Partnership

Dissolution
Accounting for Partnerships and Corporations
RCA 2022
Points to be discussed
01. Definition 02. Causes of 03. Accounting for
Dissolution Admission of a Partner
What is Partnership How to account when a
Dissolution? What are the causes of partner is admitted in the
dissolution? Partnership?

04. Accounting for 05. Accounting for Death 06. Accounting for 07. Incorporation of
Purchase of Interest of a of a Partner Retirement of a Partner Partnership
Partner How to account when a
partner die?
How to accounts when the How to account when a How to account when a
interest of a partner is partner withdraws or retires? partnership incorporates?
purchased?

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Definition

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 as distinguished from
the winding up of the business of the partnership

(Civil Code of the Philippines, Art. 1828)

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Causes of Dissolution

• Admission of a new Partner

• Withdrawal or Retirement of a Partner
• Death of a Partner
• Incorporation of Partnership

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Admission of a New Partner

Purchase of Interest from Existing

Partners
Illustration 1

Deogracia Corpuz and Magdalena Solis are

partners with capital balances of P400,000
and P200,000, respectively. They share
profits in the ratio of 3:1. Their business has
been very successful. All indications shows
that it will continue to be.

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 Purchase of Interest From Existing Partners
Case no. 1: Payment to old partners is equal to interest purchased.

Partners Deogracia Corpuz and Magdalena Solis received an offer from Leopoldo Medina to purchase
directly one-fourth of each of their interest in the partnership for P150,000. The partners agreed to admit
Leopoldo Medina as a member of the firm.

Journal Entry:
Corpuz, Capital 100,000
Solis, Capital 50,000
Medina, Capital 150,000
To record admission of Medina

One-fourth of each partner’s capital was transferred to the new partner. The Partnership did not receive the cash paid because the
transaction is between Medina and partners Corpuz and Solis personally, not between Medina and the partnership.
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 Purchase of Interest From Existing Partners
Case no. 2: Payment to old partners is less than the interest purchased.

Assume that Leopoldo Medina directly purchased one-third of each partner’s interest in the business. One-
third of each partner’s capital is to be transferred to the new partner. Medina paid the partners P160,000.

Journal Entry:
Corpuz, Capital 133,333
Solis, Capital 66,667
Medina, Capital 200,000
To record Medina’s admission.

The new partner was credited for P200,000 interest in the new partnership. The equity is transferred to Medina at its book value to the
old partners of P200,000. The negotiated price of P160,000 does not affect the entry because the exchange is between Medina and the
old partners and does not involve partnership assets.
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 Purchase of Interest From Existing Partners
Case no. 3: Payment to old partners is more than the interest purchased – with revaluation.

Assume that Leopoldo Medina directly purchased one-third of each of the partner’s interest in the business.
One-third of each partner’s capital is to be transferred to the new partner. Medina paid the partners
P300,000. However, the parties agreed that goodwill is to be recorded in the books before the admission so
that Medina’s one-third interest will equal the amount of payment. Goodwill is an asset without physical
characteristics whose value lies in rights, privileges and competitive advantage which this intangible asset
gives to the business.

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 Purchase of Interest From Existing Partners
Computation of Implied Value of Goodwill.

Implied Value of the Partnership [P300,000/(1/3)] P900,000

Less: Book Value of the Partnership 600,000
Implied Goodwill P300,000

Journal Entry:

Before admission

Goodwill 300,000
Corpuz, Capital 225,000
Solis, Capital 75,000
10 To record implied goodwill
Purchase of Interest From Existing Partners
Journal Entry:

Upon Admission

Corpuz, Capital 208,333

Solis, Capital 91,667
Medina, Capital 300,000
To record Medina’s admission

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Admission of a New Partner

Investment of Assets in a Partnership

Illustration 2

Virginia Yacapin and Marivis Gangoso are

partners with capital balances of P400,000
and P200,000, respectively. They share
profits in the ratio of 3:1. The partners
agreed to admit Leo Paolo Perez as a
member of the firm.

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Guide for Admission via Investment

Bonus Method Total Contributed Capital is always EQUAL to Total Agreed Capital

Goodwill Method or Total Contributed Capital is not EQUAL to Total Agreed Capital
Asset Revaluation
Method
Then you can check if the bonus or asset revaluation is to be credited
to the new partner/(s) or to the old partner/(s)

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 Investment of Assets in a Partnerships
Method 1. Bonus Method. Case no. 1: Bonus to Old Partners (TAC is stated).

