UNIVERSITY OF SANTO TOMAS

AMV College of Accountancy

CA51027 ACCOUNTING FOR GOVERNMENT AND NONPROFIT ORGANIZATIONS

Partnership Dissolution
Partnership Dissolution – is the change in the 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).

On dissolution, the partnership is not terminated, but continues until the winding up of partnership affairs is completed
(Article 1829).

Causes of Dissolution:
1. Admission of a partner
2. Withdrawal or retirement of a partner
3. Death of a partner
4. Incorporation of the partnership

ADMISSION OF A PARTNER

A new partner can only be admitted into a partnership with the consent of all the continuing partners. No one becomes a
member of the partnership without the consent of all the members. This is because a partnership is based on mutual trust
and confidence of the partners.

By admission of a new partner, the old partnership has been dissolved and it is important that a new agreement be
formulated to govern the continuing business operations. A person may become a partner in an existing partnership by
either of the following:
1. Purchase of an interest from one or more of the existing partners.
2. Investment of assets in the partnership by the new partner.

Illustration: Admission of a Partner

Mario and Luigi sell electronic equipment and supplies through their partnership. They wish to expand their computer lines
and decide to admit Popeye to the partnership. Mario’ capital and Luigi’s capital are P100,000 and P80,000, respectively and
they share income in a ratio of 3:2.

Required: Prepare the journal entries required to record the admission of Popeye for each of the following independent
situations:

1. Popeye directly purchases half of Luigi’s investment in the partnership for P46,500.
2. Popeye invests the amount needed to give him a one-third interest in the capital of the partnership if no goodwill or
bonus is recorded.
3. Popeye invests P56,000 for a one-fourth interest. Goodwill is to be recorded.
4. Mario and Luigi agree that some of the inventory is obsolete. The inventory account is decreased before Popeye is
admitted. Popeye invests P52,000 for a one-fourth interest.
5. Popeye directly purchases a one-fourth interest by paying Mario P32,000 and Luigi P36,000. The land account is
increased before Popeye is admitted.
6. Popeye invests P40,000 for a one-fifth interest in the total capital of P220,000.
7. Popeye invests P60,000 for one-fifth interest. Goodwill is to be recorded.

WITHDRAWAL OR RETIREMENT OF A PARTNER

A partner may withdraw or retire from a partnership for various reasons. Disputes with other partners, old age, and pursuit
for better opportunities are among the possible explanations. The withdrawal of a partner dissolves the old partnership. This
type of dissolution may be accomplished by either of the following ways:
1. By selling his equity interest to one or more of the remaining partners.
2. By selling his equity interest to an outsider.
3. By selling his equity interest to the partnership.
a. Withdrawal at book value
b. Withdrawal at more than book value
c. Withdrawal at less than book value

Illustration: Retirement of a Partner

The partnership of Steph, Klay and Dray has been in business for 25 years. On December 31, 2023, Dray decided to retire
from the partnership. The partnership reported the following capital balances for each partner at December 31, 2023.
Steph, Capital P 150,000
Klay, Capital 200,000
Dray, Capital 120,000

The partners allocate partnership income and loss in the ratio of 20:30:50.

Required: Record the withdrawal of Dray under each of the following independent situations:

1. Dray’s capital interest was acquired for P150,000 by Klay in a personal transaction. Partnership assets were not
revalued, and partnership goodwill was not recognized.
2. Assume the same facts as in (1) above except that partnership goodwill applicable to the entire business was
recognized by the partnership.
3. Dray was given P180,000 of partnership cash upon retirement. Capital of the partnership after Dray’s retirement
was P290,000.
4. Dray was given P60,000 cash and partnership land with a fair value of P120,000. The carrying amount of the land
on the partnership books was P100,000. Capital of the partnership after Dray’s retirement was P310,000.
5. Dray was given P150,000 of partnership cash upon retirement. The portion of goodwill attributable to Dray was
recorded by the partnership.
6. Assume the same facts as in (5) above except that the partnership goodwill attributable to all the partners was
recorded.

