College of Accountancy

PARTNERSHIP DISSOLUTION
Contents:
4.1. Causes of Dissolution
4.2. Admission of a Partner
4.2.1. Purchase of an Interest from the Existing Partners
4.2.2. Investment of Assets in a Partnership
4.3. Withdrawal or Retirement or Death of a Partner
4.3.1. Sale of Interest to a Partner or an Outsider
4.3.2. Sale of Interest to the Partnership
4.4. Partnership Incorporation

Lesson 4.1 Causes of Dissolution

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. Winding up (Liquidation) is the process of settling the business or
partnership affairs after dissolution.

Causes of Dissolution
Partnership dissolution due to changes in ownership occurs for varying reasons and the
following are more prevalent:
1. Admission of a partner
2. Withdrawal or retirement of a partner
3. Death of a partner
4. Incorporation of the partnership
Lesson 4.2 Admission of a Partner
A new partner can only be admitted into the partnership with the consent of all the
continuing partners. By admission of a new partner, the old partnership has been dissolved and it
is important that a new agreement be formulated to govern the continuing business operations. A
person may become a partner in an existing partnership by either of the following:
a. Purchase of an interest from one or more of the existing partners.
b. Investment of assets in the partnership by the new partner.

Liability of Incoming Partner for Existing Obligations

A person admitted as a 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 liability is limited to his capital contribution, unless otherwise
agreed.
Lesson 4.2.1 Purchase of an Interest from the 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 credit to the capital account of the buying partner for the
interesting purchased. The amount debited and credited is not affected by actual price for the
equity interest. In this type of admission, the total assets, total liabilities and total partners’ equity
of the partnership are not affected upon admission.

Instructor: Orlando L. Ananey Page 1 of 9

 College of Accountancy

Illustration:
James and Anthony are partners with capital balances of P400,000 and P200,000,
respectively. They share profit in the ratio of 3:1. Their business has been successful. All
indications show that it will continue to be.

Case 1: Payment to old partners is equal to interest purchased.

Partners James and Anthony received an offer from Paul to purchase directly one-fourth of
each of their interest in the partnership for P150,000. The partners agreed to admit Paul into the
firm.
James, Capital 100,000 Computation:
Anthony, Capital 50,000 James: P400,000 x ¼ = P100,000
Paul, Capital 150,000 Anthony: P200,000 x ¼ = 50,000
To record admission of Interest transferred P150,000
Paul

One-fourth of each partner’s capital was transferred to the new partner. The partnership did
not receive the cash paid because transaction is between Paul and partners James and Anthony
personally, not between Paul and the partnership.

Case 2: Payment to old partners is more or less than the interest purchased.
Assume that Paul directly purchased 30% of each partner’s interest in the business. Paul paid
P200,000 for 30% of each partner’s capital.
James, Capital 120,000 Computation:
Anthony, Capital 60,000 James: P400,000 x 30% = P120,000
Paul, Capital 180,000 Anthony: P200,000 x 30% = 60,000
To record admission of Interest transferred P180,000
Paul

Whether the negotiated price is less than or more than the interest purchased, it does not affect
the entry because the exchange is between Paul and the old partners and does not involve the
partnership assets.
Case 3: With Revaluation of Assets
Partners James and Anthony received an offer from Paul to purchase directly 20% of each of
their interest in the partnership for P150,000. The partners agreed to admit Paul into the firm. On
the date of admission of Paul, the fair value of the equipment of the partnership is P100,000
greater than the its carrying amount.

Equipment 100,000 Computation:

James, Capital 75,000 James: P100,000 x 3/4 = P75,000
Anthony, Capital 25,000 Anthony: P100,000 x 1/4 = 25,000
To record the asset Total Asset Revaluation P100,000
revaluation
James, Capital 95,000 Computation:
Anthony, Capital 45,000 James: P475,000 x 20% = P95,000
Paul, Capital 140,000 Anthony: P225,000 x 20% = 45,000
To record admission of Interest transferred P140,000
Paul
If there is an asset revaluation, the capital balances of the existing partners are adjusted
first for the revaluation before recording the admission of the new partner. Note that the basis for
the interest transferred to the new partner is the capital of the partners after adding the
revaluation.

Instructor: Orlando L. Ananey Page 2 of 9

 College of Accountancy

Lesson 4.2.2 Investment of Assets in a Partnership

A person may be admitted into the partnership by investing cash or other assets in the business.
The assets are invested into the partnership and not given to the individual partners. The
investments will increase the total assets and the total partners’ equity.
Definition of Terms
Total Contributed Capital (TCC)
- It is the sum of the capital balances of the old partners and the actual investment of
the new partner.
Total Agreed Capital (TAC)
- It is the total capital of the partnership after considering the capital credits given to
the partners. Under bonus method, total agreed capital is equal to the total contributed
capital though the capital credits to each partner may be equal to, greater than or less
than his capital contributions.
Bonus
- It is the amount of capital or equity transferred by one partner to another partner.
Capital Credit
- It is the equity of the partner in the new partnership and is obtained by multiplying the
total agreed capital by the applicable percentage interest of the partner.

