ADVANCED FINANCIAL ACCOUNTING

AND REPORTING
G.P. COSTA

ACCOUNTING FOR DISSOLUTION (Changes in Membership) OF A PARTNERSH

Partnership Dissolution refers to the legal termination of a former partnership and creation of a new partnership as a result of
factors that change the membership in the firm. Dissolution does not require termination of the business. Dissolution means that
the partnership’s books are brought up to date through any necessary adjusting entries. Changes in the membership of a
partnership occur with the addition (admission) of new partners or the retirement (withdrawal) of present partners.

ACCOUNTING FOR ADMISSION

New partners are often a primary source of additional capital or needed business expertise. The legal structure of a partnership
requires that the admission of a new partner be subject to the unanimous approval of the present partners.

A new partner may be admitted by:

1. By acquiring part of an existing partner’s interest directly in a private transaction with the selling partner or

2. By investing capital directly in the partnership.

The purchase of an existing partner’s ownership by a new partner is a personal transaction that involves the existing partner and
the new partner without otherwise affecting the records of the partnership. Accounting for this method is very straightforward.
The only changes that are recorded on the partnership’s books occur in the two partners’ capital accounts. The existing
partner’s capital account is debited and, after being created, the new partner’s capital account is credited.

If instead the new partner invests directly into the partnership, the change increases the assets of the partnership as
well as the capital accounts. When the new partner’s investment may be less than his or her capital credit, a bonus to the
new partner may be considered. A bonus to the old partner or partners increases (or credits) their capital balances. The amount
of the increase depends on the income ratio before the new partner’s admission.

ACCOUNTING FOR RETIREMENT OR WITHDRAWAL

A partner of a firm may decide to retire from the firm due to old age, health issues or any other reasons. At the time of the
retirement, the retiring partner is eligible to receive the share of his capital and share to gain on revaluation. In case, the existing
partners decide to allow the retirement of partner from the firm by paying him or her from the funds of the firm, all the assets
and liabilities of the firm are revalued before the retirement of the partner. Any loss or gain arising on revaluation is
distributed among the partners in the profit- sharing ratio as mutually agreed upon.

Settlement is more than Capital Interest = Bonus to the retiring partner

If the Settlement is less than Capital Interest = Bonus to the remaining partner

Problem 1

Capital balances and profit-sharing percentages for the partnership of Eva, Ara, and

Sia on January 1,2018 are as follows:

 Eva (36%) P140,000

Ara (24%) 100,000

Sia (40%) 160,000

On January 2,2018 the partners agree to admit Yza in the partnership for a 25% interest in capital and earnings for her
investment in the partnership of P120,000. Partnership are not to be revalued.

A. The capital balance of Eva, Ara, Sia and Yza, immediately after the admission of Yza would be:
B. What will be new profit and loss ratio for Eva, Ara, Sia, and Yza, if old partners will share profits using the old ratio?

Problem 2

The balance sheet of Daniel and Samuel Partnership at December 31, 2018, appears below:

Assets: P15,000 Liabilities: P35,000

Cash Accounts Payable
Accounts Receivable (net) 45,000 Notes Payable 25,000
Inventories 75,000 Accrued Liabilities 40,000
PPE (net) 225,000 Mortgage Payable 110,000
Daniel, Capital 60,000

Samuel, Capital 90,000

P360,000 P360,000

Determine the capital balances of partners immediately after the admission of Saul under the ff. independent situations:

a. Saul acquired 25% interest in the partnership capital directly from Daniel and Samuel for P50,000. Saul paid P18,750
directly from Daniel and P31,250 directly to Samuel. Total Assets of the partnership after the admission of Saul were
P360,000. How much must be the capital balance of Daniel immediately after the admission of Saul.

b. Assume the same facts as in a except that total assets of the partnership were P410,000 after the admission of Saul. At
January 1,2019, inventories had a fair value of P85,000, while PPE (net) had a fair value of P265,000. Both Daniel
and Samuel decided to revalue the partnership’s assets before the admission of Saul. Determine the capital balance of
Samuel immediately after the admission of Saul

c. Saul acquired a 25% interest in capital by investing P50,000 of cash into the partnership. Total capital of the Daniel-
Samuel-Saul Partnership on January 1, 2019, amounted to P200,000. Determine the capital balance of Saul
immediately after his admission

d. Saul acquired 25% interest in capital by investing P80,000 of cash into the partnership. Total capital of the Daniel-
Samuel-Saul Partnership after Saul’s admission amounted to P320,000. The fair value of the inventories was
P85,000 and the fair value of the PPE (net) was P305,000 on January 1, 2019. Determine the capital balance of
Daniel, Samuel and Saul immediately after Saul’s admission.
Problem 3

MM desires to purchase a one-fourth capital and profit and loss interest in the partnership of EE, GG, DD. The three partners
agree to sell MM a one fourth of their respective capital and profit and loss interest in exchange for a total payment of 40,000.
The capital accounts and the respective percentage interest in profits and losses immediately before the sale to WW are:
 EE, capital (60%) 80,000.00

GG, capital (30%) 40,000.00

DD, capital (10%) 20,000.00

Total 140,000.00

All other assets and liabilities are fairly valued and with no adjustments is to be recorded prior to the acquisition by WW
immediately after MM’s acquisition, what would be the capital balances of EE, GG and DD respectively?

a. 60,000; 30,000; 15,000 c. 77,000; 38,500; 19,500

b. 69,000; 34,500; 16,500 d. 92,000; 46,000; 22,000

Problem 4

The capital accounts of the Sarah and Opel partnership on January 1, 2018 were:

Brown, Capital (75% profit percentage) P 140,000

Shaun, Capital (25% profit percentage) 60,000

Total Capital P 200,000

On October 1, Leah was admitted for a 40% interest in the partnership when she purchased 40% of each existing partner’s
capital for P100,000, paid directly to Brown and Shaun. The partnership’s net income for the year is P82,500 and 2/3 of it was
earned in the last quarter of the year.

