PARTNERSHIP DISSOLUTION WITHOUT

LIQUIDATION

Dissolution

1. The change in the relation of the partners caused by any partner

ceasing to be associated in the carrying out of the business.

2. The termination of the life of an existing partnership.

Dissolution of an old partnership may be followed by:

1. the formation of a new partnership new partnership continues

the business activities of the dissolved partnership without
interruption.

2. liquidation termination of business activities and winding up of

partnership affairs preparatory to going out of business.

Conditions resulting to partnership dissolution

1. Admission of a new partner

2. Withdrawal of a partner due to retirement, death, incapacity,

bankruptcy or voluntary withdrawal

3. Incorporation of a partnership

Admission of a New Partner

1. The consent of all the partners is necessary.

2. Upon the admission of a new partner, a new agreement covering

partners interests, profit and loss sharing and other
considerations should be drawn because the dissolution of the
original partnership cancels the old agreement.

3. There is a need to update the capital balances of the partners by

a. determining profit share of each partner from the last

balance sheet date to dissolution date.

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 b. revaluing/ adjusting partnership assets and liabilities using
a temporary account called the Capital Adjustment
account. The Capital Adjustment account is closed to the
partners capital accounts using their profit and loss ratio.

Pro- forma Entries

Determine profit Income Summary xxx

Share of partners A, Drawing xxx
B, Drawing xxx

A, Drawing xxx
B, Drawing xxx
A, Capital xxx
B, Capital xxx

Increase in value Asset xxx

of an asset Capital Adjustment xxx
without a contra-
asset account

Decrease in value Capital Adjustment xxx

of an asset Asset xxx
without a contra
asset account

Increase in value Contra- asset xxx

of an asset Capital Adjustment xxx
with a contra
asset account

Decrease in value Capital Adjustment xxx

of an asset Contra- asset xxx
with a contra
asset account

Increase in value Capital Adjustment xxx

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 of a liability Liability xxx

Decrease in value Liability xxx

of a liability Capital Adjustment xxx

Note: These adjustments

are similar to the year-end
adjusting entries. Only,
replace the nominal
accounts with the Capital
Adjustment account.

Close the Capital Capital Adjustment xxx

adjustment A, Capital xxx
account B. Capital xxx
OR
A, Capital xxx
B, Capital xxx
Capital Adjustment xxx

Note: The Capital

Adjustment account is
divided among the partners
based on their profit and
loss ratio.

Types of Admission of a New Partner

1. By purchase of interest from one or more of the old partners

a. It is considered as a personal transaction between the

selling partner and the buyer who becomes a new partner.

b. The cash paid by the buyer is not recorded in the books of

the partnership for this is a personal transaction between
the selling partners and the buyer.

c. The gain or loss arising from the sale of interest is not

recorded in the partnership books. It is considered as a
personal gain or loss of the selling partner.

d. It merely involves a transfer of capital of the selling partner

to the capital of the buying partner.

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 e. There is no increase in total assets and no increase in total
partners equity.

2. By investment or asset contribution in the partnership

a. It is a transaction between the partnership and the

incoming partner.

b. It involves the investment of assets by new partner into the

partnership.

c. Total assets and total partners equity will increase.

d. Record the admission of the new partner based on the

following procedures:

Record the investment (contributed capital) of the

new partner.

Determine the agreed capital of the new partner.

This is computed as follows:

Total Agreed Capital of the Firm x % of Interest of New

Partner

Compare the contributed capital and the agreed

capital of the new partner. Record bonus, if there is
any.

Pro-forma Entries

By purchase A, Capital xxx

of interest C, Capital xxx

By Investment Cash xxx

Non-cash asset xxx
C, Capital xxx

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Bonus

1. It is an amount partners are willing to allow as additional credit

to a partners capital in excess of his actual capital contribution.

2. It is a transfer of capital from one partner to another.

3. Bonus may be recognized only when total agreed capital of the

firm is equal to its total contributed capital.

Pro-forma Entries

Bonus to old C, Capital xxx

partners A, Capital xxx
B, Capital xxx

Bonus to new A, Capital xxx

partner B, Capital xxx
C, Capital xxx

Note: Bonus is divided

among the old partners
using profit and loss ratio.

