TITLE: PARTNERSHIP DISSOLUTION

Topic 1: ADMISSION OF A PARTNER

Time Allotment: 40 mins

Learning Objectives:

At the end of the module, you will be able to:

A. Understand the nature of dissolution
B. Identify the transactions that result to partnership dissolution
C. Accounting for admission of a partner
D. Identify different ways of partner admission

"Embracing change is the key to growth. As we bid farewell to one chapter, let's welcome the opportunity for a new
partnership. Through dissolution, we pave the way for fresh perspectives, renewed energy, and shared success with
our new ally. Together, we write the next inspiring chapter of our journey."

Presentation of Content
DISSOLUTION
There are many reasons why change in ownership of partners will occur – expansion, infusion of more capital, special skills and strengthen competitive position
may allow for admission of new partners while dissatisfaction with the way the business is operating may prompt a partner to withdraw from the partnership.

The legal provisions of the New Civil Code, Article 1830 and 1831 gives us four cases of dissolution:
 a) By the acts of partners, like when partnership purpose or objective has already been accomplished, or mutual agreement among partners to admit a new
partner/s or a decision to withdraw from the partnership.
b) By operation of law, like when an event makes it illegal for the business to operate, or when a partner becomes insolvent or dies or incorporation of
partnership.
c) By judicial decree, like insanity of a partner or commission of fraud by a partner or internal dissention among partners.

ADMISSION OF A PARTNER
Admission of a new partner may be effected either through:
a) Purchase of interest in the partnership, or
b) Investment in the partnership

Purchase of interest in the partnership Investment

Distinction in the partnership
Parties Transaction between the new partner and the existing Transaction between the new partner and the partnership
involved partner/s.
Recognitio Any consideration received or paid is not recorded in the Any consideration received by the partnership is recorded.
n partnership books.

The only entry is the transfer within entity.

Journal Selling partner’s capital xx Asset invested xx
entry Incoming partner’s capital xx Incoming partner’s capital xx
Capitalizati Partnership capital remains the same. Partnership capital is increased by the incoming partner’s
on contribution.
Valuation A new capital account is established for the new partner 1) New partner’s capital account, credited at an amount equal to FV
and a corresponding decrease is made on the capital of of his investment
the selling partner/s. 2) New partner’s capital account, credited at an amount greater than
or less than FV of his investment (Bonus method).
 Revaluatio When a partnership is dissolved a new partnership is created. The assets and liabilities carried over to the new partnership are
n of assets restated to fair values. The adjustment is allocated first to the existing partners before recording the admission of a new partner.

Illustrations
A. Purchase of Interest
The following are the capital account balances and profit and loss ratios of the partners in AB Partnership as of July 1, 20x1:
Capital accounts P/L Ratios
A, Capital 150,000 40% date approximate their fair values.
B, Capital 250,000 60%
400,000 In the succeeding assumptions, you are required to:
1. Prepare the journal entry to record the transaction
2. Compute for capital balances after the admission of the new partner.
3. Compute for the gain or loss to be recognized in the partnership books
4. Compute for the gains or losses recognized by the partner/s.

Case.1: Purchase of interest from one partner

On July 1, 20x1, C was admitted to the partnership when he purchase 20% interest in the net assets and profits of the firm from A for P100,000 cash.

Case 2: Purchase of interest from more than one partner

On July 1, 20x1, C was admitted to the partnership when he purchase a proportionate interest from A and B representing 20% interest in the net assets and profits of
the firm for P100,000 cash

Required Case 1 Case 2

1. Journal entry A, Capital (150,000 x 20%/40%) 75,000 A, Capital (400,000 x 20% x 40% = 32,000) 32,000
C, Capital 75,000 B, Capital (400,000 x 20% x 60% = 48,000) 48,000
To record the admission of C to the partnership. C, Capital (400,000 x 20% = 80,000) 80,000
To record the admission of C to the partnership.
2. Capital balances A B C Totals A B C Totals
Capital, beg. 150,000 250,000 - 400,000 Capital, beg. 150,000 250,000 - 400,000
Credit - - 75,000 75,000 Credit - - 80,000 80,000
Debit ( 75,000) - - (75,000) Debit ( 32,000) ( 48,000) - (80,000)
Capital, end. 75,000 250,000 75,000 400,000 Capital, end. 118,000 202,000 80,000 400,000
================================== ==================================

3. Partnership gain or ZERO. No gain or loss is recognized in the partnership books when a new ZERO. No gain or loss is recognized in the partnership books when a new partner
loss partner is admitted. is admitted.
4. Selling Partner/s A A B Totals
gain or loss Consideration received 100,000 Consideration received:
Amount debited to capital account (75,000) (100,000 x 40%) 40,000 40,000
Personal gain (loss) 25,000 (100,000 x 60%) 60,000 60,000 Amount debited
======= to capital account (32,000) (48,000) (80,000)
Consequently, C has a personal loss of 25,000 since he paid 100,000 for a Personal gain (loss) 8,000 12,000 20,000
75,000 worth of interest in the partnership. ====================
Consequently, C has a personal loss of 20,000.

Observe the following:

1. The consideration paid by C on both cases is not recorded in the partnership books since it was partners A and B who received the cash. Moreover,
no gain or loss is recognized in the partnership books because these are personal gains and losses of the partners.
 2. The total capital of the partnership does not change when admission is through “purchase of interest”. (i.e., the total capital before and after the
admission of C remains at P400,000)

Case 3: Purchase of interest – Revaluation

Using the same information in the problem above - Case 2, except that the carrying amount of the partnership assets does not equal to the fair values at the time of
admission. The difference is due to the increase of 50,000 in the fair value of the partnership equipment.

