Partnership dissolution

PARTNERSHIP DISSOLUTION
ANNA MAE MAGBANUA, CPA

DISSOLUTION
• Dissolution is the change in the relation of the partners
caused by any partner ceasing to be associated in the
carrying on of the business, or an entry or additional partner
• Major considerations:
– Admission of a partner
– Withdrawal, retirement or death of a partner
– Incorporation of a partnership
• Note that the admission of a new partner requires all the
consent of the other partners

What is this?
• A new partner is admitted to the partnership. This is a personal
transaction between and among the partners, therefore, any
consideration paid or received is not recorded in the
partnership books.
• A new capital account is established for the new partner and a
corresponding decrease is made on the capital accounts of the
selling partners.

PURCHASE of interest in the partnership
• This is a personal transaction between and among the partners,
therefore, any consideration paid or received is not recorded in
the partnership books.
• A new capital account is established for the new partner and a
corresponding decrease is made on the capital accounts of the
selling partners.

DISSOLUTION
Admission of partner
Purchase of interest in the partnership
Investment in the partnership
~a new partner may be admitted when he
purchases part or all of the interest of one or
more of the existing partners
~a new partner is added.

Example:
The following are the capital account balances and profit and loss ratios of the partners in
AB Partnership as of July 1, 2017.
Capital Accounts Profit or loss ratios
A, Capital P150,000 40%
B, Capital 250,000 60%
400,000
On July 1, 2017, C was admitted to the partnership when he purchased 20% interest in the
net assets and profits of the firm from A (or one-half of A's interest in the partnership) for
P100,000. The net assets of the firm as of this date approximate their fair values.
Requirement: Journal entries

Example:
The following are the capital account balances
and profit and loss ratios of the partners in AB
Partnership as of July 1, 2017.
Capital Accounts Profit or loss ratios
A, Capital P150,000 40%
B, Capital 250,000 60%
400,000
On July 1, 2017, C was admitted to the
partnership when he purchased a proportionate
interest from A and B representing 20% interest
in the net assets and profits of the firm for
P100,000. The net assets of the firm as of this
date approximate their fair values.
Requirements:
a. Provide the journal
entries
b. How much are the
capital balances of the
partners after the
admission of C?
c. How much is the
gain or loss to be
recognized in the
partnership books?
d. How much are the
gains or losses recognized
by A and B, respectively?

A. July 1, 2017 A, Capital 32,000
B, Capital 48,000
C, Capital 80,000
B. A B C Totals
Capital, Beginning
Credit
Debit
Capital, Ending
150,000 250,000 400,000
80,000 80,000
(32,000) (48,000) (80,000)
118,000 202,000 80,000 400,000
Notice that it did not change

C. ZERO. No gain or loss is recognized in the partnership books when a
new partner is admitted
D. A B
Consideration received
(100,000 x 40%)
(100,000 x 60%)
Amount debited to capital account
Personal gain (loss)
40,000
60,000
(32,000) (48,000)
8,000 12,000

• When a partnership is dissolved, a new partnership is created.
The assets and liabilities may be restated to fair values.
• The adjustment to the assets and liabilities is allocated first to the
existing partners before recoding the admission of the new
partner.

Example:
On July 1, 2017, C was admitted to the partnership when he purchased a proportionate interest from A and B
representing 20% interest in the net assets and profits of the firm for P100,000.
On this date, the carrying amounts and fair values of the assets and liabilities of the partnership are as
follows:
Requirements:
a) Provide the journal entries to be made on July 1, 2017
b) How much are the capital balances of the partners after the admission of C?
Carrying amount Fair Value Increase (Decrease)
Cash 20,000 20,000 -
Equipment 340,000 390,000 50,000
Accounts Payable 10,000 10,000 -
A, Capital (40%) 130,000 N/A
B, Capital (60%) 220,000 N/A

First, adjust the capital balances for the revaluation increase of Equipment.
July 1, 2017 Equipment 50,000
A, Capital 20,000
B, Capital 30,000
Notice! that the revaluation increase is allocated only to the existing partners.
No allocation is made to C, the incoming partner.

