PARTNERSHIP - DISSOLUTION

Dissolution - change in the relation of the partners caused by any partner being disassociated from the business
Liquidation - termination of business operations or winding up of business affairs

Does partnership dissolution necessarily terminate the business?

Major considerations in the accounting for partnership dissolutions

1. Admission of partner
> Purchase of interest
Purchase of part or all of interest of one partner
Personal transaction
Consideration paid is not recorded in the books
Total capital remains the same. Only transfer within equity to establish the new partner's acco
No gain or loss is recognized by the partnership
> Investment in the partnership
Admitted by investing directly to the business
Transaction with the partnership
Consideration paid is recorded in the books
Total capital is increased
No gain or loss is recognized by the partnership
Scenarios that may occur for the investment in the partnership
> Equal to capital credit; no bonus
> Greater than capital credit; excess treated as bonus to old partners
> Less than capital credit; deficiency treated as bonus to old partners
2. Withdrawal, retirement or death of partner
The partner's capital may be:
> Purchased by one or all of the remaining partners
> Settled by the partnership
Deferred settlement
Partner's interest is transferred to a liability account.
Considered normal claim, subordinate to the outside creditors
It may also agredd that interest shall accrue on the unpaid balance of outgoing partner
It is adjusted for the following
> Share of any profit or loss
> Share of any revaluation gains or losses
3. Incorporation of partnership
Before REVAL After REVAL
Cash 100.00 100.00 Cash
AR 20.00 10.00 AR
PPE 50.00 60.00 PPE
Liab (30.00) (30.00) Liab
A,c (80.00) (80.00) Share Cap
B,c (60.00) (60.00) APIC
ted from the business

Purchase capital interest

Considera

Before D After D
0.3 A 30 30
0.2 B 20 20
0.5 C 50 20
h the new partner's account New D 30
Total 100 100

TCC TAC
0.4 A 40 40
0.3 B 60 60
0.3 C 80 80
New D 60 0 60
old partners Total 240 240
old partners
Investment D 60 0.25
20

D, capital
Payable to D

0.4 A 40
outgoing partner 0.4 B 60 D, capital
0.1 C 80
0.1 D 60 XXX
Total 240
 30
50

TCC TAC TCC

0.4 A 40 6.00 46 0.4 A 40
0.3 B 60 4.50 64.5 0.3 B 60
0.3 C 80 4.50 84.5 0.3 C 80
D 80 (15.00) 65 D 52
Total 260 - 260 Total 232

Investment 80 0.25 Investment 52

Before D After D
D, capital Assets
Payable to D Liabilities
Payable to D 60 60 Supplier
Equity 0 Bank
A 40 40
B 60 60
C 80 80
D 60 -60 0
 TAC TCC BONUS REVAL
(2.40) 37.6 0.4 A 40.00 (10.00) 28.00
(1.80) 58.2 0.3 B 60.00 (7.50) 21.00
(1.80) 78.2 0.3 C 80.00 (7.50) 21.00
6.00 58 D 50.00 25.00
- 232 Total 230.00 - 70.00

0.25
D invests 50
D capital interest 0.25
Total agreed capital 300

E
G
TAC
58.00
73.50
93.50
75.00 300.00
300.00
Case 1 Case 3
D purchases one-half of C's capital interest for Php48,000. D purchases 20% interest from A and B
to account for the sale at "book values"
Case 2
D purchases 25% of A's, B's and C's capital interest for Php60,000 Case 4
D purchases 20% interest in the net ass
from A and B for Php50,000. The partne
The partnership's invetory was underv
is overvalued by Php 50,000.
 Requirement
How much is the partners capital balances
How much is the gain of the new partner
How much is the gain of the partnership
Journal entry

es 20% interest from A and B for Php50,000. The partners agreed

t for the sale at "book values" of A's and B's capital accounts.

es 20% interest in the net assets and profits of the partnership

d B for Php50,000. The partners agreed to share proportionately.
ership's invetory was undervalued by Php20,000 and the PPE
ued by Php 50,000.
Case 1
D invests Php60,000 cash for a 25% interest in the partnership's net assets and profit

Case 2
D invests Php80,000 cash for a 25% interest in the partnership's net assets and profit

Case 3
D invests Php52,000 cash for a 25% interest in the partnership's net assets and profit

Case 4
D wants to join the partnership through direct investment. D asks the existing partners
how much should he invest for a 20% interest in the partnership's net assets and profits.
The partnership books include a receivable from A of Php8,000 and a loan payable to
B of Php10,000.
Requirement
How much is the partners capital balances
How much is the gain of the new partner
How much is the gain of the partnership
Journal entry