Major considerations in accounting for partnership dissolutions”

Admission of a partner

Purchase of interest in the

partnership

Purchase of interest from Purchase of interest from Purchase of interest –

one partner more than one partner Revaluation of Assets

Investment in the partnership

Credit to capital equal to Credit to capital is less Credit to capital is

investment than investment greater than investment

Amount of Investment

Bonus method

Correction of Errors

Withdrawal, retirement or
death of a partner

Withdrawal- Purchase of Retirement – Purchase of Retirement – Payment in

interest by remaining partners interest by partnership the form of Non-cash

Death of a Partner – Purchase Withdrawal – Fully

of interest by partnership depreciated asset

Retirement of a Partner-
Personal account

Settlement amount includes payment for Settlement of amount excludes payment

loan for loan

Incorporation of a partnership

Total par value and number of Share premium Preference share

shares issued
Causes of partnership dissolution
1. Admission of a partner
2. Withdrawal, retirement or death of a partner
3. Incorporation of a partnership

Admission of partner
• The admission of a new partner may be effected either through:
1. Purchase of interest in the partnership, or
2. Investment in the partnership

Purchase of interest
• A personal transaction between and among the partners
• Any consideration paid or received is not recorded in the partnership books
• Only a transfer within equity is made to establish the capital account of the new partner
and decrease the capital account(s) of the selling partner(s).
• No gain or loss shall is recognized in the partnership books.

Revaluation of assets
• When a partnership is dissolved but not liquidated, a new partnership is created. The
assets and liabilities carried over to the new partnership are restated to fair values.
• Any adjustment to the assets and liabilities is allocated first to the existing partners
before recording the admission of the new partner.

Investment in the partnership

• The incoming partner invests directly to the partnership instead of purchasing interest
from an existing partner(s).
• This is a transaction between the new partner and the partnership. Any consideration
paid by the incoming partner is recorded in the partnership books.
• No gain or loss shall be recognized

Withdrawal, retirement or death of a partner

• When a partner withdraws, retires or dies, his interest may be purchased (a) by one or
all of the remaining partners or (b) by the partnership.
• The interest of the withdrawing, retiring, or deceased partner shall be adjusted for the
following:
a. his share of any profit or loss during the period up to the date of his withdrawal,
retirement or death; and
b. his share of any revaluation gains or losses as at the date of his withdrawal,
retirement, or death.
• Purchase by one or all of the remaining partners
This is a transaction between and among the partners (or deceased partner’s estate). As such,
the settlement amount is not recorded in the books. The only entry to be made in the
partnership books is a transfer within equity.
• Settlement by the partnership
This is a transaction between the retiring or withdrawing partner (or deceased partner’s estate)
and the partnership. As such, the settlement amount is recorded in the books.
Incorporation of a partnership
• On date of incorporation:
a. The partners’ capital balances are adjusted for their respective shares in any
profit or loss and revaluation gains or losses as at the date of incorporation. The
adjusted capital balances may be used in determining the number of shares to
be issued to each partner.
b. Normally, the books of the partnership are closed and new books are set-up for
the corporation.
 Illustrative Problems

Instruction: Answer what is asked in the following problems.

Admission of a new partner

1. Carrot joins the partnership of Apple and Banana. The partnership’s statement of financial
position before Carrot’s admission is as follows:
Cash 30,000 Accounts payable 80,000
Accounts Receivable 140,000 Apple, Capital (60%) 515,000
Inventory 200,000 Banana, Capital (40%) 275,000

Equipment 500,000 _______

Total Assets 870,000 Total liabilities and equity 870,000

The following adjustments are determined:

a. The recoverable amount of the accounts receivable is P120,000.
b. The inventory has a net realizable value of P160,000.
c. The equipment has a fair value of P450,000.
d. Unrecorded liabilities amount to P20,000.

Case 1: Purchase of interest from one partner

Carrot acquires half of Banana’s capital interest for P800,000.

Requirements: Provide the entry and determine the capital balances and P/L ratio of the
partners after Carrot’s admission.

