MODULE 3 – PARTNERSHIP DISSOLUTION

Dissolution is defined in Article 1825 of the Civil Code of the Philippines as the change in the
relation of the partners caused by any partner ceasing to be associated in the carrying out of the
business.

Dissolution refers to the termination of the life of an existing partnership. The dissolution of an
old partnership may be followed by:

1. The formation of a new partnership. This is known as dissolution by change in

ownership structure. The new partnership continues the business activities of the
dissolved partnership without interruption.
2. Liquidation. This refers to the termination of the business activities carried on by the
partnership and the winding up of partnership affairs preparatory to going out of
business.

NOTE: Dissolution does not always result to liquidation although liquidation is always preceded
by dissolution.

CONDITIONS RESULTING TO PARTNERSHIP DISSOLUTON

The following conditions will result to partnership dissolution by a change in ownership

structure:
1. Admission of a new partner
2. Retirement or withdrawal of a partner
3. Death, incapacity or bankruptcy of a partner
4. Incorporation of a partnership

ADMISSION OF A NEW PARTNER

A new partner, with the consent of all the partners, may be admitted in an existing partnership.
Upon admission of a new partner, the firm is automatically dissolved and a new partnership is
formed. All the partners draw a new contract, Articles of Co-Partnership. The admission of a
new partner gives rise to the following accounting problems:

1. Determination of the profit or loss from the beginning of the accounting period to the
date of admission of a new partner and the distribution of such profit or loss to the old
partners.
2. Correction of accounting errors in prior periods like overstatement or understatement of
inventories, excessive depreciation charges and failure to provide adequately for
doubtful accounts.
3. Revaluation of accounts which may call for restatement of the existing assets of the
partnership to appraised or fair market values and recognition of unrecorded liabilities of
the firm. All adjustments to the accounts give rise to profit or loss; such adjustments are
recorded in the partnership books as increase or decrease in capital shared according to
partners’ profit and loss ratio.
4. Closing of the partnership books.

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ADMISSION BY PURCHASE

With the consent of all the partners, a new partner may be admitted in an existing partnership by
purchasing a capital equity interest directly from one or more of the old partners. Terms such
as purchases, sells, pays, bought, sold and transferred indicate admission by purchase.

The sale to a new partner of an old partner’s interest in an existing partnership is a personal
transaction between the selling partner and the buying partner. The amount paid by the partner
who purchases an interest goes personally to the partner who sells his or her interest; the
amount paid does not go to the partnership.

The only entry required on the partnership books is the recording of the transfer of capital from
the capital account of the selling partner to that of the buying partner. The amount of capital
transferred will be equal to the book value of the interest sold regardless of the amount paid.

The pro-forma entry is:

(Name of seller), Capital XXX

(Name of buyer), Capital XXX

The purchase price of the interest sold to the new partner may be:
1. Equal to the book value of interest sold
2. Less than the book value of interest sold
3. More than the book value of interest sold

NOTE: The partner may pay more than or less than the book value of the interest sold by the
old partner resulting in a gain or loss in the transaction. This gain or loss, however, is a personal
gain or loss of the selling partner and not of the partnership. Therefore, no gain or loss is
recognized in the partnership books.

Illustrative Problem A: Lhod and Alice are partners with capital balances of P100,000 and
P50,000, respectively. They share profits and losses equally. Con is a new partner.

Case 1a – Purchase at book value from one partner only.

Con purchases a 1/5 interest from Lhod by paying P20,000.

Lhod, Capital 20,000

Con, Capital (P100,000 x 1/5) 20,000

The P20,000 paid by the new partner Con to the old partner Lhod should not be relflected in
the partnership books because the said amount goes directly to Lhod. What is recorded in the
partnership books is the transfer of 1/5 of the capital of Lhold to Con. The amount paid in the
purchase is equal to the book value of the acquired 1/5 interest; hence, the sale of interest does
not give rise in any personal gain or loss to Lhod.

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Case 1b – Purchase at book value from more than one partner.
Con purchases 1/5 interest from the old partners by paying P30,000.

