Chapter 4 – Partnership

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

CHAPTER 4 ownership structure. The new partnership continues the business activities of the
PARTNERSHIP DISSOLUTION dissolved partnership without interruption.

2. Liquidation. This refers to the termination of the business activities carried on by the
LEARNING OBJECTIVES partnership and the winding up of a partnership affair preparatory to going out of
business.
1. Define partnership dissolution and identify the condition giving rise to it.
2. Understand the accounting procedures to record the admission of a new partner by purchase.
3. Understand the accounting procedures to record the admission of a new partner by investment. Dissolution, therefore, does not always result to liquidation although liquidation is always
preceded by dissolution.
PREVIEW OF THE CHAPTER
CONDITIONS RESULTING TO PARTNERSHIP DISSOLUTION
PARTNERSHIP
The following conditions will result to partnership dissolution by a change in ownership
DISSOLUTION structure:

1. Admission of a new partner

Causes of Dissolution
• Admission of a new
partner
• Retirement of a
partner
• Death, incapacity, or
bankruptcy of a
partner
• Incorporation of a
partnership
Admission by Purchase
• Sale of interest a book value
• Sale of interest at less than
book value
• Sale of interest at more than
book value
2. Retirement or withdrawal of a partner
3. Death, incapacity or bankruptcy of a partner
Admission by
4. Incorporation of a partnership
Investment
• Capital credit equal to Accounting for admission of a new partner is discussed in this chapter. Accounting for
capital contribution retirement, withdrawal, incapacity or bankruptcy and death of a partner is discussed in the next
• Capital credit not equal chapter.
to capital contribution
• Bonus method ADMISSION OF A NEW PARTNER
• Asset revaluation
method 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:

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. Determination of the profit or loss from the beginning of the accounting period to the
date of admission of anew 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 the restatement of the existing assets of the
partnership to appraise or fair market values and recognition of unrecorded liabilities

40 | P a g e
Chapter 4 – Partnership

of the firm. All adjustments to the accounts give rise to profit or loss; such adjustments Illustrative Problem A: Coloma and Claudio are partners with capital balances of P100,000 and
are recorded in the partnership books as increase or decrease in capital shared P50,000, respectively. They share profits and losses equally. Cordero is a new partner
according to partners’ profit.
Case 1a – Purchase at book value from one partner only. Cordero purchases a 1/5 interest
4. Closing of the partnership books. from Coloma by paying P20,000.

TYPES OF ADMISSION OF A NEW PARTNER Coloma, Capital 20,000

Cordero, Capital 20,000
A new partner may be admitted into a partnership by: P100,000 x 1/5 = P20,000

1. Purchase of interest from one or more of the original (old) partners; or The P20,000 paid by the new partner Cordero to the old partner Coloma should not be reflected
2. Investment or asset contributions to the partnership in the partnership books because the said amount goes directly to Coloma. What is recorded in
the partnership books is the transfer of 1/5 of the capital of Coloma to Cordero. The amount paid
ADMISSION BY PURCHASE in the purchase is equal to the book value of the acquired 1/5 interest; hence, the sale of interest
does not give rise to gain or loss to Coloma.
With the consent of all the partners, a new partner may be admitted in an existing partnership
Case 1 b- Purchase at book value from more than one partner. Cordero purchases 1/5
by purchasing a capital equity interest directly from one or more of the old partners. Terms such
interest from the old partners by paying P30,000.
as purchases, sells, pays, bought, sold and transferred indicate admission by purchase.
Coloma, Capital 20,000
The sale to a new partner of an old partner’s interest in an existing partnership is a personal
Claudio, Capital 10,000
transaction between the selling partner and the buying partner. The amount paid by the partner
Cordero, Capital 30,000
who purchases an interest goes personally to the partner who sells his or her interest; the
P100,000 x 1/5 = P20,000
amount paid does not go to the partnership.
P 50,000 x 1/5 = P10,000
The only entry required on the partnership books is the recording of the transfer of capital from
The P30,000 paid by Cordero to Coloma and Claudio should not be reflected in the partnership
the capital account of the selling partner to that of the buying partner. The amount of capital
books because the said amount goes directly to Coloma and Claudio. What is recorded in the
transferred will be equal to the book value of the interest sold regardless of the amount paid. The
partnership books is the transfer of 1/5 of the capital of the old partners Coloma and Claudio
pro-form entry is:
(P20,000 and P10,000, respectively) to the new partner Cordero. The admission of the new
partner, by purchasing a 1/5 interest from the old partners at book value, does not result in a
(Name of seller), Capital xxx
gain or loss to the old partners.
(Name of buyer), Capital xxx
Case 2 – Purchase at less than book value. Cordero purchases 1/5 interest form the old
The purchase price of the interest sold to the new partner may be:
partners by paying P25,000.
1. equal to the book value of interest sols
Coloma, Capital 20,000
2. less than the book value of interest sold
Claudio, Capital 10,000
3. more than the book value of interest sols
Cordero, Capital 30,000
P100,000 x 1/5 = P20,000
The new partner may pay more than or less than the book value of the interest sold by the old
P 50,000 x 1/5 = P10,000
partner resulting in a gai 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
The P25,000 paid by Cordero to Coloma and Claudio should not be reflected in the partnership
in the partnership books.
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,

