Module 3 Part 2

let’s dissolve!
DISSOLUTION & CHANGE OF
OWNERSHIP
INVESTMENT OF ASSETS IN A PARTNERSHIP

In accounting by investment, before a partner is admitted to the partnership, it is but

proper to adjust the book value of the partnership assets to fair market value just as the
non-cash assets to be invested by the incoming partner should be stated at fair market
value. It is proper that non-cash assets be properly valued because after adjustments,
any gain or loss on sale of these assets becomes a partnership gain or loss and not of the
old partners nor the contributing partner. The transaction is between the partnership
and the party who seeks admission.
Definition of Terms:

1. Total Contributed Capital (TCC). It is the sum of the capital balances of the old
partners and the actual investment of the new partner.
2. Total Agreed Capital (TAC). It 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 Total Contributed Capital though the
capital credits to each partner may be equal to, greater than or less than his capital
contributions.
3. Bonus. Is the amount of capital or equity by one partner transferred to another with
no cash consideration but for the good reputation or earning capacity of the latter.
4. Capital Credit (CC). It 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 to Old Partners

Accounting for admission by investment of assets may result to :

A partnership may be exceptionally attractive because of its superior earnings record

such that the old partner may demand premium from a new partner. This premium
referred to as BONUS increases the old partner’s capital interest and effected 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
profit and loss ratio.
Illustration
Barbie and Ken are partners with capital balances of 300,000 and 200,000
respectively. They share profits and losses in the ratio of 3:2. The partners agreed to
admit Zen as new partner of the firm. This information will be the basis to compute on
the following cases:
Case 1: Total Agreed Capital is stated
Assume Zen invested 200,000 for a 1/4 interest in the business for the total agreed
capital of P700,000.
Journal Entry
1) Cash 200,000
Zen , Capital P200,000
To record investment of Zen.

2) Zen, Capital 25,000

Barbie, Capital (25,000 x 3/5) 15,000
Ken, Capital (25,000 x 2/5) 10,000
To record bonus to old partners.

The admission of Zen to the partnership resulted to a bonus of P25,000 which

increases the capital accounts of the old partners shared according to 3:2 ratio/
Illustration
Case 2:Total Agreed Capital is not explicitly stated
Assume Zen is to invest P300,000 in the partnership business inclusive of
P50,000 bonus to Barbie and Ken. Under the bonus method, total contributed
capital is equal to total agreed capital with the bonus clearly specified.

Computation of Bonus:
Barbie (50,000 x 3/5) = P30,000
Ken (50,000 x 2/5) = 20,000
Total P50,000
Journal Entry
1) Cash P300,000
Zen, Capital 300,000
To record investment of Zen.

2)Zen, Capital 50,000

Barbie, Capital 30,000
Ken, Capital 20,000
To record distribution of bonus to old partners.

The amount credited to Zen is lesser than what he has paid because he
clearly specified to give bonus to old partners in the amount of P50,000
Bonus to New Partner
A new partner may be admitted into the partnership because of his vast financial
resources, extensive business networks, distinctive reputation, unique management
and/or technical skills.

Just to ensure his joining the partnership, the old partners are willing to give
premium to the new partner due to his exceptional qualifications by allowing a
capital credit greater than the prospective partner’s investment. The premium will
be treated as a bonus from the capital of old partners and credited to the new
partner.
Illustration
Case 1: Total Agreed Capital is stated
Assume Zen invested 180,000 for a 30% interest in the business. The total agreed
capital is P680,000 as shown below:
Journal Entry
1)Cash 180,000
Zen, Capital 180,000
To record investment of Zen.

2) Barbie, Capital 14,400

Ken, Capital 9,600
Zen, Capital 24,000
To record bonus to new partner.

Because of the qualifications of Zen recognized by the partners , a bonus was given
and credited to Zen capital account/
Illustration
Case 2: Total agreed capital is not explicitly stated.
Assume Zen invested 300,000 for a 50% interest in the business. Barbie and
Ken transferred part of their capital balances to that of Zen as a bonus . Under the
bonus method, total contributed capital and total agreed capital are equal and the new
partner to receive it is clearly specified.
Journal Entry
1) Cash P300,000
Zen, Capital P300,000
To record investment of Zen.

2) Barbie, Capital 60,000

Ken, Capital 40,000
Zen Capital P100,000
To record distribution of bonus to new partner.

The capital credit of the new partner increased by 100,000 due to bonus while that
of the old partners decreased by the same amount.
Causes…
B. WITHDRAWAL OR RETIREMENT OF A PARTNER
The withdrawal or retirement of a partner will bring about the complete dissolution of the
partnership but the business may be continued without interruption. A partner may withdraw or
retire from the partnership for various reasons such as: disputes with other partners, old age or
the pursuit for better opportunities . Settlement with the withdrawing/ retiring partners may be
accomplished by either of the following ways:
a) By selling his equity interest to one or more of the remaining partners.
b) By selling his equity interest to an outsider.
c) By selling his equity interest to the partnership.

❑ Sales of interest to a Partner or an Outsider

The purchase of interest of the withdrawing, retiring partner by another partners or by an
outsider is similar to admission of new partner by purchase of interest wherein the transfer of
interest to the capital account requires a debit to the seller’s capital account for his capital
balance and credit to the buyer’s account for the same amount. The asset of the partnership are
not affected by the consideration involved.
Withdrawal…
If withdrawal or retirement is done in the middle of an accounting period, the books of
the partnership should be updated to determine the retiring partner’s capital balance.
Profits and losses should be measured from the last closing date of the books to date of
withdrawals and distributed according to their profit or loss sharing agreement.