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 7. Due to limited cash in the partnership, Dray was given land with a fair value of P100,000 and a note payable for
P50,000. The carrying amount of the land on the partnership books was P60,000. Capital of the partnership after
Dray’s retirement was P360,000.

DEATH OF A PARTNER

The death of a partner dissolves a partnership. When the death of a partner does not result to liquidation, the accounting
procedures to be followed are similar to those discussed in the withdrawal of a partner. The deceased partner may be
considered to have retired from the partnership and his heirs or estate can expect to receive the amount of his interest from
the business.

INCORPORATION OF A PARTNERSHIP

A partnership may decide to incorporate after evaluating the various advantages of having a corporate form of business
organization. After the necessary adjusting and closing entries, the assets and liabilities of the partnership are transferred to
the corporation in exchange for shares of stock. The shares received by the partnership are distributed to the partners based
on their equity interests.

Illustration: Incorporation of a Partnership

The condensed statement of financial position of the partnership of Naruto and Sasuke who shares profits and losses
equally as of December 31, 2023 showed the following:
Total assets P 200,000
Total liabilities 40,000
Naruto, capital 80,000
Sasuke, capital 80,000

On this date, the partnership was dissolved and its net assets transferred to a newly-formed corporation. The fair value of
the assets was P24,000 more than the carrying value on the firm’s books. Each of the partners was issued 10,000 shares of
the corporation’s P1 par ordinary share.

Required: Prepare the journal entries in the books of the corporation.

EXERCISES

PROBLEM 1. Bruno, Jango and Jimo are partners sharing profits in the ratio of 3:3:2. On July 31, their capital balances are
as follows: Bruno, P280,000; Jango, P200,000; Gimo, P160,000. The partners agree to admit Aldo on the following
agreement:

 Aldo is to pay Bruno, P200,000 for ½ interest of Bruno’s interest.

 Aldo is also to invest P160,000 in the partnership.
 The total capital of the partnership is to be P960,000, of which Aldo’s interest is to be 25%.

What are the capital balances of the partners after the admission of Aldo?

PROBLEM 2. The balance sheet as of September 30, 2022, for the partnership of D, E and F shows the following
information:
Assets P 72,000 D. loan P 4,000
D, capital 16,600
E, capital 15,400
. F, capital 36,000
Total P 72,000 Total P 72,000

It was agreed among the partners that D retires from the partnership, and it was also further agreed that the assets should
be adjusted to their fair value of P69,000 as of September 30, 2022. Net loss prior to the retirement of D amount to P14,000.
The partnership is to pay D P12,400 cash for D’s partnership interest, which would include the payment of his loan. D, E and
F share profit 40%, 15% and 45%, respectively.

After D’s retirement, how much would F’s capital would be?

PROBLEM 3. The capital accounts of the partnership of Rose and Tulips at October 31, 2022 are as follows:
Rose P 320,000
Tulips 160,000

The partners share profits and losses in the ratio of 3:2, respectively. The partnership is in desperate need of cash, so they
agree to admit Camia as a partner with a 1/3 interest in the capital and profits and losses upon her investment of P120,000.
Immediately after Camia’s admission, what should be the capital balances of Rose, Tulip and Camia, respectively?

PROBLEM 4. The following balances as of the end of 2022 for the partnership of Jade, Emerald and Ruby, together with
their respective profit and loss percentages, were as follows:
Assets P 360,000 Jade, loan P 18,000
Jade, capital (20%) 84,000
Emerald, capital (20%) 78,000
. Ruby, capital (60%) 180,000
Total P 360,000 Total P 360,000

Jade decided to retire from the partnership. Parties agreed to adjust the assets to their fair value of P432,000 as of
December 31, 2022. Jade will be paid P122,400 for her interest inclusive of her loan which is to be repaid in full.

What will be the balance of Emerald’s capital account after Jade’s retirement?