41 | P a g e
Chapter 4 – Partnership

respectively) to the new partner. The difference of P5,000 is a personal loss of the selling (old) Step 4 - Add the share of each partner on the asset revaluation to their capital balances to get
partners. the capital balance after the asset revaluation.

Case 3 – Purchase at more than book value. Cordero pays P40,000 for a 1/5 interest of the old Step 5 - Compute the amount of interest transferred by the old partners to the new partner
partners. based on their capital after the asset revaluation.
Coloma, Capital 20,000
Claudio, Capital 10,000 Step 6 - Prepare the entry to record the admission of the new partner.
Cordero, Capital 30,000
To illustrate, assume the same data in Illustrative Problem A where Coloma and Claudio are
The P40,000 payment made by Cordero to Coloma and Claudio should not be reflected in the partners with capital balances of P100,000 and P50,000, respectively. The share profits and
partnership books. What is recorded in the books of the partnership is the transfer of 1/5 of the losses equally. Cordero is a new partner who purchases a 1/5 interest from Coloma and Claudio
capital of the old partners to the new partner. The P10,000 excess payment is a personal gain of paying P40,000. However, before the admission of Cordero, partnership assets are to be revalued
Coloma and Claudio. using as basis the amount to be paid by Cordero.

Key Points. In the preceding four cases, 1a, 1b, 2 and 3, the transfer of capital from the old Solution:
partners to the new partner is recorded at book value regardless of the amount paid. Payments
at less than book value and at more than book value are recorded as if they were made at book Step 1 - The new partnership capital is equal to the amount paid by the incoming partner
value. divided by his fraction of interest.
New partnership capital = P40,000 ÷ 1/5 = P200,000
In addition, the four cases shows that the total partnership capital v=before and after the
admission of the new partner are the same Thus, the total partnership capital of P150,000 before Step 2 - The amount of asset revaluation is equal to the new partnership capital less old
the admission of Cordero is also the total partnership capital after his admission. Therefore, the partnership capital.
admission of a new partner by purchase will not affect the total assets and the total capital of the Asset revaluation = P200,000 - P150,000 = P50,000
partnership.
Step 3 - The allocation of the amount of the asset revaluation among the old partners is
ASSET REVALUATION UPON ADMISSION OF A NEW PARTNER BY as follows: P50,000 /2 = P25,000 per partner.
PURCHASE
Step 4 - The capital balances of the old partners after asset revaluation is equal to their old
capital balances plus their share on asset revaluation.
Revaluation of assets of the old partnership, however, is generally undertaken prior to the
admission of a new partner. The effect of the asset revaluation is carried to the capital accounts
Coloma Claudio
of the old partners. The adjusted capital of the old partners becomes the basis for the interest
Capital balances before revaluation P100,000 P50,000
transferred to the new partner.
Share on asset revaluation 25,000 25,000
Capital balances after revaluation P125,000 P 75,000
The procedures under this approach are as follows:
Step 5 - The amount of interest transferred by the old partners to the new partner based on the
Step 1 - Compute the new partnership capital using as basis the amount to be paid by the
new capital balances (capital balances alter asset revaluation)
incoming partner and his fraction of interest.
Coloma Claudio
Capital balances after revaluation P125,000 P75,000
Step 2 - Deduct the capital of the old partnership from the capital of the new partnership. The
Interest transferred 1/5 1/5
difference is the asset revaluation.
Capital transferred to Cordero P 25,000 P15,000
Step 3 - Allocate the asset revaluation among the old partners in accordance with their residual
profit and loss sharing agreement.

