The document discusses the dissolution of partnerships through changes in ownership. It defines dissolution as a change in the relationship between partners caused by any partner ceasing to be involved in the business. Dissolution is distinguished from liquidation, which ends the business operations. Causes of dissolution include the admission, withdrawal, death, or incorporation of a partner. A new partner can be admitted through purchasing an interest from existing partners or investing new assets, with the consent of continuing partners. Accounting entries are provided to record various scenarios of partner admission.

1. CHAPTER III DISSOLUTION- CHANGES IN OWNERSHIP

2. 1. DEFINITION 2. CAUSES OF DISSOLUTION 3. ADMISSION OF A PARTNER REPORTER: Jomari Cabardo

3. The dissolution of a partnership is the change in 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, Article 1828). DEFINITION:

4. LIMITED LIFE is one of the characteristics of a partnership. Any change in the membership of this form of business organization will result to dissolution. Dissolution of the partnership does not necessarily imply that business operations will come to an end. Most changes in the ownership of a partnership are accomplished without interruption of its normal operation.

5. DISSOLUTION should be distinguished from liquidation of a partnership. A partnership is said to be liquidated when the business is terminated; a partnership may be dissolved without being terminated but liquidated is always preceded by dissolution.

6. CAUSES OF DISSOLUTION: 1. Admission of a partner 2. Withdrawal or retirement of a partner 3.Death of a partner 4.Incorporation of a partnership

7. ADMISSION OF A PARTNER A new partner can only be admitted into a partnership with the consent of all the continuing partners. This is based on the principle of DELECTUS PERSONAE No one becomes a member of the partnership without the consent of all the members. This is because a partnership is based on mutual trust and confidence of the partners.

8. A person may become a partner in an existing partnership by either of the following: 1. Purchase of an interest from one or more of the existing partners. 2. Investment of assets in the partnership by the new partner.

9. Purchase of an Interest From Existing Partners By: Jennylou Enitorio

10. 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.

11. Pro-Forma Entry: (Name of Seller), Capital xxx (Name of Buyer), Capital xxx

12. The purchase price of the interest sold to a new partner may be: 1. Equal to the book value of the interest sold. 2. Less than the book value of the interest sold. 3. More than the book value of the interest sold.

13. Illustrative problem A: 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.

14. Case 1a: Purchase at book value from one partner only. Cordero purchases a 1/5 interest from Coloma by paying P20,000. ENTRY: Coloma, Capital 20 000 Cordero, Capital 20 000

15. Case 1b: Purchase at book value from more than one partner. Cordero purchases 1/5 interest from the old partners by paying P30 000. ENTRY: Coloma, Capital 20 000 Claudio, Capital 10 000 Cordero, Capital 30 000

16. Case 2:Purchase at less than book value. Cordero purchases 1/5 interest from the old partners by paying P25,000. ENTRY: Coloma, Capital 20 000 Claudio, Capital 10 000 Cordero, Capital 30 000

17. Case 3: Purchase at more than book value. Cordero pays P 40, 000 for a 1/5 interest of the old partners. ENTRY: Coloma, Capital 20 000 Claudio, Capital 10 000 Cordero, Capital 30 000

18. Asset Revaluation upon Admission of a New Partner by Purchase Coloma and Claudio are partners with capital balances of P100,00 and P50,000 respectively. They share profits and loses equally. Cordero is a new partner who purchase a 1/5 interest from Coloma and Claudio paying P40,000. However, before the admission of Cordero, partnership assets are to be revalued using as basis amount to be paid by Cordero.

19. Step 1- the new partnership capital is equal to the amount paid by the incoming partner divided by his fraction of interest. New partnership Capital = P40,000 / 1/5 P200,000

20. 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

21. Step 3 – the allocation of the amount of the asset revaluation among the old partners is as follows: P50,000 / 2 per partner.

22. Step 4 – the capital balances of the old partners after asset revaluation is equal to their old capital balances plus their share on asset revaluation. Coloma Claudio Capital balances before revaluation P100,000 P50,000 Share on asset revaluation 25,000 25,000 Capital balances after revaluation P125,000 P75,000

23. 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 asset revaluation). Coloma Claudio Capital balances after revaluation P125,000 P75,000 Interest transferred 1/5 1/5 Capital transferred after revaluation P25,000 P15,000

24. Step 6 – the journal entries to record the revaluation of asset and admission of Cordero are as follows: ENTRY: Asset 50 000 Coloma, Capital 25 000 Claudio, Capital 25 000 Coloma, Capital 25 000 Claudio, Capital 15 000 Cordero, Capital 40 000

25. Investment of Assets in a Partnership By: Cecille Shyne Deseo

26. It is a transaction between the original partnership and the new partner. A person may be admitted into a partnership by investing cash or other assets in the business. Invests Contributes Total Assets Total Partner’s Equity

27. Definition of TERMS

28. TOTAL CONTRIBUTED CAPITAL – the sum of the capital balances of the old partners and the actual investment of the new partner. TOTAL AGREED CAPITAL – it is the total capital of the partnership after considering the capital credits given to each of the partners BONUS – it is the amount of capital or equity transferred by one partner to another partner.

