Chapter 3 : Partnership Dissolution ee Learning Objectives ; 1. State the causes of partnership dissolution. 2 2 2. Account for the effects of partnetship dissolution on the| |__partnership equity, 0 Dissolution 4, As mentioned earlier, one of the characteristics of a partnership is that it has a ‘limited life,” in the sense that the partnership agreement can be easily dissolved. Dissolution is the change in the relation of the partners caused by any partner being disassociated from the business. Dissolution is different from liquidation. Liquidation is the termination of business operations or the winding up of affairs. | Partnership dissolution does mot necessarily terminate the | business. The business continues until the remaining partners decide to liquidate the business. If the business is continued after dissolution, new articles of partnership should be drawn up. The following are major considerations in the accounting for partnership dissolutions: a. Admission of a partner b. Withdrawal, retirement or death of a partner ¢. Incorporation of a partnership ee The admission of a new partner or the withdrawal, retirement or death of an existing partner dissolves the original partnership agreement because it creates a change in the relation of the partners (ie., a change in the number of the partners in 4 partnership). It should be noted that the admission of a new partner requires the consent of all the existing partners:gy ‘Admission of partner The admission of a new partner may be effected either through a. Purchase of interest in the partnership, or b. Investment in the partnership Purchase of interest Anew partner may be admitted when he purchases part or all of the interest of one or more of the existing partners. This transaction is a personal transaction between and among the partners. As such, any consideration paid or received by a partner is not recorded in the partnership's books. The only entry to be made in the partnership's books is a transfer within equity. A new capital account is established for the new partner and a corresponding decrease is made on the capital account(s) of the selling partner(s). No gain or loss is recognized in the partnership's books Illustration: Purchase of interest The capital balances and profit and loss ratios of the partners in ABC Co. are as follows: Capital PL A 40,000 40% B 60,000 30% c 80,000 30% Total 180,000 Case 1: Purchase of interest from one partner D purchases one-half of C’s capital interest for P48,000. Requirement: Provide the journal entry to record the transaction, Solution: Date C, Capital 0,000 x 1/2) 40,000 D, Capital to revord the admission of Dt the partiersip 40,000BE The P48,000 payment of D to C is not recorded in the partnership's books. Case 2: Purchase of interest from more than one Ee, ie D purchases 25% of A’s, B’s and C’s capital interests for PO0.000. | Requirements: j a. Provide the journal entry to record the transaction. | b. How much are the capital balances of the partners after the | admission of D? | c. How much is the gain or loss to be recognized in the | partnership's books? | d. How is the payment of D divided between the old partners | and how much are the old partners’ respective personal gains? | | | Solutions: Requirement (a): Date] A, Capital 40;000% 25%) 10,000 B, Capital (60,000 x 25%) 15,000 C, Capital (90,000 x25%) 20,000 11 D, Capital 45.000) ! to record the almission of D tothe partnership Requirement (b): peer a eee 5. c D Totals Capital, beg, 40,000 60,000 80,000 —- ~—_180,000 Sale of interest to C_(10,000) (15,000) (20,000) 45,000 ‘apital, end. 30,000 _45,000__ 60,000 45,000 180,000 Notice that when a new partner is admitted through “ hough “purchase of interest’ the total capital of the partnership does not change (the total capital the admission of D remains at P1800), isl osforeand ates Requirement (0): Zero. No gain or loss is recognized in the bes iba partnership’s books when a new partner is, admitted.Partnership Dissolution Requirement (d): The old partners divide the payment of D based on whatever they have agreed upon or as follows: ee A B C Total Debit to capital account 10,000 15,000 20,000 45,000 Excess allocated based on. PIL ratio (60K payment of D— Share in the payment of D 16,000 19,500 24,500 60,000 Personal gain (loss) 6,000. 4500 4,500 15,000 The personal gains of the selling partners are nat recorded inthe partnership's books. Case 3: Purchase of interest - ‘Book value method’ D purchases 20% interest from A and B for P50,000. The partners agreed to account for the sale at the ‘book values’ of A’s and B’S capital accounts (rather than the total partnership capital). Requirement: Provide the journal entry to record the transaction. Solution: Date | A, Capital 40,000 x 20%) 8,000 B, Capital (60,000 x 20%) 12,000 D, Capital 20,000 Case 4: Purchase of interest - ‘Proportionate share’ D purchases 20% interest in the net assets and profits of the partnership from A and B for ?50,000. A and B agreed to share proportionately on the 20% interest sold to D. The partnership's net assets are fairly valued on D's admission date. Requirement: How much is the combined gain of A and B from the sale? Solution:™ 60 Chapter 3 ae Payment of D 50,000 Capital credit given to D (180K total net assets «20%) __\_36,000_ Combined personal gain of A and B 14,000 Pate | A, Capital (36,000 x 407708)" 20,571 B, Capital [06,000 x 20%) x 30°%/70%|" 15,429 D, Capital (180K net assets x 20% interest) 36,000, (Fractions derived trom A's and B's P/L ratios of 40% and 30%, respectively The new P/L ratios after D's admission are as follows: A [40% - (20% x 4/7)) 28.57% B [30% - (20% x 3/7)] 21.43% c 30.00% D 20.00% 10.00% Revaluation of assets When a partnership is dissolved but not liquidated, a new partnership is created. The assets and liabilities carried over to the Rew partnership should be restated to fair values. The adjustment to the assets and liabilities is allocated first to the existing partners before recording the admission of the new partner Illustration: C purchases 20% of A’s and B’s capital interests for P100,000. The carrying amounts and fair values of the partnership's nel identifiable assets immediately before C’s admission are 28 follows: Caryiiga . Increase! ee PSNI Fat Bilue iy crcasil Cash 20,000 20,000 = Equipment 340,000 390,000 sxi00 Accounts pa 10,000 10,000 A, Capital (41 130,000 NIA B, Capital (60%) 220,000. NIAPartnership Dissolution Requirements: a. Provide the journal entries, b, Compute for the partners’ capital balances after C's admissior Solutions: Requirement (a): , The capital balances of the existing partners are adjusted for the revaluation increase before recording the admission of C | due] Equipment 50,000 A, Capital (a.a00 «40% 20,000 B, Capital (50,000 x 60%) 30,000 | | to record the revaluation of equipment | __| The adjusted capital balances are as follo i A Totals Unadjusted capital 130,000 220,000 350,000 Share in revaluation 20,000 30,000 Adjusted capital 150,000 250,000 ___ 400,000 » _C’sadmission is recorded as follows: Date A, Capital (150,000 x20%) | 30,000 | 1} B, Capital (250,000 x 20%) | 50,000 C Capital | 80,000 ‘ord te atnisionaf Ct te pinay | Requirement (b): A B c Totals Adj, capital before admission 150,000 250,000 - 400,000 Sale of interest to C (30,000) (50,000) 80,000 * Capital after C’s admission 120,000 200,000 80,000 _400,000Chapters OO ad a a ph aha Investment in the partnership Instead of purchasing interest from partner may be admitted by investing the existing partners, a new directly into the business This transaction is a transaction between the new partner and the partnership. As such, the consideration paid by the incoming partner is recorded in the partnership's books. Because this is an equity transaction with an owner, no gain or loss is invests in a partnership: 1 recognized The following scenarios may occur when a new partner The incoming partner's investment is equal to his/her capital credit which may be determined by multiplying the incoming partner's interest with the partnership's net assets after the admission. The entry is simply a debit to the invested asset and a credit to the incoming partner's capital. The incoming partner's investment is greater than his/her capital credit. The excess contribution is treated as a bonus to the old partners to compensate for their past efforts in establishing the business. The bonus is accounted for as an increase in the old partners’ capital and a decrease in the new partner's capital. The incoming parter’s investment is less than his/her capital credit. The deficiency is treated as a bonus to the new partner (possibly because he/she is bringing expertise or special skill into the business). The bonus is accounted for as an increase it the new partner’s capital and a decrease in the old partners’ capital. Illustration: Investment in the partnership The capital balances of the partners in ABC Co, are as follows: The carrying amount of the net asset Capital PiLratio A 40,000 40% B 60,000 30% « 80,000 30% Total 180,000. ts approximates fair value.Partnership Dissolution Case 1: Investment equal to Capital credit | D invests P60,000 cash for a 25% interest in the partnership's net assets and profits. Requirement: Provide the journal entry to record the transaction. Solution: Net assets before admission 180,000, Investment of D Net assets after admission D's interest in net assets D's capital credit Investment of D Bomus Date | Cash 60,000 | D, Capital 180 +604) x 25% {0 record the emission ofD tothe partnersip § Notes: © Under investment in the partnership, the consideration paid by the new partner is recorded in the partnership's books. This results to an increase in the partnership capital. * After the admission of D, the total capital of the partnership is increased to P240,000 (180K sefore D's aimission + 60K D's investnent). ‘A comparison between purchase of interest and investment in the partnership is provided below: Purchase of interest Investment in the partuership * The incoming partner's © The incoming partner's contribution is not recorded in | contribution is recorded in the the partnership's books. _partnership’s books. * Partnership capital remains the | © Partnership capital is increased same before and after the by the incoming partner's admission of the incoming contribution, partnerChapter Gh © No gain or loss is recognized in | the partnership's books, | * No gain or loss is recognized in the partnership's books. Case 2: Bonus to old partners a D invests P80,000 cash for a 25% interest in the partnership's nei assets and profits. Requirement: Provide the journal entry to record the transaction and determine the capital balances and profit and loss sharing ratio of the partners after the admission of D. Solittion: Net assets before admission 180,000 Investment of D = 0000: Net assets after admission 260,000 D's interest in net assets 25% D's capital credit 65,000 Investment of D 80,000 Bonus to old partners (15,000) Bate] Cash 80,000 ] | D, Capital 180K + 80k) x 25% 65,000 | A, Capital 05k x40%) 6,000, B, Capital (15k 30%) 4,300 C, Capital 5k x30%) 4,500. to rect theaisson of D tothe partnership | The bonus is allocated to the old partners based on their old P/L ratio. The capital balances of the partners after the admission of Dare determined as follows: vs —— = ___C oD Total Capital, before admission 40,000 60,000 80,000 40,000. Investment of D Bonus to old partn 6,000 4,500 4,590 apital, after admissi 000 64, 500 BS a 80,000 80,000Partnership Dissolti 65 New P/L ratio A (100% - 25%) x 40% 30.0 B (100% - 25%) x 30% 22.50% C 00% -25%) x 30% 22.50% D 25.00% 10.00% _ Case 3: Bonus to new partner D invests P52,000 cash for a 25% interest in the partnership's net assets and profits Requirement: Provide the journal entry to record the transaction and determine the capital balances of the partners after the admission of D. Solution: Net assets before admission 180,000 Investment of D 52,000 Net assets after admission 232,000 D's interest in net assets 25% D's capital credit 58,000 Investment of D 52,000 Bonus to D 6,000 Date | Cash 52,000 A, Capital (6K x40%) 2,400 B, Capital (6k x30%) 1,800 | C, Capital (6k «20% 1,800 D, Capital (180% + 52) 25% 58,000 to record th aimssion of D tothe partnership a A B c D Total Capital, before admission 40,000 60,000 80,000 180,000 Investment of D 52,000 52,000 Bonus to D. (2,400) _(1,800) (1,800) _ 6,000 : Capital, after admission _ 37,600 $8,200 78,200 58,000 232,000,ee oe Le @ Observe that in all the cases above, the eae capital after the admission of the new partner 1S e382) 'o the actual contributed eapital (.e., capital before admission Plus new partner's investment). Case 4.1: Amount of investment a ED D wants to join the partnership through direct investment. D asks the existing partners how much should he invest for a 20% interest in the partnership's net assets and profits. The partnership's books include a receivable from A of P8,000 and a loan payable to B of P10,000. Requirement: If no bonus is allowed, how much should D invest? Solution Net assets before admission 180,000 Divide by: (100%, -20% interest of D) 80% Net assets after admission 225,000 Multiply by: D's interest in net assets 20% D's investment 45,000 Checking: (180K ~ 45K) x 20% =45K D's capital credit equal to his investment The partners receable and payable accounts do mot affect the computations above because the business is continued after the partnership dissolution, These accounts are cartied over tothe books ofthe new partnership, Case 4.2: Adjustment to capital and Cash settlement After D’s admission in ‘Case 4.1’, the partners agreed to adjust | their capital balances to reflect their Proportionate shares in the partnership's net assets based on theit new profit and loss ratio. | Cash sett be made among the partne! equtivement: Determine how the cash settlement is to be made. SolutionPartnership Dissolution oe 67 € coos - 20%) «30 D _ A B G D Capital before admission 40,000 60,000 80,000 180,000 Investment of D 45,000_*_45,000 Total 40,000 60,000 80,000 45,000 225,000 Adjusted capital @ 24%; 24%; & 20%) 72,000 _54,000_54,000_45,000__ 225,000 (Payment)/Receipt (32,000) 