PARTNERSHIP DISSOLUTION & LIQUIDATION

DISSOLUTION
Partnership dissolution may be caused by change in agreements of the partners or change in relations of the
partners. This may include:
1. Admission of a new partner 4. Assignment of interest by a partner
2. Retirement of a partner 5. Partnership merger
3. Death of a partner 6. Incorporation of the partnership

ACCOUNTING PROCEDURES FOR DISSOLUTION

1. Asset revaluation to agreed or fair values
2. Capital re-alignment

Cases of Dissolutions
A. Admission – new partners enter the partnership
Illustrative 1: For each admission case, indicate whether the admission agreement results to bonus or
goodwill and whether it pertains to new or existing partners:

Contributed capital
Agreed Existing New Interest Goodwill(G) or
Cas capital partners partners acquire Bonus(B) to new(n) or
e d existing(e)
1 400,000 300,000 80,000 25%
2 400,000 250,000 100,000 25%
3 400,000 300,000 100,000 20%
4 400,000 300,000 100,000 30%
5 500,000 300,000 120,000 50%

CPA EXAM DRILL PROBLEMS:

1. Blue and Rubi are partners who share profits and losses in the ratio of 6:4, respectively. On May 1, 2009,
their respective capital accounts were as follows:
Blue P60,000
Rubi 50,000

On that date, Lind was admitted as a partner with a one-third interest in capital and profits for an investment
of P40,000. The new partnership began with total capital of P150,000. Immediately after Lind’s admission,
Blue’s capital should be
a. P50,000 c. P56,667
b. P54,000 d. P60,000

2. Western and Pate are partners with capital balances of P60,000 and P20,000, respectively. Profits and losses
are divided in the ratio of 60:40. Western and Pate decided to form a new partnership with Grant, who
invested land valued at P15,000 for a 20% capital interest in the new partnership. Grant’s cost of the land
was P12,000. The partnership elected to use the bonus method to record the admission of Grant into the
partnership. Grant’s capital account should be credited for
a. P12,000 c. P16,000
b. P15,000 d. P19,000
3. Dunn and Grey are partners with capital account balances of P60,000 and P90,000, respectively. They agree
to admit Zorn as a partner with a one-third interest in capital and profits, for an investment of P100,000,
after revaluing the assets of Dunn and Grey. Goodwill to the original partners should be
a. P0 c. P50,000
b. P33,333 d. P66,667

4. The following condensed balance sheet is presented for the partnership of Alfa and Beda, who share profits
and losses in the ratio of 60:40, respectively:
Cash P 45,000
Other assets 625,000
Beda, loan 30,000
P 700,000
Accounts payable P 120,000
Alfa, capital 348,000
Beda, capital 232,000
P 700,000

The assets and liabilities are fairly valued on the balance sheet. Alfa and Beda decide to admit Capp as a
new partner with 20% interest. No goodwill or bonus is to be recorded. What amount should Capp
contribute in cash or other assets?
a. P110,000 c. P140,000
b. P116,000 d. P145,000

5. A and B contributed the net assets of their respective proprietorship business amounting to P50,000 and
P80,000, respectively. A is to invest additional cash into the partnership and shall have 60% interest in the
partnership. How much cash shall A invest?
a. P3,333 b. P20,000 c. P70,000 d. P120,000

6. A, K and O formed a partnership. They agreed that their capital contributions shall be aligned with their
profit or loss agreement of 40%, 25% and 35% respectively. A, K and O contributed non-cash assets at
agreed values of P20,000, P30,000 and P85,000,respectively. K first contributed P40,000 cash for his
capital, compute the total cash contributions of the other partners?
a. P160,000 b. P105,000 c. P145,000 d. P120,000

B. Retirement/Withdrawal
When a partner retires, it is important to determine his net interest in the partnership. The net interest in the
partnership comprises the partners’ capital balance plus loans to the partnership less his loan from the
partnership.

