CHANGE IN OWNERSHIP

(DISSOLUTION)
DISSOLUTION DEFINED

Article 1828 of the New Civil Code defines dissolution as a change in the
relation of the partners ceasing to be associated in carrying on the business.
The legal provisions (Articles 1830 and 1831) further give us four causes of
dissolution:
1. By the acts of the partners, like when partnership purpose or objective has
already been accomplished or by mutual agreement among the partners or a
decision to withdraw from the partnership.
2. By operation of law, like when an event makes it illegal for the business to
be carried on, or when a partner becomes insolvent or dies, or by the civil
interdiction of any one of the partners.
DISSOLUTION DEFINED

3. By judicial decree, like insanity of a partner or commission of fraud by a

partner or by the internal dissension among the partners.
Dissolution does not necessarily terminate the basic business operation of the
partnership except for the change in ownership. In some instances, though, it
may lead to the termination or liquidation of the firm. In this, dissolution
without interruption in the regular operation of the business will be discussed.
DISSOLUTION DEFINED

The following changes in ownership will be discussed:

1. A new partner is admitted by buying interest directly from a current

partner.
2. A new partner is admitted by investing directly to the partnership.
3. A partner retires and his interest is bought by either an outsider, or a co-
partner or the partnership itself.
4. A partner dies and the partnership settles through the partner’s estate.
5. The partnership is incorporated.
ACCOUNTING PROCEDURES JUST BEFORE
DISSOLUTION

With the change in ownership, it is as if “new” partnership is created hence all

adjustments and revaluations of the existing partnership assets should be made
before the new association of the partners is to take over:
1. Update the capital accounts of the existing partners as of dissolution date by
revaluing the partnership assets, determining the profit share of the partners
from the last statement of financial position to dissolution date, and closing
their drawing account.
ACCOUNTING PROCEDURES JUST BEFORE
DISSOLUTION

2. If the dissolution contemplated upon was not provided for in the articles, the
terms and conditions for the dissolution should be assertained from the
partners.
3. Record the dissolution or change in ownership and revise the partner’s
equity.
If the partners’ equity is given just before dissolution without mention of a
need to revalue assets or record profit share, it is understood that the capital
accounts have already been updated and therefore ready for dissolution.
ARTICLES OF CO-PARTNERSHIP REDRAWN

It is important to redraw the Articles of Co-Partnership upon dissolution since

some provisions will be affected such as: the names of the partners and their
contributions, manner of management, duties and responsibilities of each
partner, their profit – sharing ratio, and manner of dissolving or liquidating the
partnership, to name a few.
UPDATING PARTNERS’ EQUITY BEFORE
DISSOLUTION

Assumes that Alex and Amado of AA Tours and Travel decide to dissolve their
partnership and admit Adrian as a new partner on March 31. The following
were agreed to the partners:
1. Revalue the land by P262,500
2. Distribute the profit reported by the accountant for the first quarter
amounting to P300,000. Additionally, cash withdrawals made during the first
quarter of the year amounts to P25,000 for each partner. As of January 1, three
months before dissolution date, records show their capital accounts as
P400,000 for Alex and P600,000 for Amado.
UPDATING PARTNERS’ EQUITY BEFORE
DISSOLUTION

The articles of co-partnership provided profit distribution based on capital

contribution. The accountant prepared the following entries:
a.) Land P262,500
Alex, Capital P105,000
Amado, Capital P157,500
(division is base on capital contributions)
b.) Income and Expense Summary P300,000
Alex, Drawing P120,000
Amado, Drawing P180,000
UPDATING PARTNERS’ EQUITY BEFORE
DISSOLUTION

c.) Alex, Drawing P95,000

Amado, Drawing P155,000
Alex, Capital P95,000
Amado, Capital P155,000
At dissolution date the updated partner’s capital balances are:
Alex, Capital (P400,000 + 105,000 + 95,000) P600,000
Amado, Capital (P600,000 + 157,500 + 155,000) P912,500
ADMISSION OF A NEW PARTNER

