Dissolution – Changes in Ownership

JOHN PAUL ASIS MARZONIA, MBA-CAR, CFMP, LPT

Instructor
Dissolution – Changes in Ownership

JOHN PAUL ASIS MARZONIA, MBA-CAR, CFMP, LPT

Instructor
Dissolution – Changes in
Ownership
JOHN PAUL ASIS MARZONIA, MBA-CAR, CFMP, LPT
Instructor
 The dissolution of a partnership is the change in the relation of the partners caused by
any partner ceasing to be associated in the carrying on as distinguished from the winding
up of the business of the partnership {Civil Code of the Philippines, Article' 1828).
 On dissolution, the partnership is not terminated, but continues until the winding up of
partnership affairs is completed (Article 1829).
 Winding up is the process of settling the business or partnership affairs after dissolution.
 Termination is that point in time when all Partnership affairs are wound up or completed
and is the end of the partnership life.
 Partnership is said to be LIQUIDATED when the business is terminated
 Partnership may be DISSOLVED without being terminated but liquidation is always
preceded by dissolution.
CAUSES OF DISSOLUTION

Partnership dissolution due to changes in ownership occurs

for varying reasons and the following are the more
prevalent:
1. Admission of a partner
2. Withdrawal or retirement of a partner
3. Death of a partner
4. Incorporation of partnership
ADMISSION OF A PARTNER

 A new partner can only be admitted into a partnership with the consent of all
the continuing partners.
 based on the principle of delectus personae: No one becomes a member of
the partnership without the consent of all the members.
 This is because a partnership is based on mutual trust and confidence of the
partners.
Liability of Incoming Partner for Existing
Obligation
 A person admitted as partner into an existing partnership is liable for all the
obligations of the partnership incurred before his admission as though he had
been a partner when such obligations were incurred.
 Such liabilities are limited to his or her capital contribution, unless otherwise
agreed.
PURCHASE OF AN INTEREST FROM
EXISTING PARTNERS
 With the consent of all continuing partners, a person may be admitted into an
existing partnership by purchasing an interest directly from one or more of
the existing partners.
 Payment is made personally to the partner from whom the interest is
obtained resulting to mere transfers among capital accounts.
 This type of admission will only result to a debit to the capital account of the
selling partner for the interest sold and a credit to the capital and credited
account is of not the affected buying by partner for the interest purchased.
 Illustration. Jaive and Jolly are partners with capital balances of 400,000 and
200,000 respectively. They share profits in the ratio of 3:1. Their business has
been very successful. All indications show that it will continue to be.
 Case 1: Payment to old partners is equal to interest purchased. Partners
Jaive and Jolly received an offer from Jane to purchase directly one-fourth of
each of their interest in the partnership for 150,000. The partners agreed to
admit Jane into the firm.

Jaive,
Capital 100,000
Jolly,
Capital 50,000
Jane, Capital 150,000
To record admission of Jane
  Case 2: Payment to old partners is less than the interest purchased. Assume
that Jane directly purchased one-third of each partner’s interest in the
business. Jane paid 160,000 for one-third of each partner’s capital.

Jaive, Capital 133,333

Jolly, Capital 66,667
Jane, Capital 200,000
Interest transferred to Jane

 Case 3: Payment to old partners is more than the interest purchased. Jaive
and Jolly received an offer from Jane to purchase directly 30% each of their
interest in the partnership for 200,000. The partners agreed to admit Jane as
a member of the firm.

Jaive, Capital 120,000

Jolly, Capital 60,000
Jane, Capital 180,000
Interest transferred to Jane
Investment of Assets in a Partnership

 Total Contributed Capital. It is the sum of the capital balances of the old
partners and the actual investment of the new partner.
 Total Agreed Capital. It is the total capital of the partnership after
considering the capital credits given to each of the partners.
 Bonus. It is the amount of capital or equity transferred by one partner to
another partner.
 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 the partner.
Bonus to Old Partners
 Illustration: Rex and Jerson are partners with capital balances of 400,000 and
200,000 respectively. They share profits in the ratio of 3:1. The partners
agreed to admit Benny as a member of the firm.
 Case 1: Total agreed capital stated. Assume Benny invested 250,000 for a
one-fourth interest in the business. The partners decided not to revalue the
assets of the partnership and that the total agreed capital is 850,000.

Contributed Bonus Agreed

Rex 400,000 28,125 428,125

Jerson 200,000 9,375 209,375

Total 600,000 37,500 637,500

Benny 250,000 - 37,500 212,500

-
Total 850,000 850,000
Cash 250,000

Benny, Capital 250,000

To record the investment of
Benny

Benny,
Capital 37,500
Rex,
Capital 28,125
Jerson,
Capital 9,375
To record bonus to old partner
 Case 2. Total agreed capital is not explicitly stated. Assume that Benny invested
P400,000 in the business. Out of the total cash investment, P100,000 is considered as a
bonus to Partners Rex and Jerson. The investment of Benny resulted to a bonus as
stated. Under the bonus method the total I contributed capital is equal to the total
agreed capital. It is also clearly specified that the old partners will receive the bonus.

