CHAPTER 19 PARTNERSHIP DISSOLUTION

Introduction
Introduction
A business conducted as a partnership usually has changes in ownership during
its existence. In this chapter, we discuss the changes in ownership that do not
result in the termination of the partnership operations or of the partnership as a
separate business and accounting entity. Such change in ownership s termed as
dissolution. Partnership dissolution is defined as "the change in the relation of
the partners caused by any partner ceasing to be associated in the carrying on
as distinguished from the winding up of the business." Dissolution ends the
association of partners for their original purpose.
Unlike corporation, changes in ownership structure are events that require
special accounting treatment.
Accounting for Partnership Dissolution
Accounting for a partnership is influenced by the propriety theory,
which views a partnership not as a distinct entity, but rather, as a
group of individual investors. Measuring changes in the equity of the
individual partners is a major aspect of partnership accounting.
Because ownership changes result in the dissolution of the
partnership, this provides an excellent opportunity for structure of
the partnership which is presumed to be arm's length transactions
that reflect the current value of the partnership.
Capital Interest versus Profit and Loss Interest
In preparing partnership agreement, the partners must recognize
that there is a distinction between a partner's capital interest and
his/her interest in income and losses subsequently reported in the
partnership.
A partner's capital interest is a claim against the net assets of the
partnership as shown by the balance in the partner's capital
account. An interest in profit and loss determines how the partner's
capital interest will increase or decrease as a result of subsequent
operations.
In some cases, the relationship of the capital accounts to one
another does not correspond with the partner's profit and loss ratio.
Capital balances are historical cost figures. As describe earlier, a
partner's capital interest may change over time because they result
from contributions and withdrawals made throughout the life of the
business as well as from the allocation of partnership income.
Therefore, any correlation between a partner's recorded capital at a
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particular point in time and the profit and loss percentage would
probably coincidental.
For example, Mr. X became a partner by having a capital of P40,000
out of a total capital of P100,000. Mr. X received a forty-percent
(40%) capital interest in the partnership, but he was given a thirty-
five percent (35%) interest in profit and loss.
Assignment of an Interest to a Third Party
A partnership is not dissolved when a partner assigns his/her
interest in the partnership to a third party, because such an
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
partnership assets in the event of liquidation.
The assignee does not become a partner and does not obtain the
right to share in management of the partnership or to review
transactions and records of the partnership. Because the assignee
does not become a partner, the only change required on the
partnership books is to transfer the interest of the assignor
partner to the assignee.
Illustration 19-1:
The capital balances (and profit and loss ratio) of A and B in the AB
partnership is presented as follows:
A, capital (75%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 75,000
A, capital (25%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 60,000
A assign 30% of his interest to C (C paid P26,000 for the interest
assigned). The entry to record the assignment is as follows:
A, Capital (30% x 75,000) . . . . . . . . . . . . . . . . . . . . . 22,500
C, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,500
The purchase price paid by C is completely irrelevant to the entry
recorded on the books.
The following should be noted:
1. The amount of the capital transfer is equal to the book value of A's
capital at the time of the assignment, and is independent of the
consideration received by A.
2. If the book value of A's capital is P22,500 (30% x P75,000), then the
amount of the transfer entry is P22.500, regardless of whether C pays A
P22,500 or some other amount.
The remaining discussions of this chapter consider the problems
that arise upon dissolution as a result of the:

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 1. Admission of a new partner:
a. by Purchase of Interest, and
b. by Investment
2. Withdrawal or retirement of a partner,
3. Death or incapacity of a partner, and
4. Incorporation of a partnership
Partnerships commonly deviate from GAAP in the following areas:
1. the use of the cash basis instead of the accrual basis,
2. the use of prior period adjustments.
3. the use of current values instead of historical cost (usually in
connection with a change in ownership), and
4. the recognition of goodwill (usually in connection with a
change in ownership).
Valuation-An Issue
When there is a change in the ownership of the partnership, the
problem of assigning a fair value of the firm arises. It is a question as
to whether or not the assets and liabilities of the continuing
partnership should be revalued. There are two approaches under
this particular issue:
1. Revaluation approach (usually referred to as goodwill
procedure. Non-GAAP). Under this approach, the use of fair
values provides an equitable measure of each partner's
capital interest in the partnership.
Revaluation of assets and liabilities are supported on the basis
that, in dissolution, the old partnership is legally dissolved and a
new partnership entity is formed. Therefore, the basis of
valuation for new entities is the fair value of the assets acquired
and liabilities assumed by the newly formed entity.
The practice of recognizing increases in partnership net assets is
not in compliance with generally accepted accounting principles
(GAAP). Partnerships using these non-GAAP methods argue that
revaluing all assets and liabilities at the time of the change in
partnership membership states fully the true economic condition of
the partnership at that point in time, and properly assigns the
changes in assets and liability values and goodwill to the partners
who have been managing the business during the time changes in
value occurred.
Further, this approach results in a marked departure from the
historical cost principle and differs from the accepted accounting

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principles in Philippine Financial Reporting Standards (PFRS) 3,
"Business Combinations", which prohibits entities from recognizing
goodwill that has not been acquired by acquisition.
Accountants who use the goodwill or asset revaluation methods
argue that the goal 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 corporate
entities.
2. Absence of revaluation (usually referred to as the bonus
procedure/book value approach - GAAP). Proponents of
this approach would retain the historical cost carrying
value. Others argue that changes in partnership interests are
like changes in stockholders of a corporation, and that private
sales of ownership interests provide no basis for revaluation of
the business entity
Some accountants criticize the revaluation of assets or recognition
of goodwill. even though there may be objective evidence that a
specific asset is undervalued or overvalued because it results in a
marked departure from the historical cost principle.
They argue that recording an increase in fair value for external
reporting is not in accordance with substance over form principle.
That is, even though the partnership may be legally dissolved, the
economic substance of some types of dissolution is that the business
activity continues without interruption which means the new
partnership is merely an extension of the old.
These alternative views reflect the concept of legal and business
entities, respectively. Both views have merit, and this text does not
emphasize either. Instead, both views are discussed and illustrated
in the following sections.
For quite some time, it has been a practice to first revalue assets
and liabilities to their lair values and record any identifiable
unrecorded assets and liabilities before recording the admission
or withdrawal of a partner. But, current standards became
prohibitive on the issues of revaluation. In summary, the following
rules should be observed in relation to valuation of assets and
liabilities on dissolution problems.
1. If there is an agreement among partners that revaluation is
allowed, then reflect the necessary adjustments before dissolution.
2. In the absence of an agreement:

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 a. Revaluation approach (or goodwill procedure - Non-GAAP).
The assets and liabilities should be recorded at their fair value.
After a complete analysis, both tangible and intangible assets
acquired by the new entity, including goodwill created by the
previous partnership, should be recorded.
b. Absence of revaluation approach (or bonus procedure
GAAP). Existing book values should not be adjusted to fair
value unless such adjustments would have otherwise been
allowed by GAAP:
i. Recognition of Decreases in Net Asset Revaluations
(GAAP). Following the principle of conservatism
(prudence), decreases or write-downs in the value of
assets may be recognized even though they are not
realized.
Recognition of unrealized losses is not unique to
partnership accounting and is not in conflict with GAAP.
Even if there is no dissolution, unrealized losses suggested
by economic events should be recognized.
For example, PAS No. 36, "Impairment of Assets", presents
procedures for recognizing impairments of fixed assets and
currently held goodwill. Net asset revaluations performed
using the appropriate accounting standards are in
accordance with GAAP

ii. Non-Recognition of Increases in Net Asset Revaluations

(Non-GAAP) There are no GAAP standards that provide for
increases in the value of nonfinancial assets or recognition
of new goodwill, solely due to a change in partnership
membership.

The use of absence of revaluation approach (or bonus

procedure) does prevent the recognition of asset
appreciation, which would otherwise not be allowed by
GAAP.
Admission of a New Partner
A new partner can be admitted with the consent of all partners
in the business. Such an admission brings about a new association
of individuals and represents the formation of new partnership; the
original partnership is considered dissolved by common consent.

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A partnership agreement is binding only while the relationship
between the original parties to the agreement remains unchanged.
A new agreement should be drawn up that specifies the partners'
interests upon formation of the partnership, the distribution of
profits and losses among partners, and all of the other
considerations relative to the new association.
The accounting problems in respect to the admission of a new
partner are as follows:
1. Recognition of accounting errors in prior periods.
2. Recognition of profit or loss from the beginning of the
accounting period to the date of admission.
3. Closing of partnership books.
4. Recognition of net asset revaluations subject to the rules
discussed previously.
Admission by Purchase of an Interest
The purchase of an interest from one or more of the
partnership's existing partners is a personal transaction
between the incoming partner and the selling partner(s). No
additional money or properties are invested in the partnership,
In this respect, the transaction is similar to individual's sale of a
corporation stock. The only entry made on the partnership's books
transfers an amount from the selling partner's capital account to the
new partner's capital account.
Illustration 19-1: Admission by Purchase of an Interest
Assume that after operations and partners' withdrawals during
20x4 and 20x5. DE Partnership has a book value of P100,000 and
profit and loss (P&L) percentage on January 1, 20x6 as follows:
Capital Balance P & L Percentage
D............................. P 60,000 70
E.............................. 40,000 30
Total . . . . . . . . . . . . . . . . . . . . . . . . . . P 100,000 100

On this date, F is admitted to the partnership.