Vague Problems

1. New partnership agreement fails to specify the total agreed

capital capitalization of the new partnership after the admission
of a new partner.

2. In the absence of expressed agreements, either the bonus or the

goodwill method may be used.

Special Terms

1. Agreed capital (AC) new capitalization of the new partnership

which will be equal to total contributed capital.

2. Contributed capital (CC) the sum of the investments or

contributions of the new and old partners.

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 3. Fraction of interest this is the interest or equity of a partner
expressed in fraction

4. Percentage of interest this is the interest or equity of a

partner expressed in percentage.

Withdrawal of a Partner

There is a need to update the capital balances of the partners by

1. determining profit share of each partner from the last balance

sheet date to dissolution date.

2. revaluing/ adjusting partnership assets and liabilities using a

temporary account called the Capital Adjustment account.
The Capital Adjustment account is closed to the partners capital
accounts using on their profit and loss ratio.

Types of Withdrawal of a Partner

1. Purchase of interest by another partner or an outsider

a. It is considered a personal transaction between the buying

and selling partners.

b. It involves the transfer of the withdrawing partners capital

to the capital account of the buying partner.

2. Purchase of interest by the partnership

a. It is considered a transaction between the partnership and

the outgoing partner.

b. It involves a decrease in partnership assets or increase in

partnership liabilities.

Pro-forma Entries

By purchase C, Capital xxx

of interest by A, Capital xxx
another person

By purchase of

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interest by the
Partnership

(a) Equal to carrying C, Capital xxx

Amount Cash/Liability xxx

(b) More than A, Capital xxx

carrying amount B, Capital xxx
(Bonus Method) C, Capital xxx

C, Capital xxx
Cash/Liability xxx

(c) Less than C, Capital xxx

Carrying amount Cash/Liability xxx
(Bonus Method) A, Capital xxx
B, Capital xxx

Classroom Exercises Admission and Withdrawal of a

Partner

1. The records of ABC Partnership show the following balances at

year-end:

ABC Partnership
Trial Balance
December 31, 200x
Cash P15,000
Accounts receivable 10,000
Allowance for bad debts P800
Office furniture 25,000

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 Accumulated depreciation 1,000
Accounts payable 3,200
Alex, Capital 10,000
Bert, Capital 15,000
Charles, Capital 20,000
Total P50,000 P50,000

Alex, Bert, Charles divide profit and loss equally. With the
consent of all the partners, Mr. Don is admitted as a new partner.
The following adjustments are agreed upon:

a. Allowance for bad debts should be 10% of accounts

receivable.
b. Office furniture should be 10% depreciated.
c. Accrued expenses amounting to P1,300 should be
recorded.

Prepare entries to adjust the accounts of the partnership.

Prepare the entry to record the admission of Mr. Don under the
following independent assumptions:

a. Mr. Don purchases of the interest of Mr. Bert for

P7,000
P5,000
P9,000

b. Mr. Don invests P8,000 cash.

c. Mr. Don invests sufficient cash to give him 25% interest in

the firm.

2. Assume the updated capital balances of the following partners

are as follows:

Partner Amy P50,000

Partner Belle 100,000
Assume Amy & Belle divide profit and loss equally.

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 Prepare the entry(ies) to record the admission of Mr. Cris under
the following independent assumptions:

a. Mr. Cris is admitted by investing P 50,000 for a capital

credit of 20% of the agreed capitalization of P200,000.

b. Mr. Cris is admitted by investing P50,000 for a capital

credit of 30% of the agreed capitalization of P200,000.

c. Mr. Cris invests P60,000 for a interest in the firm.

d. Mr. Cris invests P60,000 for a interest in the firm.

3. Assume that the updated capital balances of the partners are as

follows:

Partner Drew P50,000

Partner Earl 100,000
Partner Francis 150,000

Drew, Earl and Francis share profit and loss 3:2:3. Drew
withdraws from the partnership. Prepare all the necessary
journal entries under the following independent assumptions:

a. With the consent of Earl and Francis, Drew withdraws from

the partnership by selling his entire interest to Gary for
P50,000 cash.

b. Partnership purchases entire interest of Drew for P50,000.

c. Partnership purchases entire interest of Drew for P60,000.

d. Partnership purchases entire interest of Drew for P35,000.

January 2014