1

 “The dissolution of a partnership is the

change in the relation of the partners caused
by any partner ceasing to be associated in the
carrying on the business”
 Civil Code of the Philippines, Art. 1828

2
 Dissolution – stops the partner’s original
association

 Liquidation – converts all noncash assets into

cash to pay all claims against the partnership
as a consequence of partnership dissolution

3
 Is there always a dissolution if there is
liquidation?

 Is there always a liquidation after dissolution?

 ANSWER IS:
YES AND NO respectively

4
 • Admission or
withdrawal of
a partner
Dissolution • Insolvency of
a partner
• Incorporation
of partnership

5
 • Remaining partners
continue the
Formation
business operation
of a New
under a new
Partnership
partnership
agreement

Dissolution

• Partnership activities
are terminated and
noncash assets are
Liquidation converted into cash
to pay creditors and
distribute remaining
assets to partners.

6
 Closing of temporary accounts to partner’s
respective capital account must be made.

 According to their respective profit and loss

ratio.

7
 ABC Partnership
Trial Balance
March 31, 200x in PHP Closing Entries:

Debit Credit Date Description Debit Credit

31-Mar Professinal fee 250,000
Cash 68,000
Rent income 50,000
Acccounts receivable 120,000
Income Summary 300,000
Equipment 720,000
to close revenue accounts
Accumulated depreciation-Equipment 141,000
Accounts payable 136,000 31-Mar Income Summary 269,000
A, Capital 300,000 Salaries expense 120,000
B, Capital 250,000 Supplies expense 47,000
C, Capital 50,000 Depreciation expense 72,000
Professional fee 250,000 Miscellaneous expense 30,000
Rent income 50,000 to close expense accounts
Salaries expense 120,000
Supplies expense 47,000
Depreciation expense 72,000 31-Mar Income Summary 31,000
Miscellaneous expense 30,000 A, Capital{31,000 x 25%} 7,750
1,177,000 1,177,000 B, Capital{31,000 x 25%} 7,750
C, Capital{31,000 x 50%} 15,500
to close net income to the capital accounts
P&L Ratio:
A 25%
B 25%
C 50%
8
 Assets and liabilities of the partnership
should be restated at their fair market values
to determine the fair and equitable capital
balances of the existing partners.

 Increases or decreases of assets are allocated

based on the profit and loss ratios or capital
ratios

9
1. Negative Asset Revaluation
2. Positive Asset Revaluation

Example:
In the given example earlier, suppose partner
C is withdrawing from the partnership and
also they agreed that the equipment shall
have a fair value of P558,000.

10
 Closing Entries:

ABC Partnership Date Description Debit Credit

Trial Balance 31-Mar Professinal fee 250,000
March 31, 200x in PHP Rent income 50,000
Income Summary 300,000
Debit Credit to close revenue accounts
Cash 68,000
Acccounts receivable 120,000
31-Mar Income Summary 269,000
Equipment 720,000
Accumulated depreciation-Equipment 141,000
Salaries expense 120,000
Accounts payable 136,000 Supplies expense 47,000
A, Capital 300,000 Depreciation expense 72,000
B, Capital 250,000 Miscellaneous expense 30,000
C, Capital 50,000 to close expense accounts
Professional fee 250,000
Rent income 50,000
Salaries expense 120,000 31-Mar Income Summary 31,000
Supplies expense 47,000
A, Capital{31,000 x 25%} 7,750
Depreciation expense 72,000
B, Capital{31,000 x 25%} 7,750
Miscellaneous expense 30,000
1,177,000 1,177,000 C, Capital{31,000 x 50%} 15,500
to close net income to the capital accounts
P&L Ratio:
A 25% Computation:
B 25% Cost of equipment 720,000
C 50% Less: recorded depreciation 141,000
Book Value per record 579,000
Less: agreed FMV 558,000
increase in accumulated depreciation 21,000
11
Computation:
Cost of equipment 720,000
Less: recorded depreciation 141,000
Book Value per record 579,000
Less: agreed FMV 558,000
increase in accumulated depreciation 21,000

Adjusting Entries to effect the negative asset revaluation:

Date Description Debit Credit

31-Mar A, Capital{21,000 x 25%} 5,250
B, Capital{21,000 x 25%} 5,250
C, Capital{21,000 x 50%} 10,500
Accumulated Depreciation- Equipment 21,000
to record adjustment in value of equipment

12
 A, Capital
5,250 300,000
See the beginning balances:
7,750
5,250 307,750
A, Capital 300,000
302,500
B, Capital 250,000
C, Capital 50,000