Assume that Leo Paolo Perez invested P250,000 for a one-fourth interest in the business. The partners
decided not to revalue the assets of the partnership and that the total agreed capital is P850,000.

TCC Bonus TAC

Yacapin 400,000 28,125 428,125
Gangoso 200,000 9,375 209,375
Total 600,000 37,500 637,500
Perez 250,000 (37,500) 212,500
Total 850,000 0 850,000

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 Investment of Assets in a Partnerships
Method 1. Bonus Method. Case no. 1: Bonus to Old Partners (TAC is stated).

Journal Entry:

Cash 250,000
Perez, Capital 250,000
To record investment of Perez

Perez, Capital 37,500

Yacapin, Capital 28,125
Gangoso, Capital 9,375
To record bonus to old partners

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 Investment of Assets in a Partnerships
Method 1. Bonus Method. Case no. 2: Bonus to Old Partners (TAC is not explicitly stated).

Assume that Leo Paolo Perez invested P400,000 in the business. Out of the total cash investment,
P100,000 is considered as a bonus to Partners Yacapin and Gangoso.

TCC Bonus TAC

Yacapin 400,000 75,000 475,000
Gangoso 200,000 25,000 225,000
Total 600,000 100,000 700,000
Perez 400,000 (100,000) 300,000
Total 1,000,000 0 1,000,000

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 Investment of Assets in a Partnerships
Method 1. Bonus Method. Case no. 2: Bonus to Old Partners (TAC is not explicitly stated).

Journal Entry:

Cash 400,000
Perez, Capital 400,000
To record investment of Perez

Perez, Capital 100,000

Yacapin, Capital 75,000
Gangoso, Capital 25,000
To record bonus to old partners

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 Investment of Assets in a Partnerships
Method 1. Bonus Method. Case no. 3: Bonus to New Partners (TAC is stated).

Assume that Leo Paolo Perez invested P240,000 for a one-third interest in the business. The total agreed
capital is P840,000. The investment of Perez resulted to a bonus.

TCC Bonus TAC

Yacapin 400,000 (30,000) 370,000
Gangoso 200,000 (10,000) 190,000
Total 600,000 (40,000) 560,000
Perez 240,000 40,000 280,000
Total 840,000 0 840,000

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 Investment of Assets in a Partnerships
Method 1. Bonus Method. Case no. 3: Bonus to New Partners (TAC is stated).

Journal Entry:

Cash 240,000
Perez, Capital 240,000
To record investment of Perez

Yacapin, Capital 30,000

Gangoso, Capital 10,000
Perez, Capital 40,000
To record bonus to new partners

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 Investment of Assets in a Partnerships
Method 1. Bonus Method. Case no. 4: Bonus to New Partners (TAC is not explicitly stated).

Assume that Leo Paolo Perez invested P300,000 for a 50% interest in the business. Virginia Yacapin and
Marivis Gangoso transferred part of their capital balance to that of Leo Paolo Perez as a bonus. The
investment of Perez resulted to a bonus as stated. Under the bonus method, the total contributed capital is
equal to the total agreed capital. It is also clearly specified that the new partner will receive the bonus.

TCC Bonus TAC

Yacapin 400,000 (112,500) 287,500
Gangoso 200,000 (37,500) 162,500
Total 600,000 (150,000) 450,000
Perez 300,000 150,000 450,000

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Total 900,000 0 900,000
 Investment of Assets in a Partnerships
Method 1. Bonus Method. Case no. 4: Bonus to New Partners (TAC is not explicitly stated).

Journal Entry:

Cash 300,000
Perez, Capital 300,000
To record investment of Perez

Yacapin, Capital 112,500

Gangoso, Capital 37,500
Perez, Capital 150,000
To record bonus to new partners

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 Investment of Assets in a Partnerships
Method 2. Goodwill Method. Case no. 1: Goodwill to Old Partners (TAC is stated).

Assume that Leo Paolo Perez invested P275,000 for a one-fourth interest in the business. The total agreed
capital is P1,100,000. Since Perez is willing to invest P275,000 for a one-fourth interest in the P875,000
total contributed capital, there is an implication that the partnership has unrecorded asset values. The
amount of unrecorded asset is determined based on Perez’s investment.
TCC Revaluation TAC
Yacapin 400,000 168,750 568,750
Gangoso 200,000 56,250 256,250
Total 600,000 225,000 825,000
Perez 275,000 0 275,000
Total 875,000 225,000 1,100,000
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 Investment of Assets in a Partnerships
Method 2. Goodwill Method. Case no. 1: Goodwill to Old Partners (TAC is stated).