From the legal point of view, 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 existing partners
2.) Investing cash or other assets in the partnership
PURCHASING AN INTEREST FROM ONE OR MORE
EXISTING PARTNERS

A new partner may purchase a partnership interest from one or more existing
partners. In this case, a capital account is set up for the new partner by
transferring interest equal to the portion purchased from the existing partner
(s). This transaction is a personal transaction between the existing partner(s)
and the new partner. Partnership assets are not affected
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,
respectively. Angel and Sarah shares profits and losses 3/5 and 2/5,
respectively. Observe the following:
The analysis will affect the following 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 for P10,000.
CASE 1: TRANSFER OF INTEREST IS EQUAL TO THE
AMOUNT PAID

3.) Total partners’ equity P50,000 will not change although there will be a
change in the composition of partners’ equity, as follows:
Existing Equity Transfer of Interest Revised Equity
Angel, Capital P30,000 P30,000
Sarah, Capital 20,000 x ½ = (P10,000) 10,000
Lucas, Capital 10,000 10,000
Total Equity P50,000 - P50,000
Fundamental rule in accounting for the basic elements should always be
applied: The relationship of balances expressed in an accounting equation
between the assets, liabilities and partner’s equity must always be maintained.
CASE 1: TRANSFER OF INTEREST IS EQUAL TO THE
AMOUNT PAID

Net assets P50,000 = Partners’ Equity. Since Lucas did not invest in the firm,
total partners’ equity should still be the same after admissions.
CASE 2: TRANSFER OF INTEREST IS NOT EQUAL TO
THE AMOUNT PAID

Suppose in the above case, Lucas pays P15,000 for half of Sarah’s interest of
P10,000?
Analysis will still be the same as in case 1. It is emphasized that in admitting a
new partner by purchase, the payment does not affect the partnership assets
since the amount paid goes to the selling partner. It is Sarah who will recognize
either a personal gain or a personal loss. In the selling partner to the buying
partners.
CASE 2: TRANSFER OF INTEREST IS NOT EQUAL TO
THE AMOUNT PAID

Entry for Case 1 or 2 will be:

Sarah, Capital P10,000
Lucas, Capital P10,000
(Admission of Lucas as a new partner with the 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. Upward or downward adjustment of partnership assets
should be made to increase assets and partner’s equity. For asset impairment, if
the current fair values (less cost to dispose) of the assets are lower than their
book values, a downward adjustment should be made to decrease the assets
with the corresponding decrease in current partner’s capital.
CASE 3: ASSET REVALUATION (UPWARD
ADJUSTMENT)

Refer to Case 2, Lucas agrees to pay P15,000 for half of Sarah’s interest but
the assets must first be revalued. How do we arrive at the revaluation? If
the amount for revaluation is not given, it can be inferred from the amount
the new partner is willing to give.
The analysis will affect the following accounts in this manner:
1.) Since the payment is higher by P5,000 than the book value of the interest
being purchased of 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:
CASE 3: ASSET REVALUATION (UPWARD
ADJUSTMENT)

Amount Lucas is willing to pay for 50% of Sarah’s equity P15,000

Sarah’s Equity should be (15,000/50%) P30,000
Sarah’s Equity per books 20,000
Share of Sarah in the revaluation P10,000
Total asset revaluation (P10,000/40% equity of Sarah) P25,000
CASE 3: ASSET REVALUATION (UPWARD
ADJUSTMENT)

2.) Adjust the existing partners’ equity by the P25,000. Partners’ equity will be
P75,000 after the revaluation with Sarah’s adjusted capital as P30,000. This
will now be the basis for transferring capital to Lucas. Since the amount to be
paid (P15,000) was used as the basis for revaluation, it will also be the amount
for the transfer of interest.
CASE 3: ASSET REVALUATION (UPWARD
ADJUSTMENT)

