DISSOLUTION
Monday, 10 June 2024 8:45 pm
Definition
• Change in the relationship of the partners caused by any of the following:
i. Admission of a new partner
ii. Withdrawal or retirement of a partner
iii. Death of a partner
• Dissolution is not always followed by liquidation. As distinguished to liquidation, liquidation is the stage
wherein there is already a termination of the business activities of the partnership and winding up of
the affairs of the business.
• Before a dissolution occurs, the partnership books shall be adjusted first for any of the following:
i. Revaluation of assets
ii. Profit or loss for the period
PURCHASE OF INTERESTS
New partner directly purchases all or a portion of one or more of the existing partners interest.
When a new partner purchases , the total partnership assets and capital is remained unchanged. There
is only a transfer of capital between the existing partner and the new partner. The amount paid by the
new partner is not recorded in the books because it is only a personal transaction between the existing
partner and the new partner. So if the purchased price is greater/less than the capital credited to the
new partner at the time of admission, no gain or loss will be recognized in the partnership books.
If the assets are not fairly valued, assets and the capital accounts of the old partners shall be adjusted
first before admission of the new partner. Based on the amount paid by the partner to purchase the
interest, the total implied capital is computed and compared to total contributed capital of the
partnership. Any difference pertains to the over or under valuation of the assets.
On January 1,2019, AB partnership wants to expand their business by admitting new partners in the
partnership. Presented below is the statement of financial position as of January 1, 2019:
ABC Partnership
Statement of Financial Position
January 1, 2019
ASSETS
Cash 60,000
Accounts Receivable, net 150,500
Inventory 80,000
Land 255,000
Total Assets 545,500
LIABILITIES AND EQUITY
Accounts Payable 95,000
Notes Payable 235,000
A, Capital 115,500
B, Capital 100,000
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B, Capital 100,000
Total Liabilities and Equity 545,500
A and B share in the profits and losses in the ratio of 60:40. A and B agreed to admit C and will retain their
original share in the net income.
REQUIRED:
Under the following independent cases, compute the capital balances of each partner after admission of C and
give the entries in the books of the partnership.
CASE 1: C is to have a 30% interest as well as in the share net income in the partnership and paid 64,650.
Partnership's Capital balance Interest acquired by C Partners' Capital balance after
before admission of C admission of C
A - 115,500 (34,650) 80,850
B - 100,000 (30,000) 70,000
C- 34,650 + 30,000 64,650
A, Capital 34,650
B, Capital 30,000
C, Capital 64,650
CASE 2: C is to have a 30% interest as well as in the share net income in the partnership and paid 75,000. All
the assets are fairly valued.
Partnership's Capital balance Interest acquired by C Partners' Capital balance after
before admission of C admission of C
A - 115,500 (34,650) 80,850
B - 100,000 (30,000) 70,000
C- 34,650 + 30,000 64,650
A, Capital 34,650
B, Capital 30,000
C, Capital 64,650
CASE 3: C is to have a 30% interest as well as in the share net income in the partnership and paid 75,000.
The land is not fairly valued.
Total Implied Capital 250,000 (75,000/30%)
Total Contributed Capital 215,500
Undervaluation in Equipment 34,500
Partnership's Capital Adjustment to the Adjusted capital Interest Partners' Capital
balance before capital of old partners balance before acquired by balance after
admission of C due to undervaluation of admission of C C admission of C
equipment
A - 115,500 +20,700 136,200 (40,860) 95,340
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A - 115,500 +20,700 136,200 (40,860) 95,340
B - 100,000 +13,800 113,800 (34,140) 79,660
C- 40,860 + 75,000
34,140
Land 34,500
A, Capital 20,700
B, Capital 13,800
A, Capital 40,860
B, Capital 34,140
C, Capital 75,000
CASE 4: C is to have a 30% interest as well as in the share net income in the partnership and paid 45,000. All
assets are fairly valued.
Partnership's Capital balance Interest acquired by C Partners' Capital balance after
before admission of C admission of C
A - 115,500 (34,650) 80,850
B - 100,000 (30,000) 70,000
C- 34,650 + 30,000 64,650
A, Capital 34,650
B, Capital 30,000
C, Capital 64,650
CASE 5: C is to have a 30% interest as well as in the share of net income in the partnership and paid 45,000.
The inventory is not fairly valued.