Lhod, Capital 20,000

Alice, Capital 10,000
Con, Capital 30,000
P100,000 x 1/5 = P20,000
P50,000 x 1/5 = P10,000

The P30,000 paid by Con to Lhod and Alice should not be reflected in the partnership books
because the said amount goes directly to Lhod and Alice. What is recorded in the partnership
books is the transfer of 1/5 of the capital of the old partners Lhod and Alice (P20,000 and
P10,000, respectively) to the new partner Con. The admission of the new partner, by
purchasing a 1/5 interest from the old partners at book value, does not result in a gain or loss to
the old partners.

Case 2 – Purchase at less than book value.

Con purchases 1/5 interest from the old partners by paying P25,000

Lhod, Capital 20,000

Alice, Capital 10,000
Con, Capital 30,000
P100,000 x 1/5 = P20,000
P50,000 x 1/5 = P10,000

The P25,000 paid by Con to Lhod and Alice should not be reflected in the partnership books
because the said amount was paid directly to the partners. What is recorded in the partnership
books is the transfer of 1/5 of the capital of the old partners (P20,000 and P10,000, respectively)
to the new partner. The difference of P5,000 is a personal loss of the selling (old) partners.

Case 3a – Purchase at more than book value. Implied goodwill is not recognized.
Con pays P40,000 for a 1/5 interest of the old partners.

Lhod, Capital 20,000

Alice, Capital 10,000
Con, Capital 30,000

The P40,000 payment made by Con to Lhod and Alice should not be reflected in the partnership
books. What is recorded in the books of the partnership is the transfer of 1/5 of the capital of
the old partners to the new partner. The P10,000 excess payment is a personal gain of Lhold
and Alice.

NOTE: In the preceding 4 cases, 1a, 1b, 2 and 3a, the transfer of capital from the old partners to
the new partners is recorded at book value regardless of the amount paid. Payment at less than
book value and at more than book value are recorded as if they were made at book value.

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n addition, the four cases show that the total partnership capital before and after the admission
of the new partner are the same. Thus, the total partnership capital of P150,000 before the
admission of Con is also the total partnership capital after his admission. There, the admission
of a new partner by purchase will not affect the total assets and the total capital of the
partnership.

Case 3b – Purchase at more than book value. Implied goodwill is to be recognized.

Con pays P40,000 for a 1/5 interest of the old partners. If implied goodwill is to be recognized,
goodwill will be computed as follows:

Step 1 - Determine the new partnership capital by dividing the amount paid by the new partner
by the interest acquired.

New partnership capital (P40,000÷1/5) = P200,000

Step 2 - Determine the excess of the new partnership capital over the old partnership capital.
The excess is the amount of goodwill to be recognized.

New Partnership - Old Partnership = Goodwill

P200,000 - P150,00 = P50,000

Step 3 – Allocate the goodwill among the old partners based on the original profit & loss sharing
agreement (equally).

P50,000/2 = P25,000 allocated for each partner

Goodwill 50,000
Lhod, Capital 25,000
Alice, Capital 25,000

Step 4 – Add the share of each partners in the goodwill to their capital balances to get the
capital balances after allocation of goodwill.

Lhod, Capital Alice, Capital Total

Original capital balances 100,000 50,000 150,000
Goodwill 25,000 25,000 50,000
New capital balances after goodwill 125,000 75,000 200,000

Step 5 – Compute the amount of interest transferred by the old partners to the new partner
based on their capital after goodwill.

Lhod, Capital Alice, Capital Total

New capital balances after goodwill 125,000 75,000 200,000
Interest transferred to Con 1/5 1/5
Capital transferred to Con 25,000 15,000 40,000

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Step 6 – Prepare the entry to record the admission of the new partner.

Lhod, Capital 25,000

Alice, Capital 15,000
Con, Capital 40,000

The capital balances after the admission of Con shall be:

Lhod, Alice, Con,

Capital Capital Capital Total
Original capital 100,000 50,000 - 150,000
Goodwill 25,000 25,000 - 50,000
Fraction sold to Con (25,000) (15,000) 40,000 -
Ending Capital of Partners 100,000 60,000 40,000 200,000

ADMISSION BY INVESTMENT

The admission of a new partner by investment is a transaction between the original partnership
and the new partner. The use of the terms like invests and contributes represent admission of a
new partner by investment. The investment of the new partner increases the total assets and
the total capital of the partnership. The entry to record the admission of a new partner depends
upon the capital interest credited to the partners’ accounts.

