AFAR REVIEW

Partnership Dissolution

By: Mycriwel Louis F. Manapat

Accouting for
Partnership
Assets and Liabilities at
Formation FMV

Sharing in profits and

Operation
losses

Admission or
Dissolution
Withdrawal

Lumpsum or
Liquidation
installment
DISSOLUTION
Change in the relation of partners caused by any partner
being disassociated from the business, ART. 1828.

ART. 1829 – states that, on dissolution, the partnership is

not terminated but continues until the winding up of the
partnership affairs is completed.

Partnership
Liquidate Winding-up
ceases

Dissolution
New
Continue New articles partnership
arises
Major considerations in the
accounting for partnership
dissolution:
a. Admission of a partner
b. Withdrawal, retirement or death of a
partner
c. Incorporation of partnership

Considerations A and B dissolves the original partnership agreement because it

creates a change in the relation of the partners (e.g. a change in the number of
the partners in a partnership.

It should be noted that the admission of a new partner requires the consent of
all the existing partners.
Question!
Can a partner assigns his interest to a third
party? Does it dissolve the partnership?

Yes, a partner can assign his interest to a

third party and the partnership is not
dissolved. Assignment does not itself
change the relationship of the partners.
Such assignment only entitles the assignee
to receive the assigning partner’s interest
in future partnership profits and assets in
the event of liquidation.
 Purchase of interest in
the partnership
Admission of Partner
Investment in the
partnership

Purchase of interest – without revaluation

 Personal transactions only
 Not recorded in the partnership books
 Entry to be made by partnership is a transfer within equity
 No gain or loss is recognized
 Total assets and capital will remain unchanged
 Purchase of interest in
the partnership
Admission of Partner
Investment in the
partnership

Purchase of interest – with revaluation

 Determine the assets to be revalued
 Distribute revaluation gain/loss to existing partners
 Distribute the interest to the buying partner
 The assets and liabilities carried over to the new partnership are
restated to fair values
IFRS 3
 Goodwill method shall not be used in
accounting for admission by investments
and retirement/death of a partner
Investment in Partnership

 Transaction between the new partner and partnership

 Any consideration paid by the incoming partners is recorded in the
partnership books.
 However, because this is a transaction with an owner, no gain or loss is
recognized.

Two things may happen when a partner invests in a partnerships

1. The new partner’s capital account is credited at an amount equal to the
fair value of his investments. (no bonus)
2. The new partner’s capital account is credited at an amount greater than
or less than the fair value of his investment. (bonus is allocated to old
partners’ sharing)
Illustration – purchase of interest
The following are the capital account balances and profit and loss ratios
of the partners in AB Partnership as July 1, 2021:

Capital accounts
P/L ratios
A, Capital 150,000
40%
B, Capital 250,000
60%
400,000

On July 1, 2021, C was admitted to the partnership when he purchased a

proportionate interest from A and B representing 20% interest in the net
assets and profits of the firm for P100,000. The net assets of the firm as
of this date approximate their fair values.
Illustration – purchase of interest
Requirements:
a. Provide the journal entry to record the transaction.
b. How much are the capital balances of the partners after the admission
of C?
c. How much is the gain or loss to be recognized in the partnership books?
d. How much are the personal gains or losses recognized by A and B,
respectively?

Solutions:

Requirement (a)
A, Capital (400,000*20%*40%) 32,000 NOTE: Since C purchased a
proportionate interest from A and B, the
B, Capital (400,000*20%*60%) 48,000 amount credited to C is allocated to A
and B based on their old profit or loss
C, Capital (400,000*20%) ratio.80,000
Requirement (b)

A B C TOTALS
Capital, 150,000 250,000 - 400,000
beg.
Credit 80,000 80,000
Debit (32,000) (48,000) - (80,000)
Capital, 118,000 202,000 80,000 400,000
end.
Notice that when a new partner is admitted through “purchase of
interest”, the total capital of the partnership does not change.

