M3C4 PARTNERSHIP DISSOLUTION – RETIREMENT & DEATH/INCAPCITY OF A PARTNER

RETIREMENT OF A PARTNER 1. These will require two (1) entries:

From the legal point of view, a partner may Income Summary 27,000
leave the partnership as long as it is in accordance with Carlos, Drawing 27,000
the partnership agreement and or with the consent of To record share of Carlos in the net profit
the other partners. Otherwise, the retiring partner may
be sued by the other partners for damages resulting Carlos, Drawing 12,000
from such action. Carlos, Capital 12,000
To close the balance of the drawing account to the
capital account of Carlos. (27,000 – 15,000)
From the accounting point of view, the
following rules must be observed:
2. The updated capital of Carlos may be recovered
1. Capital balances of the retiring partner must be through any of the following alternatives:
updated as of retirement data to be used as a
a. His equity is purchased by a new partner for
basis for settlement. To be taken into
350,000
consideration are the following: asset
Carlos, Capital 312,000
revaluation and profit distribution (if New Partner,
retirement date is other than the end of the 312,000
Capital
accounting period).
2. Revaluation will affect all partners. b. He sells his equity to any one of the remaining
3. For practicality, only the capital of the retiring partners
partner may be updated for profit or loss share Carlos, Capital 312,000
through estimation. Ador, Capital 312,000
4. The drawing account of the retiring partner
must also be closed against the capital account. c. His share is paid by the partnership for 312,000
Carlos, Capital 312,000
Cash 312,000
To illustrate:

The statement of financial position of ABC The first two alternatives of selling the share of
Partnership owned by Ador. Belle and Carlos showed as the retiring partner have the same accounting approach
of December 31, 2014, the partners’ capital balances at as in admission by purchase wherein only a transfer of
₱400,000, ₱500,000, and ₱300,000, respectively. They interest is recognized in the partnership books
share profits and losses at the agreed ratio of 5:3:2, regardless of the amount of payment made. In the
respectively. Carlos decided to leave the business and third alternative, where the interest of the retiring
withdraw his interest over the partnership on June 30, partner is paid out of the partnership funds, the assets
2015. Together with his other partners, they agreed not of the partnership will decrease with the corresponding
to close the books and estimate the share of Carlos decrease in the partners' equity.
based on the average estimated net income of the
partnership for the last three years which was
₱270,000. Carlos made a cash withdrawal of ₱15,000 A problem arises when the retiring partner's
just before he decided to retire. interest will be settled by the partnership at an amount
greater than or less than the book value of P312,000.

Update the capital balances of Carlos as follows:

To illustrate, assume that Carlos with an
Carlos, Capital as of Jan 1 300,000 updated capital balance of P312,000 receives a cash
Share in net profit for 6 mos settlement from the partnership:
27,000
(270,000*1/2*.20)
Cash withdrawals (15,000)
A. 312,000 (book value)
Carlos, Capital as of June 30 312,000
Carlos, Capital 312,000
Cash 312,000
To record retirement of Carlos

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 M3C4 PARTNERSHIP DISSOLUTION – RETIREMENT & DEATH/INCAPCITY OF A PARTNER

Revised Partners’ Equity the remaining partners based on the remaining profit
sharing ratio of Ador and Belle.
Ador, Capital 400,000
Belle, Capital 500,000 Entry will be:
TOTAL 900,000
Ador, Capital
31,250
(50,000*5/8)
B. 362,000 (more than book value) Belle, Capital
18,750
(50,000*3/8)
Where the payment is higher than the Carlos Capital 312,000
capital account, the difference may be
Cash 362,000
recognized as 1) asset revaluation or 2) bonus.
To record withdrawal of Carlos

1) ASSET REVALUATION Revised Partners’ Equity after Carlos’ retirement will

show:
This is computed based on the
difference between the amount of Carlos’ Ador, Capital (400,000 – 31,250) 368,750
Capital and the payment made by the Belle, Capital (500,000 – 18,750) 481,250
partnership (362,000-312,000). The 50,000 TOTAL 850,000
represents the 20% share of Carlos, then
the total asset revaluation will be
50,000-.20=250,000.
C. 300,000 (less than book value)
1) ASSET IMPAIRMENT
Entries, assuming land has to be revalued: If Carlos’ Capital is 312,000 but the cash
settlement is only 300,000, the difference
Land 250,000
may be attributed to his share in the asset
Ador, Capital (.50)125,000
impairment.
Belle, Capital (.30) 75,000
Carlos, Capital (.20) 50,000
Total asset impairment will be (312,000-
Upward adjustment of plant asset
300,000=12,000). 12,000/.20=60,000.