Definition of Terms
Agreed Capital (AC) – it is the amount of new capital set by the partners for the partnership. It
may be equal to, more than, or less than the total contributions of the partners. Other terms
used for agreed capital are: new firm capital, total capital and agreed capitalization. The terms
of the admission of a new partner may indicate the agreed capital. If agreed capital is not
indicated, it can be computed in either of two ways:
1. Investment of the new partner divided by the new partner’s fraction of interest; or
2. Investment of the old partners (equal to the net assets or capital of the
partnership) divided by the old partners’ fraction of interest.

Example: Jun and Jing are partners with capital balances of P150,000 each. Nikki invests
P100,000 for a 2/5 interest in the new partnership. What is the agreed capital of the new
partnership?

Computation 1 – The new partner’s investment used as a basis (P100,000 ÷ 2/5 = P250,000)
Computation 2 – The old partners’ investment used as a basis (P300,000 ÷ 3/5 = P500,000)

NOTE: The basis to be used will depend on the requirements of a problem. Generally, the
new partner’s investment is used in the determining the new firm’s capital.

Total Contributed Capital (CC) – it is the investment of all the partners, both old and new, to
the partnership. It is the sum of the capital balances of the old partners (net asset investment)
and the contribution of the new partner.

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Using the information in the example given, the total contributed capital is P400,000, the sum of
the old partners’ contribution of P300,000 and the new partner’s contribution of P100,000

Jun, Capital P150,000

Jing, Capital 150,000
Nikki, Capital (500,000 X 2/5) 100,000
Total contributed capital P400,000

Capital Credit – it is the interest or equity of a partner in the firm. It is computed by multiplying
agreed capital by the fraction of interest of a partner.

Bonus – it is the transfer of capital from one partner to another. A bonus to the old partners is
given by the new partner. It is a reduction in the capital of the new partner and an increase in
the capital of the old partners. The capital accounts of the old partners are credited according
to their profit and loss ratio. A bonus to the new partner is given by the old partners. It is a
reduction in the capital of the old partners and an increase in the capital of the new partner. The
capital account of the new partner is credited and the capital accounts of the old partners are
debited according to their profit and loss ratio.

The following procedures will be helpful in the computation and determination of the ownership
of bonus:
1. Multiply agreed capital (AC) by the fraction of interest of the new partner. The result is
the capital credit of the new partner in the new partnership.
2. Compare the capital credit with the interest of the new partner.
a. If the capital credit is more than the investment of the new partner, the difference
is bonus to the new partner.
b. If the capital credit is less than the investment of the new partner, the difference
is bonus to the older partners.

GOODWILL
Computation of goodwill can be based on the following procedures:
1. Capital credit (Cap) of new partner: Multiply the agreed capital by the fraction of interest
of the new partner.
2. Compare capital credit with new investment (INV) of the partner:
• If CC is greater than INV, goodwill is considered to be contributed
• If CC less than or equal to INV, goodwill is contributed by the old partners and
credited to their capital accounts according to their agreed profit and loss
ratio.

PROBLEMS RELATING TO ADMISSION OF A NEW PARNTER BY INVESTMENT

Situation relating to admission of a new partner by investment may fall under any of the
following:
1. Agreed capital is given. When agreed capital is given, the admission of a new partner
by investment will give rise to any of the following cases:
a. No bonus, no goodwill
b. Bonus to old partners, no goodwill
c. Bonus to new partner, no goodwill

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 d. Goodwill, no bonus

2. Agreed capital is not given. When agreed capital is not given, the problem calls for tow
alternative solutions:
a. Goodwill method
b. Bonus method
c. Asset revaluation method

3. Agreed capital is not given but the basis for its computation is indicated in the terms of
admission.
4. The amount of contribution of the new partners is not given.
5. No fraction of interest for either the new partner or old partners is given.

PRACTICE CASES

AGREED CAPITAL IS GIVEN

Illustrative Problem B: Lhod and Alice are partners with capital balances of P100,000 and
P50,000, respectively. They share profits and losses equally. Con is to be admitted in the
partnership.

Case 1: No goodwill, no bonus.

Con invests for a ¼ interest in the agreed capital of P50,000.

