AE 112-

MODULE 7
(PARTNERSHIP
DISSOLUTION)

COURSE LEARNING OUTCOMES

At the end of the module, you should
be able to:
1. Define partnership dissolution;
2. Identify the reasons for the
dissolution of a partnership;and
3. Record changes to partner capital
accounts in relation to a
dissolution.

FINANCIAL
ACCOUNTING AND
REPORTING

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 In the end, it’s not the years in your life that count. It’s the life in your
years.

Abraham Lincoln

COURSE INTRODUCTION
This course provides an introduction to accounting, within the context of business
and business decisions. Students explore the role of accounting information in the
decision-making process and learn how to use various types of accounting information
found in financial statements and annual reports. This course starts with a discussion of
accounting thought and the theoretical background of accounting and the accounting
profession. The next topic is the accounting cycle - recording, handling, and summarizing
accounting data, including the preparation and presentation of financial statements for
merchandising and service companies. Moreover, it continues with transactions, financial
statements, and problems peculiar to the operations of partnerships and corporations as
distinguished from sole proprietorships. Topics include accounting for partnership formation
and operations; share capital issuances, treasury shares, other related transactions
affecting accumulated profits. Emphasis is placed on understanding the reasons
underlying basic accounting concepts and providing students with an adequate
background on the recording, classification, and summarization functions of accounting to
enable them to appreciate the varied uses of accounting data.

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 One of the basic characteristics of the partnership form of organization is its limited life. Any
change in the personnel of the membership results in the dissolution of the partnership.
Dissolution is defined in Article 1825 of the Partnership law as the change in the relation of the
partners caused by any partner ceasing to be associated in carrying of the business. Dissolution
refers to the termination of the life of an existing partnership. The dissolution of an old
partnership may be followed by:

a. The formation of a new partnership - This is known as dissolution by change in ownership

structure. The new partnership continues the business activities of the dissolved partnership
without interruption.
b. Liquidation - This refers to the termination of business activities carried on by the partnership
and the winding up of partnership affairs preparatory to going out of business. This involves
the sale or conversion of assets into cash, paying creditors, and distributing the remaining
cash to the partners. This is discussed in Chapter 4.

Thus, a partnership may be dissolved without being liquidated. While dissolution may result to
the liquidation of a partnership, liquidation always results to dissolution. Article 1830 and 1831 of
the Partnership Law states the following causes of dissolution:

1. Without violation of agreement - a partnership may, without violating the partnership

agreement, be dissolved:
a. By termination of the term or particular undertaking.
b. By express will of any partner, who must act in good faith, when no definite term of
particular undertaking is specified.
c. By the express will of all the partners.
d. By expulsion of any partner.
2. Violation of the partnership agreement.
3. The business becomes unlawful.
4. Loss of specific thing contributed to the partnership.
a. When ownership is transferred to the partnership.
i. Loss before delivery - the partnership is dissolved because the partner has not
given his contribution to the firm.
ii. Loss after delivery - the partnership is not dissolved because the risk of loss is
borne by the partnership.
b. When only the use of the thing is contributed to the partnership, the loss of the
specific thing contributed disinclines the partnership because the risk of loss is on the
partner who is the owner of the thing; as if he had not contributed anything.
5. Death of a partner.
6. Insolvency- refers to the inability to pay all debts
a. Of any partner - insolvency modifies or limits capacity to act. It implies the absence
of all responsibility, hence the partnership is dissolved.
b. Of the partnership - insolvency of the partnership results in its inability to continue its
business and to meet the claims of creditors, hence it is dissolved.
7. By decree of court under the following circumstances:
a. Insanity of a partner.
b. Incapacity of a partner.
c. Partner guilty of such conduct to affect prejudicially the carrying on of partnership
business.
d. Willful violation of agreement.
e. Business can be carried on only at a loss.

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 f. Other circumstances rendering dissolution equitable.
i. Refusal to give the share of a partner in partnership profits
ii. Refusal of a partner's right to participate in the management of the partnership
affairs, unless otherwise agreed.

But accounting problems are usually encountered in the following:

I. Admission of a partner
II. Withdrawal or Retirement of a partner
III. Death of a partner
IV. Incorporation of a Partnership

I. ADMISSION OF A PARTNER

A partner may be admitted in a partnership only with the consent of all the partners, for
reasons such as: (a) the need for additional capital; or (b) the need for skills or expertise of a
particular person; or (c) present partners may want to reduce interest. Upon admission of a
new partner, a new partnership agreement covering the partners' interest, sharing of profit and
loss and other considerations should be drawn because the dissolution of the original
partnership cancels the old agreement. New partners may be admitted either by any of the
following:

a. Purchase of an interest from present partners; or

b. Investment of assets in the partnership.

Regardless of the method of recording the admission of a new partner, an equitable

relationship in the new partnership ordinarily requires that the assets in the existing partnership
be adjusted to fair market value before admission of the new partner. The change in asset
values should be reflected in the existing partners' capital accounts according to their profit
and loss sharing ratio.

A. ADMISSION BY PURCHASE OF AN INTEREST

When a new partner purchases a portion or all of the interests of one or more of the existing
partners, the partnership assets remain unchanged. The sale of a partners’ interest in an
existing partnership is a personal transaction between the selling or old partners and the
buying or new partner. The price paid for the interest is irrelevant and not recorded in the
partnership books because it is a private or personal transaction between the buyer and
the seller. The assets and liabilities of the partnership are not affected.

The only entry required in partnership books is to record the transfer of capital from the
capital account of old or selling partner to that of the new or buying partner at an amounts
equal to book value of the interest purchased regardless to the payment made.

The partner in making the transfer of ownership can actually convey the following rights:
1. The right of co-ownership in the business property.
2. The right to share in profits and losses.
3. The right to participate in the management of the business.

KEY POINT
Any loans to from any existing partners should not be included in cases
of admission because it’s only the capital interest that is being acquired and not
total interest.

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 Illustrative Problem:
On June 30 of the current year, Bong and Jinggoy have capital balances of P120,000 and
P180,000 and divide profits and losses in the ratio 6:4, respectively. On this date, Janet is
admitted as a new partner.

The entry to record the admission of Janet and the resulting capital balances and profit and
loss ratio of the partners immediately after the admission of Janet, under the independent
cases above is presented below:

Case A: Purchase of interest from one partner at book value.

 Assume Janet purchased one-half of the interest of Bong for P60,000.

Bong, Capital 60,000

Janet, Capital 60,000
To record admission of Janet.

 The resulting capital balances and profit and loss ratio of the partners will be:

Old Capital New Capital New Old

Transfer P/L Ratio P/L Ratio Transfer
Bong P 120,000 (60,000)
P 60,000 30% 60% (30%)
Jinggoy 180,000 180,000 40% 40%
Janet 60,000* 60,000 30%* 30%
Total P 300,000 P 300,000 100% 100%
*Since Janet purchased one-half of the interest of Bong, she gets one-half of both the
capital and profit share of Bong.

Case B: Purchase of interest from all partners at book value.

 Janet purchased one-half of the interest in the partnership for P150,000.

