PARTNERSHIP DISSOLUTION

Dissolution – termination of the legal life of the partnership.

- termination of the original relationship among partners

*Note: Revaluation of Assets and recognition of net income or loss are necessary before admission of a
new partner.

Causes of dissolution:
o Admission of a new partner/s
o Withdrawal/retirement of a partner
o Death or incapacity of a partner
o Incorporating a partnership

Types of Admission of a Partner

o Admission by purchase of interest
o Admission by investment

ADMISSION OF A PARTNER

ADMISSION BY PURCHASE OF INTEREST

• A personal transaction between the selling and the buying partner
• Any gain or loss incurred, is considered as personal gain or loss of the selling partner.
• Interest of a partner can be sold at book value, more than book value or less than book value of
interest sold.
• No increase in the total partners’ equity ( transfer of capital from the selling to the buying partner).

PROFORMA ENTRY:

Selling Partner’s Capital xx

Buying Partner’s Capital xx
To record admission of a partner

TRANSACTIONS:

Data: M, Capital P200,000

N, Capital 300,000
Profit and Loss Ratio 2: 3

1. O purchased 1/4 interest of M for P50,000.

2. O purchased 1/2 interest of M and N for P250,000.
3. O purchased 1/3 interest of N for P120,000.
4. O purchased 1/4 interest of M and N for P200,000.
5. M sold 1/5 of his interest to O for P20,000.
6. N sold 1/2 of her interest to O for P100,000.
 Journal Entries
1 M Capital 50,000
O Capital 50,000
To record admission of O

2 M Capital 100,000
N Capital 150,000
O Capital 250,000

3 N Capital 100,000
O Capital 100,000

4 M Capital 50,000
N Capital 75,000
O Capital 125,000

5 M Capital 40,000
O Capital 40,000

6 N Capital 150,000
O Capital 150,000

ADMISSION BY INVESTMENT

Terms:
Total Agreed Capital (TAC) – new capitalization of the newly formed partnership.
Total Contributed Capital (TCC) – total investments of the old and new partners.
Capital Credit – interest or equity of a partner in the newly formed partnership.
Percentage/Fraction of Interest - interest or equity of a partner expressed in fraction or percentage.
Goodwill – An intangible advantage a business possesses by which it is able to earn more than what is
normal in its business operations.

Bonus - A transfer of portion of the partner’s capital to the credit of another in consideration of the latter’s
business advantage.

INVESTMENT ENTRY

• A new partner invested cash or non cash assets in the partnership

Proforma entry:

Cash xx
Non-cash assets xx
New Partner’s Capital xx
To record investment
BONUS is allowed either to the new or old partners

• Total Agreed Capital of the new partnership is equal to the Total Contributed Capital.
(TAC=TCC)

If the Capital Credit of the new partner is greater than his contribution, bonus is given to the
new partner.

Proforma entry
Cash xx
Non-cash assets xx
Old Partners’ Capital xx
New Partner’s Capital xx
To record investment and bonus

If the Capital Credit of the old partners is greater than their contributions, bonus is given to
the old partners.

Cash xx
Non-cash assets xx
New Partner’s Capital xx
To record investment.
New Partner’s Capital xx
Old Partners’ Capital xx
To record bonus to old partners.

BONUS METHOD:
Example:
Sonie Capital P200,000
Windy Capital 300,000
Profit and Loss ratio 2:3

BONUS TO OLD PARTNERS

Rica invested P100,000 for 10% interest in the new firm’s capital of P600,000.

Cash 100,000
Rica, Capital 60,000
Sonie, Capital 16,000
Windy, Capital 24,000
To record Rica’s investment and bonus to old
partners

Computation:
TAC TCC BONUS
Sonie, Capital 216,000 200,000 16,000
Windy, Capital 324,000 300,000 24,000
Rica, Capital (10%) 60,000 100,000 (40,000)
600,000 600,000 200,000
Note: The bonus was given by the new partner to the old partners since the new partner’s
capital credit was less than her capital contribution. The bonus was shared by the old
partners according to their old capital ratio.
BONUS TO NEW PARTNER
Rica invested P100,000 for 30% interest in the new firm’s capital of P600,000.

Cash 100,000
Sonie, Capital 32,000
Windy, Capital 48,000
Rica, Capital 180,000
To record Rica’s investment and bonus to
old partners

Computation:
TAC TCC BONUS
Sonie, Capital 168,000 200,000 (32,000)
Windy, Capital 252,000 300,000 (48,000)
Rica, Capital (30%) 180,000 100,000 80,000
600,000 600,000 200,000
Note: The bonus was given by the old partners to the new partner since the new
partner’s capital credit was greater than her capital contribution. The bonus
was shared by the old partners according to their old capital ratio.

Total Agreed Capital of the New Partnership is not specifically stated:

 In the absence of an expressed agreements, bonus method is used.

 To determine the BONUS, the TAC of the new partnership is assumed to be

equal to the TCC of the partners.

WITHDRAWAL/RETIREMENT OF A PARTNER
When a partner retires or withdraw from the partnership, the partnership is dissolved, but the
remaining partners may continue operating the business.
1. The equity of the withdrawing/retiring partner may increased or decreased by the
following:
- withdrawal
- share in income or loss
- changes in valuation of all assets and liabilities

2. Interest or Equity of the withdrawing/retiring partner can be sold to:

a. existing partners
b. outsiders
c. partnership

3. The retiring/withdrawing partner may receive a settlement :

a. equal to his equity
b. more than his equity
c. less than his equity
Example:
The capital accounts of the partners are as follows:
A Capital P100,000
B Capital 200,000
C Capital 200,000

The partners share profit & loss in the ratio 20:40:40. Net income for six months prior to B’s
retirement amount to P120,000. The partners decided to revalue the assets of P250,000 to
P420,000.
Required 1. Compute for the adjusted capital of B.
2. Journalize the withdrawal of B if his equity was sold to:
a. G for P300,000
b. A for P240,000
c. Partnership for
c1. - P316,000
c2 - P450,000
c3 - P280,000
Entries:
Income Summary 120,000
A Capital 24,000
B Capital 48,000
C Capital 48,000
Distribution of net profits.

Assets 170,000
A Capital 34,000
B Capital 68,000
C Capital 68,000
Revaluation of assets

COMPUTATIONS:
ADJUSTED CAPITAL OF B:
B Capital before adjustment P200,000
Add: Share in Net Income
( 120,000 x 40%) P48,000
Share in Asset Revaluation
(170,000 x 40%) 68,000 116,000
B Capital after adjustment P316,000
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 JOURNAL ENTRIES to record the withdrawal of B:

a. B Capital 316,000
G Capital 316,000
B’s equity sold to G.

b. B Capital 316,000
A Capital 316,000
B’s equity sold to A.

c. 1) B Capital 316,000
Cash 316,000
Partnership settles the equity of B.

2)B Capital 316,000

A Capital 44,667
C Capital 89,333
Cash 450,000
Partnership settles the equity of B.
Note : The amount of payment is greater than B’s Capital. The difference is considered as
bonus from the remaining partners and shared by them according to their remaining
profit and loss ratio.

3 B Capital 316,000
Cash 280,000
A Capital 12,000
C Capital 24,000
Partnership settles the equity of B
Note : The amount of payment is lesser than B’s Capital. The difference is considered as
bonus to the remaining partners and shared by them according to their remaining
profit and loss ratio.