CHAPTER 5

PARTNERSHIP DISSOLUTION

EXERCISES

5.1 Maria, Leonora and Teresa are partners with adjusted capital balances of P165,000, P150,000
and P180,000 respectively and divide profit and loss equally. At the end of the year, Maria
decides to withdraw from the partnership. Maria will receive cash settlement of P150,000
Instruction: Give the entry to record the withdrawal of Maria assuming –

a. Bonus Method is used

b. Revaluation of Asset method is used

5.2 Mercedes, Melinda and Julieta are partners sharing profit and loss 40%, 30% and 30%
respectively. Capital balances of the partners before the retirement of Mercedes were at
P450,000, P425,000 and P400,000. The company sustained a net loss of P45,000 during the
year. The partners were allowed to withdraw P10,000 each.
Instruction: Give the entry to record the retirement of Mercedes, assuming no Bonus or
Revaluation will be recorded

5.3 Santino is to withdraw from Mariposa Partnership, owned by partners Macario, Policarpio and
Santino, with capital balances of P200,000, P250,000 and P100,000. Macario purchased 60% of
Santino’s interest for P65,000 while Policarpio paid Santino P50,000 for the remainder.
Instruction: Give the entry to record the withdrawal of Santino from the Partnership.
*Macario 100,000 x 60% = 60,000; P = 100,000 – 60,000 = 40,000
Entry: DR CR
S, Capital 100,000
M, Capital 60,000
P, Capital 40,000

5.4 After closing the books of the partnership of Mutya and Associates, Lakambini announced his
retirement of from the partnership. Shown below are the partners’ capital balances and the
profit and loss ratio:
Capital Balance P/L ratio
LamAng, Capital P 50,000 30%
Lakandula, Capital 65,000 25%
Lakambini, Capital 40,000 23%
LaLuna, Capital 45,000 22%

The partners agreed to the following before the cash settlement to Lakambini.
a. The merchandise inventory will be increased by P4,500
b. Allowance for bad debts will be decreased by P2,100
c. Prepaid insurance worth P1,200 have expired.

Instruction: Give the entries to record the following:

 1) Adjustments in the books of the partnership
2) Withdrawal of Lakambini from the Partnership assuming the remaining partners will
give Lakambini a bonus of P10,000.
3) Withdrawal of Lakambini from the partnership assuming Lakambini receives P5,000
share in asset revaluation.

5.5 The partners Macopa, Sineguelas and Ashitaba have capital balances of P300,000, P450,000 and
P200,000 respectively, while profit and loss was divided in the ratio 4:4:2.

On December 1, 2017, Macopa announced his intention to leave the partnership at the
end of the year. During the year the partnership gained a Net Income of P250,000 which was
distributed as follows: 5% interest on their individual capital, salaries of P6,000 to Partners
Sineguelas and Ashitaba, 4% Bonus on Net income after salaries and interest on capital was
allowed to partner Macopa.

Instruction:
1) Compute for the distribution of Net Income at the end of the year.
M S A Total
Interest
M 5% x 300,000 15,000
S 5% x 450,000 22,500
A 5% x 200,000 10,000 47,500
Salaries 6,000 6,000 12,000
Bonus 7,620 7,620
Balance P 182,880 73,152 73,152 36,576 182,880
4:4:2

Total 95,772 101,652 52,576 250,000

B =4%(250,000-12,000-47,500)
B = 4% (190,500)
B = 7,620

2) Give the entry to record the withdrawal of Macopa at the end of the year assuming
a) Macopa cash settlement was P20,000 less than her capital interest and the bonus
method was used. M = 300,000 +NI share 95,772 = 395,772 RP +Capital (CR) P & L 4:2
Adjusted M, Capital = 395,772 S 20,000 x 4/6 = 13,333
CasH settlement (less 20,000) 375,772 A 20,000 x 2/6 = 6,667
Bonus to RP 20,000
Entry DR CR
M, Capital 395,772
S, Capital 13,333
A, Capital 6,667
Cash 375,772
 b) Macopa’s cash settlement was P10,000 more than her capital interest and the asset
revaluation method was used
Adjusted M, Capital 395,772
Cash settlement (10,000 more) 405,772
+AR share of M (4/10) 10,000*

Total +AR (10,000/4/10) = 25,000 Other Assets

M 25,000 x 4/10 = 10,000*
S 25,000 x 4/10 = 10,000
A 25,000 x 2/10 = 5,000
Entry: DR CR
M, Capital 395,772
Other Assets 25,000
S, Capital 10,000
A, Capital 5,000
Cash 405,772

c) Macopa’s cash settlement was equal to her capital interest. NO AR/NO BONUS
Entry: DR CR
M, Capital 395,772
Cash 395,772

