PARTNERSHIP DISSOLUTION 99 PARTNERSHIP DISSOLUTION Dissolution - is ¢ ge in the relation of the partners caused by any partner ceasing to be associated inthe canryingorras distinguished from the winding up of the business. (Art. 1826). It is the point in time when the partners cease to cary on the business together. Indissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed. (Art. 1829) ms Winding up is the process of settling)the business or partnership affairs after dissolution. 7 iS The dissolution of the partnership does not mean that the business,is“already ; itis just a change inthe partnership relation and/not acti &tinguishment of the partnership business. = cece tion of the partnership may be followed by: A. Change of ownership structure or interest - the business operations of the partnership will still continue without any interruption. ae B, Liquidation - it refers to the terfduadén of a business_operation. It is the winding up of business activities, where partnership assets are sold, the partnership creditors (liabilities) are paid and distribution of remaining cash to the partners Dissolution should be distinguished from the liquidation of.a partnership. A partnership is said to be liquidated when the business is already terminated; while under dissolution the partnership business operation may still conti Note: A partnership may be dissolved without being liquidated but liquidation is. always preceded by dissolution. A. Partnership dissolution due to changes in ownership structure occurs for the following reasons: V Admission of new partner 2¢ Retirement of a partner 3+ Death, incapacity, or bankruptcy of a partner_ ‘4- Incorporation of a partnership _ \yAssignment of 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 assignment does not change the relationship of the partners. Such assignment only entitles the assignee to receive Scanned wth G camscannerDARTVERSHP osSoLLTION to| the assigning partners interest in the future partnership profits and in the pertnership assets in the event of liquidation. The assignee does not becorne s | Dartnership. Since the assignee does not become a partner; the only chaner | required in the partnership books is the transfer of capital interest of the assignor | partner to the assignee. Mlustration: A and B are partners of DJ Company with capital balances_of P 100,000 and PS0,000, respectively. B assigns 20% of his interest to C. Journal Entry: B, capital (50,000 x 20%) 10,000 C, capital 10,000 K ADMISSION OF NEW PARTNER Ascenisting partnership may admit a new partner with the nai GIES partners. Such admission of new partner will dissolve the old partnership | jiness and a new association of the partnership business is formed. A new partnership agreement should be made which covers the agreement on distribution of profit and loss (new profit and oss ratio), the partners’ interests and other considerations because the dissolution of the old partnership cancels the old agreement of the partners. . ‘The following accounting problems encountered in the admission of new partn 1. Recognition of profit orloss from the beginning of the accounting period to the date of admission. b. Correction of accounting errors in prior periods, if any ¢. Closing of partnership books d. Revaluation of as sets accounts to fair market value and recognition of unrecorded liabil % )> dudes martncom a actt in an snag utaenbin bates of the following: 1. Purchase of all or in part of an interest from one or more of the existing partners, . 2. Investment of assets in the partnership by the new partner, Scanned with |\CamScannerPARTNERSHIP DISSOLUTION 101 my Capital rattof! a ‘ im against the net assets of the partnership. B. Profit and Loss ratio - is used to distribute the net income or loss of the business. A partner may be admitted into the partnership with a profit and loss ratio different from capital ratio. When there are two ratios given, example profit and loss ratio of 30% and a capital ratio of 40%. for the purpose of computing the agreed capital of the partne: : ; ADMISSION OF NEW PARTNER BY PURCHASE The admis! purchase of interest is one in which the new partner transfers assets (irectly to the old partners in consideration of the interest purchased. Thus, th) sets (capital), total assets and liabilities of the partnerships will remaja the same even after the admission of the new partner, unless the old partners decide to recognize any revaluation of assets before the admission of the new partner. The admission by purchase of interest is a personal transaction of the selling old and the new partner. The cash payment t of the new par Partner goes directly to the selling old partner. No gain or loss will be recorded in the books of the partnership because such gain or loss from the transaction is a personal gain or loss of the selling old partner. Instead the only entry entered in the books of the partnership ‘is the transfer of capital interest from selling old partner to new Partner. The amount of a capital interest transferred will be equal to the book value of interest sold regardl¢ss of the amount paid. Ne Entry: (Selling partner) Capital rox (New partner) Capital x Note: Other terminologies used to denote admission by purchase: sold, pays, transfers, bought. Illustration: Amy and Billy are partners sharing profits and losses in the ratio of 60% and 40%, respectively. Their capital balances are: Amy 48,000 Billy 24,000 They agreed to admit Carlo into the partnership. Case 1: Purchase at book value from one partner Carlo purchases % interests from Billy. Carlo pays 12,000. Scanned wth G camscannerPARTNERSHP DSSOLUTION. 102 Batry: Billy, capital 12,000 Carlo, capital 12,000 ‘The P12,000 cash paid by Carlo will not be recorded by the partnership because the said amount will go directly to partner Billy. What is recorded in the partnership books is the transfer of capital of Billy to Carlo which is P12,000 (1/2 x P24,000). i ‘Case 2: Purchase at more than book value from one partner Carlo purchases % interests from Billy. Carlo pays 14,000. Entry: Billy, capital 12,000 Carlo, capital 12,000 ‘The P14,000 cash paid by Carlo will not be recorded by the partnership because the said amount will go directly to partner Billy. What is recorded in the partnership books is the transfer of capital of Billy to Carlo which is P12,000 (1/2 x P24,000). The excess of P2,000 (14,000 - 12,000) will be a personal gain of Billy. (Case 3: Purchase at less than book value from one partner Carlo purchases ' interests from Billy. Carlo pays 9,000. Entry: Billy, capital 12,000 Carlo, capital 12,000 ‘The P10,000 cash paid by the Carlo will not be recorded by the partnership because the said amount will go directly to partner Billy. What is recorded in the partnership books is the transfer of capital of Billy to Carlo which is P12,000 (1/2 x P24,000). The excess of P3,000 (12,000 - 9,000) will be a personal loss of Billy. Note: In the three cases provided above, the transfer of capital from old partner to new partner is recorded at book value regardless of the amount of payment made by the new partner. The amount of payment made by the new partner is not recorded in the partnership books. Any difference of payment to the interest purchased will be a personal gain or loss of the selling old partner. Case 4; Purchase at book value from more thah o} er Carlo purchases 1/3 interest from the old partnei jo pays the old partners 24,000. Scanned with @ camscannerPARTNERSHIP DISSOLUTION 103 Entry: Amy, capital (48,000 x 1/3) 16,000 Billy, capital (24,000 x 1/3) - 8,000 Carlo, capital 24,000 The P24,000 cash paid by Carlo will not be recorded by the partnership because the said amount will go directly to partner Amy and Billy. What is recorded in the partnership books is the transfer of capital of Amy and Billy to Carlo which is P24,000 (1/3 x P72,000). The admission of Carlo from the old partners at book value, does not result in any gain or loss to the old partners. Case 5: Purchase more than book value from more than one partner Carlo purchases 1/3 interest from the old partners, Carlo pays the old partners 30,000. Entry: ‘ Amy, capital (48,000 x 1/3) 16,000 Billy, capital (24,000 x 1/3) 8,000 Carlo, capital 24,000 The P30,000 cash paid by Carlo will not be’ recorded by the partnership because the said amount will go directly to partner Amy and Billy. What is recorded in the partnership books is the transfer of capital of Amy and Billy to Carlo which is 24,000 (1/3 x P72,000). The admission of Carlo from the old partners at more than book value, result in a gain of P6,000 to the old partners. ion of Id. no definite rule on how to divide the payment of new partner to the old partners. The following procedure is recommended for fair and equitable distribution of payment among the old partners. Step 1: Determine the amount of interest transferred to new partner by the individual old partners. Step 2: Any excess will be divided based on the original profit and loss agreement of the partners Illustration: Amy Billy Total Interest Transferred 16,000 8,000 24,000 P/L ratio 60:40 3,600 2,400 6,000 Total cash 719,600 10,400 30, 000- Case 6; Purchase at less than book value from more than one partner Carlo purchases 1/3 interest from the old partners. Carlo pays the old partners 20,000. Scanned wth G camscanner; PARTHERSHE HSSOLUTION 104 Entry: ‘Amy, capital (48,000 x 1/3) 16,000 Billy, capital (24,000 x 1/3) 8,000 Carlo, capital 24,000 ‘The P20,000 cash paid by the Carlo will not be recorded by the partnership because the said amount will go directly to partner Amy and Billy. What is recorded in the partnership books is the transfer of capital of Amy and Billy to Carlo which is P24,000 (1/3 x P72,000). The admission of Carlo from the old partners at less than book value, result in a loss of P10,000 to the old partners. Ss Amy Billy Total Interest Transferred 16,000 8,000 24,000 P/L ratio 60:40 (2,400) (1,600) __(4,000) Total cash 13, ¥ i y \ Nese 7: Revaluation of assets upon admission of a new partner Under this scheme, the excess amount paid over the book value acquired will be capitalized to determine the revaluation of assets. The effect of the asset revaluation is carried to the capital of the old partners. The adjusted capital of the old partners will be the basis in determining the interest of the new partner. ‘The following s under this scheme are as follows: Step 1. Determiy new capital of the partnership by dividing the amount paid by the, x to its interest. — Step 2. Get the difference of the old capital of the partnership by the amount computed in step 1. (New capital of the partnership - Old capital of the partnership) Note: Ifthe new capital (implied capital) is greater than the old capital there is a under reval assets. However, ifit is less than the old capital there is an overvaluation’of assets. Step 3. Allocate the difference computed in step 2 to the old partners’ capital account using the profit and loss agreement of the old partners. Step 4. Adjust the capital of the old partners by adding the amount computed in step 3 to their old capital account. ‘Step 5. Compute the interest of the new partner base on the adjusted capital account of the old partners computed in step 4, Scanned with @ camscannerPARTNERSHIP DISSOLUTION 105 ‘Tilustration: Carlo pai ,000/ for 1/3 interest in the partnership and it is agreed that the assets shoult-be‘revalued before the admission of Carlo. Computation: NewPartnership capital/Implied Capital (30,000 + 1/3) 90,000 “ Old partnership capital 72,000 / Total Asset revaluation (under) 18,000 7) : Amy Billy Capital before revaluation 48,000 24,000 Add: Share in asset revaluation (60% x 18,000) 10,800 (40% x 18,000) 7,200 Adjusted capital before admission 5 Multiply by Interest of Carlo 1/3 1/3 Interest transferred to Carlo x z Journal Entry: Asset 18,000 v Amy, capital 10,800 ¥ Billy, capital 7,200 y To record the asset revaluation “Amy, capital - 19,600 “ Billy, capital 10,400 Carlo, capital 30,000 ¥ To record the transfer of interest of Amy and Billy to Carlo revaluation of assets. The reason of sucha new partner equal to the amount he paid. Note: In the absence of the agreement, the admission by purchase will be recorded based on the amount transferred by the partners to the new partner (at book jue) because it retains the historical cost carrying value of the assets. ‘The total capital balance after admission increases by P18,000 equivalent to the MISSION OF NEW PARTNER BY INVESTMENT The admission by investment is one in which the new partner transfers cash or other assets into the partnership. Thus, the net assets (capital) and the total assets of the partnerships increase by the amount contributed which said contribution becomes the new source of capital of the partnership. Admission by investment is a transaction between the new partner and the partnership business. er used to denote admission by investment: eS and Scanned with @ camscannerCase I: Admission by lnvestinest, ao bonse, x PARTNERSHP DSSOLUTION 106, Caphal (PSG) the total amount of contributions of the old attners and new partner. rt agree apa 2A} tht anew fecal ofthe parte Seoee ee Asset Revaluation ~is the necessary adjustment of assets upon admission of new ‘partner. It is the difference of the TAC and TCC. ‘& Positive Asset revaluation funder) this method increases the assets and the ‘capital of the old partnership. This is attributed to some assets of the \parmership that are undervalued before the admission of new partner. Under ‘this method, TOC < TAC. 2 Negative asset revaluation (over) - this method decreases the assets and the capital of the old partnership. This is attributed to some asscts of the pernership that are overvalued before the admission of new partner. Under ‘this method, TOC > TAC. ‘Bonus ~ ic the amount of capital interest transferred by one or more partner to ‘snother partner. Under this method TCC = TAC Mote: If there is no agreement as to bonus or revaluation method, the bonus method should be used because it conforms to the cost principle of valuing ‘assets. Bonus vs. Revaluation Method ‘When there 1s a change in the relation of the partnership, the partnership ceases ‘to be a going concem. At the time of dissolution a problem arises because the fair ‘mariet values of the assets and liabilities are different from book values. It is now = question 2s to whether the assets and liabilities of the partnership will be tdjusted to its fair market values. ome argue that since the old partnership has been dissolved and a new trtnershipis formed, therefore, all assets and liabilities that will be transferred to 1 new partnershup should be adjusted to its fair value. »wever, some axpuc that changes in partnershipassets and liabilities provide no sis for revaluation because even though the partnership is dissolved, the sSiness activities continue without any interruption, which means that the new ‘Enesship is just a continuation of the old partnership. stration: Amy and Billy are partners sharing profits and los: ‘and 40%, respectively. Their capital balances are: ‘Amy P Bly ‘sico0 sgreed to admit Carlo into the partnership. Carlo invested P2$,000 cash oe lapotesese of the partnership's P66 Journal Entry: Cash a Catto, Capital To record contrinatan of Cate m the pore Computation: x ai 2a a “Total 3/4) —aa arto (1/4) 2k ‘Total Sa “The 4 interest acquired by Carlo is presumed 3 interest. Mote: Any loans' to/from. if any. should ot & because itis only the capital interest is best Case 2: Admission by investment, texas to Note: Under bem mechs Carlo invested P20,000 cash for % interest i= of the partnership is P92,000 Journal Entry: ‘Cash arto, Capital To record consribusion of Caro in the par ‘Amy, capital (60% x 3,000) Billy, capital (40% x 4,000) Carlo, capital To record the transfer of capiad of Arey ect sis = ss. 3 ‘Total (3/4) a 3,0 ‘Scanned with |CamScanner"PARTNERSHIP DISSOLUTION 107 , HO bonus, no Fevaluation terest in the partnership. The agreed capital Case 1: Admission by invest Carlo invested P24,000 cash fe of the partnerships | 96,000. Journal Entry: Cash 24,000 Carlo, Capital 24,000 To record contribution of Carto in the partnership Computation: Tec TAC Amy 48,000 48,000 Billy 24,000 24,000, Total (3/4) 72, 72,000 7 Carlo (1/4) 24,000 24,000 Total ‘96,000 96,000" The % interest acquired by Carlo is presumed to be his capital and profit and loss interest. Note: Any loans to/from, if any, should not be included in cases of admission because it is only the capital i is bei: i t the i Case 2: Admission by investment, bonus to ne ogenes, no revaluation Note: Carlo invested P20,000 cash for % interest in the partnership. The agreed capital of the partnership is P92,000 Journal Entry: Cash 20,000 Carlo, Capital 20,000 To record contribution of Carlo in the partnership Amy, capital (60% x 3,000) 1,800 Billy, capital (40% x 4,000) 1,200 Carlo, capital 3,000 To record the transfer of capital of Amy and Billy to Carlo Computation: Tec TAC Adjustment —~P/L ratio Amy 48,000 46,200 (1,800) 60% Billy 24,000 22,800 (1,200) 40% Total (3/4) , i Carlo (1/4) 20,000 3,000 Total 92,000 Scanned with |\CamScannerPARTNERSHP DSSOLUTION. 108 O2,000 x = ‘TAC 92,000 x % = 23,000 partners agreed capital P69,000 Carlo receives a bonus of P3,000 (23,000 20,000) which will be shared by the old partner using their profit and loss ratio. There is no revaluation since TCC = TAC. Case 3: Admission by investment, bonus to old partner, no revaluation Caro invested P20,000 cash for 1/5 interest in the partnership. The agreed capital of the partnership is P92,000. . Journal Entry: Cash 4 20,000 Carlo, Capital 20,000 To record contribution of Carlo in the partnership Carlo, capital 1,600 Amy, capital 960 Billy, capital 640 To record the transfer of capital by Carlo to old partners Computation: Teco . TAC Adjustment —_—P/L ratio Amy 48,000 48,960 960 60% Billy 24,000 24,640 640 40% ‘Total (4/5) 72,000 73,600 7,600 Cario(t/5)— _20,000_18400__ (1,600) Total "92,000 92,000 ‘TAC 92,000 x 1/5 = Carlo’s agreed capital P18,400 ‘TAC 92,000 x 4/5= Old partners agreed capital P73,600 Amy and Billy received a bonus of 1,600 (73,600 ~ 72,000) which will be shared by them using their profit and loss ratio. There is no revaluation since TCC = TAC. Zz Case 4: Admission by inves (eosat, no tents, positive revaluation i Carlo invested P20,000 cash for 1/5 interest in the partnership. The agreed capital of the partnership is P100,000: Journal Entry; Asset 8000 ~*~ a Ay, capital B , capital > Torecord the set revaluation Cash 20,000 Carlo, », Capital 20,000 To record contribution of Carlo in the partnership « Scanned with |CamScanner™PARTNERSHP DISSOLUTION 109 TCC TAC. Adjustment P/U ratio Amy 48,000 52,800 4,800 60% Billy 24,000__27,200 3,200 40% ‘Total (4/5) x , x Carlo (1/5) 20,000 20,000 Total ‘92,000, 100,000; 8,000 TAC 100,000 x 1/5 = Carlo’s agreed capital P20,000 ‘TAC 100,000 x 4/5= Old partners agreed capital P80,000 ‘The total contributed is less than the total agreed capital, so undervaluation (positive) is recognized and be shared by the old partner using profit and loss ratio. Case 5: Admission by investment, no bonus, negative revaluation Carlo invested P30,000 cash for 2/5 interestin the partnership. The agreed capital of the partnership is P75,000. Journal Entry: Cash 30,000. Carlo, Capital 30,000 To record contribution of Carlo in the partnership Amy, capital 16,200 Billy, capital 10,800 Assets 27,000 To record the asset revaluation Tec TAC Adjustment _P/L ratio Amy 48,000 31,800 (16,200) 60% Billy 24,000. 13,200, (10,880) 40% ‘Total (3/5) 72,000 45,000, (27,000) Carlo (2/5) 30,000 30,000 Total 102,000, 75,000 (27,000) Note: Under negative revaluation method; TCC > TAC ‘TAC 75,000 x 2/5 = Carlo’s agreed capital P30,000 . TAC 75,000 x 3/5= Old partners agreed capital P45,000 ‘The total contributed is greater than the total agreed capital, so overvaluation (negative) is recognized and be shared, by the old partner using profit and loss ratio. Scanned with @ camscannerPARTNERSHP DISSOLUTION 110 Case 6: Agreed capital is not given Mustration 1: Bonus method Carlo invested P48,000 for 50% interest in the partnership. Amy and Billy transferred part of their interest to Carlo as bonus. Journal Entry: Cash 48,000 Carlo, Capital 48,000 To record contribution of Carlo in the partnership Amy, capital 7,200 Billy, capital 4,800 Carlo, capital 12,000 To record the transfer of capital of Amy and Billy to Carlo Tec TAC Adjustment —P/L ratio Amy 48,000 40,800 (7,200) 60% Billy 24,000 19,200 (4,800) 40% Total (50%) 72,000 ‘60,000 (12,000) Carlo (50%) 48,000 60,000, 12,000 Total 120,000 120,000 = ‘Note: Under Bonus method; TCC = TAC Note: If there is no agreement regarding the admission of new partner by investment, the bonus method will be used, TAC 120,000 x 50% = Carlo's agreed capital P60,000 ‘TAC 120,000 x 50%= Old partners agreed capital P60,000 Ilustration 2: Asset Revaluation Carlo invested P25,000 for 25% interest in the partnership. The assets of the partnership are fairly valued except for an equipment account which is undervalued before Carlo’s admission. Journal Entry: * Cash 20,000 Carlo, Capital 20,000 To record contribution of Carlo in the partnership Equipment 3,000 Amy, capital 1,800 Billy, capital 1,200 Torecord the asset revaluation Scanned with @ camscannerPARTNERSHP OSSOLUTION 114 Tec TAC —Adjustinent —-P/L ratio Amy 48,000 49,800 1,800 60% Billy 24,000 25,200 1200 40% Total (75%) , x x Carlo (25%) 25,000 25,000 Total ——97,000_100,000. 3,000" Under revaluation method, The TCC is either less than (positive) or more than (negative) TAC. The total agreed capital of the partnership will be computed by dividing the capital contribution of new partner by his interest (25,000 + 25% = 100,000). TAC 100,000 x 25% = Carlo’s agreed capital P25,000 TAC 100,000 x 75%= Old partners agreed capital P75,000 Note: If the problem is silent regarding revaluation, use the positive revaluation. Case 7: Bonus and Revaluation method Cario invested P25,000 for 20% interest in the partnership. The total agreed capital of the partnership is P100,000. Journal Entry Cash 25,000 Carlo, Capital 25,000 To record contribution of Carlo in the partnership Asset 3,000 Carlo, capital 5,000 Amy, capital 4,800 Billy, capital 3,200 To record the asset revaluation and bonus Tec TAC Adjustment —P/L ratio Amy 48,000 52,800 - 4,800 60% Billy 24,000 ___ 27,200 3,200 40% Total (80%) x , Carlo (20%) 25,000 __ 20,000 (5,000) Bonus Total 97,000 100,000 3,000 Revaluation TAC 100,000 x 20% = Carlo’s agreed capital P20,000 ‘TAC 100,000 x 80%= Old partners agreed capital P80,000 Total Asset revaluation is P3,000 (TCC 97,000 - TAC P100,000) Total Bonus is P5,000 (Capital contribution of Carlo P25,000 - Agreed Capital of Carlo P20,000 Scanned with @ camscannerPARTNERSHP OSSOLUTION 122 Choice between Bonus and Revaluation Method ‘The bonus method and revaluation method will not have the same result if the new partners’ interest (capital ratio) is different from his profit and loss ratio. Therefore, the new partner shall use this as a guide in choosing which is better between bonus or revaluation method: a, Choose Bonus method, if Profit and loss ratio > Capital Ratio. 'b. Choose Revaluation method, if Profit and loss ratio < Capital ratio. Illustration: Carlo invested P45,000 for 30% capital interest and 40% interest in profits in the partnership. Amy and Billy has a capital contribution of P60,000 and 30,000, and a profit and loss ratio of 60% and 40%, respectively. Bonus method Tec = TAC_— Adjustment —_—P/L ratio Amy 62,700 2,700 60% Billy 31,800 1,800 40% Total (70%) 94,500 Carlo (30%) 40,500, (4,500) Total : = Journal Entry: Cash’ 45,000 ‘Amy capital 2,700 ily copia 1,800 Carlo, capital 40,500 To record the contribution and bonus receive by Carlo from old partners Revaluation Method TCC TAC Adjustment P/L ratio Amy 60,000 69,000 9,000 60% Billy 30,000 36,000 6,000 40% Total (70%) s Carlo (30%) 45,000 __45,000 : + Total 735,000 150,000" 15,000 ‘TAC is computed as 45,000 + 30% = 150,000 Journal Entry: Cash 45,000 Carlo, Capital 45,000 To record contribution of Carlo in the partnership Asset 15,000 Amy, capital 9,000 Billy, capital 6,000 To record the asset revaluation Scanned with @ camscannerPARTNERSHIP OSSOLUTION 113 "Net Rev Assets aluation Amy Billy Carlo Bonus Method: Balances after admission of Carlo 135,000 62,700 31,800 40,500 Revaluation Method Balance after admission 150,000 15,000 69,000 36000 45,000 Share on additional Dep./Impairment* (15,000 B40 (8,600) 6,000) Balance after depreciation/ Impairment 2, x Amy Billy Carlo Balances after admission of Carlo (Bonus) 62,700 31,800 40,500 balances after admission of Carlo (Revaluation) ___63,600__32,400_39,000 Gain (loss) through use of bonus method (900) yt * New profit and loss ratio (Amy 36%; Billy 24% and Carlo 40%) RETIREMENT OF A PARTNER ‘The withdrawal or retirement of a partner dissolves the partnership business, but the remaining partners may continue the operation of the business. The retiring partner may elect to: 1. Sell his interest to an outsider (new partner) 2. Sell his interest to the to one or more remaining partners 3. Sell his interest to the partnership ‘The interest of the retiring partner must be determined upon his retirement. The partner interest may be affected by the following: 1. Capital balance (includes additional investment and withdrawals) 2. The profit or loss from the last closing of the books (beginning of the accounting period) to the date of retirement and distribution of such profit or loss Loan and advances to (from) the partnership Correction of accounting errors, if any Revaluation of partnership assets Pe Sale of Interest to an Outsider ‘The retiring partner may sell his interest to an outsider with the consent of the remaining partners. The sale will be recorded similar to the admission by purchase of interest. The partnership records -only the transfer of interest from retiring partner to the new partner (outsider). Any gain or loss from such transfer is personal gain or loss of the retiring partner. Under this sale, the total assets and capital of the partnership will not be affected. Scanned with @ camscannerPARTNERSHP DISSOLUTION 124 Sale of Interest to one or more Remaining Partner ‘The retiring partner may sell his interest to the remaining partner. The sale will be recorded similar to the admission by purchase of interest. The partnership records only the transfer of interest from retiring partner to the buying remaining partner. Any gain ot loss from such transfer is a personal gain or loss of the retiring partner. Under this sale, the total assets and capital of the partnership will not be affected. Sale of Interest to the Partnership ‘The retiring partner may sell his interest to the partnership. The sale of his interest to the partnership may be settled either by: a. Payment of cash b. Transfer of non-cash assets c. Recognition of liability for the full or the balance of the unpaid total interest of . the retiring partner. ‘The retiring partner may receive an amount from the partnership: a, At book value (equal to the interest of the retiring partner) b. Less than book value (less than his interest) c. More than book value (more than his interest) ‘ The accounting for this sale is similar to the admission by investment but in a reverse manner. Instead of admitting a new partner by contributing assets to the partnership, a partner will leave the partnership with the business paying the interest of the retiring partner. Under this sale, the total assets and capital of the partnership will decrease. Illustration: Roi, Jay, and May were partners with capital balances on January 2, 2020 of P100,000; P150,000 and P200,000, respectively. Their profit and loss ratio is 2. On July 1, 2020 Roi retires from the partnership. On the date of retirement the partnership net income is P140,000 and the partners agreed that inventories are to be valued at P70,000 from its original cost of P50,000. ‘The following entries before retirement to adjust the interest of the partners: Journal Entries Inventory 20,000 Roi, capital (50%) 10,000 Jay, capital (30%) 6,000 May, capital (20%) 4,000 To record the revaluation of inventory Scanned with |\CamScannerPARTNERSHIP DISSOLUTION 115 Income Summary 140,000 Roi, capital (50%) 70,000 day, capital (30%) 42,000 May, capital (20%) 28,000 To record the distribution of net income After considering the above adjustments, the capital balances of the partners as of July 1, 2020 are as follows: Roi Jay May Capital Balance Jan 2, 2020 100,000 150,000 200,000 Share in inventory Revaluation 10,000 6,000 4,000 Share in net income Capital Balance July 1, 2020 Case 1: Sale of interest to new partner (outsider): Roi sold his interest to Soriano for P200,000. Journal Entry: Roi, capital 180,000 ‘Soriano, capital 180,000 Note: The gain of P20,000 (200,000 - 180,000) is a personal gain of Roi. Case 2: Sale of interest to remaining partners: Roi sold his interest to Jay and May for P200,000, the interest being divided between Jay and May equally. Journal Entry: Roi, capital 180,000 Jay, capital (180,000 x 1/2) 90,000 May, capital (180,000 x 1/2) 90,000 Note: The gain of P20,000 (200,000 - 180,000) is a personal gain of Roi Sale of Interest to the Partnership Case 3: Withdrawal at Book Value: Roi sold his interest to the partnership. The remaining partners agreed to make cash settlement at book value P180,000. Journal Entry: Roi, capital 180,000 Cash 180,000 Scanned with @ camscannerPARTNERSHP OSSOLUTION 116 Case 4: At more than Book value: Under this settlement, the retiring partners receive an amount that is greater than his interest, The difference or excess amount of the interest and the payment may be accounted as (1) a bonus which decreases the capital of the remaining partner that will be distributed based on the relative profit and loss ratio of the remaining partners or (2) a revaluation of undervalued assets. Illustration: Roi sold his interest to the partnership at P250,000 more than his interest. a. The excess is treated as a bonus: Under this method, the excess amount will be deducted from the capital of the remaining partners’ base on their relative profit and loss ratio. Journal Entry: Roi, capital 180,000 Jay, capital (70,000 x 3/5) 42,000 May capital (70,000 x 2/5) 28,000 Cash 250,000 To record the retirement of Roi and bonus from remaining partner Roi Jay May ‘Total Capital Before retirement 180,000 198,000 232,000 664,000 Settlement of interest 50,000 , Excess “T7O,000)_ (42,000) (28,000) Total capital of the remaining partners and the partnership 156,000 _204,000_414,000 b. The excess is treated as a total revaluation of assets (positive revaluation): Under this method, the excess amount will be considered an undervaluation of asset share of the retiring partner. The capital account of all partners will increase for such undervaluation based on profit and loss ratio. Journal Entry: Assets 140,000 Roi, capital (140,000 x 50%) 70,000 Jay, capital (140,000 x 30%) 42,000 May, capital (140,000 x 50%) 28,000 Torecord the undervaluation of assets After recording the revaluation, the capital balance of Roi is P250,000 and the settlement for him will be recorded as: Scanned with @ camscannerPARTNERSHIP OSSOLUTION 117 Roi, capital 250,000 Cash 250,000 To record the retirement of Roi Amount paid by the partnership 250,000 Amount of Interest 180,000 Excess amount/partial revaluation of assets (share of Roi) 5 Divide by: Interest of Retiring partner Roi 50% Total undervaluation (positive) 140,000, Roi Jay May —Total Capital Before retirement * 180,000 198,000 232,000 664,000 Undervaluation - 70,000 _ 42,000 __ 28,000 _ 140,000 Capital after revaluation 330,000 240,000 260,000 804,000 Settlement of retiring partners’ interest (250,000) ; Total capital of the remaining partners and the partnership = 240,000 _ 260,000 _ 804,000 Case 5: At less than Book value: Under this settlement, the retiring partners rective an amount that is less than his interest, The difference or excess amount of the interest and the payment may be accounted as (1) a bonus which increases the capital of the remaining partner that will be distributed based on the relative profit and loss ratio of the remaining partners or (2) a revaluation of overvalued assets. stration: Roi sold his interest to the partnership at P150,000 less than his a. The excess is treated as a bonus: Under this method, the excess amount will be added to the capital of the remaining partners’ base on their relative profit and loss ratio. Journal Entry: Roi, capital 180,000 Cash 150,000 Jay, capital (180,000 x 3/5) 18,000 May capital (180,000 x 2/5) 12,000 To record the retirement of Roi and bonus to remaining partners Roi Jay May Total Capital Before retirement 180,000 198,000 232,000 664,000 Settlement of interest 150,000 (150,000) Excess 30,000" 18,000 12,000 Total capital of the remaining partners and the partnership 216,000 _ 244,000 __ 514,000 ‘Scanned with |CamScannerPARTNERSHP DISSOLUTION 128 b. The excess is treated as a total revaluation of assets (negative revaluation): Under this method, the excess amount will be considered an overvaluation of asset share of the retiring partner. The capital account of all partners will be deducted for such overvaluation based on profit and loss ratio. Journal Entry: Roi, capital (60,000 x 50%) 30,000 Jay; capital (50,000 x 30%) 18,000 May, capital (60,000 x 20%) 12,000 Assets 60,000 Torecord the overvaluation of assets After recording the revaluation, the capital balance of Roi is P150,000 and the settlement for him will be recorded as: Roi, capital 150,000 Cash 150,000 Torecord the retirement of Roi Computation of Total Overvaluation of assets: ‘Amount paid by the partnership 150,000 Amount of Interest 180,000 Excess amount/partial revaluation of assets (share of Roi) (30,000) — Divide by: Interest of Retiring partner Roi 50% Total Revaluation 160,000) Roi Jay May ‘Total Capital Before retirement 180,000 198,000 232,000 664,000 Overvaluation (30,000) _ (18,000) (12,000) (60,000) Capital after revaluation 150,000 180,000 220,000 604,000 Settlement of retiring partners’ interest _(150,000) Total capital of the remaining partners and the partnership - 180,000 220,000 604,000 DEATH OR INCAPACITY OF A PARTNER ‘The death or incapacity of a partner dissolves the partnership business. The estate or his legal representative is entitled to receive the amount of his interest in the. partnership at the date of his death or incapacity. The interest of the deceased or incapacitated partner must be determined by the partnership in order to make necessary settlement. ‘The accounting procedures to settle the interest of the deceased or incapacitated partner is similar to retirement or withdrawal of a partner. However, if the Scanned with BcamscannerPARTNERSHIP DSSOLUTION 119 partnership cannot pay immediately the Interest of the deceased partner, the following procedures may be followed. a. The total profit or loss from the date the books were last closed (beginning of the period) to the date of death or incapacity and the distribution of such profit or loss. b. Revaluation of partnership assets ¢. Correction of the prior year’s income, if there’s any. 4. Accrue interest (if any) on the said interest of the deceased partner from the date of death to the settlement date. . Settlement of interest of the deceased or incapacitated partner. f, Closing the books of the partnership. If payment to the estate of the deceased cannot be settled immediately, the balance in the capital account of the deceased partner should be transferred to a liability account, payable to the estate. Illustration: Bro, Brad, Pre and Tol formed a partnership on January 1, 2017. ‘The partnership agreement provides that in the event of death of a partner, the firm shall continue until the end of the fiscal period. Profits shall be considered to have been earned evenly throughout the year and the deceased partner's capital shall be adjusted by his share of the profit and loss to the date of death. From the date of death until the date of settlement with sie estate, there shall be added af The remaining partners shall continue to divide profits in the old ratio. Payment of the estate shall be made six months from the date of death. As of January 1, 2021, the capital balances of the partners are as follows: Amount Bro 100,000 Brad 120,000 Pre 80,000 Tol 150,000 The partnership agreement provides for monthly salary allowance of P5,000 to Brad and Pre. Interest of 15% on their beginning capital balances and the partners sharing profits and losses in the ratio of 30%; 30%; 20% and 20%, respectively. ‘The partnership had a profit of P240,000 for the year 2021 before any allowance to partners. Bro died on November 1, 2021, The books of the partnership were closed every December 31 of the year. On December 31, 2021, Brad retires from the partnership and accepts cash of P184,685 in settlement of his interest in the partnership. Scanned with @ camscannerPARTNERSHIP OSSOLLTIN 139 The folowing are d ‘entice to Feeond the Transaction 1." Journal entry to record the distribution of profit from January 1 to Noverey 1, 2021. ncome Summary 200,000 ‘Bro,capital 25,625 Brad,copital 78,125 Pre,capital 68,750 [Link] 27,500. Jan 1 - November 1 Bro Brad Pre. Tol Total ‘Salary 50,000 50,000 100,000 Interest 12,500 15,000 10,000 18,750 56,250 Balance 13,125 13,125 8,750 _8,750__43,750 ‘Share in Profit 25,625 78,125 68,750 27,500 300,000" Beginning capital 106,000 120,000 80,000 _ 156,000. Capital Nov. 1, 2021 “Y25,625198, 125 148,750 177,500 Interestexpense for 2months 3,140 ‘Total Interestof the partners 128,765 198,125 148,750 177,500 "240,000 x 10/12 months = 200,000 125,625 x 15% x 2/12 = 3,140 2 Jounal entry to record the transfer of Bro's interest to a liability account on ‘November 1, 2021 Bro, capital 128,765 Payable to the Estate of Bro 128,765 Nov.1-Dec.31 Brad = Pre Tol_—Total ‘Salary 10,000 10,000 20,000 Interest 4953 3,719 4,499 13,110 Balance 1.607 ___1,071_1,071_3,750 ‘Share in Profit 7 14,790 5,510 36, 240,000 - 200,000 - 3,140 interest of the estate = 36,860 3. Journal entry to record the distribution of profit on November ~ December 31, 021. Income Summary 36,860 ‘Brad, capital 6,560 Pre, capital 14,790 Tol, capital 15,510 Nov. 1 Capital Balance Share in Profits Nov-Dec. 34 ‘Total Interest Payment to Brad Excess: Bonus to Remaining Partners Capital Balances Dec. 31, 2021 4 Journal entry to record the retirems ‘Brad, capital ‘Cash Pre, capital Tol, capital INCORPORATION OF PARTNERSHTE Partners may expand their busin corporation. Among the benefit of beit of the stockholders, greater abit ‘existence, interest cam be transferret When the partnership is change to: sets and assumes the liabilities ¢ ‘stocks. The shares of stocks rece partners in settlement of their inte dissolved and the partner become: ‘corporation. ‘The following accounting procedures on whether the partnership books opened: A. Partnership books will be retai 1 Revalue the assets and adjxt 2. Closed the partners’ capital B. New sets of books will be opens 1 Revalue the assets and adju 2. Closed all the accounts of ‘assets and liabilities to the © land distribution of it in sett Mlustration: Assume that Anton a profits and losses in a 80:20 ratio, partnership business. The XY Corp: ‘shares of P20 par value share, of wh to the partners in accordance with t2 1,000 shares each for cash to Cris, ‘Scanned withPARTNERSHIP DISSOLUTION 121 Brad Pre Tol Nov. 1 Capital Balance 198,125 148,750 177,500 Share in Profits Nov - Dec. 31 16,560 14,790__ 5,510 Total Interest yt 5 d Payment to Brad 184,685 Excess: Bonus to Remaining Partners (30,000) _15,000__15,000 Capital Balances Dec. 31, 2021 178,540 _ 198,010 4. Journal entry to record the retirement of Brad Brad, capital 214,685. Cash 184,685 Pre, capital 15,000 Tol, capital 15,000 INCORPORATION OF PARTNERSHIP Partners may expand their business by converting the partnership to a corporation. Among the benefit of beinga corporation business are limited liability of the stockholders, greater ability to acquire funds (capital), continuity of existence, interest can be transferred without the consent of other stockholders. When the partnership is change to @ corporation, the corporation takes over the assets and assumes the liabilities of the partnership in exchange for shares of stocks. The shares of stocks receive by the partnership is distributed to the partners in settlement of their interest in the partnership. The partnership is dissolved and the partner becomes the stockholders in the newly organized corporation. ‘The following accounting procedures in incorporating the partnership will depend on whether the partnership books will be retained or a new set of books will be opened: A. Partnership books will be retained 1. Revalue the assets and adjust liability accounts, if any 2. Closed the partners’ capital accounts to corporate capital accounts B. New sets of books will be opened 1. Revalue the assets and adjust liability accounts, if any 2. Closed all the accounts of the partnership by recording the transfer of assets and liabilities to the corporation and the receipts of shares of stocks and distribution of it in settlement of the interest of the partners. Illustration: Assume that Anton and Bong, partners of AB Company, who share profits and losses in a 80:20 ratio, organized the XY Corporation to take over the partnership business. Th¢ XY Corporation is authorized to issue 50,000 ordinary shares of P20 par value share, of which 27,500 shares are issued at P30 per share to the partners in accordance with their adjusted capital accounts. XY also issued 1,000 shares each for cash to Cris, Dave and Elsa, other incorporator at P30 per ‘Scanned with |CamScannerPARTNERSHIP DISSOLUTION 122 Share. The financial position of the partnership on July 1, 2020, the date of incorporation is as follows: AB Company ‘Statement of Financial Position July 1, 2020 Assets Cash 120,000 Accounts Receivables 281,000 Less: Allowance for doubtful accounts 6,000 275,000 Inventories 255,000 Equipment 600,000 Less: Accumulated Depreciation 260,000 _ 340,000 ‘Total Assets ‘990,000 Liabilities and Capital Liabilities Accounts Payable 350,000 Capital Anton, capital 479,900 Bong, capital 160,100 Total liabilities and capital 990,000 ‘The partners agree with the following adjustments before the iricorporation: Increase the allowance for doubtful accounts to P10,000 b. Increase the inventories to P400,000 accumulated depreciation of P305,000. 4. Recognized accrued expense of P11,000 A. Partnership books retained by the corporation Journal entries in the books of the new corporation Inventories (400,000 - 255,000) 145,000 Equipment (700,000 - 600,000) 100,000 Allowance for doubtful accounts (10,000 - 6,000) Accumulated Depreciation (305,000 - 260,000) Accrued expenses . Anton, capital (185,000 x 80%) Bong, capital (185,000 x 20%) Increase the equipment cost to its replacement cost of P700,000 and the 4,000 45,000 11,000 148,000 37,000 To adjust assets and liabilities to agreed amounts and to divide net adjustments between the partners Scanned with |\CamScannerPARTNERSHIP OSSOLUTION 123 ‘Anton, capital 627,900 Bong, capital " 197,100 Ordinary share (27,500 shares x P20) 550,000 Share premium (27,500 x P10) 275,000 To record issuance of 27,500 shares of P20 par value to the partners at a price of P30 per share. jtuution of 27.500 Sunsiiltal Anton 627,900 /P30 per share = 20,930 shares Bong 197,100 / P30 per share = 6,570 shares Cash 90,000 Ordinary share (3,000 shares x P20) 60,000 Share Premium (3,000 x P10) 30,000 To record issuance of shares to Cris, Dave and Elsa B. New sets of books opened for the corporation Journal Entries in the partnership books Inventories (400,000 - 255,000) 145,000 Equipment (700,000 - 600,000) 100,000 Allowance for doubtful accounts (10,000. - 6,000) 4,000 Accumulated Depreciation (305,000 - 260,000) ; 45,000 Accrued expenses 11,000 Anton, capital (185,000 x 80%) = 148,000 Bong, capital (185,000 x 20%) 37,000 To adjust assets and liabilities to agreed amounts and to divide net adjustments between the partners Ordinaiy share of XY Corp. 825,000 Accounts Payable : 350,000 Accrued Expenses 11,000 Allowance for doubtful accounts 10,000 Accumulated depreciation 305,000 Cash 120,000 Accounts Receivable 281,000 Inventories 400,000 Equipment 700,000 Torecord transfer of assets and liability to XY Corp. and the receipt of 27,500 share. Anton, capital 627,900 Bong, capital 197,100 Ordinary share of XY Corp 825,000 Torecord share distribution to partners Scanned with @ camscannerPARTNERSHIP DISSOLUTION 124 Distribution of 27,500 shares to Anton and Bong will be: Anton 627,900 /P30 per share = 20,930 shares Bong 197,100 / P30 per share = 6,570 shares Journal entries in the books of the new Corporation Cash 120,000 Accounts Receivable 281,000 Inventories 400,000 Equipment (net) 395,000 Allowance for doubtful accounts Accrued expenses Accounts Payable Ordinary Share Share premium Torecord the acquisition of assets and liabilities from the partnership. Cash 90,000 Ordinary share (3,000 shares x P20) Share Premium (3,000 x P10) To record issuance of shares to Cris, Dave and Elsa 10,000 11,000 350,000 550,000 275,000 60,000 30,000 ‘The financial position of the XY Corporation on July 1, 2020, is as follows: XY Corporation Statement of Financial Position July 1, 2020 Assets Cash 210,000 Accounts Receivables 281,000 Less: Allowance for doubtful accounts 10,000 271,000 Inventories 400,000 Equipment 395,000 Total Assets 1,276,000 Liabilities and Capital Liabilities Accounts Payable 350,000 Accrued expense 11,000 Stockholders’ Equity Ordinary share, P20 par, authorized 50,000 shares, 30,500 issued and outstanding shares 610,000 Share premium 305,000 Total liabilities and Stockholders' Equity Scanned with |\CamScanner