Partnership Dissolution

LEARNING OBJECTIVES

1. Explain the concepts related to dissolution and the

causes of the change in partnership structures
2. Distinguish the accounting for admission of a new
partner by purchase from admission by investment
3. Differentiate total contributed capital from total
agreed capital
4. Account for incorporation of a partnership
5. Solve problems on partnership dissolution
DEFINITION OF DISSOLUTION

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, Art. 1828)
DISSOLUTION COMPARED TO WINDING UP
AND TERMINATION OF PARTNERSHIP

On dissolution, the partnership is NOT

terminated, but continues until the winding
up of partnership affairs is completed. (Art
1829).
WINDING UP is the process of settling the
business or partnership affairs after
dissolution.
DISSOLUTION COMPARED TO WINDING UP
AND TERMINATION OF PARTNERSHIP

Dissolution is different from liquidation of

partnership. A partnership is said to be
liquidated when the business is terminated.
TERMINATION is that point in time when all
partnership affairs are wound up or
completed, and is the end of the
partnership life.
CAUSES OF DISSOLUTION

Admission of a partner

Withdrawal or retirement of a partner

Death of a partner

Incorporation of the partnership

PRINCIPLE OF DELECTUS PERSONAE

A new partner can only be admitted into

a partnership with the consent of all the
continuing partners. This is based on the
principle of delectus personae: no one
becomes a member of the partnership
without the consent of all the members.
ADMISSION OF A PARTNER

A person may become a partner in an

existing partnership by either:

Purchase of an interest from existing partner/s

Investment of assets in the partnership

LIABILITY OF INCOMING PARTNER FOR
EXISTING OBLIGATION

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, but limited only to his
contribution unless otherwise agreed.
PURCHASE OF AN INTEREST FROM EXISTING
PARTNERS

• Payment is made directly and personally to the

partner
• DEBIT the old partner’s capital (selling partner)
• CREDIT the new partner’s capital (buying partner)
• Debited and credited amount is NOT affected by
the actual price for the equity interest
• Total assets, total liabilities, and total partners’
equity of the partnership is NOT affected
PURCHASE OF AN INTEREST FROM EXISTING
PARTNERS

NO EFFECT
NO EFFECT NO EFFECT
IN TOTAL
IN TOTAL IN TOTAL
PARTNERS’
ASSETS LIABILITIES
EQUITY
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.
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.
BONUS METHOD

Under the bonus method, total agreed capital

is EQUAL to the total contributed capital
though the capital credits to each partner
may be equal to, greater than, or less than his
capital contributions.
BONUS is the amount of capital or equity
transferred by one partner to another partner.
ILLUSTRATION: ADMISSION BY PURCHASE

Suppose that Milo and Val (a 60:40 partnership)

decide to admit Aya to the partnership.

Aya pays Milo P72,000 for half of Milo's interest.

Suppose the capital accounts for Milo and Val
are P120,000 and P80,000, respectively.
INVESTMENT OF ASSETS IN A PARTNERSHIP

A partner may be admitted into a partnership by

investing cash or other assets in the business.

INCREASE
INCREASE IN TOTAL
IN TOTAL PARTNERS’
ASSETS EQUITY
ILLUSTRATION: INVESTMENT BY ADMISSION PROB 1

Suppose that Milo and Val (a 60:40 partnership)

decide to admit Aya to the partnership.
Aya invested P72,000 for 25% of capital's interest
in the partnership. Suppose the capital accounts
for Milo and Val are P120,000 and P80,000,
respectively.
LEARNING ACTIVITY

Suppose that Milo and Val (a 60:40 partnership)

decide to admit Aya to the partnership.
Aya invested P40,000 for 25% of capital's interest
in the partnership. Suppose the capital accounts
for Milo and Val are P120,000 and P80,000,
respectively.
WITHDRAWAL OR RETIREMENT OF A
PARTNER

This dissolution may be accomplished by

either of the following:
• By selling his equity interest to one or more of
the remaining partners
• By selling his equity interest to an outsider
• By selling his equity interest to the partnership
ILLUSTRATION:
(1 of 2)
Withdrawal or Retirement of a Partner
Suppose that Rosemary is retiring in midyear from the
partnership of Camia, Daisy, and Rosemary because of
family migration. After the books have been adjusted for
the semi-annual profits but before revaluation, their
capital balances are as follows:

Camia, Capital P 540,000

Daisy, Capital 430,000
Rosemary, Capital 210,000
ILLUSTRATION:
(2 of 2)
Withdrawal or Retirement of a Partner
An independent appraiser revalued their cosmetics inventory
(carrying amount of P440,000) to P380,000 and their land (cost of
P550,000) to P1,010,000. The profit and loss ratio of Camia, Daisy, and
Rosemary is 1:2:1.
Required:
(1) Prepare the adjusting journal entry for asset revaluation.
(2) Compute the adjusted capital of each partner
(3) Assume that Rosemary agreed to accept each of the following
independent case:
3.1 payment of P310,000
3.2 payment of P400,000
3.3 payment of P280,000
DEATH OF A PARTNER

• When the death of a partner does not result to

liquidation, the accounting procedures to be followed
are similar to withdrawal of a partner.
• The deceased partner may be considered to have
retired from the partnership and his heirs can expect to
receive the amount of his interest from the business.
• If payment cannot be made immediately, the capital
balance of the deceased partner should be credited to
a liability account
INCORPORATION OF A PARTNERSHIP

• A partnership may decide to incorporate.

• Prepare the necessary adjustments and closing
entries in the partnership books.
• Assets and liabilities are transferred to the
corporation in exchange of SHARES OF STOCKS.
• Shares are distributed to the partners based on their
equity interest.
ILLUSTRATION:
(1 of 2)
Incorporation of a Partnership
Partners Michael and LeBron who shared equally in profits and losses,
have the following items in their partnership’s statement of financial
position as of December 31, 2018:
ILLUSTRATION:
(2 of 2)
Incorporation of a Partnership
They agreed to incorporate their partnership, with the new corporation
absorbing the net assets after the following adjustments:
• Providing for allowance for doubtful accounts equivalent to 4% of
accounts receivable;
• Restatement of inventory to its net realizable value of P200,000; and
• Additional depreciation on the equipment, P8,000
The corporation’s share capital will have a par value of P100, and the
partners will be issued the shares equivalent to their adjusted capital
balances.
Required:
Prepare the journal entry to incorporate the partnership.
REFERENCE

Partnership and Corporation Accounting

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