Case 1: Purchase of Interest from One Partner. F paid P24,000
directly to D in exchange for one- third (1/3) interest. The entry to
record the transaction in the books follows:
D, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
F, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000

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The purchase price paid by F is completely irrelevant to the entry
recorded on the partnership books, regardless of why F paid more
than the book value of the partnership interest. Simply. the excess of
P4,000 is a personal gain of partner D.
The above entry shows that no cash is transferred to the
partnership. The new profit and loss ratio will be set by the new set
of partners.
Case 2: Purchase of Interest from All Partners. This situation
gives rise to three assumptions:
Assumption 1: Purchase at Book Value. F purchases a one-fourth
(1/4) interest in the firm, One- fourth of each partner's capital is to
be transferred to the new partner. F pays the partner's P25,000. The
entry to record the transaction in the books follows:
D, Capital (P60,000 x ¼) . . . . . . . . . . . . . . . . . . . . . . . . 15,000
E, Capital (P40,000 x ¼) . . . . . . . . . . . . . . . . . . . . . . . . 10,000
F, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
The capital balances of the partners after the admission of F would
be as follows:
D E F Total
Capital before admission P 60,000 P 40,000 P 100,000
X: Interest remained . . . . . _ ¾ _ ¾ _ _
Capital after P 45,000 P 30,000 P 25,000 P 100,000
admission . . .
It should be observed that the total capital balance before and after
admission is the same, since the book value of the partnership was
preserved.
Since the interest acquired is % it is presumed that this interest
represented the capital and profit and loss interest. Therefore, the
profit and loss ratio of the partners after the admission of f would be
as follows:
D, capital (70% x 52.50 %
¾) . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.50%
E, capital (30% x 25.00%
¾) . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.00%
F, capital (equivalent to interest acquired) . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Assumption 2: Purchase at More than Book Value. F purchased

one-fourth of D's interest for P18,000 and one-fourth of F's interest
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 for P12,000, making payment directly to D and E. The new partner
will have a ¼ profit and loss ratio and the old partners continue to
use their old profit and loss ratio.
There are three alternatives to reflect the above transaction:
Alternative 1: Book value (BV) approach. Same answer with
Assumption 1 above. The positive excess of P5,000 represents a
personal gain of D and E, computed as follows:
Amount paid (P18,000+ P12,000) . . . . . . . . . . . . . P 30,000
Less: BV of interest acquired (P 100,000 x ¼) . . 25,000
Excess (Gain of D and E-personal in P 5,000
nature) . . . .
The partnership does not record this gain because it was not benefited
from it.
*this may also refer to as bonus method.

Alternative 2: Revaluation (goodwill) approach. Under this

approach, the positive excess of the amount paid over book value
acquired will be capitalized to determine the revaluation of assets.
The entry to record the transaction in the books follows:
Asset 20,000
(Goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000
D, Capital (P20,000 x 6,000
70%) . . . . . . . . . . . . . . . . . . .
E, Capital (P20,000 x 70%) . . . . . . . . . . . . . . . . . . .
Amount paid (P18,000+ P12,000) . . . . . . . . P 30,000 / ¼ P 120,000 (100%)
Less: BV of interest acquired (P 100,000 x 25,000 100,000 (100%)
¼) P 5,000
Excess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _ ¼
Divided by (capitalized at): Interest acquired P 20,000 P 20,000 (100%)
Revaluation of Asset
Upward . . . . . . . . . . . . . .

D, Capital [(P60,000 + 14,000) x ¼] . . . . . . . . . . . . . 18,500

E, Capital [(P40,000 + 6,000) x 11,500
¼] . . . . . . . . . . . . . . . 30,000
F, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The capital balances of the partners after the admission of F would
be as follows:
D E F Total
Capital before admission P 60,000 P 40,000 P 100,000
Revaluation of Upward . . . 14,000 6,000 20,000
Capital after P 74,000 P 46,000 P 120,000

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 revaluation . . _ ¾ _ ¾ _ _
X: Interest remained . . . . . P 55,500 P 34,500 P 30,000 P 100,000
Capital after
admission . . .
D, capital (70% x ¾) . . . . . . . . . . . . . . . . . . . . . . . . . . . 52.50 %
E, capital (30% x ¾) . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.50%
F, capital (equivalent to interest acquired) . . . . . 25.00%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.00%
It should be observed that the total capital balance after the
admission increases equivalent to the revaluation of assets
amounting to P20,000. The reason of such adjustments is to equalize
the capital of the new partner to the amount paid,
Assumption 3: Purchase at Less than Book Value. F purchased
one-fourth of D's interest by paying P22,000 directly to D and E. The
new partner will have a profit and loss ratio and the old partners
continue to use their old profit and loss ratio.
There are three alternatives to reflect the above transaction:
Alternative 1: Book value (BV) approach. Same answer with
Assumption 1 above. The negative excess of P3,000 represents a
personal loss of D and E, computed as follows:
Amount paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 22,000
Less: BV of interest acquired (P 100,000 x ¼) . . 25,000
Excess (Loss of D and E-personal in (P 3 ,000)
nature) . . . .

Alternative 2: Revaluation (goodwill) approach. Under this

approach, the negative excess of the amount paid over book value
acquired will be capitalized to determine the revaluation of assets.
The entry to record the transaction in the books follows:
D, Capital (P12,000 x 70%) . . . . . . . . . . . . . . . . . . . . . 8,400
E, Capital (P12,000 x 30%) . . . . . . . . . . . . . . . . . . . 3,600
Asset 12,000
(Goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amount paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 22,000 /¼ P 88,000 (100%)

Less: BV of interest acquired (P 100,000 x 25,000 100,000 (100%)
¼) (P 3,000)
Excess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _ ¼
Divided by (capitalized at): Interest (P12,000 (P12,000) (100%)
acquired )
Revaluation of Asset Downward . . . . . . . . . .

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D, Capital [(P60,000 – 8,400) x ¼] . . . . . . . . . . . . . 12,900
E, Capital [(P40,000 - 3,600) x ¼] . . . . . . . . . . . . . . . 9,100
F, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,000
The capital balances of the partners after the admission of F would
be as follows:
D E F Total
Capital before admission P 60,000 P 40,000 P 100,000
Revaluation of Downward 8,400 3,600 12,000
Capital after P 51,600 P 36,400 P 88,000
revaluation . . _ ¾ _ ¾ _ _
X: Interest remained . . . . . P 38,700 P 27,300 P 22,000 P 88,000
Capital after
admission . . .

D, capital (70% x ¾) . . . . . . . . . . . . . . . . . . . . . . . . . . . 52.50 %

E, capital (30% x ¾) . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.50%
F, capital (equivalent to interest acquired) . . . . . 25.00%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.00%
It should be observed that the total capital balance after the
admission decreases equivalent to the revaluation of assets
amounting to P12,000. The reason of such adjustments is to equalize
the capital of the new partner to the amount paid.
In absence of an agreement, for assumptions 2 and 3 above the book
value approach should be in effect because it would retain the
historical cost carrying value of asset,
The observations before when the purchase was made from one
partner apply in this cate o well. Besides, entries made in (4) and (6)
above have no effect on how cash payment made by F is to be
distributed to D and E outside the partnership. The amount and
distribution of cash is a negotiated transaction between individuals
and does not affect the partnership accounts unless the amount is
used as a basis for the revaluation of the firm.
Comparison of Book Value and Revaluation Approach (Goodwill
Procedure)
To assist the partners in making a decision between the two
methods on their respective capita balances. If the firm were forced
to liquidate, the identifiable assets (or in case of goodwill recognized
will be eventually impaired and would probably be of no value and,
therefore, would represent a loss to the partnership.
The book value and revaluation approach will yield the same result
if two conditions related to the new profit and loss agreement are
met. These are:

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 1. The new partner's profit and loss sharing ratio must be equal
to his/her capital interest (percentage interest in assets).
2. The old partner's continue to share profits and losses between
themselves in the original ratio.
In Case 2, Assumption (2), both the conditions (a) and (b) above
were met, so either the revaluation (goodwill) approach or absence
of revaluation (book value) approach will be selected. The balances
for each method are presented as follows:

Schedule of Account Balances:

Net Asset Capital
Book Value Approach
Assets Revaluation D E F
Balance before P100,000 P60,000 P40,000
admission . . . . . . . . ___________ (15,000 (10,000) P25,000
Admission by purchase . . . . . . . . P100,000 ) P30,000 P25,000
Balance after admission of F . . . . . P45,000

Revaluation Approach: P100,000 P40,000

Balance before P20,000 P60,000 6,000
admission . . . . . . . . __________ _________ 14,000 (11,500) P30,000
Revaluation . . . . . . . . . . . . . . . . . . . (18,500
. P100,000 P20,000 ) P34,500 P30,000
Admission by purchase . . . . . . . . __________ (20,000) (4,500) (5,000)
Balance after admission of F be P55,500
depreciation/impairment . . . . . . . P100,000 -0- (10,500 P30,000 P25,000
Depreciation/ )
impairment* . . . . .
Balance after depreciation/ P45,000
impairment . . . . . . . . . . . . . . . . . . . . .
*new profit and loss ratio (D. 52.50%: E. 22.50%, and F. 25.00%)
The two methods will yield the same results computed as follows:
Capital
D E F
Balances after admission of F (BV approach) P45,000 P30,000 P25,000
Balances after admission of F (Revaluation approach) 45,000 30,000 25,000
Gain or (loss) through use of book value approach -0- -0- -0-

The book value (bonus) approach and revaluation approach will

not yield the same result if the incoming partner's share profit and
loss is not identical with the percentage interest allowed in assets
(capital interest). Therefore, the selection process for the new
(incoming) partner should be as follows:
1. Prefer Book Value (Bonus) approach if, P & L Interest >
Capital Interest. Choice of the bonus method as compared
with the goodwill method results in eventual advantage to the

11
 new partner and corresponding disadvantage to the original
partners.
2. Prefer Revaluation (Goodwill) approach if, P & L Interest <
Capital Interest. Choice of the revaluation (goodwill)
approach results in ultimate advantage to the new partner and
disadvantage to the original partners.