Illustration:
Leonard and George are partners with capital balances of P400,000 and P200,000,
respectively. They share profits in the ratio of 3:1. The partners agreed to admit Beverly as a
member of the firm.

Case 1: Bonus to Old Partners

Assume that Beverly invested P250,000 for a one-fourth interest in the business. The partners
decided not to revalue the assets of the partnership.
TCC Bonus TAC
Leonard P400,000 28,125 428,125
George 200,000 9,375 209,375
Beverly 250,000 (37,500) 212,500 2nd
Total P850,000 = P850,000
1st

Under the bonus method, total contributed capital (TCC) is equal to total agreed capital
(TAC). Since Beverly invested for ¼ interest in the business, she will have P212,500 (P850,000
x ¼) agreed capital. The actual asset contributed by Beverly is lesser than the interest she
received. The difference (P250,000 – P212,500 = P37,500) represented the bonus to old partners
which is distributed to the old partners using their profit and loss ratio (Leonard: P37,500 x ¾ =
P28,125; George: P37,500 x ¼ = P9,375).

The entries to record the investment of Beverly will be:

1. Investment of Beverly
Cash 250,000
Beverly, Capital 250,000
To record the investment of Beverly
2. Bonus to old partners
Beverly, Capital 37,500
Leonard, Capital 28,125
George, Capital 9,375
To record the bonus to old partners

Instructor: Orlando L. Ananey Page 3 of 9

 College of Accountancy

Case 2: Bonus to New Partner

Assume that Beverly invested P240,000 for one-third interest in the business.
TCC Bonus TAC
Leonard P400,000 (30,000) 370,000
George 200,000 (10,000) 190,000
Beverly 240,000 40,000 280,000 2nd
Total P840,000 = P840,000
1st

The entries to record the investment of Beverly will be:

3. Investment of Beverly
Cash 240,000
Beverly, Capital 240,000
4. Bonus to old partners
Leonard, Capital 30,000
George, Capital 10,000
Beverly, Capital 40,000
To record the bonus to new partners

The capital credit for Beverly is P280,000 is P40,000 more than his actual investment.
This difference represented a bonus to the new partner because the total contributed capital is
equal to the total agreed capital, and the capital credit to the new partner is more than his actual
investment. The equities of the old partners are decreased by P40,000 in their profit or loss ratio.
Lesson 4.3 Withdrawal or Retirement or Death 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
The interest of the partners are adjusted for the following (if any) before closing the capital
account of the retiring or withdrawing partner:
a. Share of any profit or loss during the period up to the date of a partner’s withdrawal,
retirement or death; and
b. Share of any revaluation gains or losses as at the date of a partner’s withdrawal, retirement,
or death.

Lesson 4.3.1 Sale of Interest to a Partner or an Outsider

When a partner’s interest is sold to another partner or an outsider, the withdrawing
partner is paid from the personal assets of the buyer. Accounting for this sale is similar to
admission by purchase of interest. The total assets of the partnership are not affected by the
consideration involved. The required entry will only be a debit to the seller’s capital account for
his capital balance and a credit to the buyer’s capital account for the same amount.

Lesson 4.3.2 Sale of Interest to the Partnership

The partnership may purchase the interest of the retiring, withdrawing, or deceased
partner. This is a transaction between the retiring, withdrawing partner (or deceased partner’s

Instructor: Orlando L. Ananey Page 4 of 9

 College of Accountancy

estate) and the partnership. As such, settlement amount is recorded in the partnership books,
alongside any other necessary adjustments.

The accounting issues to be encountered here will be similar to admission by investment

of assets but in a reverse manner. Instead of a new partner joining the partnership by investing
assets into the partnership, an old partner is now leaving the partnership with the business
distributing assets to the withdrawing partner. Note that the withdrawing partner may receive his
share of the business in partnership assets other than cash.

Illustration: Bonus Method

The capital balances of partners A, B, and C after adjustments for profit and revaluation of
assets follow:
A, Capital P640,000
B, Capital 630,000
C, Capital 310,000
Partner C decided to withdraw from the partnership.

Case 1: Withdrawal at book value.

Assume that C agreed to accept payment equal to his interest. The entry to record the payment
of cash and the closing of his capital account will be:
C, Capital 310,000
Cash 310,000
To record the withdrawal of C

Case 2: Withdrawal at more than book value.