When settlement do not equal with net interest, capital re-alignment issue arises:
1) Settlement > Net interest
The excess is attributable to either:
1. Bonus – to retiring partner
2. Goodwill – to retiring partner
a. Total goodwill approach
b. Partial goodwill approach
2) Settlement < Net interest
The excess is attributable to bonus (to continuing partners).
CPA EXAM DRILL QUESTIONS:
1. On June 30, 2009, the condensed balance sheet for the partnership of Eddy, Fox, and Grimm, together with
their respective profit and loss sharing percentages was as follows:
Assets, net of liabilities P320,000
Eddy, capital (50%) P160,000
Fox, capital (30%) 96,000
Grimm, capital (20%) 64,000
P320,000

Eddy decided to retire from the partnership and by mutual agreement is to be paid P180,000 out of
partnership funds for his interest. Total goodwill implicit in the agreement is to be recorded. After Eddy’s
retirement, what are the capital balances of the other partners?
Fox Grimm Fox Grimm
a. P 84,000 P56,000 c. P108,000 P72,000
b. P102,000 P68,000 d. P120,000 P80,000

2. Assume instead that Eddy remains in the partnership and that Hamm is admitted as a new partner with a
25% interest in the capital of the new partnership for a cash payment of P140,000. Total goodwill implicit in
the transaction is to be recorded. Immediately after admission of Hamm, Eddy’s capital account balance
should be
a. P280,000 b. P210,000 c. P160,000 d. P140,000

3. As of December 31, 2009, A, B and C shares profit equally and have unadjusted capital balances of
P120,000, P180,000 and P200,000, respectively. Also as of this date, the income summary account have a
credit balance of P60,000. Both A and B made drawings of P40,0000 each during the year which were
charged directly to their capital. On December 31, 2009, A retired and was paid P110,000. Compute the
capital balances of B and C, respectively, after A’s retirement.
a. P160,000; P215,000 b. P155,000; P215,000 c. P155,000; P235,000 d. P215,000; P235,000

4. On June 30, 2009, the balance sheet for the partnership of Coll, Boy, and Rei, together with their respective
profit and loss ratios, was as follows:
Assets, at cost P 180,000
Coll, loan P 9,000
Coll, capital (20%) 42,000
Boy, capital (20%) 39,000
Rei, capital (60%) 90,000
Total P 180,000

Coll has decided to retire from the partnership. By mutual agreement, the assets are to be adjusted to their
fair value of P216,000 at June 30, 2009. It was agreed that the partnership would pay Coll P61,200 cash for
Coll’s partnership interest, including Coll’s loan which is to be repaid in full No goodwill is to be recorded.
After Coll’s retirement, what is the balance of Boy’s capital account?
a. P36,450 c. P45,450
b. P39,000 d. P46,200

C. Death of a Partner
 The death of a partner results in automatic dissolution of the partnership at the point of death. The capital
balances of the partners must be updated upon death. The adjusted capital of the deceased partner shall be
transferred to a liability account. Interest payable to the estate is a real expense on the books of the
continuing partners.

Illustrative
On January 1, 2008, the partnership of D, E and F started with an initial contribution from the partners of
P100,000, P200,000 and P300,000, respectively. The partners stipulated that in case of death of any partner,
the parties will compute profits up to the nearest month and to provide for 20% annual interest for the
deceased partner interest prior to its settlement.

On July 1, 2008, D was heart-attacked and instantly died. The newly hired accountant of the partnership
prepared the following entries during the year:

7/1/8 D, capital 100,000

Payable to D’s estate 100,000
To set-up D’s capital as a liability

12/31/8 Interest expense 10,000

Payable to D’s estate 10,000
To recognize interest on D’s estate

12/31/8 Sales 700,000

Inventory, end 50,000
Purchases 300,000
Operating expenses 160,000
Interest expense 10,000
Profit and loss summary 280,000
To close nominal accounts

12/31/8 Profit and loss summary 280,000

E, capital (40%) 160,000
F, capital (30%) 120,000
To close profit and loss to E and F’s remaining P&L sharing ratio.

Profits were evenly earned throughout the year. Compute the correct capital balances of E and F as of
December 31, 2008, respectively.
a. P302,333; P453,500 c. P298,666; P440,500
b. P332,657; P399,493 d. P320,000; P460,000

D. Assignment of interest
A partner’s interest may be assigned to:
1. Partnership – rules of retirement applies
2. Other partners – reclassification of capital
3. Third party
a. With consent of other partners – rules of formation applies
b. Without consent of other partners – no accounting issue

Note concepts…

CPA EXAM DRILL QUESTIONS:

1. MacDo will invest in the partnership of Jabili and Pitsa Hat for a 40% interest. Jabili and Pitsa Hat have
capital of P40,000 and P30,000 and shares profit 60:40, respectively. MacDo is to invest P20,000 into the
partnership and to purchase 1/2 of Jabili’s interest for P30,000. Compute the capital interest of MacDo,
Jabili and Pitsa Hat, respectively, under the bonus method.
a. P 50,000, P20,000; P20,000 c. P 40,000, P20,000; P20,000
b. P 36,000, P22,400; P31,600 d. P 20,000, P20,000; P20,000

