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CHAPTER 2 (PARTNERSHIP DISSOLUTION) Case C – C is to purchase ¼ interest from the partnership paying P85,000
• Dissolution – change in relation of the partners of the partners caused by A, Capital 62,500
any partner ceasing to be associated in the carrying on of the business B, Capital 18,750
C, Capital 81,250
▲ Causes of Dissolution
• Admission of New Partner Amount paid 85,000
■ By purchase of interest Less: Capital contribution (81,250)
■ By investment Gain shared by old partners 3,750
• Removal of Old Partner
■ Withdrawal or retirement - The P3,750 is personal gain for A and B and a personal loss of C
■ Death or incapacity
• Incorporation of a partnership
Cap admission before Equity purchased Cap admission after

P/L Capital P/L Capital P/L Capital

▲ Admission of a New Partner
A 60% 250,000 (¼ ) (62,500) 45% 187,500
• Admission by purchase – a new partner can be admitted with the
B 40% 75,000 (¼ ) (18,750) 30% 56,250
consent of all partners in the business
C ¼ 81,250 25% 81,250

Total 100% 325,000 100% 325,000

ILLUSTRATION 1
A and B are partners with capital balances of P250,000 and P75,000
respectively. They share profits and losses 60% and 40% respectively. C Case D – C is to purchase 1/2 interest of A and B by paying P165,000
will be admitted as a new partner A, Capital 125,000
B, Capital 37,500
Case A – C is to purchase ¼ interest from A paying P70,500 C, Capital 162,500
A, Capital 62,500
C, Capital 62,500
Cap admission before Equity purchased Cap admission after

P/L Capital P/L Capital P/L Capital

- The 8,000 is a personal gain for C and a personal loss for A
A 60% 250,000 (½ ) (125,000) 30% 125,000
- The old partnership is dissolved and the new partners should agree on
B 40% 75,000 (½ ) (37,500) 20% 37,500
new profit and loss
C ½ 162,500 50% 162,500
- In the absence of agreement, it is presumed that the residual P/L after
giving the new partner his interest purchased will be assigned to the selling Total 100% 325,000 100% 325,000
partner

• Admission by Investment – admission where an individual may obtain

Cap admission before Equity purchased Cap admission after interest on capital and earnings of the partnership by investing cash or non-
P/L Capital P/L Capital P/L Capital cash assets into partnership

A 60% 250,000 (¼ ) (62,500) 45% 187,500

- The investment of the incoming partner will be recorded in the books
partnership, thus, the net assets of the partnership will increase after the
B 40% 75,000 40% 75,000
admission
C ¼ 62,500 15% 62,500

Total 100% 325,000 100% 325,000 ■ Bonus approach – under this method, the total contributed capital will
be equal to total agreed capital
Case B – C is to purchase ¼ interest from B paying P20,000 - AC of new partner > Contributed capital of new partner = Bonus to new
partner
A, Capital 18,750
- AC of new partner < Contributed capital of new partner = Bonus to old
C, Capital 18,750
partner

- The P1,250 is a personal gain for A and a personal loss for C

ILLUSTRATION 2
Harry and Potter are partners with capital balances of 120,000 and 80,000,
Cap admission before Equity purchased Cap admission after respectively. Their profit and loss ratio is 3:2. Hogwarts will be admitted
P/L Capital P/L Capital P/L Capital as a new partner
A 60% 250,000 60% 250,000

B 40% 75,000 (¼ ) (18,750) 30% 56,250 Case A – Capital credit is equal to the amount invested
C ¼ 18,750 10% 18,750 Hogwarts will invest 40,000 for 1/6 interest in the partnership capital and
40% share in profit and loss
Total 100% 325,000 100% 325,000
Cash 40,000
Hogwarts, Capital 40,000

- The share of Hogwarts in total AC is (240,000*1/6) P40,000 which is

equal to his cash investment, therefore, no bonus is recognized.
Pagatpat, Aischelle Mhae R.
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CC AC Bonus Old P/L New P/L
Harry 120,000 120,000 Harry 60% 80% * 60* 48%
Potter 80,000 80,000 Potter 40% 80% * 40% 32%
Hogwarts 40,000 40,000 Hogwarts 20%
Total 240,000 240,000

■ Asset Revaluation Approach – under this method, the contribution of

- Admission of a new partner results to the dissolution of the old the new partner is used as basis in determining the total agreed capital of
partnership, thus creating a new partnership the partnership
- Under the new agreement, the new profit and loss ratio is computed as - Total AC = Total CC = No revaluation
follows: - Total AC > Total CC = Positive revaluation
- Total AC < Total CC = Negative revaluation
Old P/L New P/L
Harry 60% 60% * 60* 36% ILLUSTRATION 3
Gryffindor and Slytherin are partners with capital balances of 125,000 and
Potter 40% 60% * 40% 24%
75,000, respectively. The profit and loss ratio is 3:2. Hufflepuff will be
Hogwarts 40% admitted as a new partner

