Dissolution - Change in relation among partners

OLD NEW
Admission of Partners ABC ABCD Dissolution is not equal to business termination
Withdrawal, Retirement or Death ABC AB Liquidation - Termination of business
Incorporation of Partnership ABC Part. ABC Corp

Admission of Partners
Purchase of Interest -
Incoming partners contribution is not recorded in partnership books
Partnership total capital remains the same
Recorded as transfer within Equity
No gain or loss in the partnership books

Investment in the partnership

Incoming partners contribution is recorded in partnership books
Partnership total capital increase
Recorded in regular manner
No gain or loss in the partnership books

Withdrawal, Retirement or Death

Purchase of Interest
Payment to outgoing is not recorded in partnership books
Partnership total capital remains the same
Recorded as transfer within Equity
No gain or loss in the partnership books

Settlement by partnership
Outcoming partners payment is recorded in partnership books
Partnership total capital decrease
Recorded in regular manner
No gain or loss in the partnership books

Incorporation of Partnership
the corporations acquires the net assets of the partneship in exchange of shares of stock
excess of fair value of net assets over par value of shares is credited to share premium

Illustration Purchase of Interest

Case 1
a.) Accounts Debit Credit
C, Capital 40,000.00 80,000 * 50%
D, Capital 40,000.00

A B C D Total
b.) Old partners 40,000.00 60,000.00 80,000.00 180,000.00
Purchase (40,000.00) 40,000.00 -
New Partners 40,000.00 60,000.00 40,000.00 40,000.00 180,000.00

***48,000 is personal transaction and not recorded in partnership books

***8,000 personal gain of C

Case 2
b.) A B C D Total
Old partners 40,000.00 60,000.00 80,000.00 180,000.00
Transfer of 25% share to D (10,000.00) (15,000.00) (20,000.00) 45,000.00 -
Capital Balance 30,000.00 45,000.00 60,000.00 45,000.00 180,000.00

a.) Accounts Debit Credit

A, Capital 10,000.00
B, Capital 15,000.00
C, Capital 20,000.00
D, Capital 45,000.00

c.) Gain or Loss in partnership books= 0

d.) Total payment of D 60,000.00

Capital credited to D 45,000.00
Personal loss of D 15,000.00 Personal Gain of OLD partners

40% 30% 30%

A B C Total
Transferred Capital to D 10,000.00 15,000.00 20,000.00 45,000.00
 Personal Gain 6,000.00 4,500.00 4,500.00 15,000.00
Total payment received 16,000.00 19,500.00 24,500.00 60,000.00

Case 3 Accounts Debit Credit

A, Capital (40k * 20%) 8,000.00
B, Capital (60k *20%) 12,000.00
D, Capital 20,000.00

Case 4 A B C Total
a.) Old partners 40,000.00 60,000.00 80,000.00 180,000.00 Net assets
20%
Total Capital transferred 36,000.00 36,000.00
D Payment 50,000.00
Gain or Loss (14,000.00) Personal gain of A and B

b.) OLD P&L A B C A B

40% 30% 30% 40% 30% 70%
40/70 30/70
A B C D
OLD P&L 40% 30% 30% 0%
-11.43% -8.57% 0% 20%
NEW P&L 28.57% 21.43% 30% 20% 100.00%

Illustration 2: Revaluation of Asset

a.) 40% 60%
A B Total
Unadjusted 130,000.00 220,000.00 350,000.00
Increase in FV of Equipment 20,000.00 30,000.00 50,000.00
Adjusted 150,000.00 250,000.00 400,000.00

A B C Total
Adjusted 150,000.00 250,000.00 400,000.00
Transfer to C (30,000.00) (50,000.00) 80,000.00 -
New Capital Balance 120,000.00 200,000.00 80,000.00 400,000.00

Illustration: Investment in the partnership

Case 1 A B C Total
40,000.00 60,000.00 80,000.00 180,000.00

A B C D Total
Capital before D 40,000.00 60,000.00 80,000.00 180,000.00
Investment of D 60,000.00 60,000.00

Capital after D 40,000.00 60,000.00 80,000.00 60,000.00 240,000.00

25%
Accounts Debit Credit 60,000.00
Cash 60,000.00
D, Capital 60,000.00

Case 2 Capital before D 180,000.00

Investment of D 80,000.00
Capital After D 260,000.00
Interest of D 25%
Capital Credited to D 65,000.00

