BALIUAG UNIVERSITY

College of Business Administration and Accountancy

Financial Accounting and Reporting
2nd Trimester SY 2020-2021

PARTNERSHIP DISSOLUTION: Part II

B. Investment of Assets into the Partnership
Instead of buying an interest from the old partners, a person may also be admitted into a
partnership by investing cash or non-cash assets to the entity. In such cases, the admission of an
incoming partner increases both the total assets and the total partner’s equity.

Illustrative problems for accounting for investment of asset into the partnership by an incoming
partner ( New partner’s investment is equal to his capital credit. Total contributions equal to
agreed capitalization/revised equity)

Case 1

⮚ Assume that A and B are partners with capital balances of P600,000 and P400,000,
respectively and share profits and losses in the ratio of 60:40.
⮚ C is admitted by investing P500,000 cash for a one-third interest in the equity and profits in
the firm.
⮚ The entry to record the admission of C increases total assets and capital by P500,000.
⮚ The total capital of the partnership after the investment of C is P1,500,000 and one-third of
that amount is P500,000. Thus, the investment by C is at book value.

The entry is:

Cash 500,000
C, Capital 500,000
Investment by C

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 BALIUAG UNIVERSITY
College of Business Administration and Accountancy
Financial Accounting and Reporting
2nd Trimester SY 2020-2021

After C’s admission into the partnership, the following are the capital balances

A, Capital P 600,000
B, Capital 400,000
C, Capital 500,000
Total Capital P1,500,000

● In some cases, the amount invested by an incoming partner may not be similar with the amount
credited to his capital account. This indicates that the partners, both old and new partners,
acknowledged that either the old partners or the new partner contributed unidentifiable
advantages into the new firm. This may be due to technical ability or managerial ability of the
old partners or new partner and other factors.

● If the amount credited to the new partner’s capital account does not equal the amount of his
actual contribution, there is a transfer of equity either from the old partners to the new partner
or from the new partner to the old partners. This transfer of equity is referred to as Bonus

Illustrative problems for accounting for investment of assets into the partnership by an
incoming partner with bonus (New partner’s investment is not equal to his capital credit. Total
contributions equal to agreed capitalization/revised equity)

Case 2: Bonus to New Partner

Assume again that A and B are partners with capital balances of P600,000 and P400,000,
respectively and share profits and losses in the ratio of 60:40.
C is admitted by investing P400,000 cash for a 40% interest and that all the assets are fairly
valued.
Examine the relationship between the amount contributed by C and the amount credited to
his capital:

Capital credit to C (1,400,000 x 40%) P560,000

Actual amount contributed by C 400,000
Bonus to C P160,000

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 BALIUAG UNIVERSITY
College of Business Administration and Accountancy
Financial Accounting and Reporting
2nd Trimester SY 2020-2021

✔ Because the capital credit to C of P560,000 is more than his actual investment of P400,000,
then additional equity of P160,000 should be credited to C, Capital, in addition to his actual
investment of P400,000.
✔ This P160,000 bonus to C represents a transfer of capital from the old partners, A and B,
and is debited to their capital accounts.
✔ Such an amount shall be shared by A and B in accordance with their original profit and loss
sharing ratio (60:40).

⮚ The following entry records the admission of C into the partnership, represented by his
investment of P400,000 and bonus from A and B of P160,000.

A, Capital (60% x P160,000) 96,000

B, Capital (40% x P160,000) 64,000
Cash 400,000
C, Capital 560,000
Investment of cash by C and bonus from A and B

Case 3: Bonus to Old Partners

⮚ Assume instead that C invest P400,000 for 25% interest. Let us again compare capital
credit to C with his actual contribution.

Capital Credit to C ( P1,400,000 x 25%) P 350,000

Actual Investment of C 400,000
Bonus to A and B P 50,000

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 BALIUAG UNIVERSITY
College of Business Administration and Accountancy
Financial Accounting and Reporting
2nd Trimester SY 2020-2021

⮚ Because the capital credited to C is lower than his actual investment, then bonus shall be
given to the old partners.

Cash 400,000
C, Capital 350,000
A, Capital (60% x P50,000) 30,000
B, Capital (40% x P50,000) 20,000
Investment of cash by C, with bonus to A and B

● Similar to accounting for a purchase of interest from an old partner, an investment of assets by
a new partner with a value different from the amount credited to his capital account may
indicate that some assets or liabilities of the partnership are overvalued or undervalued.
● In such a case, an adjusting entry should first be taken up to bring the partnership assets and
liabilities to fair values.

Illustrative problems for accounting for investment of assets into the partnership by an
incoming partner with asset revaluation

Case 4: New partner’s investment is equal to his capital credit. Current partner’s agree to
revalue the assets.
 Assume again that A and B are partners with capital balances of P600,000 and P400,000,
respectively and share profits and losses in the ratio of 60:40.
 A and B agreed to accept C in the partnership with a cash contribution of P240,000 for a 20%
interest in the partnership’s total agreed capitalization of P1,200,000.
 Partnership assets will increase twice: for the revaluation and for the cash investment.
 Asset revaluation should be recorded first before admitting the new partner. It should be based
on the agreed profit sharing ratio for the existing partner or the capital ratio if there is no
agreed profit ratio.

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 BALIUAG UNIVERSITY
College of Business Administration and Accountancy
Financial Accounting and Reporting
2nd Trimester SY 2020-2021

Agreed
Contributed Asset Capital/Revised
Partners Capital Revaluation Equity

A P600,000 40,000x60% (P24,000) P 576,000

B 400,000 40,000x40% (16,000) 384,000

C 240,000 240,000

Total P1,240,000 (P40,000) P1,200,000

*C will be credited for 20% based on the total agreed or revised equity of P1,200,000.

