Accounting for Partnership Dissolution_Jan 3

5/11/2018

Accountingfor PartnershipDissolution_Jan 3-slidepdf.com

Presented by: Ms. Rheichelle C. Antonio, CPA MBA

Reference: Partnership and Corporation Accounting 3rd Edition 2009-2010 by Valencia, Roxas and Asuncion

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`

³The

dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on the business´



Civil Code of the Philippines, Art. 1828


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Dissolution ± stops the partner¶s original association

`

Liquidation ± converts all noncash assets into cash to pay all claims against the partnership as a consequence of partnership dissolution


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Is

there always a dissolution if there is liquidation?

`

Is

there always a liquidation after dissolution?

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ANSWER IS: YES AND NO respectively


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 Admission

or withdrawal of

Dissolution

 

a partner Insolvency of a partner Incorporation of partnership


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Formation of a New Partnership



Remaining partners continue the business operation under a new partnership agreement



Partnership activities

Dissolution

Liquidation

are terminated noncash assetsand are converted into cash to pay creditors and distribute remaining assets to partners.


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`

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Closing of temporary accounts to partner¶s respective capital account must be made. According to their respective profit and loss ratio.


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ABC Partnership Trial Balance March 31, 200x in PHP

Cash Acccounts receivable Equipment Accumulated depreciation-Equipment Accounts payable A, Capital B, Capital C, Capital Professional fee Rent income Salaries expense Supplies expense Depreciation expense Miscellaneous expense

P&L Ratio:

Closing Entries:

Debit 68,000 120,000 720,000

120,000 47,000 72,000 30,000 1,177,000

Credit

141,000 136,000 300,000 250,000 50,000 250,000 50,000

Date

Description

31-Mar

Professinal fee Rent income Income Summary to close reve nue accounts

31-Mar

31-Mar

1,177,000

Income Summary Salaries expense Supplies expense Depreciation expense Miscellaneous expense to close expense accounts

Debit

250,000 50,000 300,000

269,000

Income Summary 31,000 A, Capital{31,000 x 25%} B, Capital{31,000 x 25%} C, Capital{31,000 x 50%} to close net income to the capital accounts

A 25% B 25% C 50% http://slidepdf.com/reader/full/accounting-for-partnership-dissolutionjan-3

Credit

120,000 47,000 72,000 30,000

7,750 7,750 15,500

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Assets and liabilities of the partnership should be restated at their fair market values to determine the fair and equitable capital balances of the existing partners.

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Increases or decreases of assets are allocated based on the profit and loss ratios or capital ratios


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1. 2.

Negative Asset Revaluation Positive Asset Revaluation

Example: In the given example earlier, suppose partner C is withdrawing from the partnership and also they agreed that the equipment shall have a fair value of P558,000.


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Closing Entries: ABC Partnership Trial Balance March 31, 200x in PHP

Cash Acccounts receivable Equipment Accumulated depreciation-Equipment Accounts payable A, Capital B, Capital C, Capital Professional fee Rent income Salaries expense Supplies expense Depreciation expense Miscellaneous expense

Debit 68,000 120,000 720,000

Date

Description

31-Mar

Professinal fee Rent income Income Summary to close reve nue accounts

Credit

31-Mar 141,000

120,000 47,000 72,000 30,000 1,177,000

Income Summary Salaries expense

Debit

300,000

269,000 120,000

Supplies expense Depreciation expense Miscellaneous expense to close expense accounts

136,000 300,000 250,000 50,000 250,000 50,000

31-Mar

Income Summary A, Capital{31,000 x 25%} B, Capital{31,000 x 25%}

47,000 72,000 30,000

7,750 7,750

15,500

31,000

C, Capital{31,000 x 50%} to close net income to the capital accounts

1,177,000

Credit

250,000 50,000

P&L Ratio:

A 25% B 25% C 50%

Computation:

Cost of equipment Less: recorded depreciation Book Value per record Less: agreed FMV incre ase in accumul ate d de pre ci ati on

720,000 141,000 579,000 558,000 21,000 11

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Computation:

Cost of equipment Less: recorded depreciation Book Value per record Less: agreed FMV i ncre ase i n accumul ated de pre ci ati on

720,000 141,000 579,000 558,000 21,000

Adjusting Entries to effect the negative asset revaluation:

Date

Description

Debit

31-Mar

A, Capital{21,000 x 25%} 5,250 B, Capital{21,000 x 25%} 5,250 C, Capital{21,000 x 50%} 10,500 Accumulated Depreciation- Equipment to record adjustment in value of equipment

Credit

21,000


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A, Capital 5,250

See the beginning balances:

A, Capital B, Capital

300,000 250,000

C, Capital

50,000

5,250

Closing Entries:

31-Mar

300,000

7,750

307,750

302,500

B, Capital

Income Summary 31,000 A, Capital{31,000 x 25%} B, Capital{31,000 x 25%} C, Capital{31,000 x 50%}

5,250

7,750 7,750 15,500

5,250

250,000

7,750

257,750

252,500

to close ne t income to the capital accounts

Adjusting Entries:

31-Mar

C, Capital

(Negative Asset Revaluation)

A, Capital{21,000 x 25%} B, Capital{21,000 x 25%} C, Capital{21,000 x 50%}

10,500

5,250 5,250 10,500

Accumulated Depreciation- Eq

10,500

50,000

15,500

65,500

55,000

21,000 13


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`

The

adjusted balance will be the basis for the payment of the withdrawing partner¶s interest.

Payment to withdrawing partner equal to its adjusted capital balance: Date

Description

31-Mar

C, Capital

Debit

Credit

55,000 Cash

55,000

to record withdrawal of partner C


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The

partners agree that the equipment shall have a fair market value of P600,000. Computation:

Cost of equipment Less: recorded depreciation Book Value per record Less: agreed FMV increase in value of equipment Adjusting Entries

720,000 141,000 579,000 600,000 21,000

to effect the positive asset revaluation:

Date

Description

Debit

31-Mar

Accumulated Depreciation- Equipment A, Capital{21,000 x 25%} B, Capital{21,000 x 25%} C, Capital{21,000 x 50%}

21,000

to record adjustment in value of equipment http://slidepdf.com/reader/full/accounting-for-partnership-dissolutionjan-3

Credit

5,250 5,250 10,500 15 15/49

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1. 2. 3.

4.

Admission of new partner Withdrawal, retirement or death of a partner Insolvency of a partnership or insolvency of a partner Incorporation of partnership


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2 Methods 1. By purchase of interest of existing partner(s) 2. By direct investment to partnership


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A DMISSION

BY PURCHA SE OF INTEREