Partnership - Dissolution

Dissolution of a partnership refers to the change in the
relation of the partners caused by any partner ceasing to be
associated in the carrying out of the business.
A partnership dissolution occurs in any of the following
cases:
1. Admission of a new partner
a. By purchase
b. By investment
2. Retirement or Withdrawal of a partner
3. Death, incapacity or bankruptcy of a partner
4. Incorporation of a partnership
to the partners based on the existing profit or loss sharing
agreement.
Continuing the previous example, assume that C is to be
admitted to the partnership by purchasing from A and B
30% of their interest by paying them a total of P120,000.
They have determined that XYZ’ assets are undervalued and
that P120,000 is equal to 30% of the true net value of the
company.
In this case, we have to determine first the new partnership
capital by grossing up P120,000 as follows:

Admission of a new partner P 120,000

=P 400,000
.30
When a new partner is admitted, the old partnership ceases
to exist and a new partnership is formed. But before the new This is the true net value of the company.
partner is admitted, the steps below should be done first.
Next, we have to determine the adjusted capital balances of
1. Determine the profit or loss for the period and distribute A and B prior to revaluation as follows:
the amount to the partners based on the existing profit
A B Total
or loss sharing agreement Unadjusted Capital P200,000 P100,000 P300,000
Example: A and B are partners of XYZ Partnership with Adjustments:
Profit (Loss) 15,000 15,000 30,000
capital balances amounting to P200,000 and P100,000, Errors 2,500 2,500 5,000
respectively. They divide profit and losses equally. Total before revaluation P217,500 P117,500 P335,000
They decided to admit C into the partnership. Prior to C’s
admission, the partnership realized a profit amounting to Thus, the adjustment for revaluation is:
P30,000. P400,000 – P335,000 = P65,000
In this case, before C is admitted, the profit should be And this should be distributed as follows:
distributed to A and B as follows:
Assets P65,000
Income and Expense Summary P30,000 A, Capital P32,500
A, Capital P15,000 B, Capital 32,500
B, Capital 15,000
In the entry above, we used the account ‘Assets’ to make the
2. Correct any errors or misstatement. If corrections will example easier to understand. However, in actual, the
affect capital or profit or loss, distribute the amount to P65,000 should be distributed to specific asset accounts like
the partners based on the existing profit or loss sharing inventory and equipment.
agreement.
Admission of a new partner by purchase:
Continuing the previous example, assume that the following
In this situation, the total adjusted capital balance before and
errors were identified:
after admission are equal. The purchase of interest is a
Allowance for doubtful accounts is understated by P10,000 personal transaction of the old partner/s with the new one.
Accumulated depreciation is overstated by P15,000 This means that the partnership is not involved and in the
In this case, before C is admitted, the errors should be partnership books, only a transfer of capital is recorded.
corrected and the effect distributed to A and B as follows: As an example, let us continue with the previous example:
Accumulated Depreciation P15,000 A B Total
Income and Expense Summary P10,000 Unadjusted Capital P200,000 P100,000 P300,000
A, Capital 2,500 Adjustments:
B, Capital 2,500 Profit (Loss) 15,000 15,000 30,000
Errors 2,500 2,500 5,000
Revaluation 32,500 32,500 65,000
3. Revaluation of accounts which may give rise to Total before admission of C P250,000 P150,000 P400,000
increased or decreased asset valuation and recognition Interest purchased 30% 30% 30%
of unrecorded liabilities. Such adjustments will give rise Interest transferred to C P75,000 P45,000 P120,000

to profit or loss, and the amounts should be distributed As what is shown above, the adjusted capital will be the
basis for the interest purchased. C’s admission is then
recorded as follows:
A, Capital P75,000
B, Capital 45,000
B, Capital 120,000
Question: If a new partner is admitted by purchase, will the
amount he paid affect the capital credited to him/her?
The answer is NO. Remember that the payment is a
transaction between and among partners. If the amount paid
is less than, the journal entry will be the same as if the
amount paid is equal to the fair value of the interest
purchased. For example, let us continue the example above.
But this time, we assume that the adjusted total capital is
still at P400,000 and C only paid P100,000. The P20,000
loss will be realized only by the partners themselves and the
entry will be the same as follows:
A, Capital P75,000
B, Capital 45,000
B, Capital 120,000
The same goes when the amount paid is above the fair value
of the paid interest. For example, let us continue the
example above. But this time, we assume that the adjusted
total capital is still at P400,000 and C paid P150,000. The
P30,000 gain will be realized only by the partners
themselves and the entry will be the same as follows:
A, Capital P75,000
B, Capital 45,000
B, Capital 120,000
Admission of a new partner by investment
In this situation, the investment is a transaction between the
existing partnership and the new partner. This means that
through the new partner’s investment, partnership assets will
increase as well as the total capital of the partnership.
But before we proceed, let us define the following terms
first:
Total Agreed Capital (TAC)
- This pertains to the gross capitalization the partners
agreed after the admission of the new partner.
Total Contributed Capital (TCC)
- This simply pertains to the sum of the contributions
of the old partners and the new partner.
Capital Credit
- This pertains to the amount of capital credited for a
partner computed as TAC x percentage interest in
the partnership.
Bonus
- When the actual contribution of the new partner is
greater than his/her capital credit, there is a bonus
to old partners. On the other hand, when his/her
actual contribution is lesser than his/her capital
credit, there is a bonus to new partner.
Asset Revaluation
- When TAC is not equal to TCC, there is asset
revaluation. When TAC > TCC, there is said to be
a Positive Asset Revaluation. On the other hand, if
TAC < TCC, there is a Negative Asset Revaluation.
Whatever the case, the resulting increase o decrease
is allocated to the old partners only based on their
existing profit or loss ratio.
For example, assume that A and B are partners in XYZ
Partnership with capital balances of P200,000 and P100,000,
respectively. They share profits and losses equally. C is to
be admitted to the partnership.
Case 1: Assume that he is to invest P100,000 for a 25%
interest. Partnership capitalization is P400,000.
In this case, TAC is P400,000 as indicated by the word
capitalization. Also, TCC is P400,000 computed by adding
all contributions (P200,000 + P100,000 + P100,000). This
means that there is no asset revaluation since TAC = TCC.
Meanwhile, C’s capital credit of P100,000 computed as
P400,000 x 25% is equal to his actual contribution of
P100,000. This means that there is no bonus. Thus, the
journal entry is as follows:
Cash P100,000
C, Capital P100,000
Case 2: Assume that he is to invest P100,000 for a 20%
interest. Partnership capitalization is P400,000.
In this case, TAC is P400,000 as indicated by the word
capitalization. Also, TCC is P400,000 computed by adding
all contributions (P200,000 + P100,000 + P100,000). This
means that there is no asset revaluation since TAC = TCC.
Meanwhile, C’s capital credit of P80,000 computed as
P400,000 x 20% is less than his actual contribution of
P100,000. This means that there is bonus to old partners
amounting to the difference of P20,000. Thus, the journal
entry is as follows:
Cash P100,000
C, Capital P100,000
C, Capital P20,000
A, Capital P10,000
B, Capital 10,000
But, the two entries above may be done as follows:
Cash P100,000
C, Capital P80,000
A, Capital 10,000
B, Capital 10,000
Case 3: Assume that he is to invest P100,000 for a 35%
interest. Partnership capitalization is P400,000.
In this case, TAC is P400,000 as indicated by the word
capitalization. Also, TCC is P400,000 computed by adding
all contributions (P200,000 + P100,000 + P100,000). This
means that there is no asset revaluation since TAC = TCC.
Meanwhile, C’s capital credit of P140,000 computed as
P400,000 x 35% is greater than his actual contribution of
P100,000. This means that there is bonus to new partner
amounting to the difference of P40,000. Thus, the journal Cash P100,000
entry is as follows: A, Capital 12,500
B, Capital 12,500
Cash P100,000
C, Capital P125,000
A, Capital 20,000
B, Capital 20,000 Note that we used “Assets” to make the illustration easier to
C, Capital P140,000 understand. But in actual, specific asset accounts should be
debited for positive asset revaluation.
Case 4: Assume that he is to invest P100,000 for a 20%
interest. Partnership capitalization is P500,000. Case 7: Assume that he is to invest P100,000 for a 20%
interest.
Assets P100,000
A, Capital P50,000 In this case, TAC is not indicated. We could approach this
B, Capital 50,000 scenario in two different ways. The first one is bonus
method where we assume that TAC = TCC. The second one
Cash P100,000 is the asset revaluation method where we assume that TAC
C, Capital P100,000 is not equal to TCC.
Note that we used ‘Assets’ to make the illustration easier to Bonus Method. In this case, TAC = TCC which is P400,000
understand. But in actual, specific asset accounts should be computed by adding all contributions (P200,000 + P100,000
debited for positive asset revaluation. + P100,000). Thus, there is no asset revaluation. Meanwhile,
C’s capital credit of P80,000 computed as P400,000 x 20%
Case 5: Assume that he is to invest P80,000 for a 25% is lesser than his actual contribution of P100,000. This
interest. Partnership capitalization is P320,000. means that there is bonus to old partners amounting to the
In this case, TAC is P320,000 as indicated by the word difference of P20,000. Thus, the journal entry is as follows:
capitalization. However, TCC is P380,000 computed by Cash P100,000
adding all contributions (P200,000 + P100,000 + P80,000). C, Capital P80,000
This means that there is a negative asset revaluation A, Capital 10,000
amounting to the difference of P60,000 since TAC < TCC. B, Capital 10,000
Meanwhile, C’s capital credit of P80,000 computed as
P320,000 x 25% is equal to his actual contribution of Asset Revaluation Method. In this case, we compute TAC
P80,000. This means that there is no bonus. Thus, the by grossing up the new partners contribution. Thus, TAC is
journal entry is as follows: P500,000 computed as P100,000 / 20%. However, TCC is
only P400,000 computed by adding all contributions
A, Capital P30,000 (P200,000 + P100,000 + P100,000). This means that there is
B, Capital 30,000 a positive asset revaluation amounting to the difference of
Assets P60,000
P100,000 since TAC > TCC. Meanwhile, C’s capital credit
of P100,000 computed as P500,000 x 20% is equal to his
Cash P80,000
actual contribution of P100,000. This means that there is no
C, Capital P80,000
bonus. Thus, the journal entry is as follows:
Note that we used “Assets” to make the illustration easier to
understand. But in actual, specific asset accounts should be Assets P100,000
A, Capital P50,000
credited for negative asset revaluation.
B, Capital 50,000

Case 6: Assume that he is to invest P100,000 for a 25% Cash P100,000

interest. Partnership capitalization is P500,000.
In this case, TAC is P500,000 as indicated by the word
capitalization. However, TCC is only P400,000 computed
by adding all contributions (P200,000 + P100,000 +
P100,000). This means that there is a positive asset
revaluation amounting to the difference of P100,000 since
TAC > TCC. Meanwhile, C’s capital credit of P125,000
computed as P500,000 x 25% is greater than his actual
contribution of P100,000. This means that there is bonus to
new partner amounting to the difference of P25,000. Thus,
the journal entry is as follows:
Assets P100,000
A, Capital P50,000
B, Capital 50,000
C, Capital P100,000
Question: Which method is preferred when TAC is not
given?
When the problem has no other information given,
Bonus Method is preferred. However, if there is a clear
indication that assets are to be revalued before admission of
a new partner, this instantly calls for the Asset Revaluation
method.
Case 8: Assume that he is to invest P80,000 for a 25%
interest.
Just like the previous case, TAC is not given. Thus we have
two options here.
Bonus Method. In this case, TAC = TCC which is P380,000 To check if our entries are correct, let us plot the movement
computed by adding all contributions (P200,000 + P100,000 of the capital balances as follows:
+ P80,000). This means that there is no asset revaluation.
A B C Total
Meanwhile, C’s capital credit of P95,000 computed as Adjusted capital
P200,000 P100,000 P0 P300,000
P380,000 x 25% is greater than his actual contribution of before admission
P80,000. This means that there is bonus to new partner Adjustments:
Revaluation (40,000) (40,000) (80,000)
amounting to the difference of P15,000. The journal entry is C’s investment P100,000 100,000
as follows: Revaluation 32,500 32,500 65,000
Bonus to old
Cash P80,00 10,000 10,000 (20,000) 0
partners
A, Capital 7,500 Capital after
P170,000 P70,000 P80,000 P320,000
B, Capital 7,500 admission
C, Capital P95,000 Interest
percentage
53.125% 21.875% 25% 100%
(Capital Balance /
Asset Revaluation Method. In this case, we compute TAC Total Capital)
by grossing up the new partners contribution. Thus, TAC is
Note that in the table above, the total interest percentage of
P320,000 computed as P80,000 / 25%. However, TCC is
old partners, A and B, is 75%. This is equal to the interest
P380,000 computed by adding all contributions (P200,000 +
allotted to them which is 75% computed as 100% - 25% (the
P100,000 + P80,000). This means that there is a negative
25% here is C’s agreed interest).
asset revaluation amounting to the difference of P60,000
since TAC < TCC. Meanwhile, C’s capital credit of P80,000 Retirement or Withdrawal of a Partner
computed as P320,000 x 25% is equal to his actual
contribution of P80,000. This means that there is no bonus. When a partner retires or withdraws from a partnership, the
Thus, the journal entry is as follows: existing partnership ceases to exist. The remaining partners
may choose to continue the partnership among themselves
A, Capital P30,000 or by replacing the exiting partner, or they may decide to
B, Capital 30,000
discontinue the partnership all in all. In the previous case,
Assets P60,000
the partnership undergoes dissolution but not liquidation.
For the latter case, the partnership undergoes both
Cash P80,000
dissolution and liquidation.
C, Capital P80,000
As mentioned in the previous illustration, when the problem With this, it is safe to assume then that liquidation is
has no other given information, use bonus method. preceded by dissolution. But, dissolution does not always
lead to liquidation.
Case 9: Assume that he is to invest P100,000 and is credited Before we go to discussing the journal entries necessary for
for P80,000, which is to be a 25% interest of the new firm. this, it must be noted that the capital balances of the partners
In this case, TAC is not given but the basis for computing it should be adjusted first. With this, we follow the following
is given. As mentioned, P80,000 is 25% of the new steps:
partnership, thus, TAC is P320,000 computed as P80,000 / 1. Determine the profit or loss for the period and distribute
25%. On the other hand, TCC is P400,000 computed by the amount to the partners based on the existing profit
adding all contributions (P200,000 + P100,000 + P100,000). or loss sharing agreement.
This means that there is a negative asset revaluation 2. Correct any errors or misstatement. If corrections will
amounting to the difference of P80,000 since TAC < TCC. affect capital or profit or loss, distribute the amount to
Meanwhile, C’s capital credit of P80,000 as mentioned is the partners based on the existing profit or loss sharing
lesser than his actual contribution of P100,000. This means agreement.
that there is bonus to the old partners amounting to the 3. Revaluation of accounts which may give rise to
difference of P20,000. Thus, the journal entry is as follows: increased or decreased asset valuation and recognition
A, Capital P40,000 of unrecorded liabilities. Such adjustments will give rise
B, Capital 40,000 to profit or loss, and the amounts should be distributed
Assets P80,000 to the partners based on the existing profit or loss
sharing agreement.
Cash P100,000
After computing for the adjusted capital balances, we
C, Capital P80,000
A, Capital 10,000 compute for the interest of the exiting partner as follows:
B, Capital 10,000
Adjusted Capital Balance (With share in profit and other adjustment) Now, we can proceed to accounting for the partner’s exit.
Less: Withdrawals
There are three different ways of which a partner exits a
Add: Loans and advances to the partnership
partnership. They are as follows:
(Partnership’s Loans Payable to Partner)
Less: Loans and advances from the partnership 1. Sold to a new partner (outsider)
(Partnership’s Loans Receivable from Partner) - This is recorded similarly as when a new partner is
admitted to the partnership through purchase. This
For example, assume the following data:
means that the total adjusted capital before and
A, B, and C are Partners of XYZ Partnership. They share after exit is equal.
their profits and losses equally. C has expressed that he will
For example, to continue the previous example, assume that
now withdraw from the partnership. Relevant balances and
C sold his interest to D for P630,000.
information before his exit are as follows:
The journal entry for this is as follows:
Loans Receivable – A P90,000
Loans Payable – B 100,000 C, Capital P780,000
Loans Receivable –C 150,000 Loans Receivable – C P150,000
A, Drawings 30,000 D, Capital 630,000
B, Drawings 20,000
C, Drawings 40,000 Question: If D pays less, for example, P600,000, will the
A, Capital 700,000
journal entry be different?
B, Capital 800,000
C, Capital 750,000 NO. See admission of a partner discussion on this.
Further, profits amounted to P300,000 and assets are to be Question: If D pays more, for example, P700,000, will the
revalued by decreasing their values by P90,000. journal entry be different?
Before we determine the total interest of C, we have to do NO. See admission of a partner discussion on this.
first the following journal entries:
2. Sold to the continuing (remaining) partners
1. Divided the profit - This is recorded similarly as when a new partner is
admitted to the partnership through purchase. That
Income and Expense Summary P300,000
A, Capital P100,000 is, the treatment is like in case number 1. This
B, Capital 100,000 means that the total adjusted capital before and
C, Capital 100,000 after exit is equal.

2. Account for the asset revaluation For example, to continue the previous example, assume
instead that C sold his interest to A and B for P630,000.
A, Capital P30,000
Both will buy 50% of the sold interest for P315,000 pesos
B, Capital 30,000
each.
C, Capital 30,000
Assets P90,000 The journal entry for this is as follows:
3. Close the withdrawals C, Capital P780,000
A, Capital P30,000 Loans Receivable – C P150,000
B, Capital 20,000 A, Capital 315,000
C, Capital 40,000 B, Capital 315,000
A, Drawings P30,000
B, Drawings 20,000 Question: If A pays less, for example, P300,000, will the
C, Drawings 40,000 journal entry be different?

With these entries, we can now determine the interest of the NO. See admission of a partner discussion on this.
partners as follows: Question: If B pays more, for example, P350,000, will the
A B C Total journal entry be different?
Unadjusted
P700,000 P800,000 P750,000 P2,250,000 NO. See admission of a partner discussion on this.
capital balance
Share in profit 100,000 100,000 P100,000 300,000
Asset revaluation (30,000) (30,000) (30,000) (90,000)
3. Sold to the partnership
Drawings (30,000) (20,000) (40,000) (90,000) - In this case, assets will be given to the exiting
Adjusted capital
P740,000 P850,000 P780,000 P2,370,000 partner or a liability may be recognized. This
balance
means that total adjusted capital before and after
Add: Loans to
- 100,000 - 100,000 dissolution is not equal.
partnership
Less: Loans from
(90,000) - (150,000) (240,000) - Settlement may be equal to the calculated interest
partnership
of the exiting partner, more, or less. In the case of
Total partner’s
P650,000 P950,000 P630,000 P2,230,000 settlement that is either more than or less than the
interest
 calculated interest, two methods maybe used, total reduction in value, we gross up the difference by
namely, bonus method and asset revaluation dividing the amount with C’s profit or loss share of 1/3 as
method. follows:
Case 1: To continue with the previous example, assume Total value reduction = P30,000 / (1/3) = P90,000.
instead that C sold his interest to the partnership. The A, B and C’s individual share in the value reduction is
partners agreed to settle C’s interest by paying P630,000. (P90,000 / 3) P30,000.
For this, since the cash payment of P630,000 is equal to C’s The journal entry for this is as follows:
adjusted interest of P630,000, there is no bonus. The journal
entry for this is as follows: A, Capital P30,000
B, Capital 30,000
C, Capital P780,000 C, Capital 30,000
Loans Receivable – C P150,000 Assets P90,000
D, Capital 630,000
C, Capital P750,000
Case 2: To continue with the previous example, assume Loans Receivable – C P150,000
instead that C sold his interest to the partnership. The Cash 600,000
partners agreed to settle C’s interest by paying P600,000.
To illustrate the grossing up process when the profit or loss
In this case, C is paid less than his calculated interest. We ratio is not equally, assume instead that A, B, and C has a
may opt to solve this in two different ways as follows: 5:3:2 profit or loss ratio. C’s Capital balance is still at
Bonus Method. For this, since the cash payment of P780,000 and partnership’s loan receivable from C is still at
P600,000 is less than C’s adjusted interest of P630,000, P150,000. For C’s exit, the partnership paid him P600,000.
there is bonus to the remaining partners which means that In this case, there is negative asset revaluation since the
their capital balances will be increased. Then, we simply payment of P600,000 is less than C’s adjusted interest of
have to distribute the difference of P30,000 among the P630,000. To reduce C’s interest to P600,000, assets must
remaining partners based on their remaining profit or loss be decreased in a way that C’s share in the value reduction is
ratio. The entry is as follows: P30,000. So, to get the total reduction in value, we gross up
C, Capital P780,000 the difference by dividing the amount with C’s profit or loss
Loans Receivable – C P150,000 share of 2/(5+3+2) or 2/10 as follows:
Cash 600,000
Total value reduction
A, Capital 15,000
B, Capital 15,000 P30,000 / (2/10) = P150,000