Closing Entries:
B, Capital
5,250 250,000
31-Mar Income Summary 31,000
7,750
A, Capital{31,000 x 25%} 7,750
5,250 257,750
B, Capital{31,000 x 25%} 7,750
252,500
C, Capital{31,000 x 50%} 15,500
to close net income to the capital accounts

C, Capital
Adjusting Entries: (Negative Asset Revaluation)
10,500 50,000
15,500
31-Mar A, Capital{21,000 x 25%} 5,250
10,500 65,500
B, Capital{21,000 x 25%} 5,250
55,000
C, Capital{21,000 x 50%} 10,500
Accumulated Depreciation- Equipment 21,000

13
 The adjusted balance will be the basis for the
payment of the withdrawing partner’s
interest.
Payment to withdrawing partner equal to its adjusted capital balance:

Date Description Debit Credit

31-Mar C, Capital 55,000
Cash 55,000
to record withdrawal of partner C

14
 The partners agree that the equipment shall
have a fair market value of P600,000.
Computation:
Cost of equipment 720,000
Less: recorded depreciation 141,000
Book Value per record 579,000
Less: agreed FMV 600,000
increase in value of equipment 21,000

Adjusting Entries to effect the positive asset revaluation:

Date Description Debit Credit

31-Mar Accumulated Depreciation- Equipment 21,000
A, Capital{21,000 x 25%} 5,250
B, Capital{21,000 x 25%} 5,250
C, Capital{21,000 x 50%} 10,500
to record adjustment in value of equipment
15
1. Admission of new partner
2. Withdrawal, retirement or death of a partner
3. Insolvency of a partnership or insolvency of
a partner
4. Incorporation of partnership

16
 2 Methods
1. By purchase of interest of existing partner(s)
2. By direct investment to partnership

17
18
 Admission of additional partner(s) by purchase of
interest of existing partner(s) does not fall under the
description of a business combination applying the
purchase method as contemplated in IAS/PAS 38.

 Accordingly, an agreement between and among the

partners to recognized goodwill is not considered as
an arm’s length’s transaction. Goodwill agreement
between or among partners may involve an element
of bias, and therefore should not be recognized.

 To be recognized, goodwill must be paid for in a

business combination by purchase.

19
 “personal transaction between the incoming
partner and old partner”

 Any gain or loss on the transaction is a

personal gain or loss of the selling partner.

 No gain or loss is recorded in the partnership

books

20
Capital Balances and agreed profit and loss distribution of
Ben and Margareth Partnership prior to dissolution.

Partners Capital Balances P/L Ratio

Ben 250,000 25%
Margareth 750,000 75%

Marion wants to buy 50% of the interest of Margareth to give her an interest of 37.50% in the
partnership's asset and partnership's profit and loss.

Margareth 750,000 x 50% = 375,000

21
Case 1: Purchase at Book Value
Marion pay Margareth equal to the interest being purchase
P375,000

Description Debit Credit

Margareth, Capital 375,000
Marion, Capital 375,000

Case 2: Purchase Lesser Than Book Value

Marion pay Margareth less than the interest being purchase In Purchase Method
P350,000
Case 1, 2 and 3 have
Description Debit Credit the same entry to
Margareth, Capital 375,000
Marion, Capital 375,000 record the admission
of the new partner.
Case 3: Purchase More Than Book Value
Marion pay Margareth more than the interest being purchase
P400,000

Description Debit Credit

Margareth, Capital 375,000
Marion, Capital 375,000

The new profit and loss of the new partnership of Ben, Margareth and Marion is
computed as follows:

Partners Old P/L Ratio P/L Ratio

Ben 25% 25.0%
Margareth 75% x 50% 37.5%
Marion 37.5%
Total 100% 100.0%

22
Given:
Capital Balances and agreed profit and loss distribution of
Tiara and Xiela Partnership prior to dissolution.

Partners Capital Balances P/L Ratio

Tiara 150,000 30%
Xiela 350,000 70%

Christian wants to buy 20% of the interest the partnership's assets and partnership's
profit and loss by paying directly each of the existing partners 20% of their respective
interest in the partnership.
Tiara 150,000 x 20% = 30,000
Xiela 350,000 x 20% = 70,000
100,000

23
Case 1: Purchase at Book Value
Christian paid total amount of P100,000 directly to the partners

Description Debit Credit

Tiara, Capital 30,000
Xiela, Capital 70,000
Christian, Capital 100,000

Case 2: Purchase Lesser Than Book Value

Christian paid total amount of P60,000 directly to the partners
In Purchase Method
Description Debit Credit
Case 1, 2 and 3 have
Tiara, Capital 30,000 the same entry to
Xiela, Capital 70,000 record the admission
Christian, Capital 100,000 of the new partner.

