Chapter 3:

PARTNERSHIPS DISSOLUTION –
CHANGES IN OWNERSHIP INTEREST
 Definition
Partnership dissolution due to changes in
ownership interests occurs for variety of
reasons. These can be summarized as
follows:
1. Admission of a partner
2. Retirement of a partner
3. Death of a partner
4. Incorporation of a partnership
ADMISSION OF A NEW PARTNER
The admission of a new partner may occur in either
of two ways, namely:
1. Purchase of all or part of the interest of one or
more of the existing partners.
2. Investment of assets in the partnership by the
incoming partner.
 Illustration
Assume the following data for the LMN Partnership
on December 31, 2013:
Partners Capitals P&L Ratio
L P20,000 20%
M 20,000 30%
N 30,000 50%

On this date, O is admitted to the partnership.

Case 1. Purchase from one partner
Assume O purchases one-half of the interest of L.
Regardless of the amount paid to L, the only entry
required in the partnership books is:

L, Capital 10,000
O, Capital 10,000
To record admission of O.

The new set of partners will then agree on a new

profit and loss ratio.
Case 2. Purchase from all the partners
Assume the following: (1) O is admitted into the partnership for
a 50 percent interest in the profits and losses of the partnership;
(2) The old partners (L,M and N) are to retain their original
capital and profit-sharing relationships to each other and are to
transfer sufficient amount (50 percent) of their own capital
accounts to O in order to accomplish his admission as planned.
If O agreed to pay a total of P50,000 to L, M and N, the entry
necessary to record this transaction will appear as follows:

L, Capital 10,000
M, Capital 10,000
N, Capital 15,000
O, Capital 35,000
To record admission of O into LMN partnership for a 50
percent interest in the profits and losses.
Case 2. Purchase from all the partners
Using the procedures, the P50,000 cash paid by O is distributed
to the old partners as follows:
P/L ratio 20% 30% 50%
Total L M N
Amounts of capital transferred P35,000 P10,000 P10,000 P15,000
Excess of (P50K-P35K) divided
using the P/L ratio 15,000 3,000 4,500 7,500
Total cash distribution P50,000 P13,000 P14,500 P22,500
Case 2. Purchase from all the partners
Alternative Method. The net assets of the partnership may be
revalued when the purchase of interest from all the partners is
for an amount more than the interest acquired.

Implied value of the partnership (P50K / 50%) P100,000

Book value of the partnership (total capital) 70,000
Undervaluation of identifiable assets (or goodwill) P 30,000

The entries to record the admission of O into the partnership

would then be:
(1) Identifiable assets (or goodwill) 30,000
L, Capital 6,000
M, Capital 9,000
N, Capital 15,000
Case 2. Purchase from all the partners
(2) L, Capital 13,000
M, Capital 14,500
N, Capital 22,500
O, Capital 50,000
To record the admission of O into the partnership.
New Partner Invest in Partnership
Illustration:
For purposes of this discussion, assume that after operations
during 2012, AB Partnership has a book value of P300,000 and
profit percentages on January 1, 2013, as follows:
Capital Bal. P/L Ratio
Andy P200,000 60%
Bony 100,000 40%
Total P300,000 100%
On January 2, 2013 Cody is to invest cash into the partnership.
Cody will have a one-fourth interest and a 25 percent share of
profits. Andy and Bony will share the remaining 75 percent of
profits in the ratio of 60:40, resulting in Andy a 45 percent share
of any profits and Bony having 30 percents.
New Partner Invest in Partnership

Case 1. Investment Equals Proportion of the

Partnership’s book value (agreed capital)

Case 2. New Partner’s Investment More than

Proportion of the Partnership Book Value (agreed
capital)

Cash 3. New partner’s investment less than

proportion of the partnership book value (agreed
capital)
New Partner Invest in Partnership
Case 1. Investment Equals Proportion of the Partnership’s book
value (agreed capital)
Cody invests P100,000. After the investment, the difference
between the new partner’s investment and his agreed capital
computed as follows:
Investment in partnership P100,000
New partner’s proportionate BV
(P300K+P100) x 25% ( 100,000)
Difference P 0

2013
January 2: Cash 100,000
Cody, Capital 100,000
To record admission of Cody for one-fourth interest
upon investment of P100,000.
New Partner Invest in Partnership
Case 2. New Partner’s Investment More than Proportion of the
Partnership Book Value (agreed capital)

Cody invests P110,000 for one-fourth capital interest in the

partnership.
Investment in partnership P110,000
Agreed Capital (P300K+110K)x25% (102,500)
Difference P 7,500

1. Revalued assets upward

2. Record unrecognized goodwill
3. Use bonus method
Illustration of Revaluation of Assets Approach
Assume that Cody paid a P7,500 excess over the proportionate
book value because the partnership owns land with a book
value of P40,000 but a recent appraisal indicates the land has a
market value of P70,000. Before recording the admission of
Cody the land should be revalued by the following adjusting
entry:
(1) Land P30,000
Andy, Capital P18,000
Bony, Capital 12,000

