PARTNERSHIP DISSOLUTION

Dissolution
- Is the change in the relation of the parties caused by any partner ceasing to be associated in
the carrying on of the business (Article 1828 of Civil Code)

Conditions that causes Partnership Dissolution

1. By the acts of partners
 Certain acts by the partners of a partnership result in dissolution. Partners’ mutual
agreement to change the ownership and withdrawal of an existing partner are some of
the examples falling under this condition.
2. By operation of law
 A partnership is automatically dissolved upon the occurrence of certain incidents
identified by law like death or insolvency of any partner, civil interdiction of any partner
or any event that makes the existing operations of the partnership unlawful.
3. By judicial decree
 The court may declare dissolution for some circumstances like insanity or incapacity of a
partner, deception, or misconduct by one of the partners or internal dissension among
partners.

Major Considerations in the Accounting for Partnership Dissolutions

1. Admission of partner
 Purchase of interest from existing partner
 Invest directly to partnership
2. Withdrawal or retirement of a partner
3. Death of a partner
4. Incorporation of a partnership

Methods/Procedures to consider in Partnership Dissolution

1. Update capital accounts of the existing partners as of dissolution date
 Determine the profit shares
 Revalue the assets if necessary
2. Terms and conditions must be ascertained by the partners
3. Record the change in ownership and revise the partner’s equity

ADMISSION OF A NEW PARTNER

A new partner may be admitted into the partnership by:

1. Purchase of all or part of the interest from one or more of the existing partners
2. Investment or asset contribution to the partnership

Admission of a new partner by investment may fall under any of the following
1. Total agreed capital is given
2. Total agreed capitalization is not given
 PURCHASE OF INTEREST FROM EXISTING PARTNER
Without Revaluation
1. Transfer of ownership from existing partner to new partner
2. The transaction is personal between existing partner and the new partner (Partnership
assets are not affected)
3. Current P/L ratio should be revised accordingly based on the percent of interest the existing
partner is selling to buying partner

With Revaluation
- Partnership assets will be affected

ILLUSTRATION:
CAPITAL P/L
A 40 000 40%
B 60 000 30%
C 80 000 30%
TOTAL 180 000

Case 1: Purchase of interest from a partner

D purchases ½ of C’s capital interest for 50 000

Journal Entry:
C, Capital 40 000
D, Capital 40 000

Capital Structure:
Partner Capital Balance Transfer New Capital
A 40 000 40 000
B 60 000 60 000
C 80 000 (40 000) 40 000
D 0 40 000 40 000
TOTAL 180 000 0 180 000

Distribution of P/L Ratio

Partner P/L Transfer New P/L
A 40% 40%
B 30% 30%
C 30% (15%) 15%
D 0 15% 15%
TOTAL 100% 0 100%
 Case 2: Purchase of interest from partnership
D purchases 25% of partnership from partners for Php 60 000

Journal Entry
A, Capital 10 000
B, Capital 15 000
C, Capital 20 000
D, Capital 45 000

Capital Structure
Partner Capital Balance Transfer New Capital
A 40 000 (10 000) 30 000
B 60 000 (15 000) 45 000
C 80 000 (20 000) 60 000
D 0 45 000 45 000
TOTAL 180 000 0 180 000

Distribution of P/L Ratio

Partner P/L Transfer New P/L
A 40% (10%) 30%
B 30% (7.5%) 22.5%
C 30% (7.5%) 22.5%
D 0 25% 25%
TOTAL 100% 0 100%

Division of payment of D and Personal gains/losses of old partners

A B C TOTAL
Debit to capital 10 000 15 000 20 000 45 000
account
Excess allocated 6 000 4 500 4 500 15 000
based on P/L
ratio (60k
payment of D-
45k credit to D) x
40%; 30%; 30%
Share in payment 16 000 19 500 24 500 60 000
of D
Debit to capital 10 000 15 000 20 000 45 000
account
Personal 6 000 4 500 4 500 15 000
gain(loss)
 Case 3: Purchase of interest- Book Value Method
D purchases 20% interest from A and B for Php 50 000. 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)

Journal Entry
A, Capital 8 000
B, Capital 12 000
D, Capital 20 000

Capital Structure
Partner Capital Balance Transfer New Capital
A 40 000 (8 000) 32 000
B 60 000 (12 000) 48 000
C 80 000 80 000
D 0 20 000 20 000
TOTAL 180 000 0 180 000

Case 4: Purchase of interest- Proportionate Shares

D purchases 20% interest in the net assets and profits of the
partnership from A and B for Php 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.