Step 1 – Fill in the given data in the table.

a. Partners, old and new
b. AC column, with the total written first
c. CC column

AC CC
Old ? 150,000
New ? 50,000
Total 200,000 200,000

Step 2 – Compare AC and CC. In this case, AC = CC (P200,000 = 200,000), therefore, there is
no goodwill.

Step 3 – Determine if there is bonus.

a. Compute for the AC of the new partner: AC x fraction of interest; (P200,000 x ¼ =
P50,000)
b. Write this amount in the AC column of the new partner.
c. Compare the new partner’s AC with his CC. In this case, AC=CC so there is no bonus.

Step 4 –
a. Complete the table by computing the AC or capital credit of the old partners:
AC x fraction of interest (4/4 – ¼ = ¾); P200,000 x ¾ = P150,000

b. A complete table appears as follows:

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 AC CC
Old 150,000 150,000
New 50,000 50,000
Total 200,000 200,000

c. Conclusion based on the table:

i. AC = CC, therefore, there is no goodwill
ii. New partner: AC = CC, therefore there Is no bonus
iii. Old partners: AC = CC, therefore, there is no bonus either.

NOTE: In actual problem solving, only one table is prepared. The missing items are filled as
they are needed.

Case 2: No bonus, goodwill contributed by the old partners.

Con invests P50,000 for a 1/5 interest in the new firm capital of P250,000.

Entries:

Cash 50,000
Con, Capital 50,000
To record Con capital.

Goodwill 50,000
Lhod, Capital 25,000
Alice, Capital 25,000
To record goodwill.

Step 1 – Prepare the table.

AC CC Goodwill
Old ? 150,000 50,000
New ? 50,000 -
Total 250,000 200,000 50,000

Step 2 – Compare AC and CC

P250,000 (AC) > P200,000 (CC) = P50,000 (Goodwill)

Step 3 - Determine who contributes goodwill.

a. Compute CC of the new partner:
AC x fraction of interest (250,000 x 1/5 = 50,000)

b. Compare the new partner’s AC with his CC. Since AC=CC; Goodwill is not
contributed by the new partner.

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 c. Goodwill is therefore contributed by the old partners and will be credited to their
accounts based on profit and loss sharing ratio.

AC CC Goodwill
Old 250,000 150,000 50,000
New 50,000 50,000 -
Total 250,000 200,000 50,000
Step 4 - Complete the table by filling in the missing figures.

a. AC or CC of the old partners

AC x fraction of interest
P250,000 x 4/5 = P200,000

Or

AC or CC of old partners + Goodwill

P150,000 + P50,000 = P200,000

Conclusion:
a. AC > CC = there is goodwill
b. New Partner: AC=CC, Goodwill is not from the new partner
c. Old Partners: AC>CC, Goodwill is to be shared according to profit and loss sharing ratio.

Case 3: No bonus, goodwill contributed by new partner.

Con invests P25,000 for a ¼ interest in the new firm capitalization of P200,000.

Step 1 – Create a table like case 1 and 2.

AC CC Goodwill
Old 150,000 -
New 50,000 25,000 -
Total 200,000 175,000 25,000

Step 2: Compare Total AC and CC.

Since AC > CC , there is goodwill.

P200,000 - P175,000 = P25,000

Step 3: Determine who contributes the goodwill.

a. Compute the capital credit of the new partner.
Total AC x fraction of interest
P200,000 x 1/4 = P50,000

b. Compare the new partner’s AC and CC.

AC of P50,000 > CC of P25,000.
In this case, the new partner contributes goodwill.

Step 4: Complete the table.

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 a. Determine capital credit of old partners.
Total AC x ¾ = P200,000 x ¾ = P150,000

b. For old partners, AC = CC, therefore they did not contribute goodwill.

Conclusion:
a. AC > CC, therefore there is goodwill.
b. New partner Con has AC > CC, therefore she contributes goodwill. The amount of
goodwill increases her capital so it is ¼ of AC.
c. Old partners, Lhod and Alice’s AC = CC, therefore they do not contribute goodwill.

Entry to record Con’s investment to the partnership:

Cash 25,000
Goodwill 25,000
Con, Capital 50,000

NOTE: If you have mastered the technique of preparing the table, Steps 1, 2 and 3 are sufficient
to reach a conclusion without reaching Step 4 which is more of a mental process.