42 | P a g e
Chapter 4 – Partnership

STEP 6 - The journal entries to record the evaluation of asset and the admission of Cordero are Using the information in the example given, the total contributed capital is P400,000, the sum of
as follows: the old partner’s contribution of P300,000 and the new partner’s contribution of P100,000.
Other Assets 50,000
Coloma, Capital 25,000 Bonus – it is the transfer of capital from one partner to another. A bonus to the old partners is
Claudio, Capital 25,000 given by the new partner. It is a reduction in the capital of the new partner and an increase in the
Coloma, Capital 25,000 capital of the old partners. The capital accounts of the old partners are credited according to their
Claudio, Capital 15,000 profit and loss ratio. A bonus to the new partner is given by the old partners. It is a reduction in
Cordero, Capital 40,000 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
ADMISSION BY INVESTMENT according to their profit and loss ratio.

The admission of a new partner by investment is a transaction between the original partnership
and the new partner. The use f 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 the new partner depends
upon the capital interest credited to the partners’ accounts.
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.

DEFINITION OF TERMS 2. Compare the capital credit with the investment of the new partner.

a. If the capital credit is more than the investment of the new partner, the difference
Agreed Capital (AC) – it is the amount of new capital set by the partners for the partnership. It
is bonus to the new partner.
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
b. If the capital credit is less than the investment of the new partner, the difference is
admission of a new partner may indicate the agreed capital. If agreed capital is not indicated, it
bonus to the old partners.
can be computed in either of two ways:
Asset Revaluation - necessary adjustment in asset values upon admission of a new partner. The
1. Investment of the new partner divided by the new partner’s fraction of interest; or
adjustment in assets may be determined as the difference between the agreed capital and the
2. Investment of the old partners (equal to the net assets or capital of the partnership)
total contributed capital. Generally, asset revaluations upon partnership formation relate only to
divided by the old partners' fraction of interest.
the partners of the old partnership.
Example: Corpus and Carlos are partners with capital balances of P150,000 each. Cabral invests
Capital Credit - it is the interest or equity of a partner in the firm. It is computed by multiplying
P100,000 for a 2/5 interest in the new partnership. The agreed capital of the new partnership is
agreed capital by the fraction of interest of a partner
determined as follows:

Computation 1 - The new partner’s investment used as a basis PROBLEMS RELATING TO ADMISSION OF A NEW PARTNER BY
P100,000 ÷ 2/5 = P250,000 INVESTMENT
Computation 2 - The old partners' investment used as a basis Situations relating to admission of a new partner by investment may fall under any of the
P300,000 ÷ 3/5 = P500,000 following:

Total Contributed Capital (CC) - it is the investment of all the partners, both old and new, to the 1. Agreed capital is given. When agreed capital is given, the admission of a new partner by
partnership. It is the sum of the capital balance of the old partners (net asset investment) and the investment will give rise to any of the following cases:
contribution of the new partner. a. No Bonus, no Asset Revaluation
b. Bonus to old partners, no Asset Revaluation
c. Bonus to new partner, no Asset Revaluation
43 | P a g e
Chapter 4 – Partnership

d. Asset Revaluation, no Bonus Step 3 Determine if there is bonus.

a. Compute for the capital credit of the new partner
2. Agreed capital is not given. When agreed capital is not given, the problem calls for two AC x fraction of interest, P400,000 x 1/4 = P100,000
alternative solutions: b. Write this amount in the AC column of the new partner.
a. Bonus method c. Compare the new partner's AC with his CC. In this case, AC and CC are the same,
b. Asset revaluation method therefore, there is no bonus.