(2) Cash P110,000

Cody, Capital 110,000
(300K+30K+110K) x 25%
 Illustration of Goodwill Recognition
Unrecognized goodwill may be computed from the amount of
new partner’s investment.
Estimated total resulting capital (110K/25%) P440,000
Total net assets (P300+P110) 410,000
Goodwill P 30,000

(1) Goodwill P30,000

Andy, Capital P18,000
Bony, Capital 12,000

(2) Cash P110,000

Cody, Capital 110,000
(300K+30K+110K) x 25%
 Illustration of Bonus Method
Unrecognized goodwill may be computed from the amount of
new partner’s investment.
New partner’s investment P110,000
Agreed Capital (300K+100K)x25% 102,500
Bonus to old partners P 7,500

(1) Cash P110,000

Andy, Capital P 4,500
Bony, Capital 3,000
Cody, Capital 102,500
To record admission of Cody with bonus to Andy and Bony.
New Partner Invest in Partnership
Case 3. New partner’s investment less than
proportion of the partnership book value (agreed
capital)
Illustration:
Assume that Cody invests P80,000 for a one-fourth
capital interest in the partnership.
New partner’s investment P80,000
Agreed Capital (300K+80K)x25% 95,000
Bonus to new partner (P15,000)

1. Revalued assets downward

2. Recognized goodwill brought in by the new partner.
3. Use bonus method.
Illustration of Revaluation of Assets Approach
Assume that the inventory of the partnership which is currently
recorded at book value of P140,000 has a fair market value of
only P80,000 because some items are obsolete. The write down
is recorded as follows:
(1) Andy, Capital 36,000
Bony, Capital 24,000
Inventory 60,000

(2) Cash P80,000

Cody, Capital 80,000
(300K-60K+80K) x 25%
 Illustration of Goodwill Recognition
Unrecognized goodwill may be computed from the amount of
new partner’s investment.
Estimated total resulting capital (300K/75%) P400,000
Total net assets (P300+P80K) 380,000
Goodwill P 20,000

(1) Cash 80,000

Goodwill 20,000
Cody, Capital 100,000
To record the admission of Cody.

Note: Use new partner’s investment to estimate goodwill to

old partner, use old partners total capital to estimate goodwill
to new partner.
 Illustration of Bonus Method
Unrecognized goodwill may be computed from the amount of
new partner’s investment.
New partner’s investment P80,000
Agreed Capital (300K+80K)x25% 95,000
Bonus to new partner (P15,000)

(1) Cash P 80,000

Andy, Capital 9,000
Bony, Capital 6,000
Cody, Capital 95,000
To record admission of Cody.
 WITHDRAWAL OF A PARTNER
Illustration. On January 2, 2013, the capital balances
and profit and loss ratio of Bee, Cee and Dee are as
follows:
Partners Capital Bal. P/L ratio
Bee P10,000 50%
Cee 15,000 30%
Dee 20,000 20%
On April 30, 2013, Bee withdraws from the
partnership. The net income of the partnership for the
four months ended April 30, 2013 is P14,000. It is
agreed that the inventory costing P5,000 has market
value of P7,000 on April 30, 2013.
 WITHDRAWAL OF A PARTNER
Case 1. Settlement equals withdrawing partner’s interest.
April 30: (1)Income Summary 14,000
Bee, Capital 7,000
Cee, Capital 4,200
Dee, Capital 2,800
To record distribution of profit.

(2)Inventory 2,000
Bee, Capital 1,000
Cee, Capital 600
Dee, Capital 400
To adjust inventory

(3)Bee, Capital 18,000

Cash 18,000
To record settlement to Bee equal to his adjusted capital
balance.
 WITHDRAWAL OF A PARTNER
Case 2. Settlement more than withdrawing partner’s interest.
Ex. Using the data in the preceding illustration and assuming
that Bee is paid P19,500, the entries to record the settlement
with Bee under each of the foregoing approaches are as
follows:
1. Partial Goodwill Method
Goodwill 1,500
Bee, Capital 18,000
Cash 19,500
2. Total Goodwill Method
Goodwill (1,500/50%) 3,000
Bee, Capital 18,000
Cee, Capital (30%xP3,000) 900
Dee, Capital (20%xP3,000) 600
Cash 19,500
3. Bonus Method
Bee, Capital 18,000
Cee, Capital 900
De, Capital 600
Cash 19,500
 WITHDRAWAL OF A PARTNER
Case 3. Settlement less than withdrawing partner’s interest.
Using the same data and assuming that Bee is paid P17,000 for
his interest, the entry will be as follows:
Bee, Capital 18,000
Cash 17,000
Identifiable Assets 1,000