B.
A B C Totals
Capital, beginning
Share in Revaluation
Credit
Debit
Capital, ending
130,000 220,000 350,000
20,000 30,000 50,000
80,000 80,000
(32,000) (48,000)
118,000 202,000 80,000 400,000
_________ _________

INVESTMENT in the partnership
• Instead of purchasing interest from the existing partners, a new
partner may be admitted by investing directly in the business.
• This is a transaction between the incoming partner and the
partnership, therefore, any consideration paid shall be recorded
in the partnership books.
• Two things may happen:
– The new partner's capital account is credited at an amount equal to the
fair value of his investment; or
– The new partner's capital account is credited at an amount greater
than or less than the fair value of his investment

Example:
The following are the capital account balances and profit
or loss ratios of the partners in AB Partnership as of July
1, 2017:
Capital Accounts Profit or loss ratio
A, Capital 150,000 40%
B, Capital 250,000 60%
400,000
On July 1, 2017, C was admitted to the partnership when
he acquired 20% interest in the net assets and profits of
the firm for a P100,000 investment. The net assets as of
this date approximate their fair values.
Requirements:
a) Assume that C's capital is credited
at an amount equal to his contribution. What
is the journal entry to record the transaction?

Requirements:
a) Assume that C's capital is credited at an amount equal to
his contribution. What is the journal entry to record the transaction?
July 1, 2017 Cash 100,000
C, Capital 100,000
Note:
~The capital increased by P100,000

Example:
1, 2017:
A, Capital 150,000 40%
B, Capital 250,000 60%
400,000
Requirements:
a) Assume that C's capital is
credited for P80,000. What is the
journal entry to record the transaction?

Requirements:
a) Assume that C's capital is credited for P80,000. What is the
Steps:
1) Find the invested capital of the new partner
2) Find the agreed capital of the new partner
3) Allocate the difference to the old partner

Invested capital - actual consideration given by the incoming partner
Agreed capital - amount to be credited as capital by the incoming
partner per agreement by all the partners
PARTNERS TIC TAC DIFF
A
B
C
TOTAL
150,000
250,000
100,000
500,000
80,000 20,000
-0-
(8,000)
(12,000)
158,000
262,000
500,000

B, Capital 12,000
A, Capital 8,000
July 1, 2017 Cash 100,000
C, Capital 80,000
A
B
C
TOTAL
20,000
-0-
(12,000)
150,000
250,000
100,000
500,000
80,000
(8,000)158,000
262,000
500,000

Example:
1, 2017:
A, Capital 150,000 40%
B, Capital 250,000 60%
400,000
Requirements:
a) Assume that C's capital is
credited for P130,000. What is the

Requirements:
a) Assume that C's capital is credited for P130,000. What is
the journal entry to record the transaction?
Steps:
1) Find the invested capital of the new partner
2) Find the agreed capital of the new partner
3) Allocate the difference to the old partner

Invested capital - actual consideration given by the incoming partner
Agreed capital - amount to be credited as capital by the incoming
partner per agreement by all the partners
A
B
C
TOTAL
150,000
250,000
100,000
500,000
130,000 (30,000)
-0-
12,000
18,000
138,000
232,000
500,000

Illustration:
Rebecca Miranda and Stephanie Calamba 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 Theodore Calaguas as a
member of the firm. The foregoing information will be the basis of the
following cases.
Case 1: Theodore Calaguas 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.

Solution:
TIC TAC DIFF
R. Miranda
S. Calamba
T. Calaguas
Total
400,000
200,000
250,000
850,000
428,125
209,375
212,500
850,000
28,125
9,375
(37,500)
-0-
P850,000 x 1/4 = P212,500 Distribution of Bonus:
Miranda -
Calamba-
P37,500 x 3/4 = P28,125
P37,500 x 1/4 = 9,375

Illustration:
following cases.
Case 2: Theodore Calaguas invested P400,000 in the business. Out of
the total investments, P100,000 is considered as a bonus to partners
Rebecca Miranda and Stephanie Calamba.

Solution:
TIC TAC DIFF
R. Miranda
S. Calamba
T. Calaguas
Total
400,000
200,000
400,000
1,000,000
475,000
225,000
300,000
1,000,000
(75,000)
(25,000)
100,000
-0-
Distribution of Bonus:
Miranda -
Calamba-
P100,000 x 3/4 = P75,000
P100,000 x 1/4 = 25,000

Illustration:
following cases.
Case 3: Theodore Calaguas invested P240,000 in the business for a
one-third interest in the business. The total agreed capital is P840,000.