2. Bridgette, Benny and Kenny are partners with existing capital balances of P 50,000, P120,000 and
P130,000, respectively. The partners also shares profits and losses 30:35:35, respectively. Bridgette sold her
interest to the partnership for P40,000. As part of the settlement she shall take an item of equipment with a
book value of P20,000 at its fair value of P25,000. The capital of Benny after Bridgette’s sale of interest is
a. P 125,000; P 135,000 c. P 120,000; P 130,000
b. P 127,500; P 137,500 d. P 121,750; P 131,750

E. Incorporation – normal corporate accounting rules apply.

The partners’ capital accounts are transferred to the shares of stock account. Excess of the aggregate capital
accounts over the par value or stated value of shares of stocks issued to the partners is treated as share
premium. Stock issue costs are deductions against share premium. Organization cost of the corporation is
charged to expense.

Illustrative
Partners Amy, Beny, Conie, Devie and Elly decided to incorporate their partnership. Immediately before
incorporation the partnership had P1,000,000 total liabilities while the partners have capital balances of
P2,200,000, P2,000,000, P2,500,000, P1,500,000 and P1,800,000, respectively. The corporation was
authorized to issue 1,000,000 P10-par value ordinary shares and 10,000 P100-par preference shares. As
agreed, the preference shares are to be divided among the incorporating partners based on the ratio of their
capital balances. The ordinary shares are to be issued in the ratio of 15 ordinary shares for each P200 of
share capital of the partners. The remaining shares are to be issued to the public. Subsequently, 10,000
shares were issued to the public at a total proceeds of P180,000. The partners incurred P120,000 for
organization costs (40,000 was on account) and P20,000 for registration of shares of stocks with the SEC.

Required: Answer the following:

1. Compute the total assets of the corporation after incorporation ____________
2. Determine the number and class of shares given to each partner
Amy Beny Conie Devie Elly
Preferred ___________ ___________ ___________ ___________ ___________
Common ___________ ___________ ___________ ___________ ___________

CPA EXAM DRILL QUESTIONS:

1. Partners A and B, sharing profits 50:50, have the following balance sheet as of December 31, 2006:

Cash P 120,000 Accounts payable P 172,000

Receivable 100,000 Accum. Depreciation 8,000
Inventory 140,000 A. Capital 140,000
Equipment 80,000 B, Capital 120,000
Total P 440,000 P 440,000

They need to incorporate their partnership, with the new corporation absorbing the net assets after the
following adjustments: provision for allowance for bad debts of P10,000; statement of the inventory at its
current fair value of P160,000; and, recognition of further depreciation on the equipment of P3,000. The
corporation’s capital stock is to have a par value of P100, and the partners are to be issued corresponding
 total shares equivalent to their adjusted capital balances. The total par value of the shares of capital stock
that were issued to Partner A and B was:
a. P260,000 b. P267,000 c. P273,000 d. P280,000

2. Jay &Kay partnership’s balance sheet at December 31, 2009, reported the following:
Total assets P 100,000
Total liabilities 20,000
Jay, capital 40,000
Kay, capital 40,000

On January 2, 2010, Jay and Kay dissolved their partnership and transferred all assets and liabilities to a
newly formed corporation. At the date of incorporation, the fair value of the net assets was P12,000 more
than the carrying amount on the partnership’s books, of which P7,000 was assigned to tangible assets and
P5,000 was assigned to goodwill. Jay and Kay were each issued 5,000 shares of the corporation’s P1 par
value common stock. Immediately following incorporation, additional paid-in capital in excess of par
should be credited for
a. P68,000 c. P77,000
b. P70,000 d. P82,000

PARTNERSHIP LIQUIDATION
Liquidation refers to the winding up of the affairs of the partnership. This involves realization of all non-cash
assets of the partnership into cash and settling all claims to the partnership.

Claims to the partnership are generally classified as follows in the order of priority in settlement:
A. External claims – claims of external third party creditors
B. Internal claims – claims of the partners
a. Partners loan
b. Partners capital

Basic Concepts on Partnership Liquidation

1. Unlimited Liability – partners have unlimited liability hence external creditors can run after their separate
personal property in case the partnership asset is insufficient to satisfy their claims. The personal creditors;
however, of a partner is preferred over partnership creditors with respect to the personal assets of a partner.
When a partner is personally insolvent and has capital deficiency, the other solvent partners absorbs his
capital deficiency.
2. Right of offset – the right of a partner to set-off his loan to the partnership against his capital deficiency

General Approaches to Liquidation:

External claims must first be satisfied before any distributions are made to any partners. After external claims
are paid, remaining cash is distributed to the partners based on either:
1. Installment Liquidation – cash distributions to partners are made once cash becomes available from the
realization of non-cash assets
2. Lump Sum Liquidation – all non-cash assets are realized into cash and one-time cash distributions to the
part

The installment liquidation is common in practice. Cash installment may be based on a:

a. Schedule of safe payment – this is regarded as the presumptive loss approach. Every time a realization is
made, the balance of the unrealized non-cash asset is presumed a total loss which is then distributed to
the partners. Any positive balance in the partners’ capital balances represents the safe payments.
 b. Cash priority program – the loss absorption capacity of each partner is determined and ranked from
highest to lowest. The incremental differences in the partner’s loss absorption capacity multiplied by the
partners’ respective profit sharing ratio indicate the priority payments.
Loss absorption capacity = Net interest/Profit sharing ratio

Illustrative: Lump sum Liquidation

The partnership of X, Y and Z is being liquidated. The summarized balance sheet below depicts their financial
position before liquidation:

Cash P 30,000 Accounts payables P 280,000

Loans to Z 70,000 X, loan 30,000
Other non-cash assets 600,000 X, capital (40%) 90,000
Y, capital (20%) 150,000
- Z, capital (40%) 150,000
Total assets P 700,000 Total liabilities and capital P 700,000

The personal assets and liabilities of each partner is shown as follows:

Personal Assets Personal Liabilities

X P 620,000 P 600,000
Y P 400,000 P 480,000
Z P 250,000 P 246,000

Assuming that the other non-cash assets will be realized at P300,000, how should the excess cash be
distributed?

CPA EXAM DRILL QUESTIONS:

1. The following condensed balance sheet is presented for the partnership of Smith and Jones, who share
profits and losses in the ratio of 60:40, respectively:
Other assets P 450,000
Smith, loan 20,000
P 470,000
Accounts payable P 120,000
Smith, capital 195,000
Jones, capital 155,000
P 470,000

The partners have decided to liquidate the partnership. If the other assets are sold for P385,000, what
amount of the available cash should be distributed to Smith?
a. P136,000 c. P159,000
b. P156,000 d. P195,000

2. On January 1, 2009, the partners of Cobb, Davis, and Eddy, who share profits and losses in the ratio of
5:3:2, respectively, decided to liquidate their partnership. On this date the partnership condensed balance
sheet was as follows:

Assets
Cash P 50,000
Other assets 250,000
P 300,000
 Liabilities and Capital
Liabilities P 60,000
Cobb, capital 80,000
Davis, capital 90,000
Eddy, capital 70,000
P 300,000

On January 15, 2009, the first cash sale of other assets with a carrying amount of P150,000 realized
P120,000. Safe installment payments to the partners were made the same date. How much cash should be
distributed to each partner?
Cobb Davis Eddy
a. P15,000 P51,000 P44,000
b. P40,000 P45,000 P35,000
c. P55,000 P33,000 P22,000
d. P60,000 P36,000 P24,000

3. On August 16, 2008, Tyron, Dana and Ira form a partnership investing cash of P105,000, P94,500 and
P29,400, respectively. The partners share profits 3:2:2 and on October 29, 2008, they have cash of P7,000,
and other assets of P332,500; liabilities are P179,200. On this date they decided to go out of business and
sell all the assets for P210,000. Ira has personal assets of P10,500 that may, if necessary, be used to meet
partnership obligations.

How much should be distributed to Dana upon liquidation of the partnership?

a. P14,280 b. P -0- c. P34,020 d. P 28,000
4. The partnership of Undoy, Vennie and Wally was dissolved on June 30, 2005 and account balances after
non-cash assets were converted into cash on September 1, 2005 are:

Cash P 50,000
Accounts payable 120,000
Undoy, capital (30%) 90,000
Vennie, capital (30%) ( 60,000)
Wally, capital (40%) ( 100,000)

Personal assets and liabilities of the partners at September 1, 2004 are:

Partners Personal Personal liabilities

assets
Undoy P 80,000 P 90,000
Vennie P 100,000 P 61,000
Wally P 190,000 P 80,000

If Wally contributes P70,000 to the partnership to provide cash to pay creditors, what amount of Undoy’s
P90,000 partnership equity would appear to be recoverable?
a. P 90,000 b. P 79,000 c. P 81,000 d. P 75,000