Admission by Investment
An individual may obtain a partnership interest in capital and future
income by investing something of value to the partnership. It
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 and loss ratio.
An incoming partner may acquire an interest in the partnership
based on the following situations:
1. No bonus (absence of revaluation) or no revaluation (goodwill
approach
2. Bonus (absence of revaluation approach, and
3. Revaluation (goodwill approach)

The situation indicated above (2) bonus approach, and (3)

revaluation (goodwill) approach are mutually exclusive of each. Both
methods understand the possibility of adjusting assets and/or the
existence of revaluation of assets (and liabilities). However, they
differ in how these conditions are recognized.
Bonus Approach (GAAP). 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 GAAP.
Therefore, when a partner is admitted to an existing partnership, the
total (agreed) capital of the new partnership consists of the
following:
1. The book value of the previous partnership lest:
2. Any write-downs in the value of the previous partnership's
assets as recognized by GAAP, and

12
 3. The fair value of the consideration paid (net asset contributed
to the partnership by the incoming partner.
The book-value method of the bonus approach does not directly
recognize increases in asset values suggested by the consideration
that the incoming partner.
However, the method does indirectly recognize such increases by
reallocating or adjusting the capital balances of the partners.
Revaluation (Goodwill) Approach (Non-GAAP). The revaluation
(goodwill approach emphasizes the legal significance of a change in
the ownership structure of a partnership. From a legal viewpoint,
the entrance of a new partner results in the dissolution of the
previous partnership and the creation of a new legal entity. Since a
new entity has resulted, the assets transferred to this entity should
be recorded as their fair value.
After a complete analysis, both tangible and intangible assets
acquired by the new partnership, including revaluation of net assets
(goodwill) created by the previous partnership, should be recorded.
Therefore, the total (agreed) capital of the new partnership will
consist of the following values:
1. The book value of the net assets of the previous partnership
plus:
2. Unrecognized appreciation or less unrecognized depreciation
on the recorded net assets of the previous partnership plus:
3. Unrecognized revaluation of net assets (goodwill) traceable to
the previous partnership plus; and
4. The fair value of the consideration paid (net asset contributed),
both tangible and intangible, received from the incoming
partner.
Therefore, in analyzing transactions involving admission of a
partner by investment, the following procedure is followed:
A. Generally, compare the total contributed capital (TCC) with the
total agreed capital (TAC):
1. If TCC TAC, no adjustment is made for revaluation (goodwill) of
net assets.
2. If TCC > TAC, the difference is due to either (which is normally
the case) to the overstatement of the partnership assets or the
required diminution in partner's capital which can be affected
by drawing (this happens if there is a specification that the old
partners will continue to use their old profit and loss ratio).
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 3. If TCC TAC, the difference is due to either unrecorded net
assets (goodwill) or the required additional investment in
partner's capital (this happens if there is a specification that
the old partners will continue to use their old profit and loss
ratio).
B. Specifically, the traceability of bonus or revaluation (goodwill) to
either old or new partners can be determined by comparing the
contributed capital (CC) of the new partner with his agreed capital
(AC):
1. If the CC = AC, there is no transfer of capital (meaning no
bonus) between the old and the new partners. The old
partners' capital accounts are credited for revaluation of net
assets (goodwill), if any.
2. If the CC > AC, the difference is a capital transfer or bonus to
the old partners.
3. If the CC < AC, the additional capital credit is either share in
bonus or revaluation of net assets (goodwill) from the old
partners as the case maybe.

Illustration 19-2: Admission by Investment

Assume the following data for GH Partnership had the following
condensed balance sheet
Assets Liabilities & Capital
Cash P 2,500 Liabilities P 7,500
Noncash Assets 32,500 G, capital (60%) 20,000
G, loan 2,500 H, capital (40%) 10,000
Total P 37,500 Total P 37,500

The percentages in parentheses after the partner's capital balances

represent their respective Interests in profits and losses. The
partners agree to admit J as a member of the firm.
Case 1: No Bonus or No Revaluation. J invests P10,000 for a %
interest in the firm. The total firm capital is to be P40,000.
a. The total agreed capital is equal to total agreed capital:
Total agreed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . . . P40,000
Less: Total agreed capital (P20,000+,P10,000+ P10,000) . . 40,000
Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0-
.
14
b. The new partner's capital is the same with his actual investment,
therefore, no bonus or revaluation to be recognized.
To record the admission of J computed as follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
J, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
The following items should be observed:
1. The one-fourth (1/4) interest acquired by J is presumed to be the capital
interest and profit and loss interest ownership.
2. 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
not total interest.

Case 2: Bonus to New Partner. J invests P10,000 for a 35% interest

in the firm. The total agreed capital after admission is P40,000.
a. The total contributed capital (TCC) is equal to total agreed capital
(TAC), so no revaluation (goodwill should be recognized as follows:
Total agreed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . . . P40,000
Less: Total agreed capital (P20,000+,P10,000+ P10,000) . . 40,000
Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0-
.

b. The new partner's contributed capital is less than the agreed

capital, the difference is attributable to bonus to new partner:
J’s contributed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . P10,000
Less: J’s agreed capital (P40,000 x 35%) . . . . . . . . . . . . . . . . 14,000
Difference (bonus to new (P 4,000)
partner) . . . . . . . . . . . . . . . . . . . .
The entry to record the transaction in the books follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
. 2,400
G, Capital (P4,000 x 1,600
60%) . . . . . . . . . . . . . . . . . . . . . . . 14,000
H, Capital (P4,000 x
40%) . . . . . . . . . . . . . . . . . . . . . . .
J, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Case 3: Revaluation (Goodwill) to New Partner. J invests P10,000

for a 1/3 interest in the firm and is allowed a credit of P15,000 for
his capital.
15
a. The total contributed capital (ICC) is less than the total agreed
capital (TAC), 50 revaluation (goodwill) should be recognized as
follows:
Total agreed capital (P15,000 / P45,000
1/3) . . . . . . . . . . . . . . . . . . Less: Total agreed capital 40,000
(P20,000+,P10,000+ P10,000) . . Difference P 5,000
(revaluation/goodwill) . . . . . . . . . . . . . . . . . . . .

b. The new partner's contributed capital is less than the agreed

capital, the difference of P5,000 in (a) is attributable to
revaluation/goodwill to new partner.
J’s contributed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . P10,000
Less: J’s agreed capital (given) 15,000
......................... P 5,000
Difference (revaluation/goodwill) . . . . . . . . . . . . . . . . . . . .
The entry to record the transaction in the books follows
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
. 5,000
Asset (goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
J, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Case 4: Bonus to Old Partners. J conveyed a tangible assets with a

fair value of P25,000 with an assumed mortgage of P5,000 in
exchange for a 30% interest in capital with bonus to be recognized,
keeping in mind that J would be acquiring a 1/4 interest in profits.
Before the admission of J, GH Partnership had an equipment of
P4,000 with a fair value of P7,000.
a. The total contributed capital (TCC) is equal to total agreed capital
(TAC), so no revaluation (goodwill) should be recognized as follows:
Total agreed capital (should be equal to TCC since it is a bonus method) P50,000
Less: Total agreed capital (P20,000+,P10,000+ P25,000 – P5,000) 50,000
. . . . . . -0-
Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.

b. The new partner's contributed capital is greater than his agreed

capital, the difference is attributable to bonus to old partners:
J’s contributed capital (P25,000- P20,000
P5,000) . . . . . . . . . . . . . . 15,000
Less: J’s agreed capital (P50,000 x 30%) . . . . . . . . . . . . . . . . P 5,000
Difference (bonus to old

16
 partners) . . . . . . . . . . . . . . . . . . . .

The entry to record the transaction in the books follows:

Tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Mortgage 5,000
payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
G, Capital (P5,000 x 60%) . . . . . . . . . . . . . . . . . . . . 2,000
H, Capital (P5,000 x 40%) . . . . . . . . . . . . . . . . . . . . 15,000
J, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The following items should be observed:
1. Since there is no agreement as to the recognition of fair value, the
recognition of understatement of assets under the bonus (book-value)
approach is not allowed under GAAP.
2. The capital Interest of 30% of the new partner is different from his
profit and loss ratio of 1/4. This item is so significant in comparing
bonus approach and revaluation (goodwill) of net asset approach.
Consequently, the new profit and loss percentage is computed as
follows:
G, capital (60% x70%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42%
H, capital (40% x 70%) . . . . . . . . . . . . . . . . . . . . . . . . . . . 28%
J, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100%

Case 5: Revaluation (Goodwill) to Old Partners. J must invest or

contribute cash of P24,000 equivalent to 37.50% interest in a total
agreed capital of P64,000. Included in the noncash assets is an
equipment undervalued by P7,000.
a. The total contributed 'capital (TCC) is less than the total agreed
capitol (TAC), so revaluation should be recognized as follows:
Total agreed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P64,000
Less: Total contributed capital (P20,000 + P10,000 + P 7,000,
revaluation + P24,000) 61,000
.............................................. P 3,000
Difference(revaluation/goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
b. The new partner's contributed capitol is equal to the agreed
capital, the difference of P3,000 in (a) is attributable to revaluation
(goodwill) to old partners:

J’s contributed capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P24,000

Less: J’s agreed capital (P64,000 x 37.5%) . . . . . . . . . . . . . . . 24,000
Difference (bonus to old -0-
partners) . . . . . . . . . . . . . . . . . . . .

