CHAPTER III
DISSOLUTION- CHANGES IN
OWNERSHIP
1. DEFINITION
2. CAUSES OF
DISSOLUTION
3. ADMISSION OF A
PARTNER
REPORTER: Jomari Cabardo
DEFINITION:
The dissolution of a partnership is the
change in relation of the partners caused
by any partner ceasing to be associated in
the carrying on as distinguished from the
winding up of the business of the
partnership (Civil Code of the
Philippines, Article 1828).
LIMITED LIFE is one of the
characteristics of a partnership. Any
change in the membership of this form of
business organization will result to
dissolution. Dissolution of the partnership
does not necessarily imply that business
operations will come to an end. Most
changes in the ownership of a partnership
are accomplished without interruption of
its normal operation.
DISSOLUTION should be distinguished
from liquidation of a partnership. A
partnership is said to be liquidated when
the business is terminated; a partnership
may be dissolved without being
terminated but liquidated is always
preceded by dissolution.
CAUSES OF
DISSOLUTION:
1. Admission of a partner
2. Withdrawal or retirement of a partner
3.Death of a partner
4.Incorporation of a partnership
ADMISSION OF A
PARTNER
A new partner can only be admitted into a
partnership with the consent of all the
continuing partners. This is based on the
principle of DELECTUS PERSONAE
No one becomes a member of the
partnership without the consent
of all the members. This is because
a partnership is based on mutual
trust and confidence of the
partners.
A person may become a
partner in an existing
partnership by either of
the following:
1. Purchase of an interest from one or more
of the existing partners.
2. Investment of assets in the partnership
by the new partner.
Purchase of an
Interest From
Existing Partners
By: Jennylou Enitorio
With the consent of all the partners, a
new partner may be admitted in an
existing partnership by purchasing a
capital equity interest directly from one
or more of the old partners. Terms such
as PURCHASES, SELLS, PAYS,
BOUGHT,SOLD AND TRANSFERRED
indicate admission by purchase.
Pro-Forma Entry:
(Name of Seller), Capital
(Name of Buyer), Capital
xxx
xxx
The purchase price of the
interest sold to a new
partner may be:
1. Equal to the book value of the interest
sold.
2. Less than the book value of the interest
sold.
3. More than the book value of the interest
sold.
Illustrative problem A:
Coloma and Claudio are partners
with capital balances of P100,000
and P50,000 respectively. They share
profits and losses equally. Cordero is
a new partner.
Case 1a: Purchase at book
value from one partner
only.
Cordero purchases a 1/5 interest from Coloma
by paying P20,000.
ENTRY:
Coloma, Capital
20 000
Cordero, Capital
20 000
Case 1b: Purchase at book
value from more than one
partner.
Cordero purchases 1/5 interest from the old
partners by paying P30 000.
ENTRY:
Coloma, Capital
Claudio, Capital
Cordero, Capital
20 000
10 000
30 000
Case 2:Purchase at less
than book value.
Cordero purchases 1/5 interest from the old
partners by paying P25,000.
ENTRY:
Coloma, Capital
20 000
Claudio, Capital
10 000
Cordero, Capital
30 000
Case 3: Purchase at more
than book value.
Cordero pays P 40, 000 for a 1/5 interest of the
old partners.
ENTRY:
Coloma, Capital
Claudio, Capital
Cordero, Capital
20 000
10 000
30 000
Asset Revaluation upon
Admission of a New Partner
by Purchase
Coloma and Claudio are partners with
capital balances of P100,00 and P50,000
respectively. They share profits and loses
equally. Cordero is a new partner who
purchase a 1/5 interest from Coloma and
Claudio paying P40,000. However, before the
admission of Cordero, partnership assets are to
be revalued using as basis amount to be paid
by Cordero.
Step 1- the new partnership capital is equal to the
amount paid by the incoming partner divided by his
fraction of interest.
New partnership Capital = P40,000 / 1/5
P200,000
Step 2 = the amount of asset revaluation is equal
to the new partnership capital less old
partnership capital.
