PARTNERSHIP

DISSOLUTION
PARTNERS It is the change in the relation of the
partners caused by any partner ceasing
HIP to be associated in the carrying on as
distinguished from the winding up of
DISSOLUTI the business.
(Art. 1828)
ON
CAUSES 1. Admission of a new partner

OF
a. by purchase of interest, and
b. by investment

DISSOLU
2. Withdrawal or retirement of a partner, and
3. Death of a partner

TION
4. Incorporation of a partnership
ASSIGNME
NT OF AN An assignment does not itself change the
relationship of the partners. Assignment only
entitles the assignee to receive the assigning
INTEREST partner’s interest in future partnership profit and
partnership assets in the event of liquidation.

TO A THIRD
PARTY
 ADMISSION OF A NEW PARTNER
A new partner can be admitted with the
consent of all partners in the business. The
original partnership is considered dissolved by
common consent.
A new agreement should be drawn up
that specifies the partner’s interest
upon formation of the partnership, the
distribution of profits and losses
among partners and all of the other
considerations relative to the new
association.
ADMISSION BY PURCHASE
OF AN INTEREST
The purchase of an interest from one or more
of the partnership’s existing partners is a
personal transaction between the incoming
partner and the selling partner(s).
No additional money or properties are
invested in the partnership.
ADMISSION BY PURCHASE
OF AN INTEREST

The only entry entered in the books of the

partnership is the transfer of capital interest
from selling old partner to new partner.
ILLUSTRATION:
 A and B are partners with capital balances of P100,000 and P50,000, respectively. They share
profits and losses equally. Cordero is a new partner.

 Case 1a : Purchase at book value from one partner only. C purchases a 1/5 interest from A by
paying P20,000.

A, CAPITAL 20,000
C, CAPITAL 20,000
ILLUSTRATION:
 A and B are partners with capital balances of P100,000 and P50,000, respectively. They share
profits and losses equally. Cordero is a new partner.

 Case 1b: Purchase at book value from more than one partner. C purchase 1/5 interest from old
partners by paying 30,000.

A, CAPITAL (100,000 x 1/5) 20,000

B, CAPITAL (50,000 x 1/5) 10,000
C, CAPITAL 30,000
ILLUSTRATION:
 A and B are partners with capital balances of P100,000 and P50,000, respectively. They share
profits and losses equally. Cordero is a new partner.

 Case 2 – Purchase at less than book value. C purchases 1/5 interest from the old partners by
paying P25,000.

A, CAPITAL (100,000 x 1/5) 20,000

B, CAPITAL (50,000 x 1/5) 10,000
C, CAPITAL 30,000
ILLUSTRATION:
 A and B are partners with capital balances of P100,000 and P50,000, respectively. They share
profits and losses equally. Cordero is a new partner.

 Case 3 – Purchase at more than book value. C purchases 1/5 interest from the old partners by
paying P40,000.

A, CAPITAL (100,000 x 1/5) 20,000

B, CAPITAL (50,000 x 1/5) 10,000
C, CAPITAL 30,000
ASSET
REVALUATION Revaluation of the assets of the old partnership
is generally undertaken prior to the admission
UPON of a new partner.

ADMISSION The adjusted capital of the old partners becomes

the basis for the interest transferred to the new
OF A PARTNER partner.

BY PURCHASE
ILLUSTRATION:
 A and B are partners with capital balances of P100,000 and
P50,000, respectively. They share profits and losses equally. C
is a new partner who purchases 1/5 interest from A and B
paying P40,000.
 However, before the admission of C, partnership assets are to
be revalued using as the basis of the amount to be paid by C.
 A and B are partners with capital balances of P100,000 and P50,000,
respectively. They share profits and losses equally. C is a new partner who
purchases 1/5 interest from A and B paying P40,000.
 However, before the admission of C, partnership assets are to be revalued
using as the basis of the amount to be paid by C.

STEP 1: The new partnership capital is equal to the amount paid by the
incoming partner divided by his fraction of interest.

New partnership capital = P40,000 | 1/5 = P200,000

 A and B are partners with capital balances of P100,000 and P50,000, respectively. They share
profits and losses equally. C is a new partner who purchases 1/5 interest from A and B paying
P40,000.
 However, before the admission of C, partnership assets are to be revalued using as the basis of
the amount to be paid by C.

STEP 2: The amount of asset revaluation is equal to the new partnership capital less old
partnership capital.
Asset revaluation = P200,000 – P150,000 = P50,000

STEP 3: The allocation of the amount of asset revaluation among the old partners is as follows:
P50,000 / 2 = P25,000 per partner
 A and B are partners with capital balances of P100,000 and P50,000, respectively. They share
profits and losses equally. C is a new partner who purchases 1/5 interest from A and B paying
P40,000.
 However, before the admission of C, partnership assets are to be revalued using as the basis of
the amount to be paid by C.

