MODULE 3
PARTNERSHIP DISSOLUTION
Week 6-9
INTRODUCTION
A dissolution of a partnership generally occurs when one of the partners ceases to be a
partner in the firm. Dissolution is distinct from the termination of a partnership and the
"winding up" of partnership business. Although the term dissolution implies termination,
dissolution is actually the beginning of the process that ultimately terminates a
partnership. It is, in essence, a change in the relationship between the partners.
Accordingly, if a partner resigns or if a partnership expels a partner, the partnership is
considered legally dissolved. Other causes of dissolution are the bankruptcy or death of
a partner, an agreement of all partners to dissolve, or an event that makes the partnership
business illegal. For instance, if a partnership operates a gambling casino and gambling
subsequently becomes illegal, the partnership will be considered legally dissolved. In
addition, a partner may withdraw from the partnership and thereby cause a dissolution.
If, however, the partner withdraws in violation of a partnership agreement, the partner
may be liable for damages as a result of the untimely or unauthorized withdrawal. 1
1
https://law.jrank.org/pages/9063/Partnership-Dissolution.html
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MODULE FOR FINANCIAL ACCOUNTING AND REPORTING II
BATANGAS STATE UNIVERSITY – MAIN 1
Guess Lecturer: Ma. Ruby A. Bagsit
INTENDED LEARNING OUTCOMES
1. To define dissolution.
2. To demonstrate the entire process of Dissolution under different
causes and prepare necessary entries to effect such.
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MODULE FOR FINANCIAL ACCOUNTING AND REPORTING II
BATANGAS STATE UNIVERSITY – MAIN 1
Guess Lecturer: Ma. Ruby A. Bagsit
PARTNERSHIP OPERATION
DISSOLUTION
The change in the relation of the partners caused by any partner ceasing to be
associated in the carrying out of the business. The termination of the life of an
existing partnership.
DISSOLUTION OF AN OLD PARTNERSHIP MAY BE FOLLOWED BY EITHER:
Formation of a new partnership
New partnership continues the business activities of the dissolved
partnership without interruption.
Liquidation
Termination of business activities and winding up of partnership affairs
preparatory to going out of business.
CONDITIONS RESULTING TO PARTNERSHIP DISSOLUTION
1. Admission of a new partner
2. Withdrawal of a partner due to retirement, death, incapacity, bankruptcy or
voluntary withdrawal
3. Incorporation of a partnership
ADMISSION OF A NEW PARTNER
▪ The consent of all the partners is necessary.
▪ Upon the admission of a new partner, a new agreement covering partners’
interests, profit and loss sharing and other considerations should be drawn
because the dissolution of the original partnership cancels the old agreement.
▪ There is a need to update the capital balances of the partners by:
o determining profit share of each partner from the last balance sheet date to
dissolution date, and
o revaluing/ adjusting partnership assets and liabilities using a temporary
account called the Capital Adjustment account. The Capital Adjustment
account is closed to the partners’ capital accounts using their profit and loss
ratio.
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MODULE FOR FINANCIAL ACCOUNTING AND REPORTING II
BATANGAS STATE UNIVERSITY – MAIN 1
Guess Lecturer: Ma. Ruby A. Bagsit
Pro- forma Entries
Determine profit Income Summary xxx
Share of partners A, Drawing xxx
B, Drawing xxx
A, Drawing xxx
B, Drawing xxx
A, Capital xxx
B, Capital xxx
Increase in value Asset xxx
of an asset Capital Adjustment xxx
without a contra-
asset account
Decrease in value Capital Adjustment xxx
of an asset Asset xxx
without a contra
asset account
Increase in value Contra- asset xxx
of an asset Capital Adjustment xxx
with a contra
asset account
Decrease in value Capital Adjustment xxx
of an asset Contra- asset xxx
with a contra
asset account
Increase in value Capital Adjustment xxx
of a liability Liability xxx
Decrease in value Liability xxx
of a liability Capital Adjustment xxx
Note: These adjustments are
similar to the year-end adjusting
entries. Only, replace the nominal
accounts with the Capital
Adjustment account.
Close the Capital Capital Adjustment xxx
adjustment A, Capital xxx
account B. Capital xxx
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MODULE FOR FINANCIAL ACCOUNTING AND REPORTING II
BATANGAS STATE UNIVERSITY – MAIN 1
Guess Lecturer: Ma. Ruby A. Bagsit
OR
A, Capital xxx
B, Capital xxx
Capital Adjustment xxx
Note: The Capital Adjustment
account is divided among the
partners based on their profit and
loss ratio.
TYPES OF ADMISSION OF A NEW PARTNER
1. By purchase of interest from one or more of the old partners
▪ It is considered as a personal transaction between the selling partner and
the buyer who becomes a new partner.