6,000 26,000 __— 5 ‘In the cash settlement, A pays B P6,000 and C 26,000. Date | B, Capital 6,000 C, Capital 26,000 A, Capital 32,000 to record the partners’ agreed covtal adjustment Case 4.3: Correction of errors In Year 3, two years after D’s admission in ‘Case 4.1’, the partnership earned profit of 1,000,000. However, it was discovered that the following items were omitted in the partnership’s books: Year 2 Year 3 Prepaid asset 35,000 50,000 Accrued expense 40,000 60,000 Requirement: How much is the share of A in the Year 3 profit? Solution; Recall the following concepts on correction of prior period errors:Chapter 3. (A profit is also is understated, © If an asset-related accoustt is ™ copliestir understated (Direct relationship). The Opps" liability-related account. © Counterbalancing errors automal i i iod if not corrected. | immediately following period if not correctee————— Refer to Intermediate Accounting 3 for detailed discussion on ct ge ee 2 Year 3 | tically reverse in the Year Unadjusted profit “ oath Understatement of prepaid asset in Year 2 35,006 ee me Understatement of prepaid asset in Year 3 5 Understatement of accrued expense in Year 2 (40,000) 1,000 Understatement of accrued expense in Year 3 (60,000) | | Adjusted profit 995,000 | Multiply by: A’s P/L ratio (ee-solution in ‘Case 4.2) 32% | Share of A in Year 3 profit, 318,400 | Goodwill method | In traditional accounting (ie., based on US GAAP), an additional method called “goodwill method” is used to recognize an implied value from a partner's contribution during admission (and payment to a partner during withdrawal). This method, however, has been outlawed by PFRS 3 Business Combinations. Illustration: Goodwill method Capital accounts PIL ratios A, Capital 150,000 40% B, Capital 250,000 60% Purchase of interest - Goodwill to old partners C purchases 20% from A and B for P100,000. The partners agreed | to recognize an implied goodwill from C’s payment. | trom C's payment. |Partnership Dissolution 0 C's payment 100,000, Divide by: C’s interest 20% Grossed-up value of partnership's net assets 500,000 Actual contributed capital 400,000 Goodwill 100,000 Bete] Goodwill ‘] 100,000, A, Capital (100K x 40%) | 40,000 | B, Capital (100k x 60%) | |_ 60,000 Date | A, Capital (150K + 40K) x 20% 38,000 | B, Capital 250k + 60k) x 20% 62,000 | | C Capital 100,000 | Case 2: Investment - Goodwill to old partners C invests P120,000 to the partnership for a 20% interest. The partners agreed to recognize an implied goodwill from C’s investment. C's investment 120,000 Divide by: C's interest 20% Grossed-up value of partnership's net assets 00,000 Actual coritributed capital (00k before admission + 120K Cs investment) 520,000 Goodwill 80,000 Date | Goodwill 80,000 A, Capital (go x 40%) 32,000 B, Capital @ok x 60%) 48,000 Dae | Cash 120,000 ©, Capital 120,000 Case 3: Investment - Goodwill to new partner C invests 90,000 to the partnership for a’ 20% interest. The pariners agreed to have a total capital of P500,000.Chapters Wo 000 Date] Cash ao Goodwill (squeezed) " ao C Capital (500K ‘agreed capital’ x 20%) _ 100,000 The equity structure of the new partnership after the admission of Cis analyzed as follows: _______—____ - Case2 Case 3 Case 1 ‘A, Capital 752,000 182,000 150,000 B, Capital 24g.900 298,000 250,000 C. Capital 400,000 __120,000__100,000 Total capital 500,000 600,000 500,000 Actual contributed capital 400,000 520,000 __ 490,000 Overstatement (equal to GW)__100,000 80,000 10,000 “Goodwill,” by its inherent nature, is difficult to measure with sufficient reliability, and it has the tendency to be measured arbitrarily. PFRS 3 proliibits the recognition of goodwill from transactions that are not business combinations. The illustrations above are provided solely for illustration purposes. Withdrawal, retirement or death of a partner When a partner withdraws, retires or dies, his interest may be (a) purchased by one or all of the remaining partners or (b) settled by the partnership. In case of death, the deceased partner’s estate is entitled to the value of the partner's interest at the date of his death. The interest of the withdrawing, retiring, or deceased partner is adjusted for the following: a. his share of any profit or loss during the period up to the date of his withdrawal, retirement or death; and b. his share of any revaluation gains or losses as at the date of his withdrawal, retirement, or death, Purchase by one or alt of the remaining partners One or all of the remaining partners may purchase the interest of the retiring, withdrawing, or deceased=partnars This isePartnership Dissolution aA transaction between and among the partners (or deceased partner's estate). As such, the settlement amount is not recorded in the partnership's books. The only entry to be made is a transfer within equity. However, the above-mentioned adjustments (i.e, share in profits or losses and revaluation gains or losses) are recorded first before the settlement. Settlement by the partnership The partnership may settle the interest of the retiring, withdrawing, or deceased partner. This is a transaction between the retiring or withdrawing partner (or deceased partner's estate) and the partnership. As such, the settlement amount is recorded in the partnership's books, alongside any other necessary adjustments. Bonus method When the outgoing partner's interest is settled at an amount greater than or Jess than the value of his interest, the bonus method is used. Under the bonus method, any excess (or deficiency) in the payment is accounted for as deduction from (or addition to) the remaining partners’ capital accounts, Deferred settlement Pending settlement, the outgoing partner's interest is transferred to a liability account, which is considered an ordinary claim, subordinate to the claims of other outside creditors (vt. 1841). It may also be agreed that interest shall accrue on the outgoing partner's unpaid balance from the date of his disassociation up to the date of settlement. In lieu of interest, the partner may be entitled to profits attributable to the use of his right in the property of the dissolved partnership (av. 1841), Mlustration 1: Withdrawal, retirement or death of a partner Fact pattern: The capital account balances of the partners in ABC Partnership on July 1, 20x1 before any necessary adjustments are as follows:A, Capital (20%) B, Capital (30%) C Capital (60%) Total The partnership reported profit of 900,000 for the six months ended June 30, 20x1. | Case 1: Withdrawal - Purchase of interest by remaining partners | On July 1, 20x1, C withdraws from the partnership when he was | bought-out by his co-partners for 620,000 cash. The net assets of the firm as of this date approximate their fair values Requirement: Provide the journal entries. Solution: The capital balances of all of the partners are adjusted for their respective shares in the profit accruing as of the date of Cs withdrawal. A (20%) B (30%) __C.G0%) ‘Total Unadjusted balance 150,000 250,000 100,000 500,000 Share in profit [900K » (20%, 30% & 507] _180,000_270,000__450,000____900,000_ Adjusted