Bong, Capital 60,000

Jinggoy, Capital 90,000
Janet, Capital 150,000
To record admission of Janet.

 The resulting capital balances and profit and loss ratio of the partners will be:

Old New Old P/L New P/L

Capital Transfer Capital Ratio Transfer Ratio
Bong P 120,000 (60,000) P 60,000 60% (30%) 30%
Jinggoy 180,000 (90,000) 90,000 40% (20%) 20%
Janet 150,000 150,000 50% 50%
Total P 300,000 P 300,000 100% 100%

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 *Since Janet purchased one-half of the interest of both partners, he gets one-half of both
the capital and profit shares of both partners.

Case C: Purchase of interest from one partner at more than book value.

 Janet purchased one-half of the interest of Bong for P72,000.

 The journal entry to record the admission of Janet as well as the new capital balances
and profit and loss ratio of the partners will be the same as in Case 1. Bong shall enjoy
the gain of P12,000 since this is a personal transaction between Bong and Janet. Only
the transfer of capital is to be reflected in partnership books.

Case D: Purchase of interest from all partners at more than book value.

 Janet purchased one-half of the interest in the partnership for P175,000

 The journal entry to record the admission of Janet as well as the new capital balances
and profit and loss ratio of the partners will be the same as in Case 2. The difference of
P25,000, between the purchase price of P175,000 and book value of interest purchased
of P150,000, is considered a personal profit to Bong and Jinggoy, and therefore not
recognized by the partnership. Only the transfer of capital is to be reflected in
partnership books.

The excess of P25,000 is to be divided between Bong and Jinggoy based on the original
partners’ profit and loss ratio, computed as follows:

Bong JInggoy Total

Interest sold P 60,000 P 90,000 P 150,000
Excess (6:4) 15,000 10,000 25,000
Total Payment P 75,000 P 100,000 P 175,000

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. Thus, if Janet buys one-half interest
in Bong and Jinggoy Partnership for P175,000 and it is agreed that the net assets should be
revalued, the computation would be:

Implied value of the partnership (P175,000 ÷ 50%) P 350,000

Book value of the partnership (Total Capital of old (300,000)
Partners)
Undervaluation of identifiable assets (or goodwill)* P 50,000
*Use the appropriate account when specified (e.g. When the problem states the
undervaluation relates to an equipment, then the debit should be to the Equipment
account).

The revaluation of P50,000 is to be divided between Bong and Jinggoy based on the original
partners’ profit and loss ratio. The updated capital balances would be computed as follows:
Bong Jinggoy Total
Capital balance before revaluation P 120000 P 180000 P 300,000
Revaluation (50000x60%; 50000x40%) 30,000 20,000 50,000
Total Payment P 150,000 P200,000 P 350,000

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  The entries to record the admission of Janet into the partnership would then be:

Identifiable Assets (or Goodwill) 50,000

Bong, Capital 30,000
Jinggoy, Capital 20,000
To record revaluation of net assets.

Bong, Capital [(150000) x ½] 75,000

Jinggoy, Capital [(200000) x ½] 100,000
Janet, Capital 175,000
To record admission of Janet.

 The resulting capital balances of the partners will be:

Capital after Revaluation

Transfer New Capital
Bong P 150,000 (75,000) P 75,000
Jinggoy 200,000 (100,000) 100,000
Janet 175,000* 175,000
Total P 350,000 P 350,000

 The resulting capital balances and profit and loss ratio of the partners will be:

Old New
P/L Ratio Transfer P/L Ratio
Bong 60% (30%) 30%
Jinggoy 40% (20%) 20%
Janet 50%* 50%
Total 100% 100%

Note, however, that goodwill should only be recorded after all identifiable assets have been
fully adjusted to their fair value. The debits to the old partners’ capital accounts are exactly
equal to the distribution of cash as shown in the previous page. Thus, when it is decided to
revalue the net assets, it is necessary to prepare a cash distribution schedule since the division
of cash coincides with the partners’ charges to their capital accounts.

Case E: Purchase of interest from one partner at less than book value.
 Janet purchased one-half of the interest of Bong for P54,000.
 The journal entry to record the admission of Janet as well as the new capital balances
and profit and loss ratio of the partners will be the same as in Case 1. Bong shall bear
the loss of P 6,000 since this is a personal transaction between Bong and Janet. Only the
transfer of capital is to be reflected in partnership books.

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 Case F: Purchase of interest from all partners at less than book value.
 Janet purchased one-half of the interest in the partnership for P140,000.
 The journal entry to record the admission of Janet as well as the new capital balances
and profit and loss ratio of the partners will be the same as in Case 2. The loss
amounting to P10,000, is considered a personal loss to Bong and Jinggoy and therefore
not recognized by the partnership. Only the transfer of capital is to be reflected in
partnership books.

The excess of P10,000 is to be divided between Bong and Jinggoy based on the original
partners’ profit and loss ratio, computed as follows:

Bong Jinggoy Total

Interest sold P 60,000 P 90,000 P 150,000
Deficit (6:4) (6,000) (4,000) (10,000)
Total Payment P 54,000 P 86,000 P 140,000

Alternative Method
The net assets of the partnership may be revalued when the purchase of interest from all the
partners is for an amount less than the interest acquired. Thus, if Janet buys one-half interest in
Bong and Jinggoy Partnership for P140,000 and it is agreed that the net assets should be
revalued, the computation would be:

Implied value of the partnership (P140,000 ÷ 50%) P 280,000

Book value of the partnership (Total Capital) (300,000)
Overvaluation of identifiable assets (P20,000)

 The entries to record the admission of Janet into the partnership would then be:

Bong, Capital 12,000

Jinggoy, Capital 8,000
Identifiable assets 20,000
To record revaluation of net assets.
Bong, Capital [(120,000 - 12,000) x ½] 54,000
Jinggoy, Capital [(180,000 - 8,000) x ½] 86,000
Janet, Capital 140,000
To record admission of Janet.

 The resulting capital balances of the partners will be:

Share in Capital after

Old Capital Revaluation Revaluation Transfer New Capital
Bong P 120,000 (P 12,000) P 108,000 (54,000) P 54,000
Jinggoy 180,000 (8,000) 172,000 (86,000) 86,000
Janet 140,000* 140,000
Total P 300,000 (P 20,000) P 280,000 P 280,000
 The resulting profit and loss ratio of the partners will be:

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 Old New
P/L Ratio Transfer P/L Ratio
Bong 60% (30%) 30%
Jinggoy 40% (20%) 20%
Janet 50%* 50%
Total 100% 100%

B. ADMISSION BY INVESTMENT

When a new partner is admitted by means of an investment of cash or other assets, there is
an increase in the partnership tangible assets. If assets are invested, the admission is
recorded by debiting the assets invested and adjusting the net capital interest in the
partnership by a corresponding amount. It is important that the assets invested be fairly
valued. Any gain or loss recognized on sales subsequent to recording the admission will be
allocated on the basis of the new profit or loss ratio.