3.) Partners’ Equity after the revaluation will not change anymore in
recognizing transfer of capital from the selling partner to the buying partner.
Thus:
CASE 3: ASSET REVALUATION (UPWARD
ADJUSTMENT)
Assuming that land is the asset to be revalued, two entries will be required:
Land P25,000
Angel, Capital P15,000
Sarah, Capital P10,000
(To adjust the land based on the agreed value fixed by the partners)

Sarah, Capital P15,000

Lucas, Capital P15,000
(Admission of Lucas as a new partner with the purchase of half of Sarah’s interest)

Revaluation of assets cannot be implied in admission by purchase.

REVISED PROFIT AND LOSS RATIO

It is necessary that the articles of co-partnership be redrawn in consideration of

the admission of a new partner. Likewise, a new agreement as to managerial
functions, division of profit and loss, and inclusions of the new partner are to
be considered.
In the event that a revised profit and loss ratio was not considered by the
partners, the current profit and loss ratio should be revised accordingly based
on the percent of interest the existing partner is selling to the buying partner.
REVISED PROFIT AND LOSS RATIO

If there is no profit or loss agreement from the start of partnership operation,

distribution of profit and loss after the dissolution shall be based on adjusted
capital contributions. In all the above cases, it can be inferred that with the half
of the interest purchased from Sarah, half of her profit ratio is also purchased:
INVESTING IN A PARTNERSHIP

A new partner may invest assets in the existing partnership. The following
rules should be applied:
1.) Since the new partner is contributing to the partnership, the transaction is
between the new partner and the partnership
2.) Contributions increases the partnership assets and the partner’s equity.
CASE 4: NEW PARTNER’S INVESTMENT IS EQUAL TO HIS
CAPITAL CREDIT, TOTAL CONTRIBUTIONS EQUAL TO AGREED
OR REVISED EQUITY

Assume that Lucas will invest P25,000 cash and will be given a 1/3 interest to
the partnership agreed equity of P75,000.
The analysis will affect the following accounts in this manner:
1.) Partnership assets and partners’ equity will increase by P25,000:
CASE 4: NEW PARTNER’S INVESTMENT IS EQUAL TO HIS CAPITAL CREDIT,
TOTAL CONTRIBUTIONS EQUAL TO AGREED OR REVISED EQUITY

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

3.) New partner gets a 33.33% interest in the total partners’ equity of P75,000
4.) Entry to record the investment will be:

Cash P25,000
Lucas, Capital P25,000
CASE 5: NEW PARTNER’S CONTRIBUTION IS EQUAL TO HIS CAPITAL
CREDIT. CURRENT PARTNERS AGREE TO REVALUE ASSETS

Lucas will invest P30,000 cash for a 30% interest in the net assets of the
partnership. Partnership assets should be revalued first by P20,000.
1.) Partnership assets will increase twice for the revaluation and for the cash
investment.
2.) Asset revaluation should be recorded first before admitting the new partner.
It should be base on agreed profit ratio for the existing partners or the capital
ratio if there is no agreed profit ratio.
CASE 5: NEW PARTNER’S CONTRIBUTION IS EQUAL TO HIS CAPITAL
CREDIT. CURRENT PARTNERS AGREE TO REVALUE ASSETS

3.) New partner’s equity is equal to what was invested.

*Lucas Capital will be credited for 30% based on total agreed or revised equity
of P100,000
CASE 5: NEW PARTNER’S CONTRIBUTION IS EQUAL TO HIS CAPITAL
CREDIT. CURRENT PARTNERS AGREE TO REVALUE ASSETS

Assuming that land is to be revalued, two entries will be prepared:

Land P20,000
Angel, Capital P12,000
Sarah, Capital P8,000
Cash P30,000
Lucas, Capital P30,000
BONUS
A bonus from the new partner may be required by the existing partners as a
privelege of joining the firm when current value of the partnership is more than
the stated amounts of equity of the existing partners. The procedure is the same
as a partnership formation where contribution of the new partner is higher than
the amount credited to his capital account. The excess contribution called
bonus capital will be credited to the existing partners’ capital accounts.
BONUS
On the other hand, a bonus from existing partners may be given to the new
partner to entice the new partner who has exceptional talents. The capital
credit of the new partner will be higher than the amount of contribution. The
excess capital is taken from the old partners’ capital and be given to new
partner.
CASE 6: CAPITAL CREDIT FOR THE NEW PARTNER IS LESS THAN ACTUAL
CONTRIBUTION. BONUS CAPITAL FOR THE EXISTING PARTNERS.

Lucas will invest P30,000 cash for a 25% interest in the net assets of the
partnership. A bonus of P10,000 will be given to the existing partners
1.) Partnership assets and partners’ equity will increase because of the cash
investment.
2.) Total contributed capital should be equal to total agreed or revised equity.
3.) Actual investment is P30,000 but new partner will be credited only for
P20,000 based on total agreed equity of P80,000 x 25%
CASE 6: CAPITAL CREDIT FOR THE NEW PARTNER IS LESS THAN ACTUAL
CONTRIBUTION. BONUS CAPITAL FOR THE EXISTING PARTNERS.

4.) A bonus capital will be given to the existing partners.

Only one entry is required:

Cash P30,000
Angel, Capital P6,000
Sarah, Capital P4,000
Lucas, Capital P20,000
CASE 7: CAPITAL CREDIT TO NEW PARTNER IS HIGHER THAN HIS
ACTUAL CONTRIBUTION. BONUS IS GIVEN TO THE NEW PARTNER.

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

1.) Partership assets will increase to P80,000 with the new partner’s
contribution of P30,000
2.) Total contribution should be equal to total agreed equity.
3.) Agreed capital for new partner is P40,000. The new partner receives a
bonus.
CASE 7: CAPITAL CREDIT TO NEW PARTNER IS HIGHER THAN HIS
ACTUAL CONTRIBUTION. BONUS IS GIVEN TO THE NEW PARTNER.

4.) New partner’s equity will increase twice: for the actual contribution and the
bonus capital coming from the old partners.

Cash P30,000
Angel, Capital P6,000
Sarah, Capital P4,000
Lucas, Capital P40,000
ASSET REVALUATION OR BONUS MAY BE IMPLIED

Analyzing problem in admission by investment could be simple if assset

revaluation or bonus is specified. What if problem does not specify that there
should be asset revaluation or bonus? If not given, it cannot always inferred
that there is none. Bonus or asset revaluation may be implied based on the
following rules:
1.) There is no asset revaluation if total agreed equity is the same as total
contributed capital, no bonus if the new partner’s capital credited is the same as
the actual contribution made.
ASSET REVALUATION OR BONUS MAY BE IMPLIED

2.) If total contributed capital is not equal to total agreed capital, there is asset
revaluation. Will it be an upward or a downward adjustment?
a.) When assets are undervalued, it requires an upward adjustment. TCC is
lesser than TAC.
b.) When assets are overvalued, it requires a downward adjustment. TCC is
greater than TAC.
3.) If TAC is the same as TCC but the new partner’s capital credit is not the
same as actual contribution, there is a bonus.
ASSET REVALUATION OR BONUS MAY BE IMPLIED

Who gets the bonus?

a.) Bonus is for the new partner if the capital credited for the new partner is
higher than the actual contribution made.
b.) Bonus is for the old partner if the capital credited for the new partner is
lower than the actual contribution made.
CASE 8
Lucas will invest P15,000 cash and will be given a 15% interest in the assets
and in the profits of the business. This case may be viewed in 2 ways:
1.) Asset Revaluation – Since asset revaluation belongs to old partners, use the
actual investment of Lucas worth P15,000 and divide this by his 15% interest
and come up with TAC of P100,000. Compare TAC of P100,000 to TCC of
P65,000, the difference represents asset revaluation.
2.) Bonus to Old Partners – Assume TCC is equal to TAC. Lucas will be
credited based on 15% interest of TAC worth P65,000 or P9,750. Compare this
against the actual investment of P15,000’ the excess amount is the bonus for
the Old Partners.
CASE 8
First View: Asset Rev. – Upward Adj.