Assume that C demanded a P400,000 settlement for his interest because he firmly believes
that she has contributed so much to the success of the business. The remaining partners agreed
for old time’s sake. The entry to record the payment of cash and the closing of his capital
account will be:
A, Capital 30,000
B, Capital 60,000
C, Capital 310,000
Cash 400,000
To record the withdrawal of C
The difference between the settlement price and the capital balance of C is treated as a bonus
to C, the withdrawing partner.

Case 2: Withdrawal at less than book value.

Assume that C is very eager to retire and is willing to accept settlement at P280,000. The
entry to record the payment of cash and the closing of his capital account will be:
C, Capital 310,000 The difference between the
Cash 280,000 settlement price and the capital
A, Capital 10,000 balance of C is treated as a
B, Capital 20,000 bonus to the remaining
To record the withdrawal partners.
of C

Instructor: Orlando L. Ananey Page 5 of 9

 College of Accountancy

Illustration: Asset Revaluation Method

Aside from the agreed adjustments for the values of the assets of the partnership, the
partners may revalue the assets to recognized the difference of the payment for the
retiring/withdrawing partner and his/her capital instead of recognizing a bonus. Asset
revaluation can be recognized fully (full revaluation) or partially (specific revaluation). In full
revaluation, all the partners including the retiring/withdrawing partner will recognize their
share in the asset revaluation. In specific or partial revaluation, only the share of the retiring/
withdrawing partner will be recognized.
Lucio, John and Henry are partners sharing profits and losses of 40%, 40% and 20%,
respectively. The December 31,20x1 balance sheet of the partnership before any profit allocation
was summarized as follows:
ASSETS LIABILITIES AND CAPITAL
Cash 90,000 Accounts payable 7,500
Inventories 60,000 John, Loan 5,000
Equipment 75,000 Lucio, Capital 100,000
Trademark 22,500 Henry, Capital 90,000
Total Assets 247,500 John, Capital 45,000
Total Liab. And Capital 247,500
The income summary account has a credit balance of P25,000 for the year 20x1. On
January 1, 20x2, a partner has decided to retire from the partnership and by mutual agreement
among partners; the following have been arrived at:
• Inventories amounting to P10,000 is considered obsolete and must be written off
• Equipment should be adjusted to their current value of P50,000
• Trademarks are to be written-off immediately before the retirement
It was agreed that the partnership will pay the retiring partner for his interest in the
partnership inclusive of loan balance.

Case 1: Full Revaluation

Assume that John retired and received P43,500. The partnership is using full revaluation method.
a. Adjusted Capital of Partners
Partners Capital Accounts Adjustments Share in Adjusted
(per agreement) Income Capital
Lucio (40%) P100,000 (P23,000) P10,000 P87,000
Henry (20%) 90,000 (11,500) 5,000 83,500
John (40%) 45,000 (23,000) 10,000 32,000
Total P235,000 (P57,500) 25,000 P202,500
The adjusted capital of the partners will be used in accounting for the retirement of John.
b. Share of John in the Asset Revaluation
Retirement Price P43,500
John adjusted capital P32,000
Loans 5,000
Total interest before retirement P37,000
Revaluation of Asset P6,500

c. Total Revaluation and Share of Other Partners

𝑆ℎ𝑎𝑟𝑒 𝑖𝑛 𝑟𝑒𝑣𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 𝑃6,500

𝐹𝑢𝑙𝑙 𝑅𝑒𝑣𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 = = = 𝑃16,250
𝑃𝑟𝑜𝑓𝑖𝑡 𝑜𝑟 𝐿𝑜𝑠𝑠 % 40%

Share of Lucio: (P16,250 x 40%) P6,500

Share of Henry: (P16,250 x 20%) P3,250

Instructor: Orlando L. Ananey Page 6 of 9

 College of Accountancy

d. Journal Entry to Record the Revaluation

Various Asset Accounts 16,250
Lucio, Capital 6,500
Henry, Capital 3,250
John, Capital 6,500

e. Adjusted Capital of Remaining Partners After Retirement of John

Partners Adjusted Share in Adjusted
Capital Before Revaluation of Capital After
Retirement Asset Retirement
Lucio (40%) P87,000 P6,500 P93,500
Henry (20%) 83,500 3,250 86,250
Total P170,500 P9,750 P180,250