Case B – Capital credit is less than the amount invested (Bonus to old Case A – Total AC = Total CC = No revaluation
partner) Hufflepuff will invest 40,000 for 1/6 interest in the partnership capital and
Hogwarts will invest 40,000 1/8 interest in the partnership capital and 20% share in profit and loss.
profit and loss Cash 40,000
Cash 40,000 Hufflepuff, Capital 40,000
Hogwarts, Capital (240K*1/8) 30,000
Harry, Capital (10K*3/5) 6,000 CC AC Revaluation
Potter, Capital (10K*2/5) 4,000 Gryffindor 125,000 125,000
Slytherin 75,000 75,000
CC AC Bonus
Hufflepuff 40,000 40,000
Harry 120,000 126,000 6,000
Total 240,000 240,000
Potter 80,000 84,000 4,000
Hogwarts 40,000 30,000 (10,000)
Old P/L New P/L
Total 240,000 240,000
Gryffindor 60% 80% * 60* 48%
Slytherin 40% 80% * 40% 32%
Old P/L New P/L
Hufflepuff 20%
Harry 60% 87.5% * 60* 52.5%
Potter 40% 87.5% * 40% 35%
Case B – Total AC > Total CC = Positive revaluation
Hogwarts 12.5% Hufflepuff will invest 60,000 for 20% interest in the partnership capital
and 25% share in profit and loss.
Case C – Capital credit is greater than the amount invested (Bonus to new Other assets 40,000
partner) Gryffindor, Capital 24,000
Hogwarts will invest 40,000 1/5 interest in the partnership capital and Slytherin, Capital 16,000
profit and loss
Cash 40,000 Cash 60,000
Harry, Capital (8K*3/5) 4,800 Hufflepuff, Capital 60,000
Potter, Capital (8K*2/5) 3,200
Hogwarts, Capital (240K*1/5) 48,000
CC AC Revaluation
Gryffindor 125,000 149,000 24,000
CC AC Bonus
Slytherin 75,000 91,000 16,000
Harry 120,000 115,200 (4,800)
Hufflepuff 60,000 60,000
Potter 80,000 76,800 (3,200)
Total 260,000 300,000 40,000
Hogwarts 40,000 48,000 8,000
Total 240,000 240,000

Pagatpat, Aischelle Mhae R.

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Old P/L New P/L ■ Sale of interest to the partnership
Baba decided to retire from the partnership to pursue his singing career
Gryffindor 60% 75% * 60* 45%
Slytherin 40% 75% * 40% 30%
Case 1 – The partnership paid 500,000 to Baba
Hufflepuff 25% Baba, Capital 500,000
Cash 500,000
Case C – Total AC < Total CC = Negative revaluation
Hufflepuff will invest 60,000 for 25% interest in the partnership capital - Since the amount paid by the partnership to Baba is equal to his interests,
and 30% share in profit and loss. neither bonus revaluation of assets will be recognized
Gryffindor, Capital 12,000
Slytherin, Capital 8,000 Case 2 – The partnership paid 620,000 to Baba
Other assets 20,000 ◊ Bonus approach
Bonus=Excess∗P /L without retiring partner
Cash 60,000
Hufflepuff, Capital 60,000 Bebe bonus
120,000 * 4/6 = 80,000
CC AC Revaluation
Gryffindor 125,000 149,000 (12,000) Bubu bonus
Slytherin 75,000 91,000 (8,000) 120,000 * 2/6 = 40,000

Hufflepuff 60,000 60,000

Baba, Capital 500,000
Total 260,000 240,000 (20,000)
Bebe, Capital 80,000
Bubu, Capital 40,000
Old P/L New P/L Cash 620,000
Gryffindor 60% 70% * 60* 42%
Slytherin 40% 70% * 40% 28% ◊ Revaluation approach

Hufflepuff 30% Revaluation=Excess / P/ L retiring partner

▲ Withdrawal, Retirement or Death of a Partner Share∈ℜ valuation=Revaluation∗P /L

- If a partner withdraws or retire from the partnership, the interest of
withdrawing/retiring partner must be liquidated - Settlement > Capital = Positive Revaluation
- Settlement < Capital = Negative Revaluation
• Ways On Liquidating The Interest
ILLUSTRATION 4 Positive Revaluation
Baba, Bebe and Bubu are partners of Bekenemen Partnership engage in the Excess 120,000
distribution of maple syrup in the town of Sweetwater River. Their capital Divide: P/L Baba 40%
balances and profit and loss ratio are Baba 40%-500,000; Bebe 40%-
300,000; Bubu 20%-200,000. Revaluation 300,000

■ Sale of interest to outsider Other assets 300,000

Baba decided to retire from the partnership and with the consent of Bebe Baba, Capital 120,000
and Bubu, he sold his interest to Kaka for 600,000 Bebe, Capital 120,000
Baba, Capital 500,000 Bubu, Capital 60,000
Kakaa, Capital 500,000
Case 3 – The partnership paid 450,000 to Baba
■ Sale of interest to one or more continuing partners ◊ Bonus approach
Baba decided to retire from the partnership and sold his interest to Bubu Bebe bonus
for 400,000 50,000 * 4/6 = 33,333
Baba, Capital 500,000
Bubu, Capital 500,000 Bubu bonus
50,000 * 2/6 = 16,667

Baba, Capital 500,000

Bebe, Capital 33,333
Bubu, Capital 16,667

Pagatpat, Aischelle Mhae R.

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◊ Revaluation approach
Negative revaluation
Excess 50,000
Divide: P/L Baba 40%
Revaluation 125,000

Baba, Capital 50,000

Bebe, Capital 50,000
Bubu, Capital 25,000
Other assets 125,000

Baba, Capital 450,000

Cash 450,000

Pagatpat, Aischelle Mhae R.