STEP 4: The capital balances of the old partners after the asset revaluation is equal to their old
capital balances plus their share in the asset revaluation.
A B
Capital balances before reval. P100,000 P50,000
Share on asset reval. 25,000 25,000
Capital balances after reval. P125,000 P75,000
 A and B are partners with capital balances of P100,000 and P50,000, respectively. They share
profits and losses equally. C is a new partner who purchases 1/5 interest from A and B paying
P40,000.
 However, before the admission of C, partnership assets are to be revalued using as the basis of
the amount to be paid by C.

STEP 5: The amount of interest transferred by the old partners to the new partner is based on
the new capital balances (capital balances after the asset revaluation).
A B
Capital balances after reval. P125,000 P75,000
Interest transferred 1/5 1/5
Capital transferred to C P25,000 P15,000
 A and B are partners with capital balances of P100,000 and P50,000, respectively. They share
profits and losses equally. C is a new partner who purchases 1/5 interest from A and B paying
P40,000.
 However, before the admission of C, partnership assets are to be revalued using as the basis of
the amount to be paid by C.

 STEP 5: Record journal entries for the asset revaluation and the admission of C

Asset P50,000
A, Capital P25,000
B, Capital P25,000

A, Capital P25,000
B, Capital P15,000
C, Capital P40,000
 Any gain or loss recognized subsequent to recording
the admission will be allocated on the basis of the new

ADMISSIO profit and loss ratio.

Investment of a new partner increases the total assets
and total capital of the partnership.
N BY An incoming partner may acquire an interest in the
partnership based on the following situations:
INVESTME 1. No bonus

NT
2. Bonus approach; and
3. revaluation approach
 Contributed capital:
 The investment of all partners, both old and new, to the
partnership.
Agreed capital:

DEFINITIO  The amount of new capital set by the partners for the
partnership.

N OF  Equal, more than, or less than the total contributions of

the partners.

TERMS Bonus – Transfer of capital from one partner to another.

Asset revaluation:
 Necessary adjustments in the asset values upon
admission of a new partner.
 Difference between the agreed capital and contributed
capital
ILLUSTRATION:
 A and B are partners with capital balances of P200,000 and
P100,000 respectively. They share profits and losses equally. C
is to be admitted in the partnership.
 A and B are partners with capital balances of P200,000 and P100,000 respectively. They share
profits and losses equally. C is to be admitted in the partnership.

CASE 1- No bonus, no asset revaluation. C invests P100,000 for a ¼interest in the agreed
capital of P400,000.
AC CC
OLD (3/4) 300,000 300,000
NEW (1/4) 100,000 100,000
TOTAL 400,000 400,000

CASH P100,000
C, CAPITAL P100,000
 A and B are partners with capital balances of P200,000 and P100,000 respectively. They share
profits and losses equally. C is to be admitted in the partnership.

CASE 2- Bonus to old partners, no asset revaluation. C invests P100,000 for a 1/5 interest in the
agreed capital of P400,000.
AC CC BONUS
OLD (4/5) 320,000 300,000 20,000
NEW (1/5) 80,000 100,000 (20,000)
TOTAL 400,000 400,000

CASH P100,000
C, CAPITAL P100,000
C, CAPITAL P20,000
A, CAPITAL P10,000
B, CAPITAL P10,000
 A and B are partners with capital balances of P200,000 and P100,000 respectively. They share
profits and losses equally. C is to be admitted in the partnership.

CASE 3- Bonus to new partner, no asset revaluation. C invests P60,000 for a 1/5 interest in the
agreed capital of P360,000
AC CC BONUS
OLD 4/5 288,000 300,000 (12,000)
NEW 1/5 72,000 60,000 12,000
TOTAL 360,000 360,000

CASH P60,000
C, CAPITAL P60,000
A, CAPITAL P6,000
B, CAPITAL P6,000
C, CAPITAL P12,000
 A and B are partners with capital balances of P200,000 and P100,000 respectively. They share
profits and losses equally. C is to be admitted in the partnership.

CASE 4-Positive asset revaluation, no Bonus. C invests P100,000 for a 1/5 interest in the agreed
capital of P500,000
AC CC ASSET REVALUATION
OLD 4/5 400,000 300,000 100,000
NEW 1/5 100,000 100,000
TOTAL 500,000 400,000 100,000

CASH P100,000
C, CAPITAL P100,000
OTHER ASSETS 100,000
A, CAPITAL P50,000
B, CAPITAL P50,000
 A and B are partners with capital balances of P200,000 and P100,000 respectively. They share
profits and losses equally. C is to be admitted in the partnership.