Contributed Bonus Agreed

Rex 400,000 75,000 475,000
Jerson 200,000 25,000 225,000
Total 600,000 100,000 700,000
Benny 400,000 - (100,000) 300,000
Total 1,000,000 - 1,000,000
Benny,
Capital 100,000
Cash 400,000 Rex,
Capital 75,000
Benny, Capital 400,000 Jerson,
To record the investment of Capital 25,000
Benny To record bonus to old partner
Bonus to New Partner
 Case 1: Total agreed capital is stated. Assume that Benny invested 240,000
for a one-third interest in the business. The total agreed capital is P840,000.
The investment of Benny resulted to a bonus as shown by the following table:

Contributed Bonus Agreed

Rex 400,000 (30,000) 370,000
Jerson 200,000 (10,000) 190,000
Total 600,000 (40,000) 560,000
Benny 240,000 - 40,000 280,000
Total 840,000 - 840,000

Rex, Capital 30,000

Cash 240,000 Jerson,
Capital 10,000
Benny, Capital 240,000 Benny,
To record the investment of Capital 40,000
Benny To record bonus to new partner
Withdrawal or Retirement of a Partner

 A partner may withdraw or retire from a partnership for various reasons.

Disputes with other partners, old age, and pursuit for better opportunities are
among the possible explanations. The withdrawal of a partner dissolves the
old partnership. This type of dissolution may be accomplished by either of the
following ways;
1. By selling his equity interest to one or more of the remaining partners.
2. By selling his equity interest to an outsider.
3. By selling his equity interest to the partnership.
Illustration: Suppose that Jojo Ruru is retiring in midyear from the partnership
Roro, Riri, and Ruru because of family problem. After the books have been
adjusted for the semi-annual profits but before revaluation, their capital
balances are as follows;
Roro, Capital 540,000
Riri, Capital 430,000
Ruru, Capital 210,000
An independent appraiser revalued their cosmetics inventory to 380,000 (a
decrease of 60,000) and their land to 1,010,000 (an increase of 460,000). The
profit and loss ratio of the partners is 1:2:1.
The entries to record the revaluation of assets follow:
Roro, Capital 15,000
Riri, Capital 30,000
Ruru, Capital 15,000
Cosmetic inventory 60,000
To revalue cosmetic inventory per appraisal.

Land 460,000
Roro, Capital 115,000
Riri, Capital 230,000
Ruru, Capital 115,000
After revaluation, the capital balances of the partners are shown below:
Roro, Capital 640,000
Riri, Capital 630,000
Ruru, Capital 310,000

Case 1. Withdrawal at book value. Assumes that Ruru agreed to accept payment
equal to interest. The entry to record the payment of cash and the closing of her
capital account will be:

Ruru, Capital 310,000

Cash 310,000

Case 2. Withdrawal at more than book value. Assume that Ruru demanded
400,000 settlement for her interest because she firmly believed that she has
contributed so much to the success of the business. The remaining partners
agreed for old time’s sake. If the current fair value of the partnership’s net
assets exceeded book value, the settlement price to the withdrawing partner will
be greaterthan his capital account balance. The excess payment is treated either
as a bonus to the retiring partner from the continuing partners.
Roro, Capital 30,000
Riri, Capital 60,000
Ruru, Capital 310,000
Cash 400,000
To record retirement of Ruru with bonus from continuing partners.
Case 3. Withdrawal at less than book value. Assume that Ruru is very eager to
retire and is willing to accept settlement at 280,000.
Roro, Capital 310,000
Cash 210,000
Riri, Capital 10,000
Ruru, Capital 20,000
To record retirement of Ruru with bonus to continuing partners.

DEATH OF A PARTNER
The death of a partner dissolves a partnership. When the death of a partner does
not result to liquidation, the accounting procedures to be followed are similar to
those discussed in the withdrawal of a partner. The deceased partner may be
considered to have retired from the partnership and his heirs or estate can
expect to receive the amount of his interest from the business. If payment to the
estate of the deceased cannot be made immediately, the balance in the capital
account of the deceased partner should be transferred to a liability account,
payable to the estate.
INCORPORATION OF A PARTNERSHIP
A partnership may decide to incorporate after evaluating the various advantages
of having a corporate form of business organization. After the necessary
adjusting and closing entries, the assets and liabilities of the partnership are
transferred to the corporation in exchange-for shares of stock. The shares
received by the partnership are distributed to the partners based on their equity
interests. In the books of the corporation, the receipt of transferred assets and•
liabilities will be recorded along with the issuance of share capital to the
incorporators, the "former" partners.

Illustration. Partners Gigi and Gogo, who share equally in profits and losses, have
the following items in their partnership's statement of financial position as at
Dec. 31, 2022:

Cash 120,000 Accounts Payable 172,000

Accounts Receivable 100,000 Accm. Depreciation 8,000
Inventory 140,000 Gigi, Capital 140,000
Equipment 80,000 Gogo, Capital 120,000
Total 440,000 Total 440,000
They agreed to incorporate their partnership, with the new corporation
absorbing the net assets after the following adjustment: providing for allowances
for doubtful accounts of 10,000; restatement of the inventory to its current fair
value of 160,000 and additional recognition of depreciation on the equipment of
3,000.
The corporation’s share capital will have a par value of 100 and the partners will
be issued the shares equivalent to their adjusted capital balance. The journal
entries to the incorporate the partners will be:

Cash 120,000
Accounts Receivable 100,000
Inventory 160,000
Equipment 69,000
Allowance for doubtful accounts 10,000
Accounts payable 172,000
Ordinary shares 267,000