The entty to record the assignment sas folows: ‘A capital (20% x P75.000) C.capital The purchase price paid by C is completely irelevant fo the entry recorded on the books. The following should be noted: . 1. The amount of the capital transfer is equal to the book value of A's capital at the time of the assignment, and is independent of the consideration received by A. 2. If the book value of A's capital is P22,500 (30% x P75,000), then the amount of the transfer entry is P22,500, regardless of whether C pays A P22,500 or some other amount. The remaining discussions of this chapter consider the problems that arise upon dissolution as a result of the: 1. Admission of a new partner: Q._ by Purchase of Interest, and b. by Investment 2. Withdrawal or retirement of a partner, 3. Death or incapacity of a partner, and 4. Incorporation of a partnership Partnerships commonly deviate from GAAP in the following areas: |. the use of the cash basis instead of the accrual basis, 2. the use of prior period adjustments, 3: the use of current values instead of historical cost (usually in connection with o change in ownership), and 4, the recognition of goodwill (usually in connection with a change in ownership). Valuation - An Issue When there iso change in the ownership of the partnership, the problem of assgring @ fair valve of the firm arises. It is a question as to whether or not the assets and libillies of the continuing partnership should be revalued, There are two approaches under this particular issue: |. Revaluation approach (usually referred to as goodwill procedure: Non-GAAP) Under this approach, the use of falr values provides an equitable measure each partner's capital interes! In the partnership. = ees “ {sere nRonp DISSOLUTIOMCHANGES IN OWNERSHIP faet Revaluation of . fr olf nortnactie ond labiltes are supported onthe basis that, n solution. Therefore, the basi legally dissolved and -nw narinew*i~ arth , 18 of valuation tor new'entiies 1 Ine taw value OF twe ¥42I8 acquired and liabilities assumed by the newly formed entity. The eee ae ing increases in partnership net assets is not in Portnerships using these erally accepted accounting principles (GAAP). jabs ct the ene of now GAae methods argue that revaluing all assets and true economic conditic 1 change in partnership membership states fully the assigns the cho ition of the partnership at that point in ime, and propery Wie halve besheeny assets and ficbilly values and goodwill fo the partners Scounied. Managing the business during the time changes in value Further, this: approach resulfs in @ marked departure from the historical cost principle and differs from the accepted accounting principles in Philippine Financial Reporting Standards (PFRS) 3, “Business Combinations", which prohibits entities from recognizing goodwill hat has not been acquired by acquisition. ‘Accountants who use the goodwill or asset revaluation methods argue that the goal of partnership accounting is to state fairy the relative copital equities of the partners and this may require different ‘accounting procedures from those used in corporate entities. ‘Absence of revaluation (usually referred fo as the bonus procedure/book value approach - GAAP). Proponents of this approach would retain the historical cost canying value. Others argue that changes in porinership interests are ke changes in stockholders of a corporation, and that private sales of ownership interests provide no basis for revaluation of the business entity. ize the revaluation of assets or recognition ‘of goodwill, y be objective evidence that a specific asset is .d because it results in a marked departure from the Some accountants critic even though there mo undervalued or overvalue tistorical cost principle. They argue that recording an increase in fair value for external reporting is not in accordance with substance over form principle. That is, even though the partnership may be legally dissolved, the economic substance of some types of dissolution is that the business activity continues without interuption which means the new partnership is merely an extension of the old. eflect the concept of legal and business entities, respectively. These alternative views 1 a is text does not emphasize either. Instead, both views are h views have merit, and this J I following sections. ‘Seussed and ilystrated in the ‘or quite some time, it has been o practice to first revalue assets and liabilities to their Values and record any identifiable unrecorded assets and liabilities before "cording the admission of withdrawal of o partner. Bui, curent standards became revaluation. In summary, the following rules should be ohibiive on the issues of ed in relation to valuation ‘of assets and liabilities on dissolution problems: Se \axmced Frond Aceoanting ~A comprehensive Conceptual & Procedural Approach ~ 1292 CHAPTER 19 1. If there isan ‘agreement among partners that revaluation is allowed, then ref the necessary adjustments before dissolution, ect 2. Inthe absence of an agreement: a. Revaluation approach (or goodwill procedure - Non-GAAP). The Assets ang liabilities should be recorded at their fair value. After a complete ‘analysis both tangible and intangible assets acquired by the new entity, includin, goodwill created by the previous partnership, should be Tecorded, ? . Absence of revaluation approach (or bonus procedure - GAAP). Existing book values should not be adjusted to fair value unless such adjustmenis would have otherwise been allowed by GAAP: 1. Recognition of Decreases in Net Asset Revaluations (GAAP). Foloning the principle of conservatism (prudence), decreases or write-downs in the value of assets may be recognized even though they are not realized, o Recognition of unrealized losses is not unique to Partnership accounting Gnd is not in conflict with GAAP. Even if there is no dissolution, unrealized losses suggested by economic events should be fecognized. For example, PAS No. 36, “Impairment of Assets", Presents procedures for recognizing impairments of fixed assets and currently held goodwil Net asset revaluations performed using the appropriate accounting standards are in accordance with GAAP. b.2, Non-Recognition of Increases in Net Asset Revaluations (Non-GAap). There are no GAAP standards that provide for increases in.the value of Nonfinancial assats or recognition of new goodwill, solely due to a change in partnership membership. The use of absence of revaluation approach {or bonus procedure) does Prevent the recognition of asset appreciation, which would otherwise not be allowed by GAAP. Admission of a New Partner Anew partner can be admitted with the consent of all partners in the business. Such an admission brings about a new association of individuals and represents the formation of new partnership: the original partnership is considered dissolved by common consent. A Parinership agreement is binding only while the relationship between the original Parties to the agreement remains unchanged. A new agreement should be drawn up that. specifies the pariners' interests upon formation of the Partnership, the distribution of Profits and losses among partners, ond all of the other considerations relative to the new association. The accounting problems in fespect to the admission of a new pariner are as follows: 1. Recognition of aecour 2. Recognition of profit date of admission, Inting errors in prior periods. . the 1 loss from the beginning of the accounting period to . = e Tre (guaneme DISSOLUTIONCHANGES IN OWN 3 Closing of partnership books ition of sate 4. Recognition of net asset revaluations subject fo the rules discussed previously. ion by Purchase of an Interest ‘hase of an int mona! transaction fhe m™ one oF mare of the parieipsexsing partner i 0 Sreney oF propeatas -heoming pariner cnd the sellng pare). No ‘ion fs similar to indivi are Invested in the partnership. In this respect, the fip's boas tana a sale of 9 corporation stock. The only entry made on . . In amount the i ‘ y phe new partner's capital account. 