Requirement (c)
ZERO. No gain or loss is recognized in the partnership books when a
new partner is admitted.
Requirement (d)

A B TOTALS
Consideration received 40,000 60,000 100,000
(100k*40%); (100k*60%)
Amount debited to capital account (32,000) (48,000) (80,000)
Personal gain or loss 8,000 12,000 20,000

The gains computed above are personal gains of the selling partners.
These are not recorded in the partnership books.
Illustration – purchase of interest
with revaluation
On July 1, 2021, C was admitted to the partnership when he purchased a
proportionate interest from A and B representing 20% interest in the net
assets and profits of the firm for P100,000.
On this date, the carrying amounts and fair values of the assets and
liabilities of the partnership are as follows:
Carrying Fair value Incr./(Decr.)
amount
Cash 20,000 20,000 -
Equipment 340,000 390,000 50,000
Accounts 10,000 10,000 -
Payable
A, Capital 130,000 N/A
(40%)
Requirement: How much are the capital balances of the partners after
B, Capital
the admission of C? 220,000 N/A
(60%)
Revaluation increase is allocated only to the existing partners. No
allocation is made to C, the incoming partner.

Equipment 50,000
A, Capital (50,000*40%) 20,000
B, Capital (50,000*60%) 30,000

After recording the entry made, the capital accounts will have the
following balances.

A B TOTALS
Capital, unadjusted 130,000 220,000 350,000
Share in revaluation 20,000 30,000 50,000
Capital, adjusted 150,000 250,000 400,000
After the net assets are properly revalued, the admission of C is recorded
as follows:

A, Capital (400,000*20%*40%) 32,000

B. Capital (400,000*20%*60%) 48,000
C, Capital (400,000*20%) 80,000

Capital balances after admission of C are as follows:

A B C TOTALS
Capital, 130,000 220,000 - 350,000
beg.
Share in rev. 20,000 30,000 - 50,000
Credit 80,000 80,000
Debit (32,000) (48,000) - (80,000)
Capital, 118,000 202,000 80,000 400,000
end.
Illustration – investment in
partnership
The following are the capital account balances and profit and loss ratios
of the partners in AB Partnership as July 1, 2021:

Capital accounts
P/L ratios
A, Capital 150,000
40%
B, Capital 250,000
60%
400,000

On July 1, 2021, C was admitted to the partnership when he acquired

20% interest in the net assets and profits of the firm for P100,000. The
net assets of the firm as of this date approximate their fair values.
We can use the following formula to check whether there is bonus or
none:

Total contributed capital

xxx
Times: interest of new partner x%
Agreed capital for new partnership xxx
Less: contributed capital of new partner (xxx)
Bonus taken (given)
xxx
Withdrawal, retirement or death of
partner
When a partner withdraws, retires or dies, his interest may be purchased
by (a) one or all of the remaining partners or (b) the partnership. 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.

The interest of the withdrawing, retiring, or deceased partner is adjusted

for the following:

a. His share of any profit or loss during the period up to the date of his
withdrawal, retirement, or death ; and
b. His share of any revaluation gains or losses as at the date of his
withdrawal, retirement, or death
 Transaction between and among the
partners

Settlement is not recorded in the

partnership books

Purchase by
Entry pertains to transfer within
remaining partners equity only

Adjust partners’ capital first

Transaction between the retiring or

withdrawing partner and the
partnership

Settlement amount is recorded in

the partnership books

Entries pertain to transfer within

equity and derecognition of such
Purchase by the settlement
partnership
Adjust partners’ capital first

Bonus may be recognized

Deferred Settlement

Pending settlement, provided all necessary adjustments were made, the

withdrawing, retiring or deceased partner’s interest is transferred to a
liability account. When a partnership is dissolved by the withdrawal,
retirement, or death of a partner, his interest shall be considered as an
ordinary claim which shall be subordinate to the claims of other outside
creditors.