If the causes of the difference are not determinable or

assignable to specific assets, then the bonus method should be
used. The entry to record the settlement with Bee is-
Bee, Capital 18,000
Cash 17,000
Cee, Capital (3/5xP1,000) 600
Dee, Capital (2/5xP1,000) 400
 DEATH OF A PARTNER
- The deceased partner’s capital is adjusted using
his profit and loss share percentage for changes in
asset values arising from revaluation of assets,
and for the profit from the date the books were last
closed.
- The balance of his capital account after
considering the necessary adjustments should be
transferred to a liability account pending
settlement.
INCORPORATION OF PARTNERSHIP
Illustration. Reyes and Cruz, partners who share
profits in an 80% and 20% ratio, organized the RC
Corporation to take over the partnership business.
The RC Corporation is authorized to issue 10,000
shares of P20 par value capital stock, of which 5,500
shares are issued at P30 a share to the partners in
accordance with their adjusted capital accounts. RC
Corporation also issued 1,000 shares for cash to the
other incorporators at P30 a share. The statement of
financial position of the partnership as of June 30,
3013, the date of incorporation, is shown in the next
page.
INCORPORATION OF PARTNERSHIP
Reyes and Cruz
Statement of Financial Position
June 30, 2013
------------------------------------------------------------------------------------------------------
Assets
Cash P24,000
Accounts Receivable P56,200
Less: Allowance for bad debts 1,200 55,000
Inventories 51,000
Equipment 120,000
Less: Accum. Dep’n 52,000 68,000
Total Assets P198,000
Liabilities & Partner’s Equity
Current Liabilities:
Notes Payable P40,000
Accounts Payable 30,000
Total Liabilities 70,000
Equity:
Reyes, Capital P95,980
Cruz, Capital 32,020 128,000
Total Liabilities and Capital P198,000
INCORPORATION OF PARTNERSHIP
The partners agree to make the following adjustments before the incorporation:

1. Increase the allowance for bad debts account to P2,000

2. Increase the cost of the inventories to its current market value of P60,000
3. Increase the historical cost of the equipment to its reproduction cost (new) of
P140,000 and the accumulated depreciation to be increased to P61,000.
4. Recognize accrued expenses of P2,200.
5. Recognize goodwill of P20,000.

PARTNERSHIP BOOKS RETAINED

Entries in the Books of the New Corporation

A Inventories (2) 9,000

Equipment (3) 20,000
Goodwill (5) 20,000
Allowance for Bad Debts (1) 800
Accumulated Depreciation (3) 9,000
Accrued Expenses (4) 2,200
Reyes, Capital 29,600
Cruz, Capital 7,400
Adjustment of accounts.
INCORPORATION OF PARTNERSHIP
B Reyes, Capital 125,580
Cruz, Capital 39,420
Capital Stock 110,000
Paid-in Capital in Excess of Par 55,000
To record issuance of 5,500 shares of P20 par value stock to the
partners at a price of P30 a share (P165,000/5,500 shares
Reyes: P125,580 / P30/share = 4,186 shares
Cruz: P39,420 / P30/share = 1.314 shares

C Cash 30,000
Capital Stock 20,000
Paid-in Capital in Excess of Par10,000
To record transfer of assets and liabilities to RC Corporation
New Books Opened for the Corporation
Entries in the Books of the Partnership
A Inventories (2) 9,000
Equipment (3) 20,000
Goodwill (5) 20,000
Allowance for Bad Debts (1) 800
Accumulated Depreciation (3) 9,000
Accrued Expenses (4) 2,200
Reyes, Capital 29,600
Cruz, Capital 7,400
Adjustment of accounts.
B Stocks of RC Corporation 165,000
Notes Payable 40,000
Accounts Payable 30,000
Accrued Expenses 2,200
Allowance for Bad Debts 2,000
Accumulated Depreciation 61,000
Cash 24,000
Accounts Receivable 56,200
Inventories 60,000
Equipment 140,000
Goodwill 20,000
To record transfer of assets and liabilities to RC Corporation
INCORPORATION OF PARTNERSHIP
C Reyes, Capital 125,580
Cruz, Capital 39,420
Stock of RC Corporation 165,000
To record issuance of 5,500 shares of P20 par value stock to the
partners at a price of P30 a share (P165,000/5,500 shares
Reyes: P125,580 / P30/share = 4,186 shares
Cruz: P39,420 / P30/share = 1.314 shares
New Books Opened for the Corporation
Entries in the Books of the New Corporation
A Cash 24,000
Accounts Receivable 56,200
Inventories 60,000
Equipment (Net) 79,000
Goodwill 20,000
Allowance for Bad Debts 2,000
Notes Payable 40,000
Accounts Payable 30,000
Accrued Expenses 2,200
Capital Stock 110,000
Paid-in Capital in Excess of Par 55,000
To record the acquisition of assets and liabilities from the partnership at
their adjusted values.
B Cash 30,000
Capital Stock 20,000
Paid-in Capital in Excess of Par 10,000
To record transfer of assets and liabilities to RC Corporation
INCORPORATION OF PARTNERSHIP
RC Corporation
Statement of Financial Position
June 30, 2013
------------------------------------------------------------------------------------------------------
Assets
Cash P 54,000
Accounts Receivable P56,200
Less: Allowance for bad debts 2,000 54,200
Inventories 60,000
Equipment 79,000
Goodwill 20,000
Total Assets P267,200
Liabilities & Partner’s Equity
Current Liabilities:
Notes Payable P 40,000
Accounts Payable 30,000
Accrued Expenses 2,200
Total Liabilities 72,200
Equity:
Capital stock P130,000
Paid-in capital in excess of par 65,000 195,000
Total Liabilities and Capital P267,200