PARTNERSHIP DISSOLUTION
Partnership Dissolution
 Dissolution is defined in Article 1825 of the Civil Code of the
Philippines as the change in the relation of the partners caused by
any partner ceasing to be associated in the carrying out of the
business. Dissolution refers to the termination of the life of an
existing partnership. The dissolution of an old partnership may be
followed by:
1. The formation of a new partnership – This is known as dissolution
by change in ownership structure. The new partnership continues
the business activities of the dissolved partnership without
interruption.
2. Liquidation – This refers to the termination of the business
activities carried on by the partnership and the winding up of
partnership affairs preparatory to going out of business
Conditions Resulting to Partnership
Dissolution
 Admission of a new partner
 Retirement or withdrawal of a partner
 Death, incapacity or bankruptcy of a
partner
 Incorporation of a partnership
ADMISSION OF A NEW PARTNER
TYPES OF ADMISSION OF A NEW
PARTNER
Purchase of interest from one or
more of the original (old) partners
Investment or asset contribution to
the partnership
ADMISSION BY PURCHASE
 The sale of a partner’s interest in an existing partnership is a
personal transaction between the selling partner and the buying or
new partner. The amount paid by the new partner goes personally
to the partner selling interest and not be partnership. The only
entry required in the partnership books is to record the transfer of
capital from the capital account of the selling partner to that of the
buying partner.
The purchase price of the interest sold to the new partner may be:
1. Equal to the book value of interest sold
2. Less than the book value of interest sold
3. More than the book value of interest sold
-Without recognition of implied goodwill
-With recognition of implied goodwill
ADMISSION BY PURCHASE
 Goodwill is an intangible advantage that increases earnings
over what is normal. It is the summation of the good
attributes of a company that enables that company to earn
more than what is normal.
 The IASB discourages the recognition of goodwill unless
there is an excess payment over the fair values of net assets of
an acquired company.
ILLUSTRATIVE PROBLEM
 A and B are partners with capital balances of P100,000 and
P50,000. They share profits and losses equally. C is a new
partner.
Case 1a – Purchase of book value from one partner only. C
purchases 1/5 interest from A by paying P20,000.
A, Capital
C, Capital
20,000
20,000
ILLUSTRATIVE PROBLEM
 Case 1b - Purchase of book value from more than one
partner. C purchases 1/5 interest from the old partners by
paying P30,000.
A, Capital (100,000 x 1/5)
B, Capital (50,000 x 1/5)
C, Capital
20,000
10,000
30,000
ILLUSTRATIVE PROBLEM
 Case 2 – Purchase at less than book value. C purchases 1/5
interest from the old partners by paying P25,000.
A, Capital
B, Capital
C, Capital
20,000
10,000
30,000
The difference of P5,000 is a personal loss of the selling (old)
partners.
ILLUSTRATIVE PROBLEM
 Case 3 – Purchase at more than book value. C pays P40,000
for a 1/5 interest of the old partners.
A, Capital
20,000
B, Capital
10,000
C, Capital
30,000
The difference of P10,000 is a personal gain of the selling (old)
partners.
ADMISSION BY INVESTMENT
ADMISSION BY INVESTMENT
 The admission of a new partner by
investment is a transaction between the
original partnership and the new partner.
The investment of the new partner increases
the total assets and the total capital of the
partnership.
DEFINITION OF TERMS
 Agreed Capital (AC) – it is the amount of new capital set
by the partners for the partnership.
 Total Contributed Capital (CC) – it is the investment of
all the partners.
 Goodwill – It is the excess of agreed capital over
contributed capital
 Bonus – It is the transfer of capital from one partner to
another.
ILLUSTRATIVE PROBLEM:
 A and B are partners with capital
balances of P100,000 and P50,000
respectively. They share profits and
losses equally. C is admitted in the
partnership.
ILLUSTRATIVE PROBLEM:
 Case 1 – No goodwill, no bonus. C invests P50,000 for a ¼
interest in the agreed capital of P200,000.
Cash
50,000
C, Capital
50,000
AC
CC
Old Partner
150,000
150,000
New Partner
50,000
50,000
200,000
200,000
Total
ILLUSTRATIVE PROBLEM:
 Case 2 – No bonus, goodwill contributed by the old partners. C invests
P50,000 for a 1/5 interest in the new firm capital of P250,000.
Cash
50,000
C, Capital
50,000
Goodwill
50,000
A, Capital
25,000
B, Capital
25,000
AC
CC
Goodwill
Old
200,000
150,000
50,000
New
50,000
50,000
-
250,000
200,000
50,000
ILLUSTRATIVE PROBLEM:
 Case 3 – No bonus, goodwill contributed by the new partner. C invests
P25,000 for ¼ interest in the new firm capitalization of P200,000.
Cash
25,000
C, Capital
25,000
Goodwill
25,000
C, Capital
25,000
AC
CC
Goodwill
Old
150,000
150,000
-
New
50,000
25,000
25,000
200,000
175,000
25,000
ILLUSTRATIVE PROBLEM:
 Case 4 – No goodwill, bonus to old partners. C invests P50,000 for a 1/5
interest in the new firm capitalization of P200,000.
Cash
50,000
C, Capital
50,000
C, Capital
10,000
A, Capital
5,000
B, Capital
5,000
AC
CC
Bonus
Old
160,000
150,000
10,000
New
40,000
50,000
(10,000)
200,000
200,000
-
ILLUSTRATIVE PROBLEM:
 Case 5 – No goodwill, bonus to new partner. C invests P30,000 for a ¼ interest
in the total capitalization of P180,000.
Cash
30,000
C, Capital
30,000
A, Capital
7,500
B, Capital7,500
C, Capital
15,000
AC
CC
Bonus
Old
135,000
150,000
(15,000)
New
45,000
30,000
15,000
180,000
180,000
-
ILLUSTRATIVE PROBLEM:

Case 6 – Goodwill and bonus to the old partners – C invests P40,000 for a 1/8 interest in the
agreed capital ratio of P200,000.
Cash
40,000
C, Capital
Goodwill
40,000
10,000
A, Capital
5,000
B, Capital
5,000
C, capital
15,000
A, Capital
B, Capital
7,500
7,500
AC
CC
Goodwill
Bonus
Old
175,000
150,000
10,000
15,000
New
25,000
40,000
-
(15,000)
200,000
190,000
10,000
0
ILLUSTRATIVE PROBLEM:
 Case 7 – Goodwill and bonus to new partner – C invests P45,000 for a 3/8
interest in the new firm capital of P200,000.
Cash
45,000
C, Capital
45,000
Goodwill
5,000
C, Capital
5,000
A, Capital
12,500
B, Capital
12,500
C, Capital
25,000
AC
CC
Goodwill
Bonus
Old
125,000
150,000
New
75,000
45,000
5,000
25,000
200,000
195,000
5,000
-
(25,000)