Carlos, Capital 362,000

Cash 362,000 Entry to record asset impairment:
To record Retirement of Carlos
Ador, Capital
30,000
(60,000*.50)
Note that Carlos’ capital of 312,000 is further increased Belle, Capital
by 50,000 because of the revaluation made for land. It 18,000
(60,000*.30)
is now 362,000 = cash settlement made. Carlos, Capital
12,000
(60,000*.20)
Land 60,000
Revised Partners’ Equity after Carlos retirement will [To record asset impairment]
show:

Ador, Capital (400,000 + 125,000) 525,000 Carlos, Capital of 312,000 will decrease by 12,000. Entry
Belle, Capital (500,000 + 75,000) 575,000 to record his retirement will be:
TOTAL 1,100,000
Carlos, Capital 300,000
Cash 300,000
[To record Retirement of Carlos]
2) BONUS TO CARLOS

Where the settlement is higher than the capital Revised Partners’ Equity after retirement will show:
credit of the retiring partner, instead of asset Ador, Capital (400,000 – 30,000) 370,000
revaluation, the excess may be given as bonus to the Belle, Capital (500,000 – 18,000) 482,000
retiring partner by decreasing the capital accounts of TOTAL 852,000

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 M3C4 PARTNERSHIP DISSOLUTION – RETIREMENT & DEATH/INCAPCITY OF A PARTNER

2) BONUS TO REMAINING PARTNERS To Illustrate:

Where the capital of the retiring partner is
On January 1, 2018, the capital accounts of the
higher than the payment to be made, the
partners who are sharing profits equally were as
difference may be recognized as bonus for
follows: Ambeth, P200,000, Cedes, P300,000 and Vic
the remaining partners.
P150,000. On October1, that was nine months later,
Partner Cedes died. Partnership agreement provides for
settlement upon retirement or death of a partner after
Entry:
six months from date partner retires or dies. An 18%
Carlos, Capital 312,000 interest shall be included and computed from date of
death to date of settlement. Net income for the year
Cash 300,000
amounted to P90,000. Records show that Cedes made a
Ador, Capital
7,500 cash withdraw during the year resulting to a debit
(12,000*5/8)
balance of P50,000 in her drawing account.
Belle, Capital
4,500
(12,000*3/8)
To record retirement of Carlos with bonus given to
Ador and Belle 2018

Oct 1
Revised Partners’ Equity after retirement will show:
Cedes, Capital 300,000
Ador, Capital (400,000 + 7,500) 407,500
Cedes, Drawing 50,000
Belle, Capital (500,000 + 4,500) 504,000
TOTAL 912,000 Payable to
250,000
Cedes’ Estate
To close Cedes’ equity to a liability account

Dec 31
∘₊✧────────✧₊∘∘₊✧────────✧₊∘∘₊✧────────✧₊∘ Income and Expense
22,500
Sum
DEATH OR INCAPACITY OF A PARTNER Payable to
22,500
Cedes’ Estate
Death or incapacity of a partner dissolves the
To record profit share of Cedes for nine (9) mos:
original association, but the business may still continue
90,000*9/12*1/3 [1/3=equal profit sharing]
operating with a substitute taking his place, as
provided in the articles of co-partnership. Or the
business may be continued by the remaining partners Income and Expense
12,262.50
with the interest of the deceased partner purchased by Sum
the remaining partners, in which case the accounting Payable to
12,262.50
procedures will be similar to the admission of a partner Cedes’ Estate
by purchase. Or the deceased partner's share may be To accrue 18% interest from Oct 1 to Dec 31:
paid out of the partnership funds, in which case the (272,500*.18*3/12)
accounting procedures will be similar to retirement of a
partner. If it will take some time for the partnership to Income and Expense
make a cash settlement, the following procedures 55,237.50
Sum
should be observed:
Ambo, Drawing 27,618.75
1. Close the capital and drawing account to a
Vic, Drawing 27,618.75
liability account – Payable to Partner’s Estate.
To record the profit shares of Ambo and Vic 90,000-
2. Compute for the partner’s share on profit until
22,500-12,262.50=55,237.50 by using the remaining
date of death and credit to increase the Payable
partners’ profit ratio [1:1]
to Partner’s Estate.
3. From the date of death to date of settlement,
accrue interest on the total liability computed
in #1 & 2 above.
4. At the date of settlement, pay liability which is
now the sum of #1, 2, & 3 above.
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 M3C4 PARTNERSHIP DISSOLUTION – RETIREMENT & DEATH/INCAPCITY OF A PARTNER