3. Agreed capital is not given but the basis for its computation is indicated in the terms of Step 4 The above table will be completed as follows:
admission.
a. AC or capital credit of the old partners
4. The amount of contribution of the new partner is not given. AC x fraction of interest (4/4 - ¼ = ¾ )
P400,000 x ¾ = P300,000
5. No fraction of interest for either the new or old partners is given.
b. A completed table appears as follows:
The following are the illustrations of the various problems involving admission of a new partner AC CC
by investment. Old P 300,000 P 300,000
New 100,000 100,000
AGREED CAPITAL IS GIVEN P 400,000 P 400,000

Illustrative Problem B: Calmer and Castro are partners with capital balances of P200,000 and c. Conclusion based on the table
P100,000, respectively. They share profits and losses equally Conde is to be admitted in the (i) AC = CC, therefore, there is no asset revaluation
partnership. (ii) New partner: AC = CC, therefore, there is no bonus
(iii) Old partners: AC = CC, therefore, there is no bonus either
Case 1 – No Bonus, no Asset Revaluation. Conde invests P100,000 for a ¼ interest in the agreed
capital of P400,000. In actual problem solving, only one table is prepared. The missing items are filled a they are
needed.
Cash 100,000
Condo, Capital 100,000 Case 2 – Bonus to the old partners, no Asset Revaluation. Conde invests P100,000 for a 1/5
interest in the new firm capitalization of P400,000.
Solution:
Cash 100,000
Step 1 Fill in the given data in the table. Conde, Capital 100,000
a. Partners, old and new.
b. AC column, with the total written first Condo, Capital 20,000
c. CC column Calma, Capital 10,000
AC CC Castro, Capital 10,000
Old P 300,000
New 100,000 These entries were made to show clearly the transfer of capital iron the new partner to the old
P 400,000 P 400,000 partners. However, a compound entry may also be prepared as follows:

Step 2 Compare AC and CC. In this case, AC = CC Cash 100,000

(400,000=P400,000), therefore, there is no asset revaluation. Condo, Capital 80,000
Calma. Capital 10,000
Castro, Capital 10,000

44 | P a g e
Chapter 4 – Partnership

Solution: Solution:
Step 1 Fill in the table as in Cases 1 and 2. The completed table after Steps l to 4 is shown
Step 1 Fill in the table as in Case l. The completed table after Steps I to 4 is shown below: below:
AC CC Bonus
AC CC Bonus Old P 270,000 P 300,000 P (30,000)
Old P 320,000 P 300,000 P 20,000 New 90,000 60,000 30,000
New 80,000 100,000 (20,000) P 360,000 P 360,000 -
P 400,000 P 400,000 -
Step 2 Compare AC and CC. In this case, AC = CC (P360,000 = P360,000).
Step 2 Compare AC and CC. In this case, AC = CC (P400,000 = P400,000) Therefore, there is no Therefore, there is no asset revaluation but there may be bonus.
asset revaluation but there may be bonus.
Step 3 Determine if there is bonus.
Step 3 Determine if there is bonus. a. Compute for the capital credit of the new partner.
a. Compute for the capital credit of the new partner. AC x fraction of interest; P360,000 x 1/4 = P90 000
AC x fraction of interest, P400,000 x 1/5 = P80,000. b. Write this amount in the AC column of the new part
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, his AC > CC (P90,000 -
c. Compare the new partner's AC with his CC. In this case, his AC < CC (P80,000 - P60,000; therefore, the increases in his contributed capital represents bonus from
P100,000); therefore, the decrease in his contributed capital represents bonus to the old partners
the old partners.
Step 4 Complete the table filling in the missing figures.
Step 4 Complete the table by filling in the missing figures. a. AC or capital credit of the old partners.
a. AC or capital credit of the old partners. AC x fraction of interest
AC x fraction of interest, P360,000 x 3/4 = P270,000 or
P400,000 x 4/5 = P320.000 or CC – Bonus to old partners
CC + Bonus to the old partners P300,000 - P30,000 = P270,000
P300,000 + P20,000 = P320,000
The bonus is shared by the old partners according to their profit and loss sharing The bonus given to the new partner is shared by the old partners according to their
ratio. profit and loss sharing ratio.
b. A completed table is shown in Step I.
c. Conclusion based on the table: b. A completed table is shown in Step 1
(i) AC = CC, therefore, there is no asset revaluation.
(ii) New partner: AC < CC, therefore, he gives the bonus. Case 4 – Positive Asset Revaluation, no Bonus. Conde invests P100,000 for a 1/5 interest in
(iii) Old partners: AC > CC, therefore, they receive the bonus shared according the agreed capital of P500,000.
to their profit and loss ratio.
Other Assets 100,000
Case 3 – Bonus to new partner, no Asset Revaluation. Condo invests P60,000 for a 1/4 interest Calma, Capital 50,000
in the total capitalization of P360,000. Castro, Capital 50,000
Cash 100,000
Cash 60,000 Conde, Capital 100,000
Calma, Capital 15,000
Castro, Capital 15,000 Solution:
Conde, Capital 90,000 Step 1 Fill in the table as in Cases 1 to 3, The completed table after Steps 1 to 4 is shown below:

45 | P a g e
Chapter 4 – Partnership

Asset
Asset AC CC Revaluation
AC CC Revaluation Old P 240,000 P 300,000 (P 60,000)
Old P 400,000 P 300,000 P 100,000 New 60,000 60,000 -
New 100,000 100,000 - P 300,000 P 360,000 P 60,000
P 500,000 P 400,000 P 100,000

Step 2 Compare AC and CC. In this case, AC > CC (P500,000 > P400,000). Step 2 Compare AC and CC. In this case, AC < CC (P300,000 < P360,000).
Therefore, there is a positive asset revaluation. Therefore, there is a negative asset revaluation.

Step 3 Determine if there is bonus. Step 3 Determine if there is bonus. .

a. Compute for the capital credit of the new partner.
AC x fraction of interest; P500,000 x 1/5 = P100,00.
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. his
AC = CC (P100,000 = P100,000); therefore, there is no bonus.
a. Compute for the capital credit of the new partner.
AC x fraction of interest; P300,000 x 1/5 = P60,000.
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, his
AC = CC (P60,000 = P60,000), therefore, there is no bonus.

Step 4 Complete the table by filling in the missing figures. Step 4 Complete the table by filling in the missing figures.
a. AC or capital credit of the old partners. a. AC or capital credit of the old partners.
AC x fraction of interest AC x fraction of interest
P500,000 x 4/5 = P400,000 or P300,000 x 4/5 = P240,000 or
CC + Asset Revaluation CC – Asset Revaluation
P300,000 + P100,000 = P400,000 P300,000 - P60,000 = P240,000
b. A completed table is shown in Step l. b. A completed table is shown in Step l.
c. Conclusion based on the table: c. Conclusion based on the table:
(i) AC > CC, therefore, there is u positive asset revaluation (i) AC < CC, therefore, there is a negative asset revaluation.
(ii) New partner: AC = CC. therefore, there is no bonus. (ii) New partner: AC = CC, therefore, there is no bonus.
(iii) Old partners: AC > CC, therefore, they are credited for the (iii) Old partners: AC < CC, therefore, they are charged for the asset revaluation
asset revaluation shared according to their profit and loss ratio. shared according to their profit and loss ratio.

Case 5 – Negative Asset Revaluation, No bonus. Conde invests P60,000 for a 1/5 interest in the In the succeeding illustrations, the tables are summarized for easier comparison.
agreed capital of P300,000.
AGREED CAPITAL IS NOT GIVEN
Calma, Capital 30,000
Castro, Capital 30,000 There are cases when the contributions and the fractions of interest of the new partner
Other Assets 60,000
are given, but the agreed capitalization of the new firm is not specified. When such a
Cash 60,000
situation exists, the admission of the new partner is recorded using any of these two
Conde, Capital 60,000 methods:

Solution: 1. Bonus method

2. Asset Revaluation method
Step 1 Fill in the tables as in Cases 1 to 4. The completed table after Steps 1 to 4 is shown
below:

46 | P a g e
Chapter 4 – Partnership

BONUS METHOD (AC = CC) 1. Bonus Method

Under this method. the agreed capitalization of the new partnership is equal to the total amount Cash 100,000
of contribution of all the partners. both old and new. No asset revaluation is recognized but there Conde, Capital 80,000
will be a transfer of capital called bonus. Bonus in the new partner is given by the old partner. Calma, Capital 15,000
Bonus to the old partner. Bonus comes from the new partner. Castro Capital 5,000

