Partnership Dissolution:

Illustration 1: Purchase of interest

The capital balances and profit and loss ratios of the partners in ABC Co. are as follows:
Capital P/L
A 40,000 40%
B 60,000 30%
C 80,000 30%
Total 180,000 100%

Case 1: Purchase of interest from one partner

D purchases one-half of C's capital interest for P48,000.
Requirement:
a. Provide the journal entry to record the transaction.
b. How much are the capital balances of the partners after the admission of D?

Case 2: Purchase of interest from more than one partner

D purchases 25% of A's, B's and C's capital interests for P60,000.
Requirements:
a. Provide the journal entry to record the transaction.
b. How much are the capital balances of the partners after the admission of D?
c. How much is the gain or loss to be recognized in the partnership's books?
d. How is the payment of D divided between the old partners and how much are the old partners'
respective personal gains?

Case 3: Purchase of interest - 'Book value method'

D purchases 20% interest from A and B for P50,000. The partners agreed to account for the sale at the
'book values' of A's and B's capital accounts (rather than the total partnership capital).
Requirement: Provide the journal entry to record the transaction.

Case 4: Purchase of interest - 'Proportionate share'

D purchases 20% interest in the net assets and profits of the partnership from A and B for P50,000. A
and B agreed to share proportionately on the 20% interest sold to D. The partnership's net assets are
fairly valued on D's admission date.
Requirement:
a. How much is the combined gain of A and B from the sale?
b. What is the new P&L ratio of the partners?

Illustration: Revaluation of Asset

C purchases 20% of A's and B's capital interests for P100,000. The carrying amounts and fair values of
the partnership's net identifiable assets immediately before C's admission are as follows:
Carrying amount Fair value Increase/(Decrease)
Cash 20,000 20,000
Equipment 340,000 390,000 50,000
Accounts payable 10,000 10,000
A, Capital (40%) 130,000 N/A
B, Capital (60%) 220,000 N/A

a. How much are the capital balances of the partners after the admission of C?

Illustration: Investment in the partnership

The capital balances of the partners in ABC Co. are as follows:
Capital P/L ratio
A 40,000 40%
B 60,000 30%
C 80,000 30%
Total 180,000
The carrying amount of the net assets approximates fair value.

Case 1: Investment equal to Capital credit

D invests P60,000 cash for a 25% interest in the partnership's net
assets and profits.
Requirement: Provide the journal entry to record the transaction.

Case 2: Bonus to old partners

D invests P80,000 cash for a 25% interest in the partnership's net assets and profits.
Requirement: Determine the capital balances and profit and loss sharing ratio of the partners after the
admission of D.

Case 3: Bonus to new partner

D invests P52,000 cash for a 25% interest in the partnership's net assets and profits.
Requirement: Provide the journal entry to record the transaction and determine the capital balances of the
partners after the admission of D.
Case 4.1: Amount of investment
D wants to join the partnership through direct investment. D asks the existing partners how much should
he invest for a 20% interest in the partnership's net assets and profits. The partnership's books include a
receivable from A of P8,000 and a loan payable to B of P10,000.
Requirement: If no bonus is allowed, how much should D invest?

Case 4.2: Adjustment to capital and Cash settlement

After D's admission in 'Case 4.1', the partners agreed to adjust their capital balances to reflect their
proportionate shares in the partnership's net assets based on their new profit and loss ratio. Cash
settlement will be made among the partners.
Requirement: Determine how the cash settlement is to be made.

Goodwill method
In traditional accounting (i.e., based on US GAAP), an additional method called "goodwill method" is used
to recognize an implied value from a partner's contribution during admission (and payment to a partner
during withdrawal). This method, however, has been outlawed by PFRS 3 Business Combinations.

Illustration: Goodwill method

Capital accounts P/L Ratios
A, Capital 150,000 40%
B, Capital 250,000 60%
400,000

Purchase of interest - Goodwill to old partners

C purchases 20% from A and B for P100,000. The partners agreed to recognize an implied goodwill from
C's payment.
Requirement: How much is the Goodwill?

Illustration 1: Withdrawal, retirement or death of a partner

Fact pattern:
The capital account balances of the partners in ABC Partnership on July 1, 20x1 before any necessary
adjustments are as follows:

A, Capital (20%) 150,000

B, Capital (30%) 250,000
C, Capital (50%) 100,000
Total 500,000

The partnership reported profit of P900,000 for the six months ended June 30, 20x1.

Case 1: Withdrawal - Purchase of interest by remaining partners On July 1, 20x1, C withdraws from the
partnership when he was bought-out by his co-partners for P620,000 cash. The net assets of the firm as
of this date approximate their fair values.
Requirement: Determine the partners capital after the withdrawal.

Case 2: Retirement - Settlement of interest by partnership

C retires on July 1, 20x1. The partnership settles C's interest for P620,000 cash.
Requirement: Determine the partners capital after the withdrawal.

Case 3: Retirement-payment in the form of non-cash asset

C retires on July 1, 20x1 and receives cash of P500,000 and land with carrying amount of P100,000 and
fair value of P300,000 from the partnership as settlement for his interest.
Requirement: Determine the partners capital after the withdrawal.

Case 4: Death of a partner - settlement of interest by partnership

Use the same information in "Case 3," except that C dies on July 1,
20x1.
Requirement: Provide the journal entries.

Case 5: Withdrawal - fully depreciated asset

C withdraws on July 1, 20x1 and receives cash of P250,000 and fully depreciated equipment with fair
value of P300,000 from the partnership, as settlement for his interest.
Requirement: Determine the partners capital after the withdrawal.
Additional Illustration: Retirement - Personal accounts
ABC Partnership
Statement of financial position
As of Dec. 31, 20x1
Cash 112,000 Loan payable to C 10,000
Receivable from A 8,000 A, Capital (20%) 150,000
Equipment 390,000 B, Capital (30%) 250,000
C, Capital (50%) 100,000
Total assets 510,000 Total liabilities and equity 510,000

C retires on Dec. 31, 20x1. The net assets approximate their fair values except for the equipment which
has a fair value of P450,000.
Case 1: Settlement amount includes payment for loan
The partnership pays C P140,000 as settlement for his interest, including his loan which is to be repaid
in full.

Requirement: Compute for the capital balances after C's retirement.

Case 2: Settlement amount excludes payment for loan
The partnership pays C P140,000 as settlement for his interest, excluding his loan which is to be repaid
in full.
Requirement: Compute for the capital balances after C's retirement.

Illustration: Incorporation of Partnership

ABC Partnership is converted into a corporation on Jan. 1, 20x1.
Relevant information follows:
Carrying amounts Fair values Increase (Decrease)
Cash 20,000 20,000
Receivables 60,000 40,000 (20,000)
Inventory 80,000 70,000 (10,000)
Equipment 540,000 670,000 130,000
Payables 50,000 50,000
A, Capital (20%) 150,000 N/A
B, Capital (30%) 200,000 N/A
C, Capital (50%) 300,000 N/A 100,000

The corporation's authorized capitalization is P2,000,000 divided into 200,000 ordinary shares with par
value of P10 per share.

Case 1: Number of shares issued

Assume that the shares to be issued to the partners are based on their respective adjusted capital
balances.
Requirement:
a. Compute for the number of shares to be issued to each of the partners.

Case 2: Share premium

Assume that A, B and C agreed to be issued 14,000, 21,000 and 35,000 shares, respectively.
Requirement: How much is credited to the share premium account?

Case 3: Preference share

Assume that the corporation was authorized to issue P100 par preference shares and P10 par ordinary
shares. The partners agreed to receive 1,000 ordinary shares each and even multiples of preference
shares for their remaining interest.
Requirement: How many ordinary and preference shares did each partner receive?