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Module 1.3 - Partnership Dissolution PDF

The document provides information about partnership dissolution, including admission of a new partner, withdrawal or retirement of an existing partner, and incorporation of a partnership. It discusses the accounting entries for these events, such as crediting the capital account of an incoming partner. It also provides examples of partnership problems involving calculations of partner capital balances after admissions or retirements.

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396 views3 pages

Module 1.3 - Partnership Dissolution PDF

The document provides information about partnership dissolution, including admission of a new partner, withdrawal or retirement of an existing partner, and incorporation of a partnership. It discusses the accounting entries for these events, such as crediting the capital account of an incoming partner. It also provides examples of partnership problems involving calculations of partner capital balances after admissions or retirements.

Uploaded by

Mila Mercado
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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DE LA SALLE LIPA

College of Business, Economics, Accountancy and Management


Accountancy and Accounting Information Systems Department

LECTURE NOTES
Module 1: Partnership, Corporate Liquidation, and Joint Arrangements

Partnership Dissolution

Dissolution – the change in the relation of the partners caused by any partner being disassociated
from the business. It does not necessarily terminate the business. The business continues until
the remaining partners decide to liquidate the business.

The following are major considerations in the accounting for partnership dissolutions:
1. Admission of a partner
2. Withdrawal, retirement or death of a partner
3. Incorporation of a partnership

Admission of a new partner may be effected either through:

1. Purchase of interest in the partnership – when the new partner purchases part or all of the
interest of one or more of the existing partners. This is a personal transaction between
and among the partners. No gain or loss is recognized in the partnership books.

Journal entry: Selling partner’s capital (Dr.)


Incoming partner’s capital (Cr.)

2. Investment in the partnership – when the new partner invests directly in the business. This
is a transaction between the new partner and the partnership, thus, any consideration paid
is recorded in the partnership books. No gain or loss is recognized because this is a
transaction with an owner.

Journal entry: Asset invested (Dr.)


Incoming partner’s capital (Cr.)

Two scenarios contemplated when a new partner invests in a partnership:


2.a The new partner’s capital account is credited at an amount equal to the fair
value of his investment.
2.b The new partner’s capital account is credited at an amount greater than or
less than the fair value of his investment. This is accounted for under the
“bonus method”.

Withdrawal, retirement or death of a partner


1. Purchase by remaining partners

Journal entry: Outgoing partner’s capital (Dr.)


Purchasing partner’s capital (Cr.)

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GMM A. DIMACULANGAN
2. Purchase by partnership

Journal entry: Outgoing partner’s capital (Dr.)


Payment made (Cr.)

Note: In case of death, the deceased partner’s estate is entitled to the value of the partner’s
interest at the date of his death.

Incorporation of a partnership – when a partnership is incorporated, the corporation acquires


the assets and assumes the liabilities of the partnership in exchange for shares of stocks issued
as settlement of the partners’ respective interests. Any excess of the fair value of the net assets
of the partnership over the aggregate par value of shares issued is credited to share premium.

Practice Problems:

1. Presented below is the condensed balance sheet of the partnership of KK, LL and MM who share
profits and losses in the ratio of 6:3:1, respectively:

Cash 85,000.00 Liabilities 80,000.00

Other assets 415,000.00 KK, Capital 252,000.00

LL, Capital 126,000.00


MM,
Capital 42,000.00

Total 500,000.00 Total 500,000.00

The partners agree to sell NN 20% of their respective capital and profit and loss interests for a total
payment of P90,000. The payment by NN is to be made directly to the individual partners. The capital
balances of KK, LL and MM, respectively after admission of NN are:

2. Oliver and Twist are partners with capital balances P60,000 and P20,000, respectively. Profits
and losses are divided in the ratio of 60:40. Oliver and Twist decided to form a new partnership with
Gunther, who invested land valued at P15,000 for a 20% capital interest in the new partnership.
Gunther's cost of the land was P12,000. The partnership elected to use the bonus method to record
the admission of Gunther into the partnership. Gunther's capital account should be credited for:

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GMM A. DIMACULANGAN
3. On June 30, 2020, the statement of financial position for the partnership of CC, Lelouch, and
Nunnally, together with their respective profit and loss ratios, were as follows:

Assets, at cost
180,000.00
CC, Loan
9,000.00
CC, Capital (20%)
42,000.00
Lelouch, Capital (20%)
39,000.00
Nunnally, Capital
(60%) 90,000.00
Total
180,000.00

CC decided to retire from their partnership. By mutual agreement, the assets are to be adjusted to
their fair value of P216,000 at June 30, 2020. It was agreed that the partnership would pay CC
P61,200 cash for CC's partnership interest, including CC's loan which is to be repaid in full. No
goodwill is to be recorded. After CC's retirement, what is the balance of Lelouch's capital account?

4. Partners Peter and Tony, who share equally in profits and losses, have the following balance
sheet as of December 31, 2019:

Accounts
Cash 120,000.00 Payable 172,000.00
Accounts Receivable 100,000.00 Accum. Dep'n 8,000.00
Inventory 140,000.00 Peter, Capital 140,000.00
Equipment 80,000.00 Tony, Capital 120,000.00
Total 440,000.00 Total 440,000.00

They agreed to incorporate their partnership, with the new corporation absorbing the net assets after
the following adjustments: provision of allowance for bad debts of P10,000; restatement 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 partners
Peter and Tony was:

References:
 CIVIL CODE, art. 1767, 1771, 1772, 1773, 1787, 1797, 1799, Rep. Act 386, as amended.
 Millan, Z. (2018). Accounting for Special Transactions (Advanced Accounting 1). (2018 Edition).
Baguio City, Philippines: Bandolin Enterprise.
 Guererro, P., Peralta, J. F. (2017). Advanced Accounting Volume I and II
 Philippine Financial Reporting Standards

--o0o--
“Commit to the Lord whatever you do, and your plans will succeed.”
– Proverbs 16:3

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GMM A. DIMACULANGAN

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