PARTNERSHIP DISSOLUTION

Admission by Buying Interest Directly from a Partner(s)

This is a personal transaction between the selling partner(s) and the buying new partner. There will be a transfer
of interest from the existing partner(s) to the new partner. The total partners’ equity will be the same since partnership
assets will not be affected.
Assume Reyes and Santos have capital balances of P100,000 each. Aquino is admitted as a partner.
Aquino purchased one half of interest of Reyes by paying P50,000.

Reyes, Capital 50,000

Aquino, Capital 50,000

Capital before Transfer of Capital after

Admission Interest Admission
Reyes ₱ 100,000 ( ₱ 50,000) ₱ 50,000
Santos 100,000 - 100,000
Aquino - 50,000 50,000
₱ 200,000 ₱ 200,000

Note: There was a transfer of ½ interest of Reyes to Aquino. The total equity did not change after the admission
of Aquino. Reyes received the payment of Aquino.

b. Transfer of interest is not equal to the amount paid

Aquino purchased one half of interest of Reyes by paying P 55,000.

Reyes, Capital 50,000

Aquino, Capital 50,000

Capital before Transfer of Capital after

Admission Interest Admission
Reyes ₱ 100,000 ( ₱ 50,000) ₱ 50,000
Santos 100,000 - 100,000
Aquino - 50,000 50,000
₱ 200,000 ₱ 200,000

Note: There was a transfer of ½ interest of Reyes to Aquino. The total equity did not change after the admission
of Aquino. Reyes received the payment of Aquino which resulted to his personal gain. If the amount paid was
less than P50,000, this would result to a personal loss.

Admission by Investment of the New Partner

The new partner may invest assets in the existing partnership. Thus, the transaction is between the new partner
and the partnership.

The partnership assets and partners’ equity will increase.

Illustration:
Trisha, Miguel and Jandet are partners in a Law firm sharing profits in the ratio of 2:4:2 with capital balances
of P300,000, P300,000 and P400,000 respectively. They decided to admit Adrian in the partnership.

a. No asset revaluation or bonus to be recognized.

 Adrian is to be given 20% interest for his investment with no asset revaluation or bonus to be recognized.

Cash 250,000
Adrian, Capital 250,000

Actual Capital Agreed Partners'

Contribution Equity
Trisha ₱ 300,000 ₱ 300,000
Miguel 300,000 300,000
Jandet 400,000 400,000
Capital before Admission* ₱ 1,000,000 ₱ 1,000,000
Adrian** 250,000 250,000
Total* ₱ 1,250,000 ₱ 1,250,000

*Total Capital contribution of existing partners is P1,000,000 which is 80% of the agreed partners’ equity
since the new partner is to be given 20%. Thus, the total agreed partners’ equity will be:
(P1,000,000/.80 = P1,250,000).

** So, Adrian would invest P250,000 (P1,250,000 - P1,000,000).

Note: When the actual capital contribution equals the agreed partners’ equity, there is no asset revaluation or bonus
or bonus to be recognized.

b. Bonus to new partner

Adrian will invest P200,000 and will be given a 20% interest in the firm including bonus from the old partners.

Cash 200,000
Trisha, Capital 10,000
Miguel, Capital 20,000
Jandet, Capital 10,000
Adrian, Capital 240,000

Actual Capital Agreed Partners'

Contribution Bonus Equity
Trisha ₱ 300,000 (P10,000) P40,000 x 2/8 ₱ 290,000
Miguel 300,000 (P20,000) P40,000 x 4/8 280,000
Jandet 400,000 (P10,000) P40,000 x 2/8 390,000
Adrian 200,000 40,000 240,000
Total* ₱ 1,200,000 ₱ 1,200,000

Note: If there is bonus, usually the total actual capital contribution equals the total agreed equity.

*Adrian capital credit would be P240,000 (P1,200,000 x 20%). So, he will receive P40,000 bonus from the
existing partners. Thus, the capital of the existing partners will decrease according to their profit and loss agreement.

c. Bonus to old partners

 For a P300,000 investment, Adrian is to be given a 20% interest in the firm with bonus to the old partners.

Cash 300,000
Trisha, Capital 10,000
Miguel, Capital 20,000
Jandet, Capital 10,000
Adrian, Capital 260,000

Actual Capital Agreed Partners'

Contribution Bonus Equity
Trisha ₱ 300,000 P10,000 (P40,000 x 2/8) ₱ 310,000
Miguel 300,000 P20,000 (P40,000 x 4/8) 320,000
Jandet 400,000 P10,000 (P40,000 x 2/8) 410,000
Adrian* 300,000 ( 40,000) 260,000
Total* ₱ 1,300,000 ₱ 1,300,000

Note: If there is bonus, usually the total actual capital contribution equals the total agreed equity.

*Adrian capital credit would be P260,000 (P1,300,000 x 20%). So, he will give P40,000 bonus to existing
partners. Thus, the capital of the existing partners will increase according to their profit and loss agreement.

d. Asset revaluation

Adrian will invest P300,000 for a 20% interest in the firm’s total equity.