Case 1:
  Carrying amts. Fair values Increase (Decrease)
Cash 30,000 30,000 -
Accounts receivable 140,000 120,000 (20,000)
Inventory 200,000 160,000 (40,000)
Equipment 500,000 450,000 (50,000)
Accounts payable (80,000) (80,000) -
Accrued liabilities (20,000) (20,000)
Net assets 790,000 660,000 (130,000)

  Apple Banana Carrot Total

Capital, beg. 515,000 275,000 790,000
Revaluation decrease 60:40 (78,000) (52,000) (130,000)
Adjusted, before admission 437,000 223,000 660,000
Sale from Banana to Carrot (111,500) 111,500 -
Capital after admission 437,000 111,500 111,500 660,000

Date Banana, Capital (223,000 x 1/2) 111,500

Carrot, Capital (223,000 x 1/2) 111,500
 Before Admission of
Partner  admission Carrot After admission
Apple 60% 60%
Banana 40% -20% 20%
Carrot 20% 20%
100% 100%

Case 2: Purchase of interest from more than on partner

Carrot purchases 20% of Apple’s and Banana’s capital interests for P800,000.

Requirements: Provide the entry and determine the capital balances of the partners after
Carrot’s admission.

Date Apple, Capital (437K adj. cap. see above x 20%) 87,400
Banana, Capital (223K adj. cap. x 20%) 44,600
Carrot, Capital 132,000

  Apple Banana Carrot Totals

Adjusted cap. 437,000 223,000 660,000

(Debit) Credit (20%) (87,400) (44,600) 132,000 -

Capital, end. 349,600 178,400 132,000 660,000

Case 3: Amount of investment

Carrot wants to invest for a 20% in the net assets and profits of the partnership.

Requirements: If no bonus is allowed, how much should Carrot invest, and what would be the
new P/L ratio of the partners after Carrot’s admission?

Adjusted capital before admission 660,000

Divide by: (100% - 20%) 80%
 Grossed-up amount 825,000
Multiply by: 20%
Amount of investment 165,000

Before Admission of
Partner  admission Carrot After admission
A 60% (100% - 20%) x 60% 48%
B 40% (100% - 20%) x 40% 32%
C 20% 20%
100% 100%

Case 4: Investment in the partnership – Bonus to new partner

Carrot invests P100,000 for a 20% interest in the net assets and profits of the partnership. No
goodwill is recognized.

Requirements: Provide the entry and compute for the capital balances of the partners after
Carrot’s admission.

Adjusted net assets before admission 660,000

Investment of Carrot 100,000
Net assets after admission 760,000
Carrot's interest in net assets 20%
Carrot’s capital credit 152,000
Investment of Carrot 100,000
Bonus to Carrot 52,000

Date Cash 100,000

Apple, Capital (152K – 100K) x 60% 31,200
Banana, Capital (152K – 100K) x 40% 20,800
Carrot, Capital (660K + 100K) x 20% 152,000

  Apple Banana Carrot Total

Adj. cap., before admission 437,000 223,000 660,000
Investment of Carrot 100,000 100,000
Bonus to Carrot (31,200) (20,800) 52,000 -
Capital, after admission 405,800 202,200 152,000 760,000
Case 5: Investment in the partnership – Bonus to old partners
Carrot invests P180,000 for a 20% interest in the net assets profits of the partnership. No
goodwill is recognized/

Requirements: Provide the entry and compute for the capital balances of the partners after
Carrot’s admission.

Adjusted net assets before admission 660,000

Investment of Carrot 180,000
Net assets after admission 840,000
Carrot's interest in net assets 20%
Carrot’s capital credit 168,000
Investment of Carrot 180,000
Bonus to Apple and Banana (12,000)

Date Cash 180,000

Carrot, Capital (660K + 180K) x 20% 168,000
Apple, Capital (12K x 60%) 7,200
Banana, Capital (12K x 40%) 4,800

  Apple Banana Carrot Total

Adj. cap., before admission 437,000 223,000 660,000
Investment of Carrot 180,000 180,000
Bonus to old partners 7,200 4,800 (12,000) -
Capital, after admission 444,200 227,800 168,000 840,000
Withdrawal, retirement or death of a partner

2. Partners A, B and C had the following capital balances on Jan. 1, 20x1: A, Capital (50%)
P320,000; B, Capital (30%) P 192,000; and C, Capital (20%) P128,000. Partner a decided to
retire on Sept. 1, 20x1. The partnership earned profit of P800,000 from Jan. 1 to Aug 31, 20x1
and the partners had the following capital withdrawals during the period: A, P40,000; B,
P60,000; and C, P30,000.

