DISSOLUTION –

CHANGES IN OWNERSHIP
Source: Partnership and Corporation, Ballada
Prepared by Greg O. Saclot
for ABM SHS/BSA 1st Year/BSBA 1st Year
 REVIEW

1. When the entity uses asset/liability

method, which of the following accounts
is likely to be debited as adjustment?
A. Prepaid Insurance
B. Cash
C. Unearned Subscription Revenue
D. Interest Revenue
 REVIEW

2. When the entity uses expense/revenue

method, which of the following accounts
is likely to be credited as adjustment?
A. Prepaid Rent
B. Insurance Expense
C. Interest Receivable
D. Cash
 REVIEW
3. When a partner contributes non-cash
assets into the partnership, the non-cash
asset will be valued at
A. fair values.
B. historical costs.
C. carrying amount.
D. agreed values.
 REVIEW
4. Which of the following is allowed in the
formation of partnership?
A. Two or more individuals
B. Two individuals and sole proprietor
C. Two sole proprietors and an individual
D. A sole proprietor and an existing
partnership
 REVIEW

5. Which of the following statements is incorrect?

A. A partner will not share in the partnership profit.
B. General professional partnership is subject to 30%
income tax.
C. The ratio 1:1:1:2 is the same as 1/5, 1/5, 1/5 and 40%.
D. Three partners may agree in the following sharing: ½,
1/3 and 1/6 even if each contributed P200,000.
 REVIEW

6. When a partnership incurred a loss during the year,

A. always, all partners will share the partnership loss.
B. all but one will share loss.
C. all but one will share profit.
D. all partners will share profit.
 REVIEW

7. The entity uses prepaid insurance whenever insurance

premiums are paid. If no adjustment for expired
portion is made at end of the year,
A. Total assets will be understated.
B. Total owner’s equity is overstated.
C. Total liabilities will decrease.
D. Total revenue is understated.
 REVIEW

8. A pure industrial partner

A. Will share in the partnership profits.
B. Will share in the partnership profits and losses.
C. Will share in the partnership losses.
D. Will not share in the partnership profits and losses.
 REVIEW

9. How much will be the bonus for Part A if 20% bonus

before bonus of the remaining partnership profits
P2,000,000?
A. P400,000
B. P333,333
C. P480,000
D. Insufficient data
 REVIEW

10. Which of the following organizations has limited

liability?
A. Sole proprietorship
B. General partnership
C. Limited partnership
D. Corporation
 LEARNING OBJECTIVES
1. Define dissolution.
2. Discuss the principle of delectus
personae.
3. Identify and describe the manner of
admitting a new partner.
4. Distinguish between admission by
purchase of an interest and admission by
investment of assets in a partnership.
 LEARNING OBJECTIVES
5. Journalize the admission of a new partner by
purchase of interest under different cases.
6. Journalize the admission of a new partner by
investment under different cases.
7. Differentiate total contributed capital from
total agreed capital.
8. Account for withdrawal of a partner.
9. Account for the death of a partner.
10. The incorporation of a partnership (will be
discussed in corporation accounting)
 DISSOLUTION

The dissolution of a partnership is the

change in the relation of the partners
caused by any partner ceasing to be
associated in the carrying on as
distinguished from the winding up of the
business of the partnership. (Civil Code of the
Philippines, Article 1828)
 DISSOLUTION
On dissolution, the partnership is not terminated,
but continues until the winding up of the
partnership affairs is completed (Article 1829).

Winding up is the process of settling the business

or business affairs after dissolution. Termination is
that point in time when all partnership affairs are
wound up or completed, and is the end of the
partnership life.
 DISSOLUTION

One of the characteristics of a partnership is

limited life. Any change in the membership
of this form of business organization will result
to dissolution.
 DISSOLUTION
Most changes in the ownership of a
partnership are accomplished without
interruption of its normal operations.