balance 330,000 __520,000 550,000 1,400,000. eaaerrara—a_ ee 000 1,800,007 «The adjusting entry is as follows: ryt, To ids] Income summary 900,000 | A, Capital | 180,000 |B, Capital | 270,000 [Capital 450,000 «__ The entry to record the withdrawal of Cis as follows: jv. | C, Capital 550,000 20 A, Capital (550,000 x 20% 50% © | 220,000 |_| B, Capital son. 305024) 390,000Partnership Dissolution 7 ¥ Notes @ The £620,000 payment to C by A and B is not recorded in the books. + The capital balance of C is allocated to the purchasing partners based on their relative old P/L ratio. (rars the sum of remaining partners’ old P/. ratios, ite, ld P/L ratio dicated by +e «Partnership capital after C’s withdrawal: A B é Total Bal. before withdrawal 330,000 520,000 550,000 1,400,000 Withdrawal of C 220,000 330,000 (550,000) Bal. after withdrawal 550,000 850,000 = ___ 1,400,000 + Note: Total partnership capital remains at P1,400,000 before and after C's withdrawal. Retirement - Settlement of interest by partnership | C retires on July 1, 20x1. The partnership settles C’s interest for | P620,000 cash. Requirement: Provide the journal entries. Solution: The partners’ capital accounts are adjusted for the P900,000 profit. After the adjustment, the balance of C’s capital account is 550,000. (See computations in Case 1 above. * _Theentry to record the retirement of C is as follows: Jv, | C, Capital 550,000 2:1 | ‘4, Capital (620K - 550K) x 20750%) 28,000 B, Capital (520k - 550K) x 30% 50%) 42,000 Cash 620,000& Notes: @ Cis given a bonus of 70,000 capital balance). The bonus is deducted balances of the remaining partners. ; The payment to C is recorded in the books ‘because the interest of Cis settled by the partnership, rather than by the remaining (620,000 payment ~ 550,000 from the capital partners, © Partnership capital after C’s retirement: A B C Total “Adj bal. before retirement 330,000 520,000 550,000 1,400,000 Payment to C (620,000) (620,000) Bonus to C (28,000) (42,000) _70,000 = | Bal. after retirement 302,000 _ 478,000 - 780,000 "Note: The parinership capital is reduced by the 620,000 payment for C's capital balance. 4 Comparison between purchase of interest by remaining partners and settlement by the partnership Purchase by remaining partners | Settlement by partnership © The payment to the outgoing | partner is not recorded in the partnership's books. |» Partnership capital remains | the same before and after the withdrawal, retirement or death of the outgoing partner. ‘* No gain or loss is recognized | _ in the partnership's books. * The payment to the outgoing partner is recorded in the partnership's books, © Partnership capital is, decreased by the payment for the outgoing partner's capital balance. * No gain or loss is recognized in the partnership's books._JPartnership Dissolution 5 Case 3: Retirement - payment in the form of non-cash asset C retires on July 1, 20x1 and receives cash of 500,000 and land | with carrying amount of P100,000 and fair value of P300,000 from | the partnership as settlement for his interest. Requirement: Provide the journal entries. Solution: ‘The partners’ capital balances are adjusted for their respective shares in the P900,000 profit and the revaluation of the land. AQ0%) BGO%) CG0%) Total ‘Unadjusted balance 150,000 250,000 100,000 500,000 Share in profit ‘900K x 20%; 30% & SOM 180,000 270,000 450,000 900,000 Shave in revaluation gain (300K - 100K) x 20%; 30% & 50% 40,000 __ 60,000 _100,000_ 200,000 “Adjusted balances ___ 370,000 580,000 650,000 __1,600,000_ «The entries to adjust the capital balances of the partners are as follows: Ta | income summary 900,000 ; A, Capital 71). B Capital C Capital 450,000 Tay | Land (300K ~ 100K) 200,000 aks ‘A, Capital GO0K ~ 100K) x20% 40,000 B, Capital 200K - 100) x 30% 60,000 C, Capital (300K - 100k) «50% 100,000 to record the revaluation ofthe land + Note: All the partners, including the retiring partner, share in the revaluation of asset as atthe date of retirement. + Theentry to record the settlement of C's interest is as follows: July | C, Capital 650,000 ahi | Ae Capital (600K + 300K) ~ 650K) x 20%/50% 60,000 rf B, Capital [(500K + 300K) - 650K] x 30%/50% 90,000 Cash 500,000 Land, 300,000,we ee a | | * Partnership capital after C’s retirement c Total A B ‘Ad bal. before retirement 370,000 580000 650,000 - 1.600.000 (800,000) (800,000) Payment to C (500K + 300K) Bonus to C (60,000) (90,000) 150,000__- Bal. after retirement 310,000 _ 490,000_= 800,000 & Notes: & The total partnership capital is reduced b payment for C’s capital balance. © The net effect of C’s taking the non-cash asset is a met decrease of P200,000 on his capital, as analyzed below: C's share in revaluation 100,000 Debit to C's capital for the fair value of land __(300,000) 1 Net decrease in C’s capital (200,000) yy. the. P800,000 [ Case 4: Death of a partner - settlement of interest by partnership | Use the same information in “Case 3,” except that C dies on July 1, | 20x1. Requirement: Provide the journal entries. Solution: The same accounting is made. However, pending settlement, C’s adjusted capital balance is transferred to a liability account. July | C, Capital 650,000 ] 20x1 | A, Capital (150,000 x 20% /50%) 60,000 | B, Capital 150,000 x 30%/50%) 90,000 _ Liability to the estate of C 800,000 The entry on settlement date is as follows: [ Setttentent | Liability to the estate of C_ date Cash aici __ LandPartnership Dissolution gy Case 5: Withdrawal - fully depreciated asset C withdraws on July 1, 20x1 and receives cash of P250,000 anc fully depreciated equipment with fair value of P300,000 from the partnership, as settlement for his interest Requirement: Provide the entry to record the withdrawal of C Solution: _The capital balances of the partners are adjusted as follows: A 20%) _B (30%) CGV's) __Toi Unadjusted balance 150,000 250,000 100,000 500,000 Share in profit ‘900K x 20%; 30M de 50% 180,000 270,000 450,000 900,000 Share in revaluation gain (GOVK- 0") x 20%; 30% & 50% 60,090,000 150,000 _300,000 ‘Adjusted balances 390,000 610,000 700,000 __1,700,000 “The carrying amount of a fully depreciated asset with no residual value is zero. «The entry to record the settlement of C’s interest is as follows: July | C, Capital 700,000 1 Cash 250,000 oe Equipment (fair value) 300,000 ‘A, Capital [700K ~ 250K + 300K) x 20%/50% 60,000 B, Capital (700K - 250K + 300K)] x 302%/50% 90,000 Partnership capital after C's withdrawal: A B c Total Bal. before withdrawal 390,000 610,000 700,000 1,700,000 Payment to C (250K + 300K) (550,000) (550,000) Bonus to A and B 60,000 90,000 __(150,000) 4 Bal. after withdrawal 450,000 ___ 700,000 = 1,150,00078 Chapter 3 We We ee a US GA, Goodwill method (Traditional accounting based on AR) Illustration: C withdraws frot are as follows: mm ABC Partnership. The adjusted capital balances A, Capital (20%) 330,000 B, Capital (30%) 520,000 C, Capital (50%) _550,000_ Total 1,400,000 | Case 1: Partial goodwill | | The partnership settles C’s capital for P620,000; The partners | agreed to recognize whatever goodwill the settlement would | Date | C, Capital | | Goodwill (squeeze) Cash [Case 2: Total goodwill The partnership settles C’s capital for P620,000. The partners | agreed to recognize total goodwill from C’s settlement, Ey Payment to C 620,000 | Css interest (650,000), Partial goodwill 70,000 Divide by: C's P/L ratio 50% Total goodwill 140,000 te Date | Goodwill — 140,000 A, Capital (140k x 20%) 28,000 |, | B, Capital :40k x 30%) | 492,000] | | | _G Capital a40K x 50%) | 70,000 Date | C, Capital mie | {Cash 620,00 |Partnership Dissolution 79 from Again, PFRS 3. prohibits the recognition of good transactions that are not business combinations. Moreover, goodwill from a partner's admission or withdrawal does not clearly meet the dofi asset under the Conceptual Framework. The illustrations above are provided solely for illustration purposes. ion of an Additional Illustration: Retirement - Personal accounts ABC Co. Statement of financial position As of Dec. 31, 20x1 Cash 112,000 Loan payable to C 10,000 Receivable from A 8,000 A, Capital (20%) 150,000 Equipment 390,000 B, Capital (30%) 250,000 ‘apital (50%) 100,000 Total assets 510,000_ Total liabilities nnd equity 510,000 € retires on Dec. 31, 20x1. The net assets approximate their fair values except for the equipment which has a fair value of 450,000. Case 1: Settlement amount includes payment for loan The partnership pays C P140,000 as settlement for his interest, including his lo Requirement: Compute for the capital balances after C’s retirement. Solution: A 20%) _B (30%) _C.G0%) Total Unadjusted balance 150,000 250,000 100,000 500,000 Share in revaluation gain (850K —390K) x 20%; 30% & 50% 12,000 __18,000__30,000___60, Adjusted balance 162,000__ 268,000 __130,000 560,000 Dec 37, | Loan payable to C 10,000 20xt | ©, Capital 130,000 Cash 140,000we ee std a bit = B c Total “dj bal: before retirement 162,000 268,000 130.000 560,000 Payment for C’s capital Banene). leeing on a A Bal. after retirement 762,000 _268,000_~ om Note: The partnership capital is reduced by the payment for C's capital balance exeluding his loan: (140K total payment including for capital). payment for loan - 10K payment for loan = 130K payment Case 2: Settlement amount excludes payment for loan = The partnership pays C P140,000 as settlement for his interest, | excluding his loan which is to be repaid in full. Requirement: Compute for the capital balances after C’s retirement. Solution: The capital balances of the partners are adjusted first for the revaluation, similar to Case 1 [ Dec: | Loan payable to C 10,000 a C, Capital (adjusted balance — see ‘Case 1’) 130,000 1c A, Capital [150K - (10K + 130K) x 20%/50% 4,000 | | B, Capital (150K - (10K + 130K)] x 30%4/50% 6,000 l Cash (140K plus 10K payment for the loan) 150,000. he el A B € Total Bal. before retirement 162,000 268,000 130,000 560,000 Payment for C’s capital (140,000) (140,000) Bonus to C (4,000) 6,000) 10,000 - Bonus toC __(4,000)__(6,000)__10,000__ = Bal. after retirement 158,000 262,000 = £20,000,Partnership Dissotution 81 Incorporation of a partnership Another instance that causes partnership dissolution is the incorporation of a partnership. When a partnership is converted into a corporation, the partners’ relation changes ~ they cease to be partners (ie., agents of the business) and become stockholders There are various reasons for incorporating a partnership, which may include the following: a, Limited liability of shareholders ~ shareholders are not liable to corporate creditors beyond their investment in the corporation. ° b. Ease of raising additional capital ~ greater capital can be raised through an increased number of owners. Also, it is easier for a corporation to generate external financing, as lenders need not worry about the death of the partners. ©. Privacy and confidentiality - unlike in partnerships, the owners of a corporation are not agents of the corporation 4. Dispersion of risk — the risk of loss is dispersed to more owners e. Unlimited life ~ changes in the relationship of the owners of a corporation do not dissolve the corporation. £. Transferability of ownership — ownership interest in a corporation can be easily transferred through sale of shares of stocks, and this does not dissolve the corporation. g. Better public relations ~ many believe that wider ownership of a business results to better public relations When a partnership is converted into a corporation, the corporation acquires the assets and assumes the liabilities of the partnership and in return issues shares of stocks to the owners, On date of incorporation: a. The partners’ capital balances are adjusted for their respective shares in any profit or loss and revaluation gains or losses as at the date of incorporation. The adjusted capital balances may be used to determine the number of shares to be issued to each partner. b. Normally, the books of the partnership are closed and new books are opened for the corporation.Illustration: . ‘ ABC Partnership is converted into a corporation on Jan. 1, 20x1, _Relevant information follows:____—_——7 Increase carrying amounts _ Fair values (Decrease) Cash) 20,000 20,000 ain Receivables 60,000 40,000 (20,000) Inventory 80,000 70,000 (20,000) Equipment 540,000 670,000 130,000 Payables 50,000 ~ 50,000 = A, Capital (20%) 150,000 N/A B, Capital (30%) 200,000 N/A C, Capital (50%) 300,000 N/A ‘The corporation’s authorized capitalization is P2,000,000 divided 100,000 into 200,000 ordinary shares with par value of P10 per share. Case Requirement: a. Compute for the number of shares to be issued to each of the partners. b. Provide the journal entries. Solutions: : Number of shares issued ‘Assume that the shares to be issued to the partners are based on A B iG Unadjusted capital 150,000 200,000 300,000 Share in revaluation gain “ 10K x 20% 30% 50% 20,000 30,000 50,000 Adjusted capital 170,000 230,000 350,000 Divide by: Par value persh 10) 10 nia shaves issued 17,000 23,000 10 v2dtd 23,000 35.000 75,00, Total 650,000 100,000 750,000 10. 75,000,Partwership Dissutution 83 Requirement (b): + _Journal entries in the partnership's books Jen | Equipment 130,000 see Receivables 20,000 Inventory 10,000 A, Capital | 20,000 8, Capital 30,000 C, Capital 50,000 _| toast the net nssts to far wues Tax | A, Capital - 170,000 | ah | Be Capital 230,000 C, Capital 350,000 Payables 50,000 | Cash 20,000 Receivables 40,000 Inventory 70,000 Equipment 670,000 1 close the books of the partnership «Journal entry in the corporation's books: Jan, | Cash 20,000 2011 | Receivables 40,000 Inventory 70,000 Equipment . | 670,000 Payables 50,000 Share capital 750,000 to record the initial investments It should be noted that under See. 1 of the Corporation Code of the Philippines, the ‘number oF incorporators shall not be less than 5 but not more than 15 natural persons all of legal age and a majority of whom are residents of the Philippines. To simplify the ilustration above, the investments of the “other” incorporators are ignored, Case 2: Share prentium Assume that A, B and C agreed to be issued 14,000, 21,000 and | | 35,000 shares, respectively. Requirement: How much is credited.