1m the selling partner's capital account en Li Asana by Purchase of an interest igme that after operations and partners’ withdrawals durin i 19 20x4 and 20x5. DE Partnership 0 book value of P100,000 and profit and loss (P&L) percentage on January 1, 20x6 as sows: . Capital Pal j_-_________Bolances_Percentage Dit: E Total itis date, Fis admitted to the partnership. tae 1; Purchase of Interest from One Partner. F paid P24,000 directly to D in exchange for one- + (1/3) interest. The entry to record the transaction in the books follows: {D. capital . aa oe 20,000 F, capital . 20,000 Torecord the admission of F. epuchase price paid by F is completely irelevant to the entry recorded on the partnership tts, egardless of why F paid more than the book valve of the partnership interest. Simply, ‘eexcess of P4,000 is a personal gain of partner D. Ye cbove entry shows that no cash is transfered to the partnership. The new ‘towil be set by the new set of partners. tae Purchase of interest from All Parner. Tis situation gives re fo tree assu tampton 1: Purchase af Book Value, Fpuchoses c one-fourth (14 interest nthe frm. One- th of each, partner's capital is to be transfered to the new partner. F poys the partner's nsgction in the books folows: profit and loss imptions: "S000. the entry to record the tro D. capital (P60,000 x E, capital (P40,000 x 4) - 10,000 F capital... +++ . Te record the admision ofFaf Book value. capt bolonces of the partners ater he admission of F would be os folows: F _D E (book valve) Total Capital before admission ..-+ P 60000 -P et \ 100,000 Ehlers! remained . 4 s ‘Apital after admission 1294 CHAPTER 19 It should be observed that the total capital balance before and alter admis i sion, since the book valve of the partnership was preserved. 's the Some, Since the interest acquied is“ itis presumed thot this interest represented the capi profit and loss interest. Therefore, the profit and loss ratio of the partners after the admascgont ‘would be as follows: . n of F LD, capital PURNMisvesvacenesevseeersevsviynerasviprocon OREOR] E, capital 30% x%) . man F, copital (equivalent to interest acquired) | _ 250% Tota ~ looong ‘Assumption 2: Purchase al More than Book Value. F purchased one-fourth of D's interest fr 18,000 and one-fourth of E's interest for P12,000, making payment directly to D and E. The new poriner will have a % profit and loss ratio and the old partners continue to use their old prot and loss ratio. There are three altematives to reflect the above transaction: Alternative 1: Book value (BV)* approach. Same answer with Assumption I above. the postive excess of P,000 represents a personal gain of D and E, computed as follows: Amount paid (P18,000 + PIZDOD sass vee . P 30,000 Less: BV of interest acquired -[P 100,000 x %) Excess (Gain of D and € - personal n nature) The partnership does not record this gain because it was not benefited from it. “thls may also refer to as bonus method. Alternative 2: Revaluation (goodwill) approach, Under this approach, the positive excess ofthe amount paid over book value acquired will be capitalized to determine the revaluation of assets, The entry to record the transaction in the books follows: Assets (Goodwill ......... D, copital (P20,000 x 70%) . E, capital (P20,000 x 30%) To revalue asses before admission of new pariner 20,000 14,000 6,000 computed as flows: ‘Amount paid (P18,000 + 12,000) ... 30,000 7% P120,000 (100%) Less: BV of interest acquired -(P 100,000 x %) ~25,000 —lo9.900 {100%} Brcess.... f Divided by (copitalzed ai): interes Revaluation of Asse! Upward...» D. capital [(P40,000 + P14,000) x ¥4)] E, capital {(P40,000 + P6,000) x ¥4)] . F.capital .. To record the admission of F using revaluation ‘approach. The capital bolances of the partners after the admission of F would be as follows B.20,000 _ (100%) 18,500 11,500 30,000 F {amount paid) fotal D E 1 Copital before admission .... P 60,000 P 40,000 P 100,000 Revaluation upward...¥.... _ 14,000 6.000 Capital balance after Revaluation .. P 74,000 P 46,000 P 120,000 x: Interest remained —% __% am Capitol after admission... ‘Advanced Financial Accounting = A Comprehensive: Conceptual & Procedural Approach Capital interest % P&LR D (3/4x 70%) , wE (3/4x 303), F be = Gt the total copital balance after the admision increases equivalent fo terevolud s amounting to P20,000. Th i F recopital of the new partner to the sc od '@ feason of such adjustments is to equalize * ond © ing et oo coc ebay, Book Value. F purchased one-fourth of b's interest by Rea . The new partner will y i TGpornes contin ous nerld pom pane wi ave Eo and eso and he nee ore three alternatives to reflect the above transaction: Memative 1: Book value (BV) approach, Same answer with Assumplion | above. The negative axces of P3,000 represents a personal loss of D and E, computed as folows: observed th tion of asset Amount pdid........... P 22,000 Less: BV of interest acquired -| 1,000 x 4) . —25,000 Excess (Loss of D and E- personal in nature) ELso00 +” mative 2: Revaluation (goodwill) approach. Under this approach, the negative excess of te amount paid over book value acquired wil be copitaized to determine the revaluation of ‘sek, The entry to record the transaction in the books folows: D, capital (P12,000 x 70%) . 8.400 E, capital (P12,000 x 30%) 3,600 Assets 12,000 To revaive assets before admission of new partner computed as: AMOUNE POI... cvessvese-e P2000 7% P6000 , (100%) Less: BV of interest acquired ~(P 100,000 x %) 25.900 190,000 * (100%) Bf ayn cgi . (3,000), Divided by: Interest acquired . % Revaluation of Assel Downward 22.000) 12.000) (100%) D, capital {(P60,000 - PB, 400) x va900 E, capital {{P40,000 - P3,600 x '4)] a | F.capital. abe Torecord the admission of F considering the revaluation. ecapital balances of the partners after the admission of F would be as follows: a an err | D E___(amountpald) Total - — P 100,000 Capital before admission .... P 60,000 P 40,000 I Revaluation downward. ...- 8.400. 3.600 ' 12.000 Capital balance after ; Revaluation . » P8160 P SA) P 88,000 Interest remained... —— a Capital after admission . p3a700 P2700 ne Pp8.000 Copital interest % . . 2.60 PALS: D(3/4x70%) 52. oat E (3/4 x 30%) , 25 ea see "ed Financial Accounting 7A Comprehensive Concaptva!