PARTNERSHIP DISSOLUTION

Accounting 2- Partnership and Corporations

LEARNING OBJECTIVES
 Define partnership dissolution and identify the condition giving rise to
it.

 Understand the accounting procedures to record the admission of a new

partner by purchase.

 Understand the accounting procedures to record the admission of a new

partner by investment.
PREVIEW OF THE CHAPTER
PARTNERSHIP DISSOLUTION
 Dissolution is defined in Article 1825 of the Civil Code of the Note:
Philippines as the change in the relation of the partners caused by any Dissolution,
partner ceasing to be associated in the carrying out of the business. therefore, does
 Dissolution refers to the termination of the life of an existing not always
result to
partnership. The dissolution of an old partnership may be followed by: liquidation
 The formation of a new partnership. This is known as dissolution by although
change in ownership structure. The new partnership continues the business liquidation is
activities of the dissolved partnership without interruption. always
 Liquidation. This refers to the termination of the business activities carried preceded by
on by the partnership and the winding up of a partnership affair preparatory to dissolution
going out of business.
CONDITIONS RESULTING TO PARTNERSHIP
DISSOLUTION

 The following conditions will result 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
ADMISSION OF A NEW PARTNER
 A new partner, with the consent of all the partners, may be admitted in an
existing partnership. Upon admission of a new partner, the firm is
automatically dissolved and a new partnership is formed. All the partners
draw a new contract, Articles of Co-Partnership. The admission of a new
partner gives rise to the following accounting problems:

1. Determination of the profit or loss from the beginning of the accounting period to
the date of admission of anew partner and the distribution of such profit or loss to
the old partners.
ADMISSION OF A NEW PARTNER

2. Correction of accounting errors in prior periods like overstatement or

understatement of inventories, excessive depreciation charges and failure to
provide adequately for doubtful accounts.

3. Revaluation of accounts which may call for the restatement of the existing assets of
the partnership to appraise or fair market values and recognition of unrecorded
liabilities of the firm. All adjustments to the accounts give rise to profit or loss;
such adjustments are recorded in the partnership books as increase or decrease in
capital shared according to partners' profit.

4. Closing of the partnership books.

TYPES OF ADMISSION OF A NEW PARTNER

 A new partner may be admitted into a partnership by:

 1.Purchase of interest from one or more of the original (old) partners; or

 2.Investment or asset contributions to the partnership

ADMISSION BY PURCHASE
 With the consent of all the partners, a new partner may be admitted in an
existing partnership by purchasing a capital equity interest directly from one
or more of the old partners. Terms such as purchases, sells, pays, bought, sold
and transferred indicate admission by purchase.

 The sale to a new partner of an old partner's interest in an existing

partnership is a personal transaction between the selling partner and the
buying partner. The amount paid by the partner who purchases an interest
goes personally to the partner who sells his or her interest; the amount paid
does not go to the partnership.
ADMISSION BY PURCHASE
 The only entry required on the partnership books is the recording of the
transfer of capital from the capital account of the selling partner to that of the
buying partner. The amount of capital transferred will be equal to the book
value of the interest sold regardless of the amount paid. The pro-form entry
is:
(Name of seller), Capital xxx
(Name of buyer), Capital xxx

 The purchase price of the interest sold to the new partner may be:
 1.equal to the book value of interest sold
 2.less than the book value of interest sold
 3.more than the book value of interest sold
 ILLUSTRATIVE PROBLEMS
 Coloma and Claudio are partners with capital balances of P100,000 and P50,000,
respectively. They share profits and losses equally. Cordero is a new partner

 Case 1.a- Purchase at book value from one partner only. Cordero purchases a
1/5 interest from Coloma by paying P20,000.
Coloma, Capital 20,000
Cordero, Capital 20,000
P100,000 x 1/5 = P20,000

The P20,000 paid by the new partner Cordero to the old partner Coloma should not be reflected in the partnership books because the said
amount goes directly to Coloma. What is recorded in the partnership books is the transfer of 1/5 of the capital of Coloma to Cordero. The
amount paid in the purchase is equal to the book value of the acquired 1/5 interest; hence, the sale of interest does not give rise to gain or
loss to Coloma.
 ILLUSTRATIVE PROBLEMS
 Case 1.b- Purchase at book value from more than one partner. Cordero purchases 1/5
interest from the old partners by paying P30,000.
Coloma, Capital 20,000
Claudio, Capital 10,000
Cordero, Capital 30,000
P100,000 x 1/5 = P20,000
P50,000 x 1/5 = P10,000