Case 1: Purchase of interest by remaining partner

Partner B purchases Partner A’s interest for P700,000.

Requirements: Provide the entry and compute for the capital balances and P/L ratio of the
partners after A’s retirement.

  A B C Total
Capital - Jan. 1, 20x1 320,000 192,000 128,000 640,000
Profit 50:30:20 400,000 240,000 160,000 800,000
Drawings (40,000) (60,000) (30,000) (130,000)
Capital - before retirement 680,000 372,000 258,000 1,310,000

Sept. A, Capital 680,000

1, 20x1 B, Capital 680,000

  A B C Total
Capital - before retirement 680,000 372,000 258,000 1,310,000
Sale from A to B (680,000) 680,000 - -
Capital - after retirement - 1,052,000 258,000 1,310,000

P/L ratio after A’s retirement:

Before Retirement of
Partner  retirement A After retirement
A 50% -50% -
B 30% 30% + 50% 80%
C 20% - 20%
100% 100%
Case 2: Settlement of interest by partnership
The partnership pays Partner A P700,000 for his interest.

Requirements: Provide the entry and compute for the capital balances and P/L ratio of the
partners after A’s retirement.

Sept. A, Capital 680,000

1, 20x1 B, Capital (700K – 680K) x 30%/50% 12,000
C, Capital (700K – 680K) x 20%/50% 8,000
Cash 700,000

  A B C Total
Capital - before retirement 680,000 372,000 258,000 1,310,000
Payment to A (700,000) (700,000)
Bonus to A 20,000 (12,000) (8,000) -
Capital - after retirement - 360,000 250,000 610,000

Partner  P/L ratio

A -
B 30% / (30% + 20%) 60%
C 20% / (30% + 20%) 40%
100%

Case 3: Settlement of interest by partnership

The partnership pays Partner A P650,000 for his capital.

Requirements: Provide the entry and compute for the capital balances of the partners after A’s
retirement.

Sept. A, Capital 680,000

1, 20x1
 Cash 650,000
B, Capital (680K – 650K) x 30%/50% 18,000
C, Capital (680K – 650K) x 20%/50% 12,000
to record the retirement of A from the partnership

  A B C Total
Capital - before retirement 680,000 372,000 258,000 1,310,000
Payment to A (650,000) (650,000)
Bonus to B and C (30,000) 18,000 12,000 -
Capital - after retirement - 390,000 270,000 660,000
Incorporation of a Partnership

3. Use the information in Problem 2 above. However, instead of Partner A retiring, the
partnership is converted into a corporation on Aug. 31, 20x1. The corporation issued 1,000
preference shares with par value of P200 per share to each of the partners and even multiples
of ordinary shares with par value of P50 per share for their remaining interests.

Requirements: Compute for the number of shares issued to each of the partners.

Solution:
  A B C Total
Adjusted capital (see #2 -
Case 1) 680,000 372,000 258,000 1,310,000
(200,000
Less: PS (1,000 x ₱200 par) (200,000) (200,000) ) (600,000)
Remaining interest 480,000 172,000 58,000 710,000
Divide by: Par val. per OS 50 50 50 50
No. of ordinary sh. issued 9,600 3,440 1,160 14,200

  A B C Total

Preference shares issued 1,000 1,000 1,000 3,000

Ordinary shares issued 9,600 3,440 1,160 14,200

Total shares issued 10,600 4,440 2,160 17,200

“Check your answers against the Key to Corrections found at the end of this SAS. Write your
score on your paper.”

