PARTNERSHIP DISSOLUTION

PARTNERSHIP DISSOLUTIONS:

Any circumstance which causes the technical termination of a partnership may lead to the partnership’s permanent
dissolution and liquidation. Partnership dissolution is not synonymous with Partnership Liquidation. Dissolution is
due to changes in ownership such as following:

A. Admission of a New Partner

A new partner may be admitted to the partnership by purchasing the interest of one or more of the
existing partners or by contributing cash or other assets. (i.e Investment of additional capital)

1. Purchase of Interest – when a new partner enters the partnership by purchasing the interest of an
existing partner, the price paid for the interest is irrelevant to the partnership accounting records
because it is a private and personal transaction between individuals. The assets and liabilities of the
partnership are not affected. The capital accounts are merely reclassified from the old partner to the
new partner.

2. Admission by Investment of Additional Assets – a new partner may be granted an interest in the
partnership in exchange for contributed assets. The admission by investment may be recorded using
bonus or revaluation method.

• Bonus to old partner

• Bonus to new partner/s
• Adjustment to capital account

B. Withdrawal of a partner (Retirement or Death of a partner)

Admission of new partner is not the only manner by which a partnership can undergo a change in
composition. Over the life of the partnership, partners may leave the organization due to circumstances.
For a partner to withdraw or retire from partnership, the total interest of a partner should be properly
determined.

Admission of a New Partner:

1. By purchase – credit new partner’s capital by amount of interest acquired (not by cash paid). If revalued
asset is to be recognized, use this computation:
Cash paid xxx
Less: Interest acquired (xxx)
Equal: Difference Xxx
Divide by: percentage of interest acquired %
Equal: Revalued asset Xxx

2. By investment – to determine the amount of goodwill or bonus to be recognized and who should recognize
this, use the format given below:
Contributed capital Bonus/Revalued Asset Agreed Capital
Old partners Xxx Xxx Xxx
New partners Xxx Xxx Xxx
Total Xxx Xxx Xxx

Partner’s Interest Different From P&L Sharing Ratio

Bonus Method:
Capital credit to new partner ( interest rate x agreed capital) xxx A
Revaluation Method:
Capital credit to new partner (equal to his capital contribution) xxx
Less: share on the impairment loss ( P&L rate x capital credit) (xxx) xxx B
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 Difference: (A - B) + /-

+ Advantage of bonus method over revaluation method

- Advantage of revaluation method over bonus method

The table below summarizes the above formula:

Case
1 Bonus method advantageous Amount of advantage
Partner's interest in the net assets < Partner's P&L ratio Difference x Revalued asset

2 Revaluation method advantageous Amount of advantage

Partner's interest in the net assets > Partner's P&L ratio Difference x Revalued asset

3 Neither bonus nor revaluation advantageous (general rule)

Partner's interest in the net assets = Partner's P&L ratio

Withdrawal of a Partner

1. If payment given to retiring partner is less than his interest, credit remaining partners’ capital proportionately.
• Bonus Method (IF SILENT)
o The difference will be credited to remaining partners’ capital proportionately
A Capital xxx
Cash xxx
B Capital xxx
C Capital xxx

• Revaluation method (Asset write-down)

o The difference represents the share of the retiring partner in the asset write-down. (The
problem usually identifies the asset to be written down, i.e. PPE, Goodwill)
A Capital xxx
B Capital xxx
C Capital xxx
Cash xxx
Land/Accumulated depreciation xxx

2. If payment is more than the interest of the retiring partner:

• Bonus method – debit remaining partners’ capital, proportionately.
• Revaluation (partial) – debit goodwill for the excess.
• Revaluation (total) – use this computation:
Cash payment to partner xxx
Less: Partner’s capital (xxx)
Equal: Excess xxx
Divided by: Retiring partner’s P’L ratio %
Equal: Revaluation Asset xxx

Incorporation of a Partnership

• The incorporation of a partnership results in the formation of a new accounting (and legal) entity. This
means that the partnership must adjust its records up to the date of incorporation.
• First, the partnership closes its books and recognizes any income or loss up to the date of incorporation.
• Second, the books of the partnership are adjusted to reflect the fair market value of the partnership
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 assets and the present value of partnership liabilities. A corresponding adjustment is made to the capital
accounts in accordance with the partners’ P&L ratio.
• Third, common stock is distributed to the partners in accordance with the amounts in their capital
accounts. Note that the entries to record the receipt of stock by the corporation are different depending
upon whether the corporation retains the partnership books or establishes new books. Retention of the
partnership books means that the issuance of common stock results in the closing of the partners’ capital
accounts with credits going to common stock and additional paid-in capital.
• Establishing new books means that the assets and liabilities are closed out and the difference between
their net value and the value of the corporate stock is debited to an asset “capital stock from corporation.”
This account is then credited and the partners’ capital accounts debited to record the distribution of stock.

