Partnership
Dissolution:
Changes in
Ownership
CHAPTER 19
Introduction
A business conducted as a partnership usually has changes in ownership during its existence.
In this chapter, we discuss the changes in ownership that do not result in the termination of
the partnership operations or of the partnership as a separate business and accounting entity.
Such change in ownership is termed as dissolution. Partnership dissolution is defined as “the
change in the 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.” Dissolution ends the
association of partners for their original purpose.
Unlike corporation, changes in ownership structure are events that require special accounting
treatment.
NAME OR LOGO
Accounting for Partnership Dissolution
Accounting for a partnership is influenced by the propriety theory, which views a
partnership not as a distinct entity, but rather, as a group of individual investors. Measuring
changes in the equity of the individual partners is a major aspect of partnership accounting.
Because ownership changes result in the dissolution of the partnership, this provides an
excellent opportunity for structure of the partnership which is presumed to be arm’s length
transactions that reflect the current value of the partnership.
NAME OR LOGO
Capital Interest versus Profit and Loss Interest
In preparing partnership agreement, the partners must recognize:
• that there is a distinction between a partner’s capital interest and
• his/her interest in income and losses subsequently reported in the partnership.
A partner’s capital interest is:
• a claim against the net assets of the partnership as shown by the balance in the partner’s capital account.
An interest in profit and loss determines how the partner’s capital interest will increase or decrease as a result
of subsequent operations.
In some cases:
• the relationship of the capital accounts to one another does not correspond with the partner’s profit and loss
ratio. Capital balances are historical cost figures. As describe earlier, a partner’s capital interest may change
over time because they result from contributions and withdrawals made throughout the life of the business
as well as from the allocation of partnership income. Therefore, any correlation between a partner’s
recorded capital at a particular point in time and the profit and loss percentage would probably coincidental.
For example, Mr. X became a partner by having a capital of P40,000 out of a total capital of P100,000. Mr. X
received a forty-percent (40%) capital interest in the partnership, but he was given a thirty-five percent (35%)
interest in profit and loss.
NAME OR LOGO
Assignment of an Interest to a Third Party
A partnership is not dissolved when a partner assigns his/her interest in the partnership to a third
party, because such an assignment does not itself change the relationship of the partners. Such
assignment only entitles the assignee to receive the assigning partner’s interest in future partnership
profits and partnership assets in the event of liquidation.
The assignee does not become a partner and does not obtain the right to share in management of the
partnership or to review transactions and records of the partnership. Because the assignee does not
become a partner, the only change required on the partnership books is to transfer the interest of the
assignor partner to the assignee.
Illustration 19-1:
The capital balances (and profit and loss ratio) of A and B in the AB partnership is presented as follows:
A, capital (75%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B, capital (25%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 75,000
60,000
A assigns 30% of his interest to C (C paid P26,000 for the interest assigned). The entry to record the assignment is
as follows:
A, capital (30% x P75,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,500
22,500
The purchase price paid by C is completely irrelevant to the entry recorded on the books.
NAME OR LOGO
The remaining discussions of this chapter consider the problems that arise upon dissolution
as a result of the:
1. Admission of a new partner:
a. by Purchase of Interest, and
b. by Investment
2. Withdrawal or retirement of a partner,
3. Death or incapacity of a partner, and
4. Incorporation of a partnership
Partnerships commonly deviate from GAAP in the following areas:
1. the use of the cash basis instead of the accrual basis,
2. the use of prior period adjustments,
3. the use of current values instead of historical cost (usually in connection with a change in
ownership), and
4. the recognition of goodwill (usually in connection with a change in ownership).
NAME OR LOGO
Valuation – An Issue
When there is a change in the ownership of the partnership, the problem of assigning a fair value of the firm arises.
It is a question as to whether or not the assets and liabilities of the continuing partnership should be revalued.
There are two approaches under this particular issue:
1. Revaluation approach (usually referred to as goodwill procedure- Non-GAAP). Under this
approach, the use of fair values provides an equitable measure of each partner’s capital interest
in the partnership.
Revaluation of assets and liabilities are supported on the basis that, in dissolution, the old
partnership is legally dissolved and a new partnership entity is formed. Therefore, the basis of
valuation for new entities is the fair value of the assets acquired and liabilities assumed by the
newly formed entity.
The practice of recognizing increases in partnership net assets is not in compliance with
generally accepted accounting principles (GAAP).
Further, this approach results in a marked departure from the historical cost principle and differs
from the accepted accounting principles in Philippine Financial Reporting Standards (PFRS) 3, “Business
Combinations”, which prohibits entities from recognizing goodwill that has not been acquired by acquisition.
Accountants who use the goodwill or asset revaluation methods argue that the goal of partnership
accounting is to state fairly the relative capital equities of the partners and this may require different
NAME OR LOGO
accounting procedures from those used in corporate entities.
2. Absence of revaluation (usually referred to as the bonus procedure/book value approach
- GAAP). Proponents of this approach would retain the historical cost carrying value. Others
argue that changes in partnership interests are like changes in stockholders of a corporation, and
that private sales of ownership interests provide no basis for revaluation of the business entity.
Some accountants criticize the revaluation of assets or recognition of goodwill, even though there
may be objective evidence that a specific asset is undervalued or overvalued because it results in a
marked departure from the historical cost principle.
They argue that recording an increase in fair value for external reporting is not in accordance with
substance over form principle. That is, even though the partnership may be legally dissolved, the
economic substance of some types of dissolution is that the business activity continues without
interruption which means the new partnership is merely an extension of the old.
NAME OR LOGO
For quite some time, it has been a practice to first revalue assets and liabilities to their fair values and record any
identifiable unrecorded assets and liabilities before recording the admission or withdrawal of a partner.
In summary, the following rules should be observed in relation to valuation of assets and liabilities on dissolution problems:
1.
If there is an agreement among partners that revaluation is allowed, then reflect the necessary adjustments before dissolution
2.
In the absence of an agreement:
a.
b.
Revaluation approach (or goodwill procedure – Non-GAAP). The assets and liabilities should be recorded at their
fair value. After a complete analysis, both tangible and intangible assets acquired by the new entity, including goodwill
created by the previous partnership, should be recorded.
Absence of revaluation approach (or bonus procedure - GAAP). Existing book values should not be adjusted to fair
value unless such adjustments would have otherwise been allowed by GAAP:
b. 1. Recognition of Decreases in Net Asset Revaluations (GAAP). Following the principle of conservatism
(prudence), decreases or write-downs in the value of assets may be recognized even though they are not realized.
Recognition of unrealized losses is not unique to partnership accounting and is not in conflict with GAAP. Even if
there is no dissolution, unrealized losses suggested by economic events should be recognized.
For example, PAS No. 36, “Impairment of Assets”, presents procedures for recognizing impairments of fixed assets
and currently held goodwill. Net asset revaluations performed using the appropriate accounting standards are in
accordance with GAAP.
b.2. Non-Recognition of Increases in Net Asset Revaluations (Non-GAAP). There are no GAAP standards that
provide for increases in the value of nonfinancial assets or recognition of new goodwill, solely due to a change in
partnership membership.
The use of absence of revaluation approach (or bonus procedure) does prevent the recognition of asset
appreciation, which would otherwise not be allowed by GAAP.
NAME OR LOGO
Admission of a New Partner
A new partner can be admitted with the consent of all partners in the business. Such an admission
brings about a new association of individuals and represents the formation of new partnership; the original
partnership is considered dissolved by common consent.
A partnership agreement is binding only while the relationship between the original parties to the agreement
remains unchanged.
A new agreement should be drawn up that specifies the partners’ interests upon formation of the partnership, the
distribution of profits and losses among partners, and all of the other considerations relative to the new association.
The accounting problems in respect to the admission of a new partner are as follows:
1. Recognition of accounting errors in prior periods.
2. Recognition of profit or loss from the beginning of the accounting period to the date of admission.
3. Closing of partnership books.
4. Recognition of net asset revaluations subject to the rules discussed previously.
NAME OR LOGO
Admission by Purchase of an Interest
The purchase of an interest from one or more of the partnership’s existing partners is a personal
transaction between the incoming partner and the selling partner(s). No additional money or properties
are invested in the partnership. In this respect, the transaction is similar to individual’s sale of a corporation
stock. The only entry made on the partnership’s books transfers an amount from the selling partner’s capital
account to the new partner’s capital account.
Illustration 19-1: Admission by Purchase of an Interest
Assume that after operations and partners’ withdrawals during 20x4 and 20x5. DE Partnership has a book value of
P100,000 and profit and loss (P&L) percentage on January 1, 20x6 as follows:
D.............................
E.............................
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital
Balances
P 60,000
40,000
P 100,000
P&L
Percentage
70
30
100
On this date, F is admitted to the partnership.
Case 1: Purchase of Interest from One Partner. F paid P24,000 directly to D in exchange for one-third (1/3)
interest. The entry to record the transaction in the books follows:
D, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,000
20,000
To record the admission of F.
NAME OR LOGO
Case 2: Purchase of Interest from All Partners. This situation gives rise to three assumptions:
Assumption 1: Purchase at Book Value. F purchases a one-fourth (1/4) interest in the firm. One-fourth of each partner’s
capital is to be transferred to the new partner. F pays the partner’s P25,000. The entry to record the transaction in the books
follows:
D, capital (P60,000 x ¼) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
E, capital (P40,000 x ¼) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,000
10,000
25,000
To record the admission of F at book value.
The capital balances of the partners after the admission of F would be as follows:
Capital before admission . . . .
x: Interest remained . . . . . . . . .
Capital after admission . . . . . .
D
P 60,000
¾
P 45,000
E
P 40,000
¾
P 30,000
F
(book value)
P 25,000
Total
P100,000
________
P100,000
It should be observed that the total capital balance before and after admission is the same, since the book value of the
partnership was preserved.
Since the interest acquired is ¼ it is presumed that this interest represented the capital and profit and loss interest. Therefore, the
profit and loss ratio of the partners after the admission of F would be as follows:
D, capital (70% x ¾) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
E, capital (30% x ¾) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F, capital (equivalent to interest acquired) . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
52.50%
22.50%
25.00%
100.00%
NAME OR LOGO
Assumption 2: Purchase at More than Book Value. F purchased one-fourth of D’s interest for P18,000 and
one-fourth of F’s interest for P12,000, making payment directly to D and E. The new partner will have a ¼ profit
and loss ratio and the old partners continue to use their old profit and loss ratio.
