——_ ™ Chapter 13 issolution partnership Di Learning Objectives 1. State the causes of P 2. Account for the effects partnership equity. artnership dissolution. of partnership dissolution on g, Dissolution 7 ‘As mentioned earlier, one of the characteristics of a partnership that it has a “limited Wife,” in the ‘sense that the partners agreement can be easily dissolved. Dissolution is the change in the relation of the partners jated from the business, caused by any partner being disas: Dissolution is different from liquidation. Liquidation is the termination of business operations or the winding up of affair. ion does not necessarily terminate the business. The business continues until the remaining partners decide to liquidate the business. If the business is continued after Partnership diss dissolution, new articles of partnership should be drawn up. The following are major considerations in the accounting for partnership dissolutions: a. Admission of a partner b. Withdrawal, retirement or death of a partner ___ The admission of a new partner or the withdrawal retirement or death of an existing partner dissolves the origins! of the partners (e.g., a change in the number of the partners in # partnership agreement because it creates a change in the re partnershi It should be noted that the admission of a new partie requires the consent ofall the existing partners dmmission of a new partner we varchase of interest in the! t be ete , st in the partner tt either. investment in the partersip Ship, opt Hwoughe purchase of interest fnew arenes May be admit pe interest of ONE OF More Of the This transaction is g when he esting iia att or all of . decrease is made on the capital account(s) of the cir No gain or loss is recognized inthe partnership books Purchase of interest wing are the capital account balances and profit and loss ratios of the partners in AB Partnership as of July 1,20x1: Iustratic Capital accounts PIL ratios A, Capital 150,000 40% B, Capital 250,000 60% 400,000 one partner od to the partnership when he .ssets and profits of the firm nership) for 100,000. roximate their fair case 1: Purchase of interest from }On July 1, 20x1, C was admitte purchased 20% interest in the net 2 from A (or one-half of A’s interes in the par The net assets of the firm as of this date app’ values. athe transaction. Requirement; Provide the joural ent 0 T= Solution: Scanned with CamScannereee a nt (b): pee cummTe tise ate oon a 1 capital 150.000 20%H0%) 7m eg ma CaP amas C101 PTO |W gal bes Hom — err rat 0 3.09) ——2__Totals jderation paid by Cto A (Le,, Py it (2 7 oy 0000 [Notice that the consideration pai P09, pent 000) acy "000 is not recorded in the partnership BOOKS Moreover, no gain or jog, Ci inal end. 118,009 mm om = eon is recognized in the partnership ‘books. = 51000 son no0 Notice that when a * em art : purchase of iMeTES” the ota piste Mite tough ange Gs the total capital bejon cosh purchase of nevst fom more than ome partner cenains at 400,000), nd ater the admission of C ‘Case 2: Purchase of interest from On July 1, 20x1, C was admitted to the partnership when he| purchased a proportionate interest from A and B representing 29, Jnterest in the net assets and profits of the firm for P100,000. The inet assets ofthe firm as of this date approximate their fair values, equirement (: yato. No gain or Joss is recognized in: ow partner is admitted the partnership books when Requirements: ‘a. Provide the journal entry to record the transaction. b. How much are the capital balances of the partners after the Mj Ragwirememt @e admission of C? 7 c. How much is the gain or loss to be recognized in the ij Consideration received ata partnership books? (WOK x 40%); (100K x 60%) 4000 «000 100,000 d. How much are the personal gains or losses recognized by Aj Amount debited to capital account _(32,000) (48,000) _(80,000) and B, respectively? Personal gain (loss) 3000 12000 20000 Sotutions: htions: ‘The gains computed above are personal gains of the Ragulvenent leh telling partners. These are not recorded inthe partnership books. Tay, hay] A, Capital 0,00 20% x 40% 32,000 al B, Capital 4on.000 x 20% x 60%) 148,000 Revaluation of assets C, Capital (400,000 x 20%) 0,00 | When a partnership is dissolved, but rot liquidated, sie {0 secord the aisson of tothe partnership tartnership is created. “The assets and liabilities cared over fo ew i ed to fair vals 7 = partnership are resa! ities sallocated frst AGdn Seeman Cctcroc en ee Dou te adjustment thes 2 ite ing te admis thei oli prt