Asset revaluation =
=
P200,000 – P150,000
P50,000
Step 3 – the allocation of the amount of the asset
revaluation among the old partners is as
follows:
P50,000 / 2 per partner.
Step 4 – the capital balances of the old partners
after asset revaluation is equal to their old
capital balances plus their share on asset
revaluation.
Coloma Claudio
Capital balances before revaluation P100,000
Share on asset revaluation
25,000
Capital balances after revaluation
P125,000
P50,000
25,000
P75,000
Step 5 – the amount of interest transferred by the
old partners to the new partner is based on the
new capital balances (capital balances after
asset revaluation).
Coloma
Capital balances after revaluation
P125,000
Interest transferred
1/5
Capital transferred after revaluation P25,000
Claudio
P75,000
1/5
P15,000
Step 6 – the journal entries to record the revaluation of
asset and admission of Cordero are as follows:
ENTRY:
Asset
50 000
Coloma, Capital
25 000
Claudio, Capital
25 000
Coloma, Capital
Claudio, Capital
Cordero, Capital
25 000
15 000
40 000
Investment of
Assets in a
Partnership
By: Cecille Shyne Deseo
It is a transaction between the original
partnership and the new partner. A person
may be admitted into a partnership by
investing cash or other assets in the
business.
Invests
Contributes
Total Assets
Total Partner’s Equity
Definition of
TERMS
TOTAL CONTRIBUTED CAPITAL – the sum of
the capital balances of the old partners
and the actual investment of the new
partner.
TOTAL AGREED CAPITAL – it is the total capital
of the partnership after considering the
capital credits given to each of the
partners
BONUS – it is the amount of capital or equity
transferred by one partner to another
partner.
CAPITAL CREDIT – it is the equity of a partner in the
new partnership and is obtained by
multiplying the total agreed capital by
the applicable percentage interest of the
partner.
ASSET REVALUATION – necessary adjustment in
asset values upon admission of a new
partner. The adjustment in assets may be
determined as the difference between the
agreed capital and the total contributed
capital.
Problems relating to
Admission of a new Partner
by Investment
1. Agreed capital is given
a. No Bonus, No Asset Revaluation
b. Bonus to old Partners, No Asset Revaluation
c. Bonus to New Partner, No Asset Revaluation
d. Asset Revaluation (Positive & Negative),
No Bonus
2. Agreed Capital is not given.
a. Bonus Method
b. Asset Revaluation method (Positive &
Negative)
3. Agreed Capital is not given but basis for its
computation is indicated in the terms of
admission
4. The amount of the Contribution of the New
partner is not given
5. Fraction of Interest is not given.
The following are the
illustrations of the
various problems
involving admission of a
new partner by
investment..
Agreed
Capital is
Given
Case 1 – No Bonus, No Asset Revaluation
Conde invests P100,000 for a ¼ interest in the
agreed capital of P400,000.
Solution:
Contributed Capital
Agreed Capital
Calma
Castro
Conde
TOTAL
P 200,000
100,000
100,000
P 400, 000
P200,000
100,000
100,000
P 400,000
ENTRY:
Cash
Conde, Capital
100 000
100 000
Case 2 – Bonus to the old partners, no Asset
revaluation
Conde invests P100, 000 for a 1/5 interests in the new firm
capitalization of P400, 000.
Solution:
Contributed
Capital
Agreed
Capital
Calma
P 200, 000
P 210, 000
Bonus
P 10, 000
Castro
100, 000
110, 000
10, 000
Conde
100, 000
80, 000
(20, 000)
TOTAL
P 400, 000
P 400, 000
---
ENTRY:
Cash
100 000
Conde, Capital
Conde, Capital
Calma, Capital
Castro, Capital
100 000
20 000
10 000
10 000
Case 3 – Bonus to new partner, no asset
revaluation
Conde invests P60,000 for a ¼ interest in the total capitalization
of P360,000.
