AST301: Lesson 3 – Partnership Dissolution

Learning objectives:

1. Define partnership dissolution and the conditions giving rise to it.

2. Understand the accounting procedures to record the admission of new partner by
purchase.
3. Understand the accounting procedures to record the admission of new partner by
investments.

I. CAUSES OF DISSOLUTION
• Admission of a new partner.
• Retirement of a partner.
• Death, incapacity, or bankruptcy of a partner.
• Incorporation of a partnership.

II. Admission by purchase

• Sale of interest at book value.
• Sale of interest at less than book value
• Sale of interest at more than book value.

III. Admission by investment

• Capital credit equal to capital contribution.
• Capital credit not equal to capital contribution
a. Bonus method
b. Asset revaluation method

IV. Definition of dissolution

✓ Refers to the termination of the life of an existing partnership.

V. Conditions resulting to partnership dissolution

A. ADMISSION OF A NEW PARTNER
1. Admission by purchase
o Journal entry:
(name of seller), Capital xxx
(name of buyer), Capital xxx
o The purchase price of the interest sold to the new partner may be:
1. Equal to the book value of interest sold
2. Less than the book value of interest sold
3. More than the book value of interest sold
o The new partner may pay more than or less than the book value of the
interest sold by the old partner resulting in a gain or loss in the transactions.
o This gain or loss, however, is a personal gain or loss of the selling partner
and not of the partnership.
o Therefore, no gain or loss is recognized in the partnership books.
 Illustrative Problem: A and B are partners with capital balances of P100,000
and P50,000 respectively. They share profits and losses equally. C is a new
partner.

Case 1A: Purchase at book value from one partner only. C purchases a 1/5
interest from A by paying P20,000.
A Capital 20,000
C Capital 20,000
P100,000 x 1/5
Case 1B: Purchase at book value from more than one partner. C purchases
1/5 interest from the old partners by paying P30,000.
A Capital 20,000
B Capital 10,000
C Capital 30,000
P100,000 x 1/5 = P20,000
P50,000 x 1/5 = P10,000
Case 2: Purchase at less than book value: C purchases 1/5 interest from the
old partners by paying P25,000.
A Capital 20,000
B Capital 10,000
C Capital 30,000
P100,000 x 1/5 = P20,000
P50,000 x 1/5 = P10,000
Note: The difference of P5,000 is a personal loss of the selling (old)
partners.
Case 3: Purchase at more than book value: C pays P40,000 for a 1/5 interest
of the old partners.
A Capital 20,000
B Capital 10,000
C Capital 30,000
Note: The P10,000 excess payment is a personal gain of partners A
and B.

B. ASSET REVALUATION UPON ADMISSION OF A NEW PARTNER BY PURCHASE

Procedures:
Step 1 Compute the new partnership capital using as basis the amount to be paid
by the incoming partner and his fraction revaluation.
Step 2 Deduct the capital of the old partnership from the capital of the new
partnership. The difference is the asset revaluation.
Step 3 Allocate the asset revaluation among the old partners in accordance with
their residual profit and loss sharing agreement.
Step 4 Add the share of each partner on the asset revaluation to their capital
balances to get the capital balances after the asset revaluation.
Step 5 Compute the amount of interest transferred by the old partners to the new
partner based on their capital after the asset revaluation.
Step 6 Prepare the entry to record the admission of the new partner.

Illustration: Assume the same data above, whereas C is a new partner who purchases a
1/5 interest from A and B paying P40,000. However, before the admission of
C, partnership assets are to be revalued using as basis the amount to be
paid by Cordero.
Step 1: the new partnership capital is equal to the amount paid by the incoming partner
divided by his fraction of interest.
New partnership capital = P40,000 divide by 1/5 = P200,000
Step 2: the amount of asset revaluation is equal to the new partnership capital less old
partnership capital.
Asset revaluation = P200,000 – P150,000 = P50,000
Step 3: the allocation of the amount of the asset revaluation among the old partners is
as follows: P 50,000 / 2 = P25,000 per partner
Step 4: the capital balances of the old partners after asset revaluation is equal to their
old capital balances plus their share on asset revaluation.
A B
Capital balances before revaluation P100,000 P50,000
Share on asset revaluation 25,000 25,000
Capital balances after revaluation P125,000 P75,000