or ssa ss asted to A and beso? Ls existing artes Po ac Partner, Scanned with CamScannerase of interest - Revaluation mitted to the partnership when purchased a proportionate interest from and B represen Dor% interest in the net assets and profits of the firm for P100, 09 ‘On this date, the carrying amounts and fair values of ¢y, assets and liabilities ofthe partnership areas Follows: Mlustration: Purch On July 1, 20e1, C was adi ——— ——__ : Increase is I el Carrying amount Fair value ge Cash 20,000 20,000 a 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 to be made on July 1, 20x, b. How much are the capital balances of the partners after the admission of C2 Solutions: Requirement (a): ‘The capital balances of the existing partners before recording the admission of C are first adjusted for the revaluation increase a8 follows: OPT Equipment 50,000 A, Capital (50,000 x 40%) 20,000 B, Capital 6000 x 60%) 30,000 orecord the recluation of he equipment __ Notice that the revaluation increase is allocated only to th? existing partners. No allocation is made to C, the incoming partner, After recording the en 8 _ethe following balances. yw aluation a) ‘A, Capital (400000-<20% aoa) B, Capital 400000 20% xan) , Capital 00.000 x2) ‘to record the adintission of C tothe "0.000 Requirement (b): A B - Totals pital, beg. 130,000 220,00 == ~—«350,000 Share in revaluation 20,000 30,000 : 50,000, Credit - : 80,000 80,000 Capital, end. 118,000 __202,000_8,000_ 400,000 'nvestment in the partnership : listead of purchasing interest from . «yin uses Partner may be admitted by investing ‘This transaction isa transaction Pa aid bythe And the partnership. AS such: 22) books coming partner i recorded i he PT ig or losis use this is a ‘transaction with am : "ognized. Scanned with CamScannerhapter yy a new partner invests ig shen may happen © ited at an a sat account is credit Moun reestment OF is credited at aN amoung his investment, Two things partnership: 1. The new pa equal tothe 2 The new pa rater than or less 7 je accounted f0F under the “Bony, second scenario © “have already discussed under ep nerease (0F decrease) in the re redution (or addition) f0 the capi) he Spc equal tothe fair value ofthe contribution, seen a oc or ame wher Miro capital account is greater th 1 credit to the new partner's capital 7 the cect oe Mecuse he is Bringing in expertise to the The method,” similar to what partnership formation. That of the existing po his contribution business; or i b. the credit to the new partner's capital account is less than his contribution in order to compensate for the past efforts ofthe existing partners in establishing the business. Ilustration 1: Investment inthe partnership The following are the capital account balances and profit and loss ratios ofthe partners in AB Partnership as of July 1, 20x1: Capital accounts PL ratios A,Copital 150,000 40% B, Capital 250,000 60% 400.009 On July 2, 20x, C was admited to the partnership when he an pee aoe — et assets and profits of the firm for a ?.000 investment, The net assets of the ' approximate their fair values. ee we or ‘Credit to capital equal to i Gores credited at an 3bmeg¢ —— a oii ., Pt amount: (6 oe ne jourmal entry to recon nt Mal to a M the transaction Comsat. results to.an increase inthe parinership + After the admission of C, the total capi increased to. 7500,000 (ic, admission of new partner + 100K. capita al of the partners ship i 400K partnership capital before ‘estment by new partner. 4 Acomparison between purchase of intrest and investment inthe partnership is provided below: |; _ Purchase of interest Investment in the partnership The incoming partner's] * The incoming partner's contribution is not recorded in| contribution is recorded in the | the partnership books. parinership books. « Partnership capital is increased by. the incoming partner's contribution, ‘Partnership capital remains the || same before and after the admission of the incoming | partner. eee IT No gain or loss is recognized in | « No gain orlssis recognized in _the partnership books. the partnership books. Scanned with CamScannerwant Cis capital is ert for F record the ta Solution Tal 2d “Under the “bomus method.” capital ofthe new partner is treated to the capital of the existing partners) profit or loss sharing ratio. in this cae, the #20,000 reduction in the capital credit of ¢ (100,000 investment ~ 80,000 capital credit) is allocated as increases in the capital balances of A and B. ‘Case 3: Credit t0 capi Solution: ee c investment tha the ie case 2 Credit to capital is Vesé hat is the journal en Case 2: Cred ‘000. What journal entry 4, Cash T Capital : {A Capital [200K — 0) 00) Capita (100K) Fe mmc ttrtee any decrease (oF increase) in the as an addition (or deduction) located based on their old 1 is greater than the investment C's capital was credited for P130,000. What is the journal entry to [record thetransactin? Tidy. | Cash A, Capital {30k - 100). 