PARTNERSHIP

DISSOLUTION
Prepared by: Jea Moral
PARTNERSHIP DISSOLUTION

 Dissolution is the change in the relation of

the partners caused by any partner being
associated from the business.
 Dissolution is different from liquidation.
Liquidation is the termination of business
operations or the winding up of affairs.
 Partnership dissolution does not necessarily
terminate the business.
PARTNERSHIP DISSOLUTION

The following are major considerations in the

accounting for partnership dissolutions:

(a) Admission of a partner

(b) Withdrawal or retirement of a partner
(c ) Death of a partner
(d) Incorporation of a partner
PARTNERSHIP
DISSOLUTION
Prepared by: Erika D. Pangan
ADMISSION
PARTNER
The admission of a new partner may be affected
either through:
a) Purchase of interest in the partnership, or
b) Investment in the partnership.
PURCHASE OF INTEREST 6

A new partner may be admitted when he purchases

part or all of the interest of one or more of the
existing partners.
Any consideration paid or received by a partner is
not recorded in the partnership’s books.
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 recognized in the partnership’s
books.
The only entry to be made is a transfer within
equity.
ILLUSTRATION: PURCHASE OF INTEREST

Case 1: D purchases one half of C’s capital interest for P48,000.

The capital balances and profit and loss ratios of the partners in ABC Co. are as
follows:
Capital P/L
A 40,000 40%
B 60,000 30%
C 80,000 30%
Total 180,000

Requirement: provide the journal entry to record the transaction.

Solution:
Date C, Capital 40,000
D, Capital 40,000
to record the admission of D to the
partnership.
Case 2: Purchase of Interest from more than one partner 8

• D purchases 25% of A’s and B’s and C’s capital interest for P160,000.
Requirements:
a) Provide the journal entry to record the transaction.
b) How much are the capital balances of the partners after the admission of D?

Solutions:
Requirement A

Date A, Capital 10,000

B, Capital 15,000
C, Capital 20,000
D, Capital 45,000
to record the admission of D to the partnership
Requirement B 9

A B 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 -

Capital, end. 30,000 45,000 60,000 45,000 180,000

REVALUATION
OF Prepared
ASSETS by: Kimberlyn Pineda
REVALUATION OF ASSETS
11
REVALUATION
“Fair value at the date of revaluation less any subsequent accumulated
depreciation and subsequent accumulated impairment loss”
ASSETS
- are the economic resources you control that have resulted from past events
and can provide you with future economic benefits.

REVALUATION OF ASSETS
- a change in the market value of assets, increasing or decreasing. Generally,
evaluations are carried out for an asset whenever there is a difference
between the asset’s current market value and its value on the company’s
balance sheet.
- When a partnership is dissolved but not liquidated, a new partnership is
created. The assets and liabilities carried over to the new partnership should
be restated to fair values.
- Any adjustment to the assets and liabilities is allocated first to the existing
partners before recording the admission of a new partner.
ILLUSTRATION: 12

C purchases 20% of A’s and B’s capital interests for P100,000. The carrying amounts and
fair values of the partnership’s net identifiable assets immediately before C’s admission
are as follows:
Carrying Amount Fair Value Increase/Decrease
Cash 20,000 20,000 -
Equipment 340,000 390,000 50,000
Accounts Payable 10,000 10,000 -
A, Capital(40%) 130,000 N/A
B, Capital(60%) 220,000 N/A
Requirements:
a. Provide the journal entries.
b. Compute for the partners’ capital balances after C’s admission.
SOLUTIONS
13
Requirement (a)
The capital balances of the existing partners are adjusted for the revaluation
increase before recording the admission of C.

Date Equipment 50,000

A, Capital (50K x 40%) 20,000
B, Capital (50K x 60%) 30,000
to record the revaluation of equipment.

The adjusted capital balances are as follows:

A B Totals
Unadjusted Capital 130,000 220,000 350,000
Share in Revaluation 20,000 30,000 50,000
Adjusted Capital 150,000 250,000 400,000
 14

 C’s admission is recorded as follows:

Date A, Capital (150K x 20%) 30,000

B, Capital (250K x 20%) 50,000
C, Capital 80,000
to record the admission of C to the partnership.

Requirement (b)

A B C Totals
Adjusted Capital before admission 150, 0000 250,000 - 400,000
Sale of Interest to C (30,000) (30,000) 80,000 -
Capital after C’s admission 120,000 200,000 80,000 400,000
INVESTMENT IN
THE
PARTNERSHIP
Prepared by: Nicole Sarmiento
 INVESTMENT IN THE PARTNERSHIP

 A person may be admitted into a partnership by investing cash or other assets

in the business.
 Instead of purchasing interest from the existing partners, a new partner may
be admitted by investing directly in 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
book. Because this is an equity transaction with an owner, no gain or loss is
recognized.
Definition of Terms
a. TOTAL CONTRIBUTED CAPITAL
- the sum of the capital balances of the old partners and the
actual investment of the new partner.
b. TOTAL AGREED CAPITAL
- it is the total capital of the partnership after considering the
capital credits given to each of the partners. Capital Credit – 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 a partner.
 18
c. BONUS
- it is the amount of capital or equity transferred by one partner
to another partner.