A partnership is said to be liquidated when

the business is terminated. A partnership
may be dissolved without being terminated
but liquidation is always preceded by
dissolution.
 DISSOLUTION

When partnership dissolution occurs, a new

accounting entity is formed. The old
partnership should first adjust its books so
that all accounts are properly stated at the
date of dissolution.
 PRINCIPLE OF DELECTUS PERSONAE
This phrase, which literally signifies the
choice of a person, is applied to show that
partners have the right to select their
co-partners; and that no set of partners can
take another person into the partnership
without the consent of each of the partners.
A new partner can only be admitted into a
partnership with the consent of all the
continuing partners.
 PRINCIPLE OF DELECTUS PERSONAE

A new partner can only be admitted into a

partnership with the consent of all the
continuing partners. No one becomes a
member of the partnership without the
consent of all the members. This is because
a partnership is based on mutual trust and
confidence of the partners.
 PRINCIPLE OF DELECTUS PERSONAE

A person admitted as a partner into an

existing partnership is liable for all the
obligations of the partnership incurred
before his admission as though he had been
a partner when such obligations were
incurred. Such liability is limited to his capital
contribution, unless otherwise agreed.
 CAUSES OF DISSOLUTION

1. Admission of a partner
a. Purchase of an interest from one or
more of the existing partners.
b. Investment of assets in the partnership
by the new partner.
 CAUSES OF DISSOLUTION
2. Withdrawal or retirement of a partner
a. by selling equity interest to one or more
of the remaining partner
b. by selling equity interest to an outsider
c. by selling equity interest to the
partnership
3. Death of a partner
4. Incorporation of the partnership
 ILLUSTRATION
Sarev Michael Joson and Nikko Aljon De
Guzman are partners with capital balances
of P500,000 and P1,000,000, respectively.
They share profits in the ratio of 1:3.
 CASE 1A.1 PAYMENT TO OLD PARTNERS IS EQUAL TO
INTEREST PURCHASED.
Partners Joson and De Guzman received an offer from Luis Miguel
Villareal to purchase directly one-fifth of each of their interest in the
partnership for P300,000.

Joson, Capital 100,000

De Guzman, Capital 200,000
Villareal, Capital 300,000
To record admission of Villareal by purchasing 1/5 interest of each
partner.
Joson P500,000 x 1/5 = P100,000
De Guzman P1,000,000 x 1/5 = P200,000
Total = P100,000 + P200,000 = P300,000
 CASE 1A.1 PAYMENT TO OLD PARTNERS IS EQUAL TO
INTEREST PURCHASED.

Effect on capital balances after admission of Villareal:

Joson De Guzman Villareal
Capital balances
before admission of P500,000 P1,000,000
Villareal
1/5 interest Purchased (100,000) ( 200,000) P300,000
= P500,000 x 1/5 =P1,000,000 x 1/5 = P1,500,000 x 1/5
Capital balances after
admission of Villareal P400,000 P 800,000 P300,000

Total partnership equity before admission is P1,500,000.

Total partnership equity after admission is P1,500,000.
 CASE 1A.1 PAYMENT TO OLD PARTNERS IS EQUAL TO
INTEREST PURCHASED.

Effect on profit sharing after admission of Villareal:

Joson De Guzman Villareal
Old profit sharing 1:3
before admission of 25% 75%
Villareal
1/5 interest Purchased - 20% -20% 20% = 1/5
New profit/loss sharing
after admission of 20% 60% 20%
Villareal = 25% x 80% = 75% x 80%
 CASE 1A.2 PAYMENT TO OLD PARTNERS IS LESS THAN
INTEREST PURCHASED.
Partners Joson and De Guzman received an offer from Luis Miguel
Villareal to purchase directly one-fourth of each of their interest in the
partnership for P300,000.

Joson, Capital 125,000

De Guzman, Capital 250,000
Villareal, Capital 375,000
To record admission of Villareal by purchasing 1/4 interest of each
partner.
Joson P500,000 x 1/4 = P125,000
De Guzman P1,000,000 x 1/4 = P250,000
Total = P125,000 + P250,000 = P375,000
 CASE 1A.2 PAYMENT TO OLD PARTNERS IS LESS THAN
INTEREST PURCHASED.

Effect on capital balances after admission of Villareal:

Joson De Guzman Villareal
Capital balances
before admission of P500,000 P1,000,000
Villareal
1/5 interest Purchased (125,000) ( 250,000) P375,000
= P500,000 x 1/4 =P1,000,000 x 1/4 = P1,500,000 x 1/4
Capital balances after
admission of Villareal P375,000 P 750,000 P375,000

Total partnership equity before admission is P1,500,000.