 Assuming inventories are to be revalued, two entries will be prepared:

A, Capital (60% x P40,000) 24,000

B, Capital (40% x P40,000) 16,000
Inventories 40,000
To adjust the inventories based on the profit sharing ratio of the partners.
Cash 240,000
C, Capital 240,000
To record the investment of C for a 20% interest in the partnership.

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 BALIUAG UNIVERSITY
College of Business Administration and Accountancy
Financial Accounting and Reporting
2nd Trimester SY 2020-2021

RETIREMENT OR DEATH OF A PARTNER

● The retirement or death of a partner is another cause for partnership dissolution.
● Similar accounting procedures are applied upon the death of a partner and retirement of a
partner.
● The books of the partnership, at the date of the retirement or death of a partner, should be
adjusted and closed.
● Ideally, assets and liabilities are brought to their fair market values to arrive at the adjusted
partners’ equity.
● The equity of the retiring or deceased partner should be settled.
● If settlement cannot be practically completed immediately, the capital account of the
retiring or deceased partner should be converted into a liability (Payable to the Retiring
Partner, in case of retirement, or Payable to the Estate of the deceased partner, in case of
death.

Depending on what has been agreed upon, settlement may either be:
 at book value
 at more than book value,
 at less than book value of the equity of the retiring partner or deceased
partner.

Illustrative problems for accounting for retirement or death of a partner

⮚ Assume that Ace, Ben and Clark have been operating a partnership for several years and
have been sharing profits and losses in the ration of 2:2:1, respectively.
⮚ On June 30, 2020, Clark decided to retire from the partnership.

⮚ After adjusting the assets and liabilities to their fair values, but before settlement to Clark,
their capital accounts show the following balances:

Ace P 200,000
Ben 200,000
Clark 100,000

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 BALIUAG UNIVERSITY
College of Business Administration and Accountancy
Financial Accounting and Reporting
2nd Trimester SY 2020-2021

Case 1: At book value

⮚ Assume that the partners agreed on a cash settlement to Clark of P100,000, the entry on the
books of the partnership is

Clark, Capital 100,000

Payable to Clark (or Cash) 100,000
To record the withdrawal of Clark

⮚ The settlement above is equal to the book value of Clark’s interest, as he is to be paid
P100,000, which is equal to his capital balance.

Case 2: At above book value.

⮚ Assume that Clark is to be paid an amount of P150,000 in settlement of his equity.

⮚ The amount to be paid to Clark is P50,000 more than the book value of his capital (P150,000 –
P100,000).
⮚ If the difference of P50,000 between the amount paid and the book value of his capital is
attributable to undervaluation of land, then land is undervalued by P250,000, computed as
P50,000 ÷ 1/5.
⮚ The revaluation of land and the settlement to the retiring partner are recorded as follows:

Land 250,000
Ace, Capital (2/5 x 250,000) 100,000
Ben, Capital (2/5 x 250,000) 100,000
Clark, Capital (1/5 x 250,000) 50,000
To record the revaluation of land.

Clark, Capital 150,000

Payable to Clark (or Cash) 150,000
To record the withdrawal of Clark

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 BALIUAG UNIVERSITY
College of Business Administration and Accountancy
Financial Accounting and Reporting
2nd Trimester SY 2020-2021

⮚ Assuming that all assets of the partnership are fairly valued at the time of Clark’s
retirement, the P50,000 excess payment to Clark is treated as bonus coming from Ace and
Ben and shall be shared by them according to their remaining profit and loss ratio (2:2).
⮚ The entries to record the bonus or transfer of capital from Ace and Ben as well as the
settlement to Clark are

Ace, Capital (2/4 x P50,000) 25,000

Ben, Capital (2/4 x P50,000) 25,000
Clark, Capital 50,000
Bonus credited to Clark

Clark, Capital 150,000

Payable to Clark (or Cash) 150,000
Settlement to Clark

Case 3: Settlement is below book value

⮚ Assume that Clark is to be paid only P50,000 in full settlement of his equity in the partnership,
the P50,000 excess of his capital balance over the amount to be paid to him is to be credited to
the remaining partners Ace and Ben and shall be shared by the two partners in their remaining
profit and loss ratio (2:2).

⮚ The entries to record bonus and the withdrawal of Clark are as follows:

Clark, Capital 50,000

Ace, Capital (2/4 x 50,000) 25,000
Ben, Capital (2/4 x 50,000) 25,000
Bonus to Ace and Ben

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 BALIUAG UNIVERSITY
College of Business Administration and Accountancy
Financial Accounting and Reporting
2nd Trimester SY 2020-2021

Clark, Capital 50,000

Payable to Clark (or Cash) 50,000
Withdrawal of Clark

❖ A partner may also retire from the partnership by selling his interest to the remaining
partners or to a new partner.

⮚ The accounting procedures for this mode of retirement are similar to the procedures to
account for the admission of a new partner by purchase of interest.

⮚ After recording the retirement by sale of interest, the adjusted capital balance of the retired
partner should have been transferred to the buyer’s capital account.

Sources:

Ballada, Win: Partnership and Corporation Accounting/ Domdane Publishers

Empleo, Robles, Cruz, German: Fundamentals of Accounting Vol. 2, Partnership and Corporation

Manuel, Zenaida: Partnership and Corporation Accounting

Internet Reference:

https://www.sec.gov.ph/wp-content/uploads/2020/01/CivilCode-BookIV_TITLE-IX-Partnership.pdf