17
The entry to record the transaction in the books follows:
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000
G, Capital (P7,000 x 60%) . . . . . . . . . . . . . . . . . . . . 4,200
H, Capital (P7,000 x 40%) . . . . . . . . . . . . . . . . . . . . 2,800

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
. 3,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800
G, Capital (P3,000 x 60%) . . . . . . . . . . . . . . . . . . . . 1,200
H, Capital (P3,000 x 40%) . . . . . . . . . . . . . . . . . . . . 24,000
J, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

It should be observed that under the revaluation (goodwill

approach, the practices of recognizing increases in partnership's net
assets or recognizing previously unrecorded goodwill are not in
compliance with GAAP.
Partnerships using these non-GAAP methods argue that revaluing
assets and liabilities at the lime of the change in partnership
membership states fully the true economic condition of the
partnership at that point in time, and properly assigns changes in
asset and liability values.
Case 6: Bonus and Revaluation (Goodwill) to New Partner. J
invests P10,000 for a 45% interest in the firm. The total agreed
capital after admission is P50,000.
a. The total contributed capital (TCC) is less than the total agreed
capital (TAC), so revaluation (goodwill) should be recognized as
follows:
Total agreed capital (given) . . . . . . . . . . . . . . . . . . . . . . . P50,000
Less: Total agreed capital (P20,000+,P10,000 + P10,000) 40,000
. . Difference (revaluation/goodwill) . . . . . . . . . . . . . . . . . . P 10,000
..
b. The new partner's contributed capital is less than the agreed
capital, the difference of P12,500 are composed of revaluation of
P10,000 in (a) above and the balance is bonus to new partner:

J's contributed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . P 10,000

18
 J's agreed capital: (P50,000 x 22,500
45%) . . . . . . . . . . . . . . . . . . . P 12.500
Difference (total bonus and 10,000
revaluation) . . . . . . . . . . . . . . P 2,500
Less: Revaluation/goodwill to new partner . . . . . . . . . . .
Bonus to new partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The entry to record the transaction in the books follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
. 10,000
Assets (goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500
G, Capital (P2,500 x 1,000
60%) . . . . . . . . . . . . . . . . . . . . . . . 22,500
H, Capital (P2,500 x
40%) . . . . . . . . . . . . . . . . . . . . . . .
J, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Case 7: Bonus and Revaluation to Old Partners. J invests P15,000

for a 20% interest in the firm. The total agreed capital after
admission is P60,000.
a. The total contributed capital (TCC) is less than the total agreed
capital (TAC), so revaluation (goodwill) should be recognized as
follows:
Total agreed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P60,000
Less: Total contributed capital (P20,000+ P10,000+ P15,000) . . . . 45,000
Difference (revaluation/goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P15,000
b. The new partner's contributed capital is greater than the agreed
capital, the difference of P3,000 is bonus to old partners since there
is already a revaluation(goodwill) as indicated by (a) above
J's contributed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . P 15,000
J's agreed capital: (P60,000 x 12,000
20%) . . . . . . . . . . . . . . . . . . . (P 3,000)
Difference (total bonus and 15,000
revaluation) . . . . . . . . . . . . . . P 18,000
Less: Revaluation/goodwill to old partner . . . . . . . . . . .
Total bonus and revaluation to old partners . . . . . . . . . .
The P3,000 difference is considered as a bonus since there was a
transfer of capital (as indicated by the decrease in capital of the new
partner) made by the new partner to the old partners.
The entry to record the transaction in the books follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
. 15,000
Notes
receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,750

19
 Unearned interest income (or Discount on notes 190,000
receivable) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,430
Unearned franchise
revenue . . . . . . . . . . . . . . . . . . 133,000
Unearned service revenue - training,
etc. . . . . . .
Unearned sales revenue - machinery and
equipments,
etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Case 8: Revaluation (Goodwill) to New and Old Partners. J

invests P15,000 for a 30% interest in the firm. The total agreed
capital after admission is P60,000.
a. The total contributed capital (TCC) is less than the total agreed
capital (TAC), so revaluation (goodwill) should be recognized as
follows:
Total agreed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P60,000
Less: Total contributed capital (P20,000+ P10,000+ P15,000) . . . . 45,000
Difference (revaluation/goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P15,000
b. The new partner's contributed capital is less than the agreed
capital, the difference of P15,000 in (a) is attributable to revaluation
(goodwill) to new partner and old partners:
J's contributed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . P 15,000
J's agreed capital: (P60,000 x 18,000
30%) . . . . . . . . . . . . . . . . . . . P 3,000
Difference (total bonus and 15,000
revaluation) . . . . . . . . . . . . . . P 12,000
Less: Revaluation/goodwill to old partner . . . . . . . . . . .
Total bonus and revaluation to old partners . . . . . . . . . .
The entry to record the transaction in the books follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
. 15,000
Assets (goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,200
G, Capital (P12,0000 x 4,800
60%) . . . . . . . . . . . . . . . . . . 12,000
H, Capital (P12,000 x
40%) . . . . . . . . . . . . . . . . . . .
J, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Case 9: Bonus to Old Partners with Bonus Amount Given. J

invests P20,000 in the firm. P5,000 is considered a bonus to
Partners G and H. The book values of partnership assets and

20
liabilities are equal to fair values, except for a machinery with a book
value of P3,000 and a fair value of P7,000.
a. The total contributed capital (TCC) is equal to total agreed capital
(TAC), so no revaluation (goodwill) should be recognized as follows:
Total agreed capital (should equal to TCC since it is a bonus method) . . . . P50,000
Less: Total contributed capital [(P20,000+ P10,000+ P20,000)] . . . . . . . 50,000
Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0-
b. The new partner's contributed capital is greater than his agreed
capital, the difference is attributable to bonus to old partners:
J's contributed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . P 20,000
J's agreed capital: (P20,000 - 5,000) . . . . . . . . . . . . . . . . . . 15,000
Difference (bonus to old (P 5,000)
partner) . . . . . . . . . . . . . . . . . . . . .
The entry to record the transaction in the books follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
. 3,000
G, Capital (P5,0000 x 60%) . . . . . . . . . . . . . . . . . . 2,000
H, Capital (P5,000 x 40%) . . . . . . . . . . . . . . . . . . . 20,000
J, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The following Items should be observed
1. If bonus is indicated to be recognized, then there should be no more
revaluation (goodwill approach to be applied.
2. The same situation in Case 4, the recognition of understatement of
assets is not in compliance with GAAP.
Case 10: Bonus to New Partner with an Indication of Bonus. J
invests P6,000 for a 30% interest in the firm. G and H transfer part
of their capitals to that of J as a bonus. An equipment used in the
business with a book value of P5.000 and a fair value of P3,000.
a. There is an overstatement of asset amounting to P2,000 (P5,000-
P3,000) that is needed. to be recorded to comply with the provisions
of GAAP recognizing overvaluation of net assets. Therefore, the
contributed capital of partner G and H are as follows:
G. capital: P20,000-(P2.000 x 60%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 18,800
H. capital: P10,000-(P2,000 x 40%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,200
Total contributed capital before the admission . . . . . . . . . . . . . . . . . . . P 28.000
b. The total contributed capital (ICC) is equal to total agreed capital
(TAC), so no revaluation (goodwill) should be recognized as follows:
Total agreed capital (should equal to TCC since it is a bonus method) P 34,000
.... 34,000
Less: Total contributed capital (P28.000 (a) + -0-
P6.000) . . . . . . . . . . . .
Difference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21
c. The new partner's contributed capital is less than the agreed
capital, the difference is attributable to bonus to new partner:
J's contributed capital P 6,000
(given) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,200
J's agreed capital: (P34,000 x 30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 4,200
Difference (bonus to new partner) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The entries to record the transaction in the books follows:
G. capital (P2,000 x 60%) . . . . . . . . . . . . . . . . . . . . . . . 1,200
H, capital (P2.000 x 800
40%) . . . . . . . . . . . . . . . . . . . . . . . 2,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
. 2,520
G, Capital (P4,200 x 1,680
60%) . . . . . . . . . . . . . . . . . . . . . . . 10,200
H, Capital (P4,200 x
40%) . . . . . . . . . . . . . . . . . . . . . . .
J,
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Case 11: Revaluation (Goodwill) to Old Partners with an

Indication of a Revaluation (Goodwill). J invests P15.000 for a %
interest in the firm. GH Partnership's had other assets with a book
value of PS,500 and a fair value of P10,500. Revaluation (goodwill
approach is recorded on the firm books prior to J's admission.
a. There is an understatement of asset amounting to P5,000
(P10,500 - P5,500) that is needed to be recorded (also even in cases
of overstatement) as long as the revaluation (goodwill) approach is
being used. Therefore, the contributed capital of partner G and H are
as follows:
G, capital: P20,000+ P23,000
(P5,000x60%) . . . . . . . . . . . . . . . . . . . 12,000
H. capital: P10,000+ P 35,000
(P5,000x40%) . . . . . . . . . . . . . . . . . . .
Total contributed capital before the
admission . . . . . . . .
b. The total contributed capital (TCC) is less than the total agreed
capital (TAC), so revaluation (goodwill should be recognized as
follows:
Total agreed capital (P15,000/ 1/4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 60,000
Less: Total contributed capital [P35,000 (a) + 50,000
P15,000] . . . . . . . . . . . P 10,000
22
 Difference (revaluation/goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The old partner's total contributed capital of P35,000 should not be
used as a basis because it will result to a negative revaluation, in
cases of revaluation and there is no specification as to upward or
downward adjustments, the presumption should always be upward.
The P15,000 was capitalized by ¼ to determine the value of the
partnership as a whole.
c. The new partner's contributed capital is equal to the agreed
capital, the difference of P10.000 in (a) is attributable to revaluation
(goodwill) to old partners:
J's contributed capital P 15,000
(given) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
J's agreed capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0-
Revaluation/goodwill to new
partner . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000

G. capital (P2,000 x 60%) . . . . . . . . . . . . . . . . . . . . 3,000
H, capital (P2.000 x 2,000
40%) . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
. 10,000
Assets (goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
G, Capital (P4,200 x 6,000
60%) . . . . . . . . . . . . . . . . . . . . . . . 4,000
H, Capital (P4,200 x
40%) . . . . . . . . . . . . . . . . . . . . . . .
J,
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
It should be observed that when revaluation (goodwill) is indicated
to be recognized, then there should be no more bonus approach to
be applied.
Case 12: Revaluation (Goodwill) to New Partner with
Revaluation Amount Given. J invests P20.000 in the firm and is
allowed a credit of P6.000 for revaluation (goodwill).
a. The total contributed capital (TCC) is less than the total agreed
capital (TAC), so revaluation (goodwill) should be recognized as
follows:
Total agreed capital (TCC, P50,000+ P6.000, goodwill) . . . . . .. . . . . . P 6,000
Less: Total contributed capital (P20,000+ P10,000+ P20,000) . . . . 10,200
Difference (revaluation/goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 4,200