5. W,X,Y and Z are partners sharing earnings in the ratio of 3/21, 4/21, 6/21 and 8/21, respectively. The
balances of their capital accounts on December 31, 2006 are as follows:
W P 1,000
X 25,000
Y 25,000
Z 9,000
P 60,000
 The partners decide to liquidate, and they accordingly convert the non-cash assets into P23,200 of cash
After paying the liabilities amounting to P3,000, they have P22,200 to divide. Assume that the debit balance
of any partner’s capital is uncollectible. After the P22,200 was divided, the capital balance of X was:
a. P3,200 b. P3,920 c. P4,500 d. P17,800

6. As of December 31, 2004, the books Ton Partnership showed capital balances of: T, P40,000; O, P25,000;
N, P5,000. The partners’ profit and loss ratio was 3:2:1, respectively. The partners decided to liquidate and
they sold all non-cash assets for P37,000. After settlement of all liabilities amounting P12,000, they still
have cash of P28,000 left for distribution. Assuming that any capital debit balance is uncollectible, the share
of T in the distribution of the P28,000 cash would be:
a. P17,800 b. P18,000 c. P 19,000 d. P17,000

7. A, B and C are partners in textile distribution business, sharing profits and losses equally. On December 31,
2004 the partnership capital and partners drawings were as follows:
A B C Total
Capital P100,000 P 80,000 P300,000 P480,000
Drawing 60,000 40,000 20,000 120,000

The partnership was unable to collect on trade and was forced to liquidate. Operating profit in 2004
amounted to P72,000 which was all exhausted including the partnership assets. Unsettled creditors’ claims
at December 31, 2004 totaled P84,000. B and C have substantial private resources but A has no personal
assets. Final cash distribution to C was:
a. P78,000 b. P84,000 c. P108,000 d. P162,000

8. Gardo and Gordo formed a partnership on July 1, 2004 to operate two stores to be managed by each of
them. They invested P30,000 and P20,000 and agreed to share earnings 60% and 40%, respectively. All
their transactions were for cash, and all their subsequent transactions were handled through their respective
bank accounts as summarized below:
Gardo Gordo
Cash receipts ……………………………………. P79,100 P65,245
Cash disbursements……………………………… 62,275 70,695

On October 31, 2004, all remaining noncash assets in the two stores were sold for cash of P60,000. The
partnership was dissolved, and cash settlement was effected. In the distribution of the P60,000 cash, Gardo
received:
a. P24,000 b. P26,000 c. P34,000 d. P36,000

FORMATION & OPERATION CONCEPT RECALL QUESTIONS:

9. AB Partnership begins its first year of operation with the following capital balances:

A, Capital, P32,000; B, Capital, P16,000

According to the partnership agreement, all profits will be distributed as follows:

 A will be allowed a monthly salary of P3,200 and P1,600 to B.
 The partners will be allowed with interest equal to 10% of the capital balance as of the first day of the
year.
 A will be allowed a bonus of 10% of the net income after bonus.
  The remainder will be divided on the basis of the beginning capital for the first year and equally for the
second year.
 Each partner is allowed to withdraw up to P1,600 a year.

Assume that the net loss for the first year of operation is P2,400 with net income of P8,800 in the following
year. Assume further that each partner withdraws the maximum amount from the business each period.

What is the balance of A’s capital account at the end of the second year?
a. P29,560 b. P45,569 c. P42,360 d. P28,800

10. On January 1, 2009, Benny and Samson contributed P800,000 and P900,000 but agreed to an equal interest
in the contributed net assets and profits of the partnership. The partners reported P180,000 profits in 2009.
The 2009 post-closing capital balances of Benny and Samson were P840,000 and P950,000, respectively.
Your analysis of their accounts disclosed that Benny’s drawings for P20,000 was charged to expense.
Determine the correct capital of Benny and Samson as of December 31, 2009.
a. P 830,000; P 960,000 c. P 930,000; P 950,000
b. P 900,000; P 1,000,000 d. P 950,000; P 950,000

11. During 2008, Rebecca and Ramsay formed a partnership and agreed to share profits and losses equally by
providing themselves annual salaries of P200,000 and P300,000, respectively, and a bonus of 10% on
operating profit to Rebecca. Their income statement for the 6 months period ended December 31, 2008 is
shown below:

Sales P 4,000,000
Less: Cost of sales 3,000,000
Gross profit P 1,000,000
Other income 200,000
Less: Expenses 880,000
Profit P 80,000

Compute for Rebecca’s profit sharing if the partnership expenses already include the salaries.
a. P 156,500 b. P 311,000 c. P 269,000 d. P 336,000

12. Sundot is considering accepting a fixed salary of P40,000 (with P120,000 salary traceable to other partners)
and 10% residual profit sharing or a 25% bonus on profit after salaries. Compute the level of income to
which A is indifferent to either option.
a. P 133,333 b. P 200,000 c. P 240,000 d. P 360,000

