PARTNERSHIP DISSOLUTION

Changes in Ownership
DISSOLUTION

 Change in the relation of the partners

 Does not necessarily terminate the business
 Gives way to two instances
1. New Entity
2. Liquidation
VALUATION APPROACHES
1. Revaluation Approach (Goodwill Procedure – Non GAAP)
 Fair value of the assets acquired and liabilities assumed at
dissolution date
 Departure from IFRS 3 Business Combination
2. Book Value Approach (Bonus Procedure – GAAP)
 Private sales of interests provide no basis for revaluation

 Mutually exclusive

 P/L interest > Capital Interest: Bonus

 P/L interest < Capital interest: Revaluation
GOODWILL METHOD

Book Value of Existing (Old) Partnership xxx

Less: Write downs in accordance with GAAP (xxx)
Fair Value of New Contribution xxx
Revaluation xxx
TOTAL AGREED CAPITAL xxx
BONUS METHOD

Book Value of Existing (Old) Partnership xxx

Less: Write downs in accordance with GAAP (xxx)
Fair Value of New Contribution xxx
TOTAL AGREED CAPITAL xxx
CAUSES OF DISSOLUTION

1. Admission of a new partner

2. Withdrawal or retirement of a partner
3. Death or incapacity of a partner
4. Incorporation of a partnership
ADMISSION OF A NEW PARTNER
 With the consent of all the partners
 Types:
1. Admission by Purchase of Interest
 Selling Partner(s) to Incoming partner
 Personal transaction; no additional capital in the partnership

2. Admission by Investment
 Incoming partner invests something to the partnership (i.e. additional capital)
Admission by Purchase of Interest
On January 1, 2020, X and Y has capital balances of P60,000 and 40,000 respectively,
sharing profits and loss at 70:30. Om this date, Z is admitted to the partnership.

1. Z purchases ¼ interest in the firm paying P25,000.

 45,000; 30,000; 25,000
2. Z purchases ¼ of X’s interest for P18,000 and ¼ of Y’s interest for P12,000.
 Bonus method: 45,000; 30,000; 25,000
3. Goodwill method: 55,500; 34,500; 30,000Z purchases ¼ of X’s interest for P18,000
and ¼ of Y’s interest for P12,000.
 Bonus method: 45,000; 30,000; 25,000
 Goodwill method: 55,500; 34,500; 30,000
4. Z purchases ¼ interest in the partnership for P22,000.
 Bonus method: 45,000; 30,000; 25,000
 Goodwill method: 38,700; 27,300; 22,000
Admission by Investment
On January 1, 2020, G and H have capital balances of P20,000 and 10,000 respectively, sharing profits
and loss at 60:40. On this date, J is admitted to the partnership.

1. J invests 10,000 for a ¼ interest in the firm.

 20,000; 10,000; 10,000
2. J invests 10,000 for a 35% interest in the firm. TAC is P40,000. Bonus to New Partner is given.
 Bonus method: 17,600; 8,400; 14,000
3. J invests P10,000 for a 1/3 interest in the firm and is allowed a credit of P15,000. Revaluation to
new partner is given.
 20,000; 10,000; 15,000
4. J invests fixed assets with a fair value of P25,000 with an assumed mortgage of P5,000, for a 30%
interest in capital with bonus to be recognized to old partners. Before the admission, the
partnership had an equipment of P4,000 with a fair value of P7,000.
 Bonus method: 23,000; 12,000; 15,000
5. J invests cash of P24,000 for a 37.5% interest in a total agreed capital of P64,000. Partnership PPE
is undervalued by P7,000.
 26,000; 14,000; 24,000
WITHDRAWAL/RETIREMENT OF PARTNER

 Retiring partner sells interest to third party

 Retiring partner sells interest to one or more remaining partners
 ALL partners may agree to transfer partnership assets to retiring
partner
 Cash payment
 Non-cash assets payment
 Recognition of liability for unpaid interest
Payment to Retiring Partner

I. Payment @ Book Value

II. Payment @ More than Book Value
a) Bonus to retiring partner
b) Partial revaluation
c) Total revaluation
III. Payment @ Less than Book Value
a) Bonus to remaining partner(s)
b) Partial revaluation
c) Total revaluation
Illustration
Assets Liabilities and Capital
Cash 50,000 Liabilities 10,000
Non cash assets 40,000 K, Capital (30%) 30,000
Loan receivable - K 5,000 L, Capital (50%) 40,000
M, Capital (20%) 15,000
TOTAL 95,000 TOTAL 95,000
Data for KLM Partnership on Jan 1, 2020 is given above. P/L ratios are given in
the parentheses. On May 1, 2020, K retires from the partnership. The net income
of the partnership amounted to P20,000. The partnership paid cash to the
retiring partner also on the retirement date.
I. Partnership paid K, P31,000.
II. Partnership paid K, P35,000. Included in the noncash assets is an
inventory costing P6,000 with a fair value of P10,000. The
remaining partners continue to use their old profit or loss ratio.
A. Bonus to Retiring Partner: 0; 47,143; 17,857
B. Partial Revaluation: 0; 52,000; 19,800
C. Total Revaluation: 0; 56,667; 21,667
III. Partnership paid K, P26,000. Included in the noncash assets is an
inventory costing P6,000 with a fair value of P10,000. The
remaining partners continue to use their old profit or loss ratio.
A. Bonus to Retiring Partner: 0; 53,571; 20,429
B. Partial Revaluation: 0; 50,000; 19,000
C. Total Revaluation: 0; 41,666; 16,667
DEATH OF A PARTNER
 Payment to dead partner’s estate
 Payment from surviving partners, partnership
assets, or partnership insurance proceeds.
INCORPORATION OF A PARTNERSHIP

 Secure advantages of corporate form

 Each partner receives an equitable portion of the capital stock issued by the
newly-formed corporation
 Appraisal of net assets
 Proceeds from sale of shares is divided between the partners on the basis of
their adjusted capital balances
Illustration
 B and C have adjusted capital balances of P60,000 and P24,000, respectively.
B&C Corporation is authorized to issue 10,000 shares at P10 par value. It
issued 7,000 shares at P12 per share in exchange for the net assets of the
partnership.

B, Capital............................................60,000
C, Capital............................................24,000
Share Capital................................................70,000
Share Premium..............................................14,000
(B: P60,000 / P12 per share = 5,000 shares)
(C: P24,000 / P12 per share = 2,000 shares)