Investment of D 80,000.00
Capital Credited to D (65,000.00)
Bonus to OLD partners 15,000.00
40% 30% 30%
A B C D Total
Capital before D 40,000.00 60,000.00 80,000.00 180,000.00
Investment of D 80,000.00 80,000.00
Bonus to OLD 6,000.00 4,500.00 4,500.00 (15,000.00) -
Capital after D 46,000.00 64,500.00 84,500.00 65,000.00 260,000.00
Case 3 Capital before D 180,000.00
Investment of D 52,000.00
Capital After D 232,000.00
Interest of D 25%
Capital Credited to D 58,000.00

Investment of D 52,000.00
Capital Credited to D (58,000.00)
Bonus to NEW Partner (6,000.00)
40% 30% 30%
A B C D Total
Capital before D 40,000.00 60,000.00 80,000.00 180,000.00
Investment of D 52,000.00 52,000.00
Bonus to New (2,400.00) (1,800.00) (1,800.00) 6,000.00 -
Capital after D 37,600.00 58,200.00 78,200.00 58,000.00 232,000.00

Case 4.1 Capital before D 180,000.00

Divide by: remaining interest 80% (100% -20%)
Capital After D 225,000.00
Interest of D 20%
Capital Credited to D 45,000.00 D's Investment

receivable from A of P8,000 and a loan payable to B of P10,000. Carried over to new partnership

Case 4.2
A B C D Total
OLD P&L 40% 30% 30% 100%
D P&L -8% -6% -6% 20%
NEW P&L 32% 24% 24% 20% 100%

A B C D Total
Capital before D 40,000.00 60,000.00 80,000.00 180,000.00
Investment of D 45,000.00 45,000.00
Bonus to New/OLD - - - -
Capital after D 40,000.00 60,000.00 80,000.00 45,000.00 225,000.00

NEW P&L 32% 24% 24% 20% 100%

A B C D Total
Capital after D 40,000.00 60,000.00 80,000.00 45,000.00 225,000.00
Cash Settlement 32,000.00 (6,000.00) (26,000.00) - -
Capital based on NEW P/L 72,000.00 54,000.00 54,000.00 45,000.00 225,000.00

A pays B 6,000
A pays C 26,000
PFRS 3 Business Combinations - Goodwill should only be recorded under business combination
Illustration: Goodwill method
C's Payment 100,000.00
Divide by: Interest of C 20%
Gross up value of net assets 500,000.00
Actual Contributed Cap 400,000.00
Goodwill 100,000.00

Illustration 1: Withdrawal, retirement or death of a partne

20% 30% 50%
Case 1 A B C Total
Unadjusted Capital 150,000.00 250,000.00 100,000.00 500,000.00
Share in Profit 180,000.00 270,000.00 450,000.00 900,000.00
Adjusted 330,000.00 520,000.00 550,000.00 1,400,000.00

Capital before withdrawal 330,000.00 520,000.00 550,000.00 1,400,000.00

Withdrawal of C 220,000.00 330,000.00 (550,000.00) -
Capital after withdrawal 550,000.00 850,000.00 - 1,400,000.00

Case 2 20% 30% 50%

A B C Total
Unadjusted Capital 150,000.00 250,000.00 100,000.00 500,000.00
Share in Profit 180,000.00 270,000.00 450,000.00 900,000.00
Adjusted 330,000.00 520,000.00 550,000.00 1,400,000.00

Capital before withdrawal 330,000.00 520,000.00 550,000.00 1,400,000.00

Payment to C (620,000.00) (620,000.00)
 Bonus to C (28,000.00) (42,000.00) 70,000.00
Capital after withdrawal 302,000.00 478,000.00 - 780,000.00

Case 3 20% 30% 50%

A B C Total
Unadjusted Capital 150,000.00 250,000.00 100,000.00 500,000.00
Share in Profit 180,000.00 270,000.00 450,000.00 900,000.00
Share in Revaluation 40,000.00 60,000.00 100,000.00 200,000.00 (300,000-100,000)
Adjusted 370,000.00 580,000.00 650,000.00 1,600,000.00

Cash of 500,000.00
Land @FV 300,000.00
Total Payment to C 800,000.00
Adjusted Bal of C 650,000.00
Bonus to C 150,000.00
20% 30% 50%
A B C Total
Capital before withdrawal 370,000.00 580,000.00 650,000.00 1,600,000.00
Payment to C (800,000.00) (800,000.00)
Bonus to C (60,000.00) (90,000.00) 150,000.00
Capital after withdrawal 310,000.00 490,000.00 - 800,000.00

Case 4
1-Jul Accounts Debit Credit
C, Capital 650,000.00
A, Capital 60,000.00
B, Capital 90,000.00
Liability to the estate of C 800,000.00