▪ The cash paid by the buyer is not recorded in the books of the partnership
for this is a personal transaction between the selling partners and the buyer.
▪ The gain or loss arising from the sale of interest is not recorded in the
partnership books. It is considered as a personal gain or loss of the selling
partner.
▪ It merely involves a transfer of capital of the selling partner to the capital of
the buying partner.
▪ There is no increase in total assets and no increase in total partners’ equity.
2. By investment or asset contribution in the partnership
▪ It is a transaction between the partnership and the incoming partner.
▪ It involves the investment of assets by new partner into the partnership.
▪ Total assets and total partners’ equity will increase.
▪ Record the admission of the new partner based on the following
procedures:
a. Record the investment (contributed capital) of the new partner.
b. Determine the agreed capital of the new partner. This is computed
as follows: Total Agreed Capital of the Firm x % of Interest of New
Partner
▪ Compare the contributed capital and the agreed capital of the new partner.
Record goodwill or bonus, if there is any.
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MODULE FOR FINANCIAL ACCOUNTING AND REPORTING II
BATANGAS STATE UNIVERSITY – MAIN 1
Guess Lecturer: Ma. Ruby A. Bagsit
Pro-forma Entries
By purchase A, Capital xxx
of interest C, Capital xxx
By Investment Cash xxx
Non-cash asset xxx
C, Capital xxx
BONUS
▪ It is an amount partners are willing to allow as additional credit to a partner’s capital
in excess of his actual capital contribution.
▪ It is a transfer of capital from one partner to another.
▪ Bonus may be recognized only when total agreed capital of the firm is equal to its
total contributed capital.
Pro-forma Entries
Bonus to old C, Capital xxx
partners A, Capital xxx
B, Capital xxx
Bonus to new A, Capital xxx
partner B, Capital xxx
C, Capital xxx
Note: Bonus is divided among the
old partners using profit and loss
ratio.
Vague Problems
▪ New partnership agreement fails to specify the total agreed capital capitalization
of the new partnership after the admission of a new partner.
▪ In the absence of expressed agreements, either the bonus or the goodwill method
may be used.
Special Terms
▪ Total Agreed Capital (TAC) – new capitalization of the new partnership which will
be equal to total contributed capital.
▪ Total Contributed Capital (TCC) – the sum of the investments or contributions of
the new and old partners.
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MODULE FOR FINANCIAL ACCOUNTING AND REPORTING II
BATANGAS STATE UNIVERSITY – MAIN 1
Guess Lecturer: Ma. Ruby A. Bagsit
▪ Fraction of interest – this is the interest or equity of a partner expressed in fraction
▪ Percentage of interest – this is the interest or equity of a partner expressed in
percentage.
WITHDRAWAL OF A PARTNER
▪ There is a need to update the capital balances of the partners by:
o determining profit share of each partner from the last balance sheet date to
dissolution date, and
o revaluing/ adjusting partnership assets and liabilities using a temporary
account called the Capital Adjustment account. The Capital Adjustment
account is closed to the partners’ capital accounts using on their profit and
loss ratio.
TYPES OF WITHDRAWAL OF A PARTNER
1. Purchase of interest by another partner or an outsider
It is considered a personal transaction between the buying and selling
partners. It involves the transfer of the withdrawing partners’ capital to the
capital account of the buying partner.
2. Purchase of interest by the partnership
It is considered a transaction between the partnership and the outgoing
partner. It involves a decrease in partnership assets or increase in
partnership liabilities.
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MODULE FOR FINANCIAL ACCOUNTING AND REPORTING II
BATANGAS STATE UNIVERSITY – MAIN 1
Guess Lecturer: Ma. Ruby A. Bagsit
Pro-forma Entries
By purchase C, Capital xxx
of interest by A, Capital xxx
another person
By purchase of
interest by the
partnership
(a) Equal to carrying C, Capital xxx
Amount Cash/Liability xxx
(b) More than A, Capital xxx
carrying amount B, Capital xxx
C, Capital xxx
C, Capital xxx
Cash/Liability xxx
(c) Less than C, Capital xxx
Carrying amount Cash/Liability xxx
A, Capital xxx
B, Capital xxx
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MODULE FOR FINANCIAL ACCOUNTING AND REPORTING II
BATANGAS STATE UNIVERSITY – MAIN 1
Guess Lecturer: Ma. Ruby A. Bagsit
END CHAPTER TEST
• The drafts of this module were submitted to our classroom as assignments.