PROBLEMS

Problem 1: (Admission of new partner by investment) (Admission of new partner by purchase)

Red, White, and Blue are partners with a profit and loss ratio of 2:4:4 and credit capital balances of P60,000,
P80,000, and P60,000, respectively. Green is to be admitted into the partnership with an investment of P75,000 for
a 25 percent interest in the capital, profit, and losses of the firm.

Required:

a. Prepare journal entries to record the admission of Green, using:

1. Revaluation of asset
2. Bonus approach

b. Prepare journal entries to record the admission of Green if, instead of investing into the partnership, he
purchases his interest from the partners at the same P75,000, and:
1. Revalued asset is to be recorded
2. Bonus method is used

(a) 1. Revaluation of Assets:

Total agreed capital (P75,000  25%) ................................... . P300,000
Total contributed capital........................................................ . _275,000
Upward revaluation of assets, P/L ratio ................................ . P 25,000

Entry
Assets ................................................................................ 25,000
Cash .................................................................................. 75,000
Red, capital ................................................................... 5,000
White, capital ................................................................ 10,000
Blue, capital .................................................................. 10,000
Green, capital ............................................................... 75,000

2. Bonus Method:
Contributed capital of Green ................................................. .. P 75,000
Agreed capital of Green (P275,000 x 25%) .......................... ... _68,750
Bonus to old partners, P/L ratio ............................................ .. P 6,250

Entry:
Cash .................................................................................. 75,000
Green, capital ............................................................... 68,750
Red, capital ................................................................... 1,250
White, capital ................................................................ 2,500
Blue, capital .................................................................. 2,500

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(b) 1. Revaluation Method:
Total Implied Capital (P75,000  25) ................................... . P300,000
Total existing capital ............................................................. . _200,000
Revalued asset to old partners ................................................ . P100,000

Entries:
Asset (Revalued) ............................................................... 100,000
Red, capital ................................................................... 20,000
White, capital ................................................................ 40,000
Blue, capital .................................................................. 40,000

Red, capital (25% x P80,000) ........................................... 20,000

White, capital (25% x p120,000) ...................................... 30,000
Blue, capital (25% x P100,000) ........................................ 25,000
Green, capital ............................................................... 75,000

2. Red, capital (25% x P10,000) ...................................................... 15,000

White, capital (25% x P80,000) ................................................... 20,000
Blue, capital (25% x P60,000) ..................................................... 15,000
Green, capital........................................................................ 50,000

Problem 2: (Admission by Purchase of Interest)

Assume that after operations and partners’ withdrawals during 20x2 and 20x3. DE Partnership has a book value of
P120,000 and profit and loss (P&L) percentage on January 1, 20x4 as follows:
D Capital (70%) P72,000
F Capital (30%) 48,000

On this date, G is admitted to the partnership.

Required:

1. Prepare journal entries to record the admission of F, assuming:

a. Purchase of interest from one partner. F paid P28,800 directly to D in exchange for one-third (1/3) interest.
b. Purchase of interest from all partners. This situation gives rise to three assumptions:

b.1 Purchase at book value. F purchase a one-fourth (1/4) interest in the firm. One-fourth of each partner’s
capital is to be transferred to the new partner. F pays the partner’s P30,000.

b.2 Purchase at more than book value. F purchased one-fourth of D’s interest for P21,600 and one-fourth of F’s
interest for P14,400, making payment directly to D and E. The new partner will have a ¼ profit and loss ratio and
the old partners continue to use their old profit and loss ratio.
b.2.1. Book value (BV) approach
b.2.2 Revaluation (goodwill) approach.

b.3. Purchase at less than book value. F purchased one-fourth of D’s interest by paying P26,400 directly to D and
E. The new partner will have a ¼ profit and loss ratio and the old partners continue to use their old profit and loss
ratio.
b.3.1. Book value (BV) approach
b.3.2 Revaluation (goodwill) approach.