-to the share premium account?Chapters A Solution: z ‘Adjusted net assets/capital (see ‘Case 1’) 50,000 Less: Total par value of shares issued [(14,000 sh. + 21,000 sh + 35,000 sh) x PIO per sh = On eo) Sle premium ¢ _Joumal entry in the corporation's books: wee 2000 + 2011 | Receivables 40,000. Inventory 70,000 Equipment 670,000 Payables 50,000 | Share capital 700,000 | Share premium 50,000 to record the inital nestments nna arlene | Case 3: Preference share Assume that the corporation was authorized to issue 100 par preference shares and P10 par ordinary shares. The partners agreed to receive 1,000 ordinary shares each and even multiples of | proference shares for their remaining interest. Requirement: How many ordinary and preference shares did each partner receive? Solution: anseescomdocsfommmncgpEvecee oo asics ABC Total Adjusted capital 170,000 230,000 350,000 750,000 Less: Ordinary shares (1,000 «P10 par) (10,000) (10,000) (20,000) _(30,000) ining interest 160,000 220.000 340,000 720,000 Divide iy: Par val per preferencesh. 10010) team No. of preference shares issued 1,600 2200 3,499 7,200 a —_Tot_. : 1,000 3,000 Preference shares issued 1,600 2,200 500 ran 200__3400___7.200 Total shares issued £6002 3.-200 4-400, 10,200 —e{[‘ 00 en, 2005Partnersitip Dissolution Chapter 3: Summary Dissolution is the change in the relation of the partners caused by any pariner being disassociated from the business. Examples of events that result to parinership dissolution: (a) Admission of a pariner, (b) Withdrawal, retirement or death of a partner, and (c) Incorporation of a partnership. Admission of a partner Selling partner's capital (Dr) Incoming partner's capital (Cr) Purchase of interest "Investment in the partnership ‘The transaction is recorded as a_| The transaction is recorded in transfer within equity: the regular manner. Asset invested (Dr) | Incoming partner's capital (Cr) | st Withdrawal, retirement or death ofa partner Purchase by remaining partners Settlement by partnership The transaction is recorded as a _| transfer within equity: Outgoing partner's capital (Dr) Purchasing partner's capital (Cr) The transaction is recorded in the regular manner: Outgoing partner's capital (Dr) Payment made (Cr) | + Incorporation of a partnership © When a partnership is incorporated, the corporation acquires the net assets of the partnership and in return issues shares of stocks to the owners. If the fair value of the net assets exceeds the aggregate par value of the shares issued, the excess is credited to share premium.Chapter 3 Chapters - Bi tt PROBLEMS PROBLEM 1: TRUE OR FALSE 1. The total capital of a partnership increases W! partner purchases interest from an existing partner. 2. According to the law, a partnership is dissolved when a new partner is admitted or when an existing partner withdraws. hen an incoming Fact pattern: You and I are partners with capi equal interests in the partnership. ital balarices of P5 each. We have 3. Friend acquires one-half of your interest for P3. Your capital balance after the admission of Friend is P2.5. 4. The payment of Friend is recorded in the partnership's books. 3, The total partnership capital after the admission of Friend is P13. 6. Disregard the previous assumptions. Friend acquires 20% interest by investing P2.5 to the partnership. No bonus is. allowed. My capital after the admission of Friend is P3.75. 7. The investment of Friend is recorded in the partnership's books. Fact pattern: Dog, Cat and Mouse are partners with capital balances of P5 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 net assets are fairly valued. 8. Dog acquires Mouse's interest for P2. Dog's capital after the withdrawal of Mouse is P10. 9. The partnership pays Mouse P7 as settlement of his partnership interest. Cat's capital after the withdrawal of Mause is P4. 10. Cat was able to persuade Mouse to stay, on condition that the partnership. should _be_converted_intoa-corporation:»TH‘gp ysnaremetan accra Partnership Dissolution corporation issued 4 shares with par value of PI per share to each of the partners. The credit to share premium is P2 PROBLEM 2: MULTIPLE CHOICE - THEORY 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, a. dissolution ¢. incorporation d. liquidation . break-up 2. The admission of a new partner effected through purchase of interest from (an) existing partner(s) is a. recorded in the partnership's books as a debit to cash or other asset and credit to the incoming, partner’s capital account. b. recorded in the partnership's books as a transfer within equity. ¢. 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 partnership formation. ¢. asa purchase of interest. d. asan 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 admittance 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?Wee ee 5. PROBLEM Chapter 3 a. Aand B’s new relative capital ratio b. Aand B's new relative capital profit and lo: c. Aand B's old capital ratio d. Aand B’s old profit and loss ratio ss ratio rtnership paid D an amount When Partner D retired, the pa! é of his capital account. Which that was lower than the balance of the following statements 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. Fact pattern: The net assets of ABC Co. consist of the following: A (20%), | 100,000; B (30%), P150,000; and C (50%), P200,000. The net assets | are fairly valued. Use the fact pattern above to answer the eight independent cases below: 1 D acquires half of C’s capital interest for P120,000. Requirement: Provide the journal entry. 2. D acquires 25% of A’s, B’s and C's capital i i 'S capital int for 150,000. pital interests Requirements: a, b. Provide the journal entry How much are the capital balances of the admission of D? partners after thePartnership Dissolution 89 c. How much is the gain or loss to be recognized in the partnership’s books? d. How will A, B and C divide the P150,000 payment of D, and how much are the personal gains (losses) of A, B and C? 3, (Ignore the previous assumption regarding the net assets being fairly valued.) D acquires 25% of A’s, B's, and C’s capital interests for P150,000. The carrying amount of the partnership's net assets as of this date approximates fair value except for equipment with carrying amount of P680,000 and fair value of P830,000. Requirements: a. Provide the journal entries. b, Determine the capital balances of the partners after the admission of D. 4. D invests P112,500 for a 20% interest in the net assets and profits of the partnership Regitirement: Provide the journal entry 5. D invests P180,000 cash for a 20% interest in the net assets and profits of the parmership, The partners use the bonus method. Regutirements: a. Provide the journal entry to record D’s admission. », Compute for the partners’ respective capital balances after D's admission ¢. Compute for the revised profit and loss sharing ratio of the partners after D's admission, 6. D invests P100,000 cash for a 20% interest in the net assets and profits of the partnership. The partners use the bonus method, Requirements: a. Provide the entry to record the-admissionof DyChapte; S02 ge b. Compute for the capital balances of the partners after Ds admission. 