Solution:
Contributed
Capital
Agreed
Capital
Bonus
Calma
P 200, 000
P 185, 000
(P 15, 000)
Castro
100, 000
85, 000
(15, 000)
Conde
60, 000
90, 000
30, 000
TOTAL
P 360, 000
P 360, 000
---
ENTRY:
Cash
Calma, Capital
Castro, Capital
Conde, Capital
60 000
15 000
15 000
90 000
Case 4 – Positive Asset Revaluation, no Bonus
Conde invests P100, 000 for a 1/5 interest in the agreed
capital of P500, 000.
Solution:
Contributed
Capital
Agreed
Capital
Asset
Revaluation
Calma
P 200, 000
P 250, 000
P 50, 000
Castro
100, 000
150, 000
50, 000
Conde
100, 000
100, 000
---
TOTAL
P 400, 000
P 500, 000
P 100, 000
ENTRIES:
Other assets
Calma, Capital
Castro, Capital
Cash
100 000
50 000
50 000
100 000
Conde, Capital
100 000
Case 5 – Negative Asset Revaluation, No
Bonus
Conde invests P60,000 for a 1/5 interest in the agreed capital
of P300,000.
Solution
:
Calma
Contributed
Capital
P 200,000
Agreed
capital
P170, 000
Asset
Revaluation
(P 30,000)
Castro
100,000
70, 000
(30, 000)
Conde
60,000
60, 000
---
TOTAL
P 360, 000
P 300, 000
(P 60, 000)
ENTRIES:
Calma, Capital
Castro, Capital
Other assets
Cash
30 000
30 000
60 000
60 000
Conde, Capital
60 000
Agreed
Capital is
Not Given
When such a situation exists, the admission
of the new partner is recorded using any of
These 2 methods:
1. Bonus Method
2. Asset Revaluation Method
Positive Asset Revaluation
Method (Ac > CC)
&
Negative Asset Revaluation
Method (Ac < CC)
The Agreed capitalization is computed as
follows:
AC = New partner’s CC ÷ new partner’s
fraction of interest
1. Bonus Method
Solution:
Calma
Castro
Conde
TOTAL
Contributed
Capital
P 200, 000
100, 000
100, 000
P 400, 000
ENTRY:
Cash
Agreed
Capital
P 215, 000
105, 000
80, 000
P 400, 000
Bonus
P 15, 000
5,000
(20, 000)
---
100 000
Conde, Capital
Calma, Capital
Castro, Capital
80 000
15 000
5 000
2. Positive Asset
Revaluation Method
Solution:
Calma
Castro
Conde
TOTAL
Contributed
Capital
P 200, 000
100, 000
100, 000
P 400, 000
ENTRIES:
Other Assets
Calma, Capital
Castro, Capital
Cash
Agreed
Capital
P 275, 000
125, 000
100, 000
P 500, 000
Asset
revaluation
P 75, 000
25,000
--P 100, 000
100 000
75 000
25 000
100 000
Conde, Capital
100 000
1. Bonus Method
Solution:
Calma
Castro
Conde
TOTAL
Contributed
Capital
P 200, 000
100, 000
80, 000
P 380, 000
ENTRY:
Cash
Calma, Capital
Castro, Capital
Conde, Capital
Agreed
Capital
P 188, 750
96, 250
95, 000
P 380, 000
Bonus
(P 11, 250)
(3, 750)
15, 000
---
80 000
11 250
3 750
95 000
2. Negative Asset
Revaluation Method
Solution:
Calma
Castro
Conde
TOTAL
Contributed
Capital
P 200, 000
100, 000
80, 000
P 380, 000
ENTRIES:
Calma, Capital
Castro, Capital
Other Assets
Cash
Agreed
Capital
P155, 000
85 , 000
80, 000
P 320, 000
Asset
revaluation
(P 45, 000)
(15,000)
--(P 60, 000)
45 000
15 000
60 000
80 000
Conde, Capital
80 000
Withdrawal and
Retirement of a
Partner
The partnership may allow any of its
partners to withdraw or retire from the firm.