Land 200,000
Trisha, Capital 50,000
Miguel, Capital 100,000
Jandet, Capital 50,000
To record asset revaluation

Cash 300,000
Adrian, Capital 300,000

Actual Capital Agreed Partners'

Contribution Revaluation Equity
Trisha ₱ 300,000 P50,000 (P200,000 x 2/8) ₱ 350,000
Miguel 300,000 P100,000 (P200,000 x 4/8) 400,000
Jandet 400,000 P50,000 (P200,000 x 2/8) 450,000
Adrian 300,000 300,000
Total* ₱ 1,300,000 200,000 ₱ 1,500,000

*Total agreed partners’ equity will be P1,500,000 computed as follows:

Total agreed partners’ equity = Adrian’s investment is 20% of the firm’s total equity

Total agreed partners’ equity = P300,000/0.20

Total agreed partners’ equity = P1,500,000

Revaluation value would be P200,000 (P1,500,000 - P1,300,000)

Note: Asset revaluation is equal to the total partners’ equity minus the total capital contribution. This results to
an increase in partners’ equity distributed among the partners according to their profit and loss agreement.
Retirement of a Partner

A partner may retire from the partnership. However, it shall be in accordance with the partnership agreement and
or with the consent of all the partners.

The capital account of the retiring partner must be updated. Thus, the following must be done before recording
the retirement of the partner:

1. Capital account of the retiring partner must be updated considering:

(A) Asset Revaluation
(B) Profit Distribution
2. Revaluation will affect all the partners.
3. The share in profit may be given only to the retiring partner or to all partners.

Illustration:

Assuming the updated capital account of Aquino is P100,000. The remaining partners, Emily and Melody have
capital balances of P200,00 and P300,000 respectively. They share profit and losses equally. The following are the
different ways that may be opted:

a. The equity is purchased by Ador, a new partner for P150,000. This is personal transaction between the retiring
partner and the new partner. This is admission of a partner by purchase of interest.

Aquino, Capital 100,000

Ador, Capital 100,000

Revised Partners' Equity

Ador Capital ₱ 100,000
Emily Capital 200,000
Melody Capital 300,000
Total ₱ 600,000

b. The equity is purchased by Emily, an existing partner for P150,000. This is personal transaction between the retiring
partner and the existing partner. There is a transfer of capital of retiring partner to the existing partner.

Aquino, Capital 100,000

Emily, Capital 100,000

Revised Partners' Equity

Emily Capital ₱ 300,000 (P200,000 + P100,000)
Melody Capital 300,000
Total ₱ 600,000

c. The equity of the retiring partner may be paid by the partnership by paying P100,000 (equal to the updated capital)

Aquino, Capital 100,000

Cash 100,000

Revised Partners' Equity

Emily Capital ₱ 200,000
Melody Capital 300,000
Total ₱ 500,000
 d. The equity of the retiring partner may be paid by the partnership at P150,000 recognizing P50,000 bonus to the
retiring partner. The capital accounts of the remaining partners decrease equally according to the profit sharing
agreement.

Aquino, Capital 100,000

Emily, Capital 25,000
Melody, Capital 25,000
Cash 150,000

Revised Partners' Equity

Emily Capital ₱ 175,000 (P200,000 - P25,000)
Melody Capital 275,000 (P300,000 - P25,000)
Total ₱ 450,000

Note: The equity decreases since the asset (cash) decreases.

e. The equity of the retiring partner may be paid by the partnership at P80,000 recognizing P20,000 bonus to the
remaining partners. The capital accounts of the remaining partners increase equally according to the profit sharing
agreement.

Aquino, Capital 100,000

Emily, Capital 10,000
Melody, Capital 10,000
Cash 80,000

Revised Partners' Equity

Emily Capital ₱ 210,000 (P200,000 + P10,000)
Melody Capital 310,000 (P300,000 + P10,000)
Total ₱ 520,000

Note: The equity decreases since the asset (cash) decreases.

Death of a Partner

If in case of death of a partner, the same procedures like the case of the retiring partner must be done in updating
the capital account of the deceased partner. However, the account of the deceased partner will be debited with a credit
to the account Payable to the Estate. Assume, Mr. Vasquez died, the entry will be:

Vasquez, Capital xx
Payable to Vasquez Estate xx

If the payment to the estate will require interest on the date of settlement, the entry will be:

Vasquez, Capital xx
Interest Expense xx
Payable to Vasquez Estate xx

Incorporation

This time the partnership may opt to change its ownership by filing for incorporation by using the partnership’s assets
as its capital. The books of the partnership will have to be adjusted and closed and a statement of financial position shall be
prepared as a basis for the incorporation.

The share capital will be distributed to partners according to their capital balances. Assuming partners X, Y, and Z
decided to incorporate their partnership the entry will be:

X, Capital xx
Y, Capital xx
Z, Capital xx
Share of XYZ Corporation xx
To record the distribution of corporation to partners based
on the capital balances of the partners.

Note: The share of XYZ Corporation equal the net assets of the partnership after the adjustments.