29. CAPITAL CREDIT – it is the equity of a partner in the new partnership and is obtained by multiplying the total agreed capital by the applicable percentage interest of the partner. ASSET REVALUATION – necessary adjustment in asset values upon admission of a new partner. The adjustment in assets may be determined as the difference between the agreed capital and the total contributed capital.

30. Problems relating to Admission of a new Partner by Investment 1. Agreed capital is given a. No Bonus, No Asset Revaluation b. Bonus to old Partners, No Asset Revaluation c. Bonus to New Partner, No Asset Revaluation d. Asset Revaluation (Positive & Negative), No Bonus

31. 2. Agreed Capital is not given. a. Bonus Method b. Asset Revaluation method (Positive & Negative) 3. Agreed Capital is not given but basis for its computation is indicated in the terms of admission 4. The amount of the Contribution of the New partner is not given 5. Fraction of Interest is not given.

32. The following are the illustrations of the various problems involving admission of a new partner by investment..

33. Agreed Capital is Given

34. Case 1 – No Bonus, No Asset Revaluation Conde invests P100,000 for a ¼ interest in the agreed capital of P400,000. ENTRY: Cash 100 000 Conde, Capital 100 000 Solution: Contributed Capital Agreed Capital Calma P 200,000 P200,000 Castro 100,000 100,000 Conde 100,000 100,000 TOTAL P 400, 000 P 400,000

35. Case 2 – Bonus to the old partners, no Asset revaluation Conde invests P100, 000 for a 1/5 interests in the new firm capitalization of P400, 000. ENTRY: Cash 100 000 Conde, Capital 100 000 Conde, Capital 20 000 Calma, Capital 10 000 Castro, Capital 10 000 Solution: Contributed Capital Agreed Capital Bonus Calma P 200, 000 P 210, 000 P 10, 000 Castro 100, 000 110, 000 10, 000 Conde 100, 000 80, 000 (20, 000) TOTAL P 400, 000 P 400, 000 ---

36. Case 3 – Bonus to new partner, no asset revaluation Conde invests P60,000 for a ¼ interest in the total capitalization of P360,000. ENTRY: Cash 60 000 Calma, Capital 15 000 Castro, Capital 15 000 Conde, Capital 90 000 Solution: Contributed Capital Agreed Capital Bonus Calma P 200, 000 P 185, 000 (P 15, 000) Castro 100, 000 85, 000 (15, 000) Conde 60, 000 90, 000 30, 000 TOTAL P 360, 000 P 360, 000 ---

37. Case 4 – Positive Asset Revaluation, no Bonus Conde invests P100, 000 for a 1/5 interest in the agreed capital of P500, 000. ENTRIES: Other assets 100 000 Calma, Capital 50 000 Castro, Capital 50 000 Cash 100 000 Conde, Capital 100 000 Solution: Contributed Capital Agreed Capital Asset Revaluation Calma P 200, 000 P 250, 000 P 50, 000 Castro 100, 000 150, 000 50, 000 Conde 100, 000 100, 000 --- TOTAL P 400, 000 P 500, 000 P 100, 000

38. Case 5 – Negative Asset Revaluation, No Bonus Conde invests P60,000 for a 1/5 interest in the agreed capital of P300,000. ENTRIES: Calma, Capital 30 000 Castro, Capital 30 000 Other assets 60 000 Cash 60 000 Conde, Capital 60 000 Solution: Contributed Capital Agreed capital Asset Revaluation Calma P 200,000 P170, 000 (P 30,000) Castro 100,000 70, 000 (30, 000) Conde 60,000 60, 000 --- TOTAL P 360, 000 P 300, 000 (P 60, 000)

39. Agreed Capital is Not Given

40. When such a situation exists, the admission of the new partner is recorded using any of These 2 methods: 1. Bonus Method 2. Asset Revaluation Method

41. Positive Asset Revaluation Method (Ac > CC) & Negative Asset Revaluation Method (Ac < CC) The Agreed capitalization is computed as follows: AC = New partner’s CC ÷ new partner’s fraction of interest

42. 1. Bonus Method ENTRY: Cash 100 000 Conde, Capital 80 000 Calma, Capital 15 000 Castro, Capital 5 000 Solution: Contributed Capital Agreed Capital Bonus Calma P 200, 000 P 215, 000 P 15, 000 Castro 100, 000 105, 000 5,000 Conde 100, 000 80, 000 (20, 000) TOTAL P 400, 000 P 400, 000 ---