Land P35,000
Angel, Capital P21,000
Sarah, Capital P14,000
Cash P15,000
Lucas, Capital P15,000
CASE 8
Second View: Asset Rev. – Upward Adj.

Cash P15,000
Lucas, Capital P9,750
Angel, Capital P3,150
Sarah, Capital P2,100
CASE 9
Lucas will invest P15,000 cash and will be given a 25% interest in the assets
and in the profits of the business. This case may be viewed in 2 ways:
1.) Asset Impairment – Since asset impairment affects only old partners, use
the actual investment of Lucas worth P15,000 and divide this by his 25%
interest and come up with TAC of P60,000. Compare TAC of P60,000 to TCC
of P65,000, the difference represents asset impairment.
2.) Bonus to New Partner – Assume TCC is equal to TAC. Lucas will be
credited based on 25% interest of TAC worth P65,000 or P16,250. Compare
this against the actual investment of P15,000’ the excess amount is the bonus
for the New Partner.
CASE 9
First View: Asset Imp. – Downward Adj.

Angel, Capital P3,000

Sarah, Capital P2,000
Land P5,000

Cash P15,000
Lucas, Capital P15,000
CASE 9
Second View: Asset Imp. – Downward Adj.

Cash P15,000
Angel, Capital P750
Sarah, Capital P500
Lucas, Capital P16,250
CASE 10: ASSET REVALUATION AND BONUS

Lucas contributed P40,000 for a ¼ interest. TAC should be P120,000

Land P30,000
Angel, Capital P18,000
Sarah, Capital P12,000
Cash P40,000
Angel, Capital P6,000
Sarah, Capital P4,000
Lucas, Capital P30,000
RETIREMENT OF A PARTNER

From the legal point of view, a partner may leave the partnership as long as it
is in accordance with the partnership agreement or with the consent of the
other partners. Otherwise the retiring partner may be sued by the other partners
for damages resulting from such actions.
RETIREMENT OF A PARTNER

From the accounting point of view, the following must be observed:

1. Capital balances of the retiring partner must be updated as of retirement
data to be used as basis for settlement. To be taken into consideration are the
following: Asset Revaluation and Profit Distribution (If retirement date is other
than the end of the accounting period).
2. Revaluation will affect ALL of the Partners.
3. For practicality, only the capital of the retiring partner may be updated for
profit or loss share through estimation.
4. The drawing account of the retiring partner must also be closed against the
capital account.
RETIREMENT OF A PARTNER

To illustrate: The statement of financial position of ABC Partnership owned by

Ador, Belle and Carlos showed as of Decemeber 31, 2020 the partners capital
balances at P400,000’ P500,000’ and P300,000 respectively. They share profit
and losses at the agreed ratio of 5:3:2, respectively. Carlos decided to leave the
business and withdraw the interest over the partnership on June 30, 2021.
Together with his other partners, they agreed not to close the books and
estimate the share of Carlos based on the average estimated net income of the
partnership for the last three years which was P270,000. Carlos made a cash
withdrawal of P15,000 just before he decided to retire.
RETIREMENT OF A PARTNER
Update the capital balance of Carlos:
Carlos Cap. as of Jan. 1 P300,000
Share in net profit for 6 months
(P270,000 x ½ x 20%) P27,000
Cash Withdrawals (P15,000)
Carlos Cap. as of Jun. 30 P312,000

Income Summary P27,000

Carlos, Cap. P27,000

Carlos, Drawings P12,000

Carlos, Cap. P12,000
(P27,000 – P15,000)