ACC 102 FINANCIAL ACCOUNTING AND REPORTING 2
MODULE 3
Dissolution / Changes in Ownership
Week 5 to 9
INTRODUCTION
In a contract of partnership, cases like dissolution is very possible since one of its characteristics
is having a limited life. Any change in the relation of the partners or any change in membership of
this form of organization will result to dissolution. In most cases, the business partners need to
decide what will happen to the partnership itself. A partnership my be dissolved, but that may not
end its business operations. If the partnership is to continue, they may have to decide what to do
with its clients or customers particularly those already with the business for long or one that is
particularly being served by any of the partners.
An ethical partnership will notify its customers and clients of the change and whether and how the
partnership is going to continue as a business under the new partnership agreement. Partnership
Act, Art. 8, outlines the general obligations and duties of partners when a partnership is dissolved.
The Uniform Partnership Act state that the one change upon dissolution is that “each partner’s duty
not to compete” ends when the partnership dissolves.
LEARNING OBJECTIVES
After studying this module, students should be able to
1. define dissolution;
2. identify and understand the different causes why partnership business is dissolved;
3. distinguish between admission by purchase of an interest and admission by investment of
assets;
4. solve the new capital structure and the new profit and loss sharing ratio among partners after
dissolution;
5. record all necessary journal entries related to dissolution of partnership
DEFINITION
The dissolution of the partnership is 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.
(Civil Code of the Phils, Art. 1828). Dissolution does not terminate the partnership but continues
until the winding up of the partnership affairs is completed (Article 1829) it brings to an end the
association of individuals for their original purpose but not the termination of the business.
Winding up is the process of settling the business affairs after dissolution.
Termination is the point in time when all partnership affairs are wound up or completed
and it is the end of the partnership life.
DISSOLUTION VS. LIQUIDATION
A partnership is said to be liquidated when the business is terminated. A partnership may be
dissolved without being terminated but liquidation is always preceded by dissolution. When
partnership dissolution occurs, a new accounting entity is formed. The new set of partners shall
prepare a new articles of partnership while the operation of the business continues.
CAUSES OF DISSOLUTION
Changes in ownership occurs for the following reasons:
A. Admission of a new Partner
B. Withdrawal or retirement of a partner.
C. Death of a partner
D. Incorporation of the partnership
A. ADMISSION OF A NEW PARTNER
Since the basis of partnership is mutual trust and confidence. It is therefore a rule among partners
that a new partner can only be admitted into the partnership with the consent of all partners.
Admission of a new partner causes the partnership to be dissolved and now it is required that a
ACC 102 FINANCIAL ACCOUNTING AND REPORTING 2
new partnership agreement be formulated to govern the new partnership that will continue the
business operation. A person may become a partner in an existing partnership by:
A. PURCHASE OF INTEREST FROM ONE OR MORE OF THE EXISTING PARTNERS
With the consent of the old partners, it is a method of acquiring interest in the partnership
which is a personal transaction between the partner who sells his interest and the buyer who
becomes a partner. The payment made by the incoming partner is not additions to the assets
of the partnership but payment made directly by the incoming partner to the selling partner.
This type of admission requires a debit to the Capital account of the selling partner for the
interest sold and a credit to the Capital account of the buying partner for the interest
purchased. The equity account and the total assets of the partnership are not affected upon
admission.
Illustration:
Assume that Dani is to be admitted in the “ABC Partnership” of Ahn, Bona and Cass with the
following assumptions:
a. Dani purchased ½ of Bona’s interest for P150,000
b. Dani purchased ¼ of Ahn’s interest for 50,000.
