Changes in Partners

Partnerships can change with the addition or withdrawal of partners. This section discusses how
to account for those changes.
New partner

Partners may agree to add partners in one or two ways. First, the new partner could buy out all or
a portion of the interest of an existing partner or partners. Second, the new partner could invest in
the partnership resulting in an increase in the number of partners. The partnership accounts for
these changes in partners differently.

Buying out existing partner. The capital balances of an existing partnership are:

If MJM decides to retire and the partners agree to have TLM buy out MJM's partnership interest,
the partnership's accounting records must simply reflect the change of ownership. As TLM is
buying out MJM's entire interest directly from MJM, the partnership's entry to record the
transaction is as follows:
The cash that MJM receives from TLM is not recorded on the partnership's books as it is an
exchange of an investment by individuals with no assets being given to or taken from the
partnership. Therefore, it does not matter whether TLM pays $50,000, $70,000, or $100,000 for
MJM's partnership interest, the partnership simply records the change in the partner's capital
accounts using the current balance in the MJM, capital account.

Investment in the partnership. If TLM joins the existing partnership (becoming a third partner)
by investing cash of $30,000 in the partnership, the partnership must record the additional cash
and establish a capital account for the new partner. The amount recorded as capital for TLM
depends on his ownership interest in the partnership. If a difference exists between the cash TLM
contributes to the partnership and his ownership interest, the difference is allocated to the
existing partners. This difference may increase the existing partners' capital account balances (a
bonus to existing partners) or be deducted from the existing partners' capital account balances (a
bonus to the new partner).

If TLM receives a 20% ownership interest in the partnership for his $30,000 investment, the
amount of his initial capital account balance is calculated by adding the $30,000 to the total
partnership's capital before his investment and multiplying by 20%, TLM's ownership interest.
TLM's capital account would be credited for $30,000 in this case.
The entry to record TLM's investment into the partnership would be:

If TLM receives a 30% interest for his $30,000 investment, TLM's capital account would be
credited for $45,000.
The $15,000 difference between his initial capital balance of $45,000 and his cash investment of
$30,000 must be deducted from the existing partners' capital account balances according to their
sharing of gains and losses. If the current ratio for sharing gains and losses is 60%:40%, the
partnership would record TLM's 30% interest with the following entry:

If TLM receives a 15% interest in the partnership for his $30,000 investment, the partnership's
cash account would be increased (debited) by $30,000 and TLM's capital account would be
increased (credited) by $22,500 (15% × $150,000 new capital balance of partnership).
The remaining $7,500 would be added (credited) to the two existing partners' capital account
balances based on their 60%:40% ratio for sharing gains and losses. MJM's capital account
balance would increase $4,500 and EAM's capital account balance would increase $3,000. The
entry would look like:
Retirement or withdrawal of a partner
If an existing partner wishes to retire or withdraw from the partnership, the partner may be
bought out by an existing partner or may receive assets from the partnership. If an existing
partner purchases the interest of the retiring partner, the partnership records an entry to close out
the capital account balance of the retiring partner and adds the amount to the capital account
balance of the partner who purchased the interest. If the partnership gives assets to the retiring
partner in the amount of the partner's capital account balance, an entry is made to reduce the
assets and zero out the retiring partner's capital account balance. If the retiring partner receives
more assets or fewer assets than the partner's capital account balance, the difference is taken
from or added to the capital accounts of the remaining partners according to how they share in
gains or losses.

Updating Partners’ Equity Before Dissolution:

If the dissolution takes place other than at the end of the accounting period, the partners’ equity
must be determined at this point.

To illustrate: Assume that AA Partnership of Alex and Amado decided to dissolve their
partnership and admit Adrian as a new partner on March 31, 2020. They agreed to revalue the
land by P262,500 and distribute the profit reported by the accountant for the first quarter
amounting to P300,000. The partners were able to withdraw P25,000 each during the first quarter
of 2018. The financial position as of December 31, 2018 exhibited, among others, their capital
accounts at P400,000 for Alex and P600,000 for Amado. The articles of co-partnership provided
profit distribution based on capital contributions. The accountant prepared the following entries:

a. Land 262,500
Alex. Capital (400k/1M x 262,500) 105,000
Amado, Capital (600k/1M x 262,500) 157,500
Adjust for the undervaluation of land

b. IS 300,000
Alex. Drawing 120,000
Amado, Drawing 180,000
To record the profit share based on capital ratio of 4:6

c. Alex, Drawing (120,000-25,000) 95,000

Amado, Drawing (180,000-25,000) 155,000
Alex, Capital 95,000
Amado, Capital 155,000
To close the drawing accounts: profit share less regular drawings

At dissolution date the updated partners’ capital balances are:

Alex, Capital (400,000+105,000+95,000) 600,000
Amado, Capital (600,000+157,500+155,000) 912,500

ADMISSION of a NEW PARTNER:

A new partner cannot be admitted without the unanimous consent of all the partners. Admission
of a new partner may take place in one of two ways.:
1. Purchasing an interest from one or more current partners.
2. Investing cash or other assets in the partnership

PURCHASING AN INTEREST FROM ONE OR MORE CURRENT PARTNERS

Case 1: Transfer of interest is equal to the amount paid

Lucas paid Sarah P10,000 to purchase half of her interest in the retail business owned by Angel
and Sarah whose capital balances are P30,000 and P20,000. Angel and Sarah shares profits and
losses 3/5 and 2/5, respectively. Observe the following:
The analysis will affect the ffg. accounts in this manner:
1. The payment goes to Sarah, not to the partnership. Partnership assets will not change.
2. The purchase requires a transfer of capital from Sarah to Lucas in the amount of P10,000.

Total partners’ equity will not change although there will be changes within the partners’
equity:

Angel, Cap. Sarah, Cap. Lucas, Cap. Total Partners’ Equity

Before the purchase P 30,000 P 20,000 P 50,000
Purchase (transfer) (10,000) P 10,000____________________
After the purchase P 30,000 P 10,000 P 10,000 P 50,000

Case 2: Transfer of interest is not equal to the amount paid

Suppose in the above case, Lucas will pay Sarah P 15,000 for half of her interest of P 10,000.
The payment does not affect the partnership since the amount paid goes to the selling partner. It
is Sarah who will recognize either a personal gain or a personal loss. In this case Sarah
recognizes a personal gain of P5,000.

Entry for Case 1 or Case 2 will be:

Sarah, Capital 10,000
Lucas, Capital 10,000
Admission of Lucas as a new partner with purchase of half of Sarah’s interest

ASSET REVALUATION:

When the current values of the partnership assets are greater/lesser than the recorded values
(book values), the partners may agree to revalue the assets. Asset revaluation is a requirement to
update capital accounts of partners before admitting a new partner.

Case 3: Asset Revaluation

The partners agree that assets of the partnership must first be revalued before admitting Lucas in
the partnership.

1. Since the payment is higher by P15,000 than the book value of the interest being purchased at
P10,000, the implication is that the assets of the partnership are undervalued. Asset revaluation
will be based on the amount that the new partner is willing to pay, thus:

Amount Lucas is willing to pay for 50% of Sarah’s equity P 15,000

Sarah’s capital should be (15,000/50%) P 30,000

Sarah capital per books 20,000
Share of Sarah in the revaluation 2/5 10,000

Total asset revaluation (10,000/40% or 2/5 equity of Sarah) P 25,000

OR New capitalization (15,000/.2) or 50% x 40% P75,000
 Old Capitalization (30,000+20,000) 50,000
Total Asset Revaluation P25,000

Angel, Cap Sarah, Cap Lucas, Cap Total Partners’ Equity

Before the revaluation P 30,000 P 20,000 P 50,000
Asset revaluation (3/5;2/5) 15,000 10,000 25,000
After the revaluation P 45,000 P 30,000 P 75,000
Purchase – transfer ( 15,000) P15,000______________
After the purchase P 45,000 P 15,000 P 15,000 P 75,000

Land 25,000
Angel, Cap. 15,000
Sarah, Capital 10,000
To adjust the land based on the agreed value

Sarah, Cap. 15,000

Lucas, Cap. 15,000
Admission of Lucas as a new partner with the purchase of half of Sarah’s interest.
Revaluation of assets cannot be implied, it must be agreed upon by partners and specifically
mentioned in the problem. It goes to the old partners only.

Revised P/L Ratio:

In the event that a revised P/L ratio was not considered by the partners, the current profit and loss
ratio should be revised accordingly based on the percent of interest the selling partner is
transferring to the buying partner.

Angel, Cap. Sarah, Cap. Lucas, Cap. Total

Before the purchase 60%(3/5) 40%(2/5) 100%
Purchase (transfer) (20%) 20% ____
After the purchase 60% 20% 20% 100%

INVESTING IN A PARTNERSHIP:

When a new partner invests in a new existing partnership, The transaction is viewed as:
1. Between the partner and the partnership.
2. Contribution increases the partnership assets and the partners’ equity.

