ACCOUNTING FOR PARTNERSHIP DISSOLUTION
~ dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying
on of the business.
~dissolution terminates all authority of any partner to act for the partnership. When the partnership is dissolved, the union of partners
to continue the business as a going concern is put to an end.
~does not necessarily mean an automatic termination of the business activities
~does not always lead to liquidation while liquidation is always a result of dissolution
~its primary causes are: admission of a new partner, withdrawal, retirement or death of a partner, insolvency of a partnership
or insolvency of a partner, conversion of the partnership into a corporation
~accounting process requires that the existing partners' capital accounts be updated first before dissolution; assets and liabilities of the
partnership should be restated at their fair market values to determine the fair and equitable capital balances of the existing
partners. The increase or decrease of assets is allocated among them based on their profit and loss ratios or capital ratios.
ADMISSION OF A NEW PARTNER: 2 METHODS
1. By purchase of interest of existing partners = is a personal transaction between them. As such, any gain or loss on the transaction is
a personal gain or loss of the selling partner.
< may be a purchase of interest of just one partner or purchase of partial interest of all partners >
a. Equal to book value of his interest being sold
b. Less than the book value of his interest being sold
c. More than the book value of his interest being sold
2. By direct investment to partnership [should be w/o prejudice to the requirement that all existing partners should give mutual
consent to the acceptance of the new partner]
= this manner of admitting a new partner is a transaction between the incoming partner and the partnership.
= the incoming partner directly invests cash or other noncash assets to the partnership, thereby increasing the
total assets of the partnership.
a. Investment equals capital credits = there is no accounting problem in this method because all partners will be given a
capital credit exactly the same as their respective asset contributions to the partnership. The total
capital contributions of the partners are the same as the total agreed capital of the new partnership.
b. Bonus method = net assets contributed are not equal to capital credit of incoming partner, but the total partnership agreed
capital is equal to total net assets contribution of the partners.
* to the NEW partner = when the NEW partner's agreed capital credit is GREATER than his actual capital contribution
* to OLD partners = when NEW partner's capital credit is LESSER than his actual capital contribution
NOTE: **
If, after the admission of a new partner, it is determined that the old partners' capital balances are more than their agreed
capital balances, the partnership will pay their excess capital contribution.
If there is deficit capital contribution of old partner(s), he will give additional investment ot the partnership to meet his
agreed capital balances.
WITHDRAWAL OR RETIREMENT OF A PARTNER
By reason of insolvency or incapacity, a partner may voluntarily withdraw or retire from the partnership. He must obtain the consent
of his fellow partners and determine among them the amount of his capital refund in the absence of a stipulated amount in the partnership agreement.
The withdrawing partner may sell his interest to the: Outside Party, Remaining Partner(s), or Partnership
1)
2)
3)
Withdrawal at adjusted book value - no Bonus
Withdrawal at Lesser Than book value - with bonus to the remaining partners
Withdrawal at more than book value - with bonus to the withdrawing partner
The accounting procedures commonly used when the partnership purchased the interest of a withdrawing partner would be:
1. Adjust the assets of the partnership to their current fair market value before accounting for the retirement of the partner
2. Record the retirement.
INSOLVENCY OF PARTNERSHIP OR A PARTNER
INSOLVENCY is commonly a result of excessive losses from operations, the over-extension of credit to customers, or excessive
investments in inventories or in plant assets. It arises when a business (or individual) cannot pay outstanding debts as they mature.
A person is deemed insolvent when the aggregate of his property at a fair valuation is less in amount than his total liabilities. The
insolvency of a partner practically dissolves the partnership because it impairs the mutual agency principle. The law provides that
an insolvent partner shall have no legal authority to act on behalf of the partnership, and the other partners have no authority to
act for him.
rying
f the
eed
be:
CLASSROOM RULES & REGULATIONS
1 3-column journal/columnar notebook is the official notebook to
be used by Accounting II students under my class throughout
the whole semester. Needless to say that this official notebook
shall be brought to my class AT ALL TIMES.