PROBLEM 5. The following condensed balance sheet is presented for the partnership of A and B, who share profits and
losses in the ratio of 6:4, respectively:
Cash P 67,500

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 Other assets 937,500
B, loan 45,000
Total P 1,050,000

Accounts payable P 180,000

A, capital 522,000
B, capital 348,000
Total P 1,050,000

The assets and liabilities are fairly valued on the balance sheet. A and B decide to admit C as a new partner for 20%
interest. No bonus or goodwill is to be recorded. What amount should C contribute or invest in cash or other assets?

PROBLEM 6. Kravitz and Raine are partners in an excavating business known as K and R Excavating. The partners are
considering a number of options regarding the partnership including the admission of a new partner and a potential sale of
the partnership. The following information has been prepared as a basis for evaluating various alternatives:
Book Values Fair Values Tax Basis
Cash P 20,000 P 20,000 P 20,000
Accounts receivable 85,000 72,000 92,000
Inventory 42,000 30,000 50,000
Prepaid and other current assets 18,000 15,000 18,000
Property, plant and equipment (net) 358,000 300,000 320,000
Total Assets P 523,000 P 437,000 P 500,000

Accounts payable P 54,000 P 54,000 P 54,000

Other current liabilities 29,000 35,000 29,000
Notes/loans payable 240,000 240,000 240,000
Kravitz, capital 120,000
Raine, capital 80,000
Total liabilities and capital P 523,000

The partners currently share profits and losses in the ratio of 60:40, respectively, for Kravitz and Raine.
1. Given the stated fair values, if Raine were to sell one-half of her interest in capital to someone outside the
partnership, what would be the suggested asking price?
2. Given the stated fair values, if a third party were to convey assets to the partnership in exchange for a 40% interest
in the partnership, what would the value of those assets have to be?

PROBLEM 7. Horne and Pico are partners with capital balances of P140,000 and P100,000, respectively. They share profits
and losses in a 2:1 ratio, respectively. Sax is admitted into the partnership for a P60,000 cash contribution. Sax shares in
25% of the profits and losses and is to have a 25% capital interest. How much should be credited to Sax’s capital account
under the bonus method?

PROBLEM 8. Cord and Stringer are partners who share profits and losses in the ratio of 3:2, respectively. On August 31,
2022, their capital accounts are as follows:
Cord P 70,000
Stringer 60,000

On that date, they agree to admit Twiner as a partner with a one-third interest in the capital and profits and losses, for an
investment of P50,000. The new partnership will begin with a total capital of P180,000.

The capital balance of Cord after the admission of Twiner should be:

PROBLEM 9. Andrews and Block are partners in an engineering consulting firm sharing profits and losses 40% and 60%,
respectively, and their capital balances are P110,000 and P150,000, respectively. The recorded net assets of the company
are as follows:

Book Value Fair Value

Working capital P 240,000 P 220,000
Net property and equipment 80,000 108,000
Non-current liabilities 60,000 60,000

In addition to the recorded assets, the partners feel that the company has goodwill valued at P40,000 because the company
enjoys a strong client base and has earnings that are constantly above industry averages.

Carver is interested in merging his environmental consulting company with Andrews and Block. Carver’s net assets to be
conveyed to the partnership include the following:
Book Value Fair Value
Working capital P 50,000 P 40,000
Net property and equipment 60,000 50,000

In addition to the above recorded net assets, Carver feels that his business contacts and expertise will add value to the
existing partnership. Carver has valued these intangibles at P20,000.

If Carver were to acquire a 30% interest in the new partnership, how much additional cash would have to contribute to the
partnership?

MULTIPLE-CHOICE

1. The balance sheet as of June 30, 2023 for the partnership of Dom, Joe, and Rey show the following
information:
Total assets (at cost) P 360,000

Dom, loan P 20,000

Dom, capital 83,000
Joe, capital 77,000
Rey, capital 180,000
Total P 360,000
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 It was agreed among partners that Dom retires from the partnership and it was further agreed
that the assets be adjusted to their fair values P408, 000 as of June 30, 2023. The partnership
would pay Dom P121, 000 cash Dom’s partnership interest and includes the payment of loan to
Dom. No goodwill is to be recorded. Dom, Joe, and Rey share profit and losses: 25%, 25% and 50%
respectively.