There are three alternatives to reflect the above transaction:
Alternative 1: Book value (BV)* approach. Same answer with Assumption 1 above. The positive excess of
P5,000 represents a personal gain of D and E, computed as follows:
Amount paid (P18,000 + P12,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: BV of interest acquired –(P 100,000 x ¼) . . . . . . . . . . . . . . . . . . . .
Excess (Gain of D and E – personal in nature) . . . . . . . . . . . . . . . . . . . .
P 30,000
25,000
P 5,000
The partnership does not record this gain because it was not benefited from it.
*this may also refer to as bonus method.
NAME OR LOGO
Alternative 2: Revaluation (goodwill) approach. Under this approach, the positive excess of the amount paid over book
value acquired will be capitalized to determine the revaluation of assets. The entry to record the transaction in the books follows:
Assets (Goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
D, capital (P20,000 x 70%) . . . . . . . . . . . . . . . . . . . . . . . . . . .
E, capital (P20,000 x 30%) . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,000
14,000
6,000
To revalue assets before admission of new partner computed as follows:
Amount paid (P18,000 + P12,000) . . . . . . . . . . . . . . .
Less: BV of interest acquired –(P 100,000 x ¼) . . . . .
Excess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Divided by (capitalized at): Interest acquired . . . .
Revaluation of Asset Upward . . . . . . . . . . . . . . . . . .
P30,000
25,000
P 5,000
¼
P20,000
/¼
D, capital [(P60,000 + P14,000) x ¼)] . . . . . . . . . . . . . . . . . . . .
E, capital [(P40,000 + P6,000) x ¼)] . . . . . . . . . . . . . . . . . . . . . .
F, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P120,000
100,000
(100%)
(100%)
P 20,000
(100%)
18,500
11,500
30,000
To record the admission of F using revaluation approach.
The capital balances of the partners after the admission of F would be as follows:
Capital before admission . . . .
Revaluation upward . . . . . . . .
Capital balance after
Revaluation . . . . . . . . . . . . .
x: Interest remained . . . . . . . . .
Capital after admission . . . . . .
Capital interest % . . . . . . . . . . .
P & L %: D (3/4 x 70%) . . . . . .
P & L %: E (3/4 x 30%) . . . . . .
P & L %: F (1/4) . . . . . . . . . . . .
D
P 60,000
14,000
E
P 40,000
6,000
P 74,000
¾
P 55,500
P 46,000
¾
P 34,500
52.50
F
(amount paid)
P 30,000
Total
P 100,000
20,000
P 120,000
¾
P 120,000
25
22.50
25
It should be observed that the total capital balance after the admission increases equivalent to the revaluation of
assets amounting to P20,000. The reason of such adjustments is to equalize the capital of the new partner to the
amount paid.
NAME OR LOGO
Assumption 3: Purchase at Less than Book Value. F purchased one-fourth of D’s interest by paying P22,000 directly to D
and E. The new partner will have a ¼ profit and loss ratio and the old partners continue to use their old profit and loss ratio.
There are three alternatives to reflect the above transaction:
Alternative 1: Book value (BV) approach. Same answer with Assumption 1 above. The negative excess of P3,000 represents
a personal loss of D and E, computed as follows:
Amount paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: BV of interest acquired –(P 100,000 x ¼) . . . . . . . . . . . . . . . . . . . .
Excess (Loss of D and E – personal in nature) . . . . . . . . . . . . . . . . . . . .
P 22,000)
25,000)
P ( 5,000)
Alternative 2: Revaluation (goodwill) approach. Under this approach, the negative excess of the amount paid over book
value acquired will be capitalized to determine the revaluation of assets. The entry to record the transaction in the books follows:
D, capital (P12,000 x 70%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
E, capital (P12,000 x 30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
To revalue assets before admission of new partner computed as:
Amount paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: BV of interest acquired –(P 100,000 x ¼) . . . . .
Excess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Divided by: Interest acquired . . . . . . . . . . . . . . . . . .
Revaluation of Asset Downward . . . . . . . . . . . . . .
P22,000)
25,000)
P(3,000)
¼)
P(12,000)
D, capital [(P60,000 - P8,400) x ¼] . . . . . . . . . . . . . . . . . . . . . . . . .
E, capital [(P40,000 - P3,600 x ¼)].. . . . . . . . . . . . . . . . . . . . . . . . .
F, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
/¼
8,400
3,600
12,000
P 88,000)
100,000)
(100%)
(100%)
P(12,000)
(100%)
12,900
9,100
22,000
To record the admission of F considering the revaluation.
NAME OR LOGO
The capital balances of the partners after the admission of F would be as follows:
Capital before admission . . . .
Revaluation downward. . . . . . .
Capital balance after
Revaluation . . . . . . . . . . . .
x: Interest remained . . . . . . . .
Capital after admission . . . . .
Capital interest % . . . . . . . . . .
P & L %: D (3/4 x 70%) . . . . . .
P & L %: E (3/4 x 30%) . . . . . .
P & L %: F (1/4) . . . . . . . . . . .
D
P 60,000
8,400
E
P 40,000
3,600
P 51,600
¾
P 38,700
P 36,400
¾
P 27,300
52.50
F
(amount paid)
P 22,000
Total
P 100,000
12,000
P 88,000
__
P 88,000
25
22.50
25
NAME OR LOGO
Comparison of Book Value and Revaluation Approach (Goodwill Procedure)
To assist the partners in making a decision between the two methods on their respective capital balances. If the
firm were forced to liquidate, the identifiable assets (or in case of goodwill) recognized will be eventually impaired
and would probably be of no value and, therefore, would represent a loss to the partnership.
The book value and revaluation approach will yield the same result if two conditions related to the new profit and
loss agreement are met. These are:
1. The new partner’s profit and loss sharing ratio must be equal to his/her capital interest (percentage interest
in assets).
2. The old partner’s continue to share profits and losses between themselves in the original ratio.
In Case 2, Assumption (2), both the conditions (a) and (b) above were met, so either the revaluation (goodwill)
approach or absence of revaluation (book value) approach will be selected. The balances for each method are
presented as follows:
NAME OR LOGO
Schedule of Account Balances
Book Value Approach
Balance before admission . . . . . . . .
Admission by purchase . . . . . .
Balance after admission of F . . . . . .
Revaluation Approach:
Balance before admission . . . . . . . .
Revaluation . . . . . . . . . . . . . . . .
Admission by purchase . . . . . .
Balance after admission of F before
depreciation/
impairment . . . . . . . . . . . . . . . . . .
Depreciation/impairment* . . . .
Balance after depreciation/
impairment . . . . . . . . . . . . . . . . . .
Goodwill/
Asset
Revaluation
Net Assets
D
P 60,000
(15,000)
P 45,000
Capitals
E
P 40,000
(10,000)
P 30,000
P 25,000
P 25,000
P 20,000
________
P 60,000
14,000
(18,500)
P 40,000
6,000
(11,500)
P30,000
P100,000
P 20,000
(20,000)
P 55,500
(10,500)
P34,500
(4,500)
P30,000
(5,000)
P100,000
P
P 45,000
P 30,000
P 25,000
P100,000
________
P100,000
P100,000
________
-0-
F
* New profit and loss ration (D. 52.50%; E. 22.50% and F. 25.00%)
The two methods will yield the same results computed as follows;
Capital
D
Balances after admission of F (BV approach)
Balances after admission of F (Revaluation approach)
Gain or (loss) through use of book value approach
E
F
P45,000
P30,000
P25,000
45,000
30,000
25,000
P
P
P
-0-
-0-
-0NAME OR LOGO
The book value (bonus) approach and revaluation approach will not yield the same result if the
incoming partner’s share profit and loss is not identical with the percentage interest allowed in assets (capital
interest). Therefore, the selection process for the new (incoming) partner should be as follows:
1. Prefer Book Value (Bonus) approach if, P & L interest > Capital interest. Choice of the bonus
method as compared with the goodwill method results in eventual advantage to the new partner and
corresponding disadvantage to the original partners.
2. Prefer Revaluation (Goodwill) approach if, P & L interest < Capital interest. Choice of the
revaluation (goodwill) approach results in ultimate advantage to the new partner and disadvantage to the
original partners.
NAME OR LOGO
Admission by Investment
An individual may obtain a partnership interest in capital and future income by investing something of value to
the partnership. If assets are invested, the admission is recorded by debiting the assets invested and adjusting
the net capital interest in the partnership by a corresponding amount. It is important that the assets invested be
fairly valued. Any gain or loss recognized on sales subsequent to recording the admission will be
allocated on the basis of the new profit and loss ratio.
An incoming partner may acquire an interest in the partnership based on the following situations:
1. No bonus (absence of revaluation) or no revaluation (goodwill) approach;
2. Bonus (absence of revaluation) approach; and
3. Revaluation (goodwill) approach.
The situation indicated above (2) bonus approach, and (3) revaluation (goodwill) approach are mutually
exclusive of each. Both methods understand the possibility of adjusting assets and/or the existence of
revaluation of assets (and liabilities). However, they differ in how these conditions are recognized.
NAME OR LOGO
Bonus Approach (GAAP). The bonus approach generally follows the book-value method, that is, existing book
values should not be adjusted to current values unless such adjustments would have otherwise been allowed by
GAAP.
Therefore, when a partner is admitted to an existing partnership, the total (agreed) capital of the new partnership
consists of the following:
1. The book value of the previous partnership less;
2. Any write-downs in the value of the previous partnership’s assets as recognized by GAAP; and
3. The fair value of the consideration paid (net asset contributed) to the partnership by the incoming partner.
The book –value method of the bonus approach does not directly recognize increases in asset values
suggested by the consideration that the incoming partner pays. However, the method does indirectly recognize
such increases by reallocating or adjusting the capital balances of the partners.
NAME OR LOGO
Revaluation (Goodwill) Approach (Non-GAAP). The revaluation (goodwill) approach emphasizes the legal
significance of a change in the ownership structure of a partnership. From a legal viewpoint, the entrance of a new
partner results in the dissolution of the previous partnership and the creation of a new legal entity. Since a new
entity has resulted, the assets transferred to this entity should be recorded as their fair value.
