Partnership Dissolution –

Changes in Ownership
Lesson 3
Capital Interest vs Profit & Loss Interest

► Capital Interest is a claim against the net assets of the partnership as shown
by the balance int the partner’s capital account.
► Profit and Loss Interest determines how the partner’s capital interest will
increase or decrease as a result of subsequent operations.
Change of Ownership

► Admission of a new partner

► Withdrawal or retirement of a partner
► Death or incapacity of a partner
► Incorporation of a partnership
Valuation

► Revaluation Approach
► The basis of valuation for new entities is the fair value of the assets acquired and
liabilities assumed by the newly formed entity.

► Absence of Revaluation
► The basis of valuation is the historical cost carrying value.
Admission by Purchase of an Interest

► The purchase of and interest from one or more of the partnership’s existing
partners is a personal transaction
Scenario 1
Assume that after the operations and partners’ withdrawals during 20x4 and
20x5. DE partnership has a book value of P100,000 and profit and loss percentage
on Jan. 1, 20x6 as follows
Capital Balances P&L Percentage
D 60,000 70
E 40,000 30
Total 100,000 100

On this date, F is admitted to the partnership.

F paid P24,000 directly to D in exchange for 1/3 interest.
Scenario 2
Assume that after the operations and partners’ withdrawals during 20x4 and
20x5. DE partnership has a book value of P100,000 and profit and loss percentage
on Jan. 1, 20x6 as follows
Capital Balances P&L Percentage
D 60,000 70
E 40,000 30
Total 100,000 100

On this date, F is admitted to the partnership.

F purchases a ¼ interest in the firm. ¼ of each partner’s capital is to be
transferred to the new partner. F pays the partner’s P25,000.
Scenario 3
Assume that after the operations and partners’ withdrawals during 20x4 and
20x5. DE partnership has a book value of P100,000 and profit and loss percentage
on Jan. 1, 20x6 as follows
Capital Balances P&L Percentage
D 60,000 70
E 40,000 30
Total 100,000 100

On this date, F is admitted to the partnership.

F purchased ¼ of D’s interest for P18,000 and ¼ of E’s interest for P12,000,
making payment directly to D and E. The new partner will have a ¼ profit and
loss ratio and the old partners continue to use their old profit and loss ratio.
Scenario 4
Assume that after the operations and partners’ withdrawals during 20x4 and
20x5. DE partnership has a book value of P100,000 and profit and loss percentage
on Jan. 1, 20x6 as follows
Capital Balances P&L Percentage
D 60,000 70
E 40,000 30
Total 100,000 100

On this date, F is admitted to the partnership.

F purchased ¼ of D’s interest by paying P22,000 directly to D and E. The new
partner will have a ¼ profit and loss ratio and the old partners continue to use
their old profit and loss ratio
Comparison of Book Value and
Revaluation Approach
► The book value and revaluation approach will yield the same result if two
conditions related to the new profit and loss agreement are met.
► The new partner’s profit and loss sharing ratio must be equal to his/her capital
interest.
► The old partner’s continue to share profits and losses between themselves in the
original ratio.
► The book value and revaluation approach will NOT yield the same result if
the incoming partner’s share profit and loss is not identical with the
percentage interest allowed in assets.
► Prefer Book Value approach if , P&L interest > Capital interest
► Results in eventual advantage to the new partner and disadvantage to the original partners.

► Prefer Revaluation approach if, P&L interest < Capital interest

► Results in ultimate advantage to the new partner and disadvantage to the original partners.
Admission by Investment

► Obtaining partnership interest in capital and in future income by investing

something of value to the partnership

► Procedure
► Generally, compare the total contributed capital with the total agreed capital.
► Specifically, the traceability of bonus or revaluation to either old or new partners
can be determined by comparing the contributed capital of the new partner with
his agreed capital.
Scenario 5
Assume the following data for GH Partnership had the following condensed
balance sheet:
ASSETS LIABILITIES AND CAPITAL
Cash 2,500 Liabilities 7,500
Non-Cash Assets 32,500 G, Capital(60%) 20,000
G, Loan 2,500 H, Capital(40%) 10,000
Total 37,500 Total 37,500