& Procedural Approach Base CHAT, It should be observed that the total capital balance atter the admission decreases {othe revaluation of assets amounting fo P12.000. The reason of such adjustments ic cecvOent the copital of the new partner fo the amount paid, equalize In absence of an agreement, for assumplions 2 ond 3 aboveyhe book value oy ; ‘ POAC hy bein effec! because i would retain the historcal cost conying valve of ase o” tous The observations before when the purchase was made from one partner apply in hs co well ess, enes mage in 2) ond (6) above have no effect on how cash payment nea Fis to be distributed to,D and E outside the partnership. The amount and distribution of i negolialed transaction between individuals and does not, affect the patnersip unless the amount is used as a basis for the revaluation of the firm. ‘Comparison of Book Value and Revaluation Approach (Goodwill Procedure) Coshisg ‘accounts To axis the partners in making a decision between the hwo methods on their respective copia bolances. If he fim were forced fo iquidate, the identifiable asses (or in case of goodvi recognized wil be eventualy impaired and would probably be of no value and, thereto. ‘would represent a loss to the partnership. The book valug and revaluation approach will yield the same result i two conditions related fo the new profit and loss agreement are met, These are: 1. The new poriner's profit and loss sharing ratio must be equal to his/her copital interes (percentage interest in assets). 2. The old pariner's continue to share profits and losses between themselves in the original ratio, in Case 2, Assumption (2), both the conditions (a) and (o) above were met, so either the revaluation (goodwill approach or absence of revalvation [book value) approach wil be selected. The balances for each method are presented as follows: Schedule of Account Balances Goodwill Net Asset Capitals | Book Value Approach ‘Assels__ Revaluation __D E F Balance before admission ...... P100,000 60,000 40,000 “Admission by purchase... 115,000) {10,000} P 25,000 Bolance after admission of F... PJ00,000 pss e30.000 P2500) Revaluation Approach: Balance before admission 100,000, P 60,000 P 40,000 Revaluation. sre P 20,000 14,000 6,000 ‘Admission by purchase... 118,500) {11,500 30000 Balance after admission of F be depreciation impairment sess. P00}000 P2000 © $5500 P34g00 P3000 Depreciation/impaiment .. (20.000) 10,500) (4.500) {5,000 | Balance ater depreciation impairment. coves P0000 Po paso espa p2scw ‘new prof and loss rato (0, 52.50% E 22.50% ond F. 25.00%) The two methods will yield the same results computed as follows; __ Capitol ___— pea een Boiances after admission of F (BV approach) 45.000 P3000 25000 Balances after admission of F [Revaluation approach) 4 5 Gain or (loss ihrough use of book value approach pop op ‘Advanced Financial Accounting ~ A Comprehensive: Conceptual & Procedural Approach (aetMansnip Pissouur, OM CHANGED IN own ; book value ve ithe incortng peeeeach cnd ‘evaluation approach will not yleld the same interest allowed in assets (conten in Profit and loss is not identical with the percentage fncoming) partner should be a Tolone! Therefore, the selection process for the new 1. Prefer Book V " the bonus menos pproach Hf, P & L interest > Capital interest. Choice of advantage to the new pay red wilh he goodwill method results in eventual portners, Partner and Corresponding disadvantage to the original > Crolee ane (So odwill) approach #, P & L Interest < Capital interest the new porinar seg cie" (geodwil) approach results in ulimate advantage to Pariner and disadvantage to the original partners, Admission by Investment An individual may ebtain a Parinership interest in capital and future income by westing something of value to the Partnership. If assets are invested, the admission is recorded by debiting the Ossels invested and adjusting the net capital interest in the patinership by a corresponding amount, It is important that the assets invested be fairly vdled. Any gain or loss recognized on sales subsequent to recording the admission wil be allocated on te basis of the new. profit and loss ratio. An incoming partner may acquire an interest in the Partnership based on the following situations: |. No bonus (absence of revaluation) or no revaluation (goodwill) approach; 2. Bonus (absence of revaluation) approach: and 4. Revaluation (goodwill) approach, Ihe situatién indicated above (2) bonus approach, and (3) revaluation (goodwill) opproach are mutually exclusive of each. Both methods understand the possibility of Odjusting assets and/or the existence of revaluation of assets (and liabilities). However, ‘hey differ in how these conditions are recognized. Sonus Approach (GAAP). The bonus approach generally follows the book-value method, that is, existing book values should not be adjusted to current values unless Such adjustments would have otherwise been allowed by GAAP. lhetefore, when a partner is admitted to an existing partnership, the total (agreed) opital of the new partnership consists of the following: The book value of the previous partnership less; 7 - 2. Any write-downs in the value of the previous partnership's assets as recognized by GAAP: and The fair value bf the consideration paid (net asset contributed) to the partnership by the incoming partner. 1 book -value method of the bonus approach does not dreclly recognize increases " oset values suggested by the consideration that the incoming partner Pays, fowever, the method does Indirectly recognize such increases by reallocating or ‘Gusting the capital balances of the partners e . The revaluation (goodwill) aj ation (Goodwill) Approach (Non-GAAP). The | proach ""Phasizes ie oo sgniieonce of a change in the ownership structure of ‘traced Financ Accounting ~ A Comprehenrive: Conceptual & Procedural Approach _ 1298 CHAPTER Jo partnership. From a legal viewpoint, the entrance of a new partner Tesults in 9 dissolution of the previous partnership and the creation of a new legal en: new entity has resulted, the assets transferred to this entity should be recor fair valve. After a complete analysis, both tangible and intangible assets acquired by the new partnership, including revaluation of net assets (goodwill) created by the previous Partnership, should be recorded. Therefore, the total (agreed) capital of the new partnership will consist of the following values: 1, The book value of the net assets of the previous partnership plus: 2. Unrecognized appreciation or less unrecognized depreciation on the fecorded net assets of the previous partnership plus; 3. Unrecognized revaluation of net assets (goodwill) traceable to the previous partnership plus; and 4. The fair value of the consideration paid (net asset contributed). both tangible and intangible, received from the incoming partner. he tity. Since g (ded a5 they, Therefore in analyzing transactions involving admission of a partner by investment, the following procedure is followed: : A. Generally, compare the total contributed capital (TCC) with the total agreed capital (TAC): 1. IfTCC = TAC, no adjustment is made for revaluation (goodwill) of net assets. 2. If TCC > TAC, the difference is due to either (which is normally the case] to “i the overstatement of the partnership assets or the required diminution in partner's capital which can be effected by drawing (this happens if there is @ specification that the old partners will continue to use their old profit and loss ratio}. 3. IFTCC AC, the difference is a capital transfer or bonus fo the od partners. 