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1.
a. D, capital…………………………………………………………… 24,000
F, capital…………………………………………………......... 24,000

b.1.
D, capital (P72,000 x ¼)………………………………………… 18,000
E, capital (P48,000 x ¼)………………………………………… 12,000
F, capital…………………………………………………. 30,000

The capital balances of the partners after the admission of F would be as follows:

D E F (book value) Total_

Capital before admission…P 72,000 P 48,000 P120,000
x: Interest remained……….. ¾ ¾ ________
Capital after admission….. P54,000 P 36,000 P 30,000 P120,000

Therefore, the profit and loss ratio of the partners after the admission of F would be as follows:

D, capital (70% x ¾)……………………………………………… 52.50%

E, capital (30% x ¾)………………………………………………. 22.50%
F, capital (equivalent to interest acquired)…………………. 25.00%
Total…………………………………………………………………. 100.00%

b.2
b.2.1
D, capital (P72,000 x ¼)………………………………………… 18,000
E, capital (P48,000 x ¼)………………………………………… 12,000
F, capital…………………………………………………. 30,000

The positive excess of P6,000 represents a personal gain of D and E, computed as follows:
Amount paid (P21,600 + P14,400)…………………………………. P 36,000
Less: BV of interest acquired –
(P 120,000 x ¼)…………………………….................................. 30,000
Excess (Gain of D and E – personal in nature)….……………….. P 6,000

The partnership does not record this gain because it was not benefited from it.

b.2.2
Assets (Goodwill)……………………………………………….. 24,000
D, capital (P24,000 x 70%).……………………………........ 16,800
E, capital (P24,000 x 30%).……………………………......... 7,200
Or,
Amount paid (P21,600 + P14,400)…………….. P36,000 / ¼ P144,000 (100%)
Less: BV of interest acquired –
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 (P 120,000 x ¼)……………………………..... 30,000 120,000 (100%)
Excess……………………………………………….... P 6,000
Divided by (capitalized at): Interest acquired ¼
Revaluation of Asset Upward………………….. P24,000 P 24,000 (100%)

D, capital [(P72,000 + P16,800) x ¼]………………………… 22,200

E, capital [(P48,000 + P7,200) x ¼]…………………………… 13,800
F, capital…………………………………………………...... 36,000

The capital balances of the partners after the admission of F would be as follows:

D E F (amount paid) Total_

Capital before admission… P 72,000 P 48,000 P 120,000
Revaluation upward………. 16,800 7,200 24,000
Capital balance after
revaluation………………. P 88,800 P 55,200 P144,000
x: Interest remained……….. ¾ ¾ ________
Capital after admission….. P66,600 P 41,400 P 36,000 P144,000

Capital interest %..............25

P & L %: D (3/4 x 70%)…… 52.50
E (3/4 x 30%)…… 22.50
F (1/4)…………… 25

It should be observed that the total capital balance after the admission increases equivalent to
the revaluation of assets amounting to P24,000. The reason of such adjustments is to equalize
the capital of the new partner to the amount paid.

b.3
b.3.1
D, capital (P72,000 x ¼)………………………………………… 18,000
E, capital (P48,000 x ¼)………………………………………… 12,000
F, capital…………………………………………………. 30,000

The negative excess of P3,600 represents a personal loss of D and E, computed as follows:

Amount paid ……………………….…………………………………. P 26,400

Less: BV of interest acquired –
(P 120,000 x ¼)……………………………............................... 30,000
Excess (Loss of D and E – personal in nature)….………………… P( 3,600)

b.3.2
The entry to record the transaction in the books follows:
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 D, capital (P14,400 x 70%).…………………………………….. 10,080
E, capital (P14,400 x 30%).……………………………………... 4,320
Assets ……………………………………………………........ 14,400
Or,
Amount paid ………………………….………….. P 26,400 / ¼ P 105,600 (100%)
Less: BV of interest acquired –
(P 120,000 x ¼)……………………………..... 30,000 . 120,000 (100%)
Excess………………………………………………. . P( 3,600)
Divided by: Interest acquired………………….. ¼
Revaluation of Asset Downward..…………….. P(14,400) P(14,400) (100%)