5.6 The following information was taken from the books of SAMPALOC and SONS PARTNERSHIP.
Capital Balance Profit & Loss Ratio
Sampaloc, Capital X P5,000,000 35%
Kamatchili, Capital Y 2,500,000 33%
Kaimito, Capital Z 1,500,000 32%

Kaimito is to withdrew from the partnership by selling 30% of his capital interest to
Sampaloc at 2% more than his capital interest, and will sell 70% of his capital to Kamatchili at
book value. After the withdrawal of Kaimito, the remaining partners will divide their profit and
loss equally. X = 1,500,000 x 30% = 450,000; Y 70% x 1,500,000 = 1,050,000

Instruction:
1. Give the entry to record the retirement of Kaimito.
Entry DR CR
Z, Capital 1,500,000
X, Capital 450,000
Y, Capital 1,050,000
2. If the remaining partners were to have equal capital interest and share in profit and loss,
how much additional cash should one of the partners invest?
X Y Total
Original Capital 5,000,000 2,500,000 7,500,000
From Z +450,000 +1,050,000 1,500,000
 Adjusted Capital 5,450,000 3,550,000 9,000,000
Equal interest
(9,000,000/2) 4,500,000 4,500,000
Add’l investment (950,000) 950,000*

5.7 Nilupak, Biko and Maja Blanca are partners with capital balances of P324,300, P207,000 and
P158,700. After being a partner for 30 years, Biko decided to withdraw from the partnership.
Upon his withdrawal, assets were revaluated, and Biko’s share was debited for P27,000. (
Total Capital 324,300 + 207,000 + 158,700 = 690,000
Instruction:
1. Give the entry to record the revaluation of the other assets
Total -AR (27,000 x 207/690) = (90,000) Other assets
N = 90,000 x 3243/6900 = (42,300)
B = 90,000 x 2070/6900 =( 27,000)
M = 90,000 x 1587/6900 = ( 20,700)

Entry: DR CR
N, Capital 42,300
B, Capital 27,000
M, Capital 20,700
Other Assets 90,000

2. Give the entry to record the withdrawal of Biko from the partnership.
BIKO, Capital 207,000
-AR share (27,000)
Adjusted B, Capital 180,000D
Cash settlement 180,000C

Entry DR CR
B, Capital 180,000
Cash 180,000
 TRUE OR FALSE

Write True if the statement is correct and False if incorrect.

___________ 1. Articles of Co-Partnership are the written contract of a partnership.

___________ 2 To be a partner, a member has to contribute money, property or industry in

the partnership.

___________ 3 The percentage of ownership interest of the partners is always the same as
their profit-sharing ratio.

___________ 4 As industrial partner is exempt from the sharing in partnership losses.

___________ 5 Peso month is computed by multiplying the capital investment and/or

withdrawal during the period by the number of months unchanged.

___________ 6 A silent partner is one who is not known by third parties to be a partner in
the business but takes active part in the business

___________ 7 All partnership are subject to 30% income tax.

___________ 8 The transfer of capital from one partner to the other is called Bonus.

___________ 9 In the absence of an agreement, the share of each partner in the profits and
losses shall be divided equally.

___________ 10 A limited partnership is one which all partners limited partners.

___________ 11 Partnership existence depends on the contract but not to exceed 50 years.

___________ 12 The admission of a new partner in a partnership need not be dissolved

because it shall continue its existence.

___________ 13 A change in the structure of partnership ownership liquidates the

partnership.

___________ 14 Any salary allowances specified in the partnership agreement are taken into
consideration only if profit is enough to cover such allowances.

___________ 15 Mutual agency signifies that each partner is assumed to be an agent for
partnership undertakings with the authority to bind all other partners by his
actions on behalf of the partnership

___________ 16 A bonus is normally shared by the existing partners based on their existing
 profit and loss ratio.

___________ 17 A partner who has no participation in the management of the partnership

affairs is a nominal partner.

___________ 18 Liquidation is the steps and procedure of winding up the affairs of the
partnership and involves and affect the interest of third parties.

___________ 19 The partnership should determine profit or loss for the portion of the year
up to the withdrawal date of a partner and allocate profit and loss according
to the existing ratio.