Case 3: Purchase More Than Book Value

Christian paid total amount of P150,000 directly to the partners

Description Debit Credit

Tiara, Capital 30,000
Xiela, Capital 70,000
Christian, Capital 100,000

24
The new profit and loss of the new partnership of Tiara, Xiela and Christian is:
computed as follows:

Partners Old P/L Ratio P/L Ratio

Tiara 30% x (100%-20%) 24.0%
Xiela 70% x (100%-20%) 56.0%
Christian 20.0%
Total 100% 100.0%

25
Cash Payment in Case 3:
Tiara Xiela Total
30% 70% 100%
Amount of transferred capital 30,000 70,000 100,000
Excess of cash payment -
(150,000 - 100,000 = 50,000) 15,000 35,000 50,000
Total Cash Distribution 45,000 105,000 150,000

26
 Total Contributed Capital (TCC)
◦ Total actual investment made by all partners (both
existing and incoming partner/s) to the partnership

 Total Agreed Capital (TAC)

◦ Refers new amount of partnership capital as agreed
by the partners which is indicated in the
partnership contract
◦ Can be equal to, more than or less than the TCC.
◦ Other term for it is Agreed New Capital (ANC)

27
28
 Admission of additional partner(s) by
investment in the partnership will not fall
under the description of a business
combination applying the purchase method
as contemplated in IFRS 3.

 An agreement between and among the

partners to recognized goodwill may involve
bias and is not considered as an arm’s
length’s transaction.

29
1. In case there is no TAC, the TCC shall be
followed by the partners
2. If TAC is not mentioned in the partnership
contract but an agreement is made for new
partnership capitalization, the TAC is
computed using the following formula:
a) New partner’s investment / New partner’s interest
b) Old partner’s investment / Old partner’s interest

30
Given:
Triple A partnership has the following adjusted accounts prior to the
acceptance of Nimrod as a new partner: (amounts in PHP)

Assets: Liability and partner's Capital:

Cash 10,000 Accounts payable 50,000
Acccounts receivable 200,000 Aaron, Capital 150,000
Allowance of bad debts -10,000 Ahab, Capital 150,000
Merchandise inventory 300,000 Ananias, Capital 150,000
Total assets 500,000 Total liabilities and equities 500,000

P&L distribution is equally.

On May 31 the partners approve the admission of Nimrod provided that he will contribute
the following to the partnership.
Equipment with FMV of P100,000 and
Cash worth P50,000
They agreed that they would received capital interest equal to their actual
contributions to the partnership.

31
Date Description Debit Credit
31-May Cash 50,000
Equipment 100,000
Nimrod, Capital 150,000
to record investment of new partner
Therefore:
TCC TAC
Aaron, Capital 150,000 150,000 Each partner’s
Ahab, Capital 150,000 150,000 TCC = TAC
Ananias, Capital 150,000 150,000 therefore there is
Nimrod, Capital 150,000 150,000 NO BONUS.
Total 600,000 600,000

32
 The total contributed capital is equal to the
total partnership agreed capital
 But some individual partners’ contribution is
not equal to their respective capital credit
 Because there is a transfer of capital from one
partner to another
1. Bonus to new partner
2. Bonus to old partner

33
34
35
The new profit and loss of the new partnership is
computed as follows:

Partners Old P/L Ratio P/L Ratio

Job 20% x (100%-30%) 14.0%
Noah 40% x (100%-30%) 28.0%
Seth 40% x (100%-30%) 28.0%
Enoch 30.0%
Total 100% 100.0%

Date Description Debit Credit

31-May Cash 200,000
Job, Capital 8,000
Noah, Capital 16,000
Seth, Capital 16,000
Enoch, Capital 240,000
to record admission of Enoch.

36
1
Agreed Capital for Enoch (P1,200,000 x 20%) 240,000
Less: Actual Contribution of Enoch 240,000
Excess Capital credit over capital contributed -

2
Entry to record N investment to the partnership.
Date Description Debit Credit
31-May Cash 240,000
N, Capital 240,000
to record admission of Enoch.

3
The new profit and loss of the new partnership is
computed as follows:

Partners Old P/L Ratio P/L Ratio

A 60% x (100%-20%) 48.0%
S 40% x (100%-20%) 32.0%
N 20.0%
Total 100% 100.0%

37
38
 Can occur at the same time when the
partnerships assets are adjusted

 and the new partner’s capital credit is

different from his actual contribution

39
Given:
Assume the following data of A and B Partnership:
A (60%) B (40%)
Capital balances before dissolution 600,000 400,000

C is accepted in the partnership with the following agreement:

Cash contribution P500,000 for a P400,000 capital credit representing 20% interest
in the new partnership's total capital
C will also receive 20% P&L ratio.
Value of partneship's existing land be adjusted for the difference of TAC and TCC.