The percentages in parentheses after the partner’s capital balances represent

their respective interests in profits and losses. The partners agree to admit J as a
member of the firm.
J Invests P10,000 for a ¼ interest in the firm. The total firm capital is to be
P40,000.
Scenario 6
Assume the following data for GH Partnership had the following condensed
balance sheet:
ASSETS LIABILITIES AND CAPITAL
Cash 2,500 Liabilities 7,500
Non-Cash Assets 32,500 G, Capital(60%) 20,000
G, Loan 2,500 H, Capital(40%) 10,000
Total 37,500 Total 37,500

The percentages in parentheses after the partner’s capital balances represent

their respective interests in profits and losses. The partners agree to admit J as a
member of the firm.
J invests P10,000 for a 35% interest in the firm. The total agreed capital after
admission is P40,000.
Scenario 7
Assume the following data for GH Partnership had the following condensed
balance sheet:
ASSETS LIABILITIES AND CAPITAL
Cash 2,500 Liabilities 7,500
Non-Cash Assets 32,500 G, Capital(60%) 20,000
G, Loan 2,500 H, Capital(40%) 10,000
Total 37,500 Total 37,500

The percentages in parentheses after the partner’s capital balances represent

their respective interests in profits and losses. The partners agree to admit J as a
member of the firm.
J invests P10,000 for a 1/3 interest in the firm and is allowed a credit of P15,000
for his capital.
Scenario 8
Assume the following data for GH Partnership had the following condensed
balance sheet:
ASSETS LIABILITIES AND CAPITAL
Cash 2,500 Liabilities 7,500
Non-Cash Assets 32,500 G, Capital(60%) 20,000
G, Loan 2,500 H, Capital(40%) 10,000
Total 37,500 Total 37,500

The percentages in parentheses after the partner’s capital balances represent

their respective interests in profits and losses. The partners agree to admit J as a
member of the firm.
J conveyed tangible assets with a fair value of P25,000 with an assumed
mortgage of P5,000 in exchange for a 30% interest in capital with bonus to be
recognized, keeping in mind that K would be acquiring a ¼ interest in profits.
Before the admission of J, GH partnership had an equipment of P4,000 with a fair
value of P7,000.
Scenario 9
Assume the following data for GH Partnership had the following condensed
balance sheet:
ASSETS LIABILITIES AND CAPITAL
Cash 2,500 Liabilities 7,500
Non-Cash Assets 32,500 G, Capital(60%) 20,000
G, Loan 2,500 H, Capital(40%) 10,000
Total 37,500 Total 37,500

The percentages in parentheses after the partner’s capital balances represent

their respective interests in profits and losses. The partners agree to admit J as a
member of the firm.
J must invest or contribute cash of P24,000 equivalent to 37.5% interest in a total
agreed capital of P64,000. Included in the noncash assets is an equipment
undervalued by P7,000.
Scenario 10
Assume the following data for GH Partnership had the following condensed
balance sheet:
ASSETS LIABILITIES AND CAPITAL
Cash 2,500 Liabilities 7,500
Non-Cash Assets 32,500 G, Capital(60%) 20,000
G, Loan 2,500 H, Capital(40%) 10,000
Total 37,500 Total 37,500

The percentages in parentheses after the partner’s capital balances represent

their respective interests in profits and losses. The partners agree to admit J as a
member of the firm.
J invests P10,000 for a 45% interest in the firm. The total agreed capital after
admission is P50,000.
Scenario 11
Assume the following data for GH Partnership had the following condensed
balance sheet:
ASSETS LIABILITIES AND CAPITAL
Cash 2,500 Liabilities 7,500
Non-Cash Assets 32,500 G, Capital(60%) 20,000
G, Loan 2,500 H, Capital(40%) 10,000
Total 37,500 Total 37,500