After a complete analysis, both tangible and intangible assets acquired by the new partnership, including
revaluation of net assets (goodwill) created by the previous partnership, should be recorded.
Therefore, the total (agreed) capital of the new partnership will consist of the following values:
1. The book value of the net assets of the previous partnership plus;
2. Unrecognized appreciation or less unrecognized depreciation on the recorded net assets of the previous
partnership plus;
3. Unrecognized revaluation of net assets (goodwill) traceable to the previous partnership plus; and
4. The fair value of the consideration paid (net asset contributed), both tangible and intangible, received from
the incoming partner.
NAME OR LOGO
Therefore in analyzing transactions involving admission of a partner by investment, the following procedure is
followed:
A. Generally, compare the total contributed capital (TCC) with the total agreed capital (TAC):
1. f TCC = TAC, no adjustment is made for revaluation (goodwill) of net assets.
2. If TCC > TAC, the difference is due to either (which is normally the case) to the overstatement of the
partnership assets or the required diminution in partner’s capital which can be effected by drawing
(this happens if there is a specification that the old partners will continue to use their old profit and
loss ratio).
3. If TCC < TAC, the difference is due to either unrecorded net assets (goodwill) or the required
additional investment in partner’s capital (this happens if there is a specification that the old partners
will continue to use their old profit and loss ratio).
B. Specifically, the traceability of bonus or revaluation (goodwill) to either old or new partners can be
determined by comparing the contributed capital (CC) of the new partner with his agreed capital (AC):
1. If the CC = AC, there is no transfer of capital (meaning no bonus) between the old and the new
partners. The old partners’ capital accounts are credited for revaluation of net assets (goodwill), if any.
2. If the CC > AC, the difference is a capital transfer or bonus to the old partners.
3. If the CC < AC, the additional capital credit is either share in bonus or revaluation of net assets
(goodwill) from the old partners as the case maybe.
NAME OR LOGO
Illustration 19-2: Admission by Investment
Assume the following data for GH Partnership had the following condensed balance sheet:
Liabilities and Capital
Assets
Cash
P2,500
Liabilities
P7,500
Noncash assets
32,500
G, capital (60%)
20,000
G, loan
2,500
H, capital (40%)
10,000
Total
P37,500
Total
P37,500
The percentages in parentheses after the partner’s capital balances represent their respective interests in profits and losses. The partners
agree to admit J as a member of the firm.
Case 1: No Bonus or No Revaluation. J invests P10,000 for a ¼ interest in the firm. The total firm capital is to be P40,000.
a. The total agreed capital is equal to total agreed capital:
Total agreed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Total agreed capital (P20,000 + P10,000 + P10,000) . . . . .
Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 40,000)
40,000)
P
-0-
b. The new partner’s capital is the same with his actual investment, therefore, no bonus or revaluation to be recognized.
To record the admission of J computed as follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J, capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,000
10,000
To record the admission of J.
The following items should be observed:
1. The one-fourth (1/4) interest acquired by J is presumed to be the capital interest and profit and loss interest ownership.
2. Any loans to/from any existing partners should not be included in cases of admission because it’s only the capital interest that is
being acquired not total interest.
NAME OR LOGO
Case 2: Bonus to New Partner. J invests P10,000 for a 35% interest in the firm. The total agreed capital after
admission is P40,000.
a. The total contributed capital (TCC) is equal to total agreed capital (TAC), so no revaluation (goodwill)
should be recognized as follows:
Total agreed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Total agreed capital (P20,000 + P10,000 + P10,000) . . . . .
Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 40,000)
40,000)
P
-0-
b. The new partner’s contributed capital is less than the agreed capital, the difference is attributable to bonus
to new partner:
J’s contributed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . . .
J’s agreed capital: (P40,000 x 35%) . . . . . . . . . . . . . . . . . . . . . . .
Difference (bonus to new partner) . . . . . . . . . . . . . . . . . . . . . . .
P 10,000)
14,000)
P
4,000
The entry to record the transaction in the books follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G, capital (P4,000 x 60%) . . . . . . . . . . . . . . . . . . . . . . . . . . .
H, capital (P4,000 x 40%) . . . . . . . . . . . . . . . . . . . . . . . . . . .
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,000
2,400
1,600
14,000
To record the admission of J.
NAME OR LOGO
Case 3: Revaluation (Goodwill) to New Partner. J invests P10,000 for a 1/3 interest in the firm and is
allowed a credit of P15,000 for his capital.
a. The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation (goodwill)
should be recognized as follows:
Total agreed capital: (P15,000 / 1/3) . . . . . . . . . . . . . . . . . . . . . . . .
Less: Total contributed capital (P20,000 + P10,000 + P10,000) . . . .
Difference (revaluation/goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 45,000
40,000
P 5,000
b. The new partner’s contributed capital is less than the agreed capital, the difference of P5,000 in (a) is
attributable to revaluation/goodwill to new partner:
J’s contributed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . . .
J’s agreed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Difference (revaluation/goodwill to new partner) . . . . . . . . . .
P 10,000)
15,000)
P
5,000
The entry to record the transaction in the books follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets (goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,000
5,000
15,000
To record the admission of J.
NAME OR LOGO
Case 4: Bonus to Old Partners. J conveyed a tangible assets with a fair value of P25,000 with an assumed mortgage of P5,000 in
exchange for a 30% interest in capital with bonus to be recognized, keeping in mind that J would be acquiring a 1/4 interest in profits.
Before the admission of J, GH Partnership had an equipment of P4,000 with a fair value of P7,000.
a. The total contributed capital (TCC) is equal to total agreed capital (TAC), so no revaluation (goodwill) should be recognized as
follows:
Total agreed capital (should be equal to TCC since it is a
bonus method) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Total contributed capital
[(P20,000 + P10,000 + (P25,000 – P5,000)] . . . . . . . . . . . .
Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 50,000
P
50,000
-0-
b. The new partner’s contributed capital is greater than his agreed capital, the difference is attributable to bonus to old partners:
J’s contributed capital (P25,000 – P5,000) . . . . . . . . . . . . . . . .
J’s agreed capital: (P50,000 x 30%) . . . . . . . . . . . . . . . . . . . . . .
Difference (bonus to old partners) . . . . . . . . . . . . . . . . . . . . . .
P 20,000)
15,000)
P(5,000)
The entry to record the transaction in the books follows:
Tangible asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G, capital (P5,000 x 60%) . . . . . . . . . . . . . . . . . . . . . . . .
H, capital (P5,000 x 40%) . . . . . . . . . . . . . . . . . . . . . . . . .
25,000
5,000
15,000
3,000
2,000
To record the admission of J.
The following items should be observed:
The capital interest of 30% of the new partner is different from his profit and loss ratio of 1/4. This item is so significant in comparing
bonus approach and revaluation (goodwill) of net asset approach. Consequently, the new profit and loss percentage is computed as
follows:
G, capital: (60% x 70%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
H, capital: (40% x 70%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42 %
28 %
30 %
100 %
NAME OR LOGO
Case 5: Revaluation (Goodwill) to Old Partners. J must invest or contribute cash of P24,000 equivalent to 37.50% interest in a total
agreed capital of P64,000. Included in the noncash assets is an equipment undervalued by P7,000.
a. The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation should be recognized as follows:
Total agreed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Total contributed capital
(P20,000 + P10,000 + P 7,000, revaluation + P24,000) . . . . . .
Difference (revaluation/goodwill) . . . . . . . . . . . . . . . . . . . . . . . .
P 64,000
61,000
P 3,000
b. The new partner’s contributed capital is equal to the agreed capital, the difference of P3,000 in (a) is attributable to revaluation
(goodwill) to old partners:
J’s contributed capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J’s agreed capital: (P64,000 x 37.5%) . . . . . . . . . . . . . . . . . . . .
Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 24,000
24,000
P
-0-
The entries to record the transaction in the books follows:
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G, capital (P7,000 x 60%) . . . . . . . . . . . . . . . . . . . . . . . . . .
H, capital (P7,000 x 40%) . . . . . . . . . . . . . . . . . . . . . . . . . .
7,000
4,200
2,800
To increased the value of equipment.
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G, capital (P3,000 x 60%) . . . . . . . . . . . . . . . . . . . . . . . . .
H, capital (P3,000 x 40%) . . . . . . . . . . . . . . . . . . . . . . . . .
24,000
3,000
24,000
1,800
1,200
To record the admission of J.
It should be observed that under the revaluation (goodwill) approach, the practices of recognizing increases in partnership’s net assets or
recognizing previously unrecorded goodwill are not in compliance with GAAP.
Partnerships using these non-GAAP methods argue that revaluing assets and liabilities at the time of the change in partnership
membership states fully the true economic condition of the partnership at that point in time, and properly assigns changes in asset and
liability values
NAME OR LOGO
Case 6: Bonus and Revaluation (Goodwill) to New Partner. J invests P10,000 for a 45% interest in the firm. The total
agreed capital after admission is P50,000.
a. The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation (goodwill) should be
recognized as follows:
Total agreed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Total contributed capital (P20,000 + P10,000 + P10,000) . . . .
Difference (revaluation/goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 50,000
40,000
P 10,000
b. The new partner’s contributed capital is less than the agreed capital, the difference of P12,500 are composed of
revaluation of P10,000 in (a) above and the balance is bonus to new partner:
J’s contributed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . .
J’s agreed capital: (P50,000 x 45%) . . . . . . . . . . . . . . . . . . . . . .
Difference (total bonus and revaluation) . . . . . . . . . . . . . . . . .
Less: Revaluation / goodwill to new partner . . . . . . . . . . . . . . .
Bonus to new partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 10,000
22,500
P 12,500
10,000
P
2,500
The entry to record the transaction in the books follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets (goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G, capital (P2,500 x 60%) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
H, capital (P2,500 x 40%) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,000
10,000
1,500
1,000
22,500
To record the admission of J.
NAME OR LOGO
Case 7: Bonus and Revaluation to Old Partners. J invests P15,000 for a 20% interest in the firm. The total agreed capital
after admission is P60,000.
a. The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation (goodwill) should be
recognized as follows:
Total agreed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Total contributed capital (P20,000 + P10,000 + P15,000) . . . .