D, capital [(P72,000 – P10,080) x ¼]………………………. 15,480

E, capital [(P48,000 – P4,320) x ¼]………………………….. 10,920
F, capital…………………………………………………... 26,400

The capital balances of the partners after the admission of F would be as follows:

D E F (amount paid) Total_

Capital before admission….P 72,000 P 48,000 P120,000
Revaluation downward…… 10,080 4,320 14,400
Capital balance after
revaluation……………….. P 61,920 P 48,680 P 105,600
x: Interest remained………… ¾ ¾ ________
Capital after admission….. P46,440 P 32,760 P 26,400 P 105,600

Capital interest %.............. 25

P & L %: D (3/4 x 70%)…… 52.50
E (3/4 x 30%)…… 22.50
F (1/4)…………… 25

Comparison between b.3.1 and b.3.2:

Schedule of Account Balances

Net Asset Capital__________

Assets Revaluation = D E F___
Book Value Approach
Balances before admission P 120,000 P 72,000 P 48,000
Admission ( 18,000) (12,000) P 30,000
Balances after admission
of F P 120,000 P -0- P 54,000 P 36,000 P 30,000

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Revaluation Approach
Balances before admission P 120,000 P 72,000 P 48,000
Revaluation P 24,000 16,800 7,200
Admission ( 22,200) (13,800) P 36,000

Balances after admission

of F P 120,000 P 24,000 P 66,600 P 41,400 P 36,000
Depreciation/impairment* ( 24,000) ( 12,600) ( 5,400) ( 6,000)
Totals P 120,000 P -0- P 54,000 P 36,000 P 30,000

*new profit and loss ratio (D, 52.50%; E, 22.50%, and F, 25.00%)

The two methods will yield the same results computed as follows;
Capital__________
D E F___
Balances after admission of F (BV approach) P 54,000 P 36,000 P30,000
Balances after admission of F (Revaluation approach) 54,000 36,000 30,000
Gain or (loss) through use of book value approach P -0- P -0- P -0-

Problem 3: (Admission by Investment)

Bruno and Mario are partners with a profit and loss ratio of 6:2 and credit capital balances of P200,000 and
P300,000, respectively. Tomas is to be admitted into the partnership by investing P140,000 for a 20 percent
interest in the capital, profits and losses.

Required:

a. Prepare a schedule of partners’ capital balances after the admission of Tomas, if:
1. Revalued asset is not to be recorded.
2. Revalued asset is to be recorded.
3. Revalued asset is to be recorded and then written off.

b. Prepare a schedule of partners’ capital balances after the admission of Tomas. Revalued asset is to be
recorded and then written off, but the new profit and loss ratio is 4:4:2 for Bruno, Mario and Tomas
instead of 6:2:2 as in (a)(3) above.

a. (1) Bonus Method:

Contributed capital of Tomas.......................................................... .................. P140,000
Agreed capital of Tomas (P640,000 x 20%) ................................... .................. _128,000
Bonus to old partners, P/L ratio ...................................................... .................. P 12,000
BRUNO MARIO TOMAS TOTAL
Balances before admission..................... P200,000 P300,000 – P500,000
Admission of Tomas .............................. ___9,000 ___3,000 _128,000 _140,000
Balances after admission ....................... P209,000 P303,000 P128,000 P640,000

(2) Revalued Method:

Total agreed capital (P140,000  20%) . .................. ..................... P700,000
Total contributed capital ........................ .................. ..................... _640,000
Revalued asset to old partners, P/L ratio .................. ..................... P 60,000
BRUNO MARIO TOMAS TOTAL
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 Balances before admission ..................... P200,000 P300,000 P – P500,000
Admission of Tomas .............................. __45,000 __15,000 _140,000 _200,000
Balances after admission ....................... P245,000 P315,000 P140,000 P700,000

(3) Revalued asset with subsequent write-off.

BRUNO MARIO TOMAS TOTAL
Balances from A-2 ................................. P245,000 P315,000 P140,000 P700,000
Revalued asset written off, 6:2:2 ........... ( 36,000) ( 12,000) ( 12,000) ( 60,000)
Balances ................................................. P209,000 P303,000 P128,000 P640,000

b. BRUNO MARIO TOMAS TOTAL

Balances from A-2 ................................. P245,000 P315,000 P140,000 P700,000
Revalued written off, 4:4:2 ................... ( 24,000) ( 24,000) ( 12,000) ( 60,000)
Balances ................................................. P221,000 P291,000 P128,000 P640,000

Problem 4:

Rodel and Jerry who share profits and losses in the ratio of 4:6 are partners in a partnership with credit balances of
P60,000 and P80,000, respectively. Barry is to be admitted into the partnership for a 25 percent interest in the
capital of the firm.