The percentages in parentheses after the partner’s capital balances represent

their respective interests in profits and losses. The partners agree to admit J as a
member of the firm.
J invests P15,000 for a 20% interest in the firm. The total agreed capital after
admission is P60,000.
Scenario 12
Assume the following data for GH Partnership had the following condensed
balance sheet:
ASSETS LIABILITIES AND CAPITAL
Cash 2,500 Liabilities 7,500
Non-Cash Assets 32,500 G, Capital(60%) 20,000
G, Loan 2,500 H, Capital(40%) 10,000
Total 37,500 Total 37,500

The percentages in parentheses after the partner’s capital balances represent

their respective interests in profits and losses. The partners agree to admit J as a
member of the firm.
J invests P15,000 for a 30% interest in the firm. The total agreed capital after
admission is P60,000.
Scenario 13
Assume the following data for GH Partnership had the following condensed
balance sheet:
ASSETS LIABILITIES AND CAPITAL
Cash 2,500 Liabilities 7,500
Non-Cash Assets 32,500 G, Capital(60%) 20,000
G, Loan 2,500 H, Capital(40%) 10,000
Total 37,500 Total 37,500

The percentages in parentheses after the partner’s capital balances represent

their respective interests in profits and losses. The partners agree to admit J as a
member of the firm.
J invests P20,000 in the firm. P5,000 is considered a bonus to Partners G and H.
The book values of partnership assets and liabilities are equal to fair values,
except for a machinery with a book value of P3,000 and a fair value of P7,000.
Scenario 14
Assume the following data for GH Partnership had the following condensed
balance sheet:
ASSETS LIABILITIES AND CAPITAL
Cash 2,500 Liabilities 7,500
Non-Cash Assets 32,500 G, Capital(60%) 20,000
G, Loan 2,500 H, Capital(40%) 10,000
Total 37,500 Total 37,500

The percentages in parentheses after the partner’s capital balances represent

their respective interests in profits and losses. The partners agree to admit J as a
member of the firm.
J invests P6,000 for a 30% interest in the firm. G and H transfer part of their
capitals to that of J as a bonus. An equipment used in the business with a book
value of P5,000 and a fair value of P3,000.
Scenario 15
Assume the following data for GH Partnership had the following condensed
balance sheet:
ASSETS LIABILITIES AND CAPITAL
Cash 2,500 Liabilities 7,500
Non-Cash Assets 32,500 G, Capital(60%) 20,000
G, Loan 2,500 H, Capital(40%) 10,000
Total 37,500 Total 37,500

The percentages in parentheses after the partner’s capital balances represent

their respective interests in profits and losses. The partners agree to admit J as a
member of the firm.
J invests P15,000 for a ¼ interest in the firm. GH Partnership’s had other assets
with a book value of P5,500 and a fair value of P10,500. Revaluation approach is
recorded on the firm books prior to J’s admission.
Scenario 16
Assume the following data for GH Partnership had the following condensed
balance sheet:
ASSETS LIABILITIES AND CAPITAL
Cash 2,500 Liabilities 7,500
Non-Cash Assets 32,500 G, Capital(60%) 20,000
G, Loan 2,500 H, Capital(40%) 10,000
Total 37,500 Total 37,500

The percentages in parentheses after the partner’s capital balances represent

their respective interests in profits and losses. The partners agree to admit J as a
member of the firm.
J invests P20,000 in the firm and is allowed a credit of P6,000 for revaluation.
Scenario 17
Assume the following data for GH Partnership had the following condensed
balance sheet:
ASSETS LIABILITIES AND CAPITAL
Cash 2,500 Liabilities 7,500
Non-Cash Assets 32,500 G, Capital(60%) 20,000
G, Loan 2,500 H, Capital(40%) 10,000
Total 37,500 Total 37,500