The business may continue after such
withdrawals; on the other hand, the interest of
the retiring or withdrawing partner may be:
1. sold to a new partner (outsider)
2. sold to continuing (remaining) partners
3. sold to the partnership
SALE OF INTEREST TO A NEW PARTNER
* With the consent of the remaining partners, the
retiring partner may sell his interest to an
outsider. The sale is recorded in the same
manner as in the admission of a new partner
by purchase. The partnership recognizes only
the transfer of capital interest from the
retiring partner to the new partner. Any gain
or loss from the sale is a personal gain or loss
of the retiring partner.
SALE OF INTEREST TO
CONTINUING PARTNERS
* 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 to a new
partner. The partnership recognizes only the
transfer of capital interest from the retiring
partner to the acquiring partner or partners.
SALE OF INTEREST TO THE
PARTNERSHIP
*A retiring partner may sell his capital interest to
the continuing partners through the partnership.
The partnership has the obligation to make
payment to the retiring partner either by:
2. Payment in cash;
3. Transfer of none cash assets; or
3. Recognition of a liability for the full or the
balance of the unpaid interest of the retiring
partner.
*The purchase price or amount of settlement by
the partnership to the retiring partner may be:
3. Equal to the interest of the retiring partner (at
book value)
4. Less than the interest of the retiring partner
( at less than book value)
3. More than the interest of the retiring partner
( at more than the book value)
* When the payment to the retiring partner is
less than or more than his capital interest, the
difference between the purchase price and the
capital interest may be accounted for using :
1. bonus method
2. asset revaluation method
ACCOUNTING PROBLEMS
INVOLVED IN THE RETIREMENT OF
A PARTNER
Following are the accounting problems involved in determining the capital
interest of the retiring partner:
2.
Determination of the profit or loss from the beginning of the accounting
period to the date of withdrawal or retirement and the distribution of such
profit or loss.
3.
Closing of the partnership books.
4.
Correction of accounting errors in prior periods like overstatement or
understatement of inventories, excessive depreciation charges and failure
to provide adequately for doubtful accounts.
5.
Revaluation partnership assets to current values.
6.
Recording of bonus brought by the retirement of a partner
7.
Settlement of the interest of the retiring partner.
CALCULATION OF
RETIRING PARTNER’S
INTEREST
The following schedule are helpful in determining the interest of a retiring
partner:
Investment
- Withdrawals
+ Share in partnership profits to date of retirement or
- Share in partnership losses to date of retirement
+ Loans and advances to the partnership or
- Loans and advances from the partnership
+ Revaluation of assets increasing their recorded values or
- Revaluation of assets decreasing their recorded values
Interest upon retirement
Illustrative Problem A: The statement of financial position of the partnership
of Dy, David, and Diaz on December 31, 2009 follows:
Asset
Liabilities and Capital
Cash
P110,000
Liabilities
P 20, 000
Other Asset
30,000
Dy , Capital
20, 000
David, Capital
40, 000
Diaz, Capital
60, 000
P140,000 Total Liabilities and Capital P 140,000
The partners share profits and losses in the ratio of 4:2:4. On July 1, 2010,
Diaz asked to be allowed to withdraw from the partnership. The partners
decided to close the books as of these date so as to determine the capital
interest of Diaz. Profit for 6 months ended amounted P60,000 while
drawings of Dy, David and Diaz amount to P4,000 , P6,000 and P2,000,
respectively. Profits and losses are to be shared equally after the retirement
of Diaz.
The following entries will be prepared prior to the retirement of Diaz from the
partnership:
Income Summary
Dy, Capital
David, Capital
Diaz, Capital
b. Dy, Capital
David, Capital
Diaz, Capital
Dy, Drawing
David, Drawing
Diaz, Drawing
c.
60,000
24,000
12, 000
24, 000
4,000
6,000
2,000
4,000
6,000
2,000

After considering the preceding entries, the
capital interest as of the partners as of July
1,2010 may now be computed as follows:
Diaz
Dy
David
P 60,000
P 20,000
P 40,000
Share in profit from Jan. 1 – June 30
24,000
24,000
12,000
Withdrawals
( 2,000 )
( 4,000 )
Capital balance, Dec. 31,2009
P 82,0000
P 40,000
( 6,000 )
P 46,000
Assumption 1- sale of interest to a new partner.
Diaz sold his interest to Doque for P 100,000.
