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DISSOLUTION – CHANGES IN OWNERSHIP (Name of Buyer), Capital xxx

The dissolution of a partnership is the change in The purchase price of the interest sold to a new
relation of the partners caused by any partner ceasing partner may be:
to be associated in the carrying on as distinguished
 Equal to the book value of the interest sold.
from the winding up of the business of the
partnership (Civil Code of the Philippines, Article  Less than the book value of the interest sold.
1828)  More than the book value of the interest sold.

Limited life is one of the characteristics of a Sample Case:


partnership. Any change in the membership of this Coloma and Claudio are partners with capital
form of business organization will result to balances of P100,000 and P50,000 respectively.
dissolution. Dissolution of the partnership does not They share profits and losses equally. Cordero is a
necessarily imply that business operations will come new partner.
to an end. Most changes in the ownership of a
partnership are accomplished without interruption of Case 1a: (Purchase at book value from one
its normal operation. partner only) Cordero purchases a 1/5 interest from
Coloma by paying P20,000.
Dissolution should be distinguished from liquidation
of a partnership. A partnership is said to be ENTRY:
liquidated when the business is terminated; a Coloma, Capital 20 000
partnership may be dissolved without being Cordero, Capital 20 000
terminated but liquidation is always preceded by
dissolution. Case 1b: (Purchase at book value from more than
one partner) Cordero purchases 1/5 interest from
CAUSES OF DISSOLUTION the old partners by paying P30 000.
 Admission of a partner ENTRY:
 Withdrawal/ Retirement of a partner
 Death of a partner Coloma, Capital 20 000
 Incorporation of a partnership Claudio, Capital 10 000
Cordero, Capital 30 000

 ADMISSION OF A PARTNER Case 2: (Purchase at less than book value) Cordero


purchases 1/5 interest from the old partners by
A new partner can only be admitted into a paying P25,000.
partnership with the consent of all the continuing ENTRY:
partners. This is based on the principle of delectus
personae: No one becomes a member of the Coloma, Capital 20 000
partnership without the consent of all the members. Claudio, Capital 10 000
This is because a partnership is based on mutual trust Cordero, Capital 30 000
and confidence of the partners. Case 3: (Purchase at more than book value)
A person may become a partner in an existing Cordero pays P 40, 000 for a 1/5 interest of the old
partnership by either of the following: partners.

 Purchase of an interest from one or more of the ENTRY:


existing partners. Coloma, Capital 20 000
 Investment of assets in the partnership by the Claudio, Capital 10 000
new partner. Cordero, Capital 30 000
PURCHASE OF AN INTEREST FROM
EXISTING PARTNERS INVESTMENT OF ASSETS IN A
PARTNERSHIP
With the consent of all the partners, a new partner
may be admitted in an existing partnership by It is a transaction between the original
purchasing a capital equity interest directly from one partnership and the new partner. A person may be
or more of the old partners. Terms such as purchases, admitted into a partnership by investing cash or other
sells, pays, bought, sold and transferred indicate assets in the business. The investment will increase
admission by purchase. The pro-forma entry is: the total assets and the total partner’s equity.

(Name of Seller), Capital xxx Definition of terms:


Total Contributed Capital – the sum of the capital 2b) Assume that Conde invested P100,000 in the
balances of the old partners and the actual investment business and out of the total cash investment,
of the new partner. P20,000 is considered as a bonus to partners Calma
and Castro.
Total Agreed Capital – it is the total capital of the
partnership after considering the capital credits given Contributed Bonus Agreed
to each of the partners Calma 200,000 10,000 210,000
Castro 100,000 10,000 110,000
Bonus – it is the amount of capital or equity Conde 100,000 (20,000) 80,000
transferred by one partner to another partner. Total 400,000 - 400,000
Capital Credit – it is the equity of a partner in the ENTRIES:
new partnership and is obtained by multiplying the Cash 100,000
total agreed capital by the applicable percentage Conde, Capital 100,000
interest of the partner ***
Asset Revaluation – necessary adjustment in asset Conde, Capital 20,000
values upon admission of a new partner. The Calma, Capital 10,000
adjustment in assets may be determined as the Castro, Capital 10,000
difference between the agreed capital and the total 3. Bonus to New Partner
contributed capital.
3a) Conde invests P60,000 for a 1/4 interest in the
Sample Case: total capitalization of P360,000.
Calma and Castro are partners with capital balances Contributed Bonus Agreed
of P200,000 and P100,000, respectively. They share Calma 200,000 (15,000) 185,000
profits and losses equally. The partners agreed to Castro 100,000 (15,000) 85,000
admit Conde as a member of the firm. Conde 60,000 30,000 90,000
Total 360,000 - 360,000
1. No Bonus
ENTRY:
Conde invests P100,000 for a 1/4 interest in the
Cash 60,000
agreed capital of P400,000.
Calma, Capital 15,000
Contributed Agreed Castro, Capital 15,000
Calma 200,000 200,000 Conde, Capital 90,000
Castro 100,000 100,000
Conde 100,000 100,000 3b) Conde invested P100,000 for a 30% interest in
Total 400,000 400,000 the business.
ENTRY: Contributed Bonus Agreed
Cash 100,000 Calma 200,000 (10,000) 190,000
Conde, Capital 100,000 Castro 100,000 (10,000) 90,000
Conde 100,000 20,000 120,000
2. Bonus to Old Partners Total 400,000 - 400,000
ENTRY:
2a) Conde invests P100,000 for a 1/5 interests in the
business. The total agreed capital is P400,000. Cash 100,000
Calma, Capital 10,000
Contributed Bonus Agreed Castro, Capital 10,000
Calma 200,000 10,000 210,000 Conde, Capital 120,000
Castro 100,000 10,000 110,000
Conde 100,000 (20,000) 80,000 4. Positive Asset Revaluation
Total 400,000 - 400,000
Conde invests P100,000 for a 1/5 interest in the
ENTRIES: agreed capital of P500,000.
Cash 100,000 Contributed Revaluation Agreed
Conde, Capital 100,000 Calma 200,000 50,000 250,000
*** Castro 100,000 50,000 150,000
Conde, Capital 20,000 Conde 100,000 - 100,000
Calma, Capital 10,000 Total 400,000 100,000 500,000
Castro, Capital 10,000
ENTRIES: SALE OF INTEREST TO THE PARTNERSHIP
Other Assets 100,000 A retiring partner may sell his capital interest to the
Calma, Capital 50,000 continuing partners through the partnership. The
Castro, Capital 50,000 partnership has the obligation to make payment to the
*** retiring partner either by: payment in cash; transfer
Cash 100,000 of none cash assets; or recognition of a liability for
Conde, Capital 100,000 the full or the balance of the unpaid interest of the
retiring partner.
5. Negative Asset Revaluation
Sample Case:
Conde invests P60,000 for a 1/5 interest in the agreed
capital of 300,000. The statement of financial position of the partnership
of Dy, David and Diaz on December 31, 2017 shows
Contributed Revaluation Agreed
the following:
Calma 200,000 (30,000) 170,000
Castro 100,000 (30,000) 70,000 Asset Liabilities and Equity
Conde 60,000 - 60,000 Cash 110,000 Liabilities 20,000
Total 360,000 (60,000) 300,000 Other Assets 30,000 Dy, Capital 20,000
ENTRIES: David, Cap. 40,000
Diaz, Cap. 60,000
Calma, Capital 30,000
Castro, Capital 30,000 140,000 140,000
Other Assets 60,000
*** The partners share profits and losses in the ratio of
Cash 60,000 4:2:4. On July1, 2018, Diaz asked to be allowed to
Conde, Capital 60,000 withdraw from the partnership. The partners decided
to close the books as of this date as to determine the