23
b. The new partner's contributed capital is less than the agreed
capital, the difference of P6,000 in (a) is attributable to revaluation
(goodwill) to new partner.
J's contributed capital P 20,000
(given) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.000
J's agreed capital: (P20.000 + P 6.000
P6,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revaluation/goodwill to new
partner. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The entry to record the transaction in the books follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
. 6,000
Assets (goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,000
J, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Case 13: Withdrawals Instead of Revaluation. J invests P20,000

for a 50% interest in the firm. The total firm capital is to be P40.000
and partners agreed that their capital balances should made equal to
their new profit and loss ratio.
a. The total contributed capital (TCC) is greater than total agreed
capital (TAC), so it should have been a negative revaluation, Since
there was an indication that capital balances should be equal to the
profit and loss (old or new) ratio, then the difference should be
considered as withdrawals (if it is a positive revaluation it should
have been. additional investment and if the TCC TAC, it should have
been settlement between partners) instead of negative revaluation,
Total agreed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 40,000
Less: Total contributed capital (P20,000+ P10,000+ P20,000) . . . . 50,000
Difference (withdrawals) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 10.000
b. The new partner's contributed capital is less than the agreed
capital, the difference is attributable to bonus to new partner:
J's contributed capital P 20,000
(given) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
J's agreed capital: (P40,000 x 50%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0-
Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
c. The withdrawals of P10.000 should be attributable to the old
partners computed as follows:
Total agreed capital P 40,000
(given) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Less: J's agreed capital (P40,000 x 50%) . . . . . . . . . . . . . . . . P 20,000
Total agreed capital of the old partners . . . . . . . . . . . . . . . . . P12,00
Less: G's agreed capital (P20,000 x 60%) . . . . . . . . . . . . . . . 8,000 20,000
H's agreed capital (P20,000 x 40%) . . . . . . . . . . . . . . .

24
 8,000
G's withdrawal: P20,000-P12,000 2,000
H's withdrawal: P10,000-P8.000
The entry to admission and withdrawal in the books as follows:
Cash (P20,000 - 10,000
P10,000) . . . . . . . . . . . . . . . . . . . . . . . 8,000
G, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
H, 20,000
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J,
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Case 14: Bonus and Revaluation (Goodwill) When Not

Specifically Stated. An agreement may Indicate that an incoming
partner is to receive an interest that is greater or smaller than that
which would be recognized if the partner were simply to receive
credit for the amount invested. Such an agreement, however, may fail
to point out whether or not the required interest is to be
accomplished through recognition of bonus or revaluation
(goodwill. In the absence of an expressed statement, the conditions
for admission must be carefully analyzed. Following are the
examples:
Assumption 1: Revaluation (Goodwill) or Bonus to New Partner.
J invests P15,000 for a 40% capital interest and a 25% interest in
profits.
Since there was no specification as to what approach is to be used,
the following alternatives are presented:
Alternative 1: Bonus Approach.
a. The total contributed capital (TCC) is equal to the total agreed
capital (TAC), so по revaluation (goodwill) should be recognized as
follows:
Total agreed capital (should be equal to TCC, since it is a Bonus method) P 45,000
Less: Total contributed capital (P20,000 + P10,000+ P15,000) . . . 45,000
Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0-
b. The new partner's contributed capital is less than the agreed
capital, the difference is attributable to bonus to new partner:
J's contributed capital P 20,000
(given) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.000
J's agreed capital: (P45,000 x 40%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 6.000
Difference (bonus to new partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The entry to record the transaction in the books follows:

25
 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
G, Capital (3,000 x 60%) . . . . . . . . . . . . . . . . . . . . . . . . 1,800
H, Capital (3,000 x 60%) . . . . . . . . . . . . . . . . . . . . . . . . 1,200
J, 18,000
Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Alternative 2: Revaluation (Goodwill) Approach.

a. The total contributed capital (TCC) is less than the total agreed
capital (TAC), so. revaluation (goodwill) should be recognized as
follows:
Total agreed capital: (P20,000+ P10.000)/(100%- P 50,000
40%) . . . . . . . . . . 45,000
Less: Total contributed capital (P20,000+ P10,000+ P15,000) . . . . P 5,000
Difference (revaluation/goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
b. The new partner's contributed capital is less than the agreed
capital, the difference of P5,000 in (a) is attributable to revaluation
(goodwill) to new partner:
J's contributed capital P 15,000
(given) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.000
J's agreed capital: (P50,000 x 40%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 5.000
Difference (revaluation/goodwill to new
partner . . . . . . . . . . . . . . . . .
The entry to record the transaction in the books follows:
Cash (P20,000 - 15,000
P10,000) . . . . . . . . . . . . . . . . . . . . . . . 5,000
Asset (goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
J, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The following items should be observed:

1. The New Profit and Loss Ratio. The capital interest of J is 40%,
while his profit and loss is 25%, so the new profit and loss interest of
the new partnership is computed as follows:
G, capital (60% x 75%) . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 %
H, capital (40% x 75%) . . . . . . . . . . . . . . . . . . . . . . . . . . . 30%
I capital (equivalent to interest acquired) . . . . . . . . . . 25%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100%
.
2. The Capital Balances of the New Partners. After admission of
partner J, the capital balances of the new partners are computed as
follows:
Bonus Approach (total agreed capital)
- refer to Alternative I above:

26
 G, capital (P20,000 – P18,200
P1,800) . . . . . . . . . . . . . . . . . . . . . . . . . 8,800
H, capital (P10,000 – P1,200). . . . . . . . . . . . . . . . . . . . . . . . . 18,000
I P45,000
capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.
Revaluation (goodwill) Approach (total agreed capital)
- refer to Alternative 2 above
G, P20,000
capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
H, 20,000
capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P50,000
I capital (P50,000 x 40%) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.

3 .Comparing Bonus or Revaluation (Goodwill) Approach. In

admission by purchase [i.e. Case 2. Assumption 2), comparing book-
value approach against revaluation (goodwill), the partner is
indifferent on both situations because of the following reasons:
a. The new partner's profit and loss sharing ratio is the same
with his/her capital interest (percentage interest in assets)
b. The old partner's continue to share profits and losses between
themselves in the original ratio.
But, in this particular situation (Case 14, Assumption 1), the capital
interest which is 40% s different from the profit and loss interest of
25%. So, to compare bonus against revaluation (goodwill) as
follows:
Schedule of Account Balances
Net Asset Capital
Assets Revaluation G H J
Bonus approach:
Balance before admission of J. . . . P45,000 P18,200 P8,800 P18,000

Revaluation Approach:
Balance before admission of J . . . . P45,000 P5,000 P20,000 P10,000 P20,000
Depreciation/ __________ __(5,000) (2,250) (1,500) (1,250)
impairment* . . . . .
Balance after depreciation/ P450,000 -0- P17,250 P8,500 P18,750
impairment . . . . . . . . . . . . . . . . . . . . .
*new profit and loss ratio (G, 45% H, 30% and J, 25%)
The two methods will yield the same results computed as follows:
Capital
G H J

27
Balances after admission of J (Bonus approach) P18,200 P8,800 P18,000
Balances after admission of J (Revaluation approach) 17,750 8,500 18,750
Gain or (loss) through use of book value approach P 450 P 300 P( 750)
The bonus approach and revaluation (goodwill approach will not
yield the same result if the incoming partner's share profit and loss
is not identical with the percentage interest allowed in assets
(capital interest). Therefore, the selection process for the new
(incoming) partner should be as follows:
1. Prefer Bonus approach it. P & L interest > Capital interest.
2. Prefer Revaluation (Goodwill) approach if, P & L interest <
Capital interest.
Therefore, the new partner should elect to use the revaluation
(goodwill) approach because of the P750 advantage.

Assumption 2: Revaluation (Goodwill) or Bonus to Old Partners.

J invests P15,000 for a 30% capital interest and a 40% interest in
profit
Since there was no specification as to what approach is to be used,
the following alternatives pre presented:
Alternative 1: Bonus Approach,
a. The total contributed capital (ICC) is equal to the total agreed
capital (TAC), so no revaluation (goodwill) should be
recognized as follows:
Total agreed capital (should be equal to TCC. since it is a bonus method) P 45,000
Less: Total contributed capital (P20,000+ P10,000+ P15,000). 45,000
Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0-
b. The new partner's contributed capital is greater than the agreed
capital, the difference is attributable to bonus to old partners:
J's contributed capital P 15,000
(given) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,500
J's agreed capital: (P45,000 x 30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 1,500
Difference (bonus to old partners). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The entry to record the transaction in the books follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
. 900
G, Capital (P1,500 x 60%) . . . . . . . . . . . . . . . . . . . . 600
H, Capital (P1,500 x 40%) . . . . . . . . . . . . . . . . . . . . 13,500
J, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Alternative 2: Revaluation (Goodwill) Approach

28
a. The total contributed capital (ICC) is greater than the total agreed
capital (TAC), so revaluation (goodwill) should be recognized as
follows:
Total agreed capital: P15,000/30% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 50,000
Total contributed capital (P20,000+ P10,000+P15,000) . . . . . . . . . . 45,000
Difference (revaluation/goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 5,000
b. The new partner's contributed capital is equal to the agreed
capital, the difference of P5.000 in (a) is attributable to revaluation
(goodwill) to old partners:

J's contributed capital (given) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 15,000

J's agreed capital: (P50,000 x 30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0-
The entry to record the transaction in the books follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
. 5,000
Asset 3,000
(Goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
G, Capital (P5,000 x 60%) . . . . . . . . . . . . . . . . . . . 15,000
H, Capital (P5,000 x 40%) . . . . . . . . . . . . . . . . . . .
J, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The following items should be observed:

1. The New Profit and Loss Ratio. The capital interest of J is 30%,
while his profit and loss is 40%, so the new profit and loss interest of
the new partnership is computed as follows:
G, capital (60% x 75%) . . . . . . . . . . . . . . . . . . . . . . . . . . . 30%
H, capital (40% x 75%) . . . . . . . . . . . . . . . . . . . . . . . . . . . 36%
I capital (equivalent to interest acquired) . . . . . . . . . . 24%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100%
.
2. The Capital Balances of the New Partners. After admission of
partner J, the capital balances of the new partners are computed as
follows:
Bonus Approach (total agreed capital) - refer to Alternative 1 above:
G, capital (P20,000+ P900) . . . . . . . . . . . . . . . . . . . . . . . . . . . P20,900
H, capital (P10,000+ 10,600
P600) . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,500
I P45.000
capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.