After Dom’s retirement, what is the balance of Rey’s capital account?

a. P180, 000 b. P204, 000 c. P200, 000 d. Zero

2. Andrews And Block are partners in an engineering consulting firm sharing profits and losses 40%
and 60%, respectively, and their capital balances are P110, 000 and P150, 000 respectively. The
recorded net assets of the company are as follows:

Book Value Fair Value

Working capital P 240,000 P 220,000
Net property and equipment 80,000 108,000
Noncurrent liabilities 60,000 60,000

In addition to the recorded assets, the partners feel that the company has goodwill valued at P40,
000 because the company enjoys a strong client base and has earnings that are consistently
above industry averages.

Carver is interested in merging environmental consulting company with Andrews and Block.
Carver’s net assets to be conveyed to the partnership included the following:
Book Value Fair Value
Working capital P 50, 000 P 40, 000
Net property and equipment 60, 000 50, 000

In addition to the above recorded net assets, Carver feels that his business contacts and expertise
will add value to existing partnership. Carver has valued these intangibles at P20, 000.

In Carver were to acquire a 30% interest in the new partnership, how much additional cash would
have to contribute to the partnership?
a. P20, 000 b. P22, 000 c. P42, 000 d. None of the above

3. D, E and F are partners sharing earnings in the ratio of 5:3:2 respectively. As of December 31,
2022, their capital balances showed P237,500 for D, P200,000 for E and P150,000 for F. On
January 1, 2023 the partnership admitted G as a new partner and according to the partnership
agreement, G will contribute P200,000 in cash to the partnership and will also pay P25,000 for
15% of E’s share. G will share 20% in the earnings while the ratio of the original partners will
remain proportionately the Kime as before the admission of G. After G’s admission, the total
capital of the partnership will be P825,000 while G’s capital account will be P175,000. The
balance of E’s capital account after the admission of G would be:
a. P181,500 b. P197,750 c. P186,500 d. P202,750

4. The condensed balance sheet of the partnership of China and Japan as of December 31, 2022
showed the following:
Total assets P 200,000
Total liabilities 40,000
China, capital 80,000
Japan, capital 80,000

On this date, the partnership was dissolved and its net assets were transferred to a newly-formed
corporation. The fair value of the assets was P24,000 more than the carrying value on the firm’s
books. Each of the partners was issued 10,000 shares of the corporation’s P1 par common stock.
Immediately after affecting the transfer of the net assets, and the issuance of stocks, the
corporation’s additional paid-in capital account would be credited for:
a. P136,000 b. P140,000 c. P154,000 d. P164,000

5. The capital balances for Messalina is P210,000 and for Romulus is P140,000. These two partners
share profits and losses 60% and 40% for Messalina and Romulus, respectively. Claudius invests
P100,000 in cash in the partnership for a 20% ownership. The bonus method will be used. What
are the capital balances for Messalina, Romulus and Claudius after this investment is recorded?
a. P216,000, P144,000, P90,000 c. P222,000, P148,000, P80,000
b. P218,000, P142,000, P88,000 d. P240,000, P160,000, P100,000

6. Ester, Judith and Martha were partners with capital balances n January 2, 2023 of P350,000,
P420,000 and P280,000, respectively. Their loss sharing ratio is 3:5:2. On May 1, 2023, Ester
retires from the partnership. On the date of retirement, the partnership net income is P240,000.
The partners agreed further to pay Ester P382,800 in settlement of her interest. How much will be
the capital of Judith after retirement of Ester?
a. P544,320 b. P540,000 c. P539,520 d. P516,000

7. Pal and Mall are partners with capitals of P200,000 and P100,000 and sharing profits and losses
3:1, respectively. They agree to admit Kent as partner, Kent invests P150,000 for a 50% interest in
the firm. Pal and Mall transfer part of their capitals to Kent as a bonus.