❑ Sale of interest to the Partnership

If the withdrawing or retiring partner sold his assets to the partnership, that partner
receives payment from the assets of the partnership. The amount to be received maybe
equal to, greater than or less than the balance of his capital account. The sale will
reduce the assets and owner’s equity section of the partnership.

Instead of a new partner joining the partnership by investing assets, an old partner is
now leaving the partnership with the business distributing assets to the withdrawing
partner which may either receive his share of the business in partnership assets other
than cash.
IILLUSTRATION:
ILLUSTRATION:
After ten years of being a partner at Maxwella Trading Partnership, whose partners are
Max, Wella and Lala, Max decided to withdraw from the business due to physical
handicap which kept on torturing him in the past months. He decided to leave and
concentrate on recuperating. Prior to his withdrawal, upon informing the other partners,
the capital balances of the partners are as follows:
Max, Capital P 350,000
Wella, Capital 300,000
Lala, Capital 450,000
Total 1,100,000

Their profit and loss ratio are 3:2:1 with agreement to revalue the following assets:
1. Accounts Receivable of P550,000 shall be recognized at 80% realizable value.
2. Merchandise inventory of 345,000 shall be decreased by 25%
3. The depreciation of the building shall be decreased by125,000.
continued
Journal Entries to revalue partnership assets:
1) Max, Capital P55,000
Wella, Capital 36,667
Lala, Capital 18,333
Accounts Receivable 110,000
(550,000 x 80% = 440,000-550,000)
To revalue Accounts Receivable to 80% realizable.
Computation:
Max, Capital (110,000 x 3/6 ) = 55,000
Wella, Capital (110,000 x 2/6) = 36,667
Lala, Capital (110,000 x 1/6) = 18,333
Continued…
2) Max Capital 43,125
Wella, Capital 28,750
Lala, Capital 14,375
Merchandise Inventory 86,250
(345,000 x 25% )
To bring down value of inventory by 25%.

Computation:
Max, Capital 86,250 x 3/6 = 43,125
Wella Capital 86,250 x 2/6 = 28,750
Lala, Capital 86,250 x 1/6= 14,375
3). Accumulated Depreciation-Bldg. P 125,000
Max, Capital 62,500
Wella, Capital 41,667
Lala, Capital 20,833
( decrease by125,000 )
To record decrease in depreciation of the building.

Computation
Max (125,000 x 3/6) = 62,500
Wella (125,000 x 2/6) = 41,667
Lala (125,000 x 1/6) = 20,833
New capital balances
Withdrawal cases
Case 1: Withdrawal at book value

Assume that Max agreed to accept payment equal to his interest, the journal entry
would be:

Max, Capital P314,375

Cash P314,375

To record retirement of Max.

ILLUSTRATION
Case 2: Withdrawal at more than book value
Assume Max demanded a full settlement of P400,000 and the remaining partners agreed because
of his non-monetary contributions to the business. If the current fair value of the partnership’s
net assets exceeded book value, the settlement price to the withdrawing partner will be greater
than his capital account balance and the excess payment is treated as bonus to the retiring partners
from the continuing partners.
Journal Entry

Wella, Capital 57,083

Lala, Capital 28,542
Max Capital 314,375
Cash P400,000
To record retirement of Max.

Computation of the Bonus: (400,000-314,375=85,625)

Wella (85,625 x 2/3) = 57,083
Lala (85,625 x 1/3)= 28,542
Total 85,625
ILLUSTRATION
Case 3: Withdrawal at less than book value
When a retiring partner willingly accept settlement at less than book value, in
effect he is giving part of his equity interest to the continuing partners in the form of
bonus.
Assume Max willingly accepted P 300,000 as settlement money, the withdrawal
will be recorded in the partnership’s books as:
Journal Entry
Max, Capital 314,375
Cash 300,000
Wella Capital 9,583
Lala, Capital 4,792
To record retirement of Max with bonus to continuing partners.
CONTINUED…
Computation of bonus to continuing partners: (314,375-300,000)
Wella (14,375 x 2/3 ) = 9,583
Lala (14,375 x 1/3) = 4,792
Total 14,375

Payment to a retiring partner at less than book value may also mean that the assets
of the partnership are undervalued which means that these assets should be identified
and reduced to their fair values .
Causes…
C. DEATH OF A PARTNER
The death of a partner dissolves a partnership. If the death of a partner does not result to
liquidation then the procedure to be followed is similar to that of a withdrawal of a
partner. The heirs of the deceased can expect to receive his equity interest after
necessary settlement of the business affairs is made. If it cannot immediately be done,
the equity interest of the deceased will be establish as a liability payable to his estate.

D. INCORPORATION OF A PARTNERSHIP
A partnership may decide to incorporate the business after evaluating the advantages of
having a corporate form of business. After necessary adjusting and closing entries are
done in the books, the assets and liabilities of the partnership will be transferred to the
corporation in exchange for shares of stocks which will be distributed to the partners
based on their equity interest. The partners will serve as the incorporators of the
newly-formed corporation.

Thanks you! next Module 4