___________ 20 Cash settlement to a retiring partner of an amount in excess of his capital

balance may signify that some partnership assets are undervalued

___________ 21 A partnership has a juridical personality separate and distinct from each of
the partner.
___________ 22 The total assets of the partnership remain unchanged when a new partner
purchases an interest directly from an existing partner.

___________ 23 A stipulation in the partnership contract which excludes one or more

partners from any share in the profit or losses is allowed provided the
partners have agreed upon it.

___________ 24 Capital credit is the amount of capital or equity of a partner.

___________ 25 The admission of an individual in a partnership requires the consent of

majority of the partners.

___________ 26 The bonus account is credited when there is transfer of capital from the old
to the new partner

___________ 27 A partnership has unlimited life.

___________ 28 If the capital credit of a new partner is greater than his actual investment
there will be bonus to the new partner

___________ 29 An ostensible partner is one who has active part and recognized by the
public as partner in the business whether or not he has an actual interest in
the business.

___________ 30 Two or more persons that bind together to contribute money property or
industry into a common fund with the intention of dividing the profit among
themselves is a partnership
PARTNERSHIP DISSOLUTION
 Another occurrence which may bring about the change in partnership ownership is the removal
of an old partner which is caused by his voluntary withdrawal, retirement, his death, or incapacity of a
partner. .

Death, Withdrawal, Retirement or Incapacity of a Partner

This chapter focuses on the accounting for the withdrawal or retirement of a partner. The books
of the partnership, at the date of the retirement or death of a partner should be adjusted to identify
partnership profit or loss during the reporting period up until the date of death or the retirement of the
partner. Similar to the previous chapter in Formation of a Partnership, when there is a change in the
capital structure of a partnership, assets and liabilities are brought to their fair market value to arrive at
the adjusted partner’s equity. The equity of the retiring or deceased partner should be settled.

For a partner withdrawing or retiring from the partnership, he may, with the consent of the
remaining partners sell his interest to an outsider (new partner), to the remaining partners or to the
partnership. The purchase price or amount of settlement by the partnership to the retiring partner may
be (a) at book value – equal to the interest of the retiring partner; (b) less than the book value; (c) more
than the book value.

Two methods are used to account for the settlement to the retiring partner when the payment
is not equal with the book value or interest of the retiring partner, the (a) Bonus method, and the (b)
Asset Revaluation Method.

ILLUSTRATIVE PROBLEM

HaKaSa Partnership
Statement of Financial Position
September 30, 2017

Assets Liabilities & Capital

Cash P 150,000 Liabilities P 50,000
Other Assets 130,000 Halimuyak, Capital 100,000
Katarungan, Capital 90,000
Salimuot, Capital 40,000
Total Assets P 280,000 Total Liabilities & Capital P 280,000

a. Profit and Loss are divided in the ratio 5: 4 : 1

b. Salimuot decided to withdraw from the partnership.
c. Net Income for January – September 2017 amounted P50,000
d. Each partner withdrew P5,000 each as of September 30, 2017.
e. After the retirement of Salimuot, the remaining partners will divide profit and loss
equally.

The first step is to compute for the book value of the retiring partner’s (Salimuot) Capital.

Halimuyak, Katarungan, Salimuot, Total

Capital Capital Capital Capital
 Profit and Loss ratio 50% 40% 10%
Capital Balance before retirement P100,000 P 90,000 P 40,000 P 230,000
Share in Net Income 25,000 20,000 5,000 50,000
Total P125,000 P110,000 P 45,000 P 280,000

Case A –Salimuot withdraws from the partnership. The remaining partners did not take in any
more partner/s. Salimuot is paid P45,000 equal to his capital interest.

Salimuot, Capital 45,000

Cash 45,000

Case B – Salimuot sells his interest to Balanay for P40,000.

Salimuot, Capital 45,000

Balanay, Capital 45,000

The loss of P5,000, which is a personal loss of Salimuot will not be recorded in the company
books. After the retirement of Salimuot, the total capital would remain the same.

Case C –Salimuot withdraws from the partnership and sells his interest to the partnership and is
to be paid P50,000, which is P5,000 more than his capital interest.
(BONUS TO RETIRING PARTNER)

Salimuot, Capital 45,000

Halimuyak, Capital 2,778
Katarungan, Capital 2,222
Cash 50,000
P5,000 x 5/9 = P2,778
P5,000 x 4/9 = P2,222

Case D –Salimuot withdraws from the partnership and sells his interest to the partnership and is
paid P50,000 which is P5,000 MORE than his capital interest.
(ASSET REVALUATION METHOD)
The entry to record the Revaluation of Assets
Other Assets 50,000
Halimuyak, Capital 25,000
Katarungan, Capital 20,000
Salimuot, Capital 5,000
Revaluation P5,000 ÷ 10% = P50,000
P50,000 x 5/10 = P25,000
P50,000 x 4/10 = P20,000
P50,000 x 1/10 = P 5,000