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 The capital balances of the partners after Kent’s admission are:
a. Pal, P168,750; Mall, P56,250; Kent, P225,000 c. Pal, P200,000; Mall, P100,000; Kent, P150,000
b. Pal, P112,500; Mall, P37,500; Kent, P150,000 d. Pal, P143,750; Mall, P81,250; Kent, P225,000

8. If a new partner purchases his interest from an old partner, the only entry on the partnership
books is a credit to the purchaser’s capital account with a debit to the
A. Bonus account C. Capital account of the selling partner
B. Cash account D. Capital account of other partners

9. When a partner is added to a partnership:

A. The previous partnership ends.
B. The underlying business operations end.
C. The underlying business operations must close and then re-open.
D. The partnership must continue.

10. A partnership recorded the following journal entry:

Cash P 70,000
J. Dela Cruz, capital 10,000
R. Klayson, capital 10,000
H. Rivera, capital P 90,000

This entry reflects:

A. Acceptance of a new partner who invests P70,000 and receives a P20,000 bonus.
B. Withdrawal of a partner who pays a P10,000 bonus to each of the other partners.
C. Addition of a partner who pays a bonus to each of the other partners.
D. Additional investment into the partnership by Tanner and Klayson.

11. Groh and Klayson are partners. Groh's capital balance in the partnership is P64,000, and Klayson's
capital balance P61,000. Groh and Klayson have agreed to share equally in income or loss. Groh
and Klayson agree to accept Block with a 25% interest. Block will invest P35,000 in the
partnership. The bonus that is granted to Block equals:
A. P5,000 B. P2,500 C. P6,667 D. P3,333

12. Partners Chito and Ditas share profits in the ratio of 6:4 respectively. On December 31, 2023 their
respective capital balances were Chito, P120,000 and Ditas, P100,000. On that date Meng was
admitted as partner with a one-third interest in capital and profits for an investment of P80,000.
The new partnership began in 2023 with total capital of P300,000. Immediately after Meng's
admission, Chito's capital should be:
A. P120,000 B. P108,000 C. P100,000 D. 160,000

13. The condensed balance sheet of the partnership of China and Japan as of December 31, 2022
showed the following:
Total assets P 200,000 China, capital P 80,000
Total liabilities 40,000 Japan, capital 80,000

On this date, the partnership was dissolved and its net assets were transferred to a newly-formed
corporation. The fair value of the assets was P24,000 more than the carrying value on the firm’s
books. Each of the partners was issued 10,000 shares of the corporation’s P1 par common stock.
Immediately after affecting the transfer of the net assets, and the issuance of stocks, the
corporation’s additional paid-in capital account would be credited for:
A. P136,000 B. P140,000 C. P154,000 D. P164,000

14. The capital balances for Messalina is P210,000 and for Romulus is P140,000. These two partners
share profits and losses 60% and 40% for Messalina and Romulus, respectively. Claudius invests
P100,000 in cash in the partnership for a 20% ownership. The bonus method will be used. What
are the capital balances for Messalina, Romulus and Claudius after this investment is recorded?
A. P216,000, P144,000, P90,000 C. P222,000, P148,000, P80,000
B. P218,000, P142,000, P88,000 D. P240,000, P160,000, P100,000

15. Ester, Judith and Martha were partners with capital balances n January 2, 2023 of P350,000,
P420,000 and P280,000, respectively. Their loss sharing ratio is 3:5:2. On May 1, 2023, Ester
retires from the partnership. On the date of retirement, the partnership net income is P240,000.
The partners agreed further to pay Ester P382,800 in settlement of her interest. How much will be
the capital of Judith after retirement of Ester?
A. P544,320 B. P540,000 C. P539,520 D. P516,000