Journal Entry:

Cash 275,000
Perez, Capital 275,000
To record investment of Perez

Goodwill 225,000
Yacapin, Capital 168,750
Gangoso, Capital 56,250
To record Goodwill to old partners

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 Investment of Assets in a Partnerships
Method 2. Goodwill Method. Case no. 2: Goodwill to Old Partners (TAC is not explicitly stated).

Assume that Leo Paolo Perez invested P300,000 for a one-fourth interest in the business. Goodwill is
recorded in the business’ books prior to Leo Paolo Perez’s admission. The investment of Perez resulted to
goodwill as stated. Under the goodwill method, the total contributed capital is less than the total agreed
capital.
TCC Revaluation TAC
Yacapin 400,000 225,000 625,000
Gangoso 200,000 75,000 275,000
Total 600,000 300,000 900,000
Perez 300,000 0 300,000
Total 900,000 300,000 1,200,000
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 Investment of Assets in a Partnerships
Method 2. Goodwill Method. Case no. 2: Goodwill to Old Partners (TAC is not explicitly stated).

Journal Entry:

Cash 300,000
Perez, Capital 300,000
To record investment of Perez

Goodwill 300,000
Yacapin, Capital 225,000
Gangoso, Capital 75,000
To record Goodwill to old partners

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 Investment of Assets in a Partnerships
Method 2. Goodwill Method. Case no. 3: Goodwill to New Partners (TAC is stated).

Assume that Leo Paolo Perez invested P250,000 for a one-third interest in the business. The total agreed
capital is P900,000. Even if the total agreed capital is not given. It can be derived by reference to the 2/3
interest of the old partners in the new business. The total valuation of the new partnership is P900,000
(P600,000 divided by 2/3).
TCC Revaluation TAC
Yacapin 400,000 0 400,000
Gangoso 200,000 0 200,000
Total 600,000 0 600,000
Perez 250,000 50,000 300,000
Total 850,000 50,000 900,000
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 Investment of Assets in a Partnerships
Method 2. Goodwill Method. Case no. 3: Goodwill to New Partners (TAC is stated).

Journal Entry:

Cash 250,000
Perez, Capital 250,000
To record investment of Perez

Goodwill 50,000
Perez, Capital 50,000
To record Goodwill to new partners

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 Investment of Assets in a Partnerships
Method 2. Goodwill Method. Case no. 4: Goodwill to New Partners (TAC is not explicitly stated).

Assume that Leo Paolo Perez invested P400,000 in the business and is allowed a credit of P120,000 for
goodwill upon admission. The investment of Perez resulted to goodwill as stated. Under the goodwill
method, the total contributed capital is less than the total agreed capital.
TCC Revaluation TAC
Yacapin 400,000 0 400,000
Gangoso 200,000 0 200,000
Total 600,000 0 600,000
Perez 400,000 120,000 520,000
Total 1,000,000 120,000 1,120,000

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 Investment of Assets in a Partnerships
Method 2. Goodwill Method. Case no. 4: Goodwill to New Partners (TAC is not explicitly stated).

Journal Entry:

Cash 400,000
Perez, Capital 400,000
To record investment of Perez

Goodwill 120,000
Perez, Capital 120,000
To record Goodwill to new partners

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Withdrawal or Retirement of a Partner

Sale of Interest to a Partner or Outsider

When a partner’s interest is sold to another

partner or an outsider, the withdrawing partner is
paid from the personal assets of the buyer.
Accounting for this sale is similar to admission
by purchase of interest. The total assets of the
partnership are not affected by the consideration
involved. The required entry will only be a debit
to the seller’s capital account for his capital
balance and a credit to the buyer’s capital
account for the same amount.

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Sale of Interest to the Partnership

When a withdrawing partner sells his interest to

the partnership, the partner is paid from the
partnership assets. He may receive an amount
equal to, greater than or less than the balance of
his capital account. The effect of withdrawal is
to reduce the assets and the owners’ equity of the
partnership.