The P5,000 difference between Salimuot’s Capital interest and the cash settlement is his
share in the calculated Asset Revaluation, thus by dividing it with his profit and loss share of 1/5,
we get the total Asset revaluation, which is P50,000.
 The entry to record the Retirement of Salimuot
Salimuot, Capital 50,000
Cash 50,000

Salimuot receives cash settlement of P50,000 which comprises his capital interest of
P45,000 plus his P5,000 share in the revaluation.

A compound journal entry can be used instead–

Other Assets 50,000
Salimuot Capital 45,000
Halimuyak, Capital 25,000
Katarungan, Capital 20,000
Cash 50,000

Case E –Salimuot withdraws from the partnership and sells his interest to the partnership and is
paid P43,000 which is P2,000 LESS than his capital interest.
(BONUS TO REMAINING PARTNERS)

Salimuot, Capital 45,000

Halimuyak, Capital 1,111
Katarungan, Capital 889
Cash 43,000
P2,000 x 5/9 = P1,111
P2,000 x 4/9 = P 889

Case F –Salimuot withdraws from the partnership and sells his interest to the partnership and is
paid P43,000 which is P2,000 LESS than his capital interest.
(NEGATIVE ASSET REVALUATION)

The entry to record the Revaluation of Assets and settlement (compound entry)
Salimuot, Capital 45,000
Halimuyak, Capital 10,000
Katarungan, Capital 8,000
Other Assets 20,000
Salimuot, Capital 43,000
Revaluation P2,000 ÷ 10% = P20,000
P20,000 x 5/10 = P10,000
P20,000 x 4/10 = P 8,000
P20,000 x 1/10 = P 2,000

EXERCISES
10.1 Maria, Leonora and Teresa are partners with adjusted capital balances of P165,000, P150,000
and P180,000 respectively and divide profit and loss equally. At the end of the year, Maria
decides to withdraw from the partnership. Maria will receive cash settlement of P150,000
Instruction: Give the entry to record the withdrawal of Maria assuming –

a. Bonus Method is used

b. Revaluation of Asset method is used

10.2 Mercedes, Melinda and Julieta are partners sharing profit and loss 40%, 30% and 30%
respectively. Capital balances of the partners before the retirement of Mercedes were at
P450,000, P425,000 and P400,000. The company sustained a net loss of P45,000 during the
year. The partners were allowed to withdraw P10,000 each.
Instruction: Give the entry to record the retirement of Mercedes, assuming no Bonus or
Revaluation will be recorded

10.3 Santino is to withdraw from Mariposa Partnership, owned by partners Macario, Policarpio and
Santino, with capital balances of P200,000, P250,000 and P100,000. Macario purchased 60% of
Santino’s interest for P65,000 while Policarpio paid Santino P50,000 for the remainder.
Instruction: Give the entry to record the withdrawal of Santino from the Partnership.

10.4 After closing the books of the partnership of Mutya and Associates, Lakambini announced his
retirement of from the partnership. Shown below are the partners’ capital balances and the
profit and loss ratio:
Capital Balance P/L ratio
LamAng, Capital P 50,000 30%
Lakandula, Capital 65,000 25%
Lakambini, Capital 40,000 23%
LaLuna, Capital 45,000 22%

The partners agreed to the following before the cash settlement to Lakambini.
d. The merchandise inventory will be increased by P4,500
e. Allowance for bad debts will be decreased by P2,100
f. Prepaid insurance worth P1,200 have expired.

Instruction: Give the entries to record the following:

4) Adjustments in the books of the partnership
5) Withdrawal of Lakambini from the Partnership assuming the remaining partners will
give Lakambini a bonus of P10,000.
6) Withdrawal of Lakambini from the partnership assuming Lakambini receives P5,000
share in asset revaluation.

10.5 The partners Macopa, Sineguelas and Ashitaba have capital balances of P300,000, P450,000 and
P200,000 respectively, while profit and loss was divided in the ratio 4:4:2.

On December 1, 2017, Macopa announced his intention to leave the partnership at the
end of the year. During the year the partnership gained a Net Income of P250,000 which was
 distributed as follows: 5% interest on their individual capital, salaries of P6,000 to Partners
Sineguelas and Ashitaba, 4% Bonus on Net income after salaries and interest on capital was
allowed to partner Macopa.