Case 4: Assume that Lucas will invest P 15,000 cash and will be given a 15% profit share in the
partnership with the current partners sharing in the balance based on their original profit ratio.

1. Partnership assets and partners’ equity will increase by P 15,000, thus:

Angel, Cap. Sarah, Cap. Lucas, Cap. Total

Before investment P 30,000 P 20,000 P50,000
Investment by Lucas P 15,000 15,000
After investment P 30,000 P 20,000 P 15,000 P65,000

2. Total contributions will be equal to total partners’ equity.

3. New partner gets a 15% profit sharing ratio and the current partners will share in the
Remaining 85% based on their original ratio: 3/5 of 85% or 51% for Angel and
2/5 of 85% or 34% for Sarah.
4. Entry to record the investment will be:

Cash 15,000
Lucas, Cap. 15,000
Lucas invested cash for a 15% profit share.

Case 5: Lucas will invest P 30,000 cash for a 30% interest in the net assets of the partnership
which should be revalued first by P 20,000.

1. Partnership assets will increase twice: for the revaluation and for the cash investment.
2. Asset revaluation will increase current partners’ equity.
3. Cash investment will increase new partners’ equity.

Angel, Cap. Sarah, Cap. Lucas, Cap. Total

Contributions P 30,000 P 20,000 P 30,000 P80,000
Asset Revaluation 60% 12,000 (40%) 8,000 20,000
Agreed equity P 42,000 P 28,000 P 30,000 P100,000

Capital credit for Lucas: P100,000 x .3 = P30,000

Land P20,000
Angel, Cap. P12,000
Sarah, Cap. 8,000
To adjust the land based on the agreed value

Cash 30,000
Lucas, Cap. 30,000
Lucas invested cash for a 30% interest over the partnership

BONUS – The current partner may require a new partner to pay a bonus which means that the
contribution must be more than the capital to be credited to the new partner. To attract a new
partner who has a good reputation or skill/expertise needed by the business, the current partners
may entice the new partner to join them for a higher capital credit than what is to be contributed.
The excess capital credit is bonus capital given by the current partners to the new partner.

Case 6: Lucas will invest P 30,000 cash for a 25% interest in the net assets of the partnership. A
bonus of P 10,000 will be given to the current partners.
1. Partnership assets and Partners’ Equity will increase because of the cash investment.
2. A transfer of interest will be made by the new partner to the current partners. Actual
investment is P 30,000 but new partner will be credited only for P 20,000 (P 80,000 x .25)

Angel, Cap. Sarah, Cap. Lucas, Cap. Total

Contributions P 30,000 P 20,000 P 30,000 P80,000
Bonus 6,000 4,000 (10,000)
Agreed equity P 36,000 P 24,000 P 20,000 (25% x 80k) P 80,000

Cash 30,000
Angel, Cap. 6,000
Sarah, Cap. 4,000
Lucas, Capital 20,000
Lucas invested cash and was given a 25% interest in the partnership

OR 2 entries:

Lucas, Cap. 10,000

Angel, Cap. 6,000
Sarah, Cap. 4,000

Cash 30,000
Lucas, Cap. 30,000

Case7: Lucas contributed P30,000 for a 50% interest. Bonus is given to the new partner.

Angel, Cap. Sarah, Cap. Lucas, Cap. Total

Contributions P 30,000 P 20,000 P 30,000 P80,000
Bonus to new partner (6,000) (4,000) 10,000__________________
Agreed equity P 24,000 P 16,000 P 40,000 (50% x 80k) P 80,000

Cash 30,000
Angel, Cap. 6,000
Sarah, Cap. 4,000
Lucas, Cap. 40,000
To record cash contribution of Lucas and bonus from Angel and Sarah for a ¼ equity.

Case 8: Asset Revaluation and BONUS

Lucas contributed P40,000 for a ¼ interest, partnership assets should be revalued by P30,000.
Bonus to the current partners by P10,000.

Angel, Cap. Sarah, Cap. Lucas, Cap. Total

Contributions P 30,000 P 20,000 P 40,000 P90,000
Asset revaluation 3/5 18,000 2/5 12,000 30,000
Bonus to current partners 6,000 4,000 (10,000)__________________
Agreed equity P 54,000 P 36,000 P 30,000 P120,000

Entries:

Asset (such as Land) 30,000

Angel, Cap. 18,000
Sarah, Cap. 12,000
Upward adjustment for asset revaluation

Cash 40,000
Lucas, Cap. 30,000
Angel, Cap. 6,000
Sarah, Cap. 4,000
To record cash contribution of Lucas for a 1/3 equity and bonus for Angel and Sarah.

Asset Revaluation and Bonus may be implied:

1. There is no asset revaluation if total agreed equity is the same as total contributed capital.
There is no bonus if new partner’s capital credit is the same as actual contribution.
2. If total actual contribution is not equal to total agreed equity, there is asset revaluation. The
total actual contributions represent assets, so if it is lesser than agreed equity it should be
increased.
3. If total agreed equity is the same as total contributed capital but the new partner’s capital
credit is not the same as actual contribution, there is no asset revaluation but there is bonus.
a. Bonus is for the new partner if capital credit is higher than actual investment of new partner.
b. Bonus is for old partners if capital credit is lesser than actual investment of new partner.

Case 9: Lucas will invest cash and will be given a 15% interest in the assets and in the profits
of the business. This case may be viewed 2 ways:
1. The P15,000 investment of Lucas represents the 15% interest in the partnership, hence the
total partners’ equity is P100,000 (15,000/15%).
2. The 15% interest of Lucas represents 15% of the total actual contributions of the partners
(current and new) P65,000. Then Lucas’ equity of 15% of P65,000 is only P9,750.

FIRST VIEW: Asset Revaluation Method – Total contribution is less than total agreed
equity.

If total partners’ equity is agreed to be P100,000 when actual contributions total P65,000 only,
partnership assets may be undervalued and therefore must be adjusted to increase by P35,000.

Angel, Cap. Sarah, Cap. Lucas, Cap. Total

Contributions P 30,000 P 20,000 P 15,000 P65,000
Asset Revaluation 60% 21,000 (40%) 14,000 35,000
Agreed equity P 51,000 P 34,000 P 15,000 P100,000

Capital credit for Lucas: P100,000 x .15 = 15,000

Land P35,000
Angel, Cap. P21,000
Sarah, Cap. 14,000
To adjust the land based on the agreed value

Cash 15,000
Lucas, Cap. 15,000
Lucas invested cash for a 15% interest over the partnership

SECOND VIEW: Bonus Method – total contributions is also the total agreed equity but the
investment of the new partner is greater than his capital credit.

Lucas invested P15,000 cash. Total contributions amount to P65,000. Lucas will be credited only
for an interest of P9,750 which is 15% of Total Agreed Equity.

Angel, Cap. Sarah, Cap. Lucas, Cap. Total

Contributions P 30,000 P 20,000 P 15,000 P65,000
Bonus to current partners 3,150 2,100 (5,250)
Agreed equity P 33,150 P 22,100 P 9,750 (15% x 65k) P 65,000

Cash 15,000
Angel, Cap. (3/5 of 5,250) 3,150
Sarah, Cap. (2/5 of 5,250) 2,100
Lucas, Capital 9,750
Lucas invested cash and was given a 15% interest in the partnership

OR 2 entries:

Lucas, Cap. 5,250

Angel, Cap. 3,150
Sarah, Cap. 2,100

Cash 15,000
Lucas, Cap. 15,000

Case 10: Lucas will contribute cash of P15,000 for a 25% interest in the assets and profits of the
partnership.

FIRST VIEW: Asset Revaluation Method – Total agreed equity is lesser than total actual
contributions.
If total actual contribution is P65,000 but agreed equity is lower at P60,000, the difference of
P5,000 could be viewed as an overvaluation of partnership assets requiring a downward
adjustment. This in turn will decrease current partners’ capital using their current ratio. Thus:

Angel, Cap. Sarah, Cap. Lucas, Cap. Total

Contributions P 30,000 P 20,000 P 15,000 P65,000
Asset Revaluation (downward) (3,000) (2,000) 5,000
Agreed equity P 27,000 P 18,000 P 15,000 P 60,000 (15k/25%)

Assume that Land is overstated:

Angel, Cap. P 3,000

Sarah, Cap. 2,000
Land 5,000
To adjust the land based on the agreed value

Cash 15,000
Lucas, Cap. 15,000
Lucas invested cash for a 25% interest over the partnership

The total agreed was computed based on Lucas actual contribution.