Total Implied Capital 150,000 (45,000/30%)
Total Contributed Capital 215,500
Overvaluation of Inventories 65,500
Partnership's Capital Adjustment to the Adjusted capital Interest Partners' Capital
balance before capital of old partners balance before acquired by balance after
admission of C due to overvaluation of admission of C C admission of C
equipment
A - 115,500 (39,300) 76,200 (22,860) 53,340
B - 100,000 (26,200) 73,800 (22,140) 51,660
C- 22,860 + 45,000
22,140
A, Capital 39,300
B, Capital 26,200
Inventories 65,500
A, Capital 22,860
B, Capital 22,140
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B, Capital 22,140
c, Capital 45,000
INVESTMENT OF ASSETS
New partner invests assets in the partnership.
When a new partner invests, the asset invested by the new partner is recorded in the books and there
is a credit to the new partner’s capital account and in effect it increases the total assets and total
capital of the partnership.
If the assets are fairly valued, and the capital credited to the new partner is different from the
capital contributed, any difference pertains to a bonus given to the new or old partners.
Capital Contributed = Capital Credited No Bonus
Capital Contributed > Capital Credited Bonus from new to old partners
Capital Contributed < Capital Credited Bonus from old to new partners
If the assets are not fairly valued, assets and the capital accounts of the old partners shall be adjusted
first before admission of the new partner. Based on the amount invested by the partner, the total
implied capital is computed and compared to total contributed capital of the partnership. Any
difference pertains to the over or under valuation of the assets.
CASE 1: C invests 53,875 cash for 20% interest as well as in the share in net income in the partnership. All
assets are fairly valued.
A B C
Partner's Capital before admission of C 115,500 100,000
Investment of C 53,875
Capital balances after admission of C 115,500 100,000 53,875
Total Contributed Capital: 115,500 + 100,000 + 53,875 = 269,375
Capital that should be credited to C: 269,375 x 20% interest = 53,875
Capital Contributed = Capital Credited - No Bonus
53,,875 = 53,875
Entry:
Cash 53,875
C, Capital 53,875
CASE 2: C invests 70,000 cash for 20% interest as well as in the share in net income in the partnership. All
assets are fairly valued.
A (60%) B (40%) C
Partner's Capital before admission of C 115,500 100,000
Investment of C 70,000
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Investment of C 70,000
Bonus to old partners 7,740 5,160 (12,900)
Capital balances after admission of C 123,240 105,160 57,100
Total Contributed Capital: 115,500 + 100,000 + 70,000 = 285,500
Capital that should be credited to C: 285,500 x 20% interest = 57,100
Capital Contributed > Capital Credited - Bonus from new to old partners
70,000 > 57,100 - 12,900
Entry
Cash 70,000
C, Capital 70,000
C, Capital 12,900
A, Capital 7,740
B, Capital 5,160
CASE 3: C invests 70,000 cash for 20% interest as well as in the share in net income in the partnership. The
land is not fairly valued.
A (60%) B (40%) C
Partner's Capital before admission of C 115,500 100,000
Investment of C 70,000
Undervaluation of land 38,700 25,800
Capital balances after admission of C 154,200 125,800 70,000
Total Implied Capital 70,000/20% = 350,000
Total Contributed Capital 115,500 + 100,000 +70,000 = 285,500
Undervaluation in Equipment 64,500
Entry:
Land 64,500
A, Capital 38,700
B, Capital 25, 800
Cash 70,000
C, Capital 70,000
CASE 4: C invests 40,000 cash for 20% interest as well as in the share in net income in the partnership. All
assets are fairly valued.
A (60%) B (40%) C
Partner's Capital before admission of C 115,500 100,000
Investment of C 40,000
Bonus to new partners (6,660) (4,440) 11,100
Capital balances after admission of C 108,840 95,560 51,100
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Total Contributed Capital: 115,500 + 100,000 + 40,000 = 255,500
Capital that should be credited to C: 255,500 x 20% interest = 51,100
Capital Contributed < Capital Credited - bonus from old to new partners
40,000 > 51,100 - 11,100
Entry:
Cash 40,000
C, Capital 40,000
A, Capital 6,660
B, Capital 4,440
C, Capital 11,100
CASE 5: C invests 40,000 cash for 20% interest as well as in the share in net income in the partnership. The
land is not fairly valued.
A (60%) B (40%) C
Partner's Capital before admission of C 115,500 100,000
Investment of C 40,000
Overvaluation of land (33,300) (22,200)
Capital balances after admission of C 82,200 77,800 40,000
Total Implied Capital 40,000/20% = 200,000
Total Contributed Capital 115,500 + 100,000 + 40,000 = 255,500
Overvaluation in Equipment 55,500
Entry:
A, Capital 33,300
B, Capital 22,200
Land 55, 500
Cash 40,000
C, Capital 40,000
RETIREMENT / WITHDRAWAL / DEATH OF A PARTNER
• At the time of retirement/withdrawal/ death of a partner, the partnership has the obligation to settle
the interest of the partner by either:
a. Payment thru cash
b. Payment thru non-cash assets
c. By recognition first of a liability for the unpaid interest of the retiring partner
• Before retirement/withdrawal, the partnership books shall be adjusted first for profit or loss for the
period as well as any asset revaluation.