CPA EXAM PARTNERSHIP DISSOLUTION PROBLEMS (CONCEPT RECALL QUESTIONS):

1. A and B entered into a partnership as of March 1, 2006 by investing P125,000 and P75,000, respectively.
They agreed that A, as the managing partner, was to receive a salary of P30,000 per year and a bonus
computed at 10% of the net profit after adjustment for the salary; the balances of the profit was to be
distributed in the ratio of their original capital balances. On December 31, 2006, account balances were as
follows:
Cash P 70,000 Accounts payable P 60,000
Accounts receivable 67,000 A, Capital 125,000
Furniture and fixtures 45,000 B, Capital 75,000
Sales return 5,000 A, drawing ( 20,000)
Purchases 196,000 B, drawing ( 30,000)
Operating expenses 60,000 Sales 233,000
 Inventories on December 31, 2006 were as follows: supplies, P2,500, merchandise, P73,000. Prepaid
insurance was P950 while accrued expenses were P1,550. Depreciation rate was 20% per year. The
partner’s capital balances on December 31, 2006, after closing the net profit and drawing accounts, were:
A B A B
a. P 135,940 P 47,960 c. P 139,680 P 48,680
b. P 139,540 P 49,860 d. P 142,350 P 47,670

2. A, B and C are partners in an accounting firm. Their capital account balances at year-end were A P90,000;
B P110,000 and C P50,000. They share profits and losses on a 4:4:2 ratio, after the following special terms:
a. Partner C is to receive a bonus of 10% of net income after the bonus
b. Interest of 10% shall be paid on that portion of a partner’s capital in excess of P100,000.
c. Salaries of P10,000 and P12,000 shall be paid to partners A and C respectively.

Assuming a net income of P44,000 for the year, the total profit share of Partner C was:
a. P7,800 b. P16,800 c. P19,400 d. P19,800

3. A, B and C, a partnership formed on January 1, 2006 had the following initial investments: A, P100,000; B,
P150,000; and C, P225,000.

The partnership agreement states that profits and losses are to be shared equally by the partners after
consideration is made for the following:
- Salaries allows to partners: P60,000, P48,000 and P36,000 respectively to A, B and C
- Average capital balances during the year shall be allowed 10% interest

Additional information:
- On June 30, 2006, A invested an additional P60,000.
- C withdrew P70,000 from the partnership on September 30, 2006.
- Share on the remaining partnership profit was P5,000 for each partner

The total partnership capital on December 31, 2004 was:

a. P405,000 b. P671,500 c. P480,000 d. P672,750

4. Presented below is the condensed balance sheet of the partnership of A, B and C who share profits and
losses in the ratio of 6:3:1, respectively:
Cash P 85,000 Liabilities P 80,000
Other assets 415,000 A, capital 252,000
B, capital 126,000
- C, capital 42,000
P 500,000 Total P 500,000

The partners agree to sell to D 20% of their respective capital and profit and loss interest for a total payment
of P90,000. The payment by D is to be made directly to the individual partner. The partners agree that
implied goodwill is to be recorded prior to the acquisition by D. The capital balances of A, B and C,
respectively after the admission of D are:
a. P198,000; P99,000; P33,000 c. P216,000; P108,000; 36,000
b. P201,600; P100,800; P33,600 d. P255,600; P127,800; P42,600

5. A and B have capital balances of P500,000 and P1,000,000, respectively and shares losses equally. C was
admitted into the partnership and contributed P500,000 for a 20% interest in the partnership. What is B’s
profit sharing interest after C’s admission?
 a. 40% b. 50% c. 53.33% d. 26.67%

6. On December 31, 2008, A and B who share profits and losses equally, have capital balances of P170,000
and P200,000, respectively. They agree to admit C for a one third interest in the capital and profits for his
investment of P200,000. Partnership net assets are not to be revalued. Capital accounts of A, B and C,
respectively, immediately after C’s admission to the partnership are:
a. P170,000, P200,000; P200,000 c. P165,000; P195,000; P200,000
b. P175,000; P205,000; P190,000 d. P185,000; P215,000; P200,000

7. AB Partnership had a net income of P2,000 for the month ended September 30, 2004. C purchased an
interest in AB Partnership of A and B by paying A P8,000 for half of his capital and half of his 50% profit
sharing interest on October 1, 2004. At this time, A capital balance was P6,000 and B capital balance was
P14,000. C should receive a credit to his capital account balance of:
a. P4,000 b. P3,000 c. P5,000 d. P6,667