Case 4: No goodwill, bonus to old partners.

Con invests P50,000 for a 1/5 interest in a new firm capital of P200,000.

Step 1 – Fill in the table.

AC CC Bonus
Old 150,000
New 50,000
Total 200,000 200,000

Step 2: Compare Total AC and CC.

Since AC=CC, there is no goodwill.

Step 3: Determine if there is a bonus.

a. Compute for the capital credit of the new partner

TOTAL AC X Fraction of interest
P200,000 x 1/5 = P40,000

b. Compare new partner’s AC and CC.

In this case since AC<CC, (P40,000-P50,000). The decrease in the new partner’s capital
becomes the bonus to Con’s old partners.

Step 4: Complete the table by filling in the missing figures.

AC CC Bonus
Old 160,000 150,000 10,000

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 New 40,000 50,000 (10,000)
Total 200,000 200,000 -

a. AC of old partners computed as:

AC x fraction of interest of old partners
P200,000 x 4/5 = P160,000

Or
b. Add CC of old partners + bonus
P150,000 + P10,000

Conclusion:
a. AC=CC, therefore no goodwill.
b. New Partner: AC < CC , therefore she gives the bonus.
c. Old Partners: AC > CC, therefore they receive the bonus. According to their
profit & loss ratio.

Compound entry shall be:

Cash 50,000
Con, Capital 40,000
Lhod, Capital 5,000
Alice, Capital 5,000

Case 5: No goodwill, bonus to new partner.

Con invests P30,000 for a ¼ interest in a total capitalization of P180,000.

Step 1 – Fill in the table.

AC CC Bonus
Old 135,000 150,000 (15,000)
New 45,000** 30,000 15,000
Total 180,000 180,000 -

**Where P45,000 is computed as P180,000 x ¼ or P180,000/4.

• Completing the table based on the given data, the total AC = total CC. Therefore, there is no
goodwill.
• Comparing the AC vs CC of the new partner, there is a bonus of P15,000 (computed as AC of
P45,000 – CC of P30,000). This amount represents bonus from the old partners.
• We can compute for the AC of the old partners either by using the given data on the table or
compute it to verify as follows:

AC x fraction of interest = P180,000 x ¾ = P135,000

Conclusion:
a. There is no goodwill because Total AC = Total CC.
b. The new partner receives the bonus because her AC>CC.

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 c. The old partners give the bonus based on profit and loss ratio because their AC<CC.

Entry to admit Con:

Cash 30,000
Lhod, Capital 7,500
Alice, Capital 7,500
Con, Capital 45,000

Case 6: Goodwill and bonus to old partners.

Con invests P40,000 for a 1/8 interest in an agreed capital of P200,000.

Step 1 – Fill in the table.

AC CC Bonus
Old 175,000 150,000 25,000
New 25,000** 40,000 (15,000)
Total 200,000 190,000 10,000

**Where P25,000 is computed as P200,000 x 1/8 or P200,000/8.

• Completing the table based on the given data, the total AC > total CC. Therefore, we have
goodwill of P10,000.
• Comparing the AC vs CC of the new partner, the difference of P15,000 is the amount
representing bonus due to the old partners.
• We can compute for the AC of the old partners either by using the given data on the table or
compute it to verify as follows:

AC x fraction of interest = P200,000 x 7/8 = P175,000

Conclusion:
a. Total AC > total CC, therefore, there is goodwill.
b. New partner AC < CC, she gives the bonus.
c. Old partners, AC > CC, they contribute the goodwill and receive the bonus.

Entry to admit Con:

Cash 30,000
Goodwill 10,000
Lhod, Capital 12,500**
Alice, Capital 12,500
Con, Capital 25,000

**Computed as share in goodwill P5,000 + share in bonus P7,500 = P12,500

Case 7: Goodwill and bonus to new partner.

Con invests P45,000 for a 3/8 interest in the new firm capital of P200,000.

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Step 1 – Fill in the table.

