Chapter 3

Partnership Dissolution

True or False
1. The total capital of a partnership increases when an incoming partner purchases interest from an
existing partner. TRUE
2. According to the law, a partnership is dissolved when a new partner is admitted or when an
existing partner withdraws. TRUE
3. You and I are partners with capital balances of Php 5/each. We have equal interest in the
partnership. Friend acquires ½ of your interest for Php 3. Your capital balance after the admission
of Friend is Php 2.5. TRUE
4. Using the same facts above, the payment of Friend is recorded in the partnership book. FALSE
5. Using the same facts, the total partnership capital after the admission of Friend is Php 13. FALSE
6. Disregard the above assumption, Friend acquires 20% interest by investing Php 2.5 to the
partnership. No bonus is allowed. My capital after Friend admission is Php 3.75. FALSE
7. Using the above facts, the investment of Friend is recorded in the partnership books. TRUE
8. Dog, Cat and Mouse are partners with capital balance of Php 5 each. The partners have equal
interests in the partnership. Mouse is fed up with Dog and Cat’s quarrels and wants to withdraw
from the partnership. The partnership’s assets are fairly valued. Dog acquires Mouse interest for
Php 2. Dog’s capital after the withdrawal of Mouse is Php 10. TRUE
9. Using the above facts, the partnership pays Mouse Php 7 as settlement of his partnership interest.
Cat’s capital after the withdrawal of Mouse is Php 4. TRUE
10. Using the same facts, Cat was able to persuade Mouse to stay on the condition that the
partnership should be converted into a corporation. The corporation issued 4 shares with par
value of Php 1/share to each of the partners. The credit to share premium is Php 2. TRUE

Multiple Choice
1. It is the change in the relation of the partners caused by any partner ceasing to be associated
in the carrying on of the business
1. Dissolution b. Liquidation c. Incorporation d. Break-up

2. The admission of a new partner effected through purchase of interest from an existing partner is
a. Recorded in the partnership books as a debit to cash or other asset and a credit
to the incoming partner’s capital account
b. Recorded in the partnership’s books as a transfer within equity
c. Recorded in the partnership’s books as a transfer from equity to liability
d. Not recorded in its entirety

3. After the admission of a new partner, the total partnership capital increased by the fair value of
the new partner’s net contributions to the partnership. The admission was accounted for
a. Under the goodwill method
b. As a partnership formation
c. As a purchase of interest
d. As an investment in the partnership

4. In the A&B partnership, A and B had a capital ratio of 3:1 and a profit and loss ratio of 2:1,
respectively. The bonus method was used to record C’s admission as a new partner. What ratio would be
used to allocate to A and B, the excess of C’s contribution over the amount credited to C’s capital account?
a. A and B’s new relative capital ratio
b. A and B’s new relative capital profit and loss ratio
c. A and B’s old capital ratio
d. A and B’s old profit and loss ratio

5. When partner D retired, the partnership paid D an amount that was lower than the balance of his
capital account. Which of the following statement is incorrect?
a. The partnership assets decreased as a result of D’s retirement
b. The other partners’ capital balances increased
c. The partnership assets were not affected
d. The number of capital accounts in the partnership chart of accounts decreased.
Problem Solving:
1. Car joins the partnership of App and Bann. The partnership’s statement of financial position
before admission of Car are as follows:
Cash Php 30,000 Accounts Payable Php 80,000
Accounts Receivable 140,000 App, Capital 515,000
Inventory 200,000 Bann, Capital 275,000
Equipment 500,000

The following adjustments are determined:

a. The recoverable amount of the account receivable is Php 120,000
b. The inventory has a net realizable value of Php 160,000
c. The equipment has a fair value of Php 450,000
d. Unrecorded liabilities amount to Php 20,000

Required:
A. Assume a purchase of interest where Car acquires 50% of Bann capital for Php 800,000. Provid e
the entry to determine the capital balances and P/L ratio of the partners after Car’s admission.
Ban, capital 137,500.00
Car, capital 137,500.00
p/l
App 515,000.00 55%
Bann 275,000.00 30%
Car 137,500.00 15%
927,500.00
B. Assume that Car purchase 20% of App and Bann capital interest for Php 800,000. Provide the
entry to determine the capital balances of the partner’s after Car’s admission.