The following terms are useful in accounting for partnership dissolution by means of
investment:
- Contributed Capital is the investment of partners, both old and new, to the partnership.
- Agreed Capital is the amount of new capital set by the partners for the partnership.
- Total Contributed Capital is the sum of the capital balances of the old partners (net asset
investment) and the contribution of the new partner.
- Total Agreed Capital is the new total capital of the partnership. Other terms for this are:
New Firm Capital, Total Capital and Agreed Capitalization. The terms of admission of a
new partner may indicate the agreed capital.

An incoming partner may acquire an interest in the partnership based on the following
situations:
1. The new partner’s investment (contributed capital) EQUALS the new partner’s
proportion of the partnership’s book value (agreed capital).
2. The new partner’s investment (contributed capital) is MORE than the new partner’s
proportion of the partnership’s book value (agreed capital).
3. The new partner’s investment (contributed capital) is LESS than the new partner’s
proportion of the partnership’s book value (agreed capital)

Case A: CC = AC
 The new partner’s investment (contributed capital) EQUALS the new partner’s proportion
of the partnership’s book value (agreed capital)
 Assume that after its first year of operations in 2019, OK Partnership had the following
information as of January 1, 2020:
Capital Balance Profit & Loss
Ratio
Olga P400,000 60%
Karina 200,000 40%

On January 1, 2020, Sandra is admitted into the partnership and is willing to invest
P200,000 cash into the partnership. Sandra will have a 25% interest and share in the
profits of the new partnership.

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 Agreed Contributed
Capital Computation Capital Difference
Old P 600,000 P 600,000 -
New 200,000 200,000 -
Total P 800,000 200,000  25% = 800,000 P 800,000 -

 The entry to record the admission of the new partner is simply a debit to cash and credit
to the new partner's capital account. Sandra is admitted into the partnership and
contributes enough cash for a 25% interest in the new firm’s capital. If the interest of the
new partner is 25%, then the interest of the old partners is equivalent to 75%. The total
capital of the new partnership is P800,000 [(P600,000 ÷ 75%].

 The entry to record the admission of Sandra will be:

Cash 200,000
Sandra, Capital 200,000
To record the admission of Sandra.

Case B: CC >AC
 The new partner’s investment (contributed capital) is MORE than the new partner’s
proportion of the partnership’s book value (agreed capital)
 Assume that after its first year of operations in 2019, OK Partnership had the following
information as of January 1, 2020:
Capital Balance Profit & Loss
Ratio
Olga P400,000 60%
Karina 200,000 40%

On January 1, 2020, Sandra is admitted into the partnership and is willing to invest
P220,000 cash into the partnership. Sandra will have a 25% interest and share in the
profits of the new partnership.

Given the information, if the new partner’s investment (contributed capital) is more than
the new partner’s proportion of the partnership’s book value (agreed capital) indicates
that the partnership’s prior net assets are undervalued or that the partnership has some
unrecorded goodwill. In this case, three (3) possible assumptions may be used:

Assumption 1: Use Bonus Approach (Bonus to Old Partners)

Agreed Contributed
Capital Computation Capital Difference
Old P 615,000 820,000 – 205,000 P 600,000 P15,000
New 205,000 820,000 x 25% 220,000 (15,000)
Total P 820,000 P 820,000 -

This approach is basically a transfer of capital balances among partners (old and new). This
approach is used when the partners do not wish to record adjustments in asset accounts or
recognize goodwill. The bonus approach generally follows the book value method, that is,

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 existing book values should not be adjusted to current values unless such adjustments would
have otherwise been allowed by Generally Accepted Accounting Principles or GAAP.

The new partner’s contributed capital is greater than her agreed capital. The difference is
attributable to bonus to old partners. The excess paid by Sandra is a bonus allocated to the
old partners in their old profit and loss ratio. Sandra may dislike the bonus approach
because her capital balance is P100,000 less than her investment in the partnership.

Using bonus approach, the entry to record the admission of Sandra will be:

Cash 220,000
Olga, Capital (P15,000 x 60%) 9,000
Karina, Capital (P15,000 x 40%) 6,000
Sandra, Capital 205,000
To record the admission of Sandra.

Analyzing the entry shown above:

a. The old partner’s capital accounts are increased for their respective shares of the
bonus paid by the new partner.
b. The partnership’s total resulting capital equals the prior capital balances plus the
new partner’s investment.

Assumption 2: Use Revaluation Approach (Undervaluation of Assets)

Agreed Contributed
Capital Computation Capital Difference
Old P 660,000 880,000 – 220,000 P 600,000 P 60,000
New 220,000 220,000 -
Total P 880,000 220,000 ÷ 25% P 820,000 P 60,000

Under this approach, the historical cost bases of the partnership’s net assets are adjusted
during admission of the new partner. Some partner’s may object to this departure from
historical cost and prefer to use bonus method, which involves capital transfers among the
partners to align the total resulting capital of the partnership.

Using revaluation approach, the entry to record the admission of Sandra will be:

Cash 220,000
Assets 60,000
Olga, Capital (P60,000 x 60%) 36,000
Karina, Capital (P60,000 x 40%) 24,000
Sandra, Capital 220,000
To record the admission of Sandra.

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 Analyzing the entry shown above:
a. Asset book values are increased to their fair values.
b. The old partners’ capital accounts are increased for their respective shares of
increase in the book values of the assets.
c. The partnerships total resulting capital reflects the prior capital balances plus the
amount of asset revaluation plus the new partner’s investment.

Assumption 3: Use Goodwill Approach (Unrecognized Goodwill)

Agreed Contributed
Capital Computation Capital Difference
Old P 660,000 880,000 – 220,000 P 600,000 P 60,000
New 220,000 220,000 -
Total P 880,000 220,000 ÷ 25% P 820,000 P 60,000

Under this approach, the new partner may be paying an excess because of unrecognized
goodwill, indicated by the partnership’s high profitability. This is an opportunity to record
unrecognized goodwill created by the old partners. Recording unrecognized goodwill is
allowed for partnership accounting because of the need to establish appropriate capital
equity among the partners. This is an exception to the general rule established in PAS 38
(see page 97 for the discussion). The partner’s information needs and specific purposes of
the partnership’s financial statements justify this exception.

This approach is similar to Assumption 2, instead of asset book values being increased to
their fair values, unrecognized goodwill is recorded.

Using goodwill approach, the entry to record the admission of Sandra will be:

Cash 220,000
Goodwill 60,000
Olga, Capital (P60,000 x 60%) 36,000
Karina, Capital (P60,000 x 40%) 24,000
Sandra, Capital 220,000
To record the admission of Sandra.

Analyzing the entry shown in the previous page:

a. Unrecognized goodwill is recorded.
b. The old partners’ capital accounts are increased for their respective shares of the
goodwill.
c. The partnerships total resulting capital is now equal to the prior capital balances plus
the goodwill recognized plus the new partner’s investment.

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 Case C: CC<AC
 The new partner’s investment (contributed capital) is LESS than the new partner’s
proportion of the partnership’s book value (agreed capital)
 Assume that after its first year of operations in 2019, OK Partnership had the following
information as of January 1, 2020:
Capital Balance Profit & Loss
Ratio
Olga P400,000 60%
Karina 200,000 40%

 On January 1, 2020, Sandra is admitted into the partnership and is willing to invest
P160,000 cash into the partnership. Sandra will have a 25% interest and share in the
profits of the new partnership.

