PARTNERSHIP DISSOLUTION

Module 5
 ▪ As defined in Article 1828 of the Civil Code of the Philippines, it is the
“change in the relation of the partners caused by any partner ceasing
to be associated in the carrying out of the business.”

▪ TWO TYPES OF PARTNERSHIP DISSOLUTION:

1. Dissolution by change in ownership structure which covers the
following:
PARTNERSHIP ▪ A. Admission of a new partner in the existing partnership
DISSOLUTION ▪ B. Retirement or withdrawal of a partner
▪ C. Death, bankruptcy or incapacity of a partner
▪ D. Incorporation of a partnership

2. Dissolution with liquidation (this will be discussed in Module 6)

 ▪ There are two types of admitting a new partner in an existing
partnership: Admission by purchase of interest and admission by
investment.
ADMISSION BY PURCHASE OF INTEREST:
▪ The term “interest” refers to a partner’s equity or capital
PARTNERSHIP ▪ The new or incoming partner is referred to as the buying partner
DISSOLUTION ▪ The old or existing partner/s are the selling partner/s
1. Admission of a ▪ Under this type of admission, the transaction is personal in nature
new partner in the ▪ The transaction is between the selling partner and buying
existing partnership partners only as far as money matters is concerned.
▪ The transaction will not increase or decrease the assets and total
capitalization of the partnership before and after the admission.
 CASE 1- Purchase of a portion of interest from one partner only.
Peter and Paul are partners with capital balances of P60,000 and P80,000 respectively. They shared
profit and losses equally. Mary is admitted in the partnership by allowing her to purchase 1/3 of
Peter’s interest.
Assumption: 1. Mary pays P20,000 (at book value)
(Peter has no personal gain or loss)
2. Mary pays P15,000 (less than book value)
1. Admission of a (Peter has a personal loss of P5,000)

new partner in 3. Mary pays P25,000 (more than book value)

the existing (Peter has a personal gain of P5,000)

Journal entry: Peter, Capital P20,000
partnership (by Mary, Capital P20,000
purchase of To transfer 1/3 of Peter’s interest to Mary.

interest.)
Capital balances BA: Capital balances AA:
Peter P60,000 Peter (P60,000-20,000) P40,000
Paul 80,000 Paul 80,000
P140,000 Mary 20,000
P140,000
 CASE 2- Purchase of one whole interest from one partner.

Peter and Paul are partners with capital balances of P60,000 and P80,000 respectively.
They shared profit and losses equally. Mary is admitted in the partnership by
purchasing the whole interest of Peter in the partnership.
1. Admission of a Journal entry: Peter, Capital P60,000
new partner in Mary, Capital P60,000
the existing To transfer the whole interest of Peter to Mary.
partnership (by Capital balances BA: Capital balances AA:
purchase of Peter P60,000 Peter -
interest.) Paul 80,000 Paul 80,000

P140,000 Mary 60,000

P140,000
 CASE 3- Purchase of portion of interest from more than one partner.
Peter and Paul are partners with capital balances of P60,000 and P80,000 respectively.
They shared profit and losses equally. Mary is admitted in the partnership by
purchasing ½ of Peter and ¼ of Paul’s interest.
Peter- ½ of P60,000 =P30,000
Paul -1/4 of P80,000 = 20,000
1. Admission of a Total interest transferred P50,000
new partner in Journal entry: Peter, Capital P30,000
the existing Paul, Capital 20,000
partnership (by Mary, Capital P50,000
purchase of To transfer ½ of Peter and ¼ of Paul’s interest to Mary.

interest.) Capital balances BA: Capital balances AA:

Peter P60,000 Peter (P60,000-30,000) P30,000
Paul 80,000 Paul (P80,000-20,000) 60,000
P140,000 Mary 50,000
P140,000
 CASE 4- Purchase of whole interest from all partners.

Peter and Paul are partners with capital balances of P60,000 and P80,000 respectively.
They shared profit and losses equally. Mary purchased all of the partners’ interest.

Journal entry: Peter, Capital P60,000

1. Admission of a Paul, Capital 80,000
new partner in Mary, Capital P140,000
the existing To transfer the whole interest of the partnership to Mary.
partnership (by Capital balances BA: Capital balances AA:
purchase of Peter P60,000 Peter -
interest.) Paul 80,000 Paul -

P140,000 Mary P140,000

P140,000
 ▪ There are two types of admitting a new partner in
an existing partnership: Admission by purchase of
interest and admission by investment.
PARTNERSHIP ADMISSION BY INVESTMENT:
DISSOLUTION ▪ Under this type of admission, the transaction is
1. Admission of a
new partner in the between the new partner and the partnership.
existing partnership ▪ The transaction increases both the assets and total
(by investment)
capitalization of the partnership after the
admission.
 Case 1: The capital account balances of partners Allera and Padayao who shared
profit and loss of 70% and 30% respectively were as follows:
Allera, Capital P60,000
Padayao, Capital 40,000
P100,000
PARTNERSHIP Lada is admitted in the partnership by allowing her to invest cash of P30,000.
DISSOLUTION Journal entry: Cash P30,000
1. Admission of a Lada, Capital P30,000
new partner in the Admission of Lada.
existing partnership Capital balances BA: Capital balances AA:
(by investment) Allera P60,000 Allera P60,000
Padayao 40,000 Padayao 40,000
P100,000 Lada 30,000
P130,000
 Case 2:
The capital account balances of partners Allera and Padayao are P60,000 and
P40,000. They shared profit and loss of 70% and 30% respectively. Lada is admitted
in the partnership by allowing her to invest an amount that will give her a 20%
interest in the new firm.
Solution:
P100,000/80% P125,000
PARTNERSHIP Deduct original capital of Allera and Padayao 100,000
DISSOLUTION Investment of Lada for a 20% interest P25,000
1. Admission of a Journal entry: Cash P25,000
new partner in the Lada, Capital P25,000
existing partnership Investment of Lada.
(by investment) Capital balances BA: Capital balances AA:
Allera P60,000 Allera P60,000
Padayao 40,000 Padayao 40,000
P100,000 Lada 25,000
P125,000
 BONUS METHOD
▪ Refers to the “transfer of capital from one partner to another in
consideration for a good reputation or earning capacity of the latter.”
▪ It has the effect of decreasing the capital balance of the partner giving
bonus and increasing the capital balance of the partner receiving the
bonus.
PARTNERSHIP ACCOUNTING FOR BONUS IN PARTNERSHIP TRANSACTIONS
DISSOLUTION Terminologies:
1. Admission of a ▪ Total Agreed Capital (TAC)- refers to the amount of new capital set by the
new partner in the partners. Sometimes termed as “New Firm Capital” or “Agreed Capitalization.”
existing partnership ▪ Total Contributed Capital (TCC)- refers to the capital of both old and new
(by investment) partners combined.

▪ Total Credit of New Partner (TCr)- refers to the interest or equity of the new
partner in the partnership.

▪ Total Contribution of a New Partner (Tcon)- refers to the amount actually

contributed by the new partner upon admission.
 BONUS TO NEW PARTNER

Case 3: The capital account balances of partners Allera and Padayao are P60,000 and P40,000. They shared profit
and loss of 70% and 30% respectively. Lada is admitted in the partnership by allowing her to invest P50,000 that
will give her a 1/2 interest in the total agreed capitalization of P150,000.

Solution: Lada’s Capital Credit (P150,000x ½) P75,000

Lada’s contributions 50,000

Bonus to new partner P25,000

PARTNERSHIP Journal entry: Cash P50,000

Lada, Capital P50,000

DISSOLUTION Investment of Lada.
1. Admission of a Allera, Capital (70%) P17,500
new partner in the Padayao, Capital (30%) 7,500
existing partnership Lada, Capital P25,000
(by investment) To provide bonus to Lada.

Capital balances BA: Capital balances AA:

Allera P60,000 Allera (P60,000-17,500) P42,500

Padayao 40,000 Padayao (P40,000-7,500) 32,500

P100,000 Lada (P50,000+ 25,000) 75,000

P150,000
 BONUS TO OLD PARTNER

Case 4: The capital account balances of partners Allera and Padayao are P60,000 and P40,000. They shared profit
and loss of 70% and 30% respectively. Lada is admitted in the partnership by allowing her to invest P50,000 that
will give her a 1/4 interest in the total agreed capitalization of P150,000.

Solution: Lada’s Capital Credit (P150,000x 1/4) P37,500

Lada’s contributions 50,000

Bonus to old partners P12,500

PARTNERSHIP Journal entry: Cash P50,000

Lada, Capital P50,000

DISSOLUTION Investment of Lada.
1. Admission of a Lada, Capital P12,500
new partner in the Allera, Capital (70%) P8,750
existing partnership Padayao, Capital (30%) 3,750
(by investment) To provide bonus to old partners.

Capital balances BA: Capital balances AA:

Allera P60,000 Allera (P60,000+8,750) P68,750

Padayao 40,000 Padayao (P40,000+3,750) 43,750

P100,000 Lada (P50,000-12,500) 37,500

P150,000
 ▪ A partner may withdraw or retire from the partnership and ceased to
be a partner.

▪ The basic accounting problems involved are as follows:

1. Sale of interest to an outsider
PARTNERSHIP 2. Sale of interest to one or more of the remaining partners
DISSOLUTION
3. Sale of interest to the partnership
2. Retirement or
withdrawal of a a. at book value
partner. b. more than book value (bonus to retiring partner)

c. less than book value (bonus to remaining partner/s)

4. Journal entry in the book of the partnership

 Sale of interest to an outsider

▪ When a withdrawing partner sold his interest to an outsider, the payment is received by the
retiring partner and not by the partnership because the transaction is personal in nature.

Illustration:

The capital balances of partners Fay, Tyrone and Paeng after adjustments in preparation for the
withdrawal of one of the partners are: P40,000, 20,000 and 30,000. They shared profit and loss

PARTNERSHIP equally. Paeng decides to withdraw from the partnership and that his interest is sold to Aries an
outsider with the consent of the other partners.
DISSOLUTION Journal entry: Paeng, Capital P30,000
2. Retirement or Aries, Capital P30,000
withdrawal of a Withdrawal of Paeng and transfer of interest to Aries.
partner. Capital balances BW: Capital balances AW:

Fay P40,000 Fay P40,000

Tyrone 20,000 Tyrone 20,000

Paeng 30,000 Aries 30,000

P90,000 P90,000
 Sale of interest to one or more of the remaining partners

Illustration:

The capital balances of partners Fay, Tyrone and Paeng after adjustments in preparation for the
withdrawal of one of the partners are: P40,000, 20,000 and 30,000. They shared profit and loss
equally. Paeng decides to withdraw from the partnership and that ½ of his interest is sold to Fay
and the other half to Tyrone.

Journal entry: Paeng, Capital P30,000

PARTNERSHIP Fay, Capital P15,000

DISSOLUTION Tyrone, Capital 15,000

2. Retirement or Withdrawal of Paeng and transfer of interest to remaining

withdrawal of a partners.

partner. Capital balances BW: Capital balances AW:

Fay P40,000 Fay (P40,000+15,000) P55,000

Tyrone 20,000 Tyrone (20,000+15,000) 35,000

Paeng 30,000 P90,000

P90,000
 ▪ When a partner dies, becomes bankrupt (insolvent) or becomes incapacitated, the existing partnership is
dissolve. The dissolution may result to either liquidation or operations will continue with a new
partnership contract.

▪ Illustration: Ba, Ka, Da are partners who shared profits and losses equally. Da died on June 1, 2020.
Da’s Capital balance as of Dec. 31, 2019, the last closing date before his death is P45,000. The Income
and Expense Summary account showed a credit balance of P15,000 which represents profits from Jan.
1-June 1, 2020.

Journal entry:

Income and Expense Summary P15,000

PARTNERSHIP Ba, Capital P5,000

DISSOLUTION Ka, Capital 5,000

3. Death, bankruptcy Da, Capital 5,000

or incapacity of a To distribute profit to partners.

partner. ▪ Da’s interest in the partnership is given to his heirs

Da, Capital P50,000

Cash P50,000

▪ Assuming that Ga, Da’s heir doesn’t want to withdraw the shares of his father in the partnership. The
partners have agreed to execute a new contract with Ga.

Da, Capital P50,000

Ga, Capital P50,000

 ▪ The partnership is converted into a corporation.
▪ The partnership contract is dissolved
▪ The assets of the partnership are adjusted to conform with
their current or fair market values.
PARTNERSHIP ▪ All liabilities must be recognized.
DISSOLUTION ▪ These assets and liabilities are to be transferred to the
4. Incorporation of corporation and the corporation will issue number of shares
a partnership equal to the amount of net assets of the partnership being
transferred.

▪ Net assets refer to the excess of all partnership’s assets over

liabilities.