COURSE CODE and TITLE: BAEN 2 - PRINCIPLES OF ACCOUNTING 1A

LESSON 10 : PARTNERSHIP DISSOLUTION (PART 3)

TOPICS : Partnership Dissolution Defined, Admission of

a New Partner by Investment

INSTRUCTOR : Dr. Rosario A. Calamba, CPA

__________________________________________________________________

LEARNING OBJECTIVES:

At the end of this lesson, the learners should be able to:

1. Explain the meaning of dissolution and its effect in the partnership.

2. Identify the conditions giving rise to dissolution.

3. Understand the accounting procedures to record the admission of a new

partner by Investment.

4. Record the change in ownership and revise partner’s equity.

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PRE-ASSESSMENT:

TRUE OR FALSE: Write TRUE if the statement is correct and FALSE if the
statement is not correct.

1. Admission by investment under bonus method will increase the assets of the
partnership by the amount of investment plus bonus to be recorded.

2. A bonus and asset revaluation should not occur concurrently because there is no
asset adjustment in the former as compared to the latter.

3. In the admission of a new partner by investment, agreed capital must always equal
contributed capital.

4. A new partner may be admitted without an investment and without the recognition of
capital interest.

5. When the capital of a retiring partner is to be purchased by the partnership, this will
result in the decrease of the total partnership’s asset even if his interest is to be retired
at an amount lower than its book value.

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 LESSON PRESENTATION

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

PROBLEMS RELATING TO ADMISSION OF A

NEW PARTNER BY INVESTMENT

Situations relating to admission of a new partner by investment may fall under any
of the following:

1. Agreed Capital is Given. When agreed capital is given, the admission of a

new partner by investment will give rise to any of the following cases:
a. No Bonus, No Asset Revaluation
b. Bonus to Old Partners, No Asset Revaluation
c. Bonus to New Partner, No Asset Revaluation
d. Asset Revaluation, No Bonus

2. Agreed Capital is Not Given. When agreed capital is not given, the problem
calls for two alternative solutions.
a. Bonus Method
b. Asset Revaluation Method

3. Agreed Capital is Not Given – but the basis for its computation is indicated
in the terms of admission.

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 4. The Amount of Contribution of the New Partner is Not Given.

5. No Fraction of Interest for Either the New or Old Partners is Given.

AGREED CAPITAL IS GIVEN – CONTINUATION:

Illustrative Problem: Lara and Lyn are partners with capital balances of P200,000
and P100,000, respectively. They share profits and losses equally. Rose is to be
admitted in the partnership.

Case 2 – Bonus to the old partners, no Asset Revaluation

Rose invests P100,000 for a 1/5 interest in the new firm capitalization of P400,000.

Cash P 100,000
Rose, Capital P100,000

Rose, Capital P 20,000

Lara, Capital P 10,000
Lyn, Capital 10,000

Those entries were made to show clearly the transfer of capital from the new partner
to the old partners. However, a compound entry may also be prepared as follows:
Cash P 100,000
Rose, Capital P 80,000
Lara, Capital 10,000
Lyn, Capital 10,000

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Solution:

Step 1 Fill in the table as in Case 1. The completed table after Steps 1 to 4 is
shown below:
AC CC Bonus
Old P 320,000 P 300,000 P 20,000
New P 80,000 100,000 (20,000)
--------------- -------------- -------------
P 400,000 P 400,000 0.00

Step 2 Compare AC and CC. In this case, AC = CC (P400,000 = P400,000)

Therefore, there is no asset revaluation but there may be bonus.

Step 3 Determine if there is bonus.

a. Compare for the capital credit of the new partner
AC x fraction of interest: P400,000 x 1/5 = P80,000.
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 is less than CC (P80,000 – P100,000); therefore, the decrease in
his contributed capital represents bonus to the old partners.

Step 4 Complete the table by filling the missing figures.

a. AC or capital credit of the old partners
AC x fraction of interest;
P400,000 x 4/5 = P320,000 or
CC + Bonus to the old partners
P300,000 + P20,000 = P320,000
The bonus is shared by the old partners according to their profit
and loss sharing ratio.

b. A completed table is shown in Step 1.