Difference (revaluation/goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 60,000
45,000
P 15,000
b. The new partner’s contributed capital is greater than the agreed capital, the difference of P3,000 is bonus to old partners
since there is already a revaluation(goodwill) as indicated by (a) above.
J’s contributed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . .
J’s agreed capital: (P60,000 x 20%) . . . . . . . . . . . . . . . . . . . . . .
Difference (bonus to old partners) . . . . . . . . . . . . . . . . . . . . . . .
Less: Revaluation / goodwill to old partners . . . . . . . . . . . . . . .
Total bonus and revaluation to old partners . . . . . . . . . . . . . . .
P 15,000)
12,000)
P (3,000)
15,000)
P 18,000)
The P3,000 difference is considered as a bonus since there was a transfer of capital (as indicated by the decrease in
capital of the new partner) made by the new partner to the old partners.
The entry to record the transaction in the books follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets (goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G, capital (P18,000 x 60%) . . . . . . . . . . . . . . . . . . . . . . . .
H, capital (P18,000 x 40%) . . . . . . . . . . . . . . . . . . . . . . . .
15,000
15,000
12,000
10,800
7,200
To record the admission of J.
NAME OR LOGO
Case 8: Revaluation (Goodwill) to New and Old Partners. J invests P15,000 for a 30% interest in the firm.
The total agreed capital after admission is P60,000.
a. The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation (goodwill)
should be recognized as follows:
Total agreed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Total contributed capital (P20,000 + P10,000 + P15,000) . . . .
Difference (revaluation/goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 60,000
45,000
P 15,000
b. The new partner’s contributed capital is less than the agreed capital, the difference of P15,000 in (a) is
attributable to revaluation (goodwill) to new partner and old partners:
J’s contributed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . .
J’s agreed capital: (P60,000 x 30%) . . . . . . . . . . . . . . . . . . . . . .
Difference (revaluation/goodwill to new partner) . . . . . . . . . .
Less: Revaluation / goodwill computed in (a) . . . . . . . . . . . . .
Revaluation/goodwill to old partners . . . . . . . . . . . . . . . . . . . . .
P 15,000)
18,000)
P 3,000)
15,000)
P 12,000)
The entry to record the transaction in the books follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets (goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G, capital (P12,000 x 60%) . . . . . . . . . . . . . . . . . . . . . . . .
H, capital (P12,000 x 40%) . . . . . . . . . . . . . . . . . . . . . . . .
15,000
15,000
18,000
7,200
4,800
To record the admission of J.
NAME OR LOGO
Case 9: Bonus to Old Partners with Bonus Amount Given. J invests P20,000 in the firm. P5,000 is considered a bonus to Partners G and H.
The book values of partnership assets and liabilities are equal to fair values, except for a machinery with a book value of P3,000 and a fair value of
P7,000.
a. The total contributed capital (TCC) is equal to total agreed capital (TAC), so no revaluation (goodwill) should be recognized as follows:
Total agreed capital (should equal to TCC since it is
a bonus method) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Total contributed capital
[(P20,000 + P10,000 + P20,000)] . . . . . . . . . . . . . . . . . . . . . . . .
Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
b.
P 50,000
P
50,000
-0-
The new partner’s contributed capital is greater than his agreed capital, the difference is attributable to bonus to old partners:
J’s contributed capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J’s agreed capital: (P20,000 – P5,000) . . . . . . . . . . . . . . . . . . . .
Difference (bonus to old partners) . . . . . . . . . . . . . . . . . . . . . . .
P 20,000))
15,000))
P (5,000))
The entry to record the transaction in the books follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G, capital (P5,000 x 60%) . . . . . . . . . . . . . . . . . . . . . . . . .
H, capital (P5,000 x 40%) . . . . . . . . . . . . . . . . . . . . . . . . .
20,000
15,000
3,000
2,000
To record the admission of J.
The following items should be observed:
1. If bonus is indicated to be recognized, then there should be no more revaluation (goodwill) approach to be applied.
2. The same situation in Case 4, the recognition of understatement of assets is not in compliance with GAAP.
NAME OR LOGO
Case 10: Bonus to New Partner with an Indication of Bonus. J invests P6,000 for a 30% interest in the firm. G and H transfer part
of their capitals to that of J as a bonus. An equipment used in the business with a book value of P5,000 and a fair value of P3,000.
a. There is an overstatement of asset amounting to P2,000 (P5,000 – P3,000) that is needed to be recorded to comply with the
provisions of GAAP recognizing overvaluation of net assets. Therefore, the contributed capital of partner G and H are as follows:
G, capital: P20,000 – (P2,000 x 60%) . . . . . . . . . . . . . . . . . . . . . .
H, capital: P10,000 – (P2,000 x 40%) . . . . . . . . . . . . . . . . . . . . . .
Total contributed capital before the admission . . . . . . . . . . . .
P 18,800)
9,200)
P 28,000)
b. The total contributed capital (TCC) is equal to total agreed capital (TAC), so no revaluation (goodwill) should be recognized as
follows:
Total agreed capital (should equal to TCC since it is
a bonus method) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Total contributed capital [P28,000 (a) + P6,000]. . . . . . . . .
Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
c.
P 34,000
34,000
P
-0-
The new partner’s contributed capital is less than the agreed capital, the difference is attributable to bonus to new partner:
J’s contributed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . .
J’s agreed capital: (P34,000 x 30%) . . . . . . . . . . . . . . . . . . . . . .
Difference (bonus to new partner) . . . . . . . . . . . . . . . . . . . . . .
P
6,000)
10,200)
P 4,200)
The entries to record the transaction in the books follows:
G, capital (P2,000 x 60%) . . . . . . . . . . . . . . . . . . . . . . . . . .
H, capital (P2,000 x 40%) . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,200
800
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G, capital (P4,200 x 60%) . . . . . . . . . . . . . . . . . . . . . . . . . . .
H, capital (P4,200 x 40%) . . . . . . . . . . . . . . . . . . . . . . . . . . .
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,000
2,520
1,680
To reduced the value of equipment.
To record the admission of J.
2,000
10,200
NAME OR LOGO
Case 11: Revaluation (Goodwill) to Old Partners with an Indication of a Revaluation (Goodwill). J
invests P15,000 for a ¼ interest in the firm. GH Partnership’s had other assets with a book value of P5,500 and a
fair value of P10,500. Revaluation (goodwill) approach is recorded on the firm books prior to J’s admission.
a. There is an understatement of asset amounting to P5,000 (P10,500 – P5,500) that is needed to be recorded
(also even in cases of overstatement) as long as the revaluation (goodwill) approach is being used.
Therefore, the contributed capital of partner G and H are as follows:
G, capital: P20,000 + (P5,000 x 60%) . . . . . . . . . . . . . . . . . . . . .
H, capital: P10,000 + (P5,000 x 40%) . . . . . . . . . . . . . . . . . . . . . .
Total contributed capital before the admission . . . . . . . . . . .
P 23,000)
12,000)
P 35,000)
b. The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation (goodwill)
should be recognized as follows:
Total agreed capital (P15,000 / ¼ )* . . . . . . . . . . . . . . . . . . . . .
Less: Total contributed capital [P35,000 (a) + P15,000] . . . . . .
Difference (revaluation/goodwill ) . . . . . . . . . . . . . . . . . . . . . .
P 60,000)
50,000)
P 10,000)
* The old partner’s total contributed capital of P35,000 should not be used as a basis because it will result to a negative revaluation. In cases of revaluation and there is no
specification as to upward or downward adjustments, the presumption should always be upward. The P15,000 was capitalized by ¼ to determine the value of the
partnership as a whole.
NAME OR LOGO
c. The new partner’s contributed capital is equal to the agreed capital, the difference of P10,000 in (a) is
attributable to revaluation (goodwill) to old partners:
J’s contributed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . .
J’s agreed capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revaluation/goodwill to new partner . . . . . . . . . . . . . . . . . . .
P 15,000)
15,000)
P
-0-)
The entries to record the transaction in the books follows:
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G, capital (P5,000 x 60%) . . . . . . . . . . . . . . . . . . . . . . . .
H, capital (P5,000 x 40%) . . . . . . . . . . . . . . . . . . . . . . . .
5,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets (goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G, capital (P10,000 x 60%) . . . . . . . . . . . . . . . . . . . . . . . .
H, capital (P10,000 x 40%) . . . . . . . . . . . . . . . . . . . . . . . .
15,000
10,000
To revalue (increased) other assets.
To record the admission of J.
3,000
2,000
15,000
6,000
4,000
NAME OR LOGO
Case 12: Revaluation (Goodwill) to New Partner with Revaluation Amount Given. J invests P20,000 in
the firm and is allowed a credit of P6,000 for revaluation (goodwill).
a. The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation (goodwill) should
be recognized as follows:
Total agreed capital (TCC, P50,000 + P6,000, goodwill) . . . . . . . .
Less: Total contributed capital (P20,000 + P10,000 + P20,000). .
Difference (revaluation/goodwill) . . . . . . . . . . . . . . . . . . . . . .
P 56,000)
50,000)
P 6,000)
b. The new partner’s contributed capital is less than the agreed capital, the difference of P6,000 in (a) is
attributable to revaluation (goodwill) to new partner:
J’s contributed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . . .
J’s agreed capital: (P20,000 + P6,000) . . . . . . . . . . . . . . . . . . . .
Revaluation/goodwill to new partner . . . . . . . . . . . . . . . . . . . .
P 20,000
26,000
P
6,000
The entry to record the transaction in the books follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets (goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
To record the admission of J.
20,000
6,000
26,000
NAME OR LOGO
Case 13: Withdrawals Instead of Revaluation. J invests P20,000 for a 50% interest in the firm. The total firm capital is to be
P40,000 and partners agreed that their capital balances should made equal to their new profit and loss ratio.
a. The total contributed capital (TCC) is greater than total agreed capital (TAC), so it should have been a negative revaluation. Since
there was an indication that capital balances should be equal to the profit and loss (old or new) ratio, then the difference should
be considered as withdrawals (if it is a positive revaluation it should have been additional investment and if the TCC = TAC, it
should have been settlement between partners) instead of negative revaluation.
Total agreed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Total contributed capital (P20,000 + P10,000 + P20,000). . .
Difference (withdrawals) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 40,000
50,000
P 10,000
b. The new partner’s contributed capital is less than the agreed capital, the difference is attributable to bonus to new partner:
J’s contributed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . . .
J’s agreed capital: (P40,000 x 50%) . . . . . . . . . . . . . . . . . . . . . .
Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
c.
P 20,000
20,000
P
-0-
The withdrawals of P10,000 should be attributable to the old partners computed as follows:
Total agreed capital (given) . . . . . . . . . . . . . . . . . . . . . . . .
Less: J’s agreed capital (P40,000 x 50%) . . . . . . . . . . . . . .
Total agreed capital of the old partners . . . . . . . . . . . . . .
Less: G’s agreed capital (P20,000 x 60%) . . . . . . . . . . . . . .
H’s agreed capital (P20,000 x 40%) . . . . . . . . . . . . . .
G’s withdrawal: P20,000 – P12,000 . . . . . . . . . . . . . . . . . . . .
H’s withdrawal: P10,000 – P8,000 . . . . . . . . . . . . . . . . . . . . .
P12,000
8,000
P40,000
20,000
P20,000
20,000
P 8,000
P 2,000
The entry to admission and withdrawal in the books as follows:
Cash (P20,000 – P10,000) . . . . . . . . . . . . . . . . . . . . . . . . . . .
G, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
H, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,000
8,000
2,000
20,000
To record the admission of J and withdrawals of G and H.
NAME OR LOGO
Case 14: Bonus and Revaluation (Goodwill) When Not Specifically Stated. An agreement may indicate that an incoming partner
is to receive an interest that is greater or smaller than that which would be recognized if the partner were simply to receive credit for the
amount invested. Such an agreement, however, may fail to point out whether or not the required interest is to be accomplished through
recognition of bonus or revaluation (goodwill). In the absence of an expressed statement, the conditions for admission must be carefully
analyzed. Following are the examples:
Assumption 1: Revaluation (Goodwill) or Bonus to New Partner. J invests P15,000 for a 40% capital interest and a 25% interest
in profits.
Since there was no specification as to what approach is to be used, the following alternatives are presented:
Alternative 1: Bonus Approach.
a. The total contributed capital (TCC) is equal to the total agreed capital (TAC), so no revaluation (goodwill) should be recognized as
follows:
Total agreed capital (should be equal to TCC, since it is a
Bonus method) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Total contributed capital (P20,000 + P10,000 + P15,000). . .
Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 45,000
45,000
P
-0-
b. The new partner’s contributed capital is less than the agreed capital, the difference is attributable to bonus to new partner:
J’s contributed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . . .
J’s agreed capital: (P45,000 x 40%) . . . . . . . . . . . . . . . . . . . . . .
Difference (bonus to new partner) . . . . . . . . . . . . . . . . . . . . . .
P 15,000
18,000
P 3,000
The entry to record the transaction in the books follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G, capital (P3,000 x 60%) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
H, capital (P3,000 x 40%) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,000
1,800
1,200
18,000
To record the admission of J.
NAME OR LOGO
Alternative 2: Revaluation (Goodwill) Approach
a. The total contributed capital (TCC) is less than the total agreed capital (TAC), so revaluation (goodwill) should
be recognized as follows:
Total agreed capital: (P20,000 + P10,000) / (100% - 40%) . . . . . .
Less: Total contributed capital (P20,000 + P10,000 + P15,000). . .
Difference (revaluation/goodwill) . . . . . . . . . . . . . . . . . . . . . . . . .
P 50,000
45,000
P 5,000
b. The new partner’s contributed capital is less than the agreed capital, the difference of P5,000 in (a) is
attributable to revaluation (goodwill) to new partner:
J’s contributed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . .
J’s agreed capital: (P50,000 x 40%) . . . . . . . . . . . . . . . . . . . . .
Difference (revaluation/goodwill to new partner) . . . . . . . . .
P 15,000
20,000
P 5,000
The entry to record the transaction in the books follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets (goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,000
5,000
20,000
To record the admission of J.
NAME OR LOGO
The following items should be observed:
1. The New Profit and Loss Ratio. The capital interest of J is 40%, while his profit and loss is 25%, so the new profit and loss
interest of the new partnership is computed as follows:
Capital interest % . . . . . . . . . . . . . .
P & L %: G (60% x 75%) . . . . . . . . .
P & L %: H (40% x 75%) . . . . . . . . .
P & L %: J . . . . . . . . . . . . . . . . . . . .
G
45
H
30
J
40
25
2. The Capital Balances of the New Partners. After admission of partner J, the capital balances of the new partners are
computed as follows:
Bonus Approach (total agreed capital)
- refer to Alternative 1 above:
G, capital (P20,000 – P1,800) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
H, capital (P10,000 – P1,200) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 18,200
8,800
18,000
P 45,000
Revaluation (goodwill) Approach (total agreed capital)
- refer to Alternative 2 above:
G, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
H, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J, capital (P50,000 x 40%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 20,000
10,000
20,000
P 50,000
NAME OR LOGO
3. Comparing Bonus or Revaluation (Goodwill) Approach. In admission by purchase (i.e. Case 2, Assumption 2),
comparing book-value approach against revaluation (goodwill), the partner is indifferent on both situations because of the
following reasons:
a. The new partner’s profit and loss sharing ratio is the same with his/her capital interest (percentage interest in assets).
b. The old partner’s continue to share profits and losses between themselves in the original ratio.
But, in this particular situation (Case 14, Assumption 1), the capital interest which is 40% is different from the profit and loss
interest of 25%. So, to compare bonus against revaluation (goodwill) as follows:
Schedule of Account Balances
Bonus Approach
Balances admission of J . . . . . . . .
Revaluation Approach:
Balance before admission of J . . . .
Depreciation/impairment* . . . .
Balance after depreciation/
impairment . . . . . . . . . . . . . . . .
Net Assets
Goodwill/
Asset
Revaluation
P 45,000
G
P 18,200
Capitals
H
P 8,800
J
P 18,000
P 45,000
________
P
5,000
(5,000)
P 20,000
(2,250)
P 10,000
(1,500)
P 20,000
(1,250)
P 45,000
P
-0-
P 17,750
P 8,500
P 18,750
* new profit and loss ration (G, 45%; H, 30% and J, 25%)
NAME OR LOGO
The two methods will yield the same results computed as follows:
Capital
G
Balances after admission of J (Bonus approach)
Balances after admission of J (Revaluation approach)
Gain or (loss) through use of bonus approach
H
J
P 18,200
P 8,800
P 18,000
17,750
8,500
18,750
450
P 300
P (750)
P
The bonus approach and revaluation (goodwill) approach will not yield the same result if the incoming partner’s share profit and
loss is not identical with the percentage interest allowed in assets (capital interest). Therefore, the selection process for the new
(incoming) partner should be as follows:
1. Prefer Bonus approach if, P & L interest > Capital interest.
2. Prefer Revaluation (Goodwill) approach if, P & L interest < Capital interest.
Therefore, the new partner should elect to use the revaluation (goodwill) approach because of the P750 advantage.
NAME OR LOGO
Assumption 2: Revaluation (Goodwill) or Bonus to Old Partners. J invests P15,000 for a 30% capital interest and a 40%
interest in profits.
Since there was no specification as to what approach is to be used, the following alternatives are presented:
Alternative 1: Bonus Approach.
a. The total contributed capital (TCC) is equal to the total agreed capital (TAC), so no revaluation (goodwill) should be
recognized as follows:
Total agreed capital (should be equal to TCC, since it is a
bonus method) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Total contributed capital (P20,000 + P10,000 + P15,000). .
Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 45,000
45,000
P
-0-
b. The new partner’s contributed capital is greater than the agreed capital, the difference is attributable to bonus to old partners:
J’s contributed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . . .
J’s agreed capital: (P45,000 x 30%) . . . . . . . . . . . . . . . . . . . . . .
Difference (bonus to old partners) . . . . . . . . . . . . . . . . . . . . . . .
P 15,000
13,500
P
1,500
The entry to record the transaction in the books follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G, capital (P1,500 x 60%) . . . . . . . . . . . . . . . . . . . . . . .
H, capital (P1,500 x 40%) . . . . . . . . . . . . . . . . . . . . . . . .
To record the admission of J.
15,000
13,500
900
600
NAME OR LOGO
Alternative 2: Revaluation (Goodwill) Approach.
a. The total contributed capital (TCC) is greater than the total agreed capital (TAC), so
should be recognized as follows:
Total agreed capital: P15,000 / 30% . . . . . . . . . . . . . . . . . . . . . .
Total contributed capital (P20,000 + P10,000 + P15,000) . . . . .
Difference (revaluation/goodwill) . . . . . . . . . . . . . . . . . . . . . . .
revaluation (goodwill)
P 50,000
45,000
P 5,000
b. The new partner’s contributed capital is equal to the agreed capital, the difference of P5,000 in (a) is
attributable to revaluation (goodwill) to old partners:
J’s contributed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . . .
J’s agreed capital: (P50,000 x 30%) . . . . . . . . . . . . . . . . . . . . . .
Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 15,000
15,000
P
-0-
The entry to record the transaction in the books follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets (goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G, capital (P5,000 x 60%) . . . . . . . . . . . . . . . . . . . . . . . .
H, capital (P5,000 x 40%) . . . . . . . . . . . . . . . . . . . . . . . .
15,000
5,000
15,000
3,000
2,000
To record the admission of J.
NAME OR LOGO
The following items should be observed:
1. The New Profit and Loss Ratio. The capital interest of J is 30%, while his profit and loss is 40%, so the new
profit and loss interest of the new partnership is computed as follows:
Capital interest % . . . . . . . . . . . . . .
P & L %: G (60% x 60%) . . . . . . . . .
P & L %: H (40% x 60%) . . . . . . . . .
P & L %: J . . . . . . . . . . . . . . . . . . . .
G
36
H
24
J
30
40
2. The Capital Balances of the New Partners. After admission of partner J, the capital balances of the new
partners are computed as follows:
Bonus Approach (total agreed capital) refer to Alternative 1 above:
G, capital (P20,000 + P900) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
H, capital (P10,000 + P600). . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 20,900
10,600
13,500
P 45,000
Revaluation (goodwill) Approach (total agreed capital) refer to Alternative 2 above:
G, capital (P20,000 + P3,000) . . . . . . . . . . . . . . . . . . . . . . . . . . .