43. 2. Positive Asset Revaluation Method ENTRIES: Other Assets 100 000 Calma, Capital 75 000 Castro, Capital 25 000 Cash 100 000 Conde, Capital 100 000 Solution: Contributed Capital Agreed Capital Asset revaluation Calma P 200, 000 P 275, 000 P 75, 000 Castro 100, 000 125, 000 25,000 Conde 100, 000 100, 000 --- TOTAL P 400, 000 P 500, 000 P 100, 000

44. 1. Bonus Method ENTRY: Cash 80 000 Calma, Capital 11 250 Castro, Capital 3 750 Conde, Capital 95 000 Solution: Contributed Capital Agreed Capital Bonus Calma P 200, 000 P 188, 750 (P 11, 250) Castro 100, 000 96, 250 (3, 750) Conde 80, 000 95, 000 15, 000 TOTAL P 380, 000 P 380, 000 ---

45. 2. Negative Asset Revaluation Method ENTRIES: Calma, Capital 45 000 Castro, Capital 15 000 Other Assets 60 000 Cash 80 000 Conde, Capital 80 000 Solution: Contributed Capital Agreed Capital Asset revaluation Calma P 200, 000 P155, 000 (P 45, 000) Castro 100, 000 85 , 000 (15,000) Conde 80, 000 80, 000 --- TOTAL P 380, 000 P 320, 000 (P 60, 000)

48. Withdrawal and Retirement of a Partner

49. The partnership may allow any of its partners to withdraw or retire from the firm. The business may continue after such withdrawals; on the other hand, the interest of the retiring or withdrawing partner may be: 1. sold to a new partner (outsider) 2. sold to continuing (remaining) partners 3. sold to the partnership

50. SALE OF INTEREST TO A NEW PARTNER * With the consent of the remaining partners, the retiring partner may sell his interest to an outsider. The sale is recorded in the same manner as in the admission of a new partner by purchase. The partnership recognizes only the transfer of capital interest from the retiring partner to the new partner. Any gain or loss from the sale is a personal gain or loss of the retiring partner.

51. SALE OF INTEREST TO CONTINUING PARTNERS * The interest of the retiring partner may be acquired by any of the continuing partners. The transaction is recorded in the same manner as in the sale of interest to a new partner. The partnership recognizes only the transfer of capital interest from the retiring partner to the acquiring partner or partners.

52. 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: Payment in cash; Transfer of none cash assets; or 3. Recognition of a liability for the full or the balance of the unpaid interest of the retiring partner.

53. *The purchase price or amount of settlement by the partnership to the retiring partner may be: Equal to the interest of the retiring partner (at book value) Less than the interest of the retiring partner ( at less than book value) 3. More than the interest of the retiring partner ( at more than the book value)

54. * When the payment to the retiring partner is less than or more than his capital interest, the difference between the purchase price and the capital interest may be accounted for using : 1. bonus method 2. asset revaluation method

55. ACCOUNTING PROBLEMS INVOLVED IN THE RETIREMENT OF A PARTNER Following are the accounting problems involved in determining the capital interest of the retiring partner: Determination of the profit or loss from the beginning of the accounting period to the date of withdrawal or retirement and the distribution of such profit or loss. Closing of the partnership books. Correction of accounting errors in prior periods like overstatement or understatement of inventories, excessive depreciation charges and failure to provide adequately for doubtful accounts. Revaluation partnership assets to current values. Recording of bonus brought by the retirement of a partner Settlement of the interest of the retiring partner.

56. CALCULATION OF RETIRING PARTNER’S INTEREST The following schedule are helpful in determining the interest of a retiring partner: Investment - Withdrawals + Share in partnership profits to date of retirement or - Share in partnership losses to date of retirement + Loans and advances to the partnership or - Loans and advances from the partnership + Revaluation of assets increasing their recorded values or - Revaluation of assets decreasing their recorded values Interest upon retirement

57. Illustrative Problem A: The statement of financial position of the partnership of Dy, David, and Diaz on December 31, 2009 follows: Asset Liabilities and Capital Cash P110,000 Liabilities P 20, 000 Other Asset 30,000 Dy , Capital 20, 000 David, Capital 40, 000 Diaz, Capital 60, 000 P140,000 Total Liabilities and Capital P 140,000 The partners share profits and losses in the ratio of 4:2:4. On July 1, 2010, Diaz asked to be allowed to withdraw from the partnership. The partners decided to close the books as of these date so as to determine the capital interest of Diaz. Profit for 6 months ended amounted P60,000 while drawings of Dy, David and Diaz amount to P4,000 , P6,000 and P2,000, respectively. Profits and losses are to be shared equally after the retirement of Diaz.