• Bonus To New Partner • Bonus To Old Partners

Bonus Bonus
Old Partners (xx) Old Partners xx
New Partner Xx New Partner (xx)
TOTAL - TOTAL -
d. ASSETS REVALUATION – necessary adjustment in asset 19
values upon admission of a new partner. The adjustment in assets
may be determined as the difference between the agreed capital
and the total contributed capital.
Asset Revaluation

Old Partners xx / (xx)

New Partner -

TOTAL xx / (xx)

Problems relating to the Admission of a new partner by investment

a.) No Bonus, No Asset Revaluation
b.) Bonus to Old Partners, No Asset Revaluation
c.) Bonus to New Partner, No Asset Revaluation
d.) Asset Revaluation (Positive & Negative, No Bonus
e.) Agreed Capital is not given but the basis for its computation is indicated in the
terms o admission (e.g. based on capital balances, ratio, percentage)
Entries: (Hammer Technique) 20

Agreed Capital Contributed Bonus / Asset

(AC) Capital Revaluation
(CC)
Old Partners xx xx xx
New Partner xx xx xx
TOTAL xx xx xx

• No Bonus, No Asset Revaluation

Cash xx
New Partner, Capital xx
• Bonus To New Partner
21
Cash xx
Old P.(1), Capital xx
Old P.(2), Capital xx
New P., Capital xx

• Bonus to Old Partners

Cash xx
New P., Capital xx
Old P.(1), Capital xx
Old P.(2), Capital xx

• Asset Revaluation (Positive – Undervalued)

Cash xx
Equipment (or other assets) xx
New P., Capital xx
Old P.(1), Capital xx
Old P.(2), Capital xx
 22

• Asset Revaluation (Negative – Overvalued)

Cash xx
Old P.(1), Capital xx
Old P.(2), Capital
New P., Capital xx
Equipment (or other assets) xx
 23
ILLUSTRATIVE PROBLEMS:

1. B, S, and A are partners in PAKOPYA Company. Their capital balances

as of December 31, 2002 are as follows:
B, Capital P400,000
S, Capital P100,000
A, Capital P250,000

Each partner has agreed to admit IS to the partnership.

Required:
Prepare the entries to record IS’s admission to the partnership under each of
the following conditions:
a. IS invested P150,000 cash in the partnership and received an interest
equal to her investment. (NO BONUS, NO ASSET REVALUATION)
SOLUTION:
24
Agreed Contributed Bonus/Asset
Capital (AC) Capital (CC) Revaluation
Old Partners P750,000 P750,000 (i) -

New Partner P150,000 P150,000 -

TOTAL P900,000 P900,000 -

(i)
B, Capital P400,000
S, Capital P100,000
A, Capital P250,000
CC, Old P. P750,000

Journal Entry:
Cash P150,000
IS, Capital P150,000
b. IS invested P300,000 cash in the partnership for 20% interest in
25
the business. A bonus is to be recorded for the original partners on
the basis of their capital balances. (BONUS TO ?)
Agreed Capital Contributed Bonus
(AC) Capital (CC)
Old Partners
New Partner
TOTAL

SOLUTION: (BONUS TO OLD PARTNERS)

Agreed Capital Contributed Bonus
(AC) Capital (CC)

Old Partners (80%) P840,000 (ii) P750,000 P90,000

New Partner (20%) P210,000 (i) P300,000 (P90,000)

TOTAL (100%) P1,050,000 P1,050,000 -

(i) Total AC P1,050,000 x 20% = P210,000 26

(ii) Total AC P1,050,000 x 80% = P840,000

Journal Entry:
Cash P300,000
IS, Capital P210,000
B, Capital(90K x 400K/750K) 48,000
S, Capital (90K x 100K/750K) 12,000
A, Capital (90K x 250K/750K) 30,000
c. IS invested P300,000 cash in the partnership for 40% interest in the27
business. The original partners gave IS a bonus according to the ratio of
their capital balances on December 31, 2022. (BONUS TO ?)
Agreed Capital Contributed Bonus
(AC) Capital (CC)
Old Partners
New Partner
TOTAL

SOLUTION: (BONUS TO NEW PARTNER)

Agreed Capital Contributed Bonus
(AC) Capital (CC)

Old Partners (60%) P630,000 (ii) P750,000 (P120,000)

New Partner (40%) P420,000 (i) P300,000 P120,000

TOTAL (100%) P1,050,000 P1,050,000 -

 28
(i) Total AC P1,050,000 x 40% = P420,000
(ii) Total AC P1,050,000 x 60% = P360,000

Journal Entry:
Cash P300,000
B, Capital(120K x 400K/750K) 64,000
S, Capital (120K x 400K/750K) 16,000
A, Capital (120K x 400K/750K) 40,000
IS, Capital P420,000
2. A and B are partners in AB Partnership with capital balances of P550,000
and P350,000, respectively; they share income and loss in the ratio 1:3,29
respectively; The partners are considering the admission of C.