AC CC Bonus Goodwill
Old 125,000 150,000 (25,000)
New 75,000** 45,000 25,000 5,000
Total 200,000 195,000 5,000 5,000

**Where P75,000 is computed as P200,000 x 3/8.

• Compare total AC and total CC. In this case, AC > CC, therefore there is goodwill of P5,000
• Determine if there is bonus. Compare capital credit of new partner.
AC > CC, the difference in her contributed capital represents the goodwill she contributes
and the bonus from old partners.
• Complete the table by computing the agreed capital portion for old partners.

AC x fraction of interest = P200,000 x 5/8 = P125,000

Entry to admit Con:

Cash 45,000
Goodwill 5,000
Lhod, Capital 12,500
Alice, Capital 12,500
Con, Capital 75,000

Conclusion:
a. Total AC > Total CC, therefore, there is goodwill.
b. New partner: AC > CC, therefore, she contributes the goodwill and receives the bonus
c. Old partners: AC < CC, therefore they give the bonus to the new partner shared
according to profit and loss ratio.

Case 8: Goodwill to all partners.

Con invests P50,000 for a ¼ interest in the agreed capital of P250,000.

AC CC Bonus Goodwill
Old 187,500 150,000 37,500
New 62,500** 50,000 12,500
Total 250,000 200,000 50,000

**Where P62,500 is computed as P250,000 x 1/4.

• Compare total AC and total CC. In this case, AC > CC, therefore there is goodwill of
P50,000.
• Complete the table by computing the agreed capital portion for old partners.
AC x fraction of interest = P250,000 x 3/4 = P187,500
• Determine if there is bonus. Compare capital credit of new partner.

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 AC > CC, the difference in her contributed capital represents the goodwill she contributes
and the bonus from old partners.

Entry to admit Con:

Cash 50,000
Goodwill 50,000
Con, Capital 62,500
Lhod, Capital 18,750
Alice, Capital 18,750

Conclusion:
a. Total AC > Total CC, therefore there is goodwill.
b. New Partner’s AC > CC, therefore she receives part of the goodwill.
c. Old partners’ AC > CC, therefore they also get part of the goodwill. The entry, however
remains the same.

AGREED CAPITAL IS NOT GIVEN

There are cases when the contributions and the fraction of interest of the new partner are given,
but the agreed capitalization of the new firm is not specified. When such a situation exists, the
admission of the new partner is recorded using any of these methods:
1. Goodwill method
2. Bonus method
3. Asset valuation method

Goodwill Method
Under this method, an intangible asset, goodwill must be recognized which may be contributed
by the new and/or the old partners. If it is contributed by the new partner, it will be credited to
the new partner’s capital account. If goodwill is contributed by the old partners, it shall be
credited to the old partners’ capital accounts according to their profit and loss ratio.

The agreed capitalization is computed under the goodwill method by getting the higher of the
following amounts:
AC = New partner’s CC/fraction of interest
AC = Old partners’ CC/ fraction of interest

Bonus Method
Under this method, the agreed capitalization of the new partnership is equal to the total amount
of contribution of all the partners, both old and new. NO GOODWILL IS TO BE RECOGNIZED,
but there will be a TRANSFER OF CAPITAL CALLED BONUS.
• Bonus to the new partner is given by the old partner.
• Bonus to the old partners comes from the new partner.

Asset Revaluation Method

An asset revaluation is made to properly value the assets of the partnership prior to admission of
a new partner. An asset valuation will result to either an increase o decrease in the recorded
amount of the partnership assets and partners’ capital. An asset revaluation increase (positive

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asset revaluation) indicates that some partnership assets are undervalued. On the other hanh,
an asset revaluation decrease (negative asset revaluation) indicates that some partnership
assets are overvalued.

Under this method, the agreed capitalization of the new partnership is LESS THAN the total
amount of contribution of both the old and new partners. Revaluation of assets is necessary
before the admission of a new partner because some partnership assets may not be properly
valued.
Illustrative Problem C:
Con invests P40,000 for a ¼ interest in the partnership. The capital contributions of Lhod and
Alice are P100,000 and P50,000, respectively. They share profits and losses in the ratio of 2:1.
After the admission of Con, profits and losses will be divided equally.

1. Goodwill Method

Partners AC CC Goodwill
Old (3/4) 150,000 150,000 -
New (1/4) 50,000** 40,000 10,000
Total 200,000 190,000 10,000

**Computed as 150,000 ÷ ¾ = P200,000 x ¼ = P50,000

Choose the higher between AC of new partner and AC of old partners.