3. If the CC < AC, the adaitional capital credit is either share in bonus a revaluation of net assets (goodwill from the old partners as the case maybe ‘Advanced Financial Accounting — A Comprehensive: Conceptual & Procedural Approach Gorm DISSOLUTION: CHANGES IN OWNERSHIP = twustration 19-2: Admission by Investment ssume In folowing dota or GH Parinestip hod te folowing condensed bance she: Cash... Liabilities and Capital Noncash assets. P 7.500 Ihe percentages in parentheses after the . ‘ partner's capital balances represent their respective interests in profits and losses, The partners agree to admit J as a rember of the firm. Case 1; No Bonus or No Revaluation. J it Nit Cost lis fo be P4000, invests P10,000 for a % interest in the firm. The total firm a. The total agreed capital is equal to total agreed capital: Total agreed capital (given) ........... Less: Total agreed capital (P20,000 + P10,000 + P10,000) Difference ssituwulled b. The new partner's copia isthe same with his actual invest revaluation to be recognized. Torecord the admission of J computed as follows: ment, therefore, no bonus or To record the admission of J. The following items should be observed: aiene ane fourth (1/4 interest acquired by J's presumed fo be the capital interest and profit and loss interest ownership. included in cases of admission xisting partners should not bé tl interest that is being acquired not total ferest in the firm. The total agreed 2. Any loans to/from any because it's only the capi Case 2: Bonus to New Partner. J invests P10,000 for 0 36% int copital after admission is 40,000. niributed capital (TCC) is equal to total o interest. greed copital (TAC), so no «a. The total cor revaluation (goodwill should be recognized as folows: Total agreed capital (given)... ~ P 40,000 Less: Toral agreed capital °:20,000 + P70,000 + P10,000 40,000 Difference ....-..1se0eet iti EL 2 b, The new partner's contibuted copital sess than the agreed copital, the differenc® is attributable to bonus to new partner: T'scontributed capital (given) P 10,000 J's agreed capital: (P40,000 x 35%) _14,000 Difference (bonus to new portney) «+++ 24.000 The enty fo record the transaction in he books follows: Cosh... ai Gavanstovacbe Toon G, capital (P4,000 x A . 0 H, capital (P4,000 x 40%) - 1,600 J.capital : 14,000 1300 CHAPTER 19 Case 3; Revaluation (Goodwill) to New Partner. J invests P10,000 for a 1/3 interest in the fim nds olowed a credit of P15, 000 for his capital. «a, The total contibuled capital (TCC) is less thon the total agreed capital (TAC), go revaluation {goodwill should be recognized os follows: Total agreed copia: (P15,000/ 1/3) .. r08 ~ P5000 Less: Total contributed capital (P20,000 + P10,000 + P10,000} .... 40,000 Difference (revaluation/goodwill . -P§000 [pitlerence revauaton/goo tw , The new partner's contiouted capitals less than the agreed capital, the diference of 5,000 in (a is attributable to revaluation/aoodwil fo new partner: vevevsteree P 10,000 Y's contbuted capital (given) . y's agreed copital (given) ....... +08 Difference revaluation/goodwill to new partner) The entry to record the transaction in the books follows: Cash... 10,000 Assets (goodwill 5,000 J.capital... 15000 To record the admision Case 4: Bonus to Old Partners, J conveyed tangible assets with a fair value of P25,000 with an cossumed morigage of P5,000 in exchange for a 30% interest in capital with bonus to be recognized, keeping in mind that J would be acquiring a 1/4 interest in profits. Before the admission of J, GH Partnership had an equipment of P4,000 with a fair value of F7,000. a. The total contributed capital (TCC) is equal to total agreed capital (TAC), so no revaluation (goodwill) should be recognized as follows: 4 Total agreed capital (should be equal fo TCC since itis a bonus method) .... 5 P $0,000 Less: Total contributed capital {(P20,000 + P10,000 + (P25,000~ P5,000)] se, —$0,000 Difference .........-+- » Pa b. The new partner's contributed copital is greater than his agreed capital, the difference is attributable to bonus to old partners: . J's contributed capital (P25,000 - PS,000) . . ~ P 20/000 4's agreed copital (P50,000 x 30%) —15.000 Difference (bonus to old partners) 15,000) ‘The entry to record the transaction in the books follows: Tangible assel ar 25,000 | Morlgage payable 5,000 J. capital . . 15,000 G, capital (P5,000 x 60%) . . 3,000 H, copttol (P5000 408) .......cceereesvevernee® 2,000 Torecard he adison FL The following items should be observed: ' 1. Since there is no agreement os to the recognition of far valve, the recoarifon of wncigroroment of assets under the bonus (book-value) approach is not allowed unde" ‘Advanced Financial Accounting ~ A Comprehensive: Conceptual & Procedural Approach DISSOLUTION CHAN 2. The capita! inte “ a oak Of the"new partner s different from his profit and loss rato of 1/4 reer approach Concer acomParing bonus approach and revaluation (goodwal one! ‘Quentty. he new profit and loss percentage is computed 9s follows: cach, Consequently he new pf andi perceioge computed ¢ G, capital: (60% x 703} | H. capital: (woze708, : at | J, copital Case 5: Revaluation (Goodwill) to Old Partners. J must invest or contribute cash of P24,000 equvalent to 37.50% interest in a total agreed capitol of P64,000. Included in the noncash cosets is an equipment undervalued by P7000. @. The total contributed copital (TCC) is less than the total agreed copital (TAC). so revaluation should be recognized as follows: [Total agreed capital Given) ......sssssssesvsvssssstsnes Less: Total contributed capital (P20,000 + P10,000 + P 7,000, revaluation + P24,000) Difference (revaluation/goodwil b. The new pariner’s contributed capital is equal to the ‘agreed capital, the difference of 3,000 in (a) is attributable to revaluation (goodwill to od partners: J's contributed capital . J'sagreed capital: (P64. Difference ..... . The entries to record the transaction in the books follow: Equipment ..... ad v7.00 G, copital (P7,000 x 60%) . H. capital (P7,000 x 40%) To increased the voive of equpments J, copital G, capital (P3,000 x 60%) « H, copital (P3,000 x 40%). - To record the admision of 4 stould be observed that under the revaluation (goodwil) approach, the practices of recognizing increases in partnership's net assets or recognizing previously unrecorded goodwill 8 not in compliance with GAAP. GAAP methods crgue that revaluing assets and liabilities ot the Portnershi these non- : Mn time slates in partnership membership states [uly the true economic condition of the arinership at that point in time, ond property assigns changes in asset and liability valves, Case 6: Bonus and Revaluation (Goodwil) to New Partner. J invests PIO.000 for a 45% interest in the frm, The total agreed capital after admission is P50,000, ©. The total contributed capital (ICC) is less than the total agreed capital (TAC), so revaluation (goodwill should be recognized as follows: [Total agreed capital (given) -.-- += wae Less rote contributed copital {P.20,000 + P10,000 + P10,000) ~ P 50,000 tS Ba caren tg 1b. The new partners contibuted capitol less than the agreed copital, the Giference of 12500 ere composed of evaluation of PIDOODin [a] above and ine bolonces caret to new partner, _ Tscontibuled copii (given).........- Js agreed capita: P50,000x 45%)... Difference (foto! bonus and revaluation) Less: Revaluation / goodwill to new partner. . Bonus to new partner The entry to record the transaction in the books follows: 10,000 7) Assets (goodwill . 10.000 | G, copital (P2,500 x 60%) 1,500 \ H, capitol (P2.500 x 40%) . 1,000 \ Acopital...... 22.500 | Torecord the acon of Case 7: Bonus and Revaluation to Old Partners. J invests P1 The total agreed capital after admission is P60,000. @. The total contibuted capital (TCC) is less than the total ot . fevaluation (goodwill should be recognized as follows: 5,000 for a 20% interest in the firm, greed capital [TAC], so Total agreed capital given)....... sisnaacncmege POO] Less: Total contributed capital (P20,000 + P10,000 + P15.000). —45000| Difference (revaluation/goodwil)....... desake, Esau | . The new partner's contributed capitalis greater than the agreed capital, the difference Of P3000 is bonus to old partners since there is okeady a revcivation{goodwil) as indicated by (al above. J's contibuled capital (given)... a ~ P 15000 4'scagreed capital: (P60,000 x 20%) .. . 