SECOND VIEW: Bonus Method – total actual contributions the same as total agreed
equity but the investment of the new partner is lesser than his capital credit.

Lucas invested P15,000 cash but will be credited for an interest of P16,250 based on total
contributions which is also the agreed total partners’ equity. The excess credit is a bonus or a
transfer of capital from the current partners to the new partner.

Angel, Cap. Sarah, Cap. Lucas, Cap. Total

Contributions P 30,000 P 20,000 P 15,000 P65,000
Bonus to new partner (750) (500) 1,250__________________
Agreed equity P 29,250 P 19,500 P 16,250 (25% x 65k) P 65,000

Cash 15,000
Angel, Cap. (3/5 of 1,250) 750
Sarah, Cap. (2/5 of 1,250) 500
Lucas, Capital 16,750
Lucas invested cash for a 25% interest over the partnership with a bonus given by Angel and
Sarah.

OR 2 entries:

Angel, Cap. 750

 Sarah, Cap. 500
Lucas, Cap. 1,250

Cash 15,000
Lucas, Cap. 15,000

WITHDRAWAL OF A PARTNER:

A partner may withdraw from the partnership as long as it is in accordance with the partnership
agreement.

1. Capital balance of the withdrawing partner must be determined as a basis for settlement. The
books may be closed at the date of the withdrawal to update the partners’ capital balances for
share in profit or loss or for asset revaluation.

To illustrate: Assume that Carlos of the ABC Partnership with capital balance as at Dec. 31,
2019 of P300,000 and profit share of 20% decided to withdraw from the partnership on June 30,
2020. His other partners are Ador and Belle with capital balances as to Dec. 31, 2019 of
P400,000 and P500,000 and share profits in the ratio of 50% and 30% respectively. It was agreed
that the books will not be closed, but that Carlos’ share in the profit for six months be based on
the average net income of the partnership for the last 3 years which was estimated at P270,000.
Carlos has a cash withdrawal of P15,000 on June 1, 2019.

Update the capital balance of Carlos as follows:

Carlos, Cap. As of Jan.1 P 300,000

Share in net profit for 6 months (270,000 x ½ x 20%) 27,000
Cash Withdrawals (15,000)
Carlos, Cap. As of June 30 P312,000

2. The updated capital of the withdrawing partner may be recovered through any of the ffg
alternatives:
a. he sells his equity to an outside party:
Carlos, Cap. P312,000
Dina, Cap. P312,000

b. he sells his equity to another partner:

Carlos, Cap. 312,000
Ador, Cap. 312,000

c. his share is paid by the partnership:

Carlos, Cap. 312,000
Cash 312,000
To illustrate further: Assume that Carlos with an updated balance of P312,000 receives as cash
settlement from the partnership:
1. P312,000 (at book value)
Carlos, Cap. 312,000
Cash 312,000
To record retirement of Carlos

Revised Partners’ Equity will show:

Ador, Cap. P400,000
Belle, Cap. 500,000
Total P900,000

2. P362,000 (at more than Book Value) – where the payment is higher than the capital account,
the difference may be recognized as asset revaluation or bonus.

a. Asset Revaluation – this is computed based on the difference between the amount of Carlos’
Cap. And the payment made by the partnership (362,000 – 312,000). The P50,000 difference
represents the 20% share of Carlos in the asset revaluation. Total asset revaluation is 50,000/20%
or P250,000.

Plant Asset 250,000

Ador, Cap. (50%) 125,000
Belle, Cap. (30%) 75,000
Carlos, Cap. 50,000
Upward adjustment of plant asset

Carlos, Cap. 362,000

Cash 362,000
To record retirement of Carlos

Revised Partners’ Equity will show:

Ador, Cap. (400,000 + 125,000) P525,000
Belle, Cap. (500,000 + 75,000) 575,000
Total P1,100,000

b. Bonus to Carlos – Where the settlement is higher than the capital credit of the withdrawing
partner, instead of asset revaluation, the excess may be given as bonus to the retiring partner by
decreasing the capital accounts of the remaining partners.

Ador, Cap. (5/8 x 50,000) 31,250

Belle, Cap. (3/8 x 50,000) 18,750
Carlos, Cap. 312,000
Cash 362,000
To record withdrawal of Carlos

Revised Partners’ Equity will show:

Ador, Cap. (400,000 - 31,250) P368,750
 Belle, Cap. (500,000 – 18,750) 481,250
Total P 850,000

c. P300,000 (at less than book value)

1. Bonus to remaining partners – where the capital of the withdrawing partner is higher
than the payment to be made.

Carlos, Cap. 312,000

Ador, Cap. (5/8 x 12,000) 7,500
Belle, Cap. (3/8 x 12,000) 4,500
Cash 300,000
To record withdrawal of Carlos with bonus for Ador and Belle

Revised Partners’ Equity will show:

Ador, Cap. (400,000 + 7,500) P407,500
Belle, Cap. (500,000 + 4,500) 504,500
Total P912,000

2. Asset Impairment – 312,000 – 300,000 = 12,000/20% or P60,000

Ador, Cap. (50% x P60,000) 30,000

Belle, Cap. (30% x 60,000) 18,000
Carlos, Cap.(20% 12,000
Plant Assets 60,000
To record asset impairment

Carlos, Cap. 300,000

Cash 300,000
To record retirement of Carlos

Revised Partners’ Equity will show:

Ador, Cap. (400,000 - 30,000) P370,000
Belle, Cap. (500,000 - 18,000) 482,000
Total P852,000

EVALUATION:
1. Bench and Robin are partners in a sports wear business and share profits and losses in the ratio
of 40% and 60%, respectively. Their capital balances as of Dec. 31, 2019 were P120,000 and
P180,000, respectively. Tom was admitted as a new partner upon payment of P100,000for a 50%
interest from Robin on July 1, 2020. The records show that net income for the first half of 2020
was P250,000 and that each partner made regular monthly drawings of P3,000. Before admitting
Tom, the partners further agreed to make an upward adjustment for the land which was acquired
at a cost of P200,000 but appraised at P495,000.

Direction:

a. Make 3 entries
1. update the drawing accounts of the partners for the profit earned for 6 months of 2020.
2. adjust the capital accounts of the partners for the revaluation of the land.
3. close the drawing accounts to the capital accounts

b. Based on the updated capital accounts of the current partners, record the admission of Tom
and prepare the revised partners’ equity.

c. Assuming no agreement was made, determine the revised P/L ratio of the partners.

2. Bonnie and Daisy are partners with capital balances of P400,000 and P320,000, respectively.
Profits and losses are shared equally. Accounting books have been closed after the assets were
reviewed and adjusted. The company is considering the admission of Maggie, a new partner,
who is interested in buying 50% interest from anyone of the partners. The ffg. Options are open:

a. Daisy is willing to sell part of her interest for P150,000.

b. Bonnie is willing to sell part of her interest for the car of Maggie which was acquired for
P500,000 but is currently worth half the price.

c. Daisy is willing to sell part of her interest for P200,000. The partners agree to revalue the
firm’s assets first before Maggie’s admission.

d. Bonnie and Daisy are willing to sell half of the partnership equity for P300,000 after the assets
are revalued.

Direction: Give the entries to record the admission of Maggie based on each of the
aforementioned options and prepare the revised partners’ equity.
3. Bing and Hannah are partners sharing profits equally. Their respective capital balances are
P2,000,000 and P1,000,000. They agree to admit Paula who invested P2,000,000.

Direction: Make entries to record her admission based on the following independent cases:

a. She will be given a 30% interest in the total agreed equity of P5,000,000.

b. She will be given a 50% interest in the total agreed equity of P5,000,000.

c. She will be given a 1/3 interest in the total agreed equity of P6,000,000.

d. She will be given a 50% interest in the total agreed equity of P4,800,000.

4. Paul and Gally with capital balances of P300,000 and P200,000, respectively. They agree to
accept Romy who will contribute cash of P500,000 to the firm.

Direction: Make entries to record Romy’s admission based on the following independent cases:

a. Romy will be given a 50% interest in the firm. No bonus or asset revaluation should be
recognized.

b. Romy will be given a 60% interest with bonus capital coming from Paul and Gally.

c. Romy will be given a 40% interest after an asset revaluation of P250,000.

d. Romy will be given a 40% interest. Bonus will be given to Paul and Gally.

e. Romy will be given a 60% interest. Assets should also be revalued.

Changes in Partners
Partnerships can change with the addition or withdrawal of partners. This section discusses how
to account for those changes.
New partner

Partners may agree to add partners in one or two ways. First, the new partner could buy out all or
a portion of the interest of an existing partner or partners. Second, the new partner could invest in
the partnership resulting in an increase in the number of partners. The partnership accounts for
these changes in partners differently.