Step 5: the amount of interest transferred by the old partners to the new partner is
based on the new capital balances (capital balances after asset revaluation)
A B
Capital balances after revaluation P125,000 P75,000
Interest transferred 1/5 1/5
Capital transferred to C P 25,000 P15,000
Step 6: the journal entries to record the revaluation of asset and the admission of C are
as follows:
Other assets 50,000
A Capital 25,000
B Capital 25,000
A Capital 25,000
B Capital 15,000
C Capital 40,000
Capital balances after the admission of C shall be:
A P100,000 + P25,000 – P25,000 = P100,000
B P50,000 + P25,000 – P15,000 = P60,000
C = P40,000
C. ADMISSION BY INVESTMENT
o Refers to the transaction between the original partnership and the new partner.
o Agreed Capital (AC) – it is the amount of new capital set by the partners for the
partnership.
• It may be equal to, more than, or less than the total contributions of the
partners.
• If agreed capital is not indicated, it can be computed in either of two
ways:
1. Investment of the new partner divided by the new partner’s fraction
of interest
2. Investment of the old partners (equal to the net assets or capital of
the partnership ) divided by the old partners’ fraction of interest.

Example: D and E are partners with capital balances of P150,000 each. F

invests P100,000 for a 2/5 interest in the new partnership. The agreed capital
the new partnership is determined as follows:
Computation 1: The new partner’s investment used as a basis
P 100,000 divide by 2/5 = P250,000
Computation 2: The old partners’ investment used as a basis
P300,000 divide by 3/5 = P500,000
o Total Contributed Capital (CC) – it is the investment of all partners, both old
and new, to the partnership.
• It is the sum of the capital balances of the old partners (net asset
investment) and the contribution of the new partner.

Using the illustration in the example given, the total contributed capital
is P400,000, the sum of the old partners’ contribution of P300,000 and
he new partner’s contribution of P100,000.

D. BONUS
1. Multiply agreed capital (AC) by the fraction of interest of the new partner. The result
is the capital credit of the new partner in the new partnership.
2. Compare the capital credit with the investment of the new partner.
a. If the capital credit is more than the investment of the new partner, the
difference is bonus to the new partner.
b. The capital credit is less than the investment of the new partner, the difference
is bonus to the old partners.
E. PROBLEMS RELATING TO ADMISSION OF A NEW PARTNER BY INVESTMENT
1. Agreed Capital is Given
A and B are partners with capital balances of P200,000 and p100,000 respectively.
They share profits and losses equally. C is to be admitted in the partnership.

Case 1 – No bonus, no asset revaluation. C invests P100,000 for a ¼ interest in the

agreed capital of P400,000.

Case 2: Bonus to the old partners, no asset revaluation. C invests P100,000 for a 1/5
interest in the new firm capitalization of P400,000.

Case 3: Bonus to new partner, no asset revaluation. C invests P60,000 for a ¼

interest in the total capitalization of P360,000.

Case 4: Positive asset revaluation, no bonus. C invests P100,000 for a 1/5 interest in
the agreed capital of P500,000.
 Case 5: Negative asset revaluation, no bonus. C invests P60,000 for a 1/5 interest in
the agreed capital of P300,000.

F. AGREED CAPITAL IS NOT GIVEN

Illustrative Problem 1 : C invests P100,000 for a 1.5 interest in the partnership of A
and B. The contributions of A and B are P200,000 and P100,000 respectively, and
they share profits and losses in the ratio of 3:1. After the admission of C, profits and
losses will be divided equally.

1. Bonus Method

Note: the bonus is shared by the old partners according to their profit and loss
ratio.

2. Positive asset revaluation method

Illustrative problem 2: C invests P80,000 for a ¼ interest in the partnership of A and

B. the contributions of A and B are P200,000 and P100,000 respectively, and they
share profits and losses in the ratio of 3:1. After the admission of C, profits and
losses will be divided equally.
1. Bonus method
 2. Negative asset revaluation

G. AGREED CAPITAL IS NOT GIVEN, BUT BASIS FOR ITS COMPUTATION IS INDICATED IN
THE TERMS OF ADMISISON
Illustrative problem: Using the same data above, where A and B have capital balances of
P200,000 and P100,000, respectively and sharing profits and losses in the ratio of 3:1. C
invests P100,000 in the firm and is credited for P50,000 which is to be 1/8 of the new
firm capital.

H. THE AMOUNT OF THE CONTRIBUTION OF THE NEW PARTNER IS NOT GIVEN

Example 1: A and B have capital balances of P200,000 and P100,000 respectively. They
share profits and losses in the ratio of 3:1. C invests sufficient amount for a 1/3 interest.

Example 2: E, F, and G are partners with capital balances of P112,000, P130,000, and
P58,000 respectively, sharing profits and losses equally. J is admitted as a new partner
bringing with him his expertise and good reputation. He is also to invest cash for a 25%
interest in the assets of the partnership which includes a credit of P18,750 for bonus
upon the admission.
Journal entry to record the admission of the new partner is as follows:
Cash 75,000
E capital 6,250
F Capital 6,250
G Capital 6,250
J capital 93,750