The percentages in parentheses after the partner’s capital balances represent

their respective interests in profits and losses. The partners agree to admit J as a
member of the firm.
J invests P20,000 for a 50% interest in the firm. The total firm capital is to be
P40,000 and partners agreed that their capital balances should made equal to
their new profit and loss ratio.
Scenario 18
Assume the following data for GH Partnership had the following condensed
balance sheet:
ASSETS LIABILITIES AND CAPITAL
Cash 2,500 Liabilities 7,500
Non-Cash Assets 32,500 G, Capital(60%) 20,000
G, Loan 2,500 H, Capital(40%) 10,000
Total 37,500 Total 37,500

The percentages in parentheses after the partner’s capital balances represent

their respective interests in profits and losses. The partners agree to admit J as a
member of the firm.
J invests P15,000 for a 40% capital interest and a 25% interest in profits
Scenario 19
Assume the following data for GH Partnership had the following condensed
balance sheet:
ASSETS LIABILITIES AND CAPITAL
Cash 2,500 Liabilities 7,500
Non-Cash Assets 32,500 G, Capital(60%) 20,000
G, Loan 2,500 H, Capital(40%) 10,000
Total 37,500 Total 37,500

The percentages in parentheses after the partner’s capital balances represent

their respective interests in profits and losses. The partners agree to admit J as a
member of the firm.
J invests P15,000 for a 30% capital interest and a 40% interest in profits.
Withdrawal or retirement of a partner

► The retiring partner may elect to sell his interest to an outside party.
► The retiring partner may elect to sell his interest to one or more of the
remaining partners.
► The partners may mutually agree to transfer partnership assets to the retiring
partner for his interest in the firm.
► Payment in cash.
► Transfer of non-cash assets.
► Recognition of liability for the full or balance of the unpaid total interest of the
retiring partner.
Scenario 20
Assume the following date on Jan. 1, 20x4 for KLM partnership had the
following condensed balance sheet
ASSETS LIABILITIES AND CAPITAL
Cash 50,000 Liabilities 10,000
Non-Cash Assets 40,000 K, Capital(30%) 30,000
K, Loan 5,000 L, Capital(50%) 40,000
Total 95,000 M, Capital (20%) 15,000
Total 95,000

The percentages in parentheses after the partner’s capital balances represent

their respective interest in profits and losses.
On May 1, 20x4, K retires from the partnership. The net income of the
partnership to date of retirement amounted to P20,000. The partnership paid
cash to the retiring partner also on the retirement date.
The partnership paid K, P31,000.
Scenario 20
Assume the following date on Jan. 1, 20x4 for KLM partnership had the
following condensed balance sheet
ASSETS LIABILITIES AND CAPITAL
Cash 50,000 Liabilities 10,000
Non-Cash Assets 40,000 K, Capital(30%) 30,000
K, Loan 5,000 L, Capital(50%) 40,000
Total 95,000 M, Capital (20%) 15,000
Total 95,000

The percentages in parentheses after the partner’s capital balances represent

their respective interest in profits and losses.
On May 1, 20x4, K retires from the partnership. The net income of the
partnership to date of retirement amounted to P20,000. The partnership paid
cash to the retiring partner also on the retirement date.
The partnership paid K, P35,000. Included in the noncash assets is an inventory
costing P6,000 with a fair value of P10,000. The remaining partners continue to
use their old profit and loss ratio.
Scenario 20
Assume the following date on Jan. 1, 20x4 for KLM partnership had the
following condensed balance sheet
ASSETS LIABILITIES AND CAPITAL
Cash 50,000 Liabilities 10,000
Non-Cash Assets 40,000 K, Capital(30%) 30,000
K, Loan 5,000 L, Capital(50%) 40,000
Total 95,000 M, Capital (20%) 15,000
Total 95,000

The percentages in parentheses after the partner’s capital balances represent

their respective interest in profits and losses.
On May 1, 20x4, K retires from the partnership. The net income of the
partnership to date of retirement amounted to P20,000. The partnership paid
cash to the retiring partner also on the retirement date.
The partnership paid K, P26,000.