Case 2: Partial/Specific Revaluation

Assume that John retired and received P41,000. The partnership is using specific revaluation
method.
a. Adjusted Capital of Partners
Partners Capital Accounts Adjustments Share in Adjusted
(per agreement) Income Capital
Lucio (40%) P100,000 (P23,000) P10,000 P87,000
Henry (20%) 90,000 (11,500) 5,000 83,500
John (40%) 45,000 (23,000) 10,000 32,000
Total P235,000 (P57,500) 25,000 P202,500
Note: Whether full or partial asset revaluation is used, before effecting the retirement of a
partner, the adjusted capital of the partners before retirement are computed first.
b. Share of John in the Asset Revaluation
Retirement Price P41,000
John adjusted capital P32,000
Loans 5,000
Total interest before retirement P37,000
Revaluation of Asset P4,000

c. Total Revaluation and Share of Other Partners

Since partial revaluation is used, the remaining partners will not recognize their share in asset
revaluation.
d. Journal Entry to Record the Revaluation
Various Asset Accounts 4,000
John, Capital 4,000

e. Adjusted Capital of Remaining Partners After Retirement of John

Partners Adjusted Share in Adjusted
Capital Before Revaluation of Capital After
Retirement Asset Retirement
Lucio (40%) P87,000 0 P87,000
Henry (20%) 83,500 0 83,500
Total P170,500 0 P170,500

Instructor: Orlando L. Ananey Page 7 of 9

 College of Accountancy

Lesson 4.4 Partnership Incorporation

The partners of a partnership may choose to incorporate. Generally, the books of the
partnership are closed out and a new set of books for the corporation will be used. In this case,
the fair market values are used as the basis for recording all assets and liabilities with the
balancing amount credited to Common Stock. Occasionally, additional cash or other assets may
be invested in the corporation.
Illustration:
Roy and Gil are partners sharing profits and losses in the ration of 1:2, respectively, On July
1, 20x1, they decided to from the R & G Corporation by transferring the assets and liabilities
from the partnership to the Corporation in exchange of its shares. The following is the post-
closing trial balance of the partnership:
Debit Credit
Cash P45,000
Accounts receivable (net) 60,000
Inventory 90,000
Fixed assets (net) 174,000
Liabilities P60,000
Roy, capital 94,800
Gil, capital 214,200
Total P369,000 P369,000

It was agreed that adjustments be made to the following assets to be transferred to the
corporation:
Accounts receivable P40,000
Inventory 68,000
Fixed assets 180,600

Case 1:
Assume that R & G Corporation was authorized to issue P100 par preference shares and P10 par
ordinary share. Roy and Gil agreed to receive for their equity in the partnership 720 ordinary
shares each, plus preference shares for their remaining interest.
a. Net Adjustment
Accounts receivable (P40,000 – P60,000) (P20,000)
Inventory (P68,000 – P90,000) (22,000)
Fixed assets (P180,600 – P174,000) 6,600
Net Adjustment (P35,400)

Share of Roy (P35,400 x 1/3) (P11,800)

Share of Gil (P35,400 x 2/3) (P23,600)

b. Amounts to be Converted to Shares

Total Roy Gil
Capital before Adjustment P309,000 P94,800 P214,200
Net Adjustment (35,400) (11,800) (23,600)
Capital after adjustment P273,600 P83,000 P190,600
Potion covered by Ordinary shares (720sh @ P10 (14,400) (7,200) (7,200)
par value
Portion covered by preference shares (P100 par) P259,200 P75,800 P183,400

Instructor: Orlando L. Ananey Page 8 of 9

 College of Accountancy

c. Shares to be Issued
Total Roy Gil
Ordinary shares (720sh @ P10 par value)
Total: (P14,400 ÷ P10) 1,440 sh
Roy: (P7,200 ÷ P10) 720 sh
Gil: (P7,200 ÷ P10) 720 sh
Preference shares (P100 par)
Total: (P259,200 ÷ P100) 2,592 sh
Roy: (P75,800 ÷ P100) 758 sh
Gil: (P183,400 ÷ P100) 1,834 sh

Roy will have 720 ordinary shares and 758 preference shares while Gil will have 720
ordinary shares and 1,834 preference shares.

Case 2:
Assume that R & G Corporation was authorized to issue P10 par ordinary share. Roy and Gil
agreed to receive for their equity in the partnership 5,000 ordinary shares and 10,000 ordinary
shares, respectively.
a. Amounts of Ordinary Shares and Share Premium to be Issued
Total Roy Gil
Capital before Adjustment P309,000 P94,800 P214,200
Net Adjustment (35,400) (11,800) (23,600)
Capital after adjustment P273,600 P83,000 P190,600
Ordinary shares (P10 par value)
Total: (15,000sh x P10) (150,000)
Roy: (5,000sh x P10) (50,000)
Gil: (10,000sh x P10 (100,000)
Share Premium (APIC) P123,699 P33,000 P90,600

R & G Corporation will have a total 15,000 shares with par value of P10 per share and
share premium of P123,699.

Instructor: Orlando L. Ananey Page 9 of 9