App, Capital (515000*20%) 101,000.00

Ban, Capital (275000*20%) 55,000.00

Car, Capital 156,000.00

App Ban Car totals

Capital, beginning 515,000.00 275,000.00 790,000.00

sale of interest to Car (101,000.00) (55,000.00) 156,000.00 -

Capital, ending 414,000.00 220,000.00 156,000.00 790,000.00

C. Assume Car wants to invest for a 20% in the net assets and profits of the partnership. If no bonus
is allowed, how much should Car invest and what would be the new P/L ratio of the partners after Car
admission.
app ban Car total

capital bfr admission 515,000.00 275,000.00 790,000.00

CARS investment (20%) 158,000.00 158,000.00

capital after cars admission 515,000.00 275,000.00 158,000.00 948,000.00

New P/L
App 54%
Ban 29%
Car 17%

D. Assume Car invest Php 100,000 for 20% interest in the net assets and profits of the partnership.
No goodwill is recognized. Provide the entry to compute for the capital balances of the partners after Car’s
admission.

net asset bfr admission 790,000.00

investment of Car 100,000.00

after admission 890,000.00

interest of Car 20%

cars capital credit 178,000.00

 investment of Car 100,000.00

bonus 78,000.00

app ban Car total

capital bfr admission 515,000.00 275,000.00 790,000.00

cars investment 100,000.00 100,000.00

bonus to partners (50,848.10) (27,151.90) 78,000.00 -

capital aft cars admission 464,151.90 247,848.10 178,000.00 890,000.00

ENTRY

cash 100,000.00

app, capital 50,848.10

ban, capital 27,151.90

cars, capital 178,000.00

E. Assume Car invest Php 180,000 for a 20% interest in the net asset and profits of the partnership.
No goodwill is recognized. Provide for the entry and compute for the capital balances of the partners after
Car admission.

net asset bfr admission 790,000.00

investment of Car 180,000.00

after admission 970,000.00

interest of Car 20%

cars capital credit 194,000.00

investment of Car 180,000.00

bonus to car 14,000.00

app ban Car total

capital bfr admission 515,000.00 275,000.00 790,000.00

cars investment 180,000.00 180,000.00

bonus to Car (9,126.58) (4,873.42) 14,000.00 -

 capital aft cars admission 505,873.42 270,126.58 194,000.00 970,000.00

ENTRY
cash 180,000.00
app capital 9,126.58
ban, capital 4,873.42
cars capital 194,000.00

2. Partners A, B and C had the following capital balances on January 1, 20x1: A (50%) – Php 320,000;
B (30%) – Php 192,000 and C (20%) – Php 128,000. Partner A decided to retire on September 1, 20x1. The
partnership earned profit of Php 800,000 from January 1, 20x1 to August 31, 20x1 and the partners had
the following capital withdrawals during the period: A – Php 40,000; B – Php 60,000 and C – Php 30,000

Required:
A. Partner B purchases Partner’s A interest for Php 700,000. Provide the entry and compute for the
capital balances and P/L ratio of the partner’s after A’s retirement.

A, capital 320,000.00
B, capital 320,000.00

B. The partnership pays Partner A Php 700,000 for his interest. Provide the entry and compute for
the capital balances and P/L ratio of the partners after A’s retirement.

A,Capital 720,000.00

B, Capital 12,000.00

C, Capital 8,000.00

Cash 700,000.00
A B C TOTALS
adjustment before
retirement 720,000.00 432,000.00 288,000.00 1,440,000.00

payment to A (700,000.00) (700,000.00)

Bonus to A 20,000.00 (12,000.00) (8,000.00) -

40,000.00 420,000.00 280,000.00 740,000.00

C. The partnership pays Partner A Php 650,000 for his capital. Provide the entry and compute for the
capital balances of the partners after A’s retirement.

A,Capital 720,000.00

B, Capital 42,000.00

C, Capital 28,000.00

Cash 650,000.00
A B C TOTALS

adjustment before retirement 720,000.00 432,000.00 288,000.00 1,440,000.00

payment to A (650,000.00) (650,000.00)

Bonus to B&C (70,000.00) 42,000.00 28,000.00 -

- 474,000.00 316,000.00 790,000.00

3. Use the information above (No. 2). However, instead of Partner A retirement, the partnership is
converted into a corporation on August 31, 20x1. The corporation issued 1,000 preference shares with a
par value of Php 200/share to each of the partners and even multiples of ordinary shares with par value
of Php50/share for their remaining interest.

Required: Compute for the number of shares issued to each of the partners.
ordinary shares ORD. SHARE*50
A 3,000.00 Php50 150,000.00
B 3,000.00 Php50 150,000.00
C 3,000.00 Php50 150,000.00
450,000.00
PREFERENCE SHARE
A 1,000.00 200.00 200,000.00
B 1,000.00 200.00 200,000.00
C 1,000.00 200.00 200,000.00
600,000.00

SHARE CAPITAL 1,050,000.00

A, Capital 525,000.00
B, Capital 315,000.00
C, Capital 210,000.00

The End!