1. What are the capital balances of Brown, Shaun and Leah after Leah’s admission to the partnership?

A. P105,000; P45,000; P100,000

B. P135,875; P55,313; P127,500

C. P96,375; P40,125; P91,000

D. P112,500; P50,000; P87,500

2. How from the above transaction? much will Brown receive

A. P71,000
B. P92,500
C. P86,250
D. P118,750

3. Assume Leah is admitted by investing the P100,000 into the partnership for a 40% interest, how much is the ending
capital balance of Shaun after admission and the bonus (given)/received to/from Leah?
A. P68,750; (P6,250)
B. P79,063; (P13,125)
C. P89,063; P5,313
D. P59,125;(P7,750)
 Problem 5

A partnership had the following condensed balance sheet:

Assets Liabilities and Capital

Cash 2,500.00 Liabilities 7,500.00

Noncash Assets 32,500.00 XX Capital (80%) 20,000.00

XX Loan 2,500.00 YY Capital (20%) 10,000.00

Total 37,500.00 37,500.00

The percentages in parentheses after the partner's capital balances represent their respective interests in profits and losses. The
partners agree admit ZZ as a member of the firm.

ZZ purchases a ¼ interest in the firm. One fourth of each partner's capital is to be transferred to the new partner. ZZ pays the
partners which is divided between them in proportion to the equities given up. The capital balances of XX, YY, and ZZ after
should be:

XX YY ZZ

a. 15,000 7,500 9,375

b. 12,500 12,500 12,500

c. 15,000 7,500 7,500

d. 1,000 10,000 10,000

Problem 6

DD, EE and FF are partners sharing profits and losses of 50%, 30% and 20% respectively. The December 31, 2019 balance
sheet of the partnership before any profit allocation was summarized as follows:

ASSETS LIABILITES AND CAPITAL

Cash 60,000.00 Accounts Payable 4,000.00
Inventories 40,000.00 FF, loan 3,000.00
Furn. & Fixt (net) 50,000.00 DD, capital 70,000.00
Patent 15,000.00 EE, capital 60,000.00
FF, capital 30,000.00

FF, drawings (2,000.00)

Total Assets 165,000.00 Total Liabilities and Capital 165,000.00

The partnership net income for the year amounted to 30,000. On January 1, 2020, FF has decided to retire from the partnership
and by mutual agreement among partners; the following have been arrived at:

A. Inventories amounting to 5,000 is considered obsolete and must be written off

B. Furniture and fixtures should be adjusted to their current value of 65,000

C. Patents are considered worthless and must be written off immediately before the retirement of FF

It was agreed that the partners will pay FF for his interest in the partnership inclusive of loan balance

1. The interest of FF immediately before his retirement amounted to:

A. 37,000
B. 36,000
C. 35,000
D. 24,000

2. FF retires by receiving 36,000 cash payment at book value, the capital balances of DD and EE after the
retirement of FF:
A. DD, 82,500; EE, 67,500
B. DD, 85,000; EE, 69,000
C. DD, 67,500; EE, 58,500
D. DD, 57,500’ EE, 52,500

3. FF retires by receiving 38,000 cash (payment at more than book value), using bonus method, the capital balances of
DD and EE after the retirement of FF:
A. DD, 81,250; EE, 66,750
B. DD, 83,750; EE, 68,250
C. DD, 81,875; EE, 67,125
D. DD, 82,500; EE, 67,500

Problem 7

The balance sheet at December 31, 2018, for the Blue, Green and Yellow partnership is summarized as follows:

Green is retiring from the partnership. The partners agreed that the partnership assets,
Assets, at cost P 375,000 D, Loan P 18,750

Assets P 1,000,000 Liabilities D, Capital (20%) P 250,000 87,500

Loan to Green 125,000 Blue Capital (50%)E, Capital (20%) 375,00081,250

F, Capital (60%) 187,500

Green Capital (40%) 375,000

Total P 375,000

Yellow Capital (10%) 125,000

Total P 1,125,000 Total P 1,1125,000

excluding Green’s loan, should be adjusted to their fair market value of P1,250,000 and that Green should receive P380,000
for her capital balance net of the P125,000 loan.

How much is the capital balance of Blue and Yellow immediately after Green’s retirement.

A. P475,000; P145,000
B. P500,000; P150,000
C. P481,250; P146,250
D. P385,416; P127,084

Problem 8

On January 2, 2018, Dima and Salang dissolve their partnership and transfer all assets and liabilities to a newly formed
corporation. At the date of incorporation, the fair value of the net assets was P22,500 more than the carrying amount on the
partnership’s books. Of which P12,500 was assigned to tangible assets and P10,000 was assigned to patent. Dima and Salang
were each issued 5,000 shares of the corporations P12.50 par common stock.

Immediately following incorporation, additional paid-in capital in excess of par should be credited for

A. P160,000
B. P47,500
C. P25,000
D. P137,500
Problem 9

On June 30, 2017, the balance sheet for the partnership of D, E and F, together with their respective profit and loss ratios, is
summarized as follows:

D has decided to retire from the partnership, and by mutual agreement the assets are to be adjusted to their fair value of
P450,000 at June 30, 2018. It is agreed that the partnership will pay D P127,500 cash for his partnership interest exclusive of
his loan, which is to be repaid in full.

After D’s retirement, what are the capital account balances of partners E and F, respectively?

A. P81,250 and P187,500

B. P90,000 and P213,750
C. P121,250 and P307,500
D. P96,250 and P232,500