The partners agreed to admit Theodore

INVESTMENT OF ASSETS IN A Calaguas as a member of the firm. The

PARTNERSHIP foregoing information will be the basis of the
following cases.
A person may be admitted into a partnership by
investing cash or other assets in the business. Case 1. Total agreed capital is stated.
The assets are invested into the partnership and Assume that Theodore Calaguas invested
not given to the individual partners. The P250,000 for a one-fourth interest in the
investment will increase the total assets and the business. The partners decided not to revalue
total partners' equity. the assets of the partnership and that the total
agreed capital is P850,000.
Definition of Terms
Contributed Bonus Agreed
Total Contributed Capital: It is the sum of the
capital balances of the old partners and the Rebecca 400,000 28,125 428,125
Miranda
actual investment of the new partner.
Stephanie 200,000 9,375 209,375
Total Agreed Capital. It is the total capital of Calamba

the partnership after considering the capital Total 600,000 37,500 637,500
credits given to each of the partners. Under the
bonus method, total agreed capital is equal to Theodore 250,000 (37,500) 212,500
Calaguas
the total contributed capital though the capital
credits to each partner may be equal to, greater Total 850,000 0 850,000
than or less than his capital contributions.

Bonus. it is the amount of capital or equity 850,000x ¼ = 212,500

transferred by one partner to another partner. Distribution of Bonus:
Miranda: 37,500x ¾= 28,125
Capital Credit It is the equity of a partner in the Calamba: 37,500x ¼= 9,375
new partnership and is obtained by multiplying
the total agreed capital by the applicable The investment of Calaguas resulted to a bonus
percentage interest of the partner. because the total contributed capital of
P850,000 is equal to the total agreed capital.
Bonus to Old Partners The partnership net assets are increased only
A partnership may be exceptionally attractive by the amount of the new investment. The
because of superior earnings record such that capital credit for Calaguas of P212,500 is
the old partners may demand a premium from a P37,500 less than his actual investment. The
new partner. 'This premium increases the old difference represented the bonus allocated to
partners' capital interest. This premium is the old partners in their profit and loss ratio. The
effected either by allocating a portion of the use of superscripts in all the cases will facilitate
investment of the new partner to the old the formulation of the entries.
partners. The capital accounts of the old
partners are credited for the premium according Cash 250,000
to their profit and loss ratio., Theodore Calaguas, Capital 250,000

Illustration. Rebecca Miranda and Stephanie Theodore, Capital 37,500

Calamba are partners with capital balances of Miranda, Capital 28,125
P400,000 and P200,000, respectively. They Calamba, Capital 9,375
share profits in the ratio of 3:1.
Case 2. Total agreed capital is not explicitly willing to give a premium for all of these
stated. Assume that Theodore Calaguag exceptional qualifications by allowing a capital
invested P400,000 in the business. Out of the credit greater than the prospective partner's
total cash investment, P100,000 is considered investment just to ensure his association with
as a bonus to Partners Rebecca Miranda and the partnership. This premium will be treated as
Stephanie Calamba. a bonus from the equities of the old partners and
credited to the new partner.
The investment of Calaguas resulted to a bonus
as stated. Under the bonus method, the total Case 1. Total agreed capital is stated.
contributed capital is equal to the total agreed Assume that Theodore Calaguas invested
capital. It is also clearly specified that the old P240,000 for a one-third interest in the
partners will receive the bonus. business. The total agreed capital is P840,000.
The investment of Calaguas resulted to a bonus
as shown by the following table:
Contributed Bonus Agreed
Capital

Rebecca 400,000 75,000 475,000 Contributed Bonus Agreed

Miranda
Rebecca 400,000 (30,000) 370,000
Stephanie 200,000 25,000 225,000 Miranda
Calamba
Stephanie 200,000 (10,000) 190,000
Total 600,000 100,000 700,000 Calamba

Theodore 400,000 (100,000) 300,000 Total 600,000 (40,000) 560,000

Calaguas
Theodore 240,000 40,000 280,000
Total 1,000,000 0 1,000,00 Calaguas

Total 840,000 0 840,000

Distribution of Bonus:
Miranda: 100,000x ¾= 75,000 840,000x ⅓= 280,000
Calamba: 100,000x ¼= 25,000
Distribution of Bonus:
Cash 400,000 Miranda: 40,000x ¾= 30,000
Theodore, Capital 400,000 Calamba: 40,000x ¼= 10,000