8. The following are capital account balances and profit and loss ratios of the partners in Priced Company.
Capital P&L Ratio
A P 2,250,000 2
B 750,000 1

They agreed to admit C as a partner with a 25% interest in capital upon her investment of P1,000,000. A, B
and C are to share profits 5:3:2 respectively. Subsequently, D joins the partnership by investing P1,200,000
for a 20% interest in profit and capital, the old partners are to share profit in their original ratio. If goodwill
method is used, how much is the goodwill to be recorded upon the admission of D?
a. P800,000 b. P600,000 c. P400,000 d. P240,000

9. G, H and I have capital balances of P100,000, P150,000 and P200,000, respectively. The partners share
profits equally. I is withdrawing from the partnership and is to be paid P220,000 for his capital. After I’s
withdrawal, G and H will share profits 60% and 40%, respectively. If you were H, what you would prefer
between goodwill and bonus method assuming that the partnership record only the “purchased goodwill”.
a. the bonus method for an advantage of P2,000 c. either goodwill method or bonus method
b. the goodwill method for an advantage of P2,000 d. the bonus method for an advantage of P10,000

10. The capital accounts of the partnership of Newton, Sharman and Jackson on June 1, 2008 are presented,
along with their profit and loss ratios:
Newton P 139,200 1/2
Sharman 208,800 1/3
Jackson 96,000 1/6

On that date, Sidney was admitted to the partnership when he purchased for P132,000, a proportionate
interest from Newton and Sharman in the net assets and profits of the partnership. As a result of this
transaction, Sidney acquired a one-fifth interest in the net assets and profits of the firm.
Assuming that implied goodwill is not to be recorded, what is the combined gain realized by Newton and
Sharman upon the sale of a portion of their interest in the partnership to Sidney?
a. P0 b. P43,200 c. P62,400 d. P82,000

11. After several years of operation, J retired from JKL Partnership. J, K and L have outstanding capital
balances prior to J’s withdrawal of P100,000, P300,000 and P150,000, respectively. The partners also shares
profits and losses 20%:50%:30% to J, K and L, respectively. J has a loan to the partnership totaling
P30,000. The partnership also has outstanding loans: P50,000 to K and P10,000 to L. J agreed to take an
 item of equipment with a book value of P40,000 for an agreed value of P50,000. How much cash is
necessary to for the full settlement of J’s interest?
a. P100,000 b. P20,000 c. P82,000 d. P80,000

12. Q, R and S are partners with capital balances on December 31, 2008 of P300,000, P300,000 and P200,000,
respectively. Profits are shared equally. S wished to withdraw and it is agreed that she is to take certain
furniture and fixture with second hand value of P50,000 and note for the balance of his interest. The
furniture and fixtures are carried in the books at P65,000. Brand new, the furniture and fixtures may cost
P80,000. S acquisition of the second-hand furniture will result to
a. reduction in capital of P5,000 to each partner c. reduction in capital of P15,000 each for Q and R.
b. reduction in capital of P10,000 for S. d. reduction in capital of P7,500 each for Q and R.

13. D, E and F were partners with capital balances as of January 1, 2008 of P100,000, P150,000 and P200,000,
respectively, sharing profits and losses on a 5:3:2 ratio. On July 1, 2008, D withdrew from the partnership.
The partners agreed that at the time of withdrawal, certain inventories had to be revalued at P70,000 from its
cost of P50,000. For the six-month period ending June 30, 2008, the partnership generated a net income of
P140,000. Further, the partners agreed to pay D P195,000 for her interest and that the remaining partner’s
capital accounts would be adjusted for whatever goodwill the settlement would generate. The payment to D
included goodwill of
a. P15,000 b. P25,000 c. P50,000 d. P42,500

14. A and B are partners sharing profits and losses in the ratio of 1:2, respectively. On July 1, 2004, they
decided to form the A & B Corporation by transferring the assets and liabilities from the partnership to the
Corporation in exchange of its stocks. The following is the post-closing trial balance of the partnership:
Debit Credit
Cash P 45,000
Accounts receivable (net) 60,000
Inventory 90,000
Fixed asset (net) 174,000
Liabilities P 60,000
A, Capital 94,800
B, Capital 214,200
P369,000 P369,000

It was agreed that adjustments be made to the following assets to be transferred to the corporation:
Accounts receivable P 45,000
Inventory 68,000
Fixed assets 180,600

A and B corporation was authorized to issue P100 par preferred stock and P10 par common stock. A and B
agreed to receive for their equity in the partnership 720 shares of the common stock each, plus even
multiples of 10 shares of preferred stock for their remaining interest.