58. The following entries will be prepared prior to the retirement of Diaz from the partnership: Income Summary 60,000 Dy, Capital 24,000 David, Capital 12, 000 Diaz, Capital 24, 000 b. Dy, Capital 4,000 David, Capital 6,000 Diaz, Capital 2,000 Dy, Drawing 4,000 David, Drawing 6,000 Diaz, Drawing 2,000

59. After considering the preceding entries, the capital interest as of the partners as of July 1,2010 may now be computed as follows: Diaz Dy David Capital balance, Dec. 31,2009 P 60,000 P 20,000 P 40,000 Share in profit from Jan. 1 – June 30 24,000 24,000 12,000 Withdrawals ( 2,000 ) ( 4,000 ) ( 6,000 ) P 82,0000 P 40,000 P 46,000

60. Assumption 1- sale of interest to a new partner. Diaz sold his interest to Doque for P 100,000. Diaz, Capital 82,000 Doque, Capital 82,000

61. Assumption 2 – Sale of interest to the continuing partners. Diaz sold his interest to Dy and David for P75,000; the interest being divided equally by the remaining partners. Profits and losses after the retirement of Diaz will be divided equally. Diaz, Capital 82,000 Dy, Capital 41,000 David, Capital 41,000

62. Assumption 3 – 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. Profits and losses after the retiring of Diaz will be divided equally. 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

63. 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.

64. Bonus Method Diaz, Capital 82,000 Cash 76,000 Dy, Capital 4,000 David, Capital 2,000 P6,000 x 4/6 = P4,000 P6,000 x 2/6 = P2,000

65. Asset Revaluation Method Dy, Capital 6,000 David, Capital 3,000 Diaz, Capital 6,000 Other Assets 15,000 Dy = P15,000 x 4/10 = P6,000 David = P15,000 x 2/10 = P3,000 Diaz = P15,000 x 4/10 = P6,000

66. After the preceding entry, the capital balance of Diaz is P76,000 and payment to him will be recorded as follows: Diaz, Capital 76,000 Cash 76,000 A compound entry may be made as follows: Dy, Capital 6,000 David, Capital 3,000 Diaz, Capital 82,000 Cash 76,000 Other Assets 15,000

67. Case C – Settlement is more than the capital interest of the retiring partner (at more than book value). The partnership paid Diaz P85,000 which is P3,000 more than his capital interest of P82,000. Bonus Method Diaz, Capital 82,000 Dy, Capital 2,000 David, Capital 1,000 Cash 85,000

68. Asset Revaluation Method Other Assets 7,500 Dy, Capital 3,000 David, Capital 1,500 Diaz, Capital 3,000

69. After the entry recording the asset revaluation, the capital balance of Diaz is P85,000 and payment to him will be recorded as follows: Diaz, Capital 85,000 Cash 85,000 A compound entry may be made as follows: Other Assets 7,500 Diaz, Capital 82,000 Cash 85,000 Dy, Capital 3,000 David, Capital 1,500

70. COMPARISON BETWEEN the BONUS AND ASSET REVALUATION METHOD Asset Revaluation Dy, Capital David, Capital Balances after retirement of Diaz under the bonus method P 38,000 P 45,000 Balances after retirement of Diaz under the asset revaluation method P 7,500 P 43,000 P 47,500 Depreciation on asset revaluation (divided equally) ( 7,500 ) ( 3,750 ) ( 3,750 ) Balances after depreciation P 39,250 P 43,750 Net advantage (disadvantage) of using the bonus method ( P 1,250 ) P 1,250

71. CHANGE IN CAPITAL STRUCTURE BY DEATH OR INCAPACITY OF A PARTNER The death or incapacity of a partner legally dissolves the old partnership since the partner ceases to be associated in the carrying on of the business. The remaining partners may continue operations based on a new contract or Articles of Co-Partnership. The interest of the deceased or incapacitated partner must be determined by the partnership in order to make necessary settlement with his legal representatives. In case the business is continued without immediate settlement, the legal representative of the deceased is considered as an ordinary creditor and is to received an amount equal to the interest and profits attributable to this interest.

72. The following accounting problems are encountered in case of death or incapacity of a partner: Determination of the profit or loss from the beginning of the accounting period to the date of death or incapacity and the distribution of such profit or loss. Closing of the books of the partnership. Partnership agreement, however, may provide thaSt the books need to be closed and net income for the fraction of the accounting period to the date of date or incapacity be determined. Correction of prior year’s income, if there is any. Revaluation of partnership assets to arrive at current values. Recording of bonus. Settlement of the interest of the deceased or incapacitated partner.