Theodore, Capital 100,000 Cash 240,000

Miranda, Capital 75,000 Theodore, Capital 240,000
Calamba, Capital 25,000
Miranda, Capital 30,000
The capital credit for Calaguas is 100,000 less Calamba, Capital 10,000
than his actual investment. The difference Theodore, Capital 40,000
represented the bonus allocated to the old
partners in their profit and loss ratio. The capital credit for Calaguas of P280,000 is
P40,000 more than his actual investment This
Bonus to New Partner difference represents a bonus to the new partner
A new partner may be admitted into the because the total contributed capital is equal to
partnership because of his vast financial the total agreed capital, and the capital credit to
resources, extensive business network, the new partner is more than his actual
distinctive reputation, unique management investment. The equities of the old partners are
and/or technical skills. The old partners may be
decreased by P40,000 in their profit and loss decreased by P150,000 in their profit and loss
ratio. ratio.

WITHDRAWAL OR RETIREMENT OF A
Case 2. Total agreed capital is not explicitly PARTNER
stated. Assume that Theodore Calan invested A partner may withdraw or retire from a
P300,000 for a 50% interest in the business. partnership for various reasons. Disputes with
Rebecca Miranda and Stephan Calamba other partners, old age, and pursuit for better
transferred part of their capital balance to that of opportunities are among the possible
Theodore Calaguas as , bonus. The investment explanations. The withdrawal of a partner
of Calaguas resulted to a bonus as stated. dissolves the old partnership. This type of
Under the bor method, the total contributed dissolution may be accomplished by either of the
capital is equal to the total agreed capital. It is following ways:
also clearly specified that the new partner will 1. by selling his equity interest to one or more of
receive the bonus. the remaining partners
2.by selling his equity interest to an outsider
3. by selling his equity interest to the partnership
Contributed Bonus Agreed
Sale of Interest to a Partner or an Outsider
Rebecca 400,000 (112,500) 287,500 When a partner's interest is sold to another
Miranda
partner or an outsider, the withdrawing partner is
Stephanie 200,000 (37,500) 162,500 paid from the personal assets of the buyer.
Calamba Accounting for this sale is similar to admission
Total 600,000 (150,000) 450,000 by purchase of interest. The total assets of the
partnership are not affected by the consideration
Theodore 300,000 150,000 450,000 involved. The required entry will only be a debit
Calaguas
to the seller's capital account for his capital
Total 900,000 0 900,000 balance and a credit to the buyer's capital
account for the same amount.

900,000x 50%= 450,000 There are times when a partner withdraws in the
middle of the accounting period; in such a case,
Distribution of Bonus: the books of the partnership should be updated
Miranda: 150,000x ¾= 112,500 to determine the retiring partner's capital
Calamba: 150,000x ¼= 37,500 balance. Profits or losses should be measured
from the last closing of books to the date of
Cash 300,000 withdrawal and distributed according to their
Theodore, Capital 300,000 profit or loss sharing agreement.

Miranda, Capital 112,500 Sale of Interest to the Partnership

Calamba, Capital 37,500 When a withdrawing partner sells his interest to
Theodore, Capital 150,000 the partnership, the partner is paid from the
assets of the partnership. He may receive an
The capital credit for Calaguas of P450,000 is amount equal to, greater than or less than the
P150,000 more than his actual investment. This balance of his capital account. The effect of
difference represented the bonus allocated to withdrawal is to reduce the assets and the
owners' equity of the partnership.
the new partner. equities of the old partners are
The accounting issues to be encountered here Computation:
will be similar to admission by investment of
assets but in a reverse manner. Instead of a Selisana: 460,000 x ¼= 115,000
new partner joining the partnership by investing Dela Cruz: 460,000 x 2/4= 230,000
assets into the partnership, an old partner is now Albay: 460,000 x ¼= 115,000
leaving the partnership with the business
distributing assets to the withdrawing partner.
Note that the withdrawing partner may receive After revaluation, the capital balances of the
his share of the business in partnership assets partners are shown below:
other than cash.

Illustration. Suppose that Teofila Albay is retiring Jessica Selisana, Capital P640,000
in midyear from the partnership of Selisana, Daisy Dela Cruz, Capital 630,000
Dela Cruz and Albay because of family Teofila Albay, Capital 310,000
relocation. Physical distance will prevent her
from coping with the daily rigors of their fashion Computation of Capital Balances:
and beauty consulting business. After the books
have been adjusted for the semi-annual profits Selisana: 540,000-15,000+ 115,000= 640,000
but before revaluation, their capital balances are Dela Cruz: 430,000-30,000+ 230,000= 630,000
as follows: Albay: 210,000-15,000+ 115,000= 310,000

Jessica Selisana, Capital P540,000 Case 1. Withdrawal at book value. Assume

Daisy Dela Cruz, Capital 430,000 that Teofila Albay agreed to accept payment
Teofila Albay, Capital 210,000 equal to her interest. The entry to record the
payment of cash and the closing of her capital
An independent appraiser revalued their account will be:
cosmetics inventory to P380,000 (a decrease of
P60,000) and their land to P1,010,000 (an Teofila Albay, Capital 310,000
increase of P460,000). The profit and tess ratio Cash 310,000
of the partners is 1:2:1 To record the retirement of Albay.