Total partnership equity after admission is P1,500,000.
 CASE 1A.2 PAYMENT TO OLD PARTNERS IS LESS THAN
INTEREST PURCHASED.

Effect on profit sharing after admission of Villareal:

Joson De Guzman Villareal
Old profit sharing 1:3
before admission of 25% = ¼ 75% = ¾
Villareal
1/4 interest Purchased - 25% -25% 25% = 1/4
New profit/loss sharing
after admission of 18.75% = 3/16 56.25% = 9/16 25%
Villareal =¼x¾ =¾x¾ = ¼ = 4/16
 CASE 1A.3 PAYMENT TO OLD PARTNERS IS HIGHER THAN
INTEREST PURCHASED.
Partners Joson and De Guzman received an offer from Luis Miguel
Villareal to purchase directly one-tenth of each of their interest in the
partnership for P300,000.

Joson, Capital 50,000

De Guzman, Capital 100,000
Villareal, Capital 150,000
To record admission of Villareal by purchasing 1/10 interest of
each partner.
Joson P500,000 x 1/10 = P 50,000
De Guzman P1,000,000 x 1/10 = P100,000
Total = P50,000 + P100,000 = P150,000
 CASE 1A.3 PAYMENT TO OLD PARTNERS IS HIGHER THAN
INTEREST PURCHASED.

Effect on capital balances after admission of Villareal:

Joson De Guzman Villareal
Capital balances
before admission of P500,000 P1,000,000
Villareal
1/5 interest Purchased ( 50,000) ( 100,000) P150,000
= P500,000 x 1/10 =P1,000,000 x 1/10 = P1,500,000 x 1/10
Capital balances after
admission of Villareal P450,000 P 900,000 P150,000

Total partnership equity before admission is P1,500,000.

Total partnership equity after admission is P1,500,000.
 CASE 1A.3 PAYMENT TO OLD PARTNERS IS HIGHER THAN
INTEREST PURCHASED.

Effect on profit sharing after admission of Villareal:

Joson De Guzman Villareal
Old profit sharing 1:3
before admission of 25% = ¼ 75% = ¾
Villareal
1/4 interest Purchased - 10% -10% 10% = 1/10
New profit/loss sharing
after admission of 22.50% = 9/40 67.50% = 27/40 10%
Villareal = ¼ x 9/10 = ¾ x 9/10 = 1/10 = 4/40
 INVESTMENT OF ASSETS IN A PARTNERSHIP

Definition of Terms

Total contributed capital is the sum of the capital balances of the

old partners and the actual investment of the new partner.

Total agreed capital is the total capital of the partnership after

considering the capital credits given to each of the partners.
Under the bonus method, total agreed capital is equal to the total
contributed capital though the capital credits to each partner
may equal to, greater than or less than his capital contributions.
 INVESTMENT OF ASSETS IN A PARTNERSHIP

Definition of Terms

Bonus is the amount of capital or equity transferred by one partner

to another partner.

Capital credit is the equity of a partner in the new partnership and

is obtained by multiplying the total agreed capital by the
applicable percentage interest of the partner

.
 INVESTMENT OF ASSETS IN A PARTNERSHIP

Definition of Terms

Bonus to old partners

A partnership may be exceptionally attractive because of superior
earnings record such that the old partners may demand a
premium from a new partner. This premium increases the old
partners’ capital interest. This premium is effected either by
allocating a portion of the investment of the new partner to the old
partners. The capital accounts of the old partners are credited for
the premium according to their “old” profit and loss ratio.
.
 INVESTMENT OF ASSETS IN A PARTNERSHIP

Definition of Terms

Bonus to new partner

A new partner may be admitted into the partnership because of
his vast financial resources, extensive business network, distinctive
reputation, unique management and/or technical skills. The old
partners may be willing to give a premium for all these exceptional
qualifications by allowing a capital credit greater than the
prospective partner’s investment just to ensure his association with
the partnership. This premium will be treated as a bonus from the
equities of the old partners and credited to the new partner.
.
 CASE 1B.1 CONTRIBUTED CAPITAL
IS EQUAL TO CAPITAL CREDIT

Partners Joson and De Guzman received an offer from Luis Miguel

Villareal who will invest P300,000 for one-sixth in the new
partnership. The new partnership capital is P1,800,000.

