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The dissolution of a partnership is the change in 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 of the
partnership (Civil Code of the Philippines, Article 1828).
CAUSES OF DISSOLUTION:
Admission of a partner
Withdrawal or retirement of a partner
Death of a partner
Incorporation of a partnership
ADMISSION OF A PARTNER
A new partner can only be admitted into a partnership with the consent of all the continuing partners.
This is based on the principle of DELECTUS PERSONAE
With the consent of all the partners, a new partner may be admitted in an existing partnership by
purchasing a capital equity interest directly from one or more of the old partners.
Pro-Forma Entry:
The purchase price of the interest sold to a new partner may be:
ILLUSTRATIVE PROBLEM:
Bianca and Shaira are partners with capital balances of P100,000 and P50,000 respectively. They share
profits and losses equally. Jam is a new partner.
Case 1a: Purchase at book value from one partner only.
ENTRY:
Case 1b: Purchase at book value from more than one partner.
Jam purchased 1/5 interest from the old partners by paying P30 000.
ENTRY:
Case 2: Purchase at less than book value. Jam purchases 1/5 interest from the old partners by paying
P25, 000.
ENTRY:
Case 3: Purchase at more than book value. Jam pays P 40, 000 for a 1/5 interest of the old partners.
ENTRY:
Bianca and Shaira are partners with capital balances of P100,00 and P50,000 respectively. They share
profits and loses equally. Jam is a new partner who purchase a 1/5 interest from Bianca and Shaira
paying P40,000. However, before the admission of Jam, partnership assets are to be revalued using as
basis amount to be paid by Jam.
Step 1- The new partnership capital is equal to the amount paid by the incoming partner divided by his
fraction of interest.
= P200,000
Step 2 - the amount of asset revaluation is equal to the new partnership capital less old partnership
capital.
= P50,000
Step 3 the allocation of the amount of the asset revaluation among the old partners is as follows:
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.
Bianca Shaira
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).
Bianca Shaira
Step 6 the journal entries to record the revaluation of asset and admission of Jam are as follows:
ENTRY:
Asset 50 000 Bianca, Capital 25 000
GOODWILL METHOD
ENTRY
It is a transaction between the original partnership and the new partner. A person may be admitted into
a partnership by investing cash or other assets in the business (Invests /Contributes). Increase in Total
Assets and Total Partners Equity.
a. Bonus Method
b. Asset Revaluation method (Positive & Negative)
3. Agreed Capital is not given but basis for its computation is indicated in the terms of admission
ENTRY:
Ely invests P100, 000 for a 1/5 interests in the new firm capitalization of P400, 000.
ENTRY:
ENTRY:
Cash 60 000
Ely invests P100, 000 for a 1/5 interest in the agreed capital of P500, 000.
ENTRIES:
ENTRY
Ely invests P60,000 for a 1/5 interest in the agreed capital of P300,000.
ENTRIES:
A. Bonus Method
ENTRY:
Cash 100 000
ENTRIES:
ENTRIES:
GOODWILL METHOD
*whichever is higher between new partners investment and old partners investment by dividing their
respective interest ratio to their capital investments.
100 000 / 1/5 = 500 000 300 000/ 4/5 = 375 000
In goodwill method, agreed capital must be greater than the contributed capital. Therefore, agreed
capital is 500 000.
ENTRIES:
The partnership may allow any of its partners to withdraw or retire from the firm. The business may
continue after such withdrawals; on the other hand, the interest of the retiring or withdrawing partner
may be:
*The purchase price or amount of settlement by the partnership to the retiring partner may be:
* When the payment to the retiring partner is less than or more than his capital interest, the difference
between the purchase price and the capital interest may be accounted for using:
1. bonus method
2. asset revaluation method
3. goodwill method
Investment
- Withdrawals
+ Share in partnership profits to date of retirement or
- Share in partnership losses to date of retirement
+ Loans and advances to the partnership or
- Loans and advances from the partnership
+ Revaluation of assets increasing their recorded values or
- Revaluation of assets decreasing their recorded values
Interest upon retirement
The partners share profits and losses in the ratio of 4:2:4. On July 1, 2017, Bill asked to be allowed to
withdraw from the partnership. The partners decided to close the books as of these date so as to
determine the capital interest of Bill. Profit for 6 months ended amounted P60,000 while drawings of
Bea, Biboy and Bill amount to P4,000 , P6,000 and P2,000, respectively. Profits and losses are to be
shared equally after the retirement
of Bill.
The following entries will be prepared prior to the retirement of Bill from the partnership:
Assumption 1- Sale of interest to a new partner. Bill sold his interest to Doque for P 100,000.
Assumption 2 Sale of interest to the continuing partners. Bill sold his interest to Bea and Biboy for
P75,000; the interest being divided equally by the remaining partners. Profits and losses after the
retirement of Bill will be divided equally.
Assumption 3 Sale of interest to the partnership. Bill sold his interest to the partnership. The partners
agreed to make immediate cash settlement to the retiring partner. Profits and losses after the retiring of
Bill will be divided equally.
Case A Settlement to retiring partner is equal to his capital interest. The partnership paid Bill
P82,000.
Bonus Method
Bill, Capital 82,000
Cash 76,000
Bea, Capital(6,000 x 4/6) 4,000
Biboy, Capital(6,000 x 2/6) 2,000
Goodwill method
Entry
INCORPORTION OF PARTNERSHIP
Partners Barron and Britz, who share profits and losses equally, have the following balance sheet as of
December 31, 2016:
Adjusting Entry
Inventory 20 000
Accumulated Depreciation 3 000
Allowance for Doubtful Account 10 000
Barron, Capital 3 500
Britz, Capital 3 500
Closing Entry