Instruction:
1) Compute for the distribution of Net Income at the end of the year.

2) Give the entry to record the withdrawal of Macopa at the end of the year assuming
d) Macopa cash settlement was P20,000 less than her capital interest and the bonus
method was used.
e) Macopa’s cash settlement was P10,000 more than her capital interest and the asset
revaluation method was used
f) Macopa’s cash settlement was equal to her capital interest.

10.6 The following information was taken from the books of SAMPALOC and SONS PARTNERSHIP.
Capital Balance Profit & Loss Ratio
Sampaloc, Capital P5,000,000 35%
Kamatchili, Capital 2,500,000 33%
Kaimito, Capital 1,500,000 32%

Kaimito is to withdrew from the partnership by selling 30% of his capital interest to
Sampaloc at 2% more than his capital interest, and will sell 70% of his capital to Kamatchili at
book value. After the withdrawal of Kaimito, the remaining partners will divide their profit and
loss equally.

Instruction:
3. Give the entry to record the retirement of Kaimito.
4. If the remaining partners were to have equal capital interest and share in profit and loss,
how much additional cash should one of the partners invest?

10.7 Nilupak, Biko and Maja Blanca are partners with capital balances of P324,300, P207,000 and
P158,700. After being a partner for 30 years, Biko decided to withdraw from the partnership.
Upon his withdrawal, assets were revaluated, and Biko’s share was debited for P27,000.

Instruction:
1. Give the entry to record the revaluation of the other assets
2. Give the entry to record the withdrawal of Biko from the partnership.

TRUE OR FALSE

Write True if the statement is correct and False if incorrect.

___________ 1. Articles of Co-Partnership are the written contract of a partnership.

___________ 2 To be a partner, a member has to contribute money, property or industry in
the partnership.

___________ 3 The percentage of ownership interest of the partners is always the same as
their profit-sharing ratio.

___________ 4 As industrial partner is exempt from the sharing in partnership losses.

___________ 5 Peso month is computed by multiplying the capital investment and/or

withdrawal during the period by the number of months unchanged.

___________ 6 A silent partner is one who is not known by third parties to be a partner in
the business but takes active part in the business

___________ 7 All partnership are subject to 30% income tax.

___________ 8 The transfer of capital from one partner to the other is called Bonus.

___________ 9 In the absence of an agreement, the share of each partner in the profits and
losses shall be divided equally.

___________ 10 A limited partnership is one which all partners limited partners.

___________ 11 Partnership existence depends on the contract but not to exceed 50 years.

___________ 12 The admission of a new partner in a partnership need not be dissolved

because it shall continue its existence.

___________ 13 A change in the structure of partnership ownership liquidates the

partnership.

___________ 14 Any salary allowances specified in the partnership agreement are taken into
consideration only if profit is enough to cover such allowances.

___________ 15 Mutual agency signifies that each partner is assumed to be an agent for
partnership undertakings with the authority to bind all other partners by his
actions on behalf of the partnership

___________ 16 A bonus is normally shared by the existing partners based on their existing
profit and loss ratio.

___________ 17 A partner who has no participation in the management of the partnership

affairs is a nominal partner.

___________ 18 Liquidation is the steps and procedure of winding up the affairs of the
partnership and involves and affect the interest of third parties.

___________ 19 The partnership should determine profit or loss for the portion of the year
 up to the withdrawal date of a partner and allocate profit and loss according
to the existing ratio.

___________ 20 Cash settlement to a retiring partner of an amount in excess of his capital

balance may signify that some partnership assets are undervalued

___________ 21 A partnership has a juridical personality separate and distinct from each of
the partner.
___________ 22 The total assets of the partnership remain unchanged when a new partner
purchases an interest directly from an existing partner.

___________ 23 A stipulation in the partnership contract which excludes one or more

partners from any share in the profit or losses is allowed provided the
partners have agreed upon it.

___________ 24 Capital credit is the amount of capital or equity of a partner.

___________ 25 The admission of an individual in a partnership requires the consent of

majority of the partners.

___________ 26 The bonus account is credited when there is transfer of capital from the old
to the new partner

___________ 27 A partnership has unlimited life.

___________ 28 If the capital credit of a new partner is greater than his actual investment
there will be bonus to the new partner

___________ 29 An ostensible partner is one who has active part and recognized by the
public as partner in the business whether or not he has an actual interest in
the business.

___________ 30 Two or more persons that bind together to contribute money property or
industry into a common fund with the intention of dividing the profit among
themselves is a partnership