2 Cellphones should be turned off or put to silent mode throughout the whole period.
3 NO SPECIAL EXAM or QUIZ shall be given to any student at all
times unless previously arranged with me. However, in cases of
health concerns, special consideration is accorded upon presentation of medical certificates; in cases of school activities,
an excuse letter duly signed by authorized personnel may be
considered.
4 During exams or quizzes, only CALCULATORS are allowed
when required and NEVER CELLPHONES.
5 Any forms of noise or distraction should be avoided to give
respect to others who may want to learn. Anyone is welcome
to STEP OUT of the class when he/she is not up to listening/
participating in the discussion/lesson.
6 Any form of dishonesty is not tolerated for whatever reason.
7 Basis of grade computation:
Major Exams
Quizzes
Projects/Groupworks, etc
Attendance
50%
20%
20%
10%
Final Grade composition:
Prelim
Midterm
Final
30%
30%
40%
tebook is the official notebook to
to say that this official notebook
off or put to silent mode through-
ged with me. However, in cases of
PARTNERSHIP DISSOLUTION EXERCISES
ASSET REVALUATION
E & N Partnership decided to accept A as a partner with P500,000 cash contribution. The capital balances of E an
N are P600,000 and P400,000 respectively.
It was agreed among the partners that the following partnership assets should be revalued before the admission of A
Machine
Merchandise Inventory
Land
Building
P
Cost
200,000
100,000
200,000
300,000
Accumulated
Allowances
80,000
10,000
150,000
It was agreed that the new partnership name would be ENA and the profit and loss distribution would be based on
the partner's respective adjusted capital balances.
Required:
1. Journalize the asset revaluation
2. Journalize the admission of A
3. Prepare a schedule of new partners' capital balances
PURCHASE OF INTEREST from all existing partners
The capital balances and agreed profit and loss distribution of Clemer Omero and Ronica Elaine Partnership prior to
dissolution are as follows:
Partners
Clemer Omero
Ronica Elaine
Capital Balances
P
400,000
600,000
Profit and Loss Ratio
40%
60%
Aira Shane wants to purchase 25% interest in the partnership by paying directly to each of the existing partners.
Required:
1. Prepare journal entries assuming assuming Aira Shane purchased her interest from all the partners at the
following agreed prices:
a. P250,000
b. P200,000
c. P300,000
2. Compute the new profit and loss of the partners.
BONUS METHOD
The partnership of Abu and Bacar shows a total asset of P350,000. Its total available cash is just enough to pay the
P150,000 current liabilities of the partnership. Its noncurrent liabilities amounted to P50,000 and the capital balances
of the partners are equal to their agreed capital contribution of 40% and 60% which is also their respective profit and
loss distribution ratio.
Calim is to be admitted with an agreed investment of P150,000 for 20% interest in the partnership capital and profit.
Required: Using the bonus method compute the following:
1. Total partnership's capital right after admission of Calim.
2. Total capital credit to Calim.
3. The adjusted capital of Abu after admission of Calim.
4. The total assets of the partnership after the admission of Calim.
5. Total cash of the partnersip after the admission of Calim.
WITHDRAWAL OF A PARTNER
Orville, Adalyn and Analyn are partners engaged in book distribution. They share profits and losses in the ratio of
30%:30%:40%. Analyd decided to withdraw from the partnership at a time when the records of capital balances
were as follows:
Orville
300,000
0
200,000
Beginning balances
Withdrawals
Additional investments
Adalyn
400,000
100,000
200,000
Required: Journalize the withdrawal of Analyn from the partnership under each of the following independent cases
is Analyn is to receive:
1. P250,000
2. P200,000
3. P275,000
7
RETIREMENT OF A PARTNER
The existing partnership of Ang, Bat and Choy reported the following immediately prior to the retirement of Choy:
Cash
Equipment
Accounts Payable
Ang, Capital
Bat, Capital
Choy, Capital
P
Amount
150,000
300,000
150,000
75,000
100,000
125,000
Profit and Loss Ratio
25%
30%
45%
The partners agreed that the equipment is overstated by P50,000. Accrued salaries of P10,000 is to be recognized.