Given the information, if the new partner’s investment (contributed capital) is less than the
new partner’s proportion of the partnership’s book value (agreed capital) indicates that the
partnership’s prior net assets are overvalued or that the new partner is contributing
additional value in the form of expertise or skills he possesses. In this case, three (3) possible
assumptions may be used:

Assumption 1: Use Bonus Approach (Bonus to New Partner)

Agreed Contributed
Capital Computation Capital Difference
Old P 570,000 760,000 – 190,000 P 600,000 (P30,000)
New 190,000 760,000 x 25% 160,000 30,000
Total P 760,000 P 760,000 -

This approach is basically a transfer of capital balances among partners (old and new). This
approach is used when the partners do not wish to record adjustments in asset accounts or
recognize goodwill. The bonus approach generally follows the book value method, that is,
existing book values should not be adjusted to current values unless such adjustments would
have otherwise been allowed by Generally Accepted Accounting Principles or GAAP.

Using bonus approach, the entry to record the admission of Sandra will be:

Cash 160,000
Olga, Capital (P30,000 x 60%) 18,000
Karina, Capital (P30,000 x 40%) 12,000
Sandra, Capital 190,000
To record the admission of Sandra.

Analyzing the entry shown in the previous page:

a. The new partner is assigned a bonus from the old partners’ capital accounts, which
are decreased for their respective shares of the bonus paid to the new partner.

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 b. The partnership’s total resulting capital is equal to the old partner’s capital balances
plus the new partner’s investment.
Assumption 2: Use Revaluation Approach (Overvaluation of Assets)

Agreed Contributed
Capital Computation Capital Difference
Old P 480,000 640,000 – 160,000 P 600,000 (P120,000)
New 160,000 160,000 -
Total P 640,000 160,000 ÷ 25% P 760,000 (P120,000)

Under this approach, the historical cost bases of the partnership’s net assets are adjusted
during admission of the new partner. Some partners may object to this departure from
historical cost and prefer to use bonus method, which involves capital transfers among the
partners to align the total resulting capital of the partnership.

Using revaluation approach, the entry to record the admission of Sandra will be:

Cash 160,000
Olga, Capital (P120,000 x 60%) 72,000
Karina, Capital (P120,000 x 40%) 48,000
Assets 120,000
Sandra, Capital 160,000
To record the admission of Sandra.

Analyzing the entry shown above:

a. Asset book values are decreased to their fair values.
b. The old partners’ capital accounts are decreased for their respective shares of the
decrease in the book values of the assets.
c. The partnerships total resulting capital reflects the old partner’s capital balances less
the amount of asset revaluation write-down plus the new partner’s investment.

Assumption 3: Use Goodwill Approach (Goodwill Brought in by the New Partner)

Agreed Contributed
Capital Computation Capital Difference
Old P 600,000 P 600,000 -
New 200,000 800,000 – 600,000 160,000 P 40,000
Total P 800,000 600,000 ÷ 75% P 760,000 P 40,000

Under this approach, the new partner may be paying an excess because of unrecognized
goodwill, indicated by the partnership’s high profitability. This is an opportunity to record
unrecognized goodwill created by the old partners. Recording unrecognized goodwill is
allowed for partnership accounting because of the need to establish appropriate capital
equity among the partners. This is an exception to the general rule established in PAS 38
(see page 97 for the discussion). The partner’s information needs and specific purposes of
the partnership’s financial statements justify this exception.

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 This approach is similar to Assumption 2, instead of asset book values being increased to
their fair values, goodwill brought in by the new partner is recorded.

Using goodwill approach, the entry to record the admission of Sandra will be:

Cash 160,000
Goodwill 40,000
Sandra, Capital 200,000
To record the admission of Sandra.

Analyzing the entry shown above:

a. Goodwill brought in by the new partner is recorded and included in the new
partner’s capital account.
b. The old partners’ capital accounts remain unchanged.
c. The partnerships total resulting capital reflects the old partner’s capital balances plus
the new goodwill brought in plus the new partner’s cash investment.

Note:
The partnership may use any one of the assumptions. The decision is usually a result of
agreements between the old partners and the new partner. Some accountants criticized
the revaluation of assets or recognition of goodwill because it results in a departure from the
historical cost principle and differs from the accepted principles in Philippine Accounting
Standards (PAS) No. 38 “Intangible Assets,” which prohibits corporations from recognizing
goodwill that has not been acquired by purchase.

Accountants who support the recognition of goodwill point out that when a new partner is
admitted to the partnership, the old partnership is legally dissolved and a new partnership is
formed. Therefore, the basis of valuation for the new partnership is the fair value of the
assets acquired by the newly formed partnership. Consequently, assets should be recorded
at their fair values and should include previously unrecognized goodwill. Finally,
accountants who use goodwill or asset revaluation approaches argue that the purpose of
partnership accounting is to state fairly the relative capital equities of the partners and this
may require different accounting procedures from those used in corporations

II. WITHDRAWAL/RETIREMENT OF A PARTNER

The withdrawing or retiring partner is entitled to the value of his interest in the partnership as of
the date of withdrawal or retirement. To arrive at the fair amount of what is due to the retiree,
adjustments may be made on the books such as: (1) correction of accounting errors affecting
income, (2) revaluation of assets to market value, and (3) recognition of partnership goodwill.

If accounting errors are discovered and all nominal accounts are already closed, they should
be treated as prior period adjustments and corrected by adjusting the capital balances of the
partners. The errors should be allocated to partners' capital balances according to the profit
and loss sharing ratios that existed when the error was committed.

A withdrawing/retiring partner may sell his interest to any of the following:

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 1. An outsider – with the consent of the remaining partners, the withdrawing partner may
sell his interest to an outsider. The accounting procedures for the admission of a partner
by purchase shall be followed whereby the partnership recognizes only the transfer of
capital interest from the withdrawing partner to the new partner. Any gain or loss from
the sale is a personal gain or loss of the withdrawing partner.

2. Another partner - regardless of the purchase price paid by the purchasing partner to the
selling partner, this being a personal transaction between the two, there is only a transfer
of capital from the withdrawing partner to the buying partner.

3. Partnership – the withdrawing partner sells his right to the remaining partners through the
partnership. The settlement with the withdrawing partners may be:
a. At book value – settlement price is equal to the interest of retiring partner.
b. At more than book value – settlement price is greater than the interest of retiring
partner.
c. At less than book value – settlement price is less than the interest of retiring
partner.

KEY POINT
Number 1 has been discussed in earlier in admission by purchase. The
only difference is that, in admission by purchase, it should be capital interests only
unlike retirement wherein it should be total interest of the retiring partner.

ILLUSTRATION:
Assume the following balances on December 31, 2020 (before any adjustments and
partnership income for the year):
Mang Ina Sal
Capital Balances P 600,000 P 800,000 P 300,000
Profit and loss ratio 50% 30% 20%
On December 31, 2020, Mang withdraws from the partnership. The net income of the
partnership for the year ended December 31, 2020 is P120,000. It was discovered that
depreciation in the amount of P6,000 has not been recorded last year (when Sal is not yet
admitted as a partner and Mang and Ina share profits and losses in the ratio 6:4). Inventories
were also undervalued by P14,000.

