CHAPTER 3

PARTNERSHIP
DISSOLUTION
DISSOLUTION
• DEFINITION-Article 1825 of the Civil
Code of the Phil.
It is the change in relation of the
partners caused by any partner ceasing
to be associated in the carrying out of
the business.
DISSOLUTION MAY
LEAD TO:
• FORMATION OF A NEW PARTNERSHIP

• LIQUIDATION
FORMATION OF A NEW
PARTNERSHIP

• This is known as dissolution by

change in ownership structure
LIQUIDATION

• This refers to termination of the

business activities carried on by the
partnership and the winding up of
partnership affairs preparatory to
going out of the business.
CONDITIONS RESULTING TO
PARTNERSHIP DISSOLUTION BY A
CHANGE IN OWNERSHIP
STRUCTURE
• Admission of a new partner
• Retirement or withdrawal of a partner
• Death, incapacity or bankruptcy of a
partner
• Incorporation of a partnership
TYPE OF ADMISSION OF A
NEW PARTNER
• ADMISSION BY PURCHASE
-purchase of interest from one or more of
the original partners

• ADMISSION BY INVESTMENT
-investment or asset contributions to the
partnership
ADMISSION BY PURCHASE

TERMS THAT INDICATE ADMISSION BY PURCHASE

• Purchases
• Sells
• Pays
• Bought
• Sold
• Transferred
ADMISSION BY PURCHASE
PURCHASING INTEREST FROM
ONE PARTNER

C is admitted as a partner of A and B by buying 25%

interest from A for P25,000. Capital balances of
partner A & B are P100,000 and P100,000
respectively.
ENTRY: DR CR
A, CAPITAL 25,000
C, CAPITAL 25,000
ADMISSION BY PURCHASE
PURCHASING INTEREST FROM
BOTH PARTNERS
Partner C will be admitted by buying 25%
interest from each partner by paying P50,000.

ENTRY: DR CR
A, Capital 25,000
B, Capital 25,000
C, Capital 50,000
ADMISSION BY PURCHASE
PURCHASING INTEREST FROM BOTH
PARTNERS
Partner C will be admitted by buying 25% interest
from each partner by paying
a. P75,000
b. P40,000

ENTRY: DR CR
A, capital 25,000
B, capital 25,000
C, Capital 50,000
ADMISSION BY
PURCHASE
POINTS TO REMEMBER
• The only required on the partnership
books is the recording of the transfer
capital from the capital of the selling
partner to the buying partner.

• The amount of capital transferred will be

equal to the book value of interest sold
regardless of the amount paid.
ADMISSION BY
PURCHASE
POINTS TO REMEMBER:
• The amount paid by the buying partner does
not go to the partnership. Therefore there
won’t be a debit to cash.

• No gain or loss that will be recognized in the

partnership books because the purchased of
interest by the new partner is deemed a
personal transaction between the buying
partner and selling partner.
ADMISSION BY PURCHASE

POINTS TO REMEMBER:
• Admission of the new partner by purchase will not
affect the total assets and total capital of the
partnership.
BEFORE AFTER
A, CAPITAL 100,000 75,000
B, CAPITAL 100,000 75,000
C, CAPITAL 50,000
200,000 200,000
ASSET REVALUATION UPON
ADMISSION BY PURCHASE

Malagu and Pogi are partners with capital balances

P100,000 and P200,000 respectively. They share
profit & loss equally. Matsura is admitted by
purchasing ¼ interest from Malagu and Pogi paying
P175,000. However, before the admission of Matsura,
partnership are revalued using as basis the amount to
be paid by Matsura.
ASSET REVALUATION UPON
ADMISSION BY PURCHASE

1) First step:
P175,000 / ¼ = 700,000
2) Second step:
New capital 700,000
Capital before revaluation 300,000
Difference-increase in assets 400,000
ASSET REVALUATION UPON
ADMISSION BY PURCHASE
3) THIRD STEP

MALAGU POGI TOTAL

CAPITAL BALANCES 100,000 200,000 300,000
ADD: INCREASE IN
VALUE OF ASSETS 200,000 200,000 400,000
ADJUSTED CAPITAL 300,000 400,000 700,000
MULTIPLY 1/4 1/4 1/4
INTEREST TRANSFERRED
TO MATSURA 75,000 100,000 175,000
ASSET REVALUATION UPON
ADMISSION BY PURCHASE
Entry to record the asset revaluation:
DR CR
Other assets 400,000
Malagu, Capital 200,000
Pogi, Capital 200,000
Entry to record the admission:
Malagu, Capital 75,000
Pogi, capital 100,000
Matsura, Capital 175,000
ADMISSION BY
INVESTMENT
TERMS THAT WILL INDICATE ADMISSION BY
INVESTMENT:

• Contributes
• Invests
ADMISSION BY
INVESTMENT
TERMS:
• AGREED CAPITAL
It is the amount of new capital set by the partners
for the partnership. It may be equal to or more than
or less than the total contributions of the partners
-new firm capital
-total capital
-agreed capitalization
ADMISSION BY
INVESTMENT
TERMS
• TOTAL CONTRIBUTED CAPITAL
It is the investment of the old and new
partner into the partnership.
• BONUS
it is a transfer of capital from one partner to
another.
• ASSET REVALUATION
necessary adjustments in asset values upon
admission of a new partner.
ADMISSION BY
INVESTMENT
TERMS
• CAPITAL CREDIT
-is the interest or equity of a partner in the
firm.
-it is computed by multiplying agreed capital
by the fraction of interest of a partner.
ADMISSION BY
INVESTMENT
POINTS TO REMEMBER:

AC= CC THERE MAY BE BONUS

AC>CC POSITIVE ASSET REVALUATION
AC<CC NEGATIVE ASSET REVALUATION
ADMISSION BY
INVESTMENT
Ronald and Benedict are partners with capital
balances of P200,000 and P100,000
respectively. They share profits and losses
equally. Albert is to be admitted in the
partnership and invests P100,000 for a 1/5
interest in the new firm capitalization of
P400,000.
ADMISSION BY
INVESTMENT
BONUS TO THE OLD PARTNERS, NO ASSET REVALUATION

AC CC BONUS
OLD PARTNERS-4/5 320,000 300,000 20,000
NEW PARTNER-1/5 80,000 100,000 (20,000)
------------------------------------
400,000 400,000 ---
=======================
ADMISSION BY
INVESTMENT
ENTRY: DR CR
CASH 100,000
RONALD, CAPITAL 10,000
BENEDICT, CAPITAL 10,000
ALBERT, CAPITAL 80,000
ADMISSION BY
INVESTMENT
BONUS TO THE NEW PARTNER, NO ASSET REVALUATION

AC CC BONUS
OLD PARTNERS-3/4 270,000 300,000 (30,000)
NEW PARTNER-1/4 90,000 60,000 30,000
--------------------------------------
360,000 360,000 ---
========================

THE NEW PARTNER WILL INVEST 60,000 FOR A ¼ INTEREST IN

THE AGREED CAPITALIZATION OF 360,000
ADMISSION BY
INVESTMENT
ENTRY: DR CR
CASH 60,000
RONALD, CAPITAL 15,000
BENEDICT, CAPITAL 15,000
ALBERT, CAPITAL 90,000
CAPITAL after admission
Ronald, Capital - P85,000
Benedict, Capital – 185,000
Albert, Capital - 90,000
Total P360,000
 ADMISSION BY
INVESTMENT
POSITIVE ASSET REVALUATION, NO BONUS

AC CC
REVALUATION
OLD PARTNERS-4/5 400,000 300,000 100,000
NEW PARTNER-1/5 100,000 100,000
-------------------------------------
500,000 400,000 100,000
=====================

THE NEW PARTNER WILL INVEST 100,000 FOR A

1/5 INTEREST IN THE NEW FIRM CAPITAL OF
P500,000.
ADMISSION BY
INVESTMENT
ENTRY: DR CR
OTHER ASSETS 100,000
RONALD, CAPITAL 50,000
BENEDICT, CAPITAL 50,000

CASH 100,000
ALBERT, CAPITAL 100,000
ADMISSION BY
INVESTMENT
NEGATIVE ASSET REVALUATION, NO BONUS
AC CC REVAL.
OLD PARTNERS-4/5 240,000 300,000
(60,000)
NEW PARTNER-1/5 60,000 60,000
--------------------------------
300,000 360,000
(60,000)

===================

THE NEW PARTNER WILL INVEST 60,000

ADMISSION BY
INVESTMENT
ENTRY:
DR CR
RONALD, CAPITAL 30,000
BENEDICT, CAPITAL 30,000
OTHER ASSETS 60,000

CASH 60,000
ALBERT, CAPITAL 60,000
 ADMISSION BY
INVESTMENT

BONUS TO NEW PARTNER AND ASSET REVALUATION

AC CC BONUS ASSET REV

OLD PARTNERS-3/4 375,000 300,000 (25,000) 100,000
NEW PARTNER-1/4 125,000 100,000 25,000
---------------------------------------------------
500,000 400,000 - 100,000
===============================

THE NEW PARTNER WILL INVEST 100,000 FOR A 1/4 INTEREST IN THE NEW FIRM CAPITAL OF P500,000.
ADMISSION BY
INVESTMENT
ENTRY:
DR CR
OTHER ASSETS 100,000
BENEDICT, CAPITAL 50,000
RONALD, CAPITAL 50,000

CASH 100,000
BENEDICT, CAPITAL 12,500
RONALD, CAPITAL 12,500
ALBERT, CAPITAL 125,000
ADMISSION BY
INVESTMENT
HOW TO COMPUTE THE AGREED CAPITAL IF IT IS
NOT GIVEN?

• DIVIDE THE INVESTMENT OF THE NEW PARTNER

WITH THE NEW PARTNER’S FRACTION OF INTEREST

• DIVIDE THE INVESTMENT OF THE OLD PARTNERS

WITH THE OLD PARTNERS’ FRACTION OF INTEREST
ADMISSION BY
INVESTMENT
EXAMPLE:
PARTNERS HEPBI AND TWITWIT ARE PARTNERS WITH
CAPITAL BALANCES OF P150,000 EACH. HINSTAGRAM
INVESTS P100,000 FOR A 2/5 INTEREST IN THE NEW
PARTNERSHIP.

TO COMPUTE THE AGREED CAPITAL:

100,000 / 2/5 = P250,000

300,000 / 3/5 = P500,000

THANK YOU!