03 - Partnership Dissolution
03 - Partnership Dissolution
DISSOLUTION
PARTNERS It is the change in the relation of the
partners caused by any partner ceasing
HIP to be associated in the carrying on as
distinguished from the winding up of
DISSOLUTI the business.
(Art. 1828)
ON
CAUSES 1. Admission of a new partner
OF
a. by purchase of interest, and
b. by investment
DISSOLU
2. Withdrawal or retirement of a partner, and
3. Death of a partner
TION
4. Incorporation of a partnership
ASSIGNME
NT OF AN An assignment does not itself change the
relationship of the partners. Assignment only
entitles the assignee to receive the assigning
INTEREST partner’s interest in future partnership profit and
partnership assets in the event of liquidation.
TO A THIRD
PARTY
ADMISSION OF A NEW PARTNER
Case 1a : Purchase at book value from one partner only. C purchases a 1/5 interest from A by
paying P20,000.
A, CAPITAL 20,000
C, CAPITAL 20,000
ILLUSTRATION:
A and B are partners with capital balances of P100,000 and P50,000, respectively. They share
profits and losses equally. Cordero is a new partner.
Case 1b: Purchase at book value from more than one partner. C purchase 1/5 interest from old
partners by paying 30,000.
Case 2 – Purchase at less than book value. C purchases 1/5 interest from the old partners by
paying P25,000.
Case 3 – Purchase at more than book value. C purchases 1/5 interest from the old partners by
paying P40,000.
BY PURCHASE
ILLUSTRATION:
A and B are partners with capital balances of P100,000 and
P50,000, respectively. They share profits and losses equally. C
is a new partner who purchases 1/5 interest from A and B
paying P40,000.
However, before the admission of C, partnership assets are to
be revalued using as the basis of the amount to be paid by C.
A and B are partners with capital balances of P100,000 and P50,000,
respectively. They share profits and losses equally. C is a new partner who
purchases 1/5 interest from A and B paying P40,000.
However, before the admission of C, partnership assets are to be revalued
using as the basis of the amount to be paid by C.
STEP 1: The new partnership capital is equal to the amount paid by the
incoming partner divided by his fraction of interest.
STEP 2: The amount of asset revaluation is equal to the new partnership capital less old
partnership capital.
Asset revaluation = P200,000 – P150,000 = P50,000
STEP 3: The allocation of the amount of asset revaluation among the old partners is as follows:
P50,000 / 2 = P25,000 per partner
A and B are partners with capital balances of P100,000 and P50,000, respectively. They share
profits and losses equally. C is a new partner who purchases 1/5 interest from A and B paying
P40,000.
However, before the admission of C, partnership assets are to be revalued using as the basis of
the amount to be paid by C.
STEP 4: The capital balances of the old partners after the asset revaluation is equal to their old
capital balances plus their share in the asset revaluation.
A B
Capital balances before reval. P100,000 P50,000
Share on asset reval. 25,000 25,000
Capital balances after reval. P125,000 P75,000
A and B are partners with capital balances of P100,000 and P50,000, respectively. They share
profits and losses equally. C is a new partner who purchases 1/5 interest from A and B paying
P40,000.
However, before the admission of C, partnership assets are to be revalued using as the basis of
the amount to be paid by C.
STEP 5: The amount of interest transferred by the old partners to the new partner is based on
the new capital balances (capital balances after the asset revaluation).
A B
Capital balances after reval. P125,000 P75,000
Interest transferred 1/5 1/5
Capital transferred to C P25,000 P15,000
A and B are partners with capital balances of P100,000 and P50,000, respectively. They share
profits and losses equally. C is a new partner who purchases 1/5 interest from A and B paying
P40,000.
However, before the admission of C, partnership assets are to be revalued using as the basis of
the amount to be paid by C.
STEP 5: Record journal entries for the asset revaluation and the admission of C
Asset P50,000
A, Capital P25,000
B, Capital P25,000
A, Capital P25,000
B, Capital P15,000
C, Capital P40,000
Any gain or loss recognized subsequent to recording
the admission will be allocated on the basis of the new
NT
2. Bonus approach; and
3. revaluation approach
Contributed capital:
The investment of all partners, both old and new, to the
partnership.
Agreed capital:
DEFINITIO The amount of new capital set by the partners for the
partnership.
CASE 1- No bonus, no asset revaluation. C invests P100,000 for a ¼interest in the agreed
capital of P400,000.
AC CC
OLD (3/4) 300,000 300,000
NEW (1/4) 100,000 100,000
TOTAL 400,000 400,000
CASH P100,000
C, CAPITAL P100,000
A and B are partners with capital balances of P200,000 and P100,000 respectively. They share
profits and losses equally. C is to be admitted in the partnership.
CASE 2- Bonus to old partners, no asset revaluation. C invests P100,000 for a 1/5 interest in the
agreed capital of P400,000.
AC CC BONUS
OLD (4/5) 320,000 300,000 20,000
NEW (1/5) 80,000 100,000 (20,000)
TOTAL 400,000 400,000
CASH P100,000
C, CAPITAL P100,000
C, CAPITAL P20,000
A, CAPITAL P10,000
B, CAPITAL P10,000
A and B are partners with capital balances of P200,000 and P100,000 respectively. They share
profits and losses equally. C is to be admitted in the partnership.