Case A: Settlement price is equal to the interest of retiring partner

Income Summary 120,000
Mang, Capital (50%) 60,000
Ina, Capital (30%) 36,000
Sal Capital (20%) 24,000
To close the summary account.

Inventories 14,000
Mang, Capital (50%) 7,000
Ina, Capital (30%) 4,200

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 Sal Capital (20%) 2,800
To adjust the value of partnership asset.

Mang, Capital (60%) 3,600

Ina, Capital (40%) 2,400
Accumulated depreciation 6000
To record prior period adjustment.

Mang, Capital* 183,400

Cash 183,400
To record retirement of Mang.
*Computation:
Capital -Unadjusted P 120,000
Adjustments:
Share in Net Income P 60,000
Adjustment of assets 7,000
Prior period adjustment (3,600) 63,400
Capital – adjusted P 183,400

Case B: Settlement price is greater than the interest of retiring partner

When the withdrawing partner is paid an amount more than his interest, the excess
payment can be viewed as follows:
a. Bonus to the retiring partner (Bonus Approach)
b. Partial revaluation (goodwill) of partnership assets - Partial Revaluation (Goodwill)
Approach
c. Total revaluation (goodwill) of partnership assets - Total Revaluation (Goodwill)
Approach

When the problem is silent regarding any indication for revaluation of assets, then the bonus
method shall be applied. Otherwise, use the revaluation method to the extent of
revaluation and then apply bonus method for the balance.

Thus, if Mang is paid P185,000 for her interest, the related entries under the above-
mentioned approaches shall be:

Assumption 1: Record Bonus to the Retiring Partner (Bonus Approach)

Mang, Capital 183,400

Ina, Capital (3/5 x 1,600) 960
Sal, Capital (2/5 x 1,600) 640
Cash 185,000
To record the settlement with Mang.

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 Assumption 2: Partial revaluation (goodwill) of partnership assets

Partial revaluation happens when assets and liabilities are revalued only to the extent of the
excess payment. If the difference is attributable to undervaluation of the partnership’s fixed
assets, the related entries would be:

Mang, Capital 183,400

Accumulated depreciation 1,600
Cash 185,000
To record settlement with Mang.

Assumption 3: Total revaluation (goodwill) of partnership assets

Accumulated depreciation (Goodwill) 3,200

Mang, Capital (50%) 1,600
Ina, Capital (30%) 960
Sal Capital (20%) 640
To adjust the value of partnership asset.

Mang, Capital 185,000

Cash 185,000
To record the settlement with Mang.

Case C: Settlement price is less than the interest of retiring partner

A partner who is anxious to dispose of his/her interest in the partnership may agree to
accept less than his/her book value interest in the partnership. The partner may do so for a
number of reasons, such as: (a) he/she may view the future of the company negatively (b)
he/she may need operating capital for personal reasons or (c) the business association may
no longer be acceptable to the partner and, in his or her opinion, a forced liquidation of
the firm might be detrimental to his/her interest. In such cases, use of the bonus approach is
justified, since the settlement may not be based on the economic value of the firm.

When a withdrawing partner agrees to accept less than the amount reported in his/her
capital account, such a difference may be viewed as:
a. Bonus to the remaining partners (Bonus Approach)
b. Partial revaluation/write-down of specific partnership assets (Partial Revaluation
Method)
c. Total revaluation/write-down of specific partnership assets (Total Revaluation
Method)

On the other hand, if Mang is paid P180,000 for her interest, the related entries under each
of the foregoing approaches are as follows:

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 Assumption 1: Bonus to the Remaining Partners (Bonus Approach)

Mang, Capital 183,400

Cash 180,000
Ina, Capital (3/5 x 3,400) 2,040
Sal Capital (2/5 x 3,400) 1,360
To record settlement with Mang.

Assumption 2: Partial revaluation of partnership assets (Partial Revaluation Approach)

Partial revaluation happens when assets and liabilities are revalued only to the extent of the
excess payment. If the difference is attributable to undervaluation of the partnership’s fixed
assets, the related entries would be:

Mang, Capital 183,400

Accumulated depreciation 3,400
Cash 180,000
To record the settlement with Mang

Assumption 3: Total revaluation of partnership assets (Total Revaluation Approach)

Mang, Capital (50%) 3,400

Ina, Capital (30%) 2,040
Sal, Capital (20%) 1,360
Accumulated depreciation (3,400 ÷50%) 6,800
To adjust the value of partnership asset.

Mang, Capital 180,000

Cash 180,000
To record the settlement with Mang.

KEY POINT
The most satisfactory method to record any excess payment (over or
underpayment) of a retiring partner is the BONUS APPROACH. Therefore, if there is no
agreement regarding the method to be used, it is advisable to use bonus approach
because it reflects the legal change in ownership but avoids the theoretical problems
associated with revaluation. On the other hand, if the partners agreed to use
revaluation approach and are silent whether the partial or total approach is to be
used, use PARTIAL REVALUATION APPROACH.

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 III. DEATH OF A PARTNER

The death of a partner legally dissolves the old partnership since a partner ceases to be
associated in carrying on of the business. The remaining partners may continue operations
based on a new Articles of Partnership. In such case, the accounting procedures to be
followed are similar to those discussed in the case of withdrawal of a partner. The deceased
partner may be considered to have withdrawn from the partnership and his heirs or estate is
paid the amount of his interest in the firm.

The following agreement should be provided for between the partners, in case of death of a
partner:

1. Closing of the Books

The articles may provide that upon the death of any partner, the books will not be closed
until the end of the regular fiscal period. In the absence of this agreement, the books should
be closed on the date of death.

2. Amount of profits on which the dead partner may share

The articles may provide that, regardless of the date of death, the deceased partner will
share in the total profits in the year of death. Otherwise, he should share on the
proportionate amount of profits or loss up to the date of death only.

Assume that partner Cruz of XYZ Company died on June 30 of the current year. The
partners share profits and losses equally. The profits for the year amounted to P 240,000. If
the deceased partner shares in the "whole" profits, then he is entitled to P 80,000 (P240,000
profit x 1/3) . However, if he is sharing in the proportionate amount of profits or in the
absence of an agreement as to what period's profits he should share in, his share is P
40,000 which is one-third of P 120,000 (P240,000 x 6/12).

3. Valuation of assets
Upon the death of a partner, an inventory of the assets is taken for the determination of the
interest of the deceased partner. The estate of the deceased partner is entitled to receive
as an ordinary creditor an amount equal to the value of his interest. His interest is based on
the appraised values of the assets of the partnership. The result of the assets’ adjustment is
closed to the partners' capital accounts in their profit and loss ratios before payment of the
deceased partner's capital.