• Submit your answers with solutions with the following heading format:
LAST NAME, FIRST NAME, MIDDLE INITIAL
MODULE 3 PARTNERSHIP DISSOLUTION
• Typewritten or handwritten will do and your document must be submitted on time
in PDF format only.
• Name of your document: LASTNAMEFIRSTNAME_MODULE(NUMBER)
Example: BAGSITMARUBY_MODULE3
• Deadline: Before MIDTERMS
Problem 1
Review on Partnership Operation
See Module 2
Assume ABC Partnership earned a net income of P120,000 for the year. Three
partners A, B and C will share in the net income. Their capital accounts are as follows:
A, Capital
9/1 30,000 1/1 50,000
6/1 10,000
B, Capital
3/1 20,000 1/1 70,000
C, Capital
1/1 30,000
4/1 10,000
1. Prepare the entry/entries to distribute net income among the three partners
assuming:
a. Net income is divided equally.
b. Net income is divided as follows: A – ½; B – ¼; C – ¼.
c. Net income is divided as follows: A – 50%; B – 30%; C – 20%.
d. Net income is divided as follows: 3:2:1
e. Net income is divided based on original/initial capital contribution which
were as follows: A – P20,000; B – P30,000; C – P10,000.
f. Net income is divided based on beginning capital balances.
g. Net income is divided based on ending capital balances.
h. Net income is divided based on average capital.
2. Prepare the entry to divide net income if net income is to be divided as follows:
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MODULE FOR FINANCIAL ACCOUNTING AND REPORTING II
BATANGAS STATE UNIVERSITY – MAIN 1
Guess Lecturer: Ma. Ruby A. Bagsit
a. Interest of 10% on beginning capital balances.
b. Annual salaries of P5,000 to A and P4,000 to B.
c. Bonus to Partner C amounting to P16,000.
d. Remainder to be divided – 50:30:20.
3. Prepare the entry to divide net income if net income is P35,000 only.
4. Prepare the entry to close income summary if the partnership incurred a net loss
of P60,000 for the year.
Problem 2
Partnership Dissolution
The records of ABC Partnership show the following balances at year-end:
ABC Partnership
Trial Balance
December 31, 2020
Cash P15,000
Accounts receivable 10,000
Allowance for bad debts P800
Office furniture 25,000
Accumulated depreciation 1,000
Accounts payable 3,200
A, Capital 10,000
B, Capital 15,000
C, Capital 20,000
Total P50,000 P50,000
A, B, C divide profit and loss equally. With the consent of all the partners, Mr. D is
admitted as a new partner. The following adjustments are agreed upon:
• Allowance for bad debts should be 10% of accounts receivable.
• Office furniture should be 10% depreciated.
• Accrued expenses amounting to P1,300 should be recorded.
Requirements:
1. Prepare entries to adjust the accounts of the partnership. Prepare the entry to
record the admission of Partner D under the following independent assumptions:
a. Mr. D purchases ½ of the interest of Partner B for
➢ P7,000
➢ P5,000
➢ P9,000
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MODULE FOR FINANCIAL ACCOUNTING AND REPORTING II
BATANGAS STATE UNIVERSITY – MAIN 1
Guess Lecturer: Ma. Ruby A. Bagsit
b. Mr. D invests P8,000 cash.
c. Mr. D invests sufficient cash to give him 25% interest in the firm.
2. Assume the adjusted capital balances of the following partners are as follows:
Partner A P50,000
Partner B 100,000
Assume A & B divide profit and loss equally.
Prepare the entry(ies) to record the admission of Mr. C under the following
independent assumptions:
a. Mr. C is admitted by investing P 50,000 for a capital credit of 20% of the
agreed capitalization of P200,000.
b. Mr. C is admitted by investing P50,000 for a capital credit of 30% of the
agreed capitalization of P200,000.
c. Mr. C invests P60,000 for a ¼ interest in the firm.
d. Mr. C invests P60,000 for a ½ interest in the firm.
3. Assume that the updated capital balances of the partners are as follows:
Partner A P50,000
Partner B 100,000
Partner C 150,000
A, B and C share profit and loss 3:2:3. Partner A withdraws from the partnership.
Prepare all the necessary journal entries under the following independent
assumptions:
a. With the consent of Partners B and C, Partner A withdraws from the
partnership by selling his entire interest to Partner D for P50,000 cash.
b. Partnership purchases entire interest of Mr. A for P50,000.
c. Partnership purchases entire interest of Mr. A for P60,000.
d. Partnership purchases entire interest of Mr. A for P35,000.
END OF MODULE
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MODULE FOR FINANCIAL ACCOUNTING AND REPORTING II
BATANGAS STATE UNIVERSITY – MAIN 1
Guess Lecturer: Ma. Ruby A. Bagsit