Buying out existing partner. The capital balances of an existing partnership are:

If MJM decides to retire and the partners agree to have TLM buy out MJM's partnership interest,
the partnership's accounting records must simply reflect the change of ownership. As TLM is
buying out MJM's entire interest directly from MJM, the partnership's entry to record the
transaction is as follows:
The cash that MJM receives from TLM is not recorded on the partnership's books as it is an
exchange of an investment by individuals with no assets being given to or taken from the
partnership. Therefore, it does not matter whether TLM pays $50,000, $70,000, or $100,000 for
MJM's partnership interest, the partnership simply records the change in the partner's capital
accounts using the current balance in the MJM, capital account.

Investment in the partnership. If TLM joins the existing partnership (becoming a third partner)
by investing cash of $30,000 in the partnership, the partnership must record the additional cash
and establish a capital account for the new partner. The amount recorded as capital for TLM
depends on his ownership interest in the partnership. If a difference exists between the cash TLM
contributes to the partnership and his ownership interest, the difference is allocated to the
existing partners. This difference may increase the existing partners' capital account balances (a
bonus to existing partners) or be deducted from the existing partners' capital account balances (a
bonus to the new partner).

If TLM receives a 20% ownership interest in the partnership for his $30,000 investment, the
amount of his initial capital account balance is calculated by adding the $30,000 to the total
partnership's capital before his investment and multiplying by 20%, TLM's ownership interest.
TLM's capital account would be credited for $30,000 in this case.
The entry to record TLM's investment into the partnership would be:

If TLM receives a 30% interest for his $30,000 investment, TLM's capital account would be
credited for $45,000.
The $15,000 difference between his initial capital balance of $45,000 and his cash investment of
$30,000 must be deducted from the existing partners' capital account balances according to their
sharing of gains and losses. If the current ratio for sharing gains and losses is 60%:40%, the
partnership would record TLM's 30% interest with the following entry:
If TLM receives a 15% interest in the partnership for his $30,000 investment, the partnership's
cash account would be increased (debited) by $30,000 and TLM's capital account would be
increased (credited) by $22,500 (15% × $150,000 new capital balance of partnership).

The remaining $7,500 would be added (credited) to the two existing partners' capital account
balances based on their 60%:40% ratio for sharing gains and losses. MJM's capital account
balance would increase $4,500 and EAM's capital account balance would increase $3,000. The
entry would look like:
Retirement or withdrawal of a partner
If an existing partner wishes to retire or withdraw from the partnership, the partner may be
bought out by an existing partner or may receive assets from the partnership. If an existing
partner purchases the interest of the retiring partner, the partnership records an entry to close out
the capital account balance of the retiring partner and adds the amount to the capital account
balance of the partner who purchased the interest. If the partnership gives assets to the retiring
partner in the amount of the partner's capital account balance, an entry is made to reduce the
assets and zero out the retiring partner's capital account balance. If the retiring partner receives
more assets or fewer assets than the partner's capital account balance, the difference is taken
from or added to the capital accounts of the remaining partners according to how they share in
gains or losses.
Updating Partners’ Equity Before Dissolution:
If the dissolution takes place other than at the end of the accounting period, the partners’ equity
must be determined at this point.

To illustrate: Assume that AA Partnership of Alex and Amado decided to dissolve their
partnership and admit Adrian as a new partner on March 31, 2020. They agreed to revalue the
land by P262,500 and distribute the profit reported by the accountant for the first quarter
amounting to P300,000. The partners were able to withdraw P25,000 each during the first quarter
of 2018. The financial position as of December 31, 2018 exhibited, among others, their capital
accounts at P400,000 for Alex and P600,000 for Amado. The articles of co-partnership provided
profit distribution based on capital contributions. The accountant prepared the following entries:

a. Land 262,500
Alex. Capital (400k/1M x 262,500) 105,000
Amado, Capital (600k/1M x 262,500) 157,500
Adjust for the undervaluation of land

b. IS 300,000
Alex. Drawing 120,000
Amado, Drawing 180,000
To record the profit share based on capital ratio of 4:6

c. Alex, Drawing (120,000-25,000) 95,000

Amado, Drawing (180,000-25,000) 155,000
Alex, Capital 95,000
Amado, Capital 155,000
To close the drawing accounts: profit share less regular drawings

At dissolution date the updated partners’ capital balances are:

Alex, Capital (400,000+105,000+95,000) 600,000
Amado, Capital (600,000+157,500+155,000) 912,500

ADMISSION of a NEW PARTNER:

A new partner cannot be admitted without the unanimous consent of all the partners. Admission
of a new partner may take place in one of two ways.:
1. Purchasing an interest from one or more current partners.
2. Investing cash or other assets in the partnership

PURCHASING AN INTEREST FROM ONE OR MORE CURRENT PARTNERS

Case 1: Transfer of interest is equal to the amount paid

Lucas paid Sarah P10,000 to purchase half of her interest in the retail business owned by Angel
and Sarah whose capital balances are P30,000 and P20,000. Angel and Sarah shares profits and
losses 3/5 and 2/5, respectively. Observe the following:
The analysis will affect the ffg. accounts in this manner:
1. The payment goes to Sarah, not to the partnership. Partnership assets will not change.
2. The purchase requires a transfer of capital from Sarah to Lucas in the amount of P10,000.

Total partners’ equity will not change although there will be changes within the partners’
equity:

Angel, Cap. Sarah, Cap. Lucas, Cap. Total Partners’ Equity

Before the purchase P 30,000 P 20,000 P 50,000
Purchase (transfer) (10,000) P 10,000____________________
After the purchase P 30,000 P 10,000 P 10,000 P 50,000

Sarah, Cap. 10,000

Lucas, Cap. 10,000

Case 2: Transfer of interest is not equal to the amount paid

Suppose in the above case, Lucas will pay Sarah P 15,000 for half of her interest of P 10,000.
The payment does not affect the partnership since the amount paid goes to the selling partner. It
is Sarah who will recognize either a personal gain or a personal loss. In this case Sarah
recognizes a personal gain of P5,000.

Entry for Case 1 or Case 2 will be:

Sarah, Capital 10,000
Lucas, Capital 10,000
Admission of Lucas as a new partner with purchase of half of Sarah’s interest

ASSET REVALUATION:

When the current values of the partnership assets are greater/lesser than the recorded values
(book values), the partners may agree to revalue the assets. Asset revaluation is a requirement to
update capital accounts of partners before admitting a new partner.

Case 3: Asset Revaluation

The partners agree that assets of the partnership must first be revalued before admitting Lucas in
the partnership.

1. Since the payment is higher by P15,000 than the book value of the interest being purchased at
P10,000, the implication is that the assets of the partnership are undervalued. Asset revaluation
will be based on the amount that the new partner is willing to pay, thus:

Amount Lucas is willing to pay for 50% of Sarah’s equity P 15,000

Sarah’s capital should be (15,000/50%) P 30,000x1/2

Sarah capital per books 20,000
Share of Sarah in the revaluation 2/5 10,000

Total asset revaluation (10,000/40% or 2/5 equity of Sarah) P 25,000

OR New capitalization (15,000/.2) or 50% x 40% P75,000
Old Capitalization (30,000+20,000) 50,000
Total Asset Revaluation P25,000

Angel, Cap Sarah, Cap Lucas, Cap Total Partners’ Equity

Before the revaluation P 30,000 P 20,000 P 50,000
Asset revaluation (3/5;2/5) 15,000 10,000 25,000
After the revaluation P 45,000 P 30,000 P 75,000
Purchase – transfer ( 15,000) P15,000______________
After the purchase P 45,000 P 15,000 P 15,000 P 75,000

Land 25,000
Angel, Cap. 15,000
Sarah, Capital 10,000
To adjust the land based on the agreed value

Sarah, Cap. 15,000

Lucas, Cap. 15,000
Admission of Lucas as a new partner with the purchase of half of Sarah’s interest.

Revaluation of assets cannot be implied, it must be agreed upon by partners and specifically
mentioned in the problem. It goes to the old partners only.

Revised P/L Ratio:

In the event that a revised P/L ratio was not considered by the partners, the current profit and loss
ratio should be revised accordingly based on the percent of interest the selling partner is
transferring to the buying partner.

Angel, Cap. Sarah, Cap. Lucas, Cap. Total

Before the purchase 60%(3/5) 40%(2/5) 100%(5/5)
Purchase (transfer) (20%) 20% ____
After the purchase 60% 20% 20% 100%

INVESTING IN A PARTNERSHIP:

When a new partner invests in a new existing partnership, The transaction is viewed as:
1. Between the partner and the partnership.
2. Contribution increases the partnership assets and the partners’ equity.

