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Partnership Dissolution

When a change in ownership of a partnership occurs through the addition or withdrawal of a partner, it is considered a dissolution rather than a liquidation. [1] Upon dissolution, the partnership accounts are adjusted to current fair market values and a new accounting entity is formed. [2] Transactions that occur during dissolution are either between the partnership and a partner, such as a new partner contributing assets, or between partners, such as an existing partner selling their interest. [3]

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61 views2 pages

Partnership Dissolution

When a change in ownership of a partnership occurs through the addition or withdrawal of a partner, it is considered a dissolution rather than a liquidation. [1] Upon dissolution, the partnership accounts are adjusted to current fair market values and a new accounting entity is formed. [2] Transactions that occur during dissolution are either between the partnership and a partner, such as a new partner contributing assets, or between partners, such as an existing partner selling their interest. [3]

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Rochelle Buensuceso
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CHANGES IN PARTNERSHIP

Partnership Dissolution (Changes in Ownership)

Partnership dissolution occurs whenever there is a change in ownership (e.g., the addition of a new
partner, or the retirement, withdrawal or death of an existing partner). This is not to be confused with
partnership liquidation which is the winding up of partnership affairs and termination of the business.
Under dissolution the partnership business continues, but under different ownership.

When partnership dissolution occurs, a new accounting entity results. The partnership should first
adjust its records so that all accounts are properly stated at the date of dissolution. After the income
(loss) has been properly allocated to the existing partner’s capital accounts, all assets and liabilities
should be adjusted to their fair market value and their present values, respectively. The latter step is
performed because the dissolution results in a new accounting entity.

After all adjustments have been made, the accounting for dissolution depends on the type of
transaction that caused the dissolution.

These transactions can be broken down into two types:


 Transactions between the partnership and a partner (e.g., a new partner contributes assets, or a
retiring partner withdraws assets).
 Transactions between partners (e.g., a new partner purchases an interest form one or more
existing partners, or a retiring partner sells his/her interest to one or more existing partners).

When a new partner is admitted to the partnership essentially three cases can result. The new
partner can invest assets into the partnership and receive a capital balance.
a. Equal to his/her purchase price
b. Greater than his/her purchase price
c. Less than his/her purchase price

When an existing partner withdrew from a partnership, the result will also be one from these three
cases. The old partner can get assets
a. Equal to his/her capital balance
b. Greater than his/her capital balance
c. Less than his/her capital balance

Example:

The ABC Partnership’s capital balances and profit and loss ratio is shown below:

A, Capital 120,000 50%


B, Capital 100,000 30%
C, Capital 80,000 20%

Record the following independent situations regarding dissolution:

1. D is to be admitted in the partnership by purchasing 1/3 interest of the


partnership for P100,000.
2. D is to be admitted in the partnership by purchasing ½ interest of B for 80,000.
3. D is to be admitted in the partnership by investing 100,000 for 25% interest.
4. D is to be admitted in the partnership by investing 100,000 for 20% interest.
5. D is to be admitted in the partnership by investing 200,000 for 25% interest. The
land owned by the partnership will be revalued and will be increased by 100,000 before admission.
6. D will invest sufficient cash that will give him 20% interest.
7. C withdrew from the partnership and received 100,000 from A as payment of his
capital.
8. C withdrew from the partnership and received 60,000 as payment of his capital.

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