The total number of shares of preferred and common stock issued by the Corporation in exchange of the
assets and liabilities of the partnership are:
Preferred Common Preferred Common
a. 2,540 shares 1,500 shares c. 2,642 shares 1,440 shares
b. 2,592 shares 1,440 shares d. 2,642 shares 1,550 shares

15. The condensed balance sheet of the partnership of A and B as of December 31, 2006 showed the following:

Total assets P 200,000

 Total liabilities 40,000
A, Capital 80,000
B, Capital 80,000

On this date, the partnership was dissolved and its net assets were transferred to a newly-formed
corporation. The fair value of the assets was P24,000 more than the carrying value on the firm’s book. Each
of the partners was issued 10,000 shares of the corporation’s P1 par common stock. Immediately after
effecting the transfer of the net assets, and the issuance of stock, the corporation’s additional paid in capital
account would be credited for:
13. P136,000 b. P140,000 c. P154,000 d. P164,000

CPA EXAM PARTNERSHIP LIQUIDATION PROBLEMS (CONCEPT RECALL QUESTIONS):

1. The condensed balance sheet of JKL Partnership as of December 31, 2008 follows:
Asset
Cash P 28,000
Non-cash asset 265,000
Total Assets P 293,000

Liabilities P 48,000
J, capital 95,000
K, capital 80,000
L, capital 70,000
Total liabilities and Capital P 293,000

Profit and loss ratio is ½: ¼:¼, respectively. The partners voted to dissolve the partnership and liquidate by
selling assets in installments. P70,000 was realized on the first cash sale of other non-cash assets which has
a book value of P150,000. After settlement with creditors, all cash available was distributed to partners.
How much did L receive?
a. P10,500 b. P20,000 c. P32,500 d. P21,250

2. The balance sheet of D, E and F who share in the profits and losses in the ratio of 5:3:2, respectively, is as
follows:
Assets Liabilities and capital
Cash P 30,000 Liabilities P 50,000
Other assets 320,000 D, capital 80,000
E, capital 115,000
- F, capital 105,000
Total P 350,000 Total P 350,000

The partners agreed to liquidate the partnership by installment. Immediately there was a realization of
P100,000 cash in selling other assets with book value of P150,000. On the cash available, priority is the
payment of the liabilities and the balance is to be distributed to the partners. How should the remaining cash
be distributed to D, E and F, respectively?
a. P50,000; P30,000; P20,000 c. P0; P48,000; P32,000
b. P40,000; P24,000; P16,000 d. P0; P31,000; P49,000

3. On December 31, 2008, the accounting records of Armand, Bernard and Carlos Partnership included the
following information:
Armand, drawings (debit balance) P( 24,000)
Carlos, drawings (debit balance) ( 9,000)
Bernard, Loan 30,000
 Armand, capital 123,000
Bernard, capital 100,500
Carlos, capital 108,000

Total assets amounted to P478,500, including P52,500 cash and liabilities totaled P150,000. The partnership
was liquidated on December 31, 2008 and Carlos received P83,250 cash pursuant to the liquidation.
Armand, Bernard and Carlos share net income and losses in a 5:3:2, respectively. How much will Armand
receive?
a. P65,625 b. P83,250 c. P59,000 d. P59,625

4. A, B and C are partners sharing profits and losses in the ratio of 4:3:3, respectively. The condensed
balance sheet of ABC Partnership as of December 31, 2006 is:
Cash P 50,000
Other assets 130,000
Total assets P 180,000

Liabilities P 40,000
A, Capital 60,000
B, Capital 40,000
C, Capital 40,000
Total assets P 180,000

Assume instead that the ABC Partnership is dissolved and liquidated by installments, and the first
realization of P40,000 cash is on the sale of other assets with book value of P80,000. After the payment of
liabilities, the available cash shall be distributed to A, B and C, respectively, as follows:
a. P36,000; P27,000; P27,000 c. P16,000; P12,000; P12,000
b. P44,000; P28,000; P28,000 d. P24,000; P13,000; P13,000

5. After operating for 5 years, the books of the partnership of A and B showed the following balances:
Net assets P 169,000
A, Capital 110,500
B, Capital 58,500

If liquidation take place at this point and the net assets are realized at book value, the partners are entitled to:
a. A to receive P117,000 and B to receive P52,000 c. A to receive P84,500 and B to receive P84,500
b. A to receive P126,750 and B to receive P42,250 d. A to receive P110,500 and B to receive P58,500

 -- END OF HANDOUT -- 