4. Terms of payment
The terms of payment of the deceased partner's interest are subject to the provisions of the
articles of partnership. In default thereof, the surviving partners may enter into an
agreement with the representatives of the deceased partner. Where the capital is not paid
immediately, such amount is transferred to a payable account. This has to be done
because the deceased partner is no longer a co-owner of the firm, neither is he a member
of the new partnership formed.

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 The partnership contract may allow interest (expense) on the capital of the deceased
partner which the business continues to use after the date of death. Thus, in the given
example, interest may be allowed on the deceased partner’s capital which remains
invested in the firm from July 1 to the date of settlement. When no interest is allowed on the
deceased partner’s capital balance, the partnership contract may provide that the
deceased partner will share in the net income for the whole fiscal period in accordance
with the old profit and loss sharing ratio.

5. Insurance on Partners’ Lives

Partnerships may carry insurance on the lives of the partners, with either the partnership or
the surviving partners as beneficiaries. Upon the death of the insured, the insurance
proceeds may be used to pay the heirs or the estate of the deceased partner. In this way,
the partnership working capital is not so seriously impaired as to disrupt the operations of the
business.

ILLUSTRATION:
Assume that Papa, Daddy, Erpat and Ama are partners sharing profits and losses in the ratio
of 5:3:2:5, respectively. On January 1 of the current year, their capital balances are:

Papa P 440,000
Daddy 344,000
Erpat 288,400
Ama 200,000

Ama, the managing partner, died on September 1. The books were closed on this date
and net profits for the eight-month period amounted to P135,864. After negotiations with
the remaining partners, the estate of the deceased partner agreed to accept as full
settlement a one-year 12% note for P200,000 and the balance in cash.

 Assuming an immediate settlement of the estate is desired, the entries are prepared as:

Income summary 135,864

Papa, Capital (5/15) 45,288
Daddy, Capital (3/15) 27,173
Erpat, Capital (2/15) 18,115
Ama, Capital (5/15) 45,288
To close net income.

Ama, Capital 245,448

Cash 45,448
Notes payable 200,000
To record settlement with estate of Ama.

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  Assuming that the firm continued operations until December 31 which is the end of the
fiscal period and realized a net profit of P207,000, the following entries are prepared:

Income summary* 138,000

Papa, Capital (5/15) 46,000
Daddy, Capital (3/15) 27,600
Erpat, Capital (2/15) 18,400
Ama, Capital (5/15) 46,000
To record distribution of profit prior to death
of Ama.
*Computation:
Total net profit P 207,000
x Fraction of year (Jan 1 – Sept 1) 8/12
Net profit prior to death P 138,000

Income summary* 69,000

Papa, Capital (5/15) 34,500
Daddy, Capital (3/15) 20,700
Erpat, Capital (2/15) 13,800
To record distribution of profit after the death
of Ama.
*Computation:
Total net profit P 207,000
Net profit prior to death (138,000)
Net profit after death P 69,000

To record settlement with estate of Ama.

Ama, Capital 246,000
Cash 46,000
Notes payable 200,000
To record settlement with the estate of Ama.

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 Practice Exercise 7-1: TRUE OR FALSE

On the space provided, write TRUE if the statement is correct, if incorrect, write FALSE.

___________1. When a new partner is admitted into the new partnership, the consent of the
other partners is not necessary.
___________2. When a partner retires from the partnership, anyone from the remaining
partners may purchase his interest.
___________3. The total assets of the partnership will increase upon admission of a new partner
by purchase of interest.
___________4. In the admission of a partner by purchase, any change in the value of assets
and liabilities from the last balance sheet to the date of dissolution shall be for
the account of the old partners.
___________5. Admission of a new partner by purchase of interest is a debit to the capital
account of the buying partner.
___________6. There is increase in assets with the corresponding increase in capital under
admission of a new partner by investment.
___________7. The retiring partner’s capital includes his share in the net income or net loss of
the partnership up to the date of retirement.
___________8. The sale of interest of the retiring partner to a new partner will require the
recognition of a gain or loss on the partnership books.
___________9. Upon death of one of the partners, the remaining partners may continue
operations based on the old Articles of Partnership.
___________10. The death of a partner transfers his entire interest to his estate prior to
settlement by the partnership.
___________11. There is increase in assets with the corresponding increase in capital in
admission of a new partner by investment.
___________12. When a retiring partner is paid more than his capital interest without revaluation
of assets, the excess payment is treated as a bonus by the retiring partner to
the remaining partners.
___________13. The sale of interest of the withdrawing partner to a new partner will require the
recognition of a gain or loss in the partnership books.
___________14. Upon death of one of the partners, the remaining partners may continue
operations based on the old articles of partnership.
___________15. A partnership maybe dissolved by mere expulsion of any partner.

Practice Exercise 7-2: MULTIPLE CHOICE – CONCEPTUAL

Select the letter of the best possible answer to each of the following items.
_______1. The following are indications of partnership dissolution except:
A. Two or more sold part of their interest to a third party
B. A new partner is admitted to the partnership by contributing cash to the
partnership
C. One partner withdrew from the partnership
D. One partner died and the remaining partners decided not to continue
partnership operations
E. Answer not given
_______2. Partners may admit a new partner in the partnership for the following reasons,
except:

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 A. Need for additional capital
B. Need for skills or expertise of the new partner
C. Partners want to reduce their interest in the partnership
D. All of the above
E. Answer not given
_______3. When a partnership is dissolved and total partnership assets after dissolution is
greater than total assets before dissolution, the dissolution might have been
accounted for as:
A. Admission by investment
B. Admission by purchase of interest – undervaluation of assets recognized
C. Neither a nor b
D. Either a or b
E. Answer not given
_______4. Which journal entry holds true for admission of a new partner by purchase of
interest?
A. Debit to the capital account of new partner equal to the purchase price
B. Debit to the capital account of selling partner equal to the purchase
price
C. Credit to the capital account of new partner equal to the purchase price
D. Debit to the capital account of new partner equal to book value of
interest purchased
E. Credit to the capital account of new partner equal to book value of
interest purchased
_______5. Admission by investment will most probably result to the following, except:
A. Total agreed capital equal to total contributed capital
B. Total agreed capital greater than total contributed capital
C. Total agreed capital lesser than total contributed capital
D. all of the above
E. Answer not given
_______6. Admission of a new partner by investment, where the total agreed capital is
greater than total contributed capital, can result to:
A. Bonus to the old partners and undervaluation of assets closed to old
partners’ capital
B. Bonus to the new partner and undervaluation of assets closed to old
partners’ capital
C. Neither a or b
D. Either a or b
E. Answer not given
_______7. When a partner dies or withdraw from the partnership, his capital in the partnership
must be adjusted for the following, before settlement, except:
A. Share in the net income of the partnership till the date of death or
withdrawal
B. Share in the adjustment of partnership assets to their fair values at date of
death or withdrawal
C. Share in adjustment of partnership liabilities to their fair values at date of
death or withdrawal
D. None of the above
E. Answer not given
_______8. A mode of settling the interest of a retiring partner that affects the partnership
assets.