It may also be agreed that interest shall accrue on the capital balance of
the withdrawing, retiring, or deceased partner from the date of his
withdrawal, retirement, or death up to the date of settlement. In lieu of
interest, the partner may be entitled to profits attributable to the use of
his right in the property of the dissolved partnership.
Illustration: Withdrawal, retirement
or death of a partner
Use the following information for the next four independent cases:
The capital account balances of the partners in ABC Partnership on July
1, 2021 before any necessary adjustments are as follows:

Capital accounts
A, Capital (20%) 150,000
B, Capital (30%) 250,000
C, Capital (50%) 100,000
Total 500,000

The partnership reported profit of 900,000 for the six months ended July
1, 2021.
Case 1: On July 1, 2021, C withdraws from the partnership when he was
bought-out by his co-partners for P620,000 cash. The net assets of the
firm as of this date approximate their fair values.

A (20%) B C Total
(30%) (50%)
Unadjusted balance 150,000 250,000 100,00 500,000
0
Share in profit 180,000 270,000 450,00 900,000
0
ToAdjusted
record the withdrawal of C:
balance 330,000 520,000 550,00 1,400,00
0 0

C, Capital 550,000
A, Capital (550,000*20%/50%) 220,000
B, Capital (550,000*30%/50%) 330,000
Case 2: C retires on July 1, 2021. It was agreed that C shall receive
P620,000 cash from the partnership in settlement of his interest.

A (20%) B C Total
(30%) (50%)
Unadjusted balance 150,000 250,000 100,00 500,000
0
Share in profit 180,000 270,000 450,00 900,000
0
To record the withdrawal of C:
Adjusted balance 330,000 520,000 550,00 1,400,00
0 0
C, Capital
550,000
A, Capital (620k-550k*20%/50%) 28,000
B, Capital (620k-550k *30%/50%) 42,000
Cash
620,000
Case 3: C retires on July 1, 2021. It was agreed that C shall receive P500,000
cash and equipment with carrying amount of P100,000 and fair value of
P300,0000 from the partnership in settlement of his interest.

A (20%) B C Total
(30%) (50%)
Unadjusted balance 150,000 250,000 100,00 500,000
0
Share in profit 180,000 270,000 450,00 900,000
0
To Share
recordin
the withdrawal of C:
revaluation 40,000 60,000 100,00 200,000
0
C, Adjusted
Capital balance 370,000 580,000 650,00 1,600,00
650,000 0 0
A, Capital (800k-650k*20%/50%) 60,000
B, Capital (800k-650k *30%/50%) 90,000
Cash
500,000
Equipment
300,000
Case 4: Death of partner – purchase of interest by partnership
Use the same information in Case3, except that C dies on July 1, 2021

A B C Total
(20%) (30%) (50%)
Unadjusted balance 150,000 250,000 100,00 500,000
0
Share in profit 180,000 270,000 450,00 900,000
0
To record the interest of C:
Share in revaluation 40,000 60,000 100,00 200,000
C, Capital
0650,000
A, Capital (800k-650k*20%/50%) 60,000
Adjusted balance 370,000 580,000 650,00 1,600,00
B, Capital (800k-650k *30%/50%) 90,000
0 0
Liability to the estate of C
800,000

To record settlement:
Liability to the estate of C 800,000
Cash
500,000
Equipment
300,000
Incorporation of a partnership

Another instance that causes partnership dissolution is the incorporation of

a partnership. When a partnership is converted into a corporation, the
partner’s relation changes – they ceased to be partners and become
stockholders.

Various reasons for incorporating a partnership

1. Limited liability of shareholders
2. Ease of raising additional capital
3. Privacy and confidentiality
4. Dispersion of risk
5. Unlimited life
6. Transferability of ownership
7. Better public relations
When a partnership is converted into a corporation, the corporation
acquires the assets and assumes the liabilities of the partnership and in
return issues shares of stocks to the partners.

On the date of incorporation:

a. The partners’ capital balances are adjusted for their respective shares
in any profit or loss and revaluation gains or losses as at the date of
incorporation. The adjusted capital balances may be used in
determining the number of shares to be issued to each partner.
b. Normally, the books of the partnership are closed and new books are
established for the corporation.
c. Any excess of the fair values of the net assets of the partnership over
the aggregate par value of shares issued is credited to share
premium.