ASSET REVALUATION METHOD

AC CC Bonus
An asset revaluation is made to properly value the assets of the partnership prior to admission Old (4/5) P 320,000 P 300,000 P 20,000
of a new partner. An asset revaluation will result to either an increase or decrease in the recorded New (1/5) 80,000 100,000 (20,000)
amount of the partnership assets and partners' capital. An asset revaluation increase (positive P 400,000 P 400,000 -
asset revaluation) indicates that some partnership assets are undervalued. On the other hand. an
asset revaluation decrease (negative asset revaluation) indicates that some partnership assets
are overvalued. Under the asset revaluation method, the balances of partnership assets and the The agreed capital of the partnership is equal to capital contribution. The capital credit of
partners' capital must be adjusted prior to the admission of a new partner. These adjustments the old and new partners are computed as follows:
must be recorded prior to recording the admission of the new partner. New = P400,000 x 1/5 = P 80,000
Old = P400.000 x 4/5 = P 320,000
POSITIVE ASSET REVALUATION METHOD (AC ˃ CC)
The capital credit of the new partner is less than his capital contribution, therefore, the new
A positive asset revaluation increases the old partnership assets and the capital accounts of the partner gives the bonus. The bonus is shared by the old partners according to their profit
old partners. The increase is shared by the old partners based on their profit and loss sharing and loss ratio.
ratio. Here. the agreed capitalization of the new partnership is more than the total amount of
contribution of both the old and new partners. 2. Positive Asset Revaluation Method

Under this method, the agreed capitalization is computed as follows: Other Assets 100,000
Calma, Capital 75,000
AC = New partner’s CC ÷ new partner’s fraction of interest Castro, Capital 25,000

NEGATIVE ASSET REVALUATION METHGD (AC < CC) Cash 100,000 100,000
Conde, Capital
A negative asset revaluation decreases the old partnership assets and the capital accounts of the
old partners. The decrease is shared by the old partners based on their profit and loss sharing AC CC
ratio. Here, the agreed capitalization of the new partnership is less than the total amount of Revaluation
contribution of both the old and new partners. Old (4/5) P 400,000 P 300,000 P 100,000
New (1/5) 100,000 100,000 -
The agreed capitalization is computed under this method in the same manner as in positive asset P 500,000 P 400,000 P 100,000
revaluation

Illustrative Problem C. Conde invests P100,000 for a 1/5 interest in the partnership of Calma
and Castro. The contributions of Calma and Castro are P200,000 and P100,000 respectively, and
they share profits and losses I the ration of 3:1. After the admission of Conde, profits and losses
will be divided equally.

47 | P a g e
Chapter 4 – Partnership

The agreed capital of the new partnership is computed by dividing the new partner's Cash 80,000
contribution by his fraction of interest (P100,000 ÷ 1/5 = P500,000). Conde, Capital 80,000

An agreed capital of more than the contributed capital indicated that there is an understatement AC CC
in some assets of the partnership upon the admission of a new partner. The agreed capital of Old (3/4) P 240,000 P 300,000 (P60,000)
P500,000 when compared with the contributed capital of P400,000 indicates a P100,000 New (1/4) 80,000 80,000 -
increase in assets and capital for the asset understatement. The AC or capital credit of the old P 320,000 P 380,000 (P60,000)
partners which is P400,000 (P500,000 x 4/5) is P100,000 more than their contributed capital.
Therefore, the old partners are credited for the revaluation of assets. The old partners share on The agreed capital of the new partnership is computed by dividing the new partner's
the revaluation of assets according to their profit and loss ratio. contribution by his fraction of interest (P80,000 + ¼ = P320,000).

Illustrative Problem D: Conde invests P80,000 for a 1/4 interest in the partnership of Calma and
Castro. The contributions of Calma and Castro are P200,000 and P100,000 respectively, and they
share profits and losses in the ratio of 3:1. After the admission of Conde, profits and losses will
be divided equally.
1. Bonus Method
An agreed capital that is less than the contributed capital indicates that there is an overstatement
in some assets of the partnership upon the admission of a new partner. The agreed capital of
P320,000 when compared with the contributed capital of P380,000 indicates a P60,000
reduction in assets and capital for the asset overstatement. The AC or capital credit of the old
partners which is P240,000 (P320,000 x ¾) is P60,000 less than their contributed capital.
Therefore, the old partners are charged for the revaluation of assets. The old partners share on
the revaluation of assets according to their profit and loss ratio.