Case 4: Assume that Lucas will invest P 15,000 cash and will be given a 15% profit share in the
partnership with the current partners sharing in the balance based on their original profit ratio.
 1. Partnership assets and partners’ equity will increase by P 15,000, thus:

Angel, Cap. Sarah, Cap. Lucas, Cap. Total

Before investment P 30,000 P 20,000 P50,000
Investment by Lucas P 15,000 15,000
After investment P 30,000 P 20,000 P 15,000 P65,000
85% x 3/5 or 60% 85% x 40% 15% = 100%
New ratio 51% 34% 15% = 100%
2. Total contributions will be equal to total partners’ equity.
3. New partner gets a 15% profit sharing ratio and the current partners will share in the
Remaining 85% based on their original ratio: 3/5 of 85% or 51% for Angel and
2/5 of 85% or 34% for Sarah.
4. Entry to record the investment will be:

Cash 15,000
Lucas, Cap. 15,000
Lucas invested cash for a 15% profit share.

Case 5: Lucas will invest P 30,000 cash for a 30% interest in the net assets of the partnership
which should be revalued first by P 20,000.

1. Partnership assets will increase twice: for the revaluation and for the cash investment.
2. Asset revaluation will increase current partners’ equity.
3. Cash investment will increase new partners’ equity.

Angel, Cap. Sarah, Cap. Lucas, Cap. Total

Actual Contributions P 30,000 P 20,000 P 30,000 P80,000
Asset Revaluation 60% 12,000 (40%) 8,000 20,000
Agreed equity P 42,000 P 28,000 P 30,000 P100,000 x .3

Capital credit for Lucas: P100,000 x .3 = P30,000

Land P20,000
Angel, Cap. P12,000
Sarah, Cap. 8,000
To adjust the land based on the agreed value

Cash 30,000
Lucas, Cap. 30,000
Lucas invested cash for a 30% interest over the partnership

BONUS – The current partner may require a new partner to pay a bonus which means that the
contribution must be more than the capital to be credited to the new partner. To attract a new
partner who has a good reputation or skill/expertise needed by the business, the current partners
may entice the new partner to join them for a higher capital credit than what is to be contributed.
The excess capital credit is bonus capital given by the current partners to the new partner.

Case 6: Lucas will invest P 30,000 cash for a 25% interest in the net assets of the partnership. A
bonus of P 10,000 will be given to the current partners.

1. Partnership assets and Partners’ Equity will increase because of the cash investment.
2. A transfer of interest will be made by the new partner to the current partners. Actual
investment is P 30,000 but new partner will be credited only for P 20,000 (P 80,000 x .25)

Angel, Cap. Sarah, Cap. Lucas, Cap. Total

Actual Contributions P 30,000 P 20,000 P 30,000 P80,000
Bonus 6,000 4,000 (10,000) 0____
Agreed equity P 36,000 P 24,000 P 20,000 (25% x 80k) P 80,000

Cash 30,000
Angel, Cap. 6,000
Sarah, Cap. 4,000
Lucas, Capital 20,000
Lucas invested cash and was given a 25% interest in the partnership

OR 2 entries:

Lucas, Cap. 10,000

Angel, Cap. 6,000
Sarah, Cap. 4,000

Cash 30,000
Lucas, Cap. 30,000

Case7: Lucas contributed P30,000 for a 50% interest. Bonus is given to the new partner.

Angel, Cap. Sarah, Cap. Lucas, Cap. Total

Actual Contributions P30,000 P 20,000 P 30,000 P80,000
Bonus to new partner (6,000) (4,000) 10,000______________0____
Agreed equity P 24,000 P 16,000 P 40,000 (50% x 80k) P 80,000

Cash 30,000
Angel, Cap. 6,000
Sarah, Cap. 4,000
Lucas, Cap. 40,000
To record cash contribution of Lucas and bonus from Angel and Sarah for a 1/2 equity.
Case 8: Asset Revaluation and BONUS

Lucas contributed P40,000 for a ¼ interest, partnership assets should be revalued by P30,000.
Bonus to the current partners by P10,000.

Angel, Cap. Sarah, Cap. Lucas, Cap. Total

Actual Contributions P 30,000 P 20,000 P 40,000 P90,000
Asset revaluation 3/5 18,000 2/5 12,000 30,000
Bonus to current partners 6,000 4,000 (10,000)______________0____
Agreed equity P 54,000 P 36,000 P 30,000 P120,000
X¼

P&L Ratio 60%x75% 40%x75% 25% = 100%

= 45% = 30% 25% = 100%
Entries:

Asset (such as Land) 30,000

Angel, Cap. 18,000
Sarah, Cap. 12,000
Upward adjustment for asset revaluation

Cash 40,000
Lucas, Cap. 30,000
Angel, Cap. 6,000
Sarah, Cap. 4,000
To record cash contribution of Lucas for a 1/4 equity and bonus for Angel and Sarah.

Asset Revaluation and Bonus may be implied:

1. There is no asset revaluation if total agreed equity is the same as total contributed capital.
There is no bonus if new partner’s capital credit is the same as actual contribution.
2. If total actual contribution is not equal to total agreed equity, there is asset revaluation. The
total actual contributions represent assets, so if it is lesser than agreed equity it should be
increased.
3. If total agreed equity is the same as total contributed capital but the new partner’s capital
credit is not the same as actual contribution, there is no asset revaluation but there is bonus.
a. Bonus is for the new partner if capital credit is higher than actual investment of new partner.
b. Bonus is for old partners if capital credit is lesser than actual investment of new partner.

Total Actual Contr. = Total Agreed Equity -----BONUS

Total Actual Contr. Is not equal to Total Agreed Equity ----- ASSET REV.
Case 9: Lucas will invest cash and will be given a 15% interest in the assets and in the profits
of the business. This case may be viewed 2 ways:
1. The P15,000 investment of Lucas represents the 15% interest in the partnership, hence the
total partners’ equity is P100,000 (15,000/15%).
2. The 15% interest of Lucas represents 15% of the total actual contributions of the partners
(current and new) P65,000. Then Lucas’ equity of 15% of P65,000 is only P9,750.

FIRST VIEW: Asset Revaluation Method – Total contribution is less than total agreed
equity.

If total partners’ equity is agreed to be P100,000 when actual contributions total P65,000 only,
partnership assets may be undervalued and therefore must be adjusted to increase by P35,000.

Angel, Cap. Sarah, Cap. Lucas, Cap. Total

Contributions P 30,000 P 20,000 P 15,000 P65,000
Asset Revaluation 60% 21,000 (40%) 14,000 35,000
Agreed equity P 51,000 P 34,000 P 15,000 P100,000 x .15

Capital credit for Lucas: P100,000 x .15 = 15,000

Land P35,000
Angel, Cap. P21,000
Sarah, Cap. 14,000
To adjust the land based on the agreed value

Cash 15,000
Lucas, Cap. 15,000
Lucas invested cash for a 15% interest over the partnership

SECOND VIEW: Bonus Method – total contributions is also the total agreed equity but the
investment of the new partner is greater than his capital credit.

Lucas invested P15,000 cash. Total contributions amount to P65,000. Lucas will be credited only
for an interest of P9,750 which is 15% of Total Agreed Equity.

Angel, Cap. Sarah, Cap. Lucas, Cap. Total

Contributions P 30,000 P 20,000 P 15,000 P65,000
Bonus to current partners 3,150 2,100 (5,250) 0____
Agreed equity P 33,150 P 22,100 P 9,750 (15% x 65k) P 65,000

Cash 15,000
Angel, Cap. (3/5 of 5,250) 3,150
Sarah, Cap. (2/5 of 5,250) 2,100
Lucas, Capital 9,750
 Lucas invested cash and was given a 15% interest in the partnership

OR 2 entries:

Lucas, Cap. 5,250

Angel, Cap. 3,150
Sarah, Cap. 2,100

Cash 15,000
Lucas, Cap. 15,000

Case 10: Lucas will contribute cash of P15,000 for a 25% interest in the assets and profits of the
partnership.

FIRST VIEW: Asset Revaluation Method – Total agreed equity is lesser than total actual
contributions.

If total actual contribution is P65,000 but agreed equity is lower at P60,000, the difference of
P5,000 could be viewed as an overvaluation of partnership assets requiring a downward
adjustment. This in turn will decrease current partners’ capital using their current ratio. Thus:

Angel, Cap. Sarah, Cap. Lucas, Cap. Total

Contributions P 30,000 P 20,000 P 15,000 P65,000
Asset Revaluation (downward) (3,000) (2,000) ( 5,000)
Agreed equity P 27,000 P 18,000 P 15,000 P 60,000 (15k/25%)

Assume that Land is overstated:

Angel, Cap. P 3,000

Sarah, Cap. 2,000
Land 5,000
To adjust the land based on the agreed value

Cash 15,000
Lucas, Cap. 15,000
Lucas invested cash for a 25% interest over the partnership

The total agreed was computed based on Lucas actual contribution.