Required:

a. Calculate the cash payment by Barry if, after the cash payment is recorded, the capital balances of Rodel
and Jerry are P76,000 and P104,000 and revalued asset was recorded.

b. Calculate the such payment by Barry if after the cash payment is recorded, the capital balances of Rodel
and Jerry are P52,000 and P68,000 and revalued asset was not recorded.

a. Total capital after admission (P76,000 + P104,000) ..................................... .................. P180,000

Total capital before admission (P60,000 + P80,000) .................................... .................. _140,000
Revalued asset recorded ................................................................................ .................. P 40,000

Total capital of the partnership (P180,000  75%) ....................................... .................. P240,000

Less: Total capital of old partners plus Goodwill (P140,000 + 40,000) ....... .................. _180,000
Cash payment by Barry ................................................................................. .................. P 60,000

b. Total capital after admission (P52,000 + P68,000) ....................................... .................. P120,000

Total capital before admission ...................................................................... .................. _140,000
Bonus to Barry .............................................................................................. .................. P 20,000

Agreed capital of Barry (P120,000  75%) x 25% ....................................... .................. P 40,000

Less: Bonus ............................................................................................... .................. __20,000
Cash payment by Barry ................................................................................. .................. P 20,000

Problem 5: (Comparison of Bonus and Revaluation Method – Admission by Investment)

Mason and Norris are partners who have capitals of P6,000 and P4,800 and who share profits in the ratio of 3:2.
Oster is admitted as a partner upon investing cash of P5,000, with profits to be shared equally.

Required:

1. Assume that Oster is allowed a 25% in the firm.

a. What entries would be made in recording the investment if the revaluation method is used?

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 b. What entries would be made if the bonus method is used? Which method will be preferred by
Oster?
c. How much will Oster gain by the use of this method?

2. Assume that Oster is allowed a 40% interest in the firm.

a. What entries would be made in recording the investment if the goodwill method is used?
b. What entries would be made if the bonus method is used?
c. Which method will be preferred by Oster? How much will Oster gain by the use of this method?

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1. (a) Revaluation method:
Cash………………………………………………………… 5,000
Revaluation…………………………………………………4,200
Mason, Capital………………………………………… 2,520
Norris, Capital………………………………………….. 1,680
Oster, Capital………………………………………….. 5,000

Computation of Revaluation:

Total capital after adjustment for Revaluation,

P5,000 / .25…………………………………………….. P20,000
Total capital before adjustment for Revaluation.….. 15,800
Revaluation allowed old partners…………………….. P 4,200

Distribution of Revaluation:
Mason: 3/5 of P4,200………………………………… P 2,250
Norris: 2/5 of P4,200…………………………………….. 1,680
P 4,200
(b)Bonus method:
Cash………………………………………………………… 5,000
Mason, Capital………………………………………… 630
Norris, Capital………………………………………….. 420
Oster, Capital………………………………………….. 3,950
Computation of bonus:
Amount invested by Oster………………………….. P 5,000
Oster’s interest, 25% of P 15,800………………..….... 3,950
Bonus allowed old partners………………………… P 1,050
Distribution of bonus:
Mason: 3/5 of P1,050…………………………………. P 630
Norris: 2/5 of P1,050……………………………….…… 420
P 1,050

(c) The bonus method will be preferred by Oster, who will gain P350. Norris will gain P140,
while Mason will lose P490.

COMPARISON WHEN REVALUATION IS FOUND TO EXIST

Revalued Other Mason Norris Oster

Asset__ Assets Capital Capital Capital
When Revaluation method is used….. P4,200 P15,800 P8,520 P6,480 P5,500
When bonus method is used……… P15,800 P6,630 P5,220 P3,950
Add recognition of Revaluation
(gain distributed in profit and loss
ratio, equally)………………………. P4,200 1,400 1,400 1,400
P4,200 P15,800 P8,030 P6,620 P5,350
Gain (loss) through use of
bonus method………………………. (P 490) P 140 P350

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