Required:
1. Compute the new partnership TAC.
2. Prepare an analysis of bonus and asset revaluation.
3. Make a compounded journal entry for the bonus and asset revaluation. 40
Answers:
1 The new partnership agreed capital is computed as follows:
Agreed Capital Credit of C 400,000
Divided by: capital interest and P/L ratio 20%
New partnership agreed capital 2,000,000

2 the table analysis for bonus and asset revaluation would be:

41
Answers:
1 The new partnership agreed capital is computed as follows:
Agreed Capital Credit of C 400,000
Divided by: capital interest and P/L ratio 20%
New partnership agreed capital 2,000,000

2 the table analysis for bonus and asset revaluation would be:

42
Answers:
1 The new partnership agreed capital is computed as follows:
Agreed Capital Credit of C 400,000
Divided by: capital interest and P/L ratio 20%
New partnership agreed capital 2,000,000

2 the table analysis for bonus and asset revaluation would be:

43
Answers:
1 The new partnership agreed capital is computed as follows:
Agreed Capital Credit of C 400,000
Divided by: capital interest and P/L ratio 20%
New partnership agreed capital 2,000,000

2 the table analysis for bonus and asset revaluation would be:

44
Answers:
1 The new partnership agreed capital is computed as follows:
Agreed Capital Credit of C 400,000
Divided by: capital interest and P/L ratio 20%
New partnership agreed capital 2,000,000

2 the table analysis for bonus and asset revaluation would be:

45
 2 the table analysis for bonus and asset revaluation would be:

Partners: TCC TAC Asset Bonus New P/L

step 1

Revaluation Ratio
A (60%) 600,000
B (40%) 400,000
C 500,000
1,500,000

46
 2 the table analysis for bonus and asset revaluation would be:

Partners: TCC TAC Asset Bonus New P/L

step 1

Revaluation Ratio
A (60%) 600,000
B (40%) 400,000
C 500,000 20.00%

1,500,000

47
 2 the table analysis for bonus and asset revaluation would be:

Partners: TCC TAC Asset Bonus New P/L

step 1

Revaluation Ratio
A (60%) 600,000
B (40%) 400,000 32.00%

C 500,000 20.00%

1,500,000

48
 2 the table analysis for bonus and asset revaluation would be:

Partners: TCC TAC Asset Bonus New P/L

step 1

Revaluation Ratio
48.00%
A (60%) 600,000
B (40%) 400,000 32.00%

C 500,000 20.00%

1,500,000

49
 2 the table analysis for bonus and asset revaluation would be:

Partners: TCC TAC Asset Bonus New P/L

step 1

Revaluation Ratio
48.00%
A (60%) 600,000
B (40%) 400,000 32.00%

C 500,000 20.00%

1,500,000 100.00%

50
 2 the table analysis for bonus and asset revaluation would be:

Partners: TCC TAC Asset Bonus New P/L

step 1

Revaluation Ratio
48.00%
A (60%) 600,000
B (40%) 400,000 32.00%

C 500,000 400,000 20.00%

1,500,000 100.00%

51
 2 the table analysis for bonus and asset revaluation would be:

Partners: TCC TAC Asset Bonus New P/L

step 1

Revaluation Ratio
48.00%
A (60%) 600,000
B (40%) 400,000 32.00%

C 500,000 400,000 20.00%

2,000,000
1,500,000 100.00%

52
 2 the table analysis for bonus and asset revaluation would be:

Partners: TCC TAC Asset Bonus New P/L

step 1

Revaluation Ratio
48.00%
A (60%) 600,000
640,000 32.00%
B (40%) 400,000
C 500,000 400,000 20.00%

2,000,000
1,500,000 100.00%

53
 2 the table analysis for bonus and asset revaluation would be:

Partners: TCC TAC Asset Bonus New P/L

step 1

Revaluation Ratio
960,000 48.00%
A (60%) 600,000
640,000 32.00%
B (40%) 400,000
C 500,000 400,000 20.00%

2,000,000
1,500,000 100.00%

54
 2 the table analysis for bonus and asset revaluation would be:

Partners: TCC TAC Asset Bonus New P/L

step 1

Revaluation Ratio
960,000 48.00%
A (60%) 600,000
640,000 32.00%
B (40%) 400,000
C 500,000 400,000 (100,000) 20.00%