Cash 80,000 COMPARISON OF BONUS AND ASSET REVALUATION METHOD

Calma, Capital 11,250
Castro, Capital 3,750 In Illustrative Problem C, Conde is given a 1/5 interest in the partnership and a 1/3 share of
Conde, Capital 95,000 profits upon admission. Both the bonus method and the asset revaluation method can be used in
AC CC determining the required interest for the new partner but the two methods may not offer the
Old (3/4) P 285,000 P 300,000 (P15,000) same ultimate results. Based on the information and assumptions given, the comparison between
New (1/4) 95,000 80,000 15,000 the bonus method and the asset revaluation method may be illustrated as shown below.
P 380,000 P 380,000 -
Asset Calma, Castro, Conde,
Revaluation Capital Capital Capital
The agreed capital of the partnership is equal to capital contribution. The capital credit of
the old and new partners are. computed as follows: Balances under the bonus method P 215,000 P 105,000 P 80,000
New = P380,000 x ¼ = P95,000 Balances under the asset revaluation P 100,000 P 275,000 P 125,000 P 100,000
Old = P380,000 x ¾ = P285,000 method
Share on the additional depreciation
on asset revaluation (equally) (100,000) ( 33,333) ( 33,333) ( 33,334
The capital credit of` the new partner is greater than his capital contribution, therefore, he
receives the bonus. The bonus is shared by the old partners according to their profit and Balances after the add’l depreciation
on asset revaluation P 241,667 P 91,667 P 66,666
loss ratio.
Net advantage (disadvantage) of
using the asset revaluation method P 26,667 (P 13,333) (P 13,334)
2. Negative Asset Revaluation Method

Calma, Capital 45,000

Castro, Capital 15,000 Based on the above analysis, Calma will prefer the asset revaluation method while Castro and
Other Assets 60,000 Condo will prefer the bonus method.

48 | P a g e
Chapter 4 – Partnership

AGREED CAPITAL Is NOT GIVEN BUT BASIS FOR ITS COMPUTATION IS INDICATED 2. the investment of the new partner is computed by multiplying the AC by his fraction of
IN THE TERMS OF ADMISSION interest (P450,000 x 1/3 = P150,000). Conde has to invest P 150,000 in order to have a
1/3 interest in the firm.
Using the same data in Illustrative Problem D where Calma and Castro have capital balances of
P200,000 and P100,000, respectively and sharing profits and losses in the ratio of 3:1, Conde Example 2: Coral, Cielo, and Camu are partners with capital balances of P 112,000, P 130,000,
invests P100,000 in the firm and is credited for P50,000 which is to be 1/8 of the new firm capital. and P 58,000, respectively, sharing profits and losses equally. Cueva is admitted as a new
partner bringing with him his expertise and good reputation. He is to invest cash for a 25%
The entry to record the admission of Conde into the partnership is interest in the assets of the partnership which includes a credit of P18,750 for bonus upon the
admission.
Cash 100,000
Conde, Capital 50,000 The journal entry to record the admission of the new partner is as follows:
Calma, Capital 37,500
Castro, Capital 12,500 Cash 75,000
Coral, Capital 6,250
AC CC Cielo, Capital 6,250
Old (7/8) P 350,000 P 300,000 P 50,000 Camu, Capital 6,250
New (1/8) 50,000 100,000 (50,000) Cuevas, Capital 93,750
P 400,000 P 400,000 -
Solution:
The agreed capital is not given but the basis for its computation is indicated in the problem. The
new partner is to be credited for P50,000 which is 1/8 of the new firm capital. Thus, P50,000 ÷ Follow the same procedures as in Example 1. The P18,750 bonus given by the old partners to the
1/8 = P400,000 agreed capital. The agreed capital of (P400,000) is equal to total contributed new partner has to be deducted first from the total capital of the old partners to get their 75%
capital, therefore, there is no asset revaluation. But there might be bonus. The capital credit of` interest. Thus:
the new partner is less than his contribution, therefore, he gives the bonus. The bonus is shared P112,000 = P130,000 + P58,000 – P18,750 = P281,250
by the old partners in their profit and loss ratio. P281,250 / 75% = P375,000
,
THE AMOUNT OF THE CONTRIBUTION OF THE NEW PARTNER IS NOT GIVEN The amount to be contributed by the new partner is computed by deducting the P18,750 bonus
received from the old partners from the 25% interest acquired from the old partners. Thus:
Example 1: Calma and Castro have capital balances of P200.000 and P100,000, respectively. P375,000 x 25% = P93,750
They share profits and losses in the ratio of 3:1. Conde invests sufficient amount for 1/3 interest. P93,750 – P18,750 = P75,000