Diaz, Capital
82,000
Doque, Capital
82,000
Assumption 2 – Sale of interest to the continuing
partners. Diaz sold his interest to Dy and
David for P75,000; the interest being divided
equally by the remaining partners. Profits and
losses after the retirement of Diaz will be
divided equally.
Diaz, Capital
82,000
Dy, Capital
41,000
David, Capital
41,000
Assumption 3 – Sale of interest to the partnership. Diaz
sold his interest to the partnership. The partners
agreed to make immediate cash settlement to the
retiring partner. Profits and losses after the retiring of
Diaz will be divided equally.
Case A – Settlement to retiring partner is equal to his
capital interest. The partnership paid Diaz P82,000.
Diaz, Capital
Cash
82,000
82,000
Case B – Settlement is less than the capital
interest of the retiring partner (at less than
book value). The partnership paid Diaz
P76,000 which is P6,000 less than his capital
interest of P82,000.
Bonus Method
Diaz, Capital
82,000
Cash
76,000
Dy, Capital
4,000
David, Capital
2,000
P6,000 x 4/6 = P4,000
P6,000 x 2/6 = P2,000
Asset Revaluation Method
Dy, Capital
David, Capital
Diaz, Capital
Other Assets
6,000
3,000
6,000
15,000
Dy = P15,000 x 4/10 = P6,000
David = P15,000 x 2/10 = P3,000
Diaz = P15,000 x 4/10 = P6,000
After the preceding entry, the capital balance of Diaz
is P76,000 and payment to him will be recorded as
follows:
Diaz, Capital
76,000
Cash
76,000
A compound entry may be made as follows:
Dy, Capital
David, Capital
Diaz, Capital
Cash
Other Assets
6,000
3,000
82,000
76,000
15,000
Case C – Settlement is more than the capital interest
of the retiring partner (at more than book value).
The partnership paid Diaz P85,000 which is
P3,000 more than his capital interest of P82,000.
Bonus Method
Diaz, Capital
Dy, Capital
David, Capital
Cash
82,000
2,000
1,000
85,000
Asset Revaluation Method
Other Assets
Dy, Capital
David, Capital
Diaz, Capital
7,500
3,000
1,500
3,000
After the entry recording the asset revaluation, the
capital balance of Diaz is P85,000 and payment to him
will be recorded as follows:
Diaz, Capital
Cash
85,000
85,000
A compound entry may be made as follows:
Other Assets
Diaz, Capital
Cash
Dy, Capital
David, Capital
7,500
82,000
85,000
3,000
1,500
COMPARISON BETWEEN the BONUS
AND ASSET REVALUATION METHOD
Asset
Dy,
Revaluation Capital
Balances after retirement of Diaz
under the bonus method
David,
Capital
P 38,000
P 45,000
Balances after retirement of Diaz
under the asset revaluation method
P 7,500
P 43,000
P 47,500
Depreciation on asset revaluation
(divided equally)
( 7,500 )
( 3,750 )
( 3,750 )
P 39,250
P 43,750
( P 1,250 )
P 1,250
Balances after depreciation
Net advantage (disadvantage) of using
the bonus method
CHANGE IN CAPITAL
STRUCTURE BY DEATH OR
INCAPACITY OF A PARTNER
The death or incapacity of a partner legally dissolves the old
partnership since the partner ceases to be associated in the
carrying on of the business. The remaining partners may
continue operations based on a new contract or Articles of CoPartnership. 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 received an amount equal to the
interest and profits attributable to this interest.
The following accounting problems are encountered in case of
death or incapacity of a partner:
3.
4.
5.
6.
7.
8.
Determination of the profit or loss from the beginning of the
accounting period to the date of death or incapacity and the
distribution of such profit or loss.
Closing of the books of the partnership. Partnership
agreement, however, may provide thaSt the books need to be
closed and net income for the fraction of the accounting period
to the date of date or incapacity be determined.
Correction of prior year’s income, if there is any.
Revaluation of partnership assets to arrive at current values.
Recording of bonus.
Settlement of the interest of the deceased or incapacitated
partner.