PARTNERSHIP DISSOLUTION
Dissolution – termination of the legal life of the partnership.
- termination of the original relationship among partners
Causes of dissolution:
• Admission of a new partner/s
• Withdrawal/retirement of a partner
• Death or incapacity of a partner
• Incorporating a partnership
*Note: Revaluation of Assets and recognition of net income or loss are necessary prior
partnership dissolution
ADMISSION BY PURCHASE OF INTEREST
• A personal transaction between the selling and the buying partner
• Any gain or loss incurred, is considered as personal gain or loss of the selling partner.
• Interest of a partner can be sold at book value, more than book value or less than book
value of interest sold.
• No increase in the total partners’ equity ( transfer of capital from the selling to the buying
partner)
ADMISSION BY INVESTMENT
Total Agreed Capital (TAC) – new capitalization of the newly formed partnership.
Total Contributed Capital (TCC) – total investments of the old and new partners.
Capital Credit – interest or equity of a partner in the newly formed partnership.
Percentage/Fraction of Interest - interest or equity of a partner expressed in fraction or
percentage.
Goodwill – An intangible advantage a business possesses by which it can earn more than what
is normal in its business operations.
Bonus - A transfer of a portion of the partner’s capital to the credit of another in consideration of
the latter’s business advantage.
a. Bonus is allowed either to the new or old partners
✓ Total Agreed Capital of the new partnership is equal to the Total Contributed
Capital. (TAC=TCC)
WITHDRAWAL/RETIREMENT OF A PARTNER
When a partner retires or withdraws from the partnership, the partnership is dissolved, but the
remaining partners may continue operating the business.
1. The equity of the withdrawing/retiring partner may increase or decrease through
the following:
- withdrawal
- share in income or loss
- changes in valuation of all assets and liabilities
2. Interest or Equity of the withdrawing/retiring partner can be sold to:
a. existing partners
b. outsiders
c. partnership
3. The retiring/withdrawing partner may receive a settlement:
a. equal to his equity
b. more than his equity
c. less than his equity
If the Capital Credit of the new partner is greater than his contribution, bonus is
allowed to the new partner.
Proforma entry
Cash xx
Non-cash assets xx
Old Partners’ Capital xx
New Partner’s Capital To xx
record investment and bonus
If the Capital Credit of the old partners is greater than their contributions, bonus is
allowed to the old partners.
Cash xx
Non-cash assets xx
New Partner’s Capital xx
To record investment.
New Partner’s Capital xx
Old Partners’ Capital xx
To record bonus to old partners.
EXAMPLE:
1. BONUS TO OLD PARTNERS
Rica invested P100,000 for 10% interest in the new firm’s capital of P600,000.
Sonie and Windy shared profit and loss in the ratio of 40:60 respectively.
Cash 100,000
Rica, Capital 60,000
Sonie, Capital 16,000
Windy, Capital 24,000
To record Rica’s investment and bonus
to old partners
Computation:
TAC TCC Bonus
Sonie, Capital 216,000 200,000 16,000
Windy, Capital 324,000 300,000 24,000
Rica, Capital (10%) 60,000 100,000 (40,000)
600,000 600,000 -
Note: The bonus was credited to the old partners since the new partner’s
capital credit was less than her capital contribution. The bonus was
shared by the old partners according to their old profit and loss ratio.
2. BONUS TO NEW PARTNER
Rica invested P100,000 for 30% interest in the new firm’s capital of P600,000.
Cash 100,000
Sonie, Capital 32,000
Windy, Capital 48,000
Rica, Capital 180,000
To record Rica’s investment and bonus
to old partners
Computation:
TAC TCC Bonus
Sonie, Capital 168,000 200,000 (32,000)
Windy, Capital 252,000 300,000 (48,000)
Rica, Capital (30%) 180,000 100,000 80,000
600,000 600,000 -
Note: The bonus was credited to the new partner since the new partner’s
capital credit was greater than her capital contribution. The bonus was
contributed and shared by the old partners according to their old profit
and loss ratio.
Total Agreed Capital of the New Partnership is not Specifically stated:
▪ In the absence of an expressed agreements, bonus method is used. ▪ To
determine the bonus, the TAC of the new partnership is assumed to be equal to the TCC
of the partners. o Example:
▪ Sonie Capital P100,000
▪ Windy Capital 200,000
▪ Rica Capital (new partner) 100,000
Total Contributed Capital P400,000
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Transaction: Rica invests P100,000 for 20% interest in the
partnership.
-Since TAC is equal to TCC, the capital credit of Rica upon her
admission amount to P80,000. (P400,000 x 20%). The
bonus of P20,000 was credited to the old partners’
capital according the their old profit and loss
sharing.
Cash 100,000
Rica, Capital 80,000
Sonie, Capital 8,000
Windy, Capital 12,000
To record Rica’s investment and bonus
to old partners
WITHDRAWAL/RETIREMENT OF A PARTNER
When a partner retires or withdraws from the partnership, the partnership is dissolved, but
the remaining partners may continue operating the business.
4. The equity of the withdrawing/retiring partner may increase or decrease through
the following:
- withdrawal
- share in income or loss
- changes in valuation of all assets and liabilities
5. Interest or Equity of the withdrawing/retiring partner can be sold to:
a. existing partners
b. outsiders
c. partnership
6. The retiring/withdrawing partner may receive a settlement:
a. equal to his equity
b. more than his equity
c. less than his equity
EXAMPLE:
The capital accounts of the partners are as follows:
A Capital P100,000
B Capital
200,000
C Capital
200,000
The partners share profit & loss in the ratio 20:40:40 respectively. Net income for six
months prior to B’s retirement amount to P120,000. The partners decided to revalue the
assets from P250,000 to P420,000.
Required 1. Compute for the adjusted capital of B.
2. Journalize the withdrawal of B if his equity was sold to:
a. G for P300,000
b. A for P240,000
c. Partnership for
- P316,000 -
P450,000 -P280,000 Entries:
Income Summary 120,000
A Capital 24,000
B Capital 48,000
C Capital 48,000
Distribution of net profits.
Assets 170,000
A Capital 34,000
B Capital 68,000
C Capital 68,000
Revaluation of assets
COMPUTATIONS:
ADJUSTED CAPITAL OF B:
B Capital before adjustment P200,000
Add: Share in Net Income
( 120,000 x 40%) P48,000
Share in Asset Revaluation
(170,000 x 40%) 68,000 116,000
B Capital after adjustment P316,000
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JOURNAL ENTRIES:
a. B Capital 316,000
G Capital B’s 316,000
equity sold to G.
b. B Capital 316,000
A Capital 316,000
B’s equity sold to A.
c. 1) B Capital 316,000
Cash 316,000
Partnership settles the equity of B.
2)B Capital 316,000
A Capital 44,667
C Capital 89,333
Cash 450,000
Partnership settles the equity of B.
Note : The amount of payment is greater than B’s Capital. The difference is considered
bonus from the remaining partners and shared by them according to their
remaining profit and loss ratio.
3 B Capital 316,000
Cash 280,000
A Capital 12,000
C Capital 24,000
Partnership settles the equity of B
Note : The amount of payment is lesser than B’s Capital. The difference is considered
bonus to the remaining partners and shared by them according to their remaining
profit and loss ratio.