29
 Revaluation (goodwill) Approach (total agreed capital) - refer to
Alternative 2 above:
G, capital (P20,000+ P3,000) . . . . . . . . . . . . . . . . . . . . . . . . . P 23,000
H, capital (P10,000+ P2,000) . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
I capital (P50,000 x 30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P50,000
.
3. Comparing Bonus or Revaluation (Goodwill) Approach. In
Case 14, Assumption 2, the new partner prefers the revaluation
(goodwill) approach because the profit and loss interest (25%) is
less than his capital interest (40%).
But, in this particular situation (Assumption 2), the profit and loss
interest (40%) is greater than his capital interest (30%), eventually;
the bonus approach should be preferred, To compare bonus against
revaluation (goodwill) as follows:

Schedule of Account Balances

Net Asset Capital
Assets Revaluation G H J
Bonus approach:
Balance before admission of J. . . . P45,000 P20,900 P10,600 P13,500

Revaluation Approach:
Balance before admission of J . . . . P45,000 P5,000 P23,000 P12,000 P15,000
Depreciation/ __________ __(5,000) (1,800) (1,200) (2,000)
impairment* . . . . .
Balance after depreciation/ P45,000 -0- P21,200 P10,800 P13,000
impairment . . . . . . . . . . . . . . . . . . . . .

Capital
G H J
Balances after admission of J (Bonus approach) P20,900 P10,600 P13,500
Balances after admission of J (Revaluation approach) 21,200 10,800 13,000
Gain or (loss) through use of book value approach P (300) P (200) P 500

The bonus approach and revaluation (goodwill) approach will not

yield the same result if the incoming partner's share profit and loss
is not identical with the percentage interest allowed in assets
(capital interest). Therefore, the selection process for the new
(incoming) partner should be as follows:
1. Prefer Bonus approach if. P & L interest > Capital interest.
2. Prefer Revaluation (Goodwill) approach if, P & L interest <
Capital interest.

30
Therefore, the new partner should elect to use the bonus
approach because of the P500 advantage.
In cases where there is no specification as to bonus approach or
revaluation (goodwill) approach, the bonus approach should be
applied because it conforms to the cost principle of valuing assets.

Withdrawal/Retirement of a Partner
When a partner withdraws, the partnership agreement should be
consulted to determine whether or not any guidelines have been
established that would influence the procedure. The withdrawal of a
partner requires a determination of the fair value of the partnership
entity and a measurement of partnership income to the date of
withdrawal.
Likewise, in many cases, the interest of the retiring partner may not
be equal to the partner's capital balance as a result of the following
items:
1. Capital balance (including withdrawals and additional
investments);
2. Recognition of accounting errors in prior periods;
3. Recognition of profit or loss from the beginning of the
accounting period to the date of retirement;
4. Loans and advances to (from) the partnership; and
5. Recognition of net asset revaluations subject to the rules
discussed previously.
In some cases, if a partner withdraws in violation of the partnership
agreement and without approval of the remaining partners, he is
entitled only to his interest in the firm without consideration of
revaluation (goodwill). In such a case, the withdrawing partner is
liable for damages sustained by the remaining parties for his breach
of the partnership agreement. However, a partner who is forced to
withdraw from a partnership is entitled to compensation for his full
interest including revaluation (goodwill) as determined.
In the following examples, it is assumed that the partners mutually
agree to the retirement such That:
1. The refiring partner may elect to sell his interest to an outside
party;
2. The retiring partner may elect to sell his interest to one or
more of the remaining partners: or

31
 3. The partners may mutually agree to transfer partnership assets
(payment from partnership funds) to the retiring partner for
his interest in the firm. Settlement may either be:
a. Payment in cash;
b. Transfer on non-cash assets; and
c. Recognition of liability for the full or balance of the unpaid
total interest of the retiring partner.
Situation 1 has been discussed earlier in admission by purchase (the
only difference with retirement is that in admission by purchase it
should be capital interests only unlike retirement wherein it should
be total interest of the retiring partner) and need not be reviewed.
The same considerations apply to Situation 2, if negotiated outside
the partnership.
Situation 3 will be discussed thoroughly in the following
illustration:
The partners may agree to use the bonus approach or the
revaluation (goodwill) approach to record the withdrawal:
Bonus Approach (GAAP). If the bonus approach is used, the
remaining partners are charged with the amount of the payment
that exceeds the book value of the retiring partner's capital balance.
The amount of the bonus paid to the retiring partner is commonly
allocated to the remaining partners on the basis of their relative
profit and loss ratio (in this case the relative ratio of L to Mis 5:2).
Support for this approach is based on the cost principle. The bonus
approach may also be justified when the remaining partners are
simply anxious to get rid of a partner for various reasons. Any
recognition of revaluation (goodwill) is difficult to justify in the
absence of an arm's length transaction,
Revaluation (Goodwill) Approach (Non-GAAP). The revaluation
(goodwill) approach focuses on the payment to the retiring partner
as an indication of the fair value of the partnership.
Furthermore, it is used if (1) remaining partners will not agree to a
reduction in their capital: (2) the partners made specific provisions
in the partnership agreement on how the withdrawal is to be
recorded; or (3) the partners agree than a revaluation (goodwill) is
to be recognized. If the partnership has been profitable, the
partnership as a whole may be worth more than the for value of the
net assets.

32
Once again, the revaluation (goodwill) approach is supported on the
basis that a new entity s being formed and the accounts of the new
entity should be based.
Many accountants criticize recording revaluation (goodwill) on the
retirement of a partner on the same theoretical grounds as they
criticize recording unrecognized revaluation (goodwill on the
admission of a new partner. Nevertheless, partnership accounting
sometimes uses all the recognition of revaluation (goodwill) at this
event.
Illustration 19-3: Withdrawal/Retirement of a Partner
Assume the following data on January 1, 20x4 for KLM Partnership
had the following condensed balance sheet:
Assets Liabilities & Capital
Cash P 50,000 Liabilities P 10,000
Noncash Assets 40,000 K, capital (30%) 30,000
Loan receivable – K 5,000 L, capital (50%) 40,000
M, capital (20%) 15,000
Total P 95,000 Total P 95,000
The percentages in parentheses after the partner's capital balances
represent their respective interests in profits and losses.
On May 1, 20x4, K retires from the partnership. The net income of
the partnership to date of retirement amounted to P20.000. The
partnership paid cash to the retiring partner also on the retirement
date.
The following entries are necessary on the partnership books before
paying the interest of the retiring partner
Income 20,000
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
K, Capital (P20,000 x 30%) . . . . . . . . . . . . . . . . . . . 10,000
L, Capital (P20,000 x 50%) . . . . . . . . . . . . . . . . . . . 4,000
M, Capital (P20,000 x 20%) . . . . . . . . . . . . . . . . . .

K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Loan receivable – K . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
The total interest of the retiring partner K amounted to:
Capital Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 30,000
Add (deduct):
Share in net 6,000
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,000)
Loan P31,000
receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33
 Total Interest of K before his retirement . . . . . . . . . . . . . .

Case 1: Payment at Book Value (Settlement price is equal to the

Interest of retiring partner). The partnership paid K, P31,000.
The entry to record the transaction in the books follows:
K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,000

Case 2: Payment at More than Book Value (Settlement price is

greater than the Interest of retiring partner). The partnership
paid K, P35,000. Included in the noncash assets is an inventory
costing P6,000 with a fair value of P10,000. The remaining partners
continue to use their old profit and loss ratio.
Assumption 1: Bonus to Retiring Partner. The excess is considered
bonus chargeable to L and M.
The entry to record the transaction in the books follows:
K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,000
L, capital (P4,000 x 5/7) . . . . . . . . . . . . . . . . . . . . . . . . 2,857
M. capital (P4,000 x 2/7) . . . . . . . . . . . . . . . . . . . . . . . 1.143
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000
The following items should be observed:
1. Under bonus approach, undervaluation of net assets should not
be recorded because this will be in contradiction of current
accounting standards.
2. The capital balances of the partners after the retirement of K
are as follows:
L. capital (P40,000+ P10,000, profit P2,857, bonus) . . . . . . . . . . . . . . P 47,143
M, capital (P15,000+ P4,000 profit-P1,143, bonus) . . . . . . . . . . . . . . . P 17,857

Assuming the same data, except that by mutual agreement the

inventory is to be adjusted to their fair value. Then, the undervalued
asset should be recorded first before the settlement.
The entries to record the transaction in the books follows:
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
. 1,200
K, Capital (P4,000 x 30%) . . . . . . . . . . . . . . . . . . . . 2,000
L, Capital (P4,000 x 50%) . . . . . . . . . . . . . . . . . . . . 800
M, Capital (P4,000 x
20%) . . . . . . . . . . . . . . . . . . . .
34
 K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,200
L, capital (P2,800 x 5/7) . . . . . . . . . . . . . . . . . . . . . . . . 2,000
M. capital (P2,800 x 2/7) . . . . . . . . . . . . . . . . . . . . . . . 800
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000
To record retirement of K computed as follows:
Amount paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 35,000
Less: BV of K's total interest (30%)- (P31,000 + 32,200
P1,200) . . . . . . . . . . P 2,800
Bonus to Retiring
Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Assumption 2: Partial Revaluation (Goodwill) to Retiring

Partner. The excess is considered as revaluation (goodwill) to be
recognized.
The entries to record the transaction in the books follows:
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
. 1,200
K, Capital (P4,000 x 30%) . . . . . . . . . . . . . . . . . . . . 2,000
L, Capital (P4,000 x 50%) . . . . . . . . . . . . . . . . . . . . 800
M, Capital (P4,000 x
20%) . . . . . . . . . . . . . . . . . . . .