• AC of new partner: 40,000 ÷1/4 = P160,000
• AC of old partners: 150,000 ÷3/4 = P200,000

AC based on P200,000:
• AC of New Partner: P200,000 x ¼ = P50,000
• AC of Old Partners: P200,000 x ¾ = P150,000

Since AC > CC for new partner, the new Partner contributed goodwill.

Entry:

Cash 40,000
Goodwill 10,000
Con, Capital 50,000

2. Bonus Method

Partners AC CC Goodwill
Old (3/4) 142,500 150,000 (7,500)
New (1/4) 47,500** 40,000 7,500
Total 190,000 190,000 10,000

**Computed at 142,500 ÷ ¾ = 190,000 x 1/4

AC of New Partner: 190,000 X ¼ = 47,500

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AC of Old Partners: 190,000 X ¾ = 142,500

Since AC > CC for new partner, the new partner receives bonus from the old partners.

Entry:

Cash 40,000
Lhod, Capital 5,000
Alice, Capital 2,500
Con, Capital 47,500

3. Asset Valuation Method

Partners AC CC Goodwill
Old (3/4) 120,000 150,000 (30,000)
New (1/4) 40,000 40,000
Total 160,000 190,000 (30,000)

AC of New Partner: 40,000 ÷ 1/4 = 160,000

AC of Old Partner: 160,000 x ¾ = 120,000

Entry:

Lhod, Capital 20,000

Alice, Capital 10,000
Other Asset (Goodwill) 30,000

Cash 40,000
Con, Capital 40,000

COMPARIONS OF BONUS AND GOODWILL METHODS

In the previous Illustrative Problem C, Con is given a ¼ interest in the partnership and a 1/3
share of profits upon admission. Both the bonus and the goodwill methods may be used in
determining the required interest for the new partner, but the two methods may not offer the
same results.

Using the same assumptions in Illustrative Problem C, the comparison may be illustrated as
follows:

Goodwill CC Lhod, Capital

Balances under the bonus method 190,000 95,000 A
(computed as 100k –
5k)

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 Balances under the goodwill method 10,000 190,000 100,000 B
Share in the amortization of goodwill (10,000) (3,333) C
(equally) (computed as
10,000/3)
Balances after amortization of goodwill 190,000 96,667 D [B-C]
Net advantage (disadvantage) of using
the goodwill method 1,667 A-D

AGREED CAPITAL NOT GIVEN, BUT BASIS FOR COMPUTATION IS INDICATED IN TERMS
OF ADMISSION
Con invests P25,000 in the firm and is credited for P30,000 which is to be 1/6 of the new firm
capital.

The agreed capital is not given, but the basis for its computation is in the Problem already. The
new partner will be credited P30,000 for 1/6 of the new firm capital. Thus 1/6 equals P180,000
(computed as P30,000÷1/6). Since the new Partner’s AC>CC, she contributes the goodwill.

Partners AC CC Goodwill
Old (3/4) 150,000 150,000 -
New (1/4) 30,000 25,000 5,000
Total 180,000 175,000 5,000

Entry for the admission of Con:

Cash 25,000
Goodwill 5,000
Con, Capital 30,000

THE AMOUNT OF CONRIBUTION OF THE NEW PARTNER IS NOT GIVEN

Con invests sufficient cash for 1/3 interest.

To arrive at the amount to be contributed by the new partner, the new firm capital (AC) is
computed by dividing the old partners’ contributions by their fraction of interest:
P150,000 /2/3 = P225,000

The investment of the new partner is computed by multiplying the AC by her fraction of interest:
P225,000 x 1/3 = P75,000

Con has to invest P75,000 to the firm for 1/3 of its interest.

Entry for the admission of Con:

Cash 75,000
Con, Capital 75,000

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THE FRACTION OF INTEREST IS NOT GIVEN.
Con invests P50,000 in the firm. However, prior to her admission, goodwill of P5,000 is to be
recorded in the books of the partnership.

The entries to record goodwill and admission of a new partner are:

Goodwill 5,000
Lhod, Capital 2,500
Alice, Capital 2,500

Cash 50,000
Con, Capital 50,000

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