c. Dani purchased ¼ of Cass interest for 56,000
The Statement of Financial Position prior to the admission of Dani is shown below:
ABC Partnership
Statement of Financial Position
June 30, 2019
Assets:
Cash P150,000
Other Assets 1,030,000
Total Assets 1,180,000
Liabilities & Partner’s Equity
P & L Ratio
Liabilities 400,000
Ahn, Capital 20% 200,000
Bona, Capital 30% 300,000
Cass, Capital 280,000
Total Liabilities & Equity P1,180,000
Case 1 : Payment of Dani to old partners equal to interest purchased
a. 1/2 interest of Bona purchased for P150,000
P300,000 x ½ = P150,000
b. 1/4 interest of Ahn purchased for P50,000
P200,000 x 1/4 = 50,000
c. 1/5 interest of Cass purchased for P100,000
P280,000 x 1/5 = 56,000
Journal Entry:
Ahn, Capital P50,000
Bona, Capital 150,000
Cass Capital 56,000
Dani, Capital P256,000
To record admission of Dani to the partnership.
Case 2: Payment to old partners is less than the interest purchased
Assume Dani directly purchased 1/3 of interest of each partner for lump-sum price
P200,000, then the journal entry would be
Journal Entry:
Ahn, Capital 66,667
Bona, Capital 100,000
Cass, Capital 93,333
Dani Capital P260,000
ACC 102 FINANCIAL ACCOUNTING AND REPORTING 2
To record admission of Dani to the partnership
Computation:
Ahn (200,000 x 1/3) = 66,667
Bona (300,000 x 1/3) = 100,000
Cass (280,000 x 1/3) = 93,333
Total P260,000
The new partner was credited with the total interest of P260,000 in the new partnership. The equity
is transferred to Dani from the old partners Ahn, Bona & Cass. The negotiated price of P200,000
does not affect the entry as the old partners agreed to it .
Case 3: Payment to old partners is more than the interest purchased.
Assume the old partners received an offer from Dani to purchase directly 30% interest in the
partnership for 300,000. The old partners agreed to the offer.
Journal Entry:
Ahn, Capital P60,000
Bona, Capital 90,000
Cass, Capital 84,000
Dani, Capital P234,000
To record admission of Dani.
Computation:
Ahn (200,000 x 30%) = P 60,000
Bona (300,000 x 30%) = 90,000
Cass (280,000 x 30%) = 84,000
Total P234,000
The agreement was between the old partners and Dani, the buyer of the 30% interest in the
partnership. Any gain from the sale of interest by the old partners to Dani will not affect the
partnership since it is personal transaction among the old partners and Dani, no cash was received
by the partnership.
● INVESTMENT OF ASSETS IN A PARTNERSHIP (Palma, 2015)
In accounting by investment, before a partner is admitted to the partnership, it is but proper to
adjust the book value of the partnership assets to fair market value just as the non-cash assets to
be invested by the incoming partner should be stated at fair market value. It is proper that
non-cash assets be properly valued because after adjustments, any gain or loss on sale of these
assets becomes a partnership gain or loss and not of the old partners nor the contributing partner.
The transaction is between the partnership and the party who seeks admission.
Definition of Terms:
1. Total Contributed Capital (TCC). It is the sum of the capital balances of the old partners
and the actual investment of the new partner.
2. Total Agreed Capital (TAC). It is the total capital of the partnership after considering the
capital credits given to each of the partners. **Under the bonus method, Total Agreed Capital
is equal to
Total Contributed Capital though the capital credits to each partner may be equal to, greater
than or less than his capital contributions.
3. Bonus. Is the amount of capital or equity by one partner transferred to another with no cash
consideration but for the good reputation or earning capacity of the latter.
4. Capital Credit (CC). It is the equity of a partner in the new partnership and is obtained by
multiplying the total agreed capital by the applicable percentage interest of the partner.
Accounting for admission by investment of assets may result to the following:
o Bonus to Old Partners
A partnership may be exceptionally attractive because of its superior earnings record such
that the old partner may demand premium from a new partner. This premium increases the
old partner’s capital interest and effected by allocating a portion of the investment of the
ACC 102 FINANCIAL ACCOUNTING AND REPORTING 2
new partner to the old partners. The capital accounts of the old partners are credited for the
premium according to their profit and loss ratio.