12000 | Difference (bonus fo old partner)... P (3.00) Less: Revaluation / goodwil fo old pariners 15.000 | Total bonus and revaluation to old partners . —__ ee | The P3,000 difference is considered as a bonus since there was a transfer of copitol {as indicated by the decrease in capital of the new Partner] made by the new pariner to the old partners. The entry to record the transaction in the books folows: COB ee Assets (goodwil}.... Jicopital............ G, copital (P18.000 x 60%) . H. copitol (P18.000 x 40%). Torecord the admission of J Revaluation (Goodwill) o New and Old Partners. J invests P15,000 for a 30% interes in The totol agreed capital after admissions 60,000. @. The fotal contibuted capital (TCC} is less than the total ogreed capital {TAC], 50 fevaluation (goodwill) should be fecognized as follows: Total agreed capital (given)......... Less: Total contributed capital (P20,000 Difference [fevaluation/goodwil)..... v 15000 15,000 \ 12000 | 10800 | 7200 | Case 8: the firm, scasausormreesns. -P UOMO +P10,000 + P15,000) . 45.000 | “Advanced Finance Accounting ~ A Compreernve: Conceptual & Procedural Approach SHIP DISSOLUTION CHANGES IN OWN b. he MOR ln Contributed capital is less than the agreed copital. the aifference of 2 § attributable to revaluation (goodwill) to new partner and old partners: Js contributed capital | j ; ven)... : J's agreed capital: (0.00% 93) ee tag oaterce (fevaluation/goodwill o new partner) . P. 3,000 Less: Revaluation / goodwill computed in (a) 15,000 | Revaluation/adodwil to old partners P1200 | The entry to record the transaction in the books follows: + 15,000 = 15,000 18,000 7:200 H, capital (12,000 x 40%) . To record the admésion of Case %: Bonus fo Old Partners with Bonus Amount Given. J invests P20,000 in the firm. PS,000 is considered a'bonus fo Partners G and H. The book valves of parinership assets andi abies ‘are equal fo fair values, except for a machinery with a book value of P3,000 and a foir value of °7,000. . @. The total contributed copital (TCC) is equal to total agreed capital (TAC). so no revaluation (goodwill) should be recognized as follows: Total agreed capital (should equal to TCC since itis, + abonus method) ......... Less: Total contributed capital [(P20,000 + P 10,000 + P20,000)) . Difference . . os us b. The new partner's contributed capital is greater than his agreed capital, is attributable to bonus to old partners: J's contributed capital . Es 4's agreed capital: (P20,000 - P5,000) . Difference (bonus to old partners). The entry to record the transaction in the books follows: Cash... J,copital... : G, capital (P5,000 x 60%) . H.-capital (P5,000 x 408) . To record the admission of J. The following items should be observed: 1. bonus is indicated 10 be recognized, then there should be no mote revaluation (goodwill approach fo be applied. . 2. The seme situation in Case 4, the recognition’of understatement of ossels is not in compliance with GAAP. . Case 10: Bonus to New Pariner with an Indication of Bonus. J invests P6000 for a 20%; interest in the fim. G ond H transfer part of their capitals fo that of J as a bonus. An equipment used in the business with @ book value of P5,000 and a fair value of P3,000. the difference sees P 20,000 Advanced Financial Accounting ~ A Comprehensive: Conceptual & Procedural Approach 1304 CHAPTER J9 @. Theres an overstatement of asset amounting to P2000 [PS C00- 3.00) thot ign to be recorded to comply with the provisions of GAAP recognizing overvalvaion coed cssels. therefore, the contibuted capital of partner G and H are os flor ot nel , capital: P20.000 = (P2,000 x 60%) .. = H. capital: 10,000 ~ [P2.000 x 40%) ........ Total contributed capital before the admision b. The total contributed capital (TCC) is equal to total agreed Capital (TAC), son, revaluation (goodwill) should be recognized as follows: ene . Total agreed capital (should equal to TCC since itis J bonus method) . : P 34,000 Less; Total contributed capital [P28,000 Difference . . ‘ . The new partner's contributed capital is less than the agreed capital, th attributable to bonus to new partner: J's contributed capital (given) ... J's agreed capital: (P34,000 x 30%) Difference {bonus to new partner) ie difference is P 6,000 ‘The entries to record the transaction in the bdoks follows: G, capital (P2,000 x 60%) .. 1,200 H, capital (P2.000 x 40%) . 800 Equipments . 2.000 ‘To reduced the value of equipments. eS —— Cash... G, copital (P4,200 x 60%) H, capital (P4,200 x 40%) J. capitol... ‘ To record the admission of J. Case 11: Revaluation (Goodwill) to Old Partners with an indication of a Revaluation (Goodwil), 4 invests P15,000 for a 4 interest in the firm, GH Partnership's had other assets with a book value of P5,500 and a fair value of P10,500. Revaluation (goodwill) approach is recorded on the fim books prior to J's admission. 10,200 1. There is an understatement of asset amounting to PS,000 (P10,500 - P5,500) that is needed to be recorded also even in cases of overstatement) as long as the evaluation (goodwill, approach is being used. Therefore, the contributed capital of partner G and H are as follows: G, capital; P20,000 + (5,000 x 60%) H, copital: P10,000 + (P5,000 x 40%) Total contributed capital before the admissior P.35.000 } . The fotal contributed capital (ICC is less than the total agreed capital {TAC}. 0 revaluation (goodwill should be recognized as follows: Total agreed capital (P15000/ Vay. Less: Total contributed capital [P35,000 (a) Difference (revaluation/goodwil P 23,000 f pARTNERSHIP DISSOL + The old portne' : a cued coe 35000 should nol be used as there Is no orto to a negative revaluation In cases of revaluation and presumption Sud cays be ip upienl or domed adjustments, the ‘ upward, The P15, ”% ve terre fe vue of fhe patinestip Hi was copltolzed by % 0 Gi Ls eed contriouted capital is equal fo the agreed:copital, the T's contributed capital (given) . vee P 15,000 J's agreed copital . Revaluation/goodill to new partn difference of Other assets . eee G, capital:(P5,000 x 60%) H, capital (P5,000 x 40%) J, capital... : G, capital (P10.000 x 60%) - H, capital P10,000 x 40%] To record the admission of J 1 shoud be observed that when revaluation (goodwil indicated to be recognized, then s approach to be applied. there should be no more bonus Case 12: Revaluation (Goodwil) to New Parnes ‘wh Revaluation Amount Given. J invests 20000 the firm and fs alowed o crea of 6,000 for revaluation (goodwill). fol (TAC), $0 (TCC) is less than the total agreed capit a. The total contributed capital nized as follows: .dwil) should be recog revaluation (900 at eqrod copie [CC P0000 * P60, good > P9600 (Bes Tote! eontbuted capita (P20000 + 10.000 + P20.000).. $0,000 “Ego biference frevoluation/goodwil«---- contibuted copii les han the agreed cop, the difference of b. The new partner's 1 74,000 in (a) is tfioutable 10 revaluation (goodwill fo new partner: Fscontrbuted copra aver ' —p 90000 (p20,000 + P6000). © 56000 . 26000 'sagreed capitol (P20! Revaluation/goodwill tonew partner. . he books follows: cord the transaction in t The entry to res Cashes: Assets (goodwill 4, capital. Fo record he aamisson o Case 13: withdrawals Inste* Revaluation. J invests P20,000 for a 50% interest in the firm. The .ad of Reval Way000 ond partner agreed that thei copia balances should made {otal firm capital is to be re equal to their new profit ‘ond loss ratio. 