SECOND VIEW: Bonus Method – total actual contributions the same as total agreed
equity but the investment of the new partner is lesser than his capital credit.

Lucas invested P15,000 cash but will be credited for an interest of P16,250 based on total
contributions which is also the agreed total partners’ equity. The excess credit is a bonus or a
transfer of capital from the current partners to the new partner.
 Angel, Cap. Sarah, Cap. Lucas, Cap. Total
Contributions P 30,000 P 20,000 P 15,000 P65,000
Bonus to new partner (750) (500) 1,250_______________0___
Agreed equity P 29,250 P 19,500 P 16,250 (25% x 65k) P 65,000

Cash 15,000
Angel, Cap. (3/5 of 1,250) 750
Sarah, Cap. (2/5 of 1,250) 500
Lucas, Capital 16,750
Lucas invested cash for a 25% interest over the partnership with a bonus given by Angel and
Sarah.

OR 2 entries:

Angel, Cap. 750

Sarah, Cap. 500
Lucas, Cap. 1,250

Cash 15,000
Lucas, Cap. 15,000

WITHDRAWAL (RETIREMENT) OF A PARTNER:

A partner may withdraw from the partnership as long as it is in accordance with the partnership
agreement.

1. Capital balance of the withdrawing partner must be determined as a basis for settlement. The
books may be closed at the date of the withdrawal to update the partners’ capital balances for
share in profit or loss or for asset revaluation.

To illustrate: Assume that Carlos of the ABC Partnership with capital balance as at Dec. 31,
2019 of P300,000 and profit share of 20% decided to withdraw from the partnership on June 30,
2020. His other partners are Ador and Belle with capital balances as to Dec. 31, 2019 of
P400,000 and P500,000 and share profits in the ratio of 50% and 30% respectively. It was agreed
that the books will not be closed, but that Carlos’ share in the profit for six months be based on
the average net income of the partnership for the last 3 years which was estimated at P270,000.
Carlos has a cash withdrawal of P15,000 on June 1, 2019.

Update the capital balance of Carlos as follows:

Carlos, Cap. As of Jan.1 P 300,000

Share in net profit for 6 months (270,000 x ½ x 20%) 27,000
Cash Withdrawals (15,000)
Carlos, Cap. As of June 30 P312,000
2. The updated capital of the withdrawing partner may be recovered through any of the ffg
alternatives:
a. he sells his equity to an outside party:
Carlos, Cap. P312,000
Dina, Cap. P312,000

b. he sells his equity to another partner:

Carlos, Cap. 312,000
Ador, Cap. 312,000

c. his share is paid by the partnership:

Carlos, Cap. 312,000
Cash 312,000
To illustrate further: Assume that Carlos with an updated balance of P312,000 receives as cash
settlement from the partnership:

1. P312,000 (at book value)

Carlos, Cap. 312,000
Cash 312,000
To record retirement of Carlos

Revised Partners’ Equity will show:

Ador, Cap. P400,000
Belle, Cap. 500,000
Total P900,000

2. P362,000 (at more than Book Value) – where the payment is higher than the capital account,
the difference may be recognized as asset revaluation or bonus.

a. Asset Revaluation – this is computed based on the difference between the amount of Carlos’
Cap. And the payment made by the partnership (362,000 – 312,000). The P50,000 difference
represents the 20% share of Carlos in the asset revaluation. Total asset revaluation is 50,000/20%
or P250,000.

Plant Asset 250,000

Ador, Cap. (50%) 125,000
Belle, Cap. (30%) 75,000
Carlos, Cap. 50,000
Upward adjustment of plant asset

Carlos, Cap. 362,000

Cash 362,000
To record retirement of Carlos

Revised Partners’ Equity will show:

Ador, Cap. (400,000 + 125,000) P525,000
 Belle, Cap. (500,000 + 75,000) 575,000
Total P1,100,000

b. Bonus to Carlos – Where the settlement is higher than the capital credit of the withdrawing
partner, instead of asset revaluation, the excess may be given as bonus to the retiring partner by
decreasing the capital accounts of the remaining partners.

Ador, Cap. (5/8 x 50,000) 31,250

Belle, Cap. (3/8 x 50,000) 18,750
Carlos, Cap. 312,000
Cash 362,000
To record withdrawal of Carlos

Revised Partners’ Equity will show:

Ador, Cap. (400,000 - 31,250) P368,750
Belle, Cap. (500,000 – 18,750) 481,250
Total P 850,000

c. P300,000 (at less than book value)

1. Bonus to remaining partners – where the capital of the withdrawing partner is higher
than the payment to be made.

Carlos, Cap. 312,000

Ador, Cap. (5/8 x 12,000) 7,500
Belle, Cap. (3/8 x 12,000) 4,500
Cash 300,000
To record withdrawal of Carlos with bonus for Ador and Belle

Revised Partners’ Equity will show:

Ador, Cap. (400,000 + 7,500) P407,500
Belle, Cap. (500,000 + 4,500) 504,500
Total P912,000

2. Asset Impairment – 312,000 – 300,000 = 12,000/20% or P60,000

Ador, Cap. (50% x P60,000) 30,000

Belle, Cap. (30% x 60,000) 18,000
Carlos, Cap.(20% 12,000
Plant Assets 60,000
To record asset impairment

Carlos, Cap. 300,000

Cash 300,000
To record retirement of Carlos
Revised Partners’ Equity will show:
Ador, Cap. (400,000 - 30,000) P370,000
Belle, Cap. (500,000 - 18,000) 482,000
Total P852,000

EVALUATION:

1. Bench and Robin are partners in a sports wear business and share profits and losses in the ratio
of 40% and 60%, respectively. Their capital balances as of Dec. 31, 2019 were P120,000 and
P180,000, respectively. Tom was admitted as a new partner upon payment of P100,000 for a
50% interest from Robin on July 1, 2020. The records show that net income for the first half of
2020 was P250,000 and that each partner made regular monthly drawings of P3,000. Before
admitting Tom, the partners further agreed to make an upward adjustment for the land which was
acquired at a cost of P200,000 but appraised at P495,000.

Direction:

a. Make 3 entries
1. update the drawing accounts of the partners for the profit earned for 6 months of 2020.
IS 250,000
Bench Drawings - 40% 100,000
Robin Drawings– 60% 150,000

2. adjust the capital accounts of the partners for the revaluation of the land.
Land 295,000
Bench Cap. – 40% 118,000
Robin Cap. – 60% 177,000

3. close the drawing accounts to the capital accounts

Bench Drawings – 100,000 – (3000 x 6mos.) 82,000
Robin Drawings – 150,000 – 18,000 132,000
Bench Cap. 82,000
Robin Cap. 132,000
b. Based on the updated capital accounts of the current partners, record the admission of Tom
and prepare the revised partners’ equity.
Bench Robin Total
Share in NI 100,000 150,000 250,000
Drawings 3000 x 6mos. ( 18,000) (18,000) (36,000)
Cap balance Dec 31, beg 120,000 180,000 300,000
Rev of Land 118,000 177,000 295,000
Updated Cap accounts P320,000 P489,000 P809,000

Robin Cap 50% x 489,000 244,500

Tom Capital 244,500

P&L Ratio CapitaL

Bench 40% P320,000
Robin 30% 244,500
Tom 30% 244,500
100% P809,000

c. Assuming no agreement was made, determine the revised P/L ratio of the partners.

2. Bonnie and Daisy are partners with capital balances of P400,000 and P320,000, respectively.
Profits and losses are shared equally. Accounting books have been closed after the assets were
reviewed and adjusted. The company is considering the admission of Maggie, a new partner,
who is interested in buying 50% interest from anyone of the partners. The ffg. Options are open:

a. Daisy is willing to sell part of her interest for P150,000.

Daisy Cap 160,000
Maggie Cap 160,000

b. Bonnie is willing to sell part of her interest for the car of Maggie which was acquired for
P500,000 but is currently worth half the price.
Bonnie Cap 200,000
Maggie Cap 200,000

c. Daisy is willing to sell part of her interest for P200,000. The partners agree to revalue the
firm’s assets first before Maggie’s admission.
Amt Maggie is willing to pay 200,000
Daisy Cap should be 200,000/50% 400,000
Daisy cap per books 320,000
Share of Daisy in the ARev 80,000
Total Asset Rev. 80,000/50% 160,000
Land 160,000
Bonnie Cap 80,000
Daisy Cap 80,000
 Daisy Cap 200,000
Maggie Cap 200,000

d. Bonnie and Daisy are willing to sell half of the partnership equity for P300,000 after the assets
are revalued.
Total Part. Equity 720,000
Tot. Agreed Eq.300,000/50% 600,000
Decrease in Plant Assets 120,000
Bonnie Cap. 60,000
Daisy Cap 60,000
Plant Assets 120,000
(to record Asset Rev.)