7. (Ignore the previous assumption -egardins, oe ; J es approximating fair value.) D notifies A, Band rea icy invest for a one-fourth (1/4) interest in the per aes net assets and profits. The carrying amount o ie coneine approximates fair value except for land stated at its acquisition cost of P200,000 but has a fair value of P500,000. | Requirement: If no bonus shall be allowed, how much should D invest in the partnership? 8. D invests equipment with a historical cost of P200,000 and fair value of P160,000 for a 20% interest in the net assets and profits of the partnership. The partners use the bonus method. Requirement: Compute for the capital balances of the partners after D’s admission. Fact pattern: ‘The net assets of ABC Co. as of June 30, 20x1 consists of the following: A (20%), P300,000; B (30%), P500,000; and C (50%), | 200,000. Profit of P1,800,000 for the six months ended June 30, | 20x1 is not yet closed to partners’ respective capital accounts. The | [ReCaaes ap ProRuTaMetaVaLGES, | FA | Use the fact pattern above to answer the independent cases below: 9. On July 1, 20x1, C sold his partnership interest to A and B for 1,240,000. A and B share proportionately in C’s interest. Requirements a. Provide the journal entry to record the withdrawal of C b. Compute for the capital balances of A and B alter the withdrawal of C.Partersitip Dis a1 ¢ Compute for the effect of C’s withdrawal on the total partnership capital. 10. C retires on July 1, 20x1. The partnership pays C P1,240,000 as settlement of his interest. Requirements a. Provide the journal entry to record the withdrawal of C b. Compute for the capital balances after C’s withdrawal c. Compute for the effect of C's withdrawal on the total partnership capital 11. C retires on July 1, 20x1 and receives cash of P1,000,000 and equipment with carrying amount of P200,000 and fair value of ‘P600,000 as settlement of his interest Requirement: Compute for the capital balances after C’s retirement. 12. On July 1, 20x1, the partnership is converted into a corporation. The corporation issues as many ordinary shares with par value of P100 as equal to the partners’ respective adjusted capital balances. Requirement: Compute for the number of shares issued to each of the partners, PROBLEM 4: MULTIPLE CHOICE - COMPUTATIONAL Use the fotlowing information for items 1 to 4: A&B Partnership admits C as a new pariner. The statement of financial position before the admission of C is shown below: Cash 26,000 Accounts payable 62,000 Accounts receivable 120,000 A, Capital (60% interest in Pry 170,000 wentory 180,000__B, Capital (40% interest in PL) 94,000 Total assets 326,000 Total liabilities and equity 326,000 ee —_Chapter 3 —~ We ie ee The following adjustments are determined: 5 «The recoverable amount of the accounts receivable is P116 409, © AP25,000 recovery of a previous write-down on the inventory > should be recognized. sees © Prepaid assets of P3,600 and accrued liabilities of 4,00) should be recognized (AICPA - Adapted) interest in the partnership for P100,000, of B after the admission of C? ¢. 51,200 . 182,600 1. C acquires half of B’ How much is the capital balance a. 47,000 b. 21,500 2. C invests P71,250 cash for a 20% interest in the net assets and profits of the partnership. C’s capital account is credited for the fair value of the 20% interest he acquired. How much is the capital balance of B after the admission of C? a. 102,400 . 86,400 b. 94,000 d. 120,400 3. C invests P100,000 cash for a 20% interest in the partnership's net assets and profits. If the bonus method is used, how much is the capital balance of B after the admission of C? a. 165,350 c. 100,000 b. 111,600 d. 77,000 4, If no bonus is allowed, how much should C invest in order to obtain 2/5 interest in the partnership? a. 190,000 ¢. 285,000 b. 185,000 d. 220,000 5. A, B and C are partners with the following capital balances and interests: A (20%) P50,000; B (30%) 70,000; and C (50%) 130,000. D purchases 10% partnership interest from A and B for P30,000. How much would be credited to D's capital unde" the following scenarios?Partnership Dissolution 93 * _ D’s capital credit is based on the book values of the selling partners’ capital balances © D's capital credit reflects the fair value of his interest in the partnership's net assets. The partnership's net assets on D’s admission date are fairly valued. List A> a. 12,000 25,000 cc. 25,000 30,000 b. 25,000 12,000 d. 12,000 30,000, 6. The admission of a new partner to a 20% interest in a partnership for an investment of P18,000, but with a capital credit based on P75,000 total contributed capital, will result in a. bonus to the old partners. b. bonus to the new partner. goodwill to the old partners, goodwill to the new partner. (RNCPA™ Adapted) 7. The capital accounts and profit and loss sharing ratios of A, B and C are as follows: Capital PIL A 139,200 2 B 208,800 18. g 96,000 V6 On this date, D is admitted to the partnership when he purchased, for P132,000, a proportionate interest from A and B in the net assets and profits of the partnership. Asa result of the transaction, D acquired one-fifth interest in the net assets and profits of the firm. What is the combined gain realized by A and B upon the sale of a portion of their interest in the partnership to D? a 0 . 62,400 b. 43,200 4. 82,000 catcra) 8. The capital balances of partners Ming and Piw are P80,000 and 40,000, respectively. They Share it Profits and) losses in’ theChapter 3 Det Se ea ratio of 3:2. They have a desperate need for cash and they agree to admit Andre as a new partner with @ 1/3 interest in both capital and profits uipon the latter's capital infusion ot 730,000, No goodwill is to be recognized: After Andre's admission, the respective capital balances of Ming, Piw ang Ae ¢. 68,000, 32,000 & 50,000. a. 50,000, 50,000 & 50,000. b. 66,667, 33,333 & 50,000. “d, 80,000, 40,000 & 30,000. (RPCPA ~ Adapted) 9, Blau and Rubi are partners who share profits and losses in the ratio of 6:4, respectively. On May 1, 2003, their respective capital accounts were as follows: Blau 60,000 Rubi 50,000 On that date, Lind was admitted as a partner with a one-third interest in capital and profits for an investment of P40,000. The new partnership began with a total capital of 150,000. Immediately after Lind’s admission, Blau’s capital should be a. 50,000. ¢, 56,667. b. 54,000. d. 60,000. aicra) Use the following information for items 10 and 11: The partners in ABC Co. had the following capital balances and P/L sharing percentages: A (50%) P320,000; B (30%) P192,000; and C (20%) P128,000. 10. A decided to retire and sold his interest to B for P360,000. The entry on A's retirement included a a. debit to B’s capital for P24,000, b. debit to C’s capital for P16,000. ¢, credit to Bs capital for P360,000, d. credit to B's capital for P320,000,Partnership Dissolution 95 11. A withdrew and the partnership paid him 360,000. How much is the capital balance of C after A’s withdrawal? a. 112,000 c. 168,000 b. 116,800 d. 172,000 12, ABC Partnership's net assets were P1,000,000 as of Jan. 1, 20x1 Partner A retires frem the partnership on June 30, 20x1. The Partnership earned profit of P300,000 for the six months ended June 30, 20x1. Partners A, B and C share profits and losses equally. If Partner A was paid P200,000 for his interest in the partnership, how much is the adjusted net assets of the partnership immediately after Partner A’s retirement? (No goodwill is recognized.) a. 800,000 . 