The entries to record the revaluation of assets Case 2. Withdrawal at more the book value.
follow: Assume that Teofila Albay demanded a 400,000
settlement for her interest because she firmly
Jessica Selisana, Capital P15,000 believed that she had contributed so much to the
Daisy Dela Cruz, Capital 30,000 success of the business. The remaining partners
Teofila Albay, Capital 15,000 agreed for old time’s sake. If the current fair
Cosmetics Inventory 60,000 value of the partnership’s net assets exceeds
book value, the settlement price to the
Computation: withdrawing partner will be greater than his
Selisana: 60,000 x ¼= 15,000 capital account balance. The excess payment is
Dela Cruz: 60,000 x 2/4 = 30,000 treated either as a bonus to the retiring partner
Albay: 60,000 x ¼= 15,000 from the continuing partners.

Selisana, Capital 30,000

Land 460,000 Dela Cruz, Capital 60,000
Jessica Selisana, Capital P115,000 Albay, Capital 310,000
Daisy Dela Cruz, Capital 230,000 Cash 400,000
Teofila Albay, Capital 115,000
Computation: balance in the capital account of the deceased
partner should be transferred to a liability
Selisana 90,000 x ⅓= 30,000 account, payable to the estate.
Dela Cruz 90,000 x ⅔= 60,000
Total 90,000
INCORPORATION OF A PARTNERSHIP
The entry reflected the fact that Selisana and
Dela Cruz granted a 90,000 bonus to Albay that A partnership may decide to incorporate after
was charged to their capital accounts in their evaluating the various advantages of having a
profit and loss ratios. corporate form of business organization. After
the necessary adjusting and dosing entries, the
Case 3. Withdrawal at less than book value. assets and liabilities of the partnership are
Assume that Teofila Albay is very eager to retire transferred to the corporation in exchange for
and is willing to accept a settlement at 280,000. shares of stock. The shares received by the
When Albay, the retiring partner, receives as partnership are distributed to the partners based
settlement an amount less than her capital on their equity interests. in the books of the
balance, in effect, the partner is giving a part of corporation, the receipt of transferred assets and
her equity interest to the continuing partners as liabilities will be recorded along with the
bonus. The amount of the bonus is credited to issuance of share capital to the incorporators,
the capital accounts of the continuing partners in the "former" partners.
their profit and loss ratio.
Illustration. Partners Madelyn Rialubin and
Albay, Capital 310,000 Juanita Rabona, who share equally in profits
Cash 280,000 and losses, have the following items in their
Selisana, Capital 10,000 partnership's statement of financial position as at
Dela Cruz, Capital 20,000 Dec. 31, 2022:

Computation: Cash 120,000 A/P 172,000

A/R 100,000 Accum. Depre. 8000
Selisana: 30,000 x ⅓= 10,000 Inventory 140,000 Rialubin, Cap. 140,000
Dela Cruz: 30,000 x ⅔= 20,000 Equipment 80,000 Rabona, Cap. 120,000
Total 440,000 Total
Payment to a withdrawing partner at less than 440,000
book value may also imply that the partnership
assets are overvalued. In this case, the
overvalued assets should be identified and They agreed to incorporate their partnership,
reduced to their fair values. with the new corporation absorbing the net
assets after the following adjustments providing
DEATH OF A PARTNER for allowances for doubtful accounts of P10,000,
The death of a partner dissolves a partnership. restatement of the inventory to its current fair
When the death of a partner does not result in value of 160,000 and additional recognition of
liquidation, the accounting procedures to be depreciation on the equipment of P3,000.
followed are similar to those discased in the The corporation's share capital will have a par
withdrawal of a partner. The deceased partner value of P100, and the partners will be Issued
may be considered to have retired from the the shares equivalent to their adjusted capital
partnership and his heirs or estate can expect to balances. The journal entries to Incorporate the
receive the amount of his interest from the partnership will be
business. If payment to the estate of the
deceased cannot be made immediately, the
Cash 120,000
Accounts Receivable 100,000
Inventory 160,000
Equipment 83,000
Allowance for Doubtful Accounts 10,000
Accounts Payable 172,000
Ordinary Shares 281,000