K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,200
Asset (goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,800
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000

Amount paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 35,000

Less: BV of K's total interest (30%)- (P31,000 + 32,200
P1,200) . . . . . . . . . . P 2,800
Bonus to Retiring
Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The following Items should be observed:

1. Some argue that, in accordance with the cost basis, only the
revaluation (goodwill) of P2,800 that has been purchased
should be recorded.
2. The situation at bar is the same situation in admission by
investment Case 9, that recognition of understatement of
assets is in compliance with GAAP under the revaluation
(goodwill) approach.

35
 3. The capital balances of the partners after the retirement of K
are as follows:
L. capital (P40,000 + P10,000, profit + P2,000, P 52,000
adjustment) . . . . . . . 19,800
M, capital (P15,000+ P4,000, profit + P800 adjustment) . . . . . . . . . .
A modified version of this partial revaluation (goodwill) approach happens
assuming that when assets and liabilities are revalued only to the extent of
the excess payment to K, the entry to record the transaction is as follows:

K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,000
Asset (goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000
Amount paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 35,000
Less: BV of K's total interest (30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,000
Partial revaluation (goodwill) to Retiring Partner . . . . . . . . . . . . . . . . P 4,000

Assumption 3: Total Revaluation (Goodwill) to Retiring Partner.

The excess is considered as revaluation (goodwill) to be recognized.
The entries to record the transaction in the books follows:
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
. 1,200
K, Capital (P4,000 x 30%) . . . . . . . . . . . . . . . . . . . . 2,000
L, Capital (P4,000 x 50%) . . . . . . . . . . . . . . . . . . . . 800
M, Capital (P4,000 x
20%) . . . . . . . . . . . . . . . . . . . .
Assets (goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,333
K, Capital (P9,333 x 30%) . . . . . . . . . . . . . . . . . . . . 2,800
L, Capital (P9,333 x 50%) . . . . . . . . . . . . . . . . . . . . 4,666
M, Capital (P9,333 x 1,867
20%) . . . . . . . . . . . . . . . . . . . .
Amount paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 35,000
Less: BV of K's total interest (30%) - P31,000+ P1,200 . . . . . . . . . . . 32,200
P 2,800
Divided by (capitalized at): Profit and loss % of K . . . . . . . . . . . . . . . . 30%
Total Revaluation P 9,333
(goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The P2.800 represents K's 30% interest in revaluation (goodwill) of P9,333.
Notice that the P2,800 represents K's interest in the gain, which would be
realized if the revaluation (goodwill) were sold. Therefore, K's percentage is
used to suggest the total value of the revaluation (goodwill.

K, capital (P 32,200+ P2,800) . . . . . . . . . . . . . . . . . . . 35,000

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000
The following items should be observed:

36
 1. Whether part or all of the goodwill is recognized, opponents of
this procedure contend that transactions between partners
should not be viewed as arm's length; therefore, the measure of
revaluation (goodwill) may not be determined objectively. In
like manner, inequitable results may be produced if the
remaining partners subsequently changed their profit and loss
ratio.
2. The capital balances of the partners after the retirement of K
are as follows:
L, capital (P40,000 + P10,000, profit + P2,000, adjustment + P4,666) . . . . P56,666
M, capital (P15,000+ P4,000, profit + P800 adjustment + P1,867) . . . . . . . . 21,667

Comparison of Bonus Approach and Revaluation Approach

(Goodwill Procedure)
Comparing bonus approach and revaluation (goodwill approach is
not feasible when there is an undervaluation of net assets (that is
not allowed to be recorded due to GAAP rule) because this will
distort the capital balances.
For purposes of comparison, let us assume that there is no
undervalued inventory amounting to 94,000 in Case 2 above. Refer
to the following schedule for comparison.
Schedule of Account Balances
Asset Capital
Revaluation L M
Bonus approach:
Balance before admission of P47,143 P17,857
K..................

Revaluation Approach: P**4,000 P50,000 P15,000

Balance before admission of __(4,000) (2,857) (1,143)
K* . . . . . . . . . . . . . . . . . -0- P47,143 P17,857
Depreciation/impairment*** . . . . . . . . . . . . . . . . .
Balance after depreciation/ impairment . . . . . . . .
* excluding undervalued inventory of P2,000 and P800 for Land M. respectively.
** P35,000-P31,000 P4,000, partial revaluation
*** old profit and loss ratio (L, 5/7 and M, 2/7)

Asset Capital
Revaluation L M
Bonus approach:
Balance before admission of P47,143 P17,857
K..................

Revaluation Approach: P**13,333 P56,666 P21,667

Balance before admission of __(13,333) (9,523) (3,810)
K* . . . . . . . . . . . . . . . . . -0- P47,143 P17,857

37
 Depreciation/impairment*** . . . . . . . . . . . . . . . . .
Balance after depreciation/ impairment . . . . . . . .
* excluding undervalued inventory of P2.000 and P800 for L and M, respectively.
** P35.000-P31,000 P4,000, partial revaluation/30%=P13.333.
L capital: (P40,000+ P10.000) + (P13,333x50%)=P56,666
M, capital: (P15,000+ P4.000) + (P13,333 x 20%) = P 21,667
*** old profit and loss ratio (L. 5/7 and M. 2/7)

The three methods will yield the same results computed as follows:
Total .
L M .
Balances after retirement of K (Bonus approach) P 47,143 P 17,857
Balances after retirement of K (Partial Revaluation approach) P 47,143 P 17,857
Balances after retirement of K (Total Revaluation approach) P 47,143 P 17,857

Again, as previously discussed in admission by purchase, the bonus

approach and revaluation (goodwill) approach will yield the same
result because the remaining partner continue to share profits and
losses between themselves in the original ratio.
In the same situation with admission by purchase, wherein there is
no specification as to bonus approach or revaluation (goodwill)
approach, the bonus approach should be applied. As to revaluation
(goodwill) approach, both the partial or total revaluation (goodwill)
may be used to comply with the provisions of PFRS 3.
Case 3: Payment at Less than Book Value (Settlement price is
less than the Interest of refiring partner). The partnership paid K,
P26,000.
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. When a withdrawing partner agrees to
accept less than the amount reported in his/her capital account,
such a difference may be viewed (1) as a bonus accruing to
remaining partners, or (2) revaluation approach (in case. there is an
existing goodwill, as an offset against the goodwill balance).
The partner may do so for a number of reasons, such as (1) he/she
may view the future of the company negatively, (2) he/she may need
operating capital for personal reasons, or (3) the business
association may no longer be acceptable to the partner and, in his or
her opinion, 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.

38
Assumption 1: Bonus to Remaining Partners. The excess is
considered bonus chargeable to L and M.
The entry to record the transaction in the books follows:
K. capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,000
L, capital (P5,000 x 5/7) . . . . . . . . . . . . . . . . . . . . . 3,571
M, capital (P5,000 x 2/7) . . . . . . . . . . . . . . . . . . . . . 1,429

Amount paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 26.000

Less: BV of K's total interest (30%) . . . . . . . . . . . . 31,000
Bonus to Remaining P 5,000
Partners . . . . . . . . . . . . . . . . . .

Assumption 2: Partial Revaluation/Write-down of Specific

Assets (Share of Retiring Partner). The excess is considered as
partial revaluation/write-down of specific assets to be recognized.
K, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,000
Specific 5,000
Asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 26.000
Less: BV of K's total interest (30%) . . . . . . . . . . . . . . . . . . 31,000
Partial revaluation/write-down of specific assets . . . . P 5,000

The capital balances of the partners after the retirement of K are as

follows:
L, capital (P40,000+ P10.000, P 50.000
profit) . . . . . . . . . . . . . . . . . 19,000
M, capital (P15,000+ P4,000
profit) . . . . . . . . . . . . . . . . . .

Assumption 3: Total Revaluation/Write-down of Assets (Entire

Entity). The excess is considered as revaluation/write-down of
assets for the entire entity.,
The entries to record the transaction in the books follows:
K. capital 5,000
(P16,667x30%) . . . . . . . . . . . . . . . . . . . . . . . 8,334
L, capital (P16,667 x 50%) . . . . . . . . . . . . . . . . . . . . . . 3,333
M, capital (P16,667 x 16.667
39
 20%) . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 26.000
Less: BV of K's total interest (30%) . . . . . . . . . . . . . . . . . . 31,000
Partial revaluation/write-down of specific assets . . . . P 5,000
Divided by (capitalized at): Profit and loss % of K. 30%
Total revaluation/Write-down of assets P 1,667
*The P5.000 represents K's 30% interest in write-down of assets of
P16,667. Notice that the P5.000 represents K's interest in the loss.
K, capital (P 31,000 - 26,000
P5.000). . . . . . . . . . . . . . . . . . . . 26,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The capital balances of the partners after the retirement of K are as
follows:
L, capital (P40,000 +P10,000, profit - P 41,666
P8,334) . . . . . . . . 15,667
M, capital (P15,000+ P4,000, profit - P8.333) . . . . . . . .

Comparison of Bonus Approach and Revaluation Approach

(Goodwill Procedure)
Although either the bonus or revaluation (goodwill) approach can
be used to record the withdrawal of K, it should be observed that, as
in the case of earlier examples involving problems of bonus and
revaluation (goodwill), the alternative approaches offer the same
ultimate results only when the remaining partners continue to share
profits between themselves in the original ratio.

Death of a Partner
The death of a partner dissolves the partnership. In the absence of
specific provisions to the contrary, profit and loss should be
summarized, the partnership assets should be appraised, and the
descendant’s interest in the partnership should be established as of
the date of death. Profit or loss from the date the books were last
closed is determined and transferred to the capital accounts in the
existing profit and loss ratio.
The change in asset values arising from revaluation is likewise
carried in the capital accounts in the profit and loss ratio. It is then
the obligation of the partners to wind up the business. Assets are

40
sold, liabilities are paid-off, and settlement is made with the
partner’s estate and surviving partners.
Partners may provide by agreement that in the event of the death of
a partner the business shall be continued by surviving partners.
Partners may agree to settle for the interest of the deceased partner
(1) by payment from partnership assets, (2) by payment from
partnership assets, (3) by payment from partnership insurance
proceeds with surviving partners acquiring the deceased partner’s
interest.