1,100,000 b. 900,000 . Answer cannot be determined 13. The net assets of ABC Co. on June 30, 20x1 before closing entries consisted of the following: A (20%), P300,000; B (30%), 500,000; and C (50%), 200,000. Profit for the six months ended June 30, 20x1 was P1,800,000. C withdraws on July 1, 20x1 and receives 1,000,000 cash and fully depreciated equipment with fair value of P600,000 from the parmership, What is the capital balance of A right after C’s withdrawal? a, 780,000 . 700,000 b. 1,220,000 4. 1,800,000 * Use the following information for items 14 and 15: A, Band Care partners with capital balances of P300,000, P300,000 and P200,000, respectively. The partners share in profits and losses equally. C is to retire and it is agreed that he would take furniture with carrying amount of P65,000 and a note for the balance of his interest. The fair value of the furniture is 750,000; however, a brand-new furniture would cost P80,000. 14. C’s acquisition of the furniture would result in a. Teduction in capital of 5,000 each for Avand BGAly!b, reduction in capital of P7,500 each for A and B only. ¢. reduction in capital of P15,000 for C. d. reduction in capital of P55,000 for C. avers) 15. The amount of the note issued to C is a. 120,000. c. 145,000. b. 135,000. d. 150,000. (mPcray PROBLEM 5: CLASSROOM ACTIVITY INSTRUCTION: Find a study partner. Solve the cases below individually first then compare your answers. A, B and C are partners with the following P/L ratio and capital balances: A (60%) P100,000; B (30%) 60,000; and C (10%) 20,000. Case 1: Dr purchases one-half of A’s capital interest for P70,000. Provide the journal entry under the ‘book value’ method. Case 2: D purchases 20% interest in the partnership from A, B and CC for P60,000. Provide the journal entry under the ‘book value’ method and determine the capital balances of the partners after D's admission. Case 3: D invests P70,000 cash for a 20% interest in the partnership's net assets and profits. Provide the journal entry and determine the capital balances and P/L. ratio of the partners aftet D’s admission. Case 4: D wants to infuse capital to the partnership for a 10% interest in the net assets and profits. The partners determine that the net assets are fairly valued except for land carried at P365,000 but has a fair value of 410,000. If no bonus is to be given to at partner, how much is D's required investment? -Partuership Dissolution 97 Case 5: C withdraws from the partnership and sells his interest to B for P30,000. Provide the journal entry and determine the capital balances and P/L ratio of the remaining partners after C’s withdrawal. Case 6: C retires and the partnership settles his interest for 32,000. Provide the journal entry and determine the capital balances and P/L ratio of the remaining partners after C’s retirement, Case 7: The partnership is converted into a corporation. The corporation issues 6,000, 3,000 and 1,000 ordinary shares to A, B and C respectively. If the ordinary shares have par value of P10 per share, how much is the resulting share premium? PROBLEM 6: FOR CLASSROOM DISCUSSION Admission of a new partner 1. Carrot joins the partnership of Apple and Banana, The partnership's statement of financial position before Carrot’s admission is as follows: Cash 30,000 Accounts payable 80,000 Accounts receivable 140,000 Apple, Capital (60%) 515,000 Inventory 200,000 Banana, Capital (40%) 275,000 Equipment 500,000 Total assets 870,000_ Total linbilitivs and equity — 870,000 The following adjustments are determined: a. The recoverable amount of the accounts receivable is P120,000, b. The inventory has a net realizable value of P160,000 ©. The equipment has a fair value of P450,000. d, Unrecorded liabilities amount to ‘20,000. Case 1: Purchase of interest from one partner Carrot acquires half of Banana’s ¢é pital interest for P800/000.Chapter 3 | Requirements: Provide the entry and determine the capital balances, and P/L ratio of the partners after Carrot’s admission. an one partner Case 2: Purchase of interest from more tht vine! ana’s capital interests for Carrot purchases 20% of Apple's and Ban: 800,000. Requirements: Provide the entry and determine the capital balances of the partners after Carrot’s admission. Case 3: Amount of investment Carrot wants to invest for a 20% in the net assets and profits of the partnership. Requirements: If no bonus is allowed, how much should Carrot invest, and what would be the new P/L ratio of the partners after Carrot’s admission? Case 4: Investment in the partnership - Bonus to new partner Carrot invests P100,000 for a 20% interest in the net assets and profits of the partnership. No goodwill is recognized. Requirements: Provide the entry and compute for the capital balances of the partners after Carrot’s admission. Case 5: Investment in the partnership - Bonus to old partners Carrot invests P180,000 for a 20% interest in the net assets and profits of the partnership. No goodwill is recognized. Requirements: Provide the entry and compute for the capital balances of the partners after Cartot’s admission, Withdrawal, retirement or death of a partner 2. Partners A, B and C had the following capital balances on Jat 1, 20x1: A, Capital (50%%)-320,000; B; Capital (80%) 192,000!Partnership Dissolution % and C, Capital (20%) P128,000, Partner A decided to retire on Sept. 1, 20x1. The partnership earned profit of P800,000 from Jan. 1 to Aug. 31, 20x1 and the pariners had the following capital withdrawals during that period: A, P40,000; B, P60,000; and C, P30,000, Case 1: Purchase of interest by remaining partner Partner B purchases Partner A’s interest for ‘700,000. Requirements: Provide the entry and compute for the capital balances and P/L ratio of the partners after A’s retirement. Case 2: Settlement of interest by partnership The partnership pays Partner A 700,000 for his interest Requirements: Provide the entry and compute for the capital balances and P/L ratio of the partners after A’s retirement. Case 3: Settlement of interest by partnership The partnership pays Partner A P650,000 for his capital. Requirements: Provide the entry and compute for the capital balances of the partners after A’s retirement. Incorporation of a partnership 3. Use the information in Problem 2 above. However, instead of Partner A retiring, the partnership is converted into a corporation on Aug. 31, 20x1. The corporation issued 1,000 preference shares with par value of P200 per share to each of the partners and even multiples of ordinary shares with par, value of P50 per share for their remaining interests Requirements: Compute for the number of shares issued to each of the partners.