Solution:
TIC TAC DIFF
R. Miranda
S. Calamba
T. Calaguas
Total
400,000
200,000
240,000
840,000
370,000
190,000
280,000
840,000
30,000
10,000
(40,000)
-0-
Miranda -
Calamba-
P40,000 x 3/4 = P30,000
P40,000 x 1/4 = 10,000
P840,000 x 1/3 = P280,000

Illustration:
balances of P400,000 and P200,000, respectively. They share pro fits in
following cases.
Case 4: Theodore Calaguas invested P300,000 for a 50% interest in the
business. Rebecca Miranda and Stephanie Calamba transferred part of
their capital balance to that of Theodore Calaguas as a bonus. The
investment of Calaguas resulted to a bonus as stated.

Solution:
TIC TAC DIFF
R. Miranda
S. Calamba
T. Calaguas
Total
400,000
200,000
300,000
900,000
287,500
162,500
450,000
900,000
112,500
37,500
(150,000)
-0-
Miranda -
Calamba-
P150,000 x 3/4 = P112,500
P150,000 x 1/4 = 37,500
P900,000 x 50% = P450,000

The capital accounts of Loida Cardenas and Cristina San Jose have
balances of P150,000 and P110,000, respectively. Daria Labalan and
Helen Magada are to be admitted to the partnership. Labalan buys one-
fifth of Cardenas’ interest for P35,000 and one-fourth of San Jose’s
interest for P25,000. Magada contributes P70,000 cash to the
partnership, for which she is to receive an ownership equity of P70,000.
Required:
a. Journalize the entries to record the admission of Labalan and Magada.
b. What are the capital balances of each partner after the admission of
the new partners?
Exercise 1

Dapun, Budoy, and Dinoy have equities in a partnership of P600,000,
P900,000 and P500,000, respectively and share in profits and losses in a
ratio of 2:1:2, respectively. The partners have agreed to admit Amolo in
the partnership.
Required: Prepare the journal entries to record the admission of Amolo to
the partnership under each of the following assumptions:
1. Amolo invested P500,000 for a 30% interest, and bonus is recorded for
Amolo.
2. Amolo invested P750,000 for a one-fifth interest, and bonus is
recorded for the old partners.
Exercise 2

The existing partners are _________ and __________ with the following capital
balances and profit-loss sharing ratios:
_________, Capital - July 1, 2017 (40%) P180,000
_________, Capital - July 1, 2017 (60%) 70,000
Case #1: You decided to admit __________ into the partnership on July 1, 2017
when he or she acquires half of the interest of ___________ (2nd) for P30,000. The
net assets of the partnership approximate fair values on this date.
Requirements:
a. Provide the journal entry to record the admission of _____________.
b. Compute for the capital balances and the profit and loss sharing ratios of the
partners immediately after the admission of ____________.
Exercise 3

_________, Capital - July 1, 2017 (40%) P180,000
_________, Capital - July 1, 2017 (60%) 70,000
when he or she invests an amount that reflects the fair value of a 20% interest in
the partnership. The partnership's net assets approximate their fair values.
Requirements:
a. Provide the journal entry to record the admission of _____________.
b. Compute for the capital balances and the profit and loss sharing ratios of the
partners immediately after the admission of _____________.
Exercise 3

The existing partners are _________ and __________ with the following
capital balances and profit-loss sharing ratios:
_________, Capital - July 1, 2017 (40%) P180,000
_________, Capital - July 1, 2017 (60%) 70,000
Case #3: You decided to admit __________ into the partnership on July 1,
2017 when he or she invests P60,000 cash to the partnership in exchange
for 20% interest. The partnership's net assets approximate their fair values
except for a piece of land carried in the books at P500,000 but with a fair
value of P600,000.
Exercise 3

Requirements:
a. Provide the journal entry to record the admission of ___________.
b. Compute for the capital balances and the profit and loss sharing ratios
of the partners immediately after the admission of ___________.
Exercise 3

_________, Capital - July 1, 2017 (40%) P180,000
_________, Capital - July 1, 2017 (60%) 70,000
when he or she invests P50,000 cash to the partnership in exchange for 20%
interest. The partnership's net assets approximate their fair values except for a
piece of land carried in the books at P500,000 but with a fair value of P600,000.
Exercise 3

Ferraro, Castillo and Franco have equities in a partnership of P500,000,
P800,000 and P700,000, respectively, and share profits and losses in a ratio
of 5:3:2, respectively. The partners have agreed to admit Retada to the
partnership.
Required: Prepare the journal entries to record the admission of Retada to the
partnership under each of the following assumptions:
1. Retada invested P400,000 for a 25% interest, and bonus is recorded for
Retada.
2. Retada invested P800,000 for a 20% interest, and bonus is recorded for the
old partners.
Exercise 4

Partnership dissolution

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