1306 CHAPTER 19 «4. The tolal contibuted copital (CC) i greater than total agreed capital TAC), sot Tpould have been a negative revaluation. Since there was an indication that cont rretinces shoud be equal 0 the profi ond loss (old ofnew] ratio, then the ciference Should be considered as withdrawals [it's a postive revaluation it should have been eitonal investment and if the TCC = TAC, it should have been settiement between portnes) instead of negative revaluation. Total agreed capital (given).........- P 40000] Less: Total contbuted capital (P20,000 + P 50,000 Difference (withdrawal) . b. The new partner's contributed capital is less than the agreed capital, the difference is attributable fo bonus to new partner: Ts contibuted capital (given) .. P 20,000 J's agreed capital: (P40,000 x 50%) 20,000 Difference... DP ee The withdrawals of P10,000 should be attributable to the old partners computed as follows: + [Total agreed capital (given) ...... PA0,000 Less: J's agreed capital (P40,000 x 50%) . -20,000 Total agreed capital ofthe old partners. 20,000 Less: G's agreed capital (P20,000 x 60%) H's agreed copitl (P20,000 x 40%) : 20,000 G's witkdrawo: P20,000 - P12,000 8.000 H's withdrawal: P10,000 ~ P8,000 . 22.000 The entry to admission and withdrawal in the books as follows: [ Cash (P20,000-P10,000) 70,000 | G, copital. ‘i 3.000 |H, copital..... 2.000 J, capital 20,000 Torecord the admision of Jand withdrawals ofG ond A. Case 14: Bonus and Revaluation (Goodwill) When Not Specifically Staled. An agreement may indicate that an incoming partner is to receive an interest that is greater or smaller than that which would be fecognized i the portner were simply to receive crea for the amount invested. Such on agreement, however, may fai to point out whether or not the required interest is to be ‘accomplished through recognition of bonus or revaluation (goodwill). In the absence of an pe aki statement, the conditions for admission must be carefully analyzed. Following are the Assumption 1: Revaluation (Goodwill) or Boni i me capital interest and a 25% interes in mel eh her te ES Since there was no specifi ‘i . f names cation as to what approach is to be used, the following altematives Alternative 1: Bonus Approach, 4, The total contibuted capital (10) ise ‘ is equal to th i s0 70 revaluation (goodwill should be eon Ai a la capil ACL “Advanced Financial Accounting ~ A Co 7 PARTNERSHIP DISSOLUTIONCHANGES IN OWNERSHIP Bonus method) ... Less Total contributed capita [P geccere Pa iene eee P2000 + Fg» FS0 45.000 . The new partner's contriouted cay he oge ; ita is Nes th | the difere ote one .an the agreed copital, the Total agreed capital (shoul f | ‘agreed capital should be equal fo TCC, since itis nce is Js ogreed capital: (P45,000 x 40%)... Difference (bonus to new partner). Iheenty torecord the transaction in the books follows: [Cash G. capital (P3,000 x 60%) H, capital (3,000 x 403) .. J.copitol.........2 To record te admission of ‘Aemative 2: Revaluation (Goodwill) Approach. a. the total contibuled copitel (ICC) i less than the total agreed capital (TAC). 50 revaluation (goodwill) should be recognized as follows: | Total ‘agreed capital: {P20,000 + P10,000) / (100% - 40%). -..-- P 50,000 | Less: Total contributed capital {P.20,000 + P10,000 + 15,000)... 45,000 wees P6000 | Difference (revalvation/goodwil).. contributed capital is less than the agreed capital, the difference of b. The new partner's 5,000 in (a) isaltributable to revaluation (goodwil] o new partner: Ts contiboted capital (given) ~ P1500 ¥'s agreed copia: (PS0,000 x 40%) 20.000 Difference [revaluation/goodwil to new partner). E5000 The entty fo record the transaction in the books follows: | Cash... Assets (goodwill J,capital. Torecord the admsion of J 15,000 5,000 20,000 The following items should be observed: The capital interest of J is 40%, while hs profit and loss is 25%, so |. The New Profit and Loss Ratlo, ti the new profit and loss interest of the new partnership is computed as follows: ii ae G H P| es Copital interest % |PaLR: G (608x752) : | H (40% x 75K) --e > J . 25 2 the Capital Balances of the New Partners. After admission of partner J, the capit |, he capital bal othe new partners are computed os ofows: Jonces Bonus Approach (total agreed capital) refer to Alternative | above: — ‘Advanced Financial Accounting ~ A Comprehentive: Conceptual & Procedural Approach pop SHAPER 9 G, capital (F20,000 - P1,800) ..- 10,000 ~P1,200) aa #copital(P100 00 ‘is J, capital Revaluation (goodwil) Approach (total agreed capital) reer to Altemative 2 above: 4, Comparing Bonus or Revaluation (Goodwill) Approach. In admission by purchase fe. Coxe 2 "Asumpfion 2], comparing book-valve approach agains revaluation (goodwil the parner isindiferent on both situations because of the following reasons: €. The new partners proft and los sharing ratio is the same with his her copitl interes! percentage interest in assets). b. The old partner's continue to share profits and losses between themselves in the orginal ratio. But, in this potfcular situation (Case 14, Assumplion 1}, the capitol interest which is 40% different from the profit and loss interest of 25%. So, to cmpare bonus against revaluation (goodwl)as flows: Schedule of Account Balances ‘Goodwill * Net Asset Capitals Bonus Anproach Assels__Revaluation _G_'___H J Balances admission of J....... P.45:000 p1g200 P6800 P1800 Revaluation Approach: Balance before admision ofJ.. P 45000 P5000 P2000 P 10.000 © P 20000 Depreciation/impoiment* 1300) = (2.250) 11500) 1.280) | Bolance atter depreciation impaiment bso po puZ7 EBs e.1BZ80 “new profil and loss ratio (G, 45%: H, 30% and J, 25%) The two methods will yield the same results computed as follows; sapit Z Bolonces after admission of (Bonus approach] ” pyp.200 P 8.800 P 18,000 Balances ater admission of J (Revaluation approach] 1775 18 Gain oF fs) through use of bonus approach The bonus approach and revaluation ( Al not yi vesul if the incomit fs (goodwil) approach will not yield the same incoming pariner’s share profi and los is no! identical with the percentage interest cowed assets (capital interest), Theref Si Sa ner stu be a5 follows: | fre, the selection process for the new (incoming) part ; Hii bak Approach it, P & Linterest > Capital interest. i ‘evaluation (Goodwill approach if, P & L interest < Capital interest. Therefore, the new port ou Ihe ocolege Te Ud lec fo use the revaluation (goodwil) approach De< se 0! 4 Financial Accounting A Comprehensive: Conceptual & Procedural Approoct —_ paTNERSHIP DISSOLUTIONCHANG, + 1N OWNER wet. SHIP umption 2: Revaluation (Goodwi if ‘ ) italinterest ond 0 40% interest in an Bonus fo Old Poriners. J invests P15,000 for a 30% since there was no specification as «ge presente ‘nterative 1: Bonus Approach, a. The total contributed cq ‘© what approach is to be used, the following alternatives pital (TCC) is equal to the total agreed capital (TAC]. so nO revaluation (goodwill should be recognized as follows: Total agreed capit - | oreed cop A (shouldbe SaucToTCC inesligo Less: Total contibuted capital (P20,000 + P10,000 + Ps, — 45.000 (P20, Difference... 9,000) b, The new partner's contributed capital is qr : _ isattibutoble fo bonus fo ola atl greater than the agreed copital, the differencs [Ts confibuted copital (Given) ....0.0s.c0sssssssssess P 15000] J's agreed copital: (P45,000 x 30%) . 