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 A. Payment by an outsider
B. Payment by any of the remaining partners
C. Proportional payment by all of the remaining partners
D. Payment by the partnership
E. Answer not given
_______9. When Marlon retired from the partnership of Lara, Bella and Marlon, he was paid
an amount more than his adjusted capital balance. Under the bonus method, the
excess:
A. Was recorded as an expense
B. Was recorded as reduction to the capital balances of Lara and Bella.
C. Has no effect on the capital balances of Lara and Bella.
D. Was recorded as addition to the capital balance of Lara and Bella.
E. Answer not given

Practice Exercise 7-3: (Admission by Purchase of Interest)

Dally and Lily are partners with capital balances of P120,000 and P90,000, respectively. Profits
and losses are shared 75% to Dally and 25% to Lily. On May 18 of the current year, they agreed
to admit Chloe to the partnership under each of the following independent cases.

Instructions: Prepare journal entries to record the admission of Chloe in the partnership and
compute for the new profit and loss ratio after her admission for the following cases:
Case 1 - Chloe purchases one-half of the interest of Dally for P60,000.
Case 2 - Chloe purchases one-half of the interest of Dally for P55,000.
Case 3 - Chloe purchases one-third of the interest in the partnership for P80,000.
Case 4 - Chloe purchases one-third of the interest in the partnership for P80,000 and it is
agreed that the net assets should be revalued.
Case 5 - Chloe purchases one-third of the interest in the partnership for P50,000 and it is
agreed that the net assets should be revalued
Case 1 - Chloe purchases one-half of the interest of Dally for P60,000.
GENERAL JOURNAL
DATE PARTICULARS PR DEBIT CREDIT
1 1
2 2
3 3
4 4

Computation of New Profit and Loss Ratio:

Old P/L Ratio Transfer of Interest New P/L Ratio

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 Case 2 - Chloe purchases one-half of the interest of Dally for P55,000.

GENERAL JOURNAL
DATE PARTICULARS PR DEBIT CREDIT
1 1

2 2

3 3

4 4

Computation of New Profit and Loss Ratio:

Old P/L Ratio Transfer of Interest New P/L Ratio

Case 3 - Chloe purchases one-third of the interest in the partnership for P80,000.
GENERAL JOURNAL
DATE PARTICULARS PR DEBIT CREDIT
1 1

2 2

3 3

4 4

5 5

Computation of New Profit and Loss Ratio:

Old P/L Ratio Transfer of Interest New P/L Ratio

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 Case 4 - Chloe purchases one-third of the interest in the partnership for P80,000 and it is agreed
that the net assets should be revalued.
GENERAL JOURNAL
DATE PARTICULARS PR DEBIT CREDIT
1 1

2 2

3 3

4 4

5 5

6 6

7 7

8 8

9 9

10 10

Computation of New Profit and Loss Ratio:

Old P/L Ratio Transfer of Interest New P/L Ratio

Case 5 - Chloe purchases one-third of the interest in the partnership for P50,000 and it is agreed
that the net assets should be revalued

GENERAL JOURNAL
DATE PARTICULARS PR DEBIT CREDIT
1 1

2 2

3 3

4 4

5 5

6 6

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 7 7

8 8

9 9

10 10

11 11

Computation of New Profit and Loss Ratio:

Old P/L Ratio Transfer of Interest New P/L Ratio

Practice Exercise 7-4: (Admission by Investment)

Brown and Yellow are partners with capital balances of P108,000 and P72,000, respectively. The
partners agreed to share profits and losses 70% to Brown and 30% to Yellow. They decided to
admit Green into the partnership.

Instruction: Give the entries to record the admission of Green under each of the following
independent cases:
Case 1 - Green contributes P150,000 cash into the partnership. Green will have 40%
interest and share in partnership profits. Bonus is recognized upon the admission
of Green in the partnership.
Case 2 - Green contributes P150,000 cash into the partnership. Green will have 40%
interest and share in partnership profits. Green paid a P45,000 excess over the
proportionate book value because the partnership owns land with a book value
of P140,000 but a recent appraisal indicates the land has a market value of
P185,000.
Case 3 - Green contributes P150,000 cash into the partnership. Green will have 40%
interest and share in partnership profits. Green paid a P45,000 excess because of
unrecognized goodwill as indicated by the partnership’s high profitability.
Case 4 - Green contributes P100,000 cash into the partnership. Green will have 40%
interest and share in partnership profits. Bonus is recognized upon the admission
of Green in the partnership.
Case 5 - Green contributes P100,000 cash into the partnership. Green will have 40%
interest and share in partnership profits. Green paid a P30,000 excess over the
proportionate book value because the inventories of the partnership which is

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 currently recorded at book value of P90,000 has fair market value of only P60,000
because some items are obsolete.
Case 6 - Green contributes P100,000 cash into the partnership. Green will have 40%
interest and share in partnership profits. Green paid a P30,000 excess over the
proportionate book value because they all agreed that Green should be given
goodwill when he joined the partnership in recognition of his anticipated excess
contribution to the partnership’s future earnings.

Case 1 - Green contributes P150,000 cash into the partnership. Green will have 40% interest
and share in partnership profits. Bonus is recognized upon the admission of Green in the
partnership.
GENERAL JOURNAL
DATE PARTICULARS PR DEBIT CREDIT
1 1

2 2

3 3

4 4

5 5

Agreed Capital Computation Contributed Capital Difference

Old
New
Total

Case 2 - Green contributes P150,000 cash into the partnership. Green will have 40% interest
and share in partnership profits. Green paid a P45,000 excess over the proportionate
book value because the partnership owns land with a book value of P140,000 but a
recent appraisal indicates the land has a market value of P185,000.

GENERAL JOURNAL
DATE PARTICULARS PR DEBIT CREDIT
1 1

2 2

3 3

4 4

5 5

Agreed Capital Computation Contributed Capital Difference

Old
New
Total

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 Case 3 - Green contributes P150,000 cash into the partnership. Green will have 40% interest
and share in partnership profits. Green paid a P45,000 excess because of unrecognized
goodwill as indicated by the partnership’s high profitability.

GENERAL JOURNAL
DATE PARTICULARS PR DEBIT CREDIT
1 1

2 2

3 3

4 4

5 5

6 6

Agreed Capital Computation Contributed Capital Difference

Old
New
Total

Case 4 - Green contributes P100,000 cash into the partnership. Green will have 40% interest
and share in partnership profits. Bonus is recognized upon the admission of Green in the
partnership.

GENERAL JOURNAL
DATE PARTICULARS PR DEBIT CREDIT
1 1

2 2

3 3

4 4

5 5

6 6

Agreed Capital Computation Contributed Capital Difference

Old
New
Total

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 Case 5 - Green contributes P100,000 cash into the partnership. Green will have 40% interest
and share in partnership profits. Green paid a P30,000 excess over the proportionate
book value because the inventories of the partnership which is currently recorded at
book value of P90,000 has fair market value of only P60,000 because some items are
obsolete.

GENERAL JOURNAL
DATE PARTICULARS PR DEBIT CREDIT
1 1

2 2

3 3

4 4

5 5

6 6

Agreed Capital Computation Contributed Capital Difference

Old
New
Total

Case 6 - Green contributes P100,000 cash into the partnership. Green will have 40% interest
and share in partnership profits. Green paid a P30,000 excess over the proportionate
book value because they all agreed that Green should be given goodwill when he
joined the partnership in recognition of his anticipated excess contribution to the
partnership’s future earnings.