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 c. Conclusion based on the table:
(i) AC = CC, therefore, there is no asset revaluation
(ii) New partner: AC is less than CC, therefore, he gives the
bonus.
(iii) Old partners: AC is more than CC, therefore, they receive
the bonus shared according to their profit and loss ratio.

Case 3 – Bonus to new partner, no Asset Revaluation

Rose invests P100,000 for a 1/4 interest in the total capitalization of P360,000.

Cash P 60,000
Lara, Capital 15,000
Lyn, Capital 15,000
Rose, Capital P 90,000

Solution:

Step 1 Fill in the table as in Cases 1 and 2. The completed table after Steps 1 to
4 is shown below:
AC CC Bonus
Old P 270,000 P 300,000 P(30,000)
New P 90,000 60,000 30,000
--------------- -------------- -------------
P 360,000 P 360,000 0.00

Step 2 Compare AC and CC. In this case, AC = CC (P360,000 = P360,000).

Therefore, there is no asset revaluation but there may be bonus.

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Step 3 Determine if there is bonus.
a. Compute for the capital credit of the new partner.
AC x fraction of interest; P360,000 x 1/4 = P90,000.
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 is more than CC (P90,000 – P60,000); therefore, the increase in
his contributed capital represents bonus from the old partners.

Step 4 Complete the table by filling the missing figures.

a. AC or capital credit of the old partners.
AC x fraction of interest
P360,000 x 3/4 = P270,000 or
CC - Bonus to the old partners
P300,000 – P30,000 = P270,000

The bonus given to the new partner is shared by the old partners
according to their profit and loss sharing ratio.

b. A completed table is shown in Step 1.

c. Conclusion based on the table:
(iv) AC = CC, therefore, there is no asset revaluation
(v) New partner: AC is more than CC, therefore, he receives the
bonus.
(vi) Old partners: AC is less than CC, therefore, they give the
bonus shared according to their profit and loss ratio.

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ACTIVITY/ EVALUATION:

Instruction: Encircle the letter corresponding to the best answer. Support your
answers with good form computations.

1. Maria and Leonora are partners with capital account balances of P60,000 and
P90,000 respectively. They agree to admit Theresa as a partner with a one-
third interest in capital and profits, after agreed revaluation of partnership’s
assets, for his investment of P100,000.

The in Leonora’s capital as a result of the revaluation of partnership’s assets

for the admission of Theresa is:
a. P 20,000 c. P 50,000
b. P 30,000 d. P 66,667

Items 2 to 4 are based on the following:

S (50%) G (50%)
Beginning capital balances P 540,000 P 460,000

S and G partners would like to accept V as a new partner to contribute cash

amounting to P250,000 for a capital credit of P300,000 representing 20% of the
new partnership total capitalization.

2. The total amount of the new partnership total capitalization is:

a. P 1,500,000 c. P 1,200,000
b. P 1,250,000 d. P 1,000,000

3. The amount of bonus to V is:

a. P 250,000 c. P 150,000
b. P 200,000 d. P 50,000

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4. The amount of positive (negative) asset revaluation is:
a. P 300,000 c. P 200,000
b. P 250,000 d. P 150,000

5. If an existing partnership admits a new partner for a 1/5 interest in the

partnership’s total agreed capital of P40,000 for an investment of P10,000, the
admission of the new partner will result in the recognition of:
a. Bonus to the old partners if the total net assets contributed amounted to
P40,000.
b. Bonus to the new partner if the total net assets contributed were valued at
P40,000.
c. Bonus to the new partner if the total nets assets contributed by old partners
amounted to P30,000.
d. No bonus if the total net assets contributed by the old partners were
appraised at P30,000.

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 REFERENCES:

Vera Cruz-Manuel, Zenaida (2017), 21st Century Partnership and Corporation

Accounting: Raintress Trading & Publishing

Zeus Vernon B. Millan (2020), Accounting for Special Transactions (Advanced

Accounting): Bandolin Enterprise

Valencia, Roxas, & Asuncion (2019-2010), Partnership and Corporation

Accounting: Valencia Educational Supplies

Gloria J. Tolentino-Baysa & Ma. Concepcion Yamat Lupisan (2016), Accounting

for Partnership and Corporation; Millenium Books, Inc.

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