13.500 Difference (bonus to old partners)... 21500 The entry to record the transaction in the books follows: Cash . 15,000 J, capital . 13,500 G, capital (P1,500 x 60%) . . 900 600 H. capitol (P1,500 x 40%) To record the admission of J. Alemative 2: Revaluation (Goodwill) Approach. a. The total contributed capital (TCC) is greater than the total agreed capital (TAC), so revaluation (goodwil) should be recognized as follows: Total agreed capital: P1S.000 /30%...-.-.- ~.P50,000 Total contributed capital (P20.000 + P10,000+P15,000).... _48,000 Difference {revaivation/goodwil) £5000 tributed capital is equal to the agreed capital, the difference of ble to revaluation (goodwill) to old partners: b. The new partner's cont 5,000 in (a) is attributal Ts contibuted capital (given) « «+--+ J's agreed capital: (P50,000x Difference . The enity to récord the transaction in the books follows Cash... vies Assets (goodwill J.copital.......- G, capital (P5,000 x 60%) -- H, capital (PS,000 x 40%) To record the admission of J. Telolowing items should be observed: iF capital interest of J is 30%, while his profit and loss is 40%, "Thy ve New Pf Ratlo. The S0the Sea oe rs interest of the new partnership is computed as folows: ‘Mma ace A Comprehensive: Conceptual & Procedural Approach Je. 2. The CopitelBolances of the New Pariners. Aller odmision of pariner J the cop bo of the new partners are computed as follows: mices Bonus Approach {total agreed capital) refer to Altemative | above: G, capital (P20,000 + P900) . P 20900] H, capital (P10,000 + 600 10,600 | J, capital. 3.500 Total. 40 Revaluation (goodwill) Approach (total gre ed capital) refer to Altemative 2 above: G, capital (P20,000 + P3,000) . P 23,000 H, capital (P10,000 + P2,000) 12.000 J, capital (P50,000 x 30%) 15,000 Total... 3. Comparing Bonus or Revaluation (Goodwill) Approach. In Case 14, Assumption 2, the new Partner prefers the revaluation (goodwill) approach because the Profit and loss interest (25%) is less than his capital interest (40%). But, in this particular situation (Assumption 2), the profit and foss interest (40%) is greater thon his capital interest (30%), eventually; the bonus ‘approach should be prefered. To compare bonus against revaluation (goodwill) as follows: Schedule of Account Balances ‘Goodwill, ] Net Asset Capito | Bonus Approach Assets Revaluation __G H st Balances admission of J... B_45.000 P20900 P10.400 P1350 Revaluation Approach: Balance before admission of J.P 45,000 P5000 P 23000 P1200 P1500 Depreciation/impairment.. 15.000) {1.800} _{1,200) Balance after depreciation impgitmert... sx _ P_45,000 a P2120 P10.800 “new profil Gnd loss rato (G, 36%: H, 24% ond J. 40%) The two methods will yield the same results computed as follows; Capit —G__H__i- Balances after admission of J (Bonus approach} P2090 P'10,600 P ine Balonces after admission of J (Revaluation approach} _21,200 10,800 13,000 Gain or (los) through use of bonus approach PL_3001P/ 200) P 500 “ if The bonus approach and revaluation (goodwill approach wil not yield the some ee incoming parine’s share profit and losis not identical with the percentage interest a €ssets (capital interes!) Therefore, the selection process for the new (incoming) par be as follows: : the in 1. Prefer Bonus approach if,P & Linterest > Capital interes. 2. Prefer Revaluation ( (Goodwill) approach if, P & L interest < Capital interest. ‘Advanced Financal Accounting A Comprehensow Concaphoal & Procedural Approach —_ pstHeRtHIP DISFOLUTIONCHANGR IN OWnaEsmiD = u , the new partner should elect to avantoge- . cases where there is no Specification eoach, the Bonus approach should be apnted young assets. yihdrawal/Retirement ofa Partner fe the bonus approach because of the P500 bonus approach or revaluation (goodwill) because it conforms to the cost principle of «a partner withdraws, te anton Gul daeec® Partnerthip agreement should be consulled fo determine w Ga paring: roquesa c oe Siete’ that would influence the procedure. The uire ination of the fair vai i nd ‘measurement of partnership income to the date of ico, ot he parity sm. 2 \iewise, in many Cases, the interest of the retiring port i riner's eoptl balance as a resut of the following items: pare sl be ea 10tho Pome . Capital balance (including withdrawals and additional inyesiments}; a Recognition ‘of accounting errors in prior periods; Recogrition of profit or loss from the beginning of the accounting period to the date of Tetirement; Loans and advances to (from) the partnership; and Recognition of net asset revaluations subject to the rules discussed previously. hhsome cases, it a partner withdraws in violation of the partnership agreement and without spproval of the remaining partners, he is enfiled only to his interest in the firm without corideration of revaluation (goodwill. In such a case, the withdrawing partner is liable for damages sustained by the remaining partes for his breach of the partnership agreement. fonever, a pariner who is forced fo withdraw trom a partnership i entitled fo compensation for tiul interest including revaluation (goodwill as determined. med that the partners, mutually agree to the retirement such hithe following examples, itis assu hat: Ject to sell his interest to an outside party, lect fo sels interest fo one or more of the remaining partners: |. The retiring partner may el . The retiring partner may eh or 3° The partners may mut partnership funds) to the rel be: ©. Payment in cash: cia b. 1 -cash assets; on c | c focoation ot Tiabilty for the full or balance of the unpoid total interest of the retiring partner. Station 1 has been discussed et aly agree to transfer partnership assets (payment from fing partner for hisinterest in the fir. Settlement may either jer in admission by purchase (the only ditference with 'ttement i thot in admission by purchase ft should De opital interests only unike retirement Sect that in adie” yf the reling parma) and need not be reviewed. The samo mi ferations apply to Situation 2, itmegotiated outside the partnership. ation 3 will be discussed thoroug! lyin te following ilusration: e partners may agree fo use the bonus cpproach or the revaluation (goodwill approach to *Scold the withdrawal: ‘onus Approach (GAAP). If the bonus oF toute Omount of the payment that ex ‘once, proach is used, the remaining partners are charged Peeds the Book valve of the reliing partner's capital Pe ie tee ee dna Romain gies Mavencad TA Comprebenvs Conceptual & Procedural Approach a CHAPTER Jo cid to the retiing portner is commonly allocated to the yep remain f int of the Bonus P Iheone® Telative profit and loss ratio (inthis case the relative ratio of 5 otto partners on the basis of thelr 52). is bosed on the cost principle. The bonus appr support for this approach is base PPIOACH may aly iuifed when the remaining partners cre simply anxious 10 ge! rid of a pariner ty s,0® ees. any recognition offevaiuation (goodwill dificult fo justly inthe absence of on gant Jength transaction. evalvation (Goodwill) Approach (N on the payment fo the reiing partner ining partners wil nol agree fo a reduction in ther copia ‘ons in the partnership agreement on how the withdrawals to than a revaluation (goodwill isto be recognized. I the carinership as a whole may be worth mote than the for on-GAAP), The revalvation (goodwill approach loos ‘os an indication ofthe fair valve of the patinenstip. Furthermore, itis used if (1) rem« the portners made specific provi be recorded: or (3} the portners agree feship has been profitable, the p value of the net assets. Once again, the revaluation (goodwill) approach is supported on the basis that a new entity is being formed and the ‘accounts of the new entity should be based. ‘ring revaluation (goodwil} on the retirement of o partner on the same theoretical grounds as they criticize recording unrecognized revaluation (goodwill on the admission of a new partner, Nevertheless, partnership. accounting sometimes uses al the recognition of revaluation (goodwill) at this event. Mustration 19-3: Withdrawal/Retiement of a Partner ‘Assume the following data on January 1, 20x4 for KLM Partnership had the following condensed balance sheet: Assets abilities ital 50,000 Liabilities . 