capital interest of Diaz. Profit for 6 months ended
 WITHDRAWAL OF A PARTNER amounted P60,000 while drawings of Dy, David and
The partnership may allow any of its partners to Diaz amounted to P4,000, P6,000 and P2,000,
withdraw or retire from the firm. The business may respectively.
continue after such withdrawals; on the other hand, ENTRIES:
the interest of the retiring or withdrawing partner
may be: Income Summary 60,000
Dy, Capital 24,000
1. sold to a new partner (outsider) David, Capital 12,000
2. sold to continuing (remaining) partners Diaz, Capital 24,000
3. sold to the partnership ***
SALE OF INTEREST TO A NEW PARTNER Dy, Capital 4,000
(OUTSIDER) David, Capital 6,000
Diaz, Capital 2,000
With the consent of the remaining partners, the Dy, Drawings 4,000
retiring partner may sell his interest to an outsider. David, Drawings 6,000
The sale is recorded in the same manner as in the Diaz, Drawings 2,000
admission of a new partner by purchase. The
partnership recognizes only the transfer of capital After considering the preceding entries, the capital
interest from the retiring partner to the new partner. balances of the partners are shown below:
Any gain or loss from the sale is a personal gain or Dy David Diaz
loss of the retiring partner. Balance 20,000 40,000 60,000
SALE OF INTEREST TO CONTINUING Profit share 24,000 12,000 24,000
PARTNERS Drawings (4,000) (6,000) (2,000)
40,000 46,000 82,000
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 Withdrawal at book value. Assume that Diaz
to a new partner. The partnership recognizes only the agreed to accept payment equal to his interest.
transfer of capital interest from the retiring partner to ENTRY:
the acquiring partner or partners. Diaz, Capital 82,000
Cash 82,000
Withdrawal at MORE THAN the book value. Sample Case:
Assume that Diaz demanded P85,000 which is
Partners Yves and Chuu, who share equally in profits
P3,000 more than his capital interest of P82,000.
and losses, have the following items in their
ENTRY: partnership’s statement of financial position as at
December 31, 2018:
Diaz, Capital 82,000
Dy, Capital 2,000* Cash 200,000 AP 140,000
David, Capital 1,000** AR 50,000 Acc. Dep. 10,000
Cash 85,000 Inventory 150,000 Yves, Cap. 230,000
Equipment 100,00 Chuu, Cap. 120,000
*3,000 x 4/6 = 2,000 500,000 500,000
**3,000 x 2/6 = 1,000
Withdrawal at LESS THAN the book value. They agreed to incorporate their partnership, with the
Assume that the partnership paid Diaz P76,000 new corporation absorbing the net assets after the
which is P6,000 less than his capital interest of following adjustments: providing for allowances for
P82,000. bad debts of P5,000; restatement of the inventory to
ENTRY: its current fair value of P170,000; and, additional
recognition of depreciation on the equipment of
Diaz, Capital 82,000 P5,000. The corporation’s share capital will have a
Cash 76,000 par value of P100, and the partners will be issued the
Dy, Capital 4,000* shares equivalent to their adjusted capital balances.
David, Capital 2,000**
ENTRIES:
*6,000 x 4/6 = 4,000
**6,000 x 2/6 = 2,000 Cash 200,000
Accounts Receivable 50,000
Inventory 170,000
 DEATH OF A PARTNER Equipment 85,000
The death or incapacity of a partner legally dissolves Allowance for Doubtful Acc. 5,000
the old partnership since the partner ceases to be Accounts Payable 140,000
associated in the carrying on of the business. The Ordinary Shares 360,000
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 receive
an amount equal to the interest and profits
attributable to this interest

 INCORPORATION OF A PARTNERSHIP
A partnership may decide to incorporate after
evaluating the various advantages of having a
corporate form of business organization. After the
necessary adjusting and closing entries, the assets
and liabilities of the partnership are transferred to the
corporation in exchange for shares of stock. The
shares received by the partnership are distributed to
the partners based on their equity interests. In the
books of the corporation, the receipt of transferred
assets and liabilities will be recorded along with the
issuance of share capital to the incorporators, the
“former” partners.

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