To illustrate the sharing of difference when the profit or loss
ratio is not equally, assume instead that A, B, and C has a
5:3:2 profit or loss ratio. C’s Capital balance is still at
P780,000 and partnership’s loan receivable from C is still at
P150,000. For C’s exit, the partnership paid him P600,000.
A’s share in the value reduction
P150,000 x 5/(5+3+2) = P150,000 x 5/10 = P75,000
B’s share in the value reduction
P150,000 x 3/(5+3+2) = P150,000 x 3/10 = P45,000

In this case, there is still a bonus to old partners since the C’s share in the value reduction
cash payment of P600,000 is less than C’s adjusted interest P150,000 x 2/(5+3+2) = P150,000 x 2/10 = P30,000
of P630,000. Also, the remaining profit or loss ratio is 5:3 The journal entry for this is as follows:
for A and B, respectively. We compute their share in the
P30,000 difference as follows: A, Capital P75,000
B, Capital 45,000
A = P30,000 x 5/(5+3) = P30,000 x 5/8 = P18,750 C, Capital 30,000
B = P30,000 x 3/(5+3) = P30,000 x 3/8 = P11,250 Assets P150,000

The journal entry is as follows: C, Capital P750,000

C, Capital P780,000 Loans Receivable – C P150,000
Loans Receivable – C P150,000 Cash 600,000
Cash 600,000
A, Capital 18,750 Case 3: To continue with the previous example, assume
B, Capital 11,250 instead that C sold his interest to the partnership. The
partners agreed to settle C’s interest by paying P700,000.
Asset Revaluation Method. For this case, since the payment
In this case, C is paid more than his calculated interest. We
of P600,000 is less than C’s adjusted interest of P630,000,
may opt to solve this in two different ways as follows:
there is a negative asset revaluation. To reduce C’s adjusted
interest to P600,000, assets must be decreased in a way that Bonus Method. For this, since the cash payment of
C’s share in the value reduction is P30,000. So, to get the P700,000 is more than C’s adjusted interest of P630,000,
there is bonus to the exiting partner which will result to a P150,000. For C’s exit, the partnership paid him P00,000. In
reduction of the capital balances of the remaining partners. this case, there is positive asset revaluation since the
Then, we simply have to distribute the difference of P70,000 payment of P700,000 is more than C’s adjusted interest of
among the remaining partners based on their remaining P630,000. To increase C’s interest to P700,000, assets must
profit or loss ratio. The entry is as follows: be increased in a way that C’s share in the value increase is
P70,000. So, to get the total increase in value, we gross up
C, Capital P780,000
the difference by dividing the amount with C’s profit or loss
A, Capital 35,000
B, Capital 35,000 share of 2/(5+3+2) or 2/10 as follows:
Loans Receivable – C P150,000 Total value reduction
Cash 700,000
P70,000 / (2/10) = P350,000
To illustrate the sharing of difference when the profit or loss A’s share in the value reduction
ratio is not equally, assume instead that A, B, and C has a P350,000 x 5/(5+3+2) = P350,000 x 5/10 = P175,000
5:3:2 profit or loss ratio. C’s Capital balance is still at
P780,000 and partnership’s loan receivable from C is still at B’s share in the value reduction
P150,000. For C’s exit, the partnership paid him P700,000. P350,000 x 3/(5+3+2) = P350,000 x 3/10 = P105,000
In this case, there is still a bonus to the exiting partner since C’s share in the value reduction
the cash payment of P700,000 is more than C’s adjusted P350,000 x 2/(5+3+2) = P350,000 x 2/10 = P70,000
interest of P630,000. Also, the remaining profit or loss ratio
The journal entry for this is as follows:
is 5:3 for A and B, respectively. We compute their share in
the P70,000 difference as follows: Assets P350,000
A, Capital P175,000
A = P70,000 x 5/(5+3) = P70,000 x 5/8 = P43,750
B, Capital 105,000
B = P70,000 x 3/(5+3) = P70,000 x 3/8 = P26,250 C, Capital 70,000
The journal entry for this is as follows:
C, Capital P850,000
C, Capital P780,000 Loans Receivable P150,000
A, Capital 43,750 Cash 700,000
B, Capital 26,250