CASE 3- Bonus to new partner, no asset revaluation. C invests P60,000 for a 1/5 interest in the
agreed capital of P360,000
AC CC BONUS
OLD 4/5 288,000 300,000 (12,000)
NEW 1/5 72,000 60,000 12,000
TOTAL 360,000 360,000
CASH P60,000
C, CAPITAL P60,000
A, CAPITAL P6,000
B, CAPITAL P6,000
C, CAPITAL P12,000
A and B are partners with capital balances of P200,000 and P100,000 respectively. They share
profits and losses equally. C is to be admitted in the partnership.
CASE 4-Positive asset revaluation, no Bonus. C invests P100,000 for a 1/5 interest in the agreed
capital of P500,000
AC CC ASSET REVALUATION
OLD 4/5 400,000 300,000 100,000
NEW 1/5 100,000 100,000
TOTAL 500,000 400,000 100,000
CASH P100,000
C, CAPITAL P100,000
OTHER ASSETS 100,000
A, CAPITAL P50,000
B, CAPITAL P50,000
A and B are partners with capital balances of P200,000 and P100,000 respectively. They share
profits and losses equally. C is to be admitted in the partnership.
CASE 5-Negative asset revaluation, no Bonus. C invests P60,000 for a 1/5 interest in the agreed
capital of P300,000
AC CC ASSET REVALUATION
OLD 4/5 240,000 300,000 (60,000)
NEW 1/5 60,000 60,000
TOTAL 300,000 360,000 (60,000)
CASH P60,000
C, CAPITAL P60,000
A, CAPITAL P30,000
B, CAPITAL P30,000
OTHER ASSETS P60,000
The following rules should be observed in relation to valuation of
assets and liabilities on dissolution problems:
1. If there is an agreement among partners that revaluation is
allowed, then reflect the necessary adjustment before
dissolution.
INTEREST
BONUS APPROACH
The bonus approach generally follows the book-value method, that is, existing book values
should not be adjusted to current values unless such adjustment would have otherwise been
allowed by GAAP.
Therefore, when a partner is admitted to an existing partnership, the total (agreed) capital of the
new partnership consist of the following:
1. The book value of the previous partnership less;
2. Any write-downs in the value of the previous partnership’s assets as recognized by GAAP;
and
3. The fair value of the consideration paid (net asset contributed) to the partnership by the
incoming partner.
REVALUATION APPROACH
The assets transferred to this entity should be recorded as their fair value.
Therefore, the total (agreed) capital of the new partnership will consist of the following values :
1. The book value of the net assets of the pervious partnership plus ;
2. Unrecognized appreciation or less unrecognized depreciation on the recorded net assets of
the pervious partnership plus
3. Unrecognized revaluation of net assets traceable to the pervious partnership plus; and
4. The fair value of the consideration paid (net asset contributed), both tangible and intangible,
received from the incoming partner.
Therefore in analyzing transactions involving admission of a partner by investment, the
following procedure is followed:
A. Generally, compare the total contributed capital (TCC) with the total agreed capital (TAC):
1. If TCC = TAC, no adjustment is made for revaluation of net assets.
2. If TCC > TAC, the difference is due to either overstatement of the partnership assets or
the required diminution in partner’s capital which can be effected by drawing is a specification
that the old partners will continue to use their old profit and loss ratio.
3. If TCC < TAC, the difference is due to either unrecorded net assets or the required
additional investment in partner’s capital
B. Specifically, the traceability of bonus or revaluation to new partners can be determined by
comparing the contributed capital of the partner with his agreed capital :
WITHDRA The retiring partner may elect to:
PARTNER
WITHDRA The interest of the retiring partner may not be equal to
the partner’s capital balance as a result of the following
items :
WAL OR 1.
2.
Capital balance;
Recognition of accounting errors in prior period;
NT OF
4. Loans and advances to the partnership; and
5. Recognition of asset revaluations subject to the
rules discussed previously.
PARTNER
Bonus approach.
If the bonus approach is used, the remaining partners are charged with the amount of the
payment that exceeds the book value of the retiring partner’s capital balance.
Revaluation approach
The revaluation approach focusses on the payment to the retiring partner as an indication of the
fair value of the partnership.
A 1.
2.
By payment from the partnership assets,
By payments from partnership insurance proceeds
PARTNER
with surviving partners acquiring the deceased
partner’s interest
When a partnership is converted
into a corporation, the corporation
INCORPORAT takes over the assets and assumes
ION OF A the liabilities of the partnership in
PARTNERSHI exchange for shares of stocks. The
P partners now become stockholders
of the newly formed corporation.
On date of incorporation:
The partners’ capital balances are adjusted
for their respective shares in any profit or
INCORPORAT loss and revaluation gains or losses as at the
ION OF A date of incorporation. The adjusted capital
PARTNERSHI balances may be used in determining the
number of shares to be issued to each partner.
P
Normally, the books of the partnership
are closed and new books are set-up for the
corporation.