Choy is to be paid by the partnership at book value of his adjusted interest after the agreed adjustment of its assets
and liabilities.
Required:
A. Make the journal entries for the
1. Adjustments
2. Retirement of Choy
B. Compute the following:
1. The total assets of the partnership after the agreed adjustment before the retirement of Choy.
2. The adjusted total capital of the partnership after the agreed adjustments before the retirement of
Choy.
3. The amount of payment to Choy for his retirement.
4. The total capital of the partnership after the retirement of Choy.
5. The new profit and loss ratio of Ang and Bat after the retirement of Choy in the absence of specific
agreement.
INSOLVENCY OF PARTNERS AND PARTNERSHIP
The financial conditionsof the partnership and the individual general partners are the following:
Cash
Receivable from E
Accounts Payable
Payable to T
Z, Capital (30%)
T, Capital (30%)
E, Capital (40%)
P
Partnership
Debit
Credit
200,000
50,000
P
400,000
100,000
200,000
150,000
300,000
General Partner
Assets
P
200,000
350,000
350,000
Required:
1. Prepare a schedule of the settlement of each partner's personal obligation.
2. Prepare a schedule of the partnership settlement of obligations.
3. Journalize the dissolution of the partnership.
DISSOLUTION DUE TO DEATH OF A PARTNER
NBK Partnership is engaged in leasing activities. In year 2009, the business has a monthly rent cash revenue of
P100,000 and monthly cash operating expenses of P60,000, excluding a monthly depreciation expense of
Assume the following additional information:
1.
2.
3.
4.
5.
Na
Bu
Partners' beginning capital
P
500,000
300,000
Total liabilities, P500,000. Land and building are undervalued by P1,000,000.
On October 1, 2009, Na died due to car accident.
Income tax rate is 30% of the net income.
Due to liquidity problem, the remaining partners and the heirs of Na agreed that the final settlement
of Na's capital interest will be on June 30, 2010 subject to 12% interest per year.
Required:
1. Compute the adjusted partners capital for dissolution purposes.
2. Journalize the related entries of dissolution and the payment of Na's capital balance.
ANSWER THE FOLLOWING EXERCISES:
1 Ro and Que are partners who share profits and losses equally. Each has a capital balance of P40,000
respectively. They agreed to admit Lix as a new partner upon investiment of land costing P50,000, but which is
appraised at P60,000. Profits and losses are to be shared equally after the admission of Lix. What is the percentage
of Lix's interest in the firm?
8
a)
b)
40%
33.71%
c)
d)
33.33%
35.71%
2 Based on the above case, what is the capital balance of Ro, Que and Lix in the partnership?
a) P50,000 each
b) P40,000, P50,000 and P60,000 respectively
c) P40,000, P50,000 and P50,000 respectively
d) P46,667 each
3 If the original partnership capital is P100,000 and the new partner is admitted by investing P10,000 for
in the partnership under bonus method, the new partnership's accounting elements would be
Net Assets
a) P125,000
b) P125,000
Total Capital
P125,000
P110,000
Net Assets
c) P110,000
d) P100,000
4 If the total assets of the existing partnership is P500,000, and the new partner is admitted by investing
for 20% interest in the partnership, under bonus method the new basic accounting elements of the partnership is
described as
Net Assets
a) P500,000
b) P600,000
Total Capital
P600,000
P600,000
Net Assets
c) P625,000
d) P625,000
5 Suppose that the old partnership of A & B reported the following:
Partners
A
B
Capital
P
Profit and Loss Ratio
200,000
300,000
40%
60%
If C is to be admitted for 20% interest in the partnership's asset and profit by investing P125,000, then the new profit
and loss ratio of the new partnership without specific agreement between A and B would be
A
a)
b)
40%
48%
B
60%
32%
A
c)
d)
B
32%
33%
48%
33%
6 If an existing partnership admits a new partner for a 1/5 interest in the partnership's total agreed capital of
for an investment of P10,000, the admission of the new partner will result in the recognition of
a) bonus to the old partners if the total net assets contributed amounted to P40,000
b) bonus to the new partner if the total net assets contributed were valued at P40,000
c) bonus to the new partner if the total net assets contributed by old partners amounted to P30,000
d) no bonus if the total net assets contributed by the old partners were appraised at P30,000
7 Before the admission of C, the partnership of A and B reported a net asset of P180,000 which A an B partners
contributed equally. C is admitted by investing P60,000 for a capital credit of P80,000. Which of the following is the
effect under bonus method?