Incorporation of a Partnership
Partners may evaluate the possible advantages to be gained by
incorporating a partnership. Among such advantages are limited
liability of stockholders, case of attracting additional capital, and
possible income tax advantages.
Partners may decide to incorporate in order to secure the
advantages in the corporate form of organization. When a charter is
granted recognizing a corporation, the corporation will act to
acquire the net assets of the partnership for its shares of stock.
To ensure that each partner receives an equitable portion of the
capital stock issued by the new corporation, the assets of the
partnership must be adjusted to current fair value before being
transferred to the corporation. Any identifiable intangible asset or
goodwill developed by the partnership is included among the assets
transferred to the corporation.
The shares of stock receive by the partnership is distributed to the
partners in settlement of their equities. The corporation thus takes
over the assets and assumes the liabilities of the partnership; the
partnership is dissolved and the partner now becomes shareholders
in the newly organized corporation. In recording activities of the
new entity, the partnership books may be retained, or a new set of
books may be opened
Partnership Books Retained
If the partnership books are retained, entries are necessary to
report:
1. Changes in asset and liability values in the partner’s interests
prior to incorporation, and

41
 2. The change in the form of proprietorship. A revaluation
account may be debited with losses and credited with gains
from revaluation, and the balance in this account may
subsequently be closed into the capital accounts in the profit
and loss ratio.
However, with relatively few adjustments, the capital accounts may
be debited or credited directly for losses and gains from revaluation.
The issuance of shares of stocks in exchange for the partners’
interests is recorded by debits to the partners’ capitals and credits to
the appropriate capital accounts.

New Books Opened for the Corporation

If new books are opened for the corporation, all the accounts of the
partnership are closed. In closing the accounts of the partnership,
the transfer of assets and liabilities to the corporation, the receipt of
shares of stocks in payment of net assets transferred, and the
distribution of shares to the partners are recorded. If it is desired to
provide a full summary of the transactions that terminated the
partnership, entries may also record the restatement of net assets
and partners’ interests.
Entries are made on the new books of the corporation to record the
assets that were acquired, the liabilities that were assumed, and the
shares that were issued in payment for net assets.

Illustration 19-4: Incorporation of a Partnership

Assume that Janel and Khay, partners of Janel & Khay Partnership,
who share net income and loss in a 4:1 ratio, organize J & K
Corporation to take over the net assets of the partnership. The
balance sheet of the partnership on June 30, 20x4, the date of
incorporation, is as follows:
Janel & Khay Partnership
Balance Sheet
June 30, 20x4
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 12,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 28,100
Less: Allowance for doubtful accounts . . . . . . . . . . . . . . . 600 27,500
Inventories, first in, first out 25,500
cost . . . . . . . . . . . . . . . . . . . . .
42
Equipment at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 60,000
Less: Accumulated depreciation of equipment . . . . . . . 26,000 34,000
Total P 99,000
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities and Partner’s Capital
Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 35,000
Partner’s capital:
Janel, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 47,990
Khay, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,010 64,000
Total liabilities and partner’s capital . . . . . . . . . . . . . . . . . P 99,000
After an appraisal of the equipment and an audit of the partnership's
financial statements, the partners agree that the following
adjustments are required to restate the net assets of the partnership
to current fair value:
 Increase the allowance for doubtful accounts to P1,000.
 Increase the inventories to current replacement cost of
P30,000.
 Increase the equipment to its reproduction cost new, P70,000,
less accumulated depreciation on this basis, P30,500; that is, to
current fair value, P 39,500.
 Recognize accrued liabilities of P1,100.
 Recognize goodwill of P10,000
J & K Corporation is authorized to issue 10,000 shares of P10 par
common stock. It issues 7,500 shares of common stock valued at P11
a share to the partnership in exchange for the net assets of the
partnership. The 7,500 shares received by the partnership are
divided between the partners on the basis of the adjusted balances
of their capital accounts. (Partners may withdraw small amounts of
cash to round their capital account balances to even amounts, thus
avoiding the issuance of fractional shares of common stock.) This
procedure completes the dissolution and liquidation of the
partnership.

Partnership Books Retained

The journal entries to adjust and eliminate the accounting records of
the Janel & Khay Partnership on June 30, 20x4, are as follows:
Entries in the Books of the New Corporation using the Partnership
Books:

43
 Entries in the Books of the New Corporation using the Partnership Books:
Inventories (P30,000 – P 4,500
Equipment (P70,000 – P60,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Allowance for Doubtful Accounts (P1,000 – P600) . . . . . . . 400
Accumulated Depreciation of Equipment (P30,500 – 4,500
Accrued 1,100
Janel, Capital (P18,500 x 14,800
Khay, Capital (P18,500 x 3,700
To adjust assets and liabilities to agreed amounts and to
divide net gain of P18,500 between partners in 4:1 ratio

Janel, Capital (P47,990 + 62,790

Khay, Capital (P16,010 + P3,700) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,710
Common stock (P10 par x 7,500 75,000
Paid-in capital in excess of par [(P11 – P10) x 7,500 7,500
To record distribution of common stock of J & K Corporation
to partners;
Janel: (P47,990 + P14,800) / P11 per share = 5,708 shares
Khay: (P16,010 + P3,700) / P11per share = 1,792 shares
Total shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500 shares

New Books Opened for the Corporation

Although the accounting records of the partnership may be modified
to serve as the records of the new corporation, it is customary to use
a new set of accounting records for the corporation. If this
alternative is followed, the procedures required are:
In Accounting Records of Partnership:
1. Prepare journal entries for revaluation of assets, including
recognition of goodwill.
2. Record any cash withdrawals necessary to adjust partners’
capital account balances to round amounts.(In some instances,
the contract may require transfer to the corporation of all
assets except cash.)
3. Record the transfer of assets and liabilities to the corporation,
the receipt of the corporation’s common stock by the
partnership, and the distribution of the common stock to the
partners in settlement of the balances of their capital
accounts.
Entries in the Books of the Partnership:
Inventories (P30,000 – P 25,500) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500
Equipment (P70,000 – P60,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Allowance for Doubtful Accounts (P1,000 – 400
Accumulated Depreciation of Equipment (P30,500 – 4,500
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100

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 Janel, Capital (P18,500 x 0.80) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,800
Khay, Capital (P18,500 x 0.20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,700
To adjust assets and liabilities to agreed amounts and to divide
net gain of P18,500 between partners in 4:1 ratio

Receivable from J & K Corporation (P64,000 – P18,500) . . . . . . . . . . 82,500

Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100
Allowance for Doubtful Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Accumulated Depreciation of Equipment . . . . . . . . . . . . . . . . . . . . . . 30,500
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,100
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
To record transfer of assets and liabilities to J & K Corporation.
Common Stock of J & K Corporation (7,500 shares x 82,500
Receivable from J & K Corporation . . . . . . . . . . . . . . . . . . . . . . . . . 82,500
To record receipt of 7,500 shares of P10 par common stock
valued at P11 a share in payment for net assets transferred to J &
K Corporation.
The journal entries to adjust and eliminate the accounting records of
the Janel & Khay Partnership on June 30, 20x4, are presented below:
Janel, Capital (P47,990 + P14,800) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,790
Khay, Capital (P16,010 + P3,700) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,710
Common Stock of J & K Corporation . . . . . . . . . . . . . . . . . . . . . . . . 82,500
To record distribution of common stock of J & K Corporation to
partners;
Janel: (P47,990 + P14,800) / P11 per share = 5,708 shares
Khay: (P16,010 + P3,700) / P11per share = 1,792 shares
Total shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500 shares

In the Accounting Records of the Corporation:

1. Record the acquisition of assets and liabilities (including
obligation to pay for the net assets) from the partnership at
current fair values.
2. Record the issuance of common stock at current fair value in
payment of the obligation to the partnership
The journal entries in the accounting records of J & K Corporation on
June 30,20x4 are as follows:
Entries in the Books of the New Corporation:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,100
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,500
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Allowance for Doubtful Accounts . . . . . . . . . . . . . . . . . . . 1,000
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 Accounts 35,000
Accrued 1,100
Payable to Janel & Khay Partnership . . . . . . . . . . . . . . . . 82,500
To record acquisition of assets and liabilities from Janel &
Khay Partnership.
Payable to Janel & Khay Partnership . . . . . . . . . . . . . . . . . . . . . .
Common stock, P10 par (7,500 x P10) . . . . . . . . . . . . . . 75,000
Paid-In Capital in Excess of Par . . . . . . . . . . . . . . . . . . . . . 7,500
To record issuance of 7,500 shares of common stock
valued at P11 a share in payment for net assets of Janel &
Khay Partnership.
Note that the allowance for doubtful accounts is recognized in the
accounting records of J & K Corporation because the specific
accounts receivable that may not be collected are not known. In
contrast, the depreciation recognized by the Janel & Khay
Partnership is disregarded by J & K Corporation because the “cost”
of the equipment to the new corporation is P39,500. The balance
sheet for J & K Corporation on June 30, 20x4, is as follows:
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 12,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 28,100
Less: Allowance for doubtful accounts . . . . . . . . . . . . . . . . 1,000 27,100
........
Inventories, at current replacement costs . . . . . . . . . . . . . 30,000
Equipment, at current fair value . . . . . . . . . . . . . . . . . . . . . . 39,500
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Total P118,600
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities and Stockholder’s Equity
Liabilities:
Accounts P 35,000
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,100
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 36,100
.Stockholder’s
.... equity:
Common stock, P10 par, authorized 10,000 shares,
issued and outstanding 7,500 P 75,000
shares . capital
Paid-in . . . . . . . in
. . .excess
. . . . . . .of
. . par
. . . . .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . 7,500 82,500
.Total
. . . . liabilities and stockholder’s equity . . . . . . . . . . . . . . P118,600
........

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