Bonnie Cap 400k-60k x 50% 170,000

Daisy Cap 320k -60k x 50% 130,000
Maggie Cap 300,000
(to record the admission of Maggie)

Direction: Give the entries to record the admission of Maggie based on each of the
aforementioned options and prepare the revised partners’ equity.

c) Daisy’s interest 320,000 Revised PE

Payment 200,000/50% 400,000 Bonnie 480,000
Excess – share of Daisy 80,000 Daisy 200,000
Total AR /50% = 160,000 Maggie 200,000

3. Bing and Hannah are partners sharing profits equally. Their respective capital balances are
P2,000,000 and P1,000,000. They agree to admit Paula who invested P2,000,000.

Direction: Make entries to record her admission based on the following independent cases:

a. She will be given a 30% interest in the total agreed equity of P5,000,000.

a) Bing Hannah Paula Total

Actual contributions 2,000,000 1,000,000 2,000,000 5,000,000
Bonus 250,000 250,000 (500,0000) 0
Agreed 2,250,000 1,250,000 1,500,000 5,000,000
X 30%
Cash 2,000,000
Paula, Capital 2,000,000

Paula, Cap. 500,000

Bing, Cap. 250,000
Hannah, Cap. 250,000
OR Cash 2,000,000
Bing, Cap. 250,000
Hannah, Cap. 250,000
PAULA, CAP. 1,500,000

b. She will be given a 50% interest in the total agreed equity of P5,000,000.

b) Bing Hannah Paula Total

Actual contributions 2,000,000 1,000,000 2,000,000 5,000,000
Bonus ( 250,000) (250,000) 500,0000 0
Agreed 1,750,000 750,000 2,500,000 5,000,000
X 50%

c. She will be given a 1/3 interest in the total agreed equity of P6,000,000.

c) Bing Hannah Paula Total

Actual contributions 2,000,000 1,000,000 2,000,000 5,000,000
Asset Revaluation 500,000 500,000 1,000,000
Agreed 2,500,000 1,500,000 2,000,000 6,000,000
X 1/3

d. She will be given a 50% interest in the total agreed equity of P4,800,000.

d) Bing Hannah Paula Total

Actual 2,000,000 1,000,000 2,000,000 5,000,000
A.Rev. (100,000) (100,000) (200,000)
Bonus (200,000) (200,000) 400,000 0______
Agreed 1,700,000 700,000 2400,000 4,800,000
X .50
Cash 2,000,000
Paula, Cap. 2,000,000

Bing, Cap. 100,000

Hannah, Cap. 100,000
OA 200,000

Bing, Cap. 200,000

Hannah, Cap. 200,000
Paula, Cap. 400,000
OR
Cash 2,000,000
Bing, Cap. 300,000
Hannah, Cap. 300,000
Land 200,000
Paula, Cap. 2,400,000
4. Paul and Gally with capital balances of P300,000 and P200,000, respectively. They agree to
accept Romy who will contribute cash of P500,000 to the firm.

Direction: Make entries to record Romy’s admission based on the following independent cases:

a. Romy will be given a 50% interest in the firm. No bonus or asset revaluation should be
recognized.
Cash 500,000
Romy Cap 500,000

b. Romy will be given a 60% interest with bonus capital coming from Paul and Gally.

b) Paul Gally Romy Total

Actual 300,000 200,000 500,000 1,000,000
Bonus 3/5, 2/5 (60,000) (40,000) 100,000 0
Agreed 240,000 160,000 600,000 1,000,000
X60%

c. Romy will be given a 40% interest after an asset revaluation of P250,000.

c) Paul Gally Romy Total

Actual 300,000 200,000 500,000 1,000,000
Asset Rev. 3/5; 2/5 150,000 100,000 250,000
Agreed 450,000 300,000 500,000 1,250,000
X 40%

d. Romy will be given a 40% interest. Bonus will be given to Paul and Gally.

d) Paul Gally Romy Total

Actual 300,000 200,000 500,000 1,000,000
Bonus 3/5, 2/5 60,000 40,000 (100,000) 0
Agreed 360,000 240,000 400,000 1,000,000
X 40%

e. Romy will be given a 60% interest. Assets should also be revalued.

e) Paul Gally Romy Total

Actual 300,000 200,000 500,000 1,000,000
AR (100,000) (66,667) 0 (166,667)
Agreed 200,000 133,333 500,000/ ? 833,333
60%
CFAS – LIQUIDATION:

1. Cindy, Rolly and Willy are partners who share profits and losses in the ratio of 5:3:2,
respectively. Just before the partners decided to liquidate, its financial position is as follows:
#9
Cash P 300,000 Acc. Pay. P 210,000
Other Assets (net) 800,000 Cindy, Loan 50,000
Cindy, Cap. 150,000
Rolly, Cap. 250,000
________ Willy, Cap. 440,000
P1,100,000 P1,100,000

Other Assets were sold for P440,000.

Direction:
a. Prepare a statement of partnership liquidation with journal entries.
b. Prepare a statement of partnership liquidation supported by a schedule of safe payments
and entries assuming deficient partner makes investment which is given as a second cash
distribution.

Cindy, Rolly and Willy PARTNERSHIP

Statement of Partnership Liquidation
March 1, 2020

Cash Other Accounts Loan due Capital Balances

Assets Payable To Cindy Cindy(5) Rolly(3) Willy(2)

Balances before liq. P300,000 P800,000 P210,000 P50,000 P150,000 P250,000 P440,000
1. OA sold at a loss 440,000 (800,000) (180,000) (108,000) (72,000)
Balances after sale 740,000 - 210,000 50,000 (30,000) 142,000 368,000
2. Liabilities paid ( 210,000) - (210,000)________________________________
Balances after payment 530,000 - - 50,000 (30,000) 142,000 368,000
3. Right of Offset (30,000) 30,000_________________
Bal. after right of offset 530,000 - - 20,000 - 142,000 368,000
4. Payment of loan (20,000) (20,000) -__________________
Bal after deficiency 510,000 - - - - 142,000 368,000
5. Partners paid (510,000) - - - - (142,000) (368,000)
0 0 0 0 0 0 0
2. SOL Resort is a partnership wherein the partners decided to liquidate in March 1, 2020.
#7
Assets Liabilities & Owner’s Equity
Cash P 10,000 Liabilities P 90,000
Other Assets 190,000 Loan due to Opal 10,000
Sidro, Cap. 55,000
Opal, Cap. 25,000
__ Lorie, Cap. 20,000
Total P200,000 Total P200,000

P/L is distributed equally. The other assets were sold for P100,000. Their personal assets and
liabilities are as follows: Sidro- P75,000 (50,000); Opal-P80,000 (120,000); Lorie-55,000 (50,000)

Direction: Prepare a St. of Part. Liq. with supporting journal entries. Deficient partners pay
depending on personal financial status.

SOL PARTNERSHIP
Statement of Partnership Liquidation
March 1, 2020

Cash Other Accounts Loan due Capital Balances

Assets Payable To Opal Sidro Opal Lorie

Balances before liq. P 10,000 P190,000 P 90,000 P10,000 P55,000 P25,000 P20,000
1. OA sold at a loss 100,000 (190,000) (30,000) (30,000) (30,000)
Balances after sale 110,000 - 90,000 10,000 25,000 (5,000) (10,000)
2. Liabilities paid ( 90,000) - (90,000)________________________________
Balances after payment 20,000 - - 10,000 25,000 (5,000) (10,000)
3. Right of Offset ( 5,000) ________5,000_________
Bal. after right of offset 20,000 - - 5,000 25,000 - (10,000)
4. Addl. Inv. by Lorrie 5,000 5,000
Bal. after addl. Inv. 25,000 - - 5,000 25,000 - (5,000)
5. Abs. by Sidro ( 5,000) 5,000
Bal. after abs. 25,000 - - 5,000 20,000 - -
4.Payment of loan (5,000) (5,000) ______________________
Bal after deficiency 20,000 - - - 20,000 - -
5. Partners paid ( 20,000) - - - (20,000)_______________
0 0 0 0 0 0 0
3. The Leisure Resort, a health spa, decided to dissolve the partnership when its financial
position showed the ffg: #14

Debit Credit

Cash P 40,000
Other Assets 210,000
Acc. Pay. P 60,000
Kuok, Cap. 48,000
Tong, Cap. 72,000
Lau, Cap. 70,000
P250,000 P250,000

P/L sharing ratio is 5:3:2 respectively. The partnership will be liquidated over an estimated
period of three months. As the assets are realized and liabilities liquidated, distribution will be
made to the partners as soon as there is cash available.