The above transaction will effect a
a) decrease on the capital balances of the old partner amounting to P10,000 each
b) bonus of P20,000 to the new partner
c) balance of P80,000 capital to all of the partners.
d) All of the above
8 The capital balances and profit/loss sharing of X, Y, and Z before the retirement of X are
Partners
X
Y
Z
P
Capital
150,000
160,000
200,000
Profit & Loss Ratio
30%
30%
40%
Upon retirement of X he is paid P165,000. If they agreed that bonus is to be recognized, the partnership's total
capital balance after retirement of X would be
a. 360,000
b. 345,000
c. 295,000
d. 290,000
9 The existing capital balances of Abnoy, Bitoy and Caloy prior to retirement of Abnoy were as follows:
Partners
Abnoy
Bitoy
Caloy
P
Capital
150,000
200,000
250,000
9
Profit & Loss Ratio
20%
30%
50%
Abnoy retired from the partnership by selling his whole interest in the partnership to Doy for P120,000.
ment of Abnoy will result in the total partnership's assets and capital as:
Net Assets
a. 450,000
b. 480,000
Total Capital
450,000
480,000
Net Assets
c. 600,000
d. 720,000
10 The existing capital balances of Ali, Billy and Clay prior to retirement of Ali were as follows:
Partners
Ali
Billy
Clay
P
Capital
100,000
200,000
300,000
Profit & Loss Ratio
25%
35%
40%
Ali retired from the partnership by selling his whole interest in the partnership to Billy and Clay for P120,000.
retirement of Ali will result in the total partnership's assets and capital as:
Net Assets
a. 480,000
b. 500000
Total Capital
480,000
500,000
Net Assets
c. 600,000
d. 720,000
11 Gerry and Narda are partners who have a capital of P90,000 each and share profits and losses equally. They offer
to admit Art for a one third interest int the firm upon his investment of P60,000. Under the bonus method, what is
the total agreed capital of the partnership?
a. 180,000
b. 240,000
c. 270,000
d. 150,000
12 Ba and Ka are partners who share profit and losses in the ratio of 7:3, respectively. On December 31, 2009, their
respective capital accounts were as follows:
Ba
Ka
Total Capital
P
P
350,000
300,000
650,000
On that date, they agreed to admit Daw as a partner with a one third interest in the capital and profits and losses,
and upon his investment of P250,000. Under the bonus method, what are the capital balances of Ba, Ka and Daw
immediately after the admission of Daw?
a.
b.
c.
d.
Ba, Capital
350,000
315,000
316,667
350,000
P
Ka, Capital
300,000
285,000
283,333
300,000
Daw, Capital
325,000
300,000
300,000
250,000
13 The existing capital balances of old partners prior to admission of D are as follows:
Partners
Capital Balances
Profit and Loss Ratio
A
100,000
20%
B
200,000
30%
C
300,000
50%
D is to be admitted to the partnership by direct purchase of 20% each of the existing partners' capital for
The net assets of the parnership right after the admission of D would be:
a. 340,000
b. 300,000
c. 600,000
d. 480,000
14 The existing capital balances of old partners prior to admission of D are as follows:
Partners
Capital Balances
A
200,000
B
280,000
C
320,000
D is to be admitted into the partnership by investing P200,000 for 18% interest in capital and profits of the partnership for his investment. The assets of the partnership are not to be revalued. Under the bonus method, the total
partnership's capital after admission of D is
a. 800,000
b. 975,610
c. 1,000,000
d. 650,000
15 The capital balances in the FSH are Farrah's capital P600,000, Sarrah's capital P500,000, and Hannah's capital
P400,000, and income ratios are 5:3:2 respectively. The FISH Partnership is formed by admitting Irish into the
firm with a cash investment of P600,000 for a 25% capital interest. The bonus to be credited to Hannah's capital
in admitting Irish is
a. 100,000
b. 75,000
c. 37,500
d. 15,000
10
HIP DISSOLUTION EXERCISES
s a partner with P500,000 cash contribution. The capital balances of E an
e following partnership assets should be revalued before the admission of A:
Fair Value
150,000
80,000
300,000
200,000
ame would be ENA and the profit and loss distribution would be based on
nd loss distribution of Clemer Omero and Ronica Elaine Partnership prior to
Profit and Loss Ratio
est in the partnership by paying directly to each of the existing partners.