2,000,000
1,500,000 100.00%

55
 2 the table analysis for bonus and asset revaluation would be:

Partners: TCC TAC Asset Bonus New P/L

step 1

Revaluation Ratio
960,000 48.00%
A (60%) 600,000
640,000 32.00%
B (40%) 400,000 40,000

C 500,000 400,000 (100,000) 20.00%

2,000,000
1,500,000 100.00%

56
 2 the table analysis for bonus and asset revaluation would be:

Partners: TCC TAC Asset Bonus New P/L

step 1

Revaluation Ratio
960,000 60,000 48.00%
A (60%) 600,000
640,000 32.00%
B (40%) 400,000 40,000

C 500,000 400,000 (100,000) 20.00%

2,000,000
1,500,000 100.00%

57
 2 the table analysis for bonus and asset revaluation would be:

Partners: TCC TAC Asset Bonus New P/L

step 1

Revaluation Ratio
960,000 60,000 48.00%
A (60%) 600,000
640,000 32.00%
B (40%) 400,000 40,000

C 500,000 400,000 (100,000) 20.00%

2,000,000 500,000
1,500,000 100.00%

58
 2 the table analysis for bonus and asset revaluation would be:

Partners: TCC TAC Asset Bonus New P/L

step 1

Revaluation Ratio
960,000 300,000 60,000 48.00%
A (60%) 600,000
640,000 32.00%
B (40%) 400,000 40,000

C 500,000 400,000 (100,000) 20.00%

2,000,000 500,000
1,500,000 100.00%

59
 2 the table analysis for bonus and asset revaluation would be:

Partners: TCC TAC Asset Bonus New P/L

step 1

Revaluation Ratio
960,000 300,000 60,000 48.00%
A (60%) 600,000
640,000 200,000 32.00%
B (40%) 400,000 40,000

C 500,000 400,000 (100,000) 20.00%

2,000,000 500,000
1,500,000 100.00%

60
 3 The compound entry to record the admission of C, bonus and
asset revaluation method.

Date Description Debit Credit

31-May Cash 500,000
Land 500,000
A, Capital 360,000
B, Capital 240,000
C, Capital 400,000

61
 3 The compound entry to record the admission of C, bonus and
asset revaluation method.

Date Description Debit Credit

31-May Cash 500,000
Land 500,000
A, Capital 360,000
B, Capital 240,000
C, Capital 400,000

62
 3 The compound entry to record the admission of C, bonus and
asset revaluation method.

Date Description Debit Credit

31-May Cash 500,000
Land 500,000
A, Capital 360,000
B, Capital 240,000
C, Capital 400,000

63
 3 The compound entry to record the admission of C, bonus and
asset revaluation method.

Date Description Debit Credit

31-May Cash 500,000
Land 500,000
A, Capital 360,000
B, Capital 240,000
C, Capital 400,000

64
 3 The compound entry to record the admission of C, bonus and
asset revaluation method.

Date Description Debit Credit

31-May Cash 500,000
Land 500,000
A, Capital 360,000
B, Capital 240,000
C, Capital 400,000

65
 3 The compound entry to record the admission of C, bonus and
asset revaluation method.

Date Description Debit Credit

31-May Cash 500,000
Land 500,000
A, Capital 360,000
B, Capital 240,000
C, Capital 400,000

66
Any questions?

67
1. Interest is sold to outside party
2. Interest is sold to the remaining partners
3. Interest is sold to the partnership
a. Book value (No Bonus)
b. Less than book value (with bonus to the remaining
partners)
c. More than book value (with bonus to the
withdrawing partner)

68
69
1. Determine the deceased partner’s P and L share
from the beginning of the accounting period to
the date of death.
2. Adjust the capital accounts (include profit and
loss and asset revaluation as of time of death).
3. Close the adjusted capital account of the
deceased partner to the liability account.
4. Accrue the interest on the said recognized
liability from the date of death to the
settlement date
5. Close the liability account at the settlement
date.

70
 Using Partnership Books
1. Adjust assets and liabilities directly to partners’ capital
2. Close (debit) partners’ capital and credit the
appropriate capital stock accounts

 Using New Sets of Books

◦ In the Partnership Books
1. Close all nominal accounts to the capital accounts.
2. Adjust the assets and liabilities directly to the capital
accounts
3. Close the book of the partnership by closing all real
accounts
◦ In the Books of the Corporation
1. Transfer all assets and liabilities of the partnership to the
books of the corporation and credit the appropriate capital
stock accounts to the equity

71
72