H, capital (P10,000 + P2,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J, capital (P50,000 x 30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 23,000
12,000
15,000
P 50,000
NAME OR LOGO
3.
Comparing Bonus or Revaluation (Goodwill) Approach. In Case 14, Assumption 2, the new partner prefers the revaluation (goodwill) approach
because the profit and loss interest (25%) is less than his capital interest (40%).
But, in this particular situation (Assumption 2), the profit and loss interest (40%) is greater than his capital interest (30%), eventually; the bonus approach
should be preferred. To compare bonus against revaluation (goodwill) as follows:
Schedule of Account Balances
Bonus Approach
Balances admission of J………
Net Assets
Revaluation Approach:
Balance before admission of J..
Depreciation/impairment*…
Balance after depreciation/
impairment……………………..
P 45,000
Goodwill/
Asset
Revaluation
G
P 20,900
Capitals
H
P 10,600
J
P 13,500
P 45,000
________
P
5,000
(5,000)
P 23,000
(1,800)
P 12,000
(1,200)
P 15,000
(2,000)
P 45,000
P
-0-
P 21,200
P 10,800
P 13,000
* new profit and loss ration (G, 36%; H, 24% and J, 40%)
The two methods will yield the same results computed as follows:
Balances after admission of J (Bonus approach)
Balances after admission of J (Revaluation approach)
Gain or (loss) through use of bonus approach
Capital
G
H
J
P 20,900
P 10,600
P 13,500
21,200
10,800
13,000
P ( 300)
P ( 200)
P
500
The bonus approach and revaluation (goodwill) approach will not yield the same result if the incoming partner’s share profit and loss is not identical with the
percentage interest allowed in assets (capital interest). Therefore, the selection process for the new (incoming) partner should be as follows:
1. Prefer Bonus approach if, P & L interest > Capital interest.
2. Prefer Revaluation (Goodwill) approach if, P & L interest < Capital interest.
Therefore, the new partner should elect to use the bonus approach because of the P500 advantage.
In cases where there is no specification as to bonus approach or revaluation (goodwill) approach, the bonus approach should be applied because it
conforms to the cost principle of valuing assets.
NAME OR LOGO
Withdrawal/Retirement of a Partner
When a partner withdraws, the partnership agreement should be consulted to determine whether or not any
guidelines have been established that would influence the procedure. The withdrawal of a partner requires a
determination of the fair value of the partnership entity and a measurement of partnership income to the date of
withdrawal.
Likewise, in many cases, the interest of the retiring partner may not be equal to the partner’s capital balance as a
result of the following items:
1. Capital balance (including withdrawals and additional investments);
2. Recognition of accounting errors in prior periods;
3. Recognition of profit or loss from the beginning of the accounting period to the date of retirement;
4. Loans and advances to (from) the partnership; and
5. Recognition of net asset revaluations subject to the rules discussed previously.
NAME OR LOGO
In the following examples, it is assumed that the partners mutually agree to the retirement such that:
1. The retiring partner may elect to sell his interest to an outside party;
2. The retiring partner may elect to sell his interest to one or more of the remaining partners; or
3. The partners may mutually agree to transfer partnership assets (payment from partnership funds) to the
retiring partner for his interest in the firm. Settlement may either be:
a. Payment in cash;
b. Transfer on non-cash assets; and
c. Recognition of liability for the full or balance of the unpaid total interest of the retiring partner.
Situation 1 has been discussed earlier in admission by purchase (the only difference with retirement is that in
admission by purchase it should be capital interests only unlike retirement wherein it should be total interest of the
retiring partner) and need not be reviewed. The same considerations apply to Situation 2, if negotiated outside the
partnership.
Situation 3 will be discussed thoroughly in the following illustration:
The partners may agree to use the bonus approach or the revaluation (goodwill) approach to record the
withdrawal:
NAME OR LOGO
Bonus Approach (GAAP). If the bonus approach is used, the remaining partners are charged with the amount of
the payment that exceeds the book value of the retiring partner’s capital balance.
The amount of the bonus paid to the retiring partner is commonly allocated to the remaining partners on the basis
of their relative profit and loss ratio (in this case the relative ratio of L to M is 5:2).
Support for this approach is based on the cost principle. The bonus approach may also be justified when the
remaining partners are simply anxious to get rid of a partner for various reasons. Any recognition of revaluation
(goodwill) is difficult to justify in the absence of an arm’s length transaction.
Revaluation (Goodwill) Approach (Non-GAAP). The revaluation (goodwill) approach focuses on the payment
to the retiring partner as an indication of the fair value of the partnership.
Furthermore, it is used if (1) remaining partners will not agree to a reduction in their capital; (2) the partners made
specific provisions in the partnership agreement on how the withdrawal is to be recorded; or (3) the partners agree
than a revaluation (goodwill) is to be recognized. If the partnership has been profitable, the partnership as a whole
may be worth more than the fair value of the net assets.
Once again, the revaluation (goodwill) approach is supported on the basis that a new entity is being formed and
the accounts of the new entity should be based.
Many accountants criticize recording revaluation (goodwill) on the retirement of a partner on the same theoretical
grounds as they criticize recording unrecognized revaluation (goodwill) on the admission of a new partner.
Nevertheless, partnership accounting sometimes uses all the recognition of revaluation (goodwill) at this event.
NAME OR LOGO
Illustration 19-3: Withdrawal/Retirement of a Partner
Assume the following data on January 1, 20x4 for KLM Partnership had the following condensed balance sheet:
Assets
Cash
Liabilities and Capital
P 50,000
Liabilities
P 10,000
Noncash assets
40,000
K, Capital (30%)
30,000
Loan receivable, K
5,000
L, Capital (50%)
40,000
Total
95,500
M, Capital (20%)
15,000
Total
P 95,000
The percentages in parentheses after the partner’s capital balances represent their respective interests in profits and losses.
On May 1, 20x4, K retires from the partnership. The net income of the partnership to date of retirement amounted to P20,000.
The partnership paid cash to the retiring partner also on the retirement date.
The following entries are necessary on the partnership books before paying the interest of the retiring partner:
Income Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
K, capital (P20,000 x 30%) . . . . . . . . . . . . . . . . . . . . . . . .
L, capital (P20,000 x 50%) . . . . . . . . . . . . . . . . . . . . . . . .
M, capital (P20,000 x 20%) . . . . . . . . . . . . . . . . . . . . . . . .
20,000
K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan receivable – K . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,000
To record distribution of profit.
To close loan receivable account of the retiring partner.
6,000
10,000
4,000
5,000
NAME OR LOGO
The total interest of the retiring partner K amounted to:
Capital interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add (deduct):
Share in net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Interest of K before his retirement . . . . . . . . . . . . . . . . . . .
P 30,000)
6,000)
(5,000)
P 31,000)
Case 1: Payment at Book Value (Settlement price is equal to the interest of retiring partner). The
partnership paid K, P31,000.
The entry to record the transaction in the books follows:
K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31,000
31,000
To record retirement of K.
NAME OR LOGO
Case 2: Payment at More than Book Value (Settlement price is greater than the interest of retiring
partner). The partnership paid K, P35,000. Included in the noncash assets is an inventory costing P6,000 with a
fair value of P10,000. The remaining partners continue to use their old profit and loss ratio.
Assumption 1: Bonus to Retiring Partner. The excess is considered bonus chargeable to L and M.
The entry to record the transaction in the books follows:
K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
L, capital (P4,000 x 5/7) . . . . . . . . . . . . . . . . . . . . . . . . . . .
M, capital (P4,000 x 2/7) . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31,000
2,857
1,143
35,000
To record retirement of K computed as follows:
Amount paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: BV of K’s total interest (30%) . . . . . . . . . . . . . . . . . . . . . .
Bonus to Retiring Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 35,000
31,000
P 4,000
The following items should be observed:
1. Under bonus approach, undervaluation of net assets should not be recorded because this will be in contradiction
of current accounting standards.
2. The capital balances of the partners after the retirement of K are as follows:
L, capital (P40,000 + P10,000, profit – P2,857, bonus) . . . . .
M, capital (P15,000 + P4,000 profit – P1,143, bonus) . . . . . . .
P 47,143
17,857
NAME OR LOGO
Assuming the same data, except that by mutual agreement the inventory is to be adjusted to their fair value.
Then, the undervalued asset should be recorded first before the settlement.
The entries to record the transaction in the books follows:
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
K, capital (P4,000 x 30%) . . . . . . . . . . . . . . . . . . . . . . . . .
L, capital (P4,000 x 50%) . . . . . . . . . . . . . . . . . . . . . . . . .
M, capital (P4,000 x 20%) . . . . . . . . . . . . . . . . . . . . . . . .
4,000
1,200
2,000
800
To increased the value of inventory based on agreement.
K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
L, capital (P2,800 x 5/7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
M, capital (P2,800 x 2/7) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32,200
2,000
800
35,000
To record retirement of K computed as follows:
Amount paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: BV of K’s total interest (30%) - (P31,000 + P1,200) . . . . . . .
Bonus to Retiring Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 35,000
32,200
P 2,800
NAME OR LOGO
Assumption 2: Partial Revaluation (Goodwill) to Retiring Partner. The excess is considered as revaluation
(goodwill) to be recognized.
The entries to record the transaction in the books follows:
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
K, capital (P4,000 x 30%) . . . . . . . . . . . . . . . . . . . . . . . . .
L, capital (P4,000 x 50%) . . . . . . . . . . . . . . . . . . . . . . . . .
M, capital (P4,000 x 20%) . . . . . . . . . . . . . . . . . . . . . . . .
4,000
1,200
2,000
800
To increase the value of inventory.
K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets (Goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32,000
2,800
35,000
To record retirement of K computed as follows:
Amount paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: BV of K’s total interest (30%) - (P31,000 + P1,200) . . . . . . .
Goodwill to Retiring Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 35,000
32,200
P 2,800
The following items should be observed:
1. Some argue that, in accordance with the cost basis, only the revaluation (goodwill) of P2,800 that has been
purchased should be recorded.
2. The situation at bar is the same situation in admission by investment Case 9, that recognition of understatement
of assets is in compliance with GAAP under the revaluation (goodwill) approach.
3. The capital balances of the partners after the retirement of K are as follows:
L, capital (P40,000 + P10,000, profit + P2,000, adjustment) . . . .
M, capital (P15,000 + P4,000, profit + P800 adjustment) . . . . . .
P 52,000
19,800
NAME OR LOGO
A modified version of this partial revaluation (goodwill) approach happens assuming that when assets
and liabilities are revalued only to the extent of the excess payment to K, the entry to record the
transaction is as follows:
K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31,000
4,000
35,000
To record retirement of K computed as follows:
Amount paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: BV of K’s total interest (30%) . . . . . . . . . . . . . . . . . . . . . . . .
Partial revaluation (goodwill) to Retiring Partner . . . . . . . . . . . . . .
P 35,000
31,000
P 4,000
NAME OR LOGO
Assumption 3: Total Revaluation (Goodwill) to Retiring Partner. The excess is considered as revaluation (goodwill) to be recognized.
The entries to record the transaction in the books follows:
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
K, capital (P4,000 x 30%) . . . . . . . . . . . . . . . . . . . . . . . . .
L, capital (P4,000 x 50%) . . . . . . . . . . . . . . . . . . . . . . . . .
M, capital (P4,000 x 20%) . . . . . . . . . . . . . . . . . . . . . . . .
4,000
1,200
2,000
800
To increased the value of inventory.
Assets (Goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
K, capital (P9,333 x 30%) . . . . . . . . . . . . . . . . . . . . . . . . .
L, capital (P9,333 x 50%) . . . . . . . . . . . . . . . . . . . . . . . . .
M, capital (P9,333 x 20%) . . . . . . . . . . . . . . . . . . . . . . . .
9,333
2,800
4,666
1,867
To record total revaluation (goodwill) computed as follows:
Amount paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: BV of K’s total interest (30%) - P31,000 + P1,200 . . . . . . . .
Divided by (capitalized at): Profit and loss % of K . . . . . . . . . .
Total Revaluation (goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 35,000*
32,200
P 2,800*
30%*
P 9,333
* The P2,800 represents K’s 30% interest in revaluation (goodwill) of P9,333. Notice that the P2,800 represents K’s interest in the gain, which would be realized if the
revaluation (goodwill) were sold. Therefore, K’s percentage is used to suggest the total value of the revaluation (goodwill).
K, capital (P 32,200 + P2,800) . . . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35,000
35,000
To record retirement of K.
The following items should be observed:
1. Whether part or all of the goodwill is recognized, opponents of this procedure contend that transactions between partners should not be viewed
as arm’s length; therefore, the measure of revaluation (goodwill) may not be determined objectively. In like manner, inequitable results may be
produced if the remaining partners subsequently changed their profit and loss ratio.
2. The capital balances of the partners after the retirement of K are as follows:
L, capital (P40,000 + P10,000, profit + P2,000, adjustment + P4,666).P56,666
M, capital (P15,000 + P4,000, profit + P800 adjustment + P1,867)….. 21,667
NAME OR LOGO
Comparison of Bonus Approach and Revaluation Approach (Goodwill Procedure)
Comparing bonus approach and revaluation (goodwill) approach is not feasible when there is an undervaluation of net assets (that is not allowed to be recorded due to GAAP rule) because
this will distort the capital balances.
For purposes of comparison, let us assume that there is no undervalued inventory amounting to P4,000 in Case 2 above. Refer to the following schedule for comparison.
Schedule of Account Balances
Bonus Approach
Balances after retirement of K . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Partial Revaluation /Goodwill Approach:
Balances after retirement of K* . . . . . . . . . . . . . . . . . . . . . . .
Depreciation/impairment*** . . . . . . . . . . . . . . . . . . . . . . . .
Balance after depreciation/I impairment . . . . . . . . . . . . . . . .
Goodwill/
Asset
Revaluation
P **4,000
(4,000)
P
-0-
L
P 47,143
M
P 17,857
P 50,000
(2,857)
P 47,143
P 19,000
(1,143)
P 17,857
L
P 47,143
M
P 17,857
P 56,666
(9,523)
P 47,143
P 21,667
(3,810)
P 17,857
* excluding undervalued inventory of P2,000 and P800 for L and M, respectively
** P35,000 – P31,000 = P4,000, partial revaluation
*** old profit and loss ratio (L, 5/7 and M, 2/7)
Bonus Approach
Balances after retirement of K . . . . . . . . . . . . . . . . . . . . . . . .
Partial Revaluation /Goodwill Approach:
Balances after retirement of K* . . . . . . . . . . . . . . . . . . . . . .
Depreciation/impairment*** . . . . . . . . . . . . . . . . . . . . . .
Balance after depreciation/I impairment . . . . . . . . . . . . . .
Goodwill/
Asset
Revaluation
P**13,333
(13,333)
P
-0-
* excluding undervalued inventory of P2,000 and P800 for L and M, respectively.
** P35,000 – P31,000 = P4,000, partial revaluation / 30% = P13,333
L, capital: (P40,000 + P10,000) + (P13,333 x 50%) = P56,666
M, capital: (P15,000 + P4,000) + (P13,333 x 20%) = P 21,667
*** old profit and loss ratio (L, 5/7 and M, 2/7)
NAME OR LOGO
The three methods will yield the same results computed as follows:
Total
Balances after retirement of K (Bonus approach)
Balances after retirement of K (Partial Revaluation approach)
Balances after retirement of K (Total Revaluation approach)
L
M
P 47,143
P 17,857
P 47,143
P 17,857
P 47,143
P 17,857
Again, as previously discussed in admission by purchase, the bonus approach and revaluation (goodwill) approach
will yield the same result because the remaining partner continue to share profits and losses between themselves in
the original ratio.
In the same situation with admission by purchase, wherein there is no specification as to bonus approach or
revaluation (goodwill) approach, the bonus approach should be applied. As to revaluation (goodwill) approach, both
the partial or total revaluation (goodwill) may be used to comply with the provisions of PFRS 3.
NAME OR LOGO
Case 3: Payment at Less than Book Value (Settlement price is less than the interest of retiring partner). The partnership paid
K, P26,000.
A partner who is anxious to dispose of his/her interest in the partnership may agree to accept less than his/her book value interest in the
partnership. When a withdrawing partner agrees to accept less than the amount reported in his/her capital account, such a difference may
be viewed (1) as a bonus accruing to remaining partners, or (2) revaluation approach (in case, there is an existing goodwill, as an offset
against the goodwill balance).
The partner may do so for a number of reasons, such as (1) he/she may view the future of the company negatively, (2) he/she may need
operating capital for personal reasons, or (3) the business association may no longer be acceptable to the partner and, in his or her
opinion, a forced liquidation of the firm might be detrimental to his/her interest. In such cases, use of the bonus approach is justified,
since the settlement may not be based on the economic value of the firm.
Assumption 1: Bonus to Remaining Partners. The excess is considered bonus chargeable to L and M.
The entry to record the transaction in the books follows:
K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
L, capital (P5,000 x 5/7) . . . . . . . . . . . . . . . . . . . . . . . .
M, capital (P5,000 x 2/7) . . . . . . . . . . . . . . . . . . . . . . .
31,000
26,000
3,571
1,429
To record retirement of K computed as follows:
Amount paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: BV of K’s total interest (30%) . . . . . . . . . . . . . . . . . . . . . .
Bonus to Remaining Partners . . . . . . . . . . . . . . . . . . . . . . . . . .
P 26,000
31,000
P 5,000
The capital balances of the partners after the retirement of K are as follows:
L, capital (P40,000 + P10,000, profit + P3,571, bonus) . . . . .
M, capital (P15,000 + P4,000 profit + P1,429, bonus) . . . . . .
P 53,571
20,429
NAME OR LOGO
Assumption 2: Partial Revaluation/Write-down of Specific Assets (Share of Retiring Partner). The
excess is considered as partial revaluation/write-down of specific assets to be recognized.
The entry to record the transaction in the books follows:
K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specific Asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31,000
5,000
26,000
To record retirement of K computed as follows:
Amount paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: BV of K’s total interest (30%) . . . . . . . . . . . . . . . . . . . . . .
Partial revaluation/write-down of specific assets . . . . . . . . .
P 26,000
31,000
P 5,000
The capital balances of the partners after the retirement of K are as follows:
L, capital (P40,000 + P10,000, profit) . . . . . . . . . . . . . . . . . . . .
M, capital (P15,000 + P4,000 profit) . . . . . . . . . . . . . . . . . . . .
P 50,000
19,000
NAME OR LOGO
Assumption 3: Total Revaluation/Write-down of Assets (Entire Entity). The excess is considered as revaluation/writedown of assets for the entire entity.
The entries to record the transaction in the books follows:
K, capital (P16,667 x 30%) . . . . . . . . . . . . . . . . . . . . . . . . .
L, capital (P16,667 x 50%) . . . . . . . . . . . . . . . . . . . . . . . . .
M, capital (P16,667 x 20%) . . . . . . . . . . . . . . . . . . . . . . . .
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,000
8,334
3,333
16,667
To record write-down of assets computed as follows:
Amount paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: BV of K’s total interest (30%) . . . . . . . . . . . . . . . . . . . . . .
Partial revaluation/write-down of specific assets . . . . . . . . .
Divided by (capitalized at): Profit and loss % of K . . . . . . . .
Total Revaluation/Write-down of assets . . . . . . . . . . . . . . . . .
P 26,000*
31,000*
P 5,000*
30%*
P 16,667*
*The P5,000 represents K’s 30% interest in write-down of assets of P16,667. Notice that the P5,000 represents K’s interest in the loss:
The capital balances of the partners after the retirement of K are as follows:
L, capital (P40,000 + P10,000, profit – P8,334) . . . . . . . . . . . . . .
M, capital (P15,000 + P4,000, profit – P8,333) . . . . . . . . . . . . . .
P 41,666
15,667
Comparison of Bonus Approach and Revaluation Approach (Goodwill Procedure)
Although either the bonus or revaluation (goodwill) approach can be used to record the withdrawal of K, it should be observed
that, as in the case of earlier examples involving problems of bonus and revaluation (goodwill), the alternative approaches offer
the same ultimate results only when the remaining partners continue to share profits between themselves in the original ratio.
NAME OR LOGO
Death of a Partner
The death of a partner dissolves the partnership. In the absence of specific provisions to the contrary, profit and
loss should be summarized, the partnership assets should be appraised, and the descendant’s interest in the
partnership should be established as of the date of death. Profit or loss from the date the books were last closed is
determined and transferred to the capital accounts in the existing profit and loss ratio.
The change in asset values arising from revaluation is likewise carried in the capital accounts in the profit and loss
ratio. It is then the obligation of the partners to wind up the business. Assets are sold, liabilities are paid-off, and
settlement is made with the partner’s estate and surviving partners.
Partners may provide by agreement that in the event of the death of a partner the business shall be continued by
surviving partners. Partners may agree to settle for the interest of the deceased partner (1) by payment from
partnership assets, (2) by payment from partnership assets, (3) by payment from partnership insurance proceeds
with surviving partners acquiring the deceased partner’s interest.
NAME OR LOGO
Incorporation of a Partnership
Partners may evaluate the possible advantages to be gained by incorporating a partnership. Among such
advantages are limited liability of stockholders, case of attracting additional capital, and possible income tax
advantages.
Partners may decide to incorporate in order to secure the advantages in the corporate form of organization. When a
charter is granted recognizing a corporation, the corporation will act to acquire the net assets of the partnership for
its shares of stock.
To ensure that each partner receives an equitable portion of the capital stock issued by the new corporation, the
assets of the partnership must be adjusted to current fair value before being transferred to the corporation. Any
identifiable intangible asset or goodwill developed by the partnership is included among the assets transferred to
the corporation.
The shares of stock receive by the partnership is distributed to the partners in settlement of their equities. The
corporation thus takes over the assets and assumes the liabilities of the partnership; the partnership is dissolved
and the partner now becomes shareholders in the newly organized corporation. In recording activities of the new
entity, the partnership books may be retained, or a new set of books may be opened
NAME OR LOGO
Partnership Books Retained
If the partnership books are retained, entries are necessary to report:
1. Changes in asset and liability values in the partner’s interests prior to incorporation, and
2. The change in the form of proprietorship. A revaluation account may be debited with losses and credited
with gains from revaluation, and the balance in this account may subsequently be closed into the capital
accounts in the profit and loss ratio.
However, with relatively few adjustments, the capital accounts may be debited or credited directly for losses and
gains from revaluation. The issuance of shares of stocks in exchange for the partners’ interests is recorded by
debits to the partners’ capitals and credits to the appropriate capital accounts.
New Books Opened for the Corporation
If new books are opened for the corporation, all the accounts of the partnership are closed. In closing the accounts
of the partnership, the transfer of assets and liabilities to the corporation, the receipt of shares of stocks in payment
of net assets transferred, and the distribution of shares to the partners are recorded. If it is desired to provide a full
summary of the transactions that terminated the partnership, entries may also record the restatement of net assets
and partners’ interests.
Entries are made on the new books of the corporation to record the assets that were acquired, the liabilities that
were assumed, and the shares that were issued in payment for net assets.
NAME OR LOGO
Illustration 19-4: Incorporation of a Partnership
Assume that Janel and Khay, partners of Janel & Khay Partnership, who share net income and loss in a 4:1 ratio, organize J & K Corporation to take
over the net assets of the partnership. The balance sheet of the partnership on June 30, 20x4, the date of incorporation, is as follows:
Janel & Khay Partnership
Balance Sheet
June 30, 20x4
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories, first in, first out cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated depreciation of equipment . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities and Partner’s Capital
Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Partner’s capital:
Janel, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Khay, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and partner’s capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 28,100
600
P 60,000
26,000
P 12,000
27,500
25,500
34,000
P 99,000
P 35,000
P 47,990
16,010
64,000
P 99,000
After an appraisal of the equipment and an audit of the partnership’s financial statements, the partners agree that the following adjustments are
required to restate the net assets of the partnership to current fair value:
• Increase the allowance for doubtful accounts to P1,000.
• Increase the inventories to current replacement cost of P30,000.
• Increase the equipment to its reproduction cost new, P70,000, less accumulated depreciation on this basis, P30,500; that is, to current fair
value, P 39,500.
• Recognize accrued liabilities of P1,100.
• Recognize goodwill of P10,000.
J & K Corporation is authorized to issue 10,000 shares of P10 par common stock. It issues 7,500 shares of common stock valued at P11 a share to
the partnership in exchange for the net assets of the partnership. The 7,500 shares received by the partnership are divided between the partners on
the basis of the adjusted balances of their capital accounts. (Partners may withdraw small amounts of cash to round their capital account balances to
even amounts, thus avoiding the issuance of fractional shares of common stock.) This procedure completes the dissolution and liquidation of the
NAME OR LOGO
partnership.
Partnership Books Retained
The journal entries to adjust and eliminate the accounting records of the Janel & Khay Partnership on June 30,
20x4, are as follows:
Entries in the Books of the New Corporation using the Partnership Books:
Inventories (P30,000 – P 25,500) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment (P70,000 – P60,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for Doubtful Accounts (P1,000 – P600) . . . . . . . . . . . . . .
Accumulated Depreciation of Equipment (P30,500 – P26,000). . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Janel, Capital (P18,500 x 0.80) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Khay, Capital (P18,500 x 0.20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
To adjust assets and liabilities to agreed amounts and to divide net gain of
P18,500 between partners in 4:1 ratio
Janel, Capital (P47,990 + P14,800) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Khay, Capital (P16,010 + P3,700) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock (P10 par x 7,500 shares) . . . . . . . . . . . . . . . . . . . . .
Paid-in capital in excess of par [(P11 – P10) x 7,500 shares] . . . . .
To record distribution of common stock of J & K Corporation to partners;
Janel: (P47,990 + P14,800) / P11 per share = 5,708 shares
Khay: (P16,010 + P3,700) / P11per share = 1,792 shares
Total shares...................................................... 7,500 shares
4,500
10,000
10,000
62,790
19,710
400
4,500
1,100
14,800
3,700
75,000
7,500
NAME OR LOGO
New Books Opened for the Corporation
Although the accounting records of the partnership may be modified to serve as the records of the new
corporation, it is customary to use a new set of accounting records for the corporation. If this alternative is
followed, the procedures required are:
In Accounting Records of Partnership:
1. Prepare journal entries for revaluation of assets, including recognition of goodwill.
2. Record any cash withdrawals necessary to adjust partners’ capital account balances to round amounts.(In
some instances, the contract may require transfer to the corporation of all assets except cash.)
3. Record the transfer of assets and liabilities to the corporation, the receipt of the corporation’s common
stock by the partnership, and the distribution of the common stock to the partners in settlement of the
balances of their capital accounts.
NAME OR LOGO
The journal entries to adjust and eliminate the accounting records of the Janel & Khay Partnership on June 30, 20x4, are
presented below:
Entries in the Books of the Partnership:
Inventories (P30,000 – P 25,500) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment (P70,000 – P60,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for Doubtful Accounts (P1,000 – P600) . . . . . . . . . . . . .
Accumulated Depreciation of Equipment (P30,500 – P26,000). . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Janel, Capital (P18,500 x 0.80) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Khay, Capital (P18,500 x 0.20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
To adjust assets and liabilities to agreed amounts and to divide net gain of P18,500 between
partners in 4:1 ratio
4,500
10,000
10,000
Receivable from J & K Corporation (P64,000 – P18,500) . . . . . . . . . . .
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for Doubtful Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated Depreciation of Equipment . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
To record transfer of assets and liabilities to J & K Corporation.
Common Stock of J & K Corporation (7,500 shares x P11) . . . . . . . . . .
Receivable from J & K Corporation . . . . . . . . . . . . . . . . . . . . . . . . .
To record receipt of 7,500 shares of P10 par common stock valued at P11 a share in
payment for net assets transferred to J & K Corporation.
82,500
35,000
1,100
1,000
30,500
Janel, Capital (P47,990 + P14,800) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Khay, Capital (P16,010 + P3,700) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common Stock of J & K Corporation . . . . . . . . . . . . . . . . . . . . . . . .
To record distribution of common stock of J & K Corporation to partners;
Janel: (P47,990 + P14,800) / P11 per share = 5,708 shares
Khay: (P16,010 + P3,700) / P11per share = 1,792 shares
Total shares...................................................... 7,500 shares
62,790
19,710
82,500
400
4,500
1,100
14,800
3,700
12,000
28,100
30,000
70,000
10,000
82,500
82,500
NAME OR LOGO
In the Accounting Records of the Corporation:
1. Record the acquisition of assets and liabilities (including obligation to pay for the net assets) from the partnership at current
fair values.
2. Record the issuance of common stock at current fair value in payment of the obligation to the partnership
The journal entries in the accounting records of J & K Corporation on June 30,20x4 are as follows:
Entries in the Books of the New Corporation:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for Doubtful Accounts . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payable to Janel & Khay Partnership . . . . . . . . . . . . . . . . . . . . . . . .
To record acquisition of assets and liabilities from Janel & Khay Partnership.
Payable to Janel & Khay Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, P10 par (7,500 x P10) . . . . . . . . . . . . . . . . . . . . . . .
Paid-In Capital in Excess of Par . . . . . . . . . . . . . . . . . . . . . . . . . . . .
To record issuance of 7,500 shares of common stock valued at P11 a share in
payment for net assets of Janel & Khay Partnership.
12,000
28,100
30,000
39,500
10,000
82,500
1,000
35,000
1,100
82,500
75,000
7,500
NAME OR LOGO
Note that the allowance for doubtful accounts is recognized in the accounting records of J & K Corporation because
the specific accounts receivable that may not be collected are not known. In contrast, the depreciation recognized
by the Janel & Khay Partnership is disregarded by J & K Corporation because the “cost” of the equipment to the
new corporation is P39,500. The balance sheet for J & K Corporation on June 30, 20x4, is as follows:
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories, at current replacement costs . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment, at current fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities and Stockholder’s Equity
Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholder’s equity:
Common stock, P10 par, authorized 10,000 shares, issued and
outstanding 7,500 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paid-in capital in excess of par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholder’s equity . . . . . . . . . . . . . . . . . . . . . . . . . .
P 28,100
1,000
P 12,000
27,100
30,000
39,500
10,000
P118,600
P 35,000
1,100
P 36,100
P 75,000
__7,500
82,500
P118,600
NAME OR LOGO