You are required to:

1. Prepare the journal entry to record the transaction
2. Compute for capital balances after the admission of the new partner.

Requirement 1:
 Adjust the capital balances of existing partners as follows:

Equipment 50,000
A, Capital (50,000 x 40%) 20,000
B, Capital (50,000 x 60%) 30,000
To record the revaluation of the equipment.

 After revaluation, the admission of C is recorded as follows:

A, Capital (450,000 x 20% x 40%) 36,000
B, Capital (450,000 x 20% x 60%) 54,000
C, Capital (450,000 x 20%) 90,000

Notice that total partnership capital is now 450,000, resulting from the revaluation of equipment. (400,000 + 50,000)
Requirement 2:

A B C Totals
Capital, beginning 150,000 250,000 - 400,000
Share in revaluation 20,000 30,000 - 50,000
Credit (purchase) - - 90,000 90,000
Debit (sell) (36,000) (54,000) - (90,000)
Capital, ending 134,000 226,000 90,000 450,000

B. Investment in the partnership

B.1. Amount of Investment is given
The following are the capital account balances and profit and loss ratios of the partners in AB Partnership as of July 1, 20x1:

Capital accounts P/L Ratios

A, Capital 150,000 40%
B, Capital 250,000 60%
400,000
On July 1, 20x1, C was admitted to the partnership when he purchase 20% interest in the net assets and profits of the for P100,000 investment. The net assets of the
firm as of this date approximate their fair values.

You are required to record the transaction, assuming the following:

Case 1: Credit to capital equal to investment

Cash 100,000
C, Capital 100,000
To record the admission of C to the partnership.
The capital of the partnership immediately after admission is increased to 500,000. (400,000 + 100,000).

Case 2: Credit to capital is less than the investment

C’s capital is credited for P80,000.
Cash 100,000
C, Capital 80,000
A, Capital [(100,000-80,000) x 40%] 8,000
B, Capital [(100,000-80,000) x 60%] 12,000
To record the admission of C to the partnership.

Case 3: Credit to capital is greater than the investment

C’s capital is credited for P130,000.
Cash 100,000
A, Capital [(130,000-100,000) x 40%] 12,000
B, Capital [(130,000-100,000) x 60%] 18,000
C, Capital 130,000
To record the admission of C to the partnership.

Under the “bonus method”, any increase or decrease in the capital of the new partner is treated as an addition or deduction to the capital account of the existing
partners, allocated based on their old profit or loss sharing ratio.

The equity structure of the “new” partnership after the admission of C is as follows:

Case 1 Case 2 Case 3

A, Capital 150,000 158,000 138,000
B, Capital 250,000 262,000 232,000
C, Capital 100,000 80,000 130,000
Total 500,000 500,000 500,000
Notice that the total capital remains the same regardless of whether or not an entity uses the bonus method. (i.e. capital before admission plus fair value of new
partner’s contribution)

B.2. Amount of investment is not given

The statement of financial position of AB Partnership on July 1, 20x1 is as follows:

Cash 12,000 Payable to B 10,000

Receivable from A 8,000 A, Capital (40%) 150,000
Equipment 390,000 B, Capital (60%) 250,000
Total 410,000 Total 410,000
====== ======
On July 1, 20x1, the partners decide to admit C as a new partner with 20% interest in the net assets and profits. The net assets of the firm as of this date approximate
their fair values.

Case 1: No bonus allowed

Compute for the amount of investment of C:
A, Capital 150,000
B, Capital 250,000
Total capital of existing partners 400,000
Divide by: (100% less 20% interest of C) 80%
Total capital of new partnership 500,000
Multiplied by: Interest of C 20%
Investment of C 100,000
======
Case 2: Bonus method
Using the same information above, assuming C was admitted to the partnership when he invested equipment with historical cost of 100,000 and fair value of
80,000 for a 20% interest in the partnership.
You are required to:
1. Compute for the capital credit to the new partner
2. Compute for the capital balances of the partners after admission of C
3. Compute for the relative profit or loss ratios of the partners after the admission of C

Computations:
1. Credit to C’s capital account
Total capital before admission 400,000
Fair value of C’s contribution 80,000
Total capital after the admission of C 480,000
Multiply by: C’s interest x 20%
Credit to C’s capital account 96,000
Recorded as follows: ======
Equipment 80,000
A, Capital [(96,000-80,000) x40%] 6,400
B, Capital [(96,000-80,000) x60%] 9,600
C, Capital 96,000
To record the admission of C to the partnership.

A bonus of 16,000 is given to the new partner. (96,000-80,000)

2. Capital balances of partners after admission of C

A, Capital (150,000-6,400) 143,600
B, Capital (250,000-9,600) 240,400
C, Capital 96,000
Total 480,000
======
3. New Profit and Loss ratios
A (100%-20%) X 40% 32%
B (100%-20%) X 60% 48%
C 20%
100%
====
Case 3: Purchase of interest – Revaluation
Using the same information in the problem above - Case 2, except that the
carrying amount of the partnership assets does not equal to the fair values at the
time of admission. The difference is due to the increase of 50,000 in the fair value
of the partnership equipment.

You are required to:

3. Prepare the journal entry to record the transaction
4. Compute for capital balances after the admission of the new partner.

Requirement 1:
Adjust the capital balances of existing partners as follows:

Equipment 50,000
A, Capital (50,000 x 40%) 20,000
B, Capital (50,000 x 60%) 30,000
To record the revaluation of the equipment.

After revaluation, the admission of C is recorded as follows:

A, Capital (450,000 x 20% x 40%) 36,000
B, Capital (450,000 x 20% x 60%) 54,000
C, Capital (450,000 x 20%) 90,000

Notice that total partnership capital is now 450,000, resulting from the
revaluation of equipment. (400,000 + 50,000)