408)° B, Capital 230k 100k) xan" C, Capital {ore the ison of Co he partnership “Refer to discussion in ‘requirement (b)’ The equity structure of ¢ admission of Cis analyzed as follows: the new partnership after the 100, Notice that whether or ot! few Pe the amision Pls the aia Same after artner. That is, the total capital i equal justation 2: Amount of investment rent of financial re staternen Position of AB Partnership shows the lowing information as of July 1, 20x) ates Gash 12,000 Receivable from A! 8,000 fquipment 390,000 Tall 470,000, Payable to B 10,000 A, Capital (40%) 150,000 8, Capital (60%) 250,000, Total . 410,000, On July 1, 20x1, the partners ith a 20% interest, The net asets of the ‘Pproximate their fair values. be allowed, ot an nt od,” the total capital remain the yet 8S the "bonus Re _—_—Regmt. (a) 130,000 20S methog Rem 250,000 158g) oa method the admission of to the net assets of new pertners contribution, decide to admit C as a new partner firm as of this date how much should © Scanned with CamScannerInvestment of C 0 C's capital account record the admission of ¢ ; SOR Of C is a A, Capital (96K 2) «aT B, Capital (96K - sox) * 60% C, Capital ' Loner te atin tepeneiy | Notice that partners do not affect the © business is continued even accounts are carried over f USE the + the partnership dissolution, The Ilustration 3: Bonus method ttl he capital account balances and profit and loss The following are t ratios of the partners in AB Partnership as of July 1, 20x1: Capital accounts Profit on loss ratios A, Capital 150,000 40% copia (150000 6400, 50,000 4,Cap! 5, TO) eae fo 009 we 5 Capital (250,000 - 9,600) i (Capital pea Total capital of new partnership nanan On July 1, 20x1, C was admitted to the partnership when he invested equipment with a historical cost of P100,000 and fair value of P80,000 to the partnership for a 20% interest. The net assets of the firm as of this date approximate their fair values, Note again that a bonus granted to one partner is xcounted for as reduction in the capital of the other partners. Requirements: Requirement (c): New profit or loss ratios a. If the bonus method is used to record the admission of C into the relationship, how much is the credit to C’s capital account? Profit or loss ratios "0 b. What are the capital balances of the partners after the JJ A(100% - 20%) x 40% - admission of B (100% - 20%) x 60% 20% c. What are the relative profit or loss ratios of the partners after C 100% the admission of C? Solutions: Scanned with CamScannerrtner death of 2 Pal . 1, retirement OF his int Withdrawal rig retires oF die, rest may ye withdra A ee ee ie waa partners oF (b) spo purchased by (a) death, the deceased partner's estaje j, xrtnership. In case 0 amen a hLUrUr eof ne Capital accounts ‘The interest of # ithdrawing, retiring, oF deceasey oot any iene aaa or is ge eo UP to the date 6 tal (50%) | ini gi ores tthe dae gg ME == his withdrawal, retirement, or death. pt Tee Purchase by one or all ofthe remaining partners / One or all of the remaining partners may purchase the interest of the retiring withdrawing, or deceased partner. This is transaction between and among the partners (or deceased partner's estate), As such, the settlement amount is not recorded in the partnership books. The only entry to be made is a transfer nithin equity. However, the above-mentioned adjustments (ie, share in profits and losses and revaluation gains and losses) are recorded first before the settlement. Purchase of interest by remainin, i ng partners ss July 1, 20x1, C withdraws from the partnership when he was aght-out by Iis co-partners for P620,000 cash, The net assets of ie firm as of this date approximate their fair values quirement: Provide the journal entries. solution: Purchase by the partnership ‘The partnership may purchase the interest of the retiring, withdrawing, or deceased partner. This is a transaction between the retiring or withdrawing partner (or deceased partner's estate) and the partnership. As such, the settlement amount is recorded in the partnership books, alongside any other