REO.CPA.ACADEMICS.F2.06.00
Advanced Financial Accounting and Reporting: DISSOLUTION
Introduction
There are a lot of possible scenarios that can be asked in partnership dissolution.
There is no one approach that you can use to all problems. As such, you need to
expose yourself to different problems (i.e., rule on maximum exposure) so as not
to be easily overwhelmed. At a minimum, you need the following in answering
problems related to partnership operations:
1. English comprehension
2. Basic accounting (e.g., journal entries – adjusting vs. closing, types of
accounts, basic accounting equation)
3. Mathematics
a. Basic operation including PMDAS rule.
b. College algebra
c. Mathematics of investment (e.g., interest computation (Prt), present
value computation)
4. Rules provided by the Civil Code. This is also discussed in your RFBT.
5. Rules in your other subject like revaluation under PAS 16 and 38, writedown of inventory under PAS 2, impairment of assets under PAS 36, among
others.
6. Diligence, patience, eagerness, and right mental attitude in learning.
Partnership Dissolution
Dissolution is the change in the relation of the partners caused by any partner
being disassociated from the business or by change in agreements of the
partners. This may include:
1. Admission of a new partner
2. Retirement or withdrawal of a partner
3. Death of a partner
4. Incorporation of the partnership
Note: Please refer to your RFBT for the discussion of other modes of dissolution.
Dissolution Accounting Procedures:
1. Adjust the capital for share in profit or loss during the period up to the date
of dissolution
2. Adjust the capital for any other agreement of the partners
3. Record the dissolution
ADMISSION OF NEW PARTNER
1. Admission by purchase – this is a personal transaction between the new and
existing partner(s)
Methods:
a. No adjustment or book value method – assets are not adjusted regardless
of the amount paid by the new partner. A personal gain (loss) is determined
but not recorded in the partnership books.
b. With adjustment or revaluation method – assets of the existing partnership
are adjusted based on the amount paid by the new partner. A revaluation
upwards (downwards) are shared by the existing partners.
Notes:
✓ If the problem is silent, use no adjustment or book value method.
✓ Revaluations are divided by the existing partners before recording the
admission of the new partner.
2. Admission by investment – this is a transaction between the new partner and
the partnership
Methods:
a. Bonus method – bonus to old or new partner(s)
b. Revaluation method – revaluation of existing partnership
c. Goodwill method – goodwill to new or existing partners. This method
however is not allowed under PFRS.
d. Withdrawal – withdrawal of assets as a result of re-alignment
e. Additional investment – additional investment as a result of re-alignment
Notes:
✓ If the problem is silent, use bonus method between bonus, goodwill or
revaluation method.
✓ Revaluations are divided by the existing partners before recording the
admission of the new partner.
✓ Bonus to or from the existing partners are divided in accordance with their
existing P&L ratio.
RETIREMENT/WITHDRAWAL
Scenarios:
Retiring or withdrawing partner’s interest is sold to
1. One or more of the remaining partners
a. No adjustment or book value method – assets are not adjusted regardless
of the amount paid to the retiring/withdrawing partner
b. With adjustment or revaluation method – assets of the existing partnership
are adjusted based on the amount paid to the retiring/withdrawing partner
Notes:
✓ If the problem is silent, use no adjustment or book value method.
✓ Revaluations are divided by the existing partners before recording the
admission of the new partner.
2. Outside party (with the consent of all partners)
a. No adjustment or book value method – assets are not adjusted regardless
of the amount paid to the retiring/withdrawing partner
b. With adjustment or revaluation method – assets of the existing partnership
are adjusted based on the amount paid to the retiring/withdrawing partner
Notes:
 If the problem is silent, use no adjustment or book value method.

Revaluations are divided by the existing partners before recording the
admission of the new partner.
3. Partnership
a. Settlement > Net interest

1. Bonus to retiring partner
2. Goodwill to retiring partner (not allowed under PFRS)
a. Total goodwill approach
b. Partial goodwill approach
3. Revaluation (upwards) of the partnership
b. Settlement < Net interest

1. Bonus to remaining partners
2. Revaluation (downward) or write-down of assets of the partnership
c. Settlement = net interest: �
Notes:
 If the problem is silent, use bonus method between bonus, goodwill or
revaluation method.
 Revaluations and goodwill (total goodwill approach) are divided by the
existing partners before recording the retirement of the partner.
 Bonus to or from the remaining partners are divided in accordance with
their remaining P&L ratio.
DEATH OF A PARTNER
The death of a partner results in automatic dissolution of the partnership at the
point of death.
Procedures:
1. Adjust the capital of deceased partner for share in profit or loss during the
period up to the date of death
2. Adjust the capital for share in revaluation (if any) as at the date of death
3. The adjusted capital of the deceased partner shall be transferred to a
liability account.
4. Interest payable to the estate is an expense on the books of the continuing
partners.
INCORPORATION
Procedures:
1. Adjust the capital the partners for share in profit or loss during the period
up to the date of incorporation
2. Adjust the capital the partners for share in revaluation (if any) as at the date
of incorporation
3. The adjusted capital shall be transferred to share capital. Excess of the
aggregate capital accounts over the par value or stated value of shares of
stocks issued to the partners is treated as share premium.