Settlement Accounts Debit Credit

Liability to the estate of C 800,000.00
Cash 500,000.00
Land 300,000.00

Case 5 Fair value 300,000.00

Fully depreciated carrying amount 0
Revaluation Gain 300,000.00

20% 30% 50%

A B C Total
Unadjusted Capital 150,000.00 250,000.00 100,000.00 500,000.00
Share in Profit 180,000.00 270,000.00 450,000.00 900,000.00
Share in Revaluation 60,000.00 90,000.00 150,000.00 300,000.00
Adjusted 390,000.00 610,000.00 700,000.00 1,700,000.00

Cash of 250,000.00
Equipment @FV 300,000.00
Total Payment to C 550,000.00
Adjusted Bal of C 700,000.00
Bonus to OLD Partners 150,000.00
20% 30% 50%
A B C Total
Adjusted 390,000.00 610,000.00 700,000.00 1,700,000.00
Payment to C (550,000.00) (550,000.00)
Bonus to A and B 60,000.00 90,000.00 (150,000.00)
Capital after withdrawal 450,000.00 700,000.00 - 1,150,000.00

Additional Illustration:
Case 1 Total payment to C 140,000.00
Less: Payment for loan (10,000.00)
Payment for C's Capital 130,000.00

20% 30% 50%

A B C Total
Unadjusted Capital 150,000.00 250,000.00 100,000.00 500,000.00
Share in Revaluation 12,000.00 18,000.00 30,000.00 60,000.00 (450,000 - 390,000)
Adjusted 162,000.00 268,000.00 130,000.00 560,000.00
Less: Payment to C (130,000.00)
Adjusted Bal 162,000.00 268,000.00 - 560,000.00

Case 2 Payment for C's Capital 140,000.00

 20% 30% 50%
A B C Total
Unadjusted Capital 150,000.00 250,000.00 100,000.00 500,000.00
Share in Revaluation 12,000.00 18,000.00 30,000.00 60,000.00 (450,000 - 390,000)
Adjusted 162,000.00 268,000.00 130,000.00 560,000.00

Payment for C's Capital 140,000.00

C's Adjusted Cap 130,000.00
Bonus to A and B 10,000.00

20% 30% 50%

A B C Total
Adjusted 162,000.00 268,000.00 130,000.00 560,000.00
Less: Payment to C (140,000.00) (140,000.00)
Bonus to C (4,000.00) (6,000.00) 10,000.00
Adjusted Bal 158,000.00 262,000.00 - 420,000.00

Illustration: Incorporation of Partnership

Case 1 Receivables (20,000.00)
Inventory (10,000.00)
Equipment 130,000.00
Net Revaluation Gain 100,000.00

20% 30% 50%

A B C Total
Unadjusted Capital 150,000.00 200,000.00 300,000.00 650,000.00
Net Revaluation Gain 20,000.00 30,000.00 50,000.00 100,000.00
Adjusted 170,000.00 230,000.00 350,000.00 750,000.00
Divide by: Par Value 10.00 10.00 10.00 10.00
No of shares issued 17,000.00 23,000.00 35,000.00 75,000.00

JE in Corporations books
Accounts Debit Credit
Cash 20,000.00
AR 40,000.00
Inventory 70,000.00
Equipment 670,000.00
Payables 50,000.00
Shares Capital 750,000.00

Case 2 A B C Total
No of shares issued 14,000.00 21,000.00 35,000.00 70,000.00
Multiply by Par Value 10.00 10.00 10.00 10.00
Share Capital 140,000.00 210,000.00 350,000.00 700,000.00

20% 30% 50%

A B C Total
Unadjusted Capital 150,000.00 200,000.00 300,000.00 650,000.00
Net Revaluation 20,000.00 30,000.00 50,000.00 100,000.00
Adjusted 170,000.00 230,000.00 350,000.00 750,000.00
Share Capital 140,000.00 210,000.00 350,000.00 700,000.00
Share Premium 30,000.00 20,000.00 - 50,000.00

Case 3 A B C Total
No of shares issued Ordinary 1,000.00 1,000.00 1,000.00 3,000.00
Multiply by: Par Value 10.00 10.00 10.00 10.00
Share Capital Ordinary 10,000.00 10,000.00 10,000.00 30,000.00

20% 30% 50%

A B C Total
Unadjusted Capital 150,000.00 200,000.00 300,000.00 650,000.00
Net Revaluation 20,000.00 30,000.00 50,000.00 100,000.00
Adjusted 170,000.00 230,000.00 350,000.00 750,000.00
Less: Share Capital Ordinary 10,000.00 10,000.00 10,000.00 30,000.00
Remaining for Preference 160,000.00 220,000.00 340,000.00 720,000.00
divid eby: by Par Value Pref 100.00 100.00 100.00 100.00
No. of preference shares issued 1,600.00 2,200.00 3,400.00 7,200.00