CASE 5-Negative asset revaluation, no Bonus. C invests P60,000 for a 1/5 interest in the agreed
capital of P300,000
AC CC ASSET REVALUATION
OLD 4/5 240,000 300,000 (60,000)
NEW 1/5 60,000 60,000
TOTAL 300,000 360,000 (60,000)

CASH P60,000
C, CAPITAL P60,000
A, CAPITAL P30,000
B, CAPITAL P30,000
OTHER ASSETS P60,000
 The following rules should be observed in relation to valuation of
assets and liabilities on dissolution problems:
1. If there is an agreement among partners that revaluation is
allowed, then reflect the necessary adjustment before
dissolution.

VALUATI 2. In the absence of an agreement :

a. Revaluation approach ( or goodwill procedure – Non
GAAP ).

ON b. Absence of revaluation approach (or bonus procedure –

GAAP).
b.1. Recognition of decreases in Net asset Revaluations
(GAAP)
b.2. Non-Recognition of increases in Net Asset
Revaluations (Non-GAAP)
CAPITAL A partner’s capital interest is a claim against
INTEREST the net assets of the partnership as shown by the
balance in the partner’s capital account.

VS PROFIT An interest in profit and loss determines how

AND LOSS the partner’s capital interest will increase or

decrease as a result of subsequent operations.

INTEREST
BONUS APPROACH
The bonus approach generally follows the book-value method, that is, existing book values
should not be adjusted to current values unless such adjustment would have otherwise been
allowed by GAAP.
Therefore, when a partner is admitted to an existing partnership, the total (agreed) capital of the
new partnership consist of the following:
1. The book value of the previous partnership less;
2. Any write-downs in the value of the previous partnership’s assets as recognized by GAAP;
and
3. The fair value of the consideration paid (net asset contributed) to the partnership by the
incoming partner.
REVALUATION APPROACH
The assets transferred to this entity should be recorded as their fair value.
Therefore, the total (agreed) capital of the new partnership will consist of the following values :
1. The book value of the net assets of the pervious partnership plus ;
2. Unrecognized appreciation or less unrecognized depreciation on the recorded net assets of
the pervious partnership plus
3. Unrecognized revaluation of net assets traceable to the pervious partnership plus; and
4. The fair value of the consideration paid (net asset contributed), both tangible and intangible,
received from the incoming partner.
Therefore in analyzing transactions involving admission of a partner by investment, the
following procedure is followed:

A. Generally, compare the total contributed capital (TCC) with the total agreed capital (TAC):
1. If TCC = TAC, no adjustment is made for revaluation of net assets.
2. If TCC > TAC, the difference is due to either overstatement of the partnership assets or
the required diminution in partner’s capital which can be effected by drawing is a specification
that the old partners will continue to use their old profit and loss ratio.
3. If TCC < TAC, the difference is due to either unrecorded net assets or the required
additional investment in partner’s capital
B. Specifically, the traceability of bonus or revaluation to new partners can be determined by
comparing the contributed capital of the partner with his agreed capital :
WITHDRA The retiring partner may elect to:

WAL OR 1. Sell his interest to an outsider (new

partner)

RETIREME 2. Sell his interest to the remaining

partners
NT OF 3. Sell his interest to the partnership.

PARTNER
WITHDRA The interest of the retiring partner may not be equal to
the partner’s capital balance as a result of the following
items :

WAL OR 1.

2.
Capital balance;
Recognition of accounting errors in prior period;

RETIREME 3. Recognition of profit or loss from the beginning of

the accounting period of the date of retirement;

NT OF
4. Loans and advances to the partnership; and
5. Recognition of asset revaluations subject to the
rules discussed previously.

PARTNER
Bonus approach.
If the bonus approach is used, the remaining partners are charged with the amount of the
payment that exceeds the book value of the retiring partner’s capital balance.

Revaluation approach
The revaluation approach focusses on the payment to the retiring partner as an indication of the
fair value of the partnership.

1. Remaining partners will not agree to a reduction in their capital;

2. The partners make specific provision in the partnership agreement on how the withdrawal is
to be recorded; or
3. The partners agree than a revaluation is to be recognized. If the partnership has been
profitable, the partnership as a whole may be worth more than the fair value of the net
assets.
 Partners may provide agreement that in the event of the

DEATH OF death of a partner, the business should be continued by

surviving partners. Partners may agree to settle for the
interest of deceased partner.

A 1.

2.
By payment from the partnership assets,
By payments from partnership insurance proceeds

PARTNER
with surviving partners acquiring the deceased
partner’s interest
 When a partnership is converted
into a corporation, the corporation
INCORPORAT takes over the assets and assumes
ION OF A the liabilities of the partnership in
PARTNERSHI exchange for shares of stocks. The
P partners now become stockholders
of the newly formed corporation.
 On date of incorporation:​
 The partners’ capital balances are adjusted
for their respective shares in any profit or
INCORPORAT loss and revaluation gains or losses as at the
ION OF A date of incorporation. The adjusted capital
PARTNERSHI balances may be used in determining the
number of shares to be issued to each partner.​
P
 Normally, the books of the partnership
are closed and new books are set-up for the
corporation.