40,000. K, capital (30%) 5,000 L, capital(50%). M, capital (20%).. Total. 25.000 Total. The percentages in parentheses after the partner's capital balances represent interests in profits ahd losses. Many accountants criticize rec Loan receivable — i their respective fe of the porinership 10 date of (On May 1, 20x4, K retires from the partnership. The net incom partner also on the retiement amounted to P20,000. The partnership paid cash to the refring retirement date, The following entries are necessary on the partnership books before paying the refiring partner: interest of the Income Summary... K, capital (P20,000 x 303) . L.copital (P20,000 x 50%) M, capital (P20,000 x 20%). . To record distribution of profit. K capital... Faas SETHE! . Loan receivable -K..... To close loan receivable account of the refing partner. “Advanced Financial Accounting =A Comprehensive: Conceptual & Procederal Approach . — pETNERIMIP DISSOLUTIONCHANGRS IN OWNERSHIP 1B tne otal interest of the retiring partner K amounted to: Sane Copitalinterest.........., ‘Add (deduct): P 30,000 | Share in net income ,. Loan receivable. . : 50 Total Interest of K before his retirement 231,000 case. 1: Payment al Book Value (S pad P8100. (Settlement price Is equal fo the Interest of rething partner). The tne entry to record the transaction in the books follows: K, copital. Cash To record retirement of K. cose 2: Payment at More than Book Value (settlement price is greater than the interest of relring partner). The partnership paid K, P35,000. Included in the noncash assets is an inventory costing P6000 with a fair valve of P10,000. The remaining partners continue ‘to use their old profi and loss ratio, : Assumption 1: Bonus fo Retiring Partner. The excess is considered bonus chargeable to | and M. 31,000 31,000 he entry to record the transaction in the books follows: 31,000 K, capital cs L capital (P4,000 x 5/7) M, capital (P4,000 x 2/7) . Cathie sss To record retiremer ‘Amount paid... Less: BV of K's to Bonus to Retiring Partner The following items should be observed: ne 1 net assets should not be recorded because this 1. Under bonus approach. undervaluation of wil be in contradiction of current accounting standards. ollows: The copital bolances of the partners after the retirement of K are as { {capital (P40,000 + P10.000, proft - P2867, onus)..... PA7.143 M. capital (P15,000 + P4,000 profit~ P1,143, bonus) 17.857 except Int by mutual agreement the invertor i fo be acusted to ing the some Gata, @AC6P et should be recorded fist before the setement. thei fair value. Then, the unde! ion in the books follows: The entries to record the transac! Inventory 4,000 sit 30%). 1,200 | Kapital (P4,000 x 30%) 1200 L capital (P4.000 x 50%) (p4,000 x 20%] K, capital. capital (P2 M, capital (P2,800% 2/7) - + 1314 CHAPTER 419 To record retirement of K computed os follows: ‘Amount paid .. ~.P 35,000 Less: BV of K’ 's total interest (30%) - (P31. (000+ PLO) wos oe 32,200 £2800 Bonus to Retiring Partner fom Reng | Assumption 2: Partial Revaluation (Goodwill) to Retiring Partner. The excess is considered os revaivation (goodwill to be recognized. The entries to record the transaction in the books follows: Inventory 4,000 K, capital (P4,000 x 30%) 1,200 L. capital (P4,000 x 50%) 2000 M, copital (P4,000 x 20%). 800 To increase the valve of inventory. K, copital... 32,000 ~ 2800 35,000 To record eltement of K computed as follows: Amount paid . Less: BV of K's fot interest (908) -(P31,000 + P.200) . Goodwil fo Retiring Partner The following Items should be observed: 1. Some argue that, in accordance with the cost basis, only the revaluation (goodwill of 2,800 that has been purchased should be recorded. 2. The situation at bar is the same situation in admission by investment Case 9, that recognition of understatement of assets is in compliance with GAAP under the revaluation (goodwil] approach. 3. The capital balances of the partners afler the retirement of K are as follows: L capital (P40,000 + P10,000, profit + P2,000, adjustment) ..._- P-52,000 M, capital [P15,000 + P4,000, profit + P800 adjustment)... 19,800 ‘A modifed version of ths partial revaluation (goodwill) approach happens assuming that when cosets and labilifes are revalved only to the extent of the excess payment to K, the entry 10 record the transaction is follows: K. capital . Assets. . Torecod relrement fk computed as ‘Amount paid... Less: BV of K's total intrest (30%). Partial revaluation (goodwill) to Retiing Paitner . ‘Assumption 3: Total Revaluation (Goodwill to Refiing Partner, The excess is considered 05 revaluation (goodwill 1o be recognized. = The entries to record the transaction in the books follows: inventory. TK K, copitl (P4,000 x 30%) . 1,200 L capital (P4000 x 503). 2000 M. Capital (P4,000 x 20%)... 800 To increased the valve ofinventory ‘Advanced Financhal Accounting - A Comprehensive: Conceptual & Procedural Approach x30%) . L, capital (P9,333 x 0 ! ‘Amount paid. Les: BV of K's total interest (308 -P31,000 Divided by (capitalized at): Total Revaluation (goodwill “The P2.800 represents K's 30% interest in revaluation joodwil of P9, tthe Sages ag ine an mem mert {good roo K' toca 5 's percentage bs used fo suggest fhe fota! valve of Ihe K. capital (P 32,200 + P2,800) . Cosh .. To record retvement of K fofit and loss % of K efollowing Items should be observed: 1, Whether part or all of the goodwil is recognized, ‘opponents of this procedure contend ‘am's length; therefore, the that transactions between portners should not be viewed os 1 determined objectively. In like manner, measure of revaluation (goodwill) may not b ineauitoble results may be produced If the remaining partners subsequently changed their profit anid loss ratio. ment of K are os follows: 2. The capital balances of the partners after the retirer LL, capital (P40,000 + 10,000, profit + P2.000, ‘adjustment + P4,666).P56,666 A, capital (P15,000 + PA,000, profi + 800 adjustment + P1,867).... 21.667 Comparison of Bonus Approach and Revaluation Approach (Goodwill Procedure) nd revaluation (goodwill) approach js.not feasible when there is {that is not allowed to be recorded due to GAAP rule] because Comparing bonus approach ar ‘nundervalvation of net assets tiswil distort the capital balances. ‘epuposes of comparon, lt us assume tat there ne undervalued inventory amounting fo Aton Case 2 above. Refer to the folowing schedule for comparison. ‘chedule of Account Balances Bolonces after retirement Of K-- Paria Revaluation /Goodwil APPFOO wi hice otoronerert OK P4000 P.50,000 19,000 Depreciation/impaiment*** «+ «- 7 4,000) (2857) _{1,143) ae % pareneerienty of 7200 ond PHD LOM respectively.

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