Illustration:
Barbie and Ken are partners with capital balances of 300,000 and 200,000 respectively.
The share profits and losses in the ratio of 3:2. The partners agreed to admit Zen as new
partner of the firm. This information will be the basis to compute on the following cases:
Case 1: Total Agreed Capital is stated
Assume Zen invested 200,000 for a 1/4 interest in the business for the total agreed
capital of P700,000.
Contributed Bonus Agreed
Capital Capital
Barbie P300,000 15,000 315,000
Ken 200,000 10,000 210,000
Total P500,000 25,000 525,000
Zen 200,000 (25,000) *175,000 1/4 of TAC
Total 700,000 0 P700,000
*700,000 x 1/4 = P175,000
Journal Entry
1) Cash 200,000
Zen , Capital P200,000
To record investment of Zen.
2) Zen, Capital 25,000
Barbie, Capital (25,000 x 3/5) 15,000
Ken, Capital (25,000 x 2/5) 10,000
To record bonus to old partners.
Case 2:Total Agreed Capital is not explicitly stated
Assume Zen is to invest P300,000 in the partnership business inclusive of P50,000
bonus to Barbie and Ken.
Under the bonus method, total contributed capital is equal to total agreed capiatthe
bonus clearly specified.
Contributed Bonus Agreed
Capital Capital
Barbie P300,000 30,000 330,000
Ken 200,000 20,000 220,000
Total P500,000 50,000 550,000
Zen 300,000 (50,000) 250,000
Total 800,000 0 P800,000
Computation of Bonus:
Barbie (50,000 x 3/5) = P30,000
Ken (50,000 x 2/5) = 20,000
Total P50,000
Journal Entry
1) Cash P300,000
Zen, Capital 300,000
To record investment of Zen.
2) Zen, Capital 50,000
Barbie, Capital 30,000
Ken, Capital 20,000
To record distribution of bonus to old partners.
ACC 102 FINANCIAL ACCOUNTING AND REPORTING 2
o Bonus to New Partner
A new partner may be admitted into the partnership because of his vast financial resources,
extensive business networks, distinctive reputation, unique management and/or technical
skills.
Just to ensure his joining the partnership, the old partners are willing to give premium to the
new partner due to his exceptional qualifications by allowing a capital credit greater than
the prospective partner’s investment. The premium will be treated as a bonus from the
capital of old partners and credited to the new partner.
Case 1: Total Agreed Capital is stated
Assume Zen invested 180,000 for a 30% interest in the business. The total agreed
capital is P680,000 as shown below:
Contributed Bonus Agreed
Capital Capital
Barbie P300,000 (14,400) 285,600
Ken 200,000 ( 9,600) 190,400
Total P500,000 (24,000) 476,000
Zen 180,000 24,000 *204,000
Total 680,000 0 P680,000
30% of TAC
*680,000 x 30% = 204,000
Distribution of bonus
Barbie (24,000 x 3/5) = 14,400
Ken (24,000 x 2/5) = 9,600
Total 24,000
Journal Entry
1) Cash 280,000
Zen, Capital 280,000
To record investment of Zen.
2) Barbie, Capital 14,400
Ken, Capital 9,600
Zen, Capital 24,000
To record bonus to new partner.
Case 2: Total agreed capital is not explicitly stated.
Assume Zen invested 300,000 for a 50% interest in the business. Barbie and Ken
transferred part of their capital balances to that of Zen as a bonus . Under the bonus
method, total contributed capital and total agreed capital are equal and the new
partner to receive it is clearly specified.
Contributed Bonus Agreed
Capital Capital
Barbie P300,000 (60,000) 240,000
Ken 200,000 ( 40,000) 160,000
Total P500,000 (100,000) 400,000
Zen 300,000 100,000 *400,000
Total 800,000 0 P800,000
*800,000 x 50% = 400,000
Computation
Barbie (100,000 x 3/5) = 60,000
Ken (100,000 x 2/5) = 40,000
Total P100,000
Journal Entry
1) Cash P300,000
Zen, Capital P300,000
ACC 102 FINANCIAL ACCOUNTING AND REPORTING 2
To record investment of Zen.