necessary adjustments. he capital balances of all of the partners are adjusted for their spective shares in the profit accruing as of. the date of 750,000 100,000 500,000 Unadjusted balance Stare in profit So Kx (2, 30% & 50%) 0,900 270,000_ $504 Adjusted balance Bonus method ‘When the retiring, withdrawing, or deceased partner's interest is settled at an amount greater than or less than the value of his interest, the bonus method is used. Under the bonus method, any excess (or deficiency) in the payment is accounted for a3 4 deduction (or addition) to the remaini : y ital deduct remaining partners’ capi on C's he entry to adjust the capital palances of the partners Sthdrawal date is as follows: Scanned with CamScanner462 purchase of interg, Gi st Pies on July 1, 2.1, eee se cash from the Parner " Ie Tal] Treome summary [Be Pa | ) 8 Capital isas follows: to ital balances of capi all of = ve shares inthe pro * hd ey omputaionsin “Cases apg 8 et wing The entry to record the withdrawal of C erjeom C8000 | aot |. Capital (550,000 x 20%!50%*) 2m B, Capital (650,000 x 30%%/50%") 330,09 *Partner's old PIL ratio divided by the sum of remaining partner, old P/L ratios (ie. A's 20% + B's 30% = 50%). = to record the withdra C, Capital A, Capital (20% Ss oy B, Capital (620k - 559K) “1 | 28.000 cake 350%) | an Wal of Cis follons The capital structure of the new partnership is as follows: A B Total ‘Adjusted balance -July 1,20x1 330,000 520,000 850,009 Credit from withdrawal of C 220,000 330,000 550,009 Notes: jr The retirement of C resulted to a bonus of P70 Nex apitaltalanes 580000 $5,000 Lamm aq~ J setlement- 530000 capital bane) The lowe cre from the capital balances ofthe remaining partners Notes: |r The payment to C is recorded in the books because the interest ‘The settlement amount (i, P620,000) paid by the remaining J of C is purchased by the partnership, rather than by the Partners to C is not recorded in the books. remaining partners. ‘The capital balance of Cis allocated to the purchasing partners using their relative old profit or loss ratio, ‘The adjusted total capital of the partnership remains the same before and after the withdrawal of C. he capital structure of the new partnership is as follows A B_ Total Adjusted balance -July 1,20x1 530000 520000850000 (32.000) 70.000), Debit for the bonus to C 23,000) New capital balances 302,000 478,000 _—_ 730,000. total capital of the partnership is reduced Notice that the esc lon, y the payment for the withdrawing, nalyzed below: Scanned with CamScannerxe ‘Cae Adjusted capital before ener Cee “420g Total capital after withdrawal of Pe nn pee in total capital equal to amount paid f0 2 chase of interest by remaining parison between purchase ofiferest By remaining part Searcy by he preesip Provide belo, ners Purchase «The payment t0 the outgojs ‘Purchase by remaininy * The payment to the outgoing gong et ie mot reconded in the | partner iS. recorded in ye partnership books. partnership books. Partnership capital remains |« Partnership capital > the same before and alter the | decreased by the payment {op withdrawal, retirement or | the outgoing partner's capita death ofthe outgoing partner. |_ balance. : = No gain or loss is recognized | + No gain or loss is recognizeg in the partnership books, in the partnership books. Incorporation of a partnership Another instance that causes partnership dissolution is the incorporation of a partnership. When a partnership is converted into a corporation, the partners’ relation changes - they cease to be partners (ie, agents of the business) and become stockholders, Corporate accounting is discussed in the next chapters. S&S artner being dia, a) mples of events that | ,dmission of a partner, artnet, and (6) Inc fo oe Mr date of dissolution may values: Any Tevaluation incr aissolution. json purchase of interest pe transaction is recorded ag siransfer within equity: sing partners capital (Dr) incoming partner's capital (Cr) ager 13; Summary ie. toni the change yy A Soci fo eSult tp busines Partng el hana ee all c28es of dissolution ge of the existing, partners’ ap Hon of She tines cused ty ofa pa Patter Investment nt - * The transactions recorded in the regular manner: | Asset invested 0» Incoming partner's, capital (Cr) Eee eeaeeeree ets partner Purchase by partnership a transfer within equity: tugoing partner’s capital (Dr) Purchasing partner's capital (Cx) «The transaction is recorded in the regular manner: Outgoing partner's capital (Dr) Payment made (Cr Scanned with CamScanner