Activity 5: Check for Understanding (Graded Quiz)

A, B and C are partners with the following P/L ratio and capital balances: A (60%) P100,000;
B(30%) P60,000; and C (10%) P20,000.
Case 1: D purchases one-half of A’s capital interest or P70,000. Provide the journal entry under
the book value method.

Case 2: D purchases 20% interest in the partnership from A, B and C for P60,000. Provide the
journal entry under the book value method and determine the capital balances of the partners
after D’s admission.

Case 3: D invests P70,000 cash for a 20% interest in the partnership’s net assets and profits.
Provide the journal entry and determine the capital balances and P/L ratio of the partners after
D’s admission.

Case 4: D wants t infuse capital to the partnership for a 10% interest in the net assets and
profits. The partners determine that the net assets are fairly valued except for land carried at
P365,000 but has a fair value of P410,000. If no bonus is to be given to any partner, how much
is D’s required investment?

Case 5: C withdraws from the partnership and sells his interest to B for P30,000. Provide the
journal entry and determine the capital balances and P/L ratio of the remaining partners after
C’s withdrawal.
Case 6: C retires and the partnership settles his interest for P32,000. Provide the journal entry
and determine the capital balances and P/L ratio of the remaining partners after C’s retirement.

Case 7 The partnership is converted into a corporation. The corporation issues 6,000, 3,000
and 1,000 ordinary shares to A, B and C respectively. If the ordinary shares have par value of
P10 per share, how much is the resulting share premium?

Activity 5
 Case 1:
Date A, Capital (100,000 x 1/2) 50,000
D, Capital 50,000

Case 2:
Date A, Capital (100,000 x 20%) 20,000
B, Capital (60,000 x 20%) 12,000
C, Capital (20,000 x 20%) 4,000
D, Capital 36,000

  A B C D Total
Capital before admission 100,000 60,000 20,000 180,000
Sale to D (20,000) (12,000) (4,000) 36,000 -
Capital after admission 80,000 48,000 16,000 36,000 180,000

Case 3:
Date Cash 70,000
D, Capital (180K + 70K) x 20% 50,000
A, Capital [(70K - 50K) x 60%] 12,000
B, Capital [(70K - 50K) x 30%] 6,000
C, Capital [(70K - 50K) x 10%] 2,000

  A B C D Total
Capital before admission 100,000 60,000 20,000 180,000
D's investment 70,000 70,000
Bonus to old partners 12,000 6,000 2,000 (20,000) -
Capital after admission 112,000 66,000 22,000 50,000 250,000

New P/L ratio

A (100% - 20%) x 60% 48%
B (100% - 20%) x 30% 24%
C (100% - 20%) x 10% 8%
D 20%
100%

Case 4:
Unadjusted net assets before D's
admission 180,000
Revaluation increase (410K - 365K) 45,000
Adjusted net assets before D's admission 225,000
Divide by: (100% - 10%) 90%
Net assets after D's admission 250,000
 Multiply by: D's interest 10%
D's required investment 25,000

Case 5:
Date C, Capital 20,000
B, Capital 20,000

  A B C Total
Capital before retirement 100,000 60,000 20,000 180,000
C's withdrawal 20,000 (20,000) -
Capital after retirement 100,000 80,000 - 180,000

New P/L ratio

A 60%
B (30% + 10% from C) 40%
C 0%
100%

Case 6:
Date C, Capital 20,000
A, Capital (32K – 20K) x 6/9 8,000
B, Capital (32K – 20K) x 3/9 4,000
Cash 32,000

  A B C Total
Capital before retirement 100,000 60,000 20,000 180,000
C's retirement (32,000) (32,000)
Bonus to C (8,000) (4,000) 12,000 -
Capital after retirement 92,000 56,000 - 148,000

New P/L
ratio
A 60% ÷ 90% 66.67%
B 30% ÷ 90% 33.33%
C 0.00%
100.00%

Case 7:
Net assets of partnership (100K + 60K + 20K) 180,000
Aggregate par value of shares issued [(6K + 3K + 1K) x 10] 100,000
Share premium 80,000