Settlement Value = Book Value of Capital No bonus or asset revaluation
Settlement ≠ Book Value of Capital With bonus or asset revaluation
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Causes:
1. Assets are not fairly valued
2. Bonus given to remaining / retiring partner
Settlement Value > Book Value of Capital Bonus to retiring partner/ asset is undervalued.
Settlement < Book Value of Capital Bonus to remaining partners/ asset is overvalued.
• At the time of retirement/withdrawal/ death of a partner total assets and total equity decrease. If
the settlement value is not paid at the time of retirement, the total liabilities of the partnership
increases while the total equity decreases.
PROBLEM:
ABC Partnership
Statement of Financial Position
January 1, 2019
ASSETS
Cash 260,000
Accounts Receivable 150,500
Inventory 80,000
Land 255,000
Total Assets 745,500
LIABILITIES AND EQUITY
Accounts Payable 95,000
Notes Payable 235,000
A, Capital 115,500
B, Capital 100,000
C, Capital 200,000
Total Liabilities and Equity 745,500
A ,B, C share in the profits and losses in the ratio of 42:28:30.
REQUIRED:
Under the following independent cases, compute the capital balances of each partner after admission of C and
give the entries in the books of the partnership.
CASE 1: B’s settlement is equal to his interest in the firm.
A (42%) B (28%) C (30%)
Partner's Capital before retirement of B 115,500 100,000 200,000
Investment of C (100,000)
Capital balances after retirement of B 115,500 0 200,000
Settlement Value = Book Value of Capital - no bonus or asset revaluation
150,000 > 100,000 - 50,000
Entry:
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Entry:
B, Capital 100,000
Cash / Payable to B / Payable to Estate of B 100,000
CASE 2: B’s settlement is 150,000. All assets are fairly valued.
A (42%) B (28%) C (30%)
Partner's Capital before retirement of B 115,500 100,000 200,000
Bonus to retiring partner (29,166.67) 50,000 (20,833.33)
Capital balances after bonus distribution to B 86,333.33 150,000 179,166.67
Settlement of interest of B (150,000)
Capital balances after retirement of B 86,333.33 0 179,166.67
Settlement Value > Book Value of Capital - bonus to retiring partner
150,000 > 100,000 - 50,000
Entry:
A, Capital 29,166.67
C, Capital 20,833.33
B, Capital 50,000
B, Capital 150,000
Cash / Payable to B / Payable to Estate of B 150,000
CASE 3: B’s settlement is 150,000. The land is not fairly valued.
A (42%) B (28%) C (30%)
Partner's Capital before retirement of B 115,500 100,000 200,000
Adjustment due to undervaluation of land 75,000 50,000 53,571.43
Capital balances after adjustment of undervalued land 190,500 150,000 253,571.43
Settlement of interest of B (150,000)
Capital balances after retirement of B 190,500 0 253,571.43
Total Undervaluation in Land: 50,000/28% = 178,571.43
Entry:
Land 178,571.43
A, Capital 75,000
B, Capital 50,000
C, Capital 53,571.43
B, Capital 150,000
Cash / Payable to B / Payable to Estate of B 150,000
CASE 4: B’s settlement is 72,000. All assets are fairly valued.
A (42%) B (28%) C (30%)
Partner's Capital before retirement of B 115,500 100,000 200,000
Bonus to remaining partners 16,333.33 (28,000) 11,666.67
Capital balances after bonus distribution to remaining partners 110,833.34 72,000 211,666.67
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Capital balances after bonus distribution to remaining partners 110,833.34 72,000 211,666.67
Settlement of interest of B (72,000)
Capital balances after retirement of B 110,833.34 0 211,666.67
Settlement Value < Book Value of Capital - bonus to remaining partners
72,000 > 100,000 - 28,000
Entry:
B, Capital 28,000
A, Capital 16,333.33
C, Capital 11,666.67
B, Capital 72,000
Cash / Payable to B / Payable to Estate of B 72,000
CASE 5: B’s settlement is 72,000. The inventory is not fairly valued.
A (42%) B (28%) C (30%)
Partner's Capital before retirement of B 115,500 100,000 200,000
Adjustment due to overvaluation of inventory (42,000) (28,000) (30,000)
Capital balances after adjustment of overvalued land 73,500 72,000 170,000
Settlement of interest of B (72,000)
Capital balances after retirement of B 73,500 0 170,000
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