uming Aira Shane purchased her interest from all the partners at the
s a total asset of P350,000. Its total available cash is just enough to pay the
ship. Its noncurrent liabilities amounted to P50,000 and the capital balances
capital contribution of 40% and 60% which is also their respective profit and
vestment of P150,000 for 20% interest in the partnership capital and profit.
engaged in book distribution. They share profits and losses in the ratio of
raw from the partnership at a time when the records of capital balances
Analyn
300,000
50,000
0
Analyn from the partnership under each of the following independent cases
11
Choy reported the following immediately prior to the retirement of Choy:
Profit and Loss Ratio
is overstated by P50,000. Accrued salaries of P10,000 is to be recognized.
book value of his adjusted interest after the agreed adjustment of its assets
rtnership after the agreed adjustment before the retirement of Choy.
of the partnership after the agreed adjustments before the retirement of
atio of Ang and Bat after the retirement of Choy in the absence of specific
General Partner
Liabilities
300,000
300,000
50,000
ctivities. In year 2009, the business has a monthly rent cash revenue of
xpenses of P60,000, excluding a monthly depreciation expense of P20,000.
Ko
200,000
he remaining partners and the heirs of Na agreed that the final settlement
interest will be on June 30, 2010 subject to 12% interest per year.
its and losses equally. Each has a capital balance of P40,000 and P50,000
s a new partner upon investiment of land costing P50,000, but which is
are to be shared equally after the admission of Lix. What is the percentage
12
P40,000, P50,000 and P50,000 respectively
000 and the new partner is admitted by investing P10,000 for 20% interest
Total Capital
P110,000
P100,000
hip is P500,000, and the new partner is admitted by investing P100,000
r bonus method the new basic accounting elements of the partnership is
Total Capital
P625,000
P600,000
he partnership's asset and profit by investing P125,000, then the new profit
artner for a 1/5 interest in the partnership's total agreed capital of P40,000
he total net assets contributed by old partners amounted to P30,000
ets contributed by the old partners were appraised at P30,000
ip of A and B reported a net asset of P180,000 which A an B partners
esting P60,000 for a capital credit of P80,000. Which of the following is the
0. If they agreed that bonus is to be recognized, the partnership's total
Bitoy and Caloy prior to retirement of Abnoy were as follows:
13
ling his whole interest in the partnership to Doy for P120,000. This retireTotal Capital
600,000
720,000
his whole interest in the partnership to Billy and Clay for P120,000. This
Total Capital
600,000
720,000
a capital of P90,000 each and share profits and losses equally. They offer
e firm upon his investment of P60,000. Under the bonus method, what is
and losses in the ratio of 7:3, respectively. On December 31, 2009, their
as a partner with a one third interest in the capital and profits and losses,
nder the bonus method, what are the capital balances of Ba, Ka and Daw
direct purchase of 20% each of the existing partners' capital for P100,000.
y investing P200,000 for 18% interest in capital and profits of the partnere partnership are not to be revalued. Under the bonus method, the total
ah's capital P600,000, Sarrah's capital P500,000, and Hannah's capital
espectively. The FISH Partnership is formed by admitting Irish into the
for a 25% capital interest. The bonus to be credited to Hannah's capital
14