Loans Receivable – C P150,000 Question: For Cases 2 and 3, which method is preferred?
Cash 700,000
When the problem does not have any other information
Asset Revaluation Method. For this case, since the payment given, bonus method should be used. Only when the
of P700,000 is more than C’s adjusted interest of P630,000, problem clearly states that there is asset revaluation will the
there is a positive asset revaluation. To increase C’s adjusted asset revaluation method be used.
interest to P700,000, assets must be increased in a way that
Death, Incapacity or Bankruptcy of a Partner
C’s share in the value increase is P70,000. So, to get the
total increase in value, we gross up the difference by When a partner dies or becomes incapacitated, the current
dividing the amount with C’s profit or loss share of 1/3 as partnership ceases to exist. Similar with when partner retires
follows: or withdraws from a partnership, the remaining partners may
choose to continue the business among themselves.
Total value increase = P70,000 / (1/3) = P210,000.
A, B and C’s individual share in the value reduction is The accounting process of determining the adjusted interest
(P210,000 / 3) P70,000. of a dead or incapacitated partner is similar with the
computation for the exiting partner in the previous section.
The journal entry for this is as follows:
The only difference is that, the most usual settlement of the
Assets P210,000 partner’s interest is at book value, meaning cash settlement
A, Capital P70,000 is equal to the adjusted interest.
B, Capital 70,000
C, Capital 70,000 To illustrate, assume the following scenario:
A, B, and C are partners of XYZ partnership. On July 7,
C, Capital P850,000 2020, C died of heart attack. At this date, the remaining
Loans Receivable P150,000 partners determined after closing the books that C’s capital
Cash 700,000 balance is P780,000, the partnership’s loan receivable from
C is P150,000.
To illustrate the grossing up process when the profit or loss
ratio is not equally, assume instead that A, B, and C has a Case 1: Assume that the company settled C’s interest by
5:3:2 profit or loss ratio. C’s Capital balance is still at paying cash of P630,000.
P780,000 and partnership’s loan receivable from C is still at
The journal entry for this is as follows: Accounts Payable P110,000
Notes Payable 90,000
C, Capital P780,000 C, Capital 300,000
Loans Receivable P150,000 A, Capital 180,000
Cash 630,000 B, Capital 170,000
Cash P80,000
Case 2: Assume instead that the company decided to Accounts Receivable, net 90,000
settle C’s interest at the end of 2020. Inventory 160,000
Land 250,000
The journal entry for this is as follows: Equipment, net 270,000
C, Capital P780,000
Loans Receivable – C P150,000 In the corporation books, the journal entry is as follows:
Payable to the estate of C 630,000 Cash P80,000
Accounts Receivable, net 90,000
Incorporation of a Partnership Inventory 160,000
When the partners would decide to convert the partnership Land 250,000
Equipment, net 270,000
into a corporation, the following steps should be done:
Accounts Payable P110,000
1. Assets should be revalued to reflect their fair values Notes Payable 90,000
2. Distribute the net increase or decrease to the partners Ordinary Share Capital 650,000
based on their profit or loss ratio.
3. If the corporation will use the partnership books, simply
close the partners’ capital balances to Ordinary Share
Capital account.
4. If the corporation will open a new set of books, close
the partnership accounts first. Afterwards, record the
formation of the corporation.
To illustrate, assume the following information:

Case 1: Assume the corporation will use the partnership

books.
The journal entry to close partners’ capital balances to
ordinary share capital is as follows:
C, Capital P300,000
A, Capital 180,000
B, Capital 170,000
Ordinary Share Capital P650,000

Case 2: Assume the corporation will open a new set of

books.
In the partnership books, the journal entry to close the
accounts is as follows: