Accounting for

Partnership Dissolution

1
LEARNING OBJECTIVES
1. Define dissolution.
2. Discuss the principle of delectus personae.
3. Identify and describe the manner of admitting a new
partner.
4. Distinguish between admission by purchase of an interest
and admission by investment of assets in a partnership.
5. Journalize the admission of an new partner by purchase of
interest under different cases.
6. Journalize the admission of a new partner by investment
under various cases.
7. Differentiate total contributed capital from total agreed
capital.
8. Account for the withdrawal of partners
9. Account for the death of a partner.
10. show how the incorporation of a partnership is accounted.
2
Nature of Parnership Dissolution
 “The 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 the business”
 Civil Code of the Philippines, Art. 1828

3
Partnership Dissolution and
Liquidation
 Dissolution – stops the partner’s original
association

 Liquidation – converts all noncash assets into

cash to pay all claims against the partnership
as a consequence of partnership dissolution

4
Therefore:
 Is there always a dissolution if there is
liquidation?

 Is there always a liquidation after dissolution?

 ANSWER IS:
YES AND NO respectively

5
Causes of Dissolution:

• Admission or
withdrawal of a
partner
• Insolvency of a
Dissolution partner
• Incorporation of
partnership
• Death of a
partner

6
Dissolution:
• Remaining partners
continue the
Formation
business operation
of a New
Partnership under a new
partnership
agreement

Dissolution

• Partnership activities
are terminated and
noncash assets are
Liquidation converted into cash
to pay creditors and
distribute remaining
assets to partners.

7
Preparation for Partnership
Dissolution:
 Closing of temporary accounts to partner’s
respective capital account must be made.

 According to their respective profit and loss

ratio.

8
 Preparation for Partnership
Dissolution Example:
ABC Partnership
Trial Balance
March 31, 200x in PHP Closing Entries:

Debit Credit Date Description Debit Credit

31-Mar Professinal fee 250,000
Cash 68,000
Rent income 50,000
Acccounts receivable 120,000
Income Summary 300,000
Equipment 720,000
to close revenue accounts
Accumulated depreciation-Equipment 141,000
Accounts payable 136,000 31-Mar Income Summary 269,000
A, Capital 300,000 Salaries expense 120,000
B, Capital 250,000 Supplies expense 47,000
C, Capital 50,000 Depreciation expense 72,000
Professional fee 250,000 Miscellaneous expense 30,000
Rent income 50,000 to close expense accounts
Salaries expense 120,000
Supplies expense 47,000
Depreciation expense 72,000 31-Mar Income Summary 31,000
Miscellaneous expense 30,000 A, Capital{31,000 x 25%} 7,750
1,177,000 1,177,000 B, Capital{31,000 x 25%} 7,750
C, Capital{31,000 x 50%} 15,500
to close net income to the capital accounts
P&L Ratio:
A 25%
B 25%
C 50%
9
Asset Revaluation
 Assets and liabilities of the partnership
should be restated at their fair market values
to determine the fair and equitable capital
balances of the existing partners.

 Increases or decreases of assets are allocated

based on the profit and loss ratios or capital
ratios

10
Asset Revaluation
1. Negative Asset Revaluation
2. Positive Asset Revaluation

Example:
In the given example earlier, suppose partner
C is withdrawing from the partnership and
also they agreed that the equipment shall
have a fair value of P558,000.

11
 Partner C is withdrawing from the partnership and
also they agreed that the equipment shall have a fair
value of P558,000. Closing Entries:

ABC Partnership Date Description Debit Credit

Trial Balance 31-Mar Professinal fee 250,000
March 31, 200x in PHP Rent income 50,000
Income Summary 300,000
Debit Credit to close revenue accounts
Cash 68,000
Acccounts receivable 120,000
31-Mar Income Summary 269,000
Equipment 720,000
Accumulated depreciation-Equipment 141,000
Salaries expense 120,000
Accounts payable 136,000 Supplies expense 47,000
A, Capital 300,000 Depreciation expense 72,000
B, Capital 250,000 Miscellaneous expense 30,000
C, Capital 50,000 to close expense accounts
Professional fee 250,000
Rent income 50,000
Salaries expense 120,000 31-Mar Income Summary 31,000
Supplies expense 47,000
A, Capital{31,000 x 25%} 7,750
Depreciation expense 72,000
B, Capital{31,000 x 25%} 7,750
Miscellaneous expense 30,000
1,177,000 1,177,000 C, Capital{31,000 x 50%} 15,500
to close net income to the capital accounts
P&L Ratio:
A 25% Computation:
B 25% Cost of equipment 720,000
C 50% Less: recorded depreciation 141,000
Book Value per record 579,000
Less: agreed FMV 558,000
increase in accumulated depreciation 21,000
12
Negative asset revaluation is distributed
among partners using their P&L ratio.
Computation:
Cost of equipment 720,000
Less: recorded depreciation 141,000
Book Value per record 579,000
Less: agreed FMV 558,000
increase in accumulated depreciation 21,000

Adjusting Entries to effect the negative asset revaluation:

Date Description Debit Credit

31-Mar A, Capital{21,000 x 25%} 5,250
B, Capital{21,000 x 25%} 5,250
C, Capital{21,000 x 50%} 10,500
Accumulated Depreciation- Equipment 21,000
to record adjustment in value of equipment

13
The Balances of each partner’s
capital after the closing and
adjusting entries will be: A, Capital
5,250 300,000
See the beginning balances:
7,750
5,250 307,750
A, Capital 300,000
302,500
B, Capital 250,000
C, Capital 50,000

Closing Entries:
B, Capital
5,250 250,000
31-Mar Income Summary 31,000
7,750
A, Capital{31,000 x 25%} 7,750
5,250 257,750
B, Capital{31,000 x 25%} 7,750
252,500
C, Capital{31,000 x 50%} 15,500
to close net income to the capital accounts

C, Capital
Adjusting Entries: (Negative Asset Revaluation)
10,500 50,000
15,500
31-Mar A, Capital{21,000 x 25%} 5,250
10,500 65,500
B, Capital{21,000 x 25%} 5,250
55,000
C, Capital{21,000 x 50%} 10,500
Accumulated Depreciation- Equipment 21,000

14
Partner C is the withdrawing partner.
 The adjusted balance will be the basis for the
payment of the withdrawing partner’s
interest.
Payment to withdrawing partner equal to its adjusted capital balance:

Date Description Debit Credit

31-Mar C, Capital 55,000
Cash 55,000
to record withdrawal of partner C

15
Positive Revaluation Example:
 The partners agree that the equipment shall
have a fair market value of P600,000.
Computation:
Cost of equipment 720,000
Less: recorded depreciation 141,000
Book Value per record 579,000
Less: agreed FMV 600,000
increase in value of equipment 21,000

Adjusting Entries to effect the positive asset revaluation:

Date Description Debit Credit

31-Mar Accumulated Depreciation- Equipment 21,000
A, Capital{21,000 x 25%} 5,250
B, Capital{21,000 x 25%} 5,250
C, Capital{21,000 x 50%} 10,500
to record adjustment in value of equipment
16
Accounting for Dissolution:
1. Admission of new partner
2. Withdrawal, retirement or death of a partner
3. Insolvency of a partnership or insolvency of
a partner
4. Incorporation of partnership

17
Admission of New Partner
 2 Methods
1. By purchase of interest of existing partner(s)
2. By direct investment to partnership

18
Admission by Purchase of Interest
ADMISSION BY PURCHASE OF INTEREST

Is Purchase Price = Book Value of Interest Sold?

NO YES

Excess
payment to NO Record the transfer of capital at book value of interest sold as follows:
be recorded
Debit Credit
Capital of Selling Partner xxxx
YES Capital of Buying Partner xxxx

Specific asset
account to be YES Adjust the specific asset as follows:
revalued
Debit Credit
Asset xxxx
Capital of Old Partners (P&L ratio) xxxx

Record the revaluation of specific asset prior to the transfer of old

partner's capital to buying partner. Record the transfer of adjusted
capital at book value of interest sold as follows:

Debit Credit
Capital of Selling Partner xxxx
Capital of Buying Partner xxxx

19
Example:
A, Capital P 100,000 40%
B, Capital 80,000 60%

Assume C purchase 25% interest from each

partner and paid P 60,000.

Interest Transferred to C:
A P 100,000 x 25% = P 25,000
B 80,000 x 25% = 20,000
Total P 45,000
20
Assume that the inventory was
understated in value.
1.) Record the investment of the new partner:

A, Capital 25,000
B, Capital 20,000
C, Capital 45,000

2.) Record the revaluation of inventory:

Inventories 15,000
A, Capital ( 15,000 x 40% ) 6,000
B, Capital ( 15,000 x 60%) 9,000
21
Note:
 Admission of additional partner(s) by purchase of
interest of existing partner(s) does not fall under the
description of a business combination applying the
purchase method as contemplated in IAS/PAS 38.

 Accordingly, an agreement between and among the

partners to recognized goodwill is not considered as
an arm’s length’s transaction. Goodwill agreement
between or among partners may involve an element
of bias, and therefore should not be recognized.

 To be recognized, goodwill must be paid for in a

business combination by purchase.

22
Purchase Method
 “personal transaction between the incoming
partner and old partner”

 Any gain or loss on the transaction is a

personal gain or loss of the selling partner.

 No gain or loss is recorded in the partnership

books

23
Purchase Method Example:
Capital Balances and agreed profit and loss distribution of
Ben and Margareth Partnership prior to dissolution.

Partners Capital Balances P/L Ratio

Ben 250,000 25%
Margareth 750,000 75%

Marion wants to buy 50% of the interest of Margareth to give her an interest of 37.50% in the
partnership's asset and partnership's profit and loss.

Margareth 750,000 x 50% = 375,000

24
Case 1: Purchase at Book Value
Marion pay Margareth equal to the interest being purchase
P375,000

Description Debit Credit

Margareth, Capital 375,000
Marion, Capital 375,000

Case 2: Purchase Lesser Than Book Value

Marion pay Margareth less than the interest being purchase In Purchase Method
P350,000
Case 1, 2 and 3 have
Description
Margareth, Capital
Debit
375,000
Credit
the same entry to
Marion, Capital 375,000 record the admission
Case 3: Purchase More Than Book Value
of the new partner.
Marion pay Margareth more than the interest being purchase
P400,000

Description Debit Credit

Margareth, Capital 375,000
Marion, Capital 375,000

The new profit and loss of the new partnership of Ben, Margareth and Marion is
computed as follows:

Partners Old P/L Ratio P/L Ratio

Ben 25% 25.0%
Margareth 75% x 50% 37.5%
Marion 37.5%
Total 100% 100.0%

25
Purchase of Interest From All
Partners:
Given:
Capital Balances and agreed profit and loss distribution of
Tiara and Xiela Partnership prior to dissolution.

Partners Capital Balances P/L Ratio

Tiara 150,000 30%
Xiela 350,000 70%

Christian wants to buy 20% of the interest the partnership's assets and partnership's
profit and loss by paying directly each of the existing partners 20% of their respective
interest in the partnership.
Tiara 150,000 x 20% = 30,000
Xiela 350,000 x 20% = 70,000
100,000

26
Case 1: Purchase at Book Value
Christian paid total amount of P100,000 directly to the partners

Description Debit Credit

Tiara, Capital 30,000
Xiela, Capital 70,000
Christian, Capital 100,000

Case 2: Purchase Lesser Than Book Value

Christian paid total amount of P60,000 directly to the partners
In Purchase Method
Description Debit Credit Case 1, 2 and 3 have
Tiara, Capital 30,000 the same entry to
Xiela, Capital 70,000 record the admission
Christian, Capital 100,000 of the new partner.

Case 3: Purchase More Than Book Value

Christian paid total amount of P150,000 directly to the partners

Description Debit Credit

Tiara, Capital 30,000
Xiela, Capital 70,000
Christian, Capital 100,000

27
The new profit and loss of the new partnership of Tiara, Xiela and Christian is:
computed as follows:

Partners Old P/L Ratio P/L Ratio

Tiara 30% x (100%-20%) 24.0%
Xiela 70% x (100%-20%) 56.0%
Christian 20.0%
Total 100% 100.0%

28
Cash Payment in Case 3:

Cash Payment in Case 3:

Tiara Xiela Total
30% 70% 100%
Amount of transferred capital 30,000 70,000 100,000
Excess of cash payment -
(150,000 - 100,000 = 50,000) 15,000 35,000 50,000
Total Cash Distribution 45,000 105,000 150,000

29
Admission by Direct Investment to the
Partnership – Terminologies:
 Total Contributed Capital (TCC)
◦ Total actual investment made by all partners (both
existing and incoming partner/s) to the partnership

 Total Agreed Capital (TAC)

◦ Refers new amount of partnership capital as agreed
by the partners which is indicated in the
partnership contract
◦ Can be equal to, more than or less than the TCC.
◦ Other term for it is Agreed New Capital (ANC)

30
Admission by Direct Investment to
the Partnership
ADMISSION BY INVESTMENT
Partnership's Total Contributed Capital (TCC) = Partnership's Total Agreed Capital (TAC)

Is the New Partner's Agreed Capital Credit equal to his

Actual Contribution?

NO YES

There is
No Bonus
Bonus

Bonus to the NEW partner if his Capital Credit is

GREATER THAN his actual contribution

Bonus to the OLD partners if the new partner's

Capital Credit is LESSER THAN his actual

31
Note:
 Admission of additional partner(s) by
investment in the partnership will not fall
under the description of a business
combination applying the purchase method
as contemplated in IFRS 3.

 An agreement between and among the

partners to recognized goodwill may involve
bias and is not considered as an arm’s
length’s transaction.

32
General Rules:
1. In case there is no TAC, the TCC shall be
followed by the partners
2. If TAC is not mentioned in the partnership
contract but an agreement is made for new
partnership capitalization, the TAC is
computed using the following formula:
a) New partner’s investment / New partner’s interest
b) Old partner’s investment / Old partner’s interest

33
Admission by Direct Investment to
the Partnership – Example:
Given:
Triple A partnership has the following adjusted accounts prior to the
acceptance of Nimrod as a new partner: (amounts in PHP)

Assets: Liability and partner's Capital:

Cash 10,000 Accounts payable 50,000
Acccounts receivable 200,000 Aaron, Capital 150,000
Allowance of bad debts -10,000 Ahab, Capital 150,000
Merchandise inventory 300,000 Ananias, Capital 150,000
Total assets 500,000 Total liabilities and equities 500,000

P&L distribution is equally.

On May 31 the partners approve the admission of Nimrod provided that he will contribute
the following to the partnership.
Equipment with FMV of P100,000 and
Cash worth P50,000
They agreed that they would received capital interest equal to their actual
contributions to the partnership.

34
Journal Entry to Record Admission of
New Partner:
Date Description Debit Credit
31-May Cash 50,000
Equipment 100,000
Nimrod, Capital 150,000
to record investment of new partner
Therefore:
TCC TAC
Aaron, Capital 150,000 150,000
Each partner’s
Ahab, Capital 150,000 150,000
TCC = TAC
Ananias, Capital 150,000 150,000
therefore there is
Nimrod, Capital 150,000 150,000
NO BONUS.
Total 600,000 600,000

35
Bonus Method:
 The total contributed capital is equal to the
total partnership agreed capital
 But some individual partners’ contribution is

not equal to their respective capital credit

 Because there is a transfer of capital from one

partner to another
1. Bonus to new partner
2. Bonus to old partner

36
Bonus Method Example:
Given:
The capital balance and agreed profi t and loss distribution ratio of
the partners prior to dissolution are as follows:

Job Noah Seth Total

Capital Balances 120,000 240,000 240,000 600,000
Profit and loss ratio 20% 40% 40% 100%

Enoch is admitted by investing cash of P200,000 for 30% interest in the

partnership.

Therefore:
TCC
Job 120,000
Noah 240,000 Old Partners
Seth 240,000
Enoch 200,000 New Partner
Total 800,000

37
Computation:
1. The BONUS is for the new partner.
Agreed Capital for Enoch (P800,000 x 30%) 240,000
Less: Actual Contribution of Enoch 200,000
Excess Capital credit over capital contributed 40,000

2. The decrease of P40,000 will be shouldered by old partners using their P

Decrease in
respective old
partner's capital
Job 20% 8,000
Noah 40% Multiply by P40,000 16,000
Seth 40% 16,000
40,000

3. Analysis of BONUS to new partner.

TCC TAC Bonus
Job 120,000 112,000 (8,000)
Noah 240,000 224,000 (16,000)
Seth 240,000 224,000 (16,000)
Enoch 200,000 240,000 40,000
Total 800,000 800,000 0

38
New P&L Ratio and Journal Entry to
Record Admission of New Partner:
The new profit and loss of the new partnership is
computed as follows:

Partners Old P/L Ratio P/L Ratio

Job 20% x (100%-30%) 14.0%
Noah 40% x (100%-30%) 28.0%
Seth 40% x (100%-30%) 28.0%
Enoch 30.0%
Total 100% 100.0%

Date Description Debit Credit

31-May Cash 200,000
Job, Capital 8,000
Noah, Capital 16,000
Seth, Capital 16,000
Enoch, Capital 240,000
to record admission of Enoch.

39
Excess or Deficit Capital Contribution
of Old Partners
Given:
Assume the following data of A and S partnership: 1
Agreed Capital for Enoch (P1,200,000 x 20%) 240,000
Partners Capital Balances P/L Ratio Less: Actual Contribution of Enoch 240,000
A 600,000 60% Excess Capital credit over capital contributed -
S 400,000 40%
2
Totals 1,000,000 0 100%
Entry to record N investment to the partnership.
Date Description Debit Credit
N is accepted in the partnership with the following agreement: 31-May Cash 240,000
Cash contribution P240,000 N, Capital 240,000
N will be given a 20% interest in the partnership to record admission of Enoch.
TAC of the partnership is P1,200,000
3
The new profit and loss of the new partnership is
Therefore: computed as follows:
TCC
A 600,000 Partners Old P/L Ratio P/L Ratio
S 400,000 Old Partners A 60% x (100%-20%) 48.0%
N 240,000 New Partner S 40% x (100%-20%) 32.0%
N 20.0%
Total 1,240,000
Total 100% 100.0%

40
4
Partner's Capital balances and adjustments are to be computed as follows:
Adjustment
Contributed Agreed Increase
Capital Capital (Decrease)
A 600,000 {P1,200,000 x 48%} 576,000 (24,000)
S 400,000 {P1,200,000 x 32%} 384,000 (16,000)
N 240,000 {P1,200,000 x 20%} 240,000 -
Total 1,240,000 1,200,000 (40,000)

5
TAAC is computed as follows:
N's capital 240,000
Divided by: N's interest in the total capitalization 20%
TAC 1,200,000

6
Entry to record adjust the capital excess of the old partners.
Date Description Debit Credit
31-May A, Capital 24,000
S, Capital 16,000
Cash 40,000
to adjust paartner's capital balances

41
Bonus and Asset Revaluation
Combined
 Can occur at the same time when the
partnerships assets are adjusted

 and the new partner’s capital credit is

different from his actual contribution

42
Bonus and Asset Revaluation
Combined – Example:
Given:
Assume the following data of A and B Partnership:
A (60%) B (40%)
Capital balances before dissolution 600,000 400,000

C is accepted in the partnership with the following agreement:

Cash contribution P500,000 for a P400,000 capital credit representing 20% interest
in the new partnership's total capital
C will also receive 20% P&L ratio.
Value of partneship's existing land be adjusted for the difference of TAC and TCC.

Required:
1. Compute the new partnership TAC.
2. Prepare an analysis of bonus and asset revaluation.
3. Make a compounded journal entry for the bonus and asset revaluation.

43
 Partners: TCC TAC Asset Bonus New P/L
Answers: Revaluation Ratio

step 3
1 The new partnership agreed capital is computed as follows: A (60%) 600,000 960,000 48%
Agreed Capital Credit of C 400,000 B (40%) 400,000 640,000 32%
Divided by: capital interest and P/L ratio 20% C 500,000 400,000 20%
1,500,000 2,000,000 0 0 100%
New partnership agreed capital 2,000,000

Partners: TCC TAC Asset Bonus New P/L

2 the table analysis for bonus and asset revaluation would be:
Revaluation Ratio

step 4
Partners: TCC TAC Asset Bonus New P/L A (60%) 600,000 960,000 60,000 48%
B (40%) 400,000 640,000 40,000 32%
Revaluation Ratio
C 500,000 400,000 (100,000) 20%
A (60%) 600,000
step1

1,500,000 2,000,000 0 0 100%

B (40%) 400,000
C 500,000
Partners: TCC TAC Asset Bonus New P/L
1,500,000 Revaluation Ratio

step 5
A (60%) 600,000 960,000 300,000 60,000 48%
B (40%) 400,000 640,000 200,000 40,000 32%
Partners: TCC TAC Asset Bonus New P/L C 500,000 400,000 (100,000) 20%
Revaluation Ratio 1,500,000 2,000,000 500,000 0 100%

3 The compound entry to record the admission of C, bonus and

step2

A (60%) 600,000 - 48% asset revaluation method.

B (40%) 400,000 - 32%
C 500,000 - 20% Date Description Debit Credit
31-May Cash 500,000
1,500,000 0 0 0 100% Land 500,000
A, Capital 360,000
B, Capital 240,000
C, Capital 400,000
44
Any questions?

45
Choosing Bonus Method or Asset
Revaluation Method

46
Withdrawal or Retirement of a Partner
1. Interest is sold to outside party
2. Interest is sold to the remaining partners
3. Interest is sold to the partnership
a. Book value (No Bonus)
b. Less than book value (with bonus to the remaining
partners)
c. More than book value (with bonus to the withdrawing
partner)

47
Insolvency of Partnership or a Partner

INSOLVENT PARTNERSHIP DISSOLUTION PROCEDURES

Are all general partners solvent?

NO YES

The solvent general partner will absorb the The general partners must invest additional
required payment to outside creditors and amount to pay the outside creditors.
will have existing claim against the general
partners.

48
Dissolution Due to Death of a Partner
1. Determine the deceased partner’s P and L share
from the beginning of the accounting period to
the date of death.
2. Adjust the capital accounts (include profit and
loss and asset revaluation as of time of death).
3. Close the adjusted capital account of the
deceased partner to the liability account.
4. Accrue the interest on the said recognized
liability from the date of death to the settlement
date
5. Close the liability account at the settlement date.

49
Incorporation of Partnership
 Using Partnership Books
1. Adjust assets and liabilities directly to partners’ capital
2. Close (debit) partners’ capital and credit the appropriate
capital stock accounts

 Using New Sets of Books

◦ In the Partnership Books
1. Close all nominal accounts to the capital accounts.
2. Adjust the assets and liabilities directly to the capital accounts
3. Close the book of the partnership by closing all real accounts
◦ In the Books of the Corporation
1. Transfer all assets and liabilities of the partnership to the
books of the corporation and credit the appropriate capital
stock accounts to the equity

50
Incorporation of Partnership

ACCOUNTING FOR INCORPORATING A PARTNERSHIP

Is revaluation of partnership asset to be recorded?

NO YES

Issue equivalent number of shares of stock to Adjust the specific asset account in
the partners based on the book value of their accordance with the valuation made by the
respective share in the partnership apppraiser's expert opinion. Issue
equivalent number of shares of stock to the
partners based on their adjusted capital
balance.

51