C invested P140,000 cash in partnership for one-eight interest. Assets of

the partnership are fairly valued except for equipment, which is
undervalued by P80,000. Net assets of the partnership are to be revalued
and C is to be admitted.

Required:
Prepare the entries to record the admission of C.
Agreed Capital Contributed Bonus
(AC) Capital (CC)
Old Partners

New Partner

TOTAL
SOLUTION: (ASSET REVALUATION) 30

Agreed Capital Contributed Bonus

(AC) Capital (CC)
Old Partners P980,000 P900,000 (i) P80,000
New Partner (1/8) P140,000 (iii) P140,000 -
TOTAL P1,120,000 P1,040,000 P80,000

(i) A, Capital P550,000

B, Capital P350,000
Total CC P900,000
(ii) Total CC P1,040,000 + undervalued equipment
by P80,000 = P1,120,000
(iii) Total AC P1,120,000 x 1/8 = P140,000
 31

Journal Entry:
Cash P140,000
Equipment 80,000
IS, Capital P140,000
A, Capital(80k x ¼) 20,000
S, Capital(80k x ¾) 60,000
 WITHDRAWAL,
RETIREMENT OR
DEATH
Prepared by: Merryline Tagulao
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.

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.
Purchased by one or all of the remaining partners 34

 One or all of the remaining partners may purchase the interest of the
retiring, withdrawing, or deceased partner.
 The settlement amount is not recorded in the partnership’s books.
 The only entry to be made is a transfer within equity.
Settlement by the partnership
 The partnership may settle the interest of the retiring, withdrawing, or
deceased partner.
 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
less than the value of his interest, the bonus method is used.
Deferred settlement
 Pending settlement, the outgoing partner’s interest is transferred to a library
account, which is considered an ordinary claim, subordinate to the claims of
other outside creditors (Art. 1841).
Illustration: Withdrawal, retirement or death of a partner
The capital account balances of the partners in ABC Partnership on July 1, 20x1
before any necessary adjustments are as follows:

The partnership reported profit of P900,000 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 P620,000 cash. The net assets of the firm as of the date
approximate their fair values.
Requirement: Provide the journal entries.
36

Solution:
The capital balances of all of the partners are adjusted for their respective
shares in the profit accruing as of the date of C’s withdrawal.

The adjusting entry is as follows:

The entry to record the withdrawal is as follows: 37

Partnership capital after C’s withdrawal:

Case 2: 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:
38
The partners’ capital accounts are adjusted for the P900,000 profit.
After the adjustment, the balance of C’s capital account is P550,000.
• The entry to record the retirement of C is as follows:

• Partnership capital after C’s retirement:

Case 3: Retirement - payment in the form of non-cash asset
39
C retires on July 1, 20x1 and receives cash of P500,000 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.
The entries to adjust the capital balances of the partners are as follows:

The entry to record the settlement of C’s interest is as follows:

Partnership capital after C’s retirement: 41

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:
42
The same is accounting is made. However, pending settlement, C’s
adjusted capital balance is transferred to a liability account.

The entry on settlement date is as follows:

Case 5: Withdrawal - fully depreciated asset

C withdraws on July 1, 20x1 and receives cash of P250,000 and 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:

The entry to record the settlement of C’s interest is as follows:

Partnership capital after C’s withdrawal:

INCORPORATIO
N OF
PARTNERSHIP
Prepared by: Maria Estella Tumalaytay
 45

Incorporation
• is the legal process used to form a corporate entity or company. A
corporation is the resulting legal entity that separates the firm's
assets and income from its owners and investors.

Incorporation of a partnership - When a partnership converted

into a corporation the partner's relation changes - they cease to be
partners ( ie. agents of the business ) and become stakeholders.

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
increase number of owner. Also, it is easier for a corporation to generate external
financing, as lenders need not worry about the death of the partners.

c.) Privacy and confidentiality - unlike in partnership, the owners of a corporation

are not agents of a corporation.

d.) 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.

f.) Transferability of ownership - ownership interest in a corporation can be easily

transferred through sale of shares of stocks, and this not dissolve the corporation.

g.) Better public relations

- many believe that wider ownership of a business results to better public relations.
Before you can formed a corporation you must do this following:
47
a.)Adjust
b.)Disclose
c.)Transfer