The journal entry to record the admission of Condo follows:

FRACTION OF INTEREST IS NOT GIVEN
Cash 150,000
Conde, Capital 150,000 Conde invests P50,000 in the firm. However, upon his admission
P10,000 bonus is allowed by the old partners.
Solution:
The entry to record the admission of the new partner is:
Computations similar to those made in the previous cases are no longer necessary. To arrive at Cash 50,000
the amount to be contributed by the new partner. Calma, Capital 7,500
1. the new firm capital (AC) is computed by dividing the old partners' contributions by Castro, Capital 2,500
their fraction of interest (P300,000 ÷ 2/3) = P450,000, and Conde, Capital 60,000

49 | P a g e
Chapter 4 – Partnership

REVIEW of the LEARNING OBJECTIVES MULTIPLE CHOICE

MC 4-1 If the total contributed capital exceeds the agreed capital with the new partner’s
1. Define partnership dissolution and identify the conditions giving rise to it. Partnership investment is the same as his capital credit, then the admission of the new partner
dissolution is a change in the relation of the partners caused by any partner ceasing to be involved a
associated in the carrying out of the business. Dissolution of a partnership may be caused a. bonus to new partner
by any of the following conditions: (1) admission of new partner; (2) retirement or b. bonus to old partners
withdrawal of a partner; (3) death, incapacity or bankruptcy of a partner, or (4) c. negative asset revaluation
incorporation of a partnership. d. positive asset revaluation

2. Understand the accounting procedures to record the admission of a new partner by MC 4-2 If the agreed capital is equal to the total contributed capital with the capital credit and
purchase. A new partner may be admitted into the partnership by purchasing a capital contribution of the old and new partners being the same, there exists
equity interest from one or more of the old partners. Admission of a new partner by a. asset revaluation and bonus
purchase represents a transfer of capital from the old partner/partners to the new partner. b. negative asset revaluation
The transfer of capital is recorded at the book value of the interest sold regardless of the c. no asset revaluation and no bonus
amount paid for the interest. Any gain or loss indicated in the transaction is a personal gain d. positive asset revaluation
or loss of the selling partner. Asset revaluation, however, may be undertaken by the old
partnership before admission of a new partner. In such a case, a positive or negative asset MC 4-3 If the capital credit of the new partner is less than his contribution with no adjustment
revaluation will always accrue to the old partners. in asset values. then the admission resulted in a
a. bonus to the old partners
3. Understand the accounting procedures to record the admission of a new partner by b. bonus to the new partner
investment. The admission of a new partner by investment is a transaction between the c. no bonus
original partnership and the new partner. The new partner's contribution increases the total d. both A and B
assets and the total capital of the partnership. When the capital contribution of the new
partner is not equal to his capital credit in the new partnership or when the capital MC 4-4 Calibo and Camos are partners with capital balances of P60,000 and P80,000 and
contributions of the old partners is not equal to their capital credit in the new partnership. sharing profits and losses 40% and 60% respectively. If Cueva is admitted as partner
the difference is accounted for by any of the following methods: (1) bonus method (bonus paying P50,000 in exchange for 50% of Calibo's equity, the entry in the partnership
to the old partners from the new partner or bonus to the new partner from the old partners); books should be as follows:
(2) asset revaluation method either positive or negative revaluation. a. Calibo. Capital 50,000
Cueva, Capital 50.000
b. Calibo, Capital 30,000
Cueva, Capital 30,000
c. Cash 45,000
Other Assets 15,000
Cueva, Capital 50,000
d. Cash 50.000
Calibo, Capital 15,000
Cueva, Capital 45.000

MC 4-5 Chan, Ching, and Chen are partners who share profits and losses in the ratio of 5:3:2
respectively. They agree to sell Chat 25% of their respective capital and profits and
losses ratio for a total payment directly to the partners in the amount of P140,000. They
agree that asset revaluation of P60,000 is to be recorded prior to the admission of Chat.
The condensed statement of financial position of the CCC Partnership is presented on
the next page.

50 | P a g e