Cash 300,000
Villareal, Capital 300,000
To record admission of Villareal by investing P300,000 for 1/6
interest in the new partnership.
Contributed capital P300,000
Capital credit = (P1,500,000 + P300,000) x 1/6 =P300,000
 CASE 1B.1 CONTRIBUTED CAPITAL
IS EQUAL TO CAPITAL CREDIT

Effect on capital balances after admission of Villareal:

Joson De Guzman Villareal
Capital balances
before admission of P500,000 P1,000,000
Villareal
Capital invested P300,000
Capital balances after
admission of Villareal P500,000 P1,000,000 P300,000
=P1,800,000 x 1/6

Total partnership equity before admission is P1,500,000.

Total partnership equity after admission is P1,800,000.
 CASE 1B.1 CONTRIBUTED CAPITAL
IS EQUAL TO CAPITAL CREDIT

Effect on profit sharing after admission of Villareal:

Joson De Guzman Villareal
Old profit sharing 1:3
before admission of 25% = ¼ 75% = ¾
Villareal
Interest of new partner 1/6
New profit/loss sharing
after admission of 5/24 5/8 = 15/24 1/6 = 4/24
Villareal = ¼ x 5/6 = ¾ x 5/6
 CASE 1B.2 CONTRIBUTED CAPITAL
IS GREATER THAN CAPITAL CREDIT
Partners Joson and De Guzman received an offer from Luis Miguel
Villareal who will invest P300,000 for one-tenth in the new partnership.
The new partnership capital is P1,800,000.

Cash 300,000
Joson, Capital (P120,000 x1/4) 30,000
De Guzman, Capital (120,000x ¾) 90,000
Villareal, Capital 180,000
To record admission of Villareal by investing P300,000 for 1/10
interest in the new partnership.
Contributed capital P300,000
Capital credit =(P1,500,000 + P300,000) x 1/10 = 180,000
Bonus from new partner to old parners P120,000
 CASE 1B.2 CONTRIBUTED CAPITAL
IS GREATER THAN CAPITAL CREDIT
Effect on capital balances after admission of Villareal:
Joson De Guzman Villareal
Capital balances
before admission of P500,000 P1,000,000
Villareal
Capital invested P300,000
Bonus from new to old 30,000 90,000 (120,000)
partners = P120,000 x ¼ = P120,000 x ¾
Capital balances after Capital credit
admission of Villareal P530,000 P1,090,000 P180,000
=P1,800,000 x 1/10
Total partnership equity before admission is P1,500,000.
Total partnership equity after admission is P1,800,000.
 CASE 1B.2 CONTRIBUTED CAPITAL
IS GREATER THAN CAPITAL CREDIT

Effect on profit sharing after admission of Villareal:

Joson De Guzman Villareal
Old profit sharing 1:3
before admission of 25% = ¼ 75% = ¾
Villareal
Interest of new partner 10% = 1/10
New profit/loss sharing
after admission of 9/40 27/40 1/10= 4/40
Villareal = ¼ x 9/10 = ¾ x 9/10
 CASE 1B.3 CONTRIBUTED CAPITAL
IS LESS THAN CAPITAL CREDIT
Partners Joson and De Guzman received an offer from Luis Miguel
Villareal who will invest P300,000 for one-fifth in the new partnership. The
new partnership capital is P1,800,000.

Cash 300,000
Joson, Capital (P60,000 x ¼) 15,000
De Guzman, Capital (P60,000 x ¾) 45,000
Villareal, Capital 360,000
To record admission of Villareal by investing P300,000 for 1/5
interest in the new partnership.
Contributed capital P300,000
Capital credit =(P1,500,000 + P300,000) x 1/5 = 360,000
Bonus from old partners to new partner P 60,000
 CASE 1B.3 CONTRIBUTED CAPITAL
IS LESS THAN CAPITAL CREDIT
Effect on capital balances after admission of Villareal:
Joson De Guzman Villareal
Capital balances
before admission of P500,000 P1,000,000
Villareal
Capital invested P300,000
Bonus from old to new ( 15,000) ( 45,000) 60,000
partner = P60,000 x ¼ = P60,000 x ¾
Capital balances after Capital credit
admission of Villareal P485,000 P 955,000 P360,000
=P1,800,000 x 1/5
Total partnership equity before admission is P1,500,000.
Total partnership equity after admission is P1,800,000.
 CASE 1B.3 CONTRIBUTED CAPITAL
IS LESS THAN CAPITAL CREDIT