Payment of D 50 000
Capital credit given to D (180k total net assets 36 000
x 20%
Combined Personal Gains of A and B 14 000

Journal Entry
A, Capital 20 571
B, Capital 15 429
D, Capital 36 000

New P/L ratios

A 28. 57%
B 21. 43%
C 30%
D 20%
ILLUSTRATION:
C purchases 20% of A’s and B’s capital interest for Php 100 000. The carrying amounts and
fair values of the partnership’s net identifiable assets immediate 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

Journal Entry for Revaluation Increase

Equipment 50 000
A, Capital 20 000
B, Capital 30 000

Adjusted Capital Balances

A B Total
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

Journal Entry for C’s Admission

A, Capital 30 000
B, Capital 50 000
C, Capital 80 000

Capital Balances after C’s admission

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 admission 120 000 200 000 80 000 400 000

Additional Illustrations:
Assume the ff. data for ABC Partnership on December 31, 2020
Partners Capital P/L Ratio
A 100 000 50%
B 60 000 30%
C 40 000 20%

Case 1: Purchase Price is less than the book value of interest

acquired with express revaluation assets
Assume that the old partners agreed to receive amount of
Php 90 000 from D in exchange for 50% interest in the total
capitalization of the partnership.
 Cash to be paid by D 90 000
Divided by interest acquired 50%
Implied total capitalization of partnership 180 000
Less: total capitalization of partnership before revaluation 200 000
Decrease in asset/capitalization 20 000

Journal Entry
A, Capital 10 000
B, Capital 6 000
C, Capital 4 000
Assets 20 000

Journal Entry
A, Capital 45 000
B, Capital 27 000
C, Capital 18 000
D, Capital 90 000

Partner’s equity before and after admission appears as follows:

Partners Partner’s Assets Partner’s Transfer of Partner’s P/L Ratio
Equity Revaluation Equity after Interest Equity after
before revaluation admission
admission
A 100 000 (10 000) 90 000 (45 000) 45 000 25%
B 60 000 (6 000) 54 000 (27 000) 27 000 15%
C 40 000 (4 000) 36 000 (18 000) 18 000 10%
D 90 000 90 000 50%
Total 200 000 (20 000) 180 000 180 000 100%

Case 2: Purchase Price is more than the book value of interest

acquired with express revaluation assets
D agreed to pay Php 75 000 for 30% interest in the profits or
losses of the partnership.

Cash to be paid by D 75 000

Divided by interest acquired 30%
Implied total capitalization of partnership 250 000
Less: total capitalization of partnership before revaluation 200 000
Increase in asset/capitalization 50 000
Journal Entry
 Assets 50 000
A, Capital 25 000
B, Capital 15 000
C, Capital 10 000

Journal Entry
A, Capital 37 500
B, Capital 22 500
C, Capital 15 000
D, Capital 75 000

Partners Partner’s Assets Partner’s Transfer of Partner’s P/L Ratio

Equity Revaluation Equity after Interest Equity after
before revaluation admission
admission
A 100 000 25 000 125 000 (37 500) 87 500 35%
B 60 000 15 000 75 000 (22 500) 52 500 21%
C 40 000 10 000 50 000 (15 000) 35 000 14%
D 75 000 74 000 30%
Total 200 000 50 000 250 000 250 000 100%

Case 3: Purchase Price is more than the book value of interest

acquired with express revaluation assets and express recognition of
goodwill
D agreed to pay Php 75 000 for 30% interest in the profits or
losses of the partnership. The partners agreed that goodwill should
be made before admission of D

Cash to be paid by D 75 000

Divided by interest acquired 30%
Implied total capitalization of partnership 250 000
Less: total capitalization of partnership before revaluation 200 000
Goodwill 50 000

Journal Entry
Goodwill 50 000
A, Capital 25 000
B, Capital 15 000
C, Capital 10 000