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Illustration 3

Suppose that Bienvenida Alvaro is retiring in midyear form the partnership of Dizon,
Magsino and Alvaro because of family relocation. Physical distance will prevent her
from coping with the daily rigors of their fashion and beauty consulting business. After
the books have been adjusted for the semi-annual profits their capital balances are as
follows: (The profit and loss ratio of the partners is 1:2:1)

Dizon, Capital 640,000

Magsino, Capital 630,000
Alvaro, Capital 310,000

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Case No. 1 Withdrawal at book value

Assume that Bienvenida Alvaro agreed to accept payment equal to her interest. The entry to record the
payment of cash and the closing of her capital account will be:

Alvaro, Capital 310,000

Cash 310,000
To record retirement of Alvaro

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Case No. 2 Withdrawal at more than book value

Assume that Bienvenida Alvaro demanded a P400,000 settlement for her interest because she firmly believed that
she has contributed so much to the success of the business. The remaining partners agreed for old time’s sake. If the
current fair value of the partnership’s net assets exceeded book value, the settlement price to the withdrawing
partner will be greater than his capital account balance. The excess payment is treated either as a bonus to the
retiring partner from the continuing partners as a goodwill.

1. Bonus to Retiring Partner:

Dizon, Capital 30,000
Magsino, Capital 60,000
Alvaro, Capital 310,000
Cash 400,000
To record retirement of Alvaro

The entry reflected the fact that Dizon and Magsino granted a P90,000 bonus to Alvaro that was charged to their
capital
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accounts in their profit and loss ratios.
Case No. 2 Withdrawal at more than book value

2. Goodwill equal to excess Payment:

Goodwill 90,000
Alvaro, Capital 310,000
Cash 400,000
To record retirement of Alvaro

Goodwill is recorded only to the extent paid for by the continuing partnership. This approach provides a revaluation
of Alvaro’s share of Partnership assets but not as to Dizon’s and Magsino’s capital interest.

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Case No. 2 Withdrawal at more than book value

3. Revaluation of Total Partnership Capital Based on Excess Payment:

Goodwill 360,000
Dizon, Capital 90,000
Magsino, Capital 180,000
Alvaro, Capital 90,000
To record implied goodwill

The total undervaluation of the partnership is measured by the amount implied by the excess payment. In this case,
the P360,000 is computed by dividing the P90,000 excess payment by Alvaro’s 25% profit share. Alvaro’s
retirement is recorded as follows:

Alvaro, Capital 400,000

Cash 400,000
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To record retirement of Alvaro
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Death of a Partner
Death of a Partner

The death of a partner dissolves a partnership. When the death of a partner does not result to
liquidation, the accounting procedures to be followed are similar to those discussed in the
withdrawal of a partner. The deceased partner may be considered to have retired from the
partnership and his heirs or estate can expect to receive the amount of his interest from the
business. If payment to the estate of the deceased cannot be made immediately, the balance
in the capital account of the deceased partner should be transferred to a liability account,
payable to the estate.

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Incorporation of a Partnership
Incorporation of A Partnership

A partnership may decide to incorporate after evaluating

the various advantages of having a corporate form of
business organization. After necessary adjusting and
closing entries, the assets and liabilities of the
partnership are transferred to the corporation in exchange
for shares of stock. The shares received by the
partnership are distributed to the partners based on their
equity interests.

In the books of the corporation, the receipt if transferred

assets and liabilities will be recorded along with the
issuance of share capital to the incorporators, the
“former”
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partners.
Illustration 4

Partners Elisa Diaz and Pamela Castillo, who share equally in profits and losses, have the following
items in their partnership’s statement of financial position as at December 31, 2020:

Cash 120,000 A/P 172,000

A/R 100,000 Accum. Dep’n. 8,000
Inventory 140,000 Dizon, Capital 140,000
Equipment 80,000 Castillo, Capital 120,000
Total 440,000 Total 440,000

They agreed to incorporate their partnership, with the new corporation absorbing the net assets after the
following adjustments: provision for allowances for doubtful accounts of P10,000; restatement of
inventory to its current fair value of P160,000; and additional recognition of depreciation on the
equipment of P3,000.
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Illustration 4

The corporation’s share capital will have a par value of P100, and the partners will be issued the shares
equivalent to their adjusted capital balances. The journal entries to incorporate the partnership will be:

Cash 120,000
A/R 100,000
Inventory 160,000
Equipment 69,000
Allow. For D/A 10,000
Accounts Payable 172,000
Ordinary Shares 267,000

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End of Lesson
Thank you.

RCA 2022