Effect on profit sharing after admission of Villareal:

Joson De Guzman Villareal
Old profit sharing 1:3
before admission of 25% = ¼ 75% = ¾
Villareal
Interest of new partner 20% = 1/5
New profit/loss sharing
after admission of 1/5 = 4/20 = 20% 3/5 = 12/20 = 60% 1/5 = 4/20 = 20%
Villareal = ¼ x 4/5 = ¾ x 4/5
 CASE 2 WITHDRAWAL OR RETIREMENT OF A PARTNER

When a partner’s interest is sold to another partner or an

outsider, the withdrawing partner is paid from the
personal assets of the buyer. Accounting for this sale is
similar to admission by purchase of interest. The total
assets of the partnership are not affected by the
consideration involved. The required entry will only be a
debit to the seller’s capital account for his capital
balance and a credit to the buyer’s capital account for
the same amount.
 CASE 2 WITHDRAWAL OR RETIREMENT OF A PARTNER

There are times when a partner withdraws in the middle

of the accounting period; in such case, the books of the
partnership should be updated to determine the retiring
partner’s capital balance. Profits or losses should be
measured from the last closing of books to the date of
withdrawal and distributed according to their profit or
loss sharing agreement.
 CASE 2 WITHDRAWAL OR RETIREMENT OF A PARTNER

Sale of interest to the partnership

When a withdrawing partner sells his interest to the

partnership, the partner is paid from the assets of the
partnership. He may receive an amount equal to,
greater than or less than the balance of his capital
amount. The effect of withdrawal is to reduce the assets
and the owners’ equity of the partnership.
 CASE 2 WITHDRAWAL OR RETIREMENT OF A PARTNER

Assume the capital balances of the partners are:

Joson, Capital P 500,000
De Guzman, Capital 1,500,000
Villareal, Capital 300,000
They share profit or loss in the ratio 1:3:1.
 CASE 2 WITHDRAWAL OR RETIREMENT OF A PARTNER

Case 2.1 Withdrawal at book value

Assume that Sarev Michael Joson agreed to accept

payment equal to his interest. The entry of payment is:

Joson, Capital 500,000

Cash 500,000
 CASE 2 WITHDRAWAL OR RETIREMENT OF A PARTNER
Case 2.2 Withdrawal at more than book value

Assume that Sarev Michael Joson agreed to accept P600,000

payment to his interest. The entry of payment is:
Joson, Capital 500,000
De Guzman, Capital 75,000
Villareal, Capital 25,000
Cash 600,000
De Guzman: P100,000 x ¾ = P75,000.
Villareal: P100,000 x ¼ = P25,000.
 CASE 2 WITHDRAWAL OR RETIREMENT OF A PARTNER
Case 2.3 Withdrawal at less than book value

Assume that Sarev Michael Joson agreed to accept P300,000

payment to his interest. The entry of payment is:
Joson, Capital 500,000
De Guzman, Capital 150,000
Villareal, Capital 50,000
Cash 300,000
De Guzman: P200,000 x ¾ = P150,000.
Villareal: P200,000 x ¼ = P50,000.
 CASE 3 DEATH OF A PARTNER

The death of a partner dissolves a partnership. When the

death of a partner does not result to liquidation, the
accounting procedures to be followed are similar to
those discussed in the withdrawal of a partner. The
deceased partner may be considered to have retired
from the partnership and his heirs or estate can expect to
receive the amount of his interest from the business. If
payment to the estate of the deceased cannot be made
immediately, the balance in the capital account of the
deceased partner should be transferred to a liability
account, payable to the estate.
 CASE 4 INCORPORATION OF A PARTNERSHIP

This will be discussed in accounting for corporation.

Topic for next meeting:
Liquidation
Thank you!