Payable to Cedes Estate will now be 284,762.50 LIABILITUES & OWNERS’ EQUITY
computed as follows: Accounts Payable 100,000
Notes Payable 200,000
Oct 1 250,000.00 Ada, Capital 700,000
Dec 31 Profit Share 22,500.00 Bess, Capital 500,000
Accrued Interest 12,262.50 Carol, Capital 500,000
TOTAL 284,762.50 TOTAL 2,000,000

On date of settlement, the entry will be: The Internet corporation filed its incorporation
2019 papers, and among its provision was the authority to
issue 100,000 ordinary shares at a par value of ₱50 per
April 1 share. The partners will receive common shares equal
Interest Expense 12,262.50 to their net assets after adjusting the following: 5%
Payable to Cedes provision for doubtful accounts 10% write down on
284,762.50 inventories, furniture, and equipment to be revalued
Estate
Cash 297,025.00 based on its current fair value of ₱350,000.
To record payment of liability plus accrued interest of
18%
Entries in the books of the partnership:

a)
Appropriation Account 25,000
Allowance for
25,000
∘₊✧────────✧₊∘∘₊✧────────✧₊∘∘₊✧────────✧₊∘ Bad Debts
To Adjust allowances for bad debts at 5% of 500,000
INCORPORATION OF A PARTNERSHIP [(A/R)]

If a partnership needs more funds for growth

and expansion of its business, it may file for b)
incorporation by using the partnership assets as its Appropriation Account 75,000
starting capital. The books of the partnership will have Inventories 75,000
To write down inventories to 90% of its cost
to be adjusted and closed and a statement of financial
position prepared as a basis for the incorporation.
c)
Appropriation Account 50,000
To illustrate assume that Ada, Bess, and Carol Accumulated
50,000
our partners dividing profit and loss in the ratio of 3:2:1, Depreciation
respectively. They decide to incorporate the business on To adjust the value of furniture and equipment by
July 1 and call it the Internet Corporation. With three 50,000 from book value of 400 000 to fair value of
more friends who were invited to join them additional 350,000
cash of 1,000,000 will be invested in exchange for some
shares of stock. The partnership's financial position d)
appear as follows: Ada, Capital 75,000
Bess, Capital 50,000
ASSETS
Carol, Capital 25,000
Cash 350,000
Appropriation
Accounts Receivable 500,000 150,000
Account
Inventories 750,000
To close the balance of the appropriation account
Furniture & Equipment 800,000
Accumulated Depreciation (400,000)
TOTAL 2,000,000

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 M3C4 PARTNERSHIP DISSOLUTION – RETIREMENT & DEATH/INCAPCITY OF A PARTNER

e) b)
Shares of Internet Corp 1,550,000
Accounts Payable 100,000 Cash 350,000
Notes Payable 200,000 Accounts Receivable 500,000
Allowance for Bad Inventories 675,000
25,000 Furniture & Equipment 350,000
Debts
Accumulated Accounts
450,000 100,000
Depreciation Payable
Cash 350,000 Notes Payable 200,000
Accounts Allowance for
500,000 25,000
Receivable Bad Debts
Inventories 675,000 Share Capital 1,550,000
Furniture & To record the investments of Ada, Bess, and Carol for
800,000 31,000 ordinary shares
Equipment
To record receipt of shares and transfer of the net
assets to the corporation c)

Cash 1,000,000
Note that the assets are closed at the adjusted values. Share Capital 1,000,000
Value of the shares of stock is equal to the net assets Additional 2,000 ordinary shares were issued for cash
contribution.

f)
Ada, Capital 625,000
Bess, Capital 450,000
Carol, Capital 475,000
Shares of
1,550,000
Internet Corp.
To record distribution of stock certificates to partners
and to close the partners’ equity

The decrease in the capital accounts is a result

of the adjustments made. At this point, the partnership
books are closed, and a new set of books will be opened
for the corporation.

Take note of a new account "Appropriation

Account". This is a temporary title one may use when
allocating gains or losses, profits or losses, adjustments
to the partners' capital. The purpose is to reduce the
computation to be made every time there is an
allocation/distribution to be recorded. Extract the
balance and make just one entry to increase or
decrease the capital accounts.

Entries in the books of the corporation:

a) Record authorization using a memorandum

entry:
Authorized to issue 100,000 ordinary shares at
50 par value