2) Barbie, Capital 60,000
Ken, Capital 40,000
Zen Capital P100,000
To record distribution of bonus to new partner.
The capital credit of the new partner increased by 100,000 due to bonus while that of the old
partners decreased by the same amount.
B. WITHDRAWAL OR RETIREMENT OF A PARTNER
The withdrawal or retirement of a partner will bring about the complete dissolution of the
partnership but the business may be continued without interruption. A partner may withdraw or
retire from the partnership for various reasons such as: disputes with other partners, old age or
the pursuit for better opportunities. Settlement with the withdrawing/ retiring partners may be
accomplished by either of the following ways:
a) By selling his equity interest to one or more of the remaining partners.
b) By selling his equity interest to an outsider.
c) By selling his equity interest to the partnership.
❑ Sales of interest to a Partner or an Outsider
The purchase of interest of the withdrawing, retiring partner by another partners or by
an outsider is similar to admission of new partner by purchase of interest wherein the
transfer of interest to the capital account requires a debit to the seller’s capital account
for his capital balance and credit to the buyer’s account for the same amount. The assets
of the partnership were not affected by the consideration involved.
If withdrawal or retirement is done in the middle of an accounting period, the books of
the partnership should be updated to determine the retiring partner’s capital balance.
Profits and losses should be measured from the last closing date of the books to date of
withdrawals and distributed according to their profit or loss sharing agreement.
❑ Sale of interest to the Partnership
If the withdrawing or retiring partner sold his assets to the partnership, that partner
receives payment from the assets of the partnership. The amount to be received maybe
equal to, greater than or less than the balance of his capital account. The sale will
reduce the assets and owner’s equity section of the partnership
Instead of a new partner joining the partnership by investing assets, an old partner is
now leaving the partnership with the business distributing assets to the withdrawing
partner which may either receive his share of the business in partnership assets other
than cash.
ILLUSTRATION:
After ten years of being a partner at Maxwella Trading Partnership, whose partners are Max, Wella
and Lala, Max decided to withdraw from the business due to physical handicap which kept on
torturing him in the past months. He decided to leave and concentrate on recuperating. Prior to his
withdrawal, upon informing the other partners, the capital balances of the partners are as follows:
Max, Capital P 350,000
Wella, Capital 300,000
Lala, Capital 450,000
Total P1,100,000
Their profit and loss ratio are 3:2:1 with agreement to revalue the following assets:
1. Accounts Receivable of P550,000 shall be recognized at 80% realizable value.
ACC 102 FINANCIAL ACCOUNTING AND REPORTING 2
2. Merchandise inventory of 345,000 shall be decreased by 25%
3. The depreciation of the building shall be decreased by125,000.
Journal Entries to revalue partnership assets:
1) Max, Capital P55,000
Wella, Capital 36,667
Lala, Capital 18,333
Accounts Receivable 110,000
(550,000 x 80% = 440,000-550,000)
To revalue Accounts Receivable to 80% realizable.
Computation:
Max, Capital (110,000 x 3/6 ) = 55,000
Wella, Capital (110,000 x 2/6) = 36,667
Lala, Capital (110,000 x 1/6) = 18,333
2) Max Capital 43,125
Wella, Capital 28,750
Lala, Capital 14,375
Merchandise Inventory 86,250
(345,000 x 25% )
To bring down value of inventory by 25%.
Computation:
Max, Capital 86,250 x 3/6 = 43,125
Wella Capital 86,250 x 2/6 = 28,750
Lala, Capital 86,250 x 1/6= 14,375
3). Accumulated Depreciation-Bldg. P 125,000
Max, Capital 62,500
Wella, Capital 41,667
Lala, Capital 20,833
( decrease by125,000 )
To record decrease in depreciation of the building.
