DISSOLUTION – CHANGES IN OWNERSHIP

Dissolution of a Partnership is the change in the relation of the partners

caused by any partner ceasing to be associated in the carrying on as
distinguished from the winding up of the business of the partnership (Civil
Code of the Philippines, Article 1828).

On dissolution, the partnership is not terminated, but continues until the

winding up of partnership affairs is completed. (Article 1829). Winding
up is the process of settling the business or partnership affairs after
dissolution. Termination is that point in time when all partnership affairs
are wound up or completed, and is the end of the partnership life.

 Limited life is one of the characteristics of a partnership. Any change in the membership of this form of
business organization will result to dissolution. Dissolution of the partnership does not necessarily imply
that business operations will come to an end. Most changes in the ownership of a partnership are
accomplished without interruption of its normal operations.

 Dissolution should be distinguished from liquidation of a partnership. A partnership is said to be

liquidated when the business is terminated; a partnership may be dissolved without being terminated
but liquidation is always preceded by dissolution.

 When partnership dissolution occurs, a new accounting entity is formed. The old partnership should
first adjust its books so that all accounts are properly stated at the date of dissolution.

Example: When the large international accounting firm,

Archon & Co. retires and admits partners during the year, the
former partnership is dissolved and a new partnership begins
with little outward evidence of any change. In fact, the new
partnership may retain the dissolved partnership’s name. Form
the legal viewpoint, a partnership is dissolved by admission or
by retirement of partner.

 However, accountants are more concerned with the substance of an event rather than with its legal form.
Therefore, the accountants must evaluate all the circumstances of the individual case to determine how a
change in partners should be recorded.

Causes of Dissolution:
Partnership dissolution due to changes in ownership occurs for varying reasons and the following are the more
prevalent:
1. Admission of a partner
2. Withdrawal or retirement of a partner
3. Death of a partner
4. Incorporation of the partnership

Admission of a Partner

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  A new partner can only be admitted into a partnership with the consent of all
the continuing partners. This is based on the principle of delectus personae:
No one becomes a member of the partnership without the consent of all the
members. This is because a partnership is based on mutual trust and
confidence of the partners.

By admission of a new partner, the old partnership has been dissolved and it is important that a new
agreement be formulated to govern the continuing business operations. A person may become a partner in an
existing partnership by either of the following:
1. Purchase of an interest from one or more of the existing partners.
2. Investment of assets in the partnership by the new partner.

The foregoing situations are similar in the sense that the old partnership is legally dissolved; the capital, the
profit and loss ratio will be based on a new partnership agreement. But these are dissimilar in the sense that the
partnership receives no new resources when a third party purchases an interest directly from existing partners,
but it does receive new resources when a third party becomes a partner by investing in the partnership.

Liability of Incoming Partner for Existing Obligations

- A person admitted as a partner into an existing partnership is liable for all the obligations of the
partnership incurred before his admission as though he had been a partner when such obligations were
incurred. Such liability is limited to his capital contribution, unless otherwise agreed.

Example: Naruto Uzumaki, Sasuke Uchiha, Sakura Haruno formed

Team7, a general professional partnership, with a capital of
Php50,000.00 each on Feb. 14, 2020. On April 8, the partnership
incurred an obligation of Php200,000.00 to Kakashi Hatake which will
be payable on Dec. 16. On June 13, Hinata Hyuga was admitted into the
partnership; she contributed Php20,000.00.

 Even if the obligation was incurred before Hinata Hyuga’s admission into the partnership, she is still
liable to Kakashi Hatake but only to the extent of her contribution. Total partnership capital upon
admission is Php170,000.00 leaving a balance of Php30,000.00 (deficit) which will be shared by the old
partners equally.

Purchase of an Interest from Existing Partners

- With the consent of all continuing partners, a person may be admitted into an existing partnership by
purchasing an interest directly from one or more of the existing partners. Payment is made personally to
the partner from whom the interest is obtained resulting to mere transfers among the capital accounts.
- This type of admission will only result to a debit to the capital account of the selling partner for the
interest sold and a credit to the capital account of the buying partner for the interest purchased. The
amount debited and credited is not affected by the actual price for the equity interest. In this type of
admission, the total assets, total liabilities and total partners’ equity of the partnership are not affected
upon admission.

Example: Tanjiro Kamado and Zenitsu Agatsuma are partners with

capital balances
Caseof1.Php400,000.00
Payment to old andpartners
Php200,000.00
is equalrespectively.
to interest purchased. Tanjiro
They share profits
Kamado in and
the ratio of 3:1.
Zenitsu Their business
Agatsuma receiveshas
an been
offer very
from Inosuke Hashibira to
successful. All indications
purchase show
directly that it will
one-fourth ofcontinue
each of to be. interest in the partnership for
their
Php150,000.00. The partners agreed to admit Inosuke into the firm.

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Entry:
Tanjiro Kamado, Capital Php100,000.00
Zenitsu Agatsuma, Capital 50,000.00
Inosuke Hashibira, Capital Php150,000.00
To record admission of Inosuke Hashibira.

Computation:
Tanjiro: Php400,000.00 x ¼ Php100,000.00
Zenitsu: Php200,000.00 x ¼ 50,000.00
Interest transferred to Inosuke. Php150,000.00

 One-fourth of each partner’s capital was transferred to the new partner. The partnership did not receive
the cash paid because the transaction is between Inosuke and partners Tanjiro & Zenitsu personally, not
between Inosuke and the partnership.

Case 2. Payment to old partners is less than the interest purchased.

Assume that Inosuke Hashibira directly purchased one-third of each
partner’s interest in the business. He paid Php160,000.00 for one-third of
each partner’s capital.

Entry:
Tanjiro Kamado, Capital Php133,333.00
Zenitsu Agatsuma, Capital 66,667.00
Inosuke Hashibira, Capital Php200,000.00
To record admission of Inosuke Hashibira.

Computation:
Tanjiro: Php400,000.00 x 1/3 Php133,333.00
Zenitsu: Php200,000.00 x 1/3 66,667.00
Interest transferred to Inosuke. Php200,000.00

 The new partner was credited for Php200,000.00 interest in the new partnership. The equity is
transferred to Inosuke at its book value to the old partners of Php200,000.00. The negotiated price of
Php160,000.00 does not affect the entry because the exchange is between Inosuke and the old Partners
and does not involve partnership assets.

Case 3. Payment to old partners is more than the interest

purchased. Partners Tanjiro Kamado and Zenitsu Agatsuma
received an offer from Inosuke Hashibira to purchase directly
30% of each of their interest in the partnership for
Php200,000.00. The partners agreed to admit Inosuke Hashibira
as a member of the firm.

Entry:
Tanjiro Kamado, Capital Php120,000.00
Zenitsu Agatsuma, Capital 60,000.00
Inosuke Hashibira, Capital Php180,000.00
To record admission of Inosuke Hashibira.

Computation:
Tanjiro: Php400,000.00 x 30% Php120,000.00
Zenitsu: Php200,000.00 x 30% 60,000.00
Interest transferred to Inosuke. Php180,000.00

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  Thirty percent of each partner’s capital was transferred to the new partner. Just like in the other
preceding cases, the partnership did not receive the cash and because the transaction is between Inosuke
and partners Tanjiro and Zenitsu personally, not between Inosuke and the partnership.

INVESTMENT OF ASSETS IN PARTNERSHIP

- A person may be admitted into a partnership by investing cash or other assets in the business. The assets
are invested into the partnership and not given to the individual partners. The investment will increase
the total partners’ equity.

Definition of Terms
 Total Contributed Capital. It is the sum of the capital balances of the old partners and the actual
investment of the new partner.
 Total Agreed Capital. It is the total capital of the partnership after considering the capital credits given
to each of the partners. Under the bonus method, total agreed capital is equal to the total contributed
capital though the capital credit to each partner may be equal to, greater than or less than his capital
contributions.
 Bonus. It is the amount of capital or equity transferred by one partner to another partner.
 Capital Credit. It is the equity of a partner in the new partnership in the new partnership and is obtained
by multiplying the total agreed capital by applicable percentage interest of the partner.

Bonus to Old Partners

- A partnership may be exceptionally attractive because of superior earnings record such that the old
partners’ capital interest. This premium is affected either by allocating a portion of the investment of the
new partner to the old partners. The capital accounts of the old partners are credited for the premium
according to their profit and loss ratio.

Example: Monkey D. Luffy and Roronoa Zoro are partners

with capital balances of Php400,000.00 and Php200,000.00,
respectively. They share profits in the ratio of 3:1. The partners
agreed to admit Vinsmoke Sanji as a member of the firm. The
foregoing information will be in the basis of the following
cases.

Case 1. Total agreed capital is stated. Assume that

Vinsmoke Sanji invested Php250,000.00 for a one-fourth
interest in the business. The partners decided not to revalue the
assets of the partnership and that the total agreed capital is
Php850,000.00
Contributed Bonus Agreed
Monkey D. Luffy Php400,000.00 Php28,125.00 Php428,125.00
Roronoa Zoro 200,000.00 9,375.00 209,375.00
Total Php600,000.00 Php37,500.00 Php637,500.00 ¼ of Total
Vinsmoke Sanji 250,000.00 (37,500.00) 212,500.00* Agreed Capital
Total Php850,000.00 Php-0- Php850,000.00
* Php850,000.00 x ¼ = Php212,500

Distribution of Bonus:
Luffy: Php37,500 x ¾ = Php28,125.00
Zoro: Php37,500 x ¼ = Php9,375.00

 The investment of Sanji resulted to a bonus because the total contributed capital of Php850,000.00 is
equal to the total agreed capital. The partnership net assets are increased only by the amount of the new
investment. The capital credit for Sanji of Php212,500.00 is Php37,500.00 less than his actual
investment. The difference represented the bonus allocated to the old partners in their profit and loss
ratio. The use of superscripts in all the cases will facilitate the formulation of the entries.

Cash Php250,000.00
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 Vinsmoke Sanji, Capital Php250,000.00
To record the investment of Vinsmoke Sanji.

Vinsmoke Sanji, Capital Php37,500.00

Roronoa Zoro, Capital Php28,125.00
Monkey D. Luffy, Capital 9,375.00
To record bonus to old partners.

Case 2. Total agreed capital is not explicitly stated. Assume

that Vinsmoke Sanji invested Php400,000.00 in the business.
Out of the total cash investment, Php100,000.00 is considered
as a bonus to Partners Monkey D. Luffy and Roronoa Zoro.
the investment of Sanji resulted to a bonus as stated. Under the
bonus method, the total contributed is equal to the total agreed
capital. It is also clearly specified that the old partners will
receive the bonus.

Contributed Bonus Agreed

Monkey D. Luffy Php400,000.00 Php75,000.00 Php475,000.00
Roronoa Zoro 200,000.00 25,000.00 225,000.00
Total Php600,000.00 Php100,000.00 Php700,000.00
Vinsmoke Sanji 400,000.00 (100,000.00) 300,000.00*
Total Php1,000,000.0 Php-0- Php1,000,000.00
0

Distribution of Bonus:
Luffy: Php100,000.00 * ¾ = Php75,000.00
Zoro: Php100,000.00 * ¼ = Php25,000.00

Entries:
Cash Php400,000.00
Vinsmoke Sanji, Capital Php400,000.00
To record the investment of Vinsmoke Sanji.

Vinsmoke Sanji, Capital Php100,000.00

Roronoa Zoro, Capital Php75,000.00
Monkey D. Luffy, Capital 25,000.00
To record bonus to old partners.

 The capital credit for Vinsmoke Sanji is Php100.000.00 less than his actual investment. The difference
represented the bonus allocated to the old partners in their profit and loss ratio.

Bonus to New Partner

- A new partner may be admitted into the partnership because of his vast financial resources, extensive
business network, distinctive reputation, unique management and/or technical skills. The old partners
may be willing to give a premium for all of these exceptional qualifications by allowing a capital credit
greater than the prospective exceptional qualifications by allowing a capital credit greater than the
prospective partner’s investment just to ensure his association with the partnership. This premium will
be treated as a bonus from the equities of the old partners and credited to the new partner.

Case 1. Total agreed capital is stated. Assume that

Vinsmoke Sanji invested Php240,000.00 for a one-third
interest in the business. The total agreed capital is
Php840,000.00. The investment of Sanji resulted to a bonus
shown by the following table:

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1
 Contributed Bonus Agreed
Monkey D. Luffy Php400,000.00 (Php30,000.00) Php370,000.00
Roronoa Zoro 200,000.00 (10,000.00) 190,000.00
Total Php600,000.00 (Php40,000.00) Php560,000.00
Vinsmoke Sanji 240,000.00 40,000.00 280,000.00*
Total Php840,000.00 Php-0- Php840,000.00
* Php840,000.00 x 1/3 = Php280,000.00

Distribution of Bonus:
Luffy: Php40,000.00 x ¾ = Php30,000.00
Zoro: Php40,000.00 x ¼ = Php10,000.00

Entries:
Cash Php240,000.00
Vinsmoke Sanji, Capital Php240,000.00
To record the investment of Vinsmoke Sanji.

Monkey D. Luffy, Capital Php30,000.00

Roronoa Zoro, Capital 10,000.00
Vinsmoke Sanji, Capital Php40,000.00
To record bonus to new partner.

 The capital credit for Sanji of Php280,000.00 is Php40,000.00 more than his actual investment. This
difference represented a bonus to the new partner because the total contributed capital is equal to the
total agreed capital, and the capital credit to the new partner is more than his actual investment. The
equities of the old partners are decreased by Php40,000.00 in their profit and loss ratio.
Case 2. Total agreed capital is not explicitly
stated. Assume that Vinsmoke Sanji invested
Php300,000.00 for a 50% interest in the business.
Monkey D. Luffy and Roronoa Zoro transferred part
of their capital balance to that of Vinsmoke Sanji as
a bonus. The investment of Sanji resulted to a bonus
as stated. Under the bonus method, the total
contributed capital is equal to the total agreed
capital. It is also clearly specified that the new
partner will receive the bonus.
Contributed Bonus Agreed
Monkey D. Luffy Php400,000.00 (Php112,500.00) Php287,500.00
Roronoa Zoro 200,000.00 (37,500.00) 162,500.00
Total Php600,000.00 (Php150,000.00) Php450,000.00 50% of Total
Vinsmoke Sanji 240,000.00 150,000.00 450,000.00* Agreed Capital
Total Php840,000.00 Php-0- Php900,000.00

Distribution of Bonus:
Luffy: Php150,000.00 x ¾ = Php112,500.00
Zoro: Php150,000.00 x ¼ = Php37.500.00

Entries:
Cash Php300,000.00
Vinsmoke Sanji, Capital Php300,000.00
To record the investment of Vinsmoke Sanji.

Monkey D. Luffy, Capital Php112,500.00

Roronoa Zoro, Capital 37,500.00
Vinsmoke Sanji, Capital Php150,000.00
To record bonus to new partner.

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  The capital credit for Vinsmoke Sanji of Php450,000.00 is Php150,000.00 more than his actual
investment. This difference represented the bonus allocated to the new partner. The equities of the old
partners are decreased by Php150,000.00 in their profit and loss ratio.

WITHDRAWAL OR RETIREMENT OF A PARTNER

A partner may withdraw or retire from a partnership for various reasons. Disputes with other partners, old age,
and pursuit for better opportunities are among the possible explanations. The withdrawal of a partner dissolves
the old partnership. This type of dissolution may be accomplished by either of the following ways:
1. By selling his equity interest to one or more of the remaining partners
2. By selling his equity interest to an outsider
3. By selling his equity interest to the partnership

Sale of Interest to a Partner or an Outsider

 When a partner’s interest is sold to another partner or an outsider, the withdrawing partner is paid from
the personal asset of the buyer. Accounting for his sale is similar to the admission by purchase of
interest. The total assets of the partnership are not affected by the consideration involved. The required
entry will only be a debit to the seller’s capital account for his capital balance and a credit to the buyer’s
capital account for the same amount.
 There are times when a partner withdraws in the middle of the accounting period, in such case, the
books of the partnership should be updated to determine the retiring partner’s capital balance. Profits or
losses should be measured from the last closing of books to the date of withdrawal and distributed
according to their profit or loss sharing agreement.

Sale of Interest to the Partnership

 When a withdrawing partner sells his interest to the partnership, the partner is paid from the assets of the
partnership. He may receive an amount equal to, greater than or less than the balance of his capital
account. The effect of withdrawal is to reduce the assets and the owners’ equity of the partnership.
 The accounting issues to be encountered here will be similar to admission by investment of assets but in
a reverse manner. Instead of a new partner joining the partnership by investing assets into the
partnership, an old partner is now leaving the partnership with the business distributing assets to the
withdrawing partner. Note that the withdrawing partner may receive his share of the business in
partnership assets other than cash.

Example. Suppose that Buttercup is retiring in midyear from the partnership of

Blossom, Bubbles and Buttercup because of family relocation. Physical distance
will prevent her from coping with the daily rigors of their Fashion and Beauty
consulting business. After the books have been adjusted for the semi-annual
profits but before reevaluation, their capital balances are as follows:

Blossom, Capital Php540,000.00

Bubbles, Capital Php430,000.00
Buttercup, Capital Php230,000.00

 An independent appraiser revalued their cosmetics inventory to Php380,000.00 (a decrease of

Php60,000.00) and their land to Php1,010,000.00 (an increase of Php460,000.00). The profit and loss
ratio of the partners is 1:2:1.

The entries to record the revaluation of assets follow:

Blossom, Capital Php15,000.00
Bubbles, Capital 30,000.00
Buttercup, Capital 15,000.00
Cosmetic Inventory Php60,000.00
To revalue cosmetics inventory per appraisal.

Computation:
Blossom: Php60,000.00 x 1/4 = Php15,000.00
Bubbles: Php60,000.00 x 2/4 = Php30,000.00
Buttercup: Php60,000.00 x 1/4 = Php15,000.00
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 Php60,000.00

Entry:
Land Php460,000.00
Blossom, Capital Php115,000.00
Bubbles, Capital 230,000.00
Buttercup, Capital 115,000.00
To revalue land per appraisal.
Computation:
Blossom: Php460,000.00 x 1/4 = Php115,000.00
Bubbles: Php460,000.00 x 2/4 = Php230,000.00
Buttercup: Php460,000.00 x 1/4 = Php115,000.00
Php460,000.00
After revaluation, the capital balances of the partners are shown below:
Blossom, Capital Php640,000.00
Bubbles, Capital Php630,000.00
Buttercup, Capital Php310,000.00

Computation of Capital Balances:

Blossom: Php540,000.00 – Php15,000.00 + Php115,000.00 = Php640,000.00
Bubbles: Php430,000.00 – Php30,000.00 + Php230,000.00 = Php630,000.00
Buttercup: Php210,000.00 – Php15,000.00 + Php115,000.00 = Php310,000.00

Case 1. Withdrawal at book value. Assume that RP agreed

to accept payment equal to her interest. The entry to record the
payment of cash and the closing of her capital account will be:

Buttercup, Capital Php310,000.00

Cash Php310,000.00
To record retirement of Buttercup.

Case 2. Withdrawal at more than book value. Assume that Buttercup demanded a
Php400,000.00 settlement for her interest because she firmly believed that she has
contributed so much to the success of the business. The remaining partners agreed for
old time’s sake. If the current fair value of the partnership’s net assets exceeded book
value, the settlement price to the withdrawing partner will be greater than his capital
account balance. The excess payment is treated either as a bonus to the retiring
partner from the continuing partners.

Blossom, Capital Php30,000.00

Bubbles, Capital 60,000.00
Buttercup, Capital 310,000.00
Cash Php400,000.00
To record retirement of Buttercup with bonus from continuing partners.

Computation:
Blossom: Php90,000.00 x 1/3 = Php30,000.00
Bubbles: Php90,000.00 x 2/3 = Php60,000.00
Php90,000.00

 The entry reflected the fact that Blossom and Bubbles granted a Php90,000.00 bonus to Buttercup that
was charged to their capital accounts in their profit and loss ratios.

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 Case 3. Withdrawal at less than book value. Assume that Buttercup is very eager
to retire and is willing to accept settlement at Php280,000.00. When Buttercup, the
retiring partner, received as settlement an amount less than her capital balance, in
effect, the partner is giving a part of her equity interest to the continuing partners as
bonus. The amount of the bonus is credited to the capital accounts of the continuing
partners in their profit and loss ratio.

Buttercup, Capital Php310,000.00

Cash Php280,000.00
Blossom, Capital 10,000.00
Bubbles, Capital 20,000.00
To record retirement of Buttercup with bonus to continuing partners.
Computation:
Blossom: Php30,000.00 x 1/3 = Php10,000.00
Bubbles: Php30,000.00 x 2/3 = Php20,000.00
Php30,000.00
 Payment to a withdrawing partner at less than book value may also imply that the partnership assets are
overvalued. In this case, the overvalued assets should be identified and reduced to their fair values.

DEATH OF A PARTNER
- The death of a partner dissolves a partnership. When the death of a partner does not result to liquidation,
the accounting procedures to be followed are similar to those discussed in the withdrawal of a partner.
The deceased partner may be considered to have retired from the partnership and his heirs or estate can
expect to receive the amount of his interest from the business. If payment to the estate of the deceased
cannot be made immediately, the balance in the capital account of the deceased partner should be
transferred to a liability account, payable to the estate.

INCORPORATION OF A PARTNERSHIP
- A partnership may decide to incorporate after evaluating the various advantages of having a corporate
form of business organization. After the necessary adjusting and closing entrees, the asset and liabilities
of the partnership are transferred to the corporation in exchange for shares of stock. The shares received
by the partnership are distributed to the partners based on their equity interests. In the books of the
corporation, the receipt of transferred assets and liabilities will be recorded along with the issuance of
share capital to the incorporators, the “former” partners.

Example: Partners Kobayashi and Tohru, who share equally in profits and losses, have
the following items in their partnership’s statement of financial position as at Dec. 31,
2020:
Cash Php120,000.00 Accounts Payable Php172,000.00
Accounts receivable Accum. 8,000.00
100,000.00
Depreciation
Inventory 140,000.00 Kobayashi, Capital 140,000.00
Equipment 80,000.00 Tohru, Capital 120,000.00
Total Php440,000.00 Total Php440,000.00
 They agreed to incorporate their partnership, with the new corporation absorbing the net assets after the
following adjustments: Providing for allowances for doubtful accounts of Php10,000.00: restatement of
the inventory to its current fair value of Php160,000.00 and additional recognition of depreciation on the
equipment of Php3,000.00.
 The corporation’s share capital will have a par value of Php100.00 and the partners will be issued the
share equivalents to their adjusted capital balances. The journal entries to incorporate the partnership
will be:
Cash Php120,000.00
Accounts Receivable 100,000.00
Inventory 160,000.00
Equipment 69,000.00
Allowance for Doubtful Accounts Php10,000.00
Accounts Payable 172,000.00
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 Ordinary Shares 267,000.00
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