Kuok was the only solvent partner. The ffg. are the activities for the month of June.

Sale of NCA having a book value of P120,000 for P 90,000 less P2,000 liquidation expenses. ½ of
the liabilities were paid. Cash withheld for future liquidation proceedings was estimated at
P3,000.

Direction: a. Prepare a Statement of Liquidation.

b. Support with a schedule of cash distribution considering:
1. Partners’ interest (capital plus loan balance)
2. Computation of restricted interest for possible loss if the remaining NCA will
not be sold and cash reserved for future liquidation expenses.
3. Computation of restricted interest for possible loss representing partners’
capital deficiency, if any, deducted from the balances of the partners’ interests
4. Free interest which must be equal to the cash available for distribution.

4. To continue with #3, the ffg. Transactions took place for July and August:

July – Sale of half of the remaining other assets at a loss of P8,000.

Liquidation exp. Were paid, P2,000.
Remaining liabilities were paid.
Partners were paid with the cash available except for P2,000 reserved for future liq. exp.

Aug. - Sale of the remaining other assets at a gain of P3,000.

Liq. Exp. Paid amounted to P3,000.
Final distribution was made to the partners.
Direction: Using the June 30 balances of the St. of Liq. in #3, prepare a St of Liq. for July and
August. Support with a Schedule
5. Using the same information- a. prepare a priority program
b. prepare 2 schedules of safe payment for the months of
June and July using the priority program assuming that the cash available for distribution are
P65,000 and P36,000, respectively.
3 & 4. Statement of Liquidation

Cash Assets Acct Pay Kuok -5 Tong-3 Lau-2

June balances before liq. 40,000 210,000 60,000 48,000 72,000 70,000
June Sale at a loss 90,000 (120,000) _______ (15,000) (9,000) (6,000)
130,000 90,000 60,000 33,000 63,000 64,000
Liquidation expenses paid (2,000) _______ _______ (1,000) (600) (400)
128,000 90,000 60,000 32,000 62,400 63,600
Partial payment of liab (30,000) ________ (30,000) ______ ________ _______
98,000 90,000 30,000 32,000 62,400 63,600
Cash Dist See Sch 1 (65,000) ________ _______ _______ (25,800) (39,200)
33,000 90,000 30,000 32,000 36,600 24,400
July sale at a loss 37,000 (45,000) _______ (4,000) (2,400) (1,600)
70,000 45,000 30,000 28,000 34,200 22,800
Liquidation Expenses paid (2,000) (1,000) (600) (400)
Payment of liabilities (30,000) ________ (30,000) _______ _______ _______
38,000 45,000 0 27,000 33,600 22,400
Cash dist see sch 2 (36,000) ________ _______ (3,500) (19,500) (13,000)
2,000 45,000 0 23,500 14,100 9,400
Aug sale at a gain 48,000 (45,000) _______ 1,500 900 600
50,000 0 0 25,000 15,000 10,000
Liq. Exp paid (3,000) 0 0 (1,500) (900) (600)
Final Distr. To Partners 47,000 0 0 (23,500) (14,100) (9,400)

Alternative Schedules:
Schedule 1) Cash balance P40,000
Add Proceeds net of liq exp 88,000
Total 128,000
Less: Restricted interest 63,000 =210k-120k-30k liab.bal.+3k reserve
Cash available to partners P65,000

Schedule 1) K T L
a. Capital balances 32,000 62,400 63,600
Possible loss if non-
cash assets of P90,000
will not be sold + 3,000 (46,500) (27,900) (18,600)
Balances P(14,500) P34,500 P45,000
Possible loss of 14,500 14,500 (8,700) ( 5,800) 3/5 and 2/5
Free Interest P25,800 P39,200

Schedule 2)
K T L
Balances 27,000 33,600 22,400
Possible loss of 47,000(45k (23,500) (14,100) (9,400)
+ 2k reserve)
Free Interest P 3,500 P 19,500 P 13,000
 5. Priority Program Loss Absorption Ability Payment Plan
K T L K T L
Partners’ Interest 48,000 72,000 70,000
Profit and Loss Ratio 50% 30% 20%
LAB 96,000 240,000 350,000
Priority 1 (110,000) 22,000
LAB balances 96,000 240,000 240,000
Priority 2 (144,000) (144,000) 43,200 28,800
Balances 96,000 96,000 96,000 43,200 50,800

= 94,000
Priority 3 - Further cash distribution to all based on
P and L ratio.

Cash distribution for June based on the priority program:

Ava. Cash K T L

A. Priority 1 22,000 22,000

Priority 2 - (3/5;2/5) 43,000 25,800 17,200
Total 65,000 25,800 39,200

NOTE: 94,000 – 65,000 = 29,000 still available in P2 to be distributed

B. Available Cash = 36,000 K T L
Priority 2 - 29,000 x (3/5; 2/5) 17,400 11,600
Priority 3 - 7,000 x .5; .3; .2 = 3,500 2,100 1,400
36,000 3,500 19,500 13,000

EXERCISE 1 – Yellow Book:

Ex. 1.a)
Mary, Helga, Luz,
Cash Capital Capital Capital
Balances before liquidation P 400,000 700,000 400,000 200,000
1) Sale of accts recble at a loss P25,000 175,000 (12,500) (6,250) (6,250)
2) Sale of inventories at a gain P20,000 820,000 10,000 5,000 5,000
3) Sale of equipment at a loss P50,000 550,000 (25,000) (12,500) (12,500)
4) Liquidation expenses paid P12,000 (12,000) (6,000) ( 3,000) ( 3,000)
5) Payment to creditors (700,000) ________ ________ _______
6) Payment to partners P1,233,000 P666,500 P383,250 P183,250

Cash 1,545,000
Mary, Capital 27,500
Helga, Capital 13,750
Luz, Capital 13,750
Accum Depn 100,000
Accounts Receivable 200,000
Inventories 800,000
Furniture and Equipment 700,000
If 1 entry only for all
If individual entries:
Cash 175,000
Mary, cap 12,500
Helga, Cap 6,250
Luz, Cap. 6,250
Acc. Rec. 200,000

Cash 820,000
Inv. 800,000
Mary, cap. 10,000
Helga, cap. 5,000
Luz, Cap. 5,000

Cash 550,000
Mary cap 25,000
Helga, cap 12,500
Luz, cap. 12,500
Acc. Dep. 100,000
Equipment 700,000

Mary, Capital 6,000

Helga, Capital 3,000
Luz, Capital 3,000
Cash 12,000
Liquidation expenses paid.

Accounts Payable 300,000

Notes Payable 400,000
Cash 700,000

Mary, Capital 666,500

Helga, Capital 383,250
Luz, Capital 183,250
Cash 1,233,000

2) Mary, Helga, Luz,

Cash Non-Cash Liabilities Capital Capital Capital
 Balances before liquidation P 400,000 1,600,000 700,000 700,000 400,000 200,000
Sale of non-cash assets at a loss 800,000 (1,600,000) (400,000) (200,000) (200,000)
liquidation expenses paid.of P12,000 (12,000) _______ ( 6,000) ( 3,000) ( 3,000)
Balances after sale 1,188,000 0 700,000 294,000 197,000 (3,000)
Payment of liabilities (700,000) (700,000)
Balances after payment of liabilities 488,000 0
Additional investment 3,000 3,000
4) Payment to Mary and Helga 491,000 (294,000) (197,000) 0

a. Cash 800,000 c. Accounts Payable 700,000

Mary, Capital 400,000 Cash 700,000
Helga, Capital 200,000 Cash 3,000
Luz, Capital 200,000 Luz, Capital 3,000
Accum Depn 100,000
Accounts Receivable 100,000 d.
Furniture and Equipt 700,000 Mary, Capital 294,000
Inventories 800,000 Helga, Capital 197,000
Cash 491,000
b.Mary, Capital 6,000
Helga, Capital 3,000
Luz, Capital 3,000
Cash 12,000

3) Mary, Helga, Luz,

Cash Non-Cash Liabilities Capital Capital Capital
Balances before liquidation 400,000 1,600,000 700,000 700,000 400,000 200,000
Sale of non-cash assets less liquid exp 752,000 (1,600,000) (424,000) (212,000) (212,000)
Balances after sale 1152,000 - 276,000 188,000 (12.000)
Payment of liabilities (700,000) 700,000) _______ _______ _______
452,000 -____ 276,000 188,000 (12,000)
Balances after payment of debts (8,000) (4,000) 12,000
Deficiency absorbed 268,000 184,000
Bal after absorption
Payment to Mary & Helga (452,000) (268,000) (184,000)