Computation
Max (125,000 x 3/6) = 62,500
Wella (125,000 x 2/6) = 41,667
Lala (125,000 x 1/6) = 20,833
After revaluation, new capital balances are as follows:
MAX, CAPITAL WELLA, CAPITAL LALA, CAPITAL
1)55,000 P350,000 36,667 P300,000 18,333 P450,000
43,125 62,500 28,750 41,667 14,375 20,833
98,125 412,500 65,417 341,667 32,708 470,833
Bal.314,375 Bal 276,250 Bal 438,125
Case 1: Withdrawal at book value
Assume that Max agreed to accept payment equal to his interest, the journal entry would
be:
Max, Capital P314,375
Cash P314,375
To record withdrawal of Max of his interest in the business.
Case 1: Withdrawal at more than book value
ACC 102 FINANCIAL ACCOUNTING AND REPORTING 2
Assume Max demanded a full settlement of P400,000 and the remaining partners agreed
because of his non-monetary contributions to the business. If the current fair value of the
partnership’s net assets exceeded book value, the settlement price to the withdrawing part-
ner will be greater than his capital account balance and the excess payment is treated as
bonus to the retiring partners from the continuing partners.
Journal Entry
Wella, Capital 57,083
Lala, Capital 28,542
Max Capital 314,375
Cash P400,000
To record retirement of Max.
Computation of the Bonus: (400,000-314,375=85,625)
Wella (85,625 x 2/3) = 57,083
Lala (85,625 x 1/3)= 28,542
Total 85,625
Case 1: Withdrawal at less than book value
When a retiring partner willingly accept settlement at less than book value, in effect he is
giving part of his equity interest to the retiring partners in the form of bonus.
Assume Max willingly accepted P300,000 as settlement money, the withdrawal will be
recorded in the partnership’s books as:
Journal Entry
Max, Capital 314,375
Cash 300,000
Wella Capital 9,583
Lala, Capital 4,792
To record retirement of Max with bonus to CONTINUING PARTNERS.
Computation of bonus to continuing partners: (314,375-300,000)
Wella (14,375 x 2/3 ) = 9,583
Lala (14,375 x 1/3) = 4,792
Total 14,375
Payment to a retiring partner at less than book value may also mean that the assets of the
Partnership were undervalued which means that these assets should be identified and
reduced to their fair values.
C. DEATH OF A PARTNER
The death of a partner dissolves a partnership. If the death of a partner does not result to
liquidation then the procedure to be followed is similar to that of a withdrawal of a partner. The
heirs of the deceased can expect to receive his equity interest after necessary settlement of the
business affairs is made. If it cannot immediately be done, the equity interest of the deceased will
be establish as a liability payable to his estate.
D. INCORPORATION OF A PARTNERSHIP
A partnership may decide to incorporate the business after evaluating the advantages of having
a corporate form of business. After necessary adjusting and closing entries are done in the
books, the assets and liabilities of the partnership will be transferred to the corporation in
exchange for shares of stocks which will be distributed to the partners based on their equity
interest. The partners will serve as the incorporators of the newly-formed corporation.
REFERENCES
Text books:
Ballada, W.L. (2020). Partnership & Corporation Accounting. Manila. Domdane Publishers
ACC 102 FINANCIAL ACCOUNTING AND REPORTING 2
Ballada, W.L.(2018). Basic Accounting: Made Easy. Manila. Domdane Publishers
Palma, R. (2015). Basic Accounting 2. Partnership & Corporation. Manila. REX
Valencia, E. G. et al (2016). Basic accounting: Concepts, principles, procedures and
applications. Baguio City. Valencia Educational Supply
Internet:
www.accountancysa.org.za
www.swlearning.com
www.scribd.com
www.slideshare.net
www.investopedia.com
www.coursehero.com
www.accountingverse.com
www.accountingtools.com
thefreedictionary.com