The P30,000 paid by Cordero to Coloma and Claudio should not be reflected in the partnership books because the said
amount goes directly to Coloma and Claudio. What is recorded in the partnership books is the transfer of 1/5 of the capital
of the old partners Coloma and Claudio (P20,000 and P10,000, respectively) to the new partner Cordero. The admission of
the new partner, by purchasing a 1/5 interest from the old partners at book value, does not result in a gain or loss to the old
partners.
 ILLUSTRATIVE PROBLEMS
 Case 2- Purchase at less than book value. Cordero purchases 1/5 interest form
the old partners by paying P25,000. Coloma,
Capital 20,000 Claudio, Capital
10,000 Cordero,
Capital 30,000 P100,000 x 1/5 = P20,000
P50,000 x 1/5 = P10,000

The P25,000 paid by Cordero to Coloma and Claudio should not be reflected in the partnership books because the said
amount was paid directly to the partners. What is recorded in the partnership books is the transfer of 1/5 of the capital of
the old partners (P20,000 and P10,000, respectively) to the new partner. The difference of P5,000 is a personal loss of the
selling (old)partners.
 ILLUSTRATIVE PROBLEMS
 Case 3- Purchase at more than book value. Cordero pays P40,000 for a 1/5
interest of the old partners.
Coloma, Capital 20,000
Claudio, Capital 10,000
Cordero, Capital 30,000

The P40,000 payment made by Cordero to Coloma and Claudio should not be reflected in the partnership books. What is
recorded in the books of the partnership is the transfer of 1/5 of the capital of the old partners to the new partner. The
P10,000 excess payment is a personal gain of Coloma and Claudio.
KEY POINTS
 In the preceding four cases, 1a, 1b, 2 and 3, the transfer of capital from the
old partners to the new partner is recorded at book value regardless of the
amount paid. Payments at less than book value and at more than book value
are recorded as if they were made at book value.

 In addition, the four cases shows that the total partnership capital before and
after the admission of the new partner are the same Thus, the total
partnership capital of P150,000 before the admission of Cordero is also the
total partnership capital after his admission. Therefore, the admission of a
new partner by purchase will not affect the total assets and the total capital of
the partnership.
ADMISSION BY INVESTMENT

 The admission of a new partner by investment is a transaction between the

original partnership and the new partner. The use f 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 the new partner
depends upon the capital interest credited to the partners' accounts.
ADMISSION BY INVESTMENT

 Illustrative Problem B: Calmer and Castro are partners with capital

balances of P200,000 and P100,000, respectively. They share profits and
losses equally Conde is to be admitted in the partnership.
 Case 1- Conde invests P100,000.
Cash 100,000
Condo, Capital 100,000
CHANGE IN CAPITAL STRUCTURE BY WITHDRAWAL
OR RETIREMENT OF A PARTNER
 SALE OF INTEREST TO THE PARTNERSHIP

 A retiring partner may sell his capital interest to the continuing partners
through the partnership. The partnership has the obligation to make payment
to the retiring partner either by:

 1.payment in cash;
 2.transfer of noncash assets; or
 3.recognition of a liability for the full or the balance of the unpaid interest of the
retiring partner.
 Sale of interest to the partnership. Diaz sold his interest to the partnership.
The partners agreed to make immediate cash settlement to the retiring
partner.

 Case A - Settlement to retiring partner is equal to his capital interest. The

partnership paid Diaz P82,000.
Diaz, Capital 82.000
Cash 82,000
 Case B- Settlement is less than the capital interest of the retiring partner (at less
than book value).The partnership paid Diaz P76,000 which is P6,000 less than
his capital interest of P82,000. The difference between the amount of payment
and the capital interest of Diaz may now be considered as:

1.Bonus to the remaining partners (Bonus Method) Diaz,

Capital 82,000 Cash
76,000 Dy, Capital
2,790 David, Capital 3,210

P6,000 x
40/86 = P2,790 P6,000 x 46/86 = P3,210
 Case C- Settlement is more than the capital interest of the retiring partner. The
partnership paid Diaz P88,000 which is P6,000 more than his capital interest of
P82,000. The difference between the amount of payment and the capital interest of
Diaz may now be considered as:

2.Bonus to the retiring partners (Bonus Method) Diaz,

Capital 82,000 Dy, Capital
2,790 David, Capital 3,210
Cash
88,000
P6,000 x
40/86 = P2,790 P6,000 x 46/86 =
P3,210