GENERAL JOURNAL
DATE PARTICULARS PR DEBIT CREDIT
1 1

2 2

3 3

4 4

5 5

6 6

Agreed Capital Computation Contributed Capital Difference

Old
New
Total

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 Practice Exercise 7-5: (Retirement/Withdrawal of a Partner)

The following data on January 1, 2020 for Barry, Manny and Lou Partnership is shown below:

Assets Liabilities and Capital

Cash P 60,000 Accounts Payable P 12,000
Non-cash Assets 48,000 Barry, Capital (30%) 36,000
Loan to Barry 6,000 Manny, Capital (50%) 48,000
Lou, Capital (20%) 18,000
Total P 114,000 Total Liabilities and Capital P 114,000
The percentages in parentheses after the partner’s capital balances represent their respective
interests in profits and losses.

On May 1, 2020, Barry retires from the partnership. The net income of the partnership as of the
date of retirement amounted to P24,000. The partnership paid cash to the retiring partner also
on the retirement date.

Instruction: Prepare journal entries to record the retirement of Barry under each of the following
independent cases.

Case 1 - The partnership paid Barry, P37,200 (Settlement price is equal to the interest of retiring
partner).

GENERAL JOURNAL
DATE PARTICULARS PR DEBIT CREDIT
1 1

2 2

3 3

4 4

5 5

Case 2 - The partnership paid Barry, P42,000. Included in the non-cash assets is an inventory
costing P7,200 with a fair value of P12,000. The remaining partners continue to use their
old profit and loss ratio. (Settlement price is greater than the interest of retiring partner –
Bonus to retiring partner).

GENERAL JOURNAL
DATE PARTICULARS PR DEBIT CREDIT
1 1

2 2

3 3

4 4

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 Case 3 - The partnership paid Barry, P42,000. Included in the non-cash assets is an inventory
costing P7,200 with a fair value of P12,000. The remaining partners continue to use their
old profit and loss ratio. (Settlement price is greater than the interest of retiring partner –
Partial revaluation (goodwill) to retiring partner).

GENERAL JOURNAL
DATE PARTICULARS PR DEBIT CREDIT
1 1

2 2

3 3

4 4

5 5

Case 4 - The partnership paid Barry, P42,000. Included in the non-cash assets is an inventory
costing P7,200 with a fair value of P12,000. The remaining partners continue to use their
old profit and loss ratio. (Settlement price is greater than the interest of retiring partner –
Total revaluation (goodwill) to retiring partner).

GENERAL JOURNAL
DATE PARTICULARS PR DEBIT CREDIT
1 1

2 2

3 3

4 4

5 5

6 6

7 7

8 8

9 9

10 10

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 Case 5 - The partnership paid Barry, P31,200. (Settlement price is less than the interest of retiring
partner – Bonus to remaining partner).

GENERAL JOURNAL
DATE PARTICULARS PR DEBIT CREDIT
1 1

2 2

3 3

4 4

5 5

Case 6 - The partnership paid Barry, P31,200. (Settlement price is less than the interest of retiring
partner – Partial revaluation/Write-down of Assets – Share of retiring partner only).

GENERAL JOURNAL
DATE PARTICULARS PR DEBIT CREDIT
1 1

2 2

3 3

4 4

5 5

Case 7 - The partnership paid Barry, P31,200. (Settlement price is less than the interest of retiring
partner – Total revaluation/Write-down of Assets – Entire entity).

GENERAL JOURNAL
DATE PARTICULARS PR DEBIT CREDIT
1 1

2 2

3 3

4 4

5 5

6 6

7 7

8 8

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 Summative Assessment (Graded Activity) – Partnership Dissolution – Admission by
Investment
Assume the following data for China and Philippines Partnership:

Assets Liabilities and Capital

Cash P 3,000 Liabilities P 9,000
Non-cash Assets 39,000 China, Capital 24,000
China, Loan 3,000 Philippines, Capital 12,000
Total Assets P 45,000 Total Liabilities & Capital P 45,000

China and Philippines share profits and losses in the ratio of 60:40. The partners agree to admit
America as member of the firm.

Instruction: Prepare journal entries to record the admission of America, assuming:

a. America invests P12,000 for a 35% interest in the firm. The total agreed capital after
admission is P48,000.

b. America invests P12,000 for a one-third interest in the firm and is allowed a credit of
P18,000 for his capital.

c. America must invest or contribute cash of P28,800 equivalent to 37.50% interest in total
agreed capital of P76,800. Included in the non-cash assets is an equipment
undervalued by P8,400.

d. America must invest P12,000 for a 45% interest in the firm. The total agreed capital after
admission is P60,000.

e. America invests P18,000 for a 20% interest in the firm. The total agreed capital after
admission is P72,000.

f. America invests P7,200 for a 30% interest in the firm. China and Philippines transfer part
of their capitals to that of America as a bonus. An equipment used in the business with
a book value of P6,000 and a fair value of P3,600.

g. America invests P18,000 for a one-fourth interest in the firm. China and Philippines
Partnership’s had other assets with a book value of P6,600 and a fair value of P11,400.
Revaluation (Goodwill) approach is recorded on the firm books prior to America’s
admission.

h. America invests P18,000 for a 30% capital interest and a 40% interest in profits. Use bonus
approach.

i. America invests P18,000 for a 30% capital interest and a 40% interest in profits. Use
revaluation (goodwill) approach.

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 Summative Assessment (Graded Activity) – Partnership Dissolution – Death of
Partner
Bart, Ton, Manuel and Ed share profits and losses 15%, 15%, 30% and 40%, respectively. Their
partnership agreement provides that in the event of death of a partner, the firm shall continue
until the end of the fiscal period. Profits shall be considered to have been earned
proportionately during the period, and the deceased partner’s capital shall be adjusted by the
proper share of the profit or loss until the date of death. The remaining partners shall continue
to share profits in the old ratio.

Bart dies on November 1, 2019. On this date, the office equipment is under-depreciated by
P12,000 and the inventories are to be revalued to P1,475,000. On December 31, account
balances on the partnership books before the income summary account is closed are as
follows:

Cash P 112,500 Notes Payable P 225,000

Accounts Receivable 1,050,000 Accounts Payable 1,057,500
Inventories 1,425,000 Bart, Capital 337,500
Office Equipment, net 675,000 Ton, Capital 360,000
Store Furniture and Fixtures, net 247,500 Manuel, Capital 562,500
Ed, Capital 630,000
Income Summary 337,500
Total P 3,510,000 Total P 3,510,000

The estate of Bart agreed to accept a 60-day, 12% note amounting to P200,000 and the
balance in cash. The income summary account is closed on December 31.

Instructions: Prepare journal entries to record the following:

a. Adjustment of assets on the date of death
b. Distribution of net profit prior to death of Bart
c. Distribution of net profit after death of Bart
d. Settlement with the estate of Bart
e. Settlement of the note

End of Module 7

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