Journal Entry
A, Capital 37 500
B, Capital 22 500
C, Capital 15 000
 D, Capital 75 000

Partners Partner’s Goodwill Partner’s Transfer of Partner’s P/L Ratio

Equity Equity after Interest Equity after
before Goodwill admission
admission
A 100 000 25 000 125 000 (37 500) 87 500 35%
B 60 000 15 000 75 000 (22 500) 52 500 21%
C 40 000 10 000 50 000 (15 000) 35 000 14%
D 75 000 75 000 30%
Total 200 000 50 000 250 000 250 000 100%

INVESTMENT OR ASSET CONTRIBUTION TO THE PARTNERSHIP

Terminologies
1. Total Contributed Capital (TCC)
 The sum of capital balances of the old partners and the actual investment of the new
partner
2. Total Agreed Capital
 Total capital of the partnership after considering the capital credit given to each of
the partners
3. Agreed Capital New Partner
 Amount credited to the new partner after adjustments
4. Agreed Capital Old Partners
 Amount credited old partner after adjustments
5. Asset Revaluation
 Necessary adjustment in asset values upon admission of new partner. The
adjustment in assets may be determined as the difference of TAC and TCC. Given to
Old Partner
6. Goodwill
 Amount given to any partner (old or new) for the intangible benefits he will
contribute to the partnership
7. Bonus
 Amount of capital or equity transferred by one partner to another partner (old to
new – new to old)

Possibilities
1. TCC = TAC ----> CC-NP = AC-NP (No, Revaluation, Goodwill and Bonus)
2. TCC ≠ TAC ----> CC-NP = AC-NP (With Revaluation/Goodwill, no Bonus)
3. TCC = TAC ----> CC-NP ≠ AC-NP (No Revaluation/Goodwill, with Bonus)
4. TCC ≠ TAC ----> CC-NP ≠ AC-NP (With Revaluation/Goodwill, with bonus)
ILLUSTRATION #1
A and B whose partner of AB partnership with a capital balance of 250 000 each sharing
profit equally decided to admit C as new partner. C invested 500 000 cash for a 50% interest in the
partnership. Total agreed capital is 1 000 000.

Case 1: TCC = TAC ----> CC-NP = AC-NP (No, Revaluation, Goodwill and Bonus)
Partners TCC TAC Difference
A 250 000 250 000 0
B 250 000 250 000 0
C 500 000 500 000 0
Total 1 000 000 1 000 000 0

ILLUSTRATION #2
A and B whose partner of AB partnership with a capital balance of 250 000 each sharing
profit equally decided to admit C as new partner. C invested 500 000 cash for a 40% interest in the
partnership. Total agreed capital is 1 250 000. The Old partners agree to revalue the Land First
before C’s admission

Case 2: TCC ≠ TAC ----> CC-NP = AC-NP (With Revaluation/Goodwill, no Bonus)

Partners TCC TAC Difference
A 250 000
B 250 000
C 500 000 500 000 0
Total 1 000 000 1 250 000 250 000

Revaluation Journal Entry

Land 250 000
A, Capital 125 000
B, Capital 125 000

C ‘s Investment Journal Entry

Cash 500 000
C, Capital 500 000

Partner’s Equity Account

A B C Total
TCC 250 000 250 000 500 000 1 000 000
Revaluation 125 000 125 000 0 250 000
TAC 375 000 375 000 500 000 1 250 000

P/L Ratio
Partner P/L Transfer New P/L
A 50% (20%) 30%
B 50% (20%) 30%
C 0% 40% 40%
Total 100% 0 100%
ILLUSTRATION #3
A and B whose partner of AB partnership with a capital balance of 250 000 each sharing
profit equally decided to admit C as new partner. C invested 500 000 cash for a 40% interest in the
partnership. Total agreed capital is 1 000 000.

Case 3: TCC = TAC ----> CC-NP ≠ AC-NP (No Revaluation/Goodwill, with Bonus)
Partners TCC TAC Difference
A 250 000 300 000
B 250 000 300 000
C 500 000 400 000 (100 000)
Total 1 000 000 1 000 000 0

C ‘s Investment Journal Entry

Cash 500 000
C, Capital 500 000

Bonus Journal Entry

C, Capital 100 000
A, Capital 50 000
B, Capital 50 000

Partner’s Equity Account

A B C Total
TCC 250 000 250 000 500 000 1 000 000
Bonus 50 000 50 000 (100 00) 0
TAC 300 000 300 000 400 000 1 000 000

P/L Ratio
Partner P/L Transfer New P/L
A 50% (20%) 30%
B 50% (20%) 30%
C 0% 40% 40%
Total 100% 0 100%

ILLUSTRATION #4
A and B whose partner of AB partnership with a capital balance of 250 000 each sharing
profit equally decided to admit C as new partner. C invested 500 000 cash for a 50% interest in the
partnership. Total agreed capital is 1 375 000. The old partners agree to revalue the land first
before C’s admission

Case 4: TCC ≠ TAC ----> CC-NP ≠ AC-NP (With Revaluation/Goodwill, with bonus)
Partners TCC TAC Difference
A 250 000
B 250 000
C 500 000 687 500 187 500
Total 1 000 000 1 375 000 375 000
 Partners TCC Revaluation Total Bonus TAC
A 250 000 187 500 437 500 (93 750) 343 750
B 250 000 187 500 437 500 (93 750) 343 750
C 500 000 0 500 000 187 500 687 500
Total 1 000 000 375 000 1 375 000 1 375 000

Revaluation Journal Entry

Land 375 000
A, Capital 187 500
B, Capital 187 500

C ‘s Investment Journal Entry

Cash 500 000
C, Capital 500 000

Bonus Journal Entry

A, Capital 93 750
B, Capital 93 750
C, Capital 187 500

Partner’s Equity Account

A B C Total
TCC 250 000 250 000 500 000 1 000 000
Revaluation 187 500 187 500 375 000
Bonus (93 750) (93 750) 137 5000 0
TAC 343 750 343 750 687 500 1 375 000

Problem-Solving:

Presented below is the condensed balance sheet of the partnership of A, B, and C who shares profits
and losses in the ratio of 6:3:1, respectively:

Cash 85 000 Liabilities 80 000

Other 415 000 A, Capital 252 000
Assets
B, Capital 126 000
C, Capital 42 000
Total 500 000 Total 500 000

The partner agreed to sell D 20% of their respective capital and profit/loss interest for a total
payment of Php 90 000. The payment by NN is to be made directly to the individual partners. The
capital balances of A, B, and C, respectively after the admission of D are:
 A 252 000 20% 50 400 201 600
B 126 000 20% 25 200 100 800
C 42 000 20% 8 400 33 600
D 84 000 84 000

Using the same information below, assuming that implied revaluation of asset is to be recorded
prior to the acquisition of D. the capitals of A, B, and C, respectively after the admission are:

Cash to be paid by D 90 000

Divided by interest acquired 20%
Implied total capitalization of partnership 450 000
Less: total capitalization of partnership before revaluation 420 000
Increase in asset/capitalization 30 000

30 000 x 60% 18 000

30 000 x 30% 9 000
30 000 x 10% 3 000

90 000 x 60% 54 000

90 000 x 30% 27 000
90 000 x 10% 9 000

Partners Partner’s Assets Partner’s Transfer of Partner’s P/L Ratio

Equity Revaluation Equity after Interest Equity after
before revaluation admission
admission
A 252 000 18 000 270 000 (54 000) 216 000 48%
B 126 000 9 000 135 000 (27 000) 108 000 24%
C 42 000 3 000 45 000 (9 000) 36 000 8%
D 90 000 90 000 20%
Total 420 000 30 000 450 000 450 000 100%

The capital accounts of the partnership of A, B, and C on June 1, 2021, are presented below with
their respective P/L ratios:

A 139 200 ½
B 208 800 1/3
C 96 000 1/6

On June 1, 2021, D is admitted to the partnership when D purchased, for Php 132 000, a
proportionate interest from A and C in the net assets and profits of the partnership. As a result of a
transaction, D acquired a 1/5 interest in the net assets and profits of the firm. What is the combined
gain realized by A and C upon sale of a portion of their interest in the partnership to D?
Amount Paid 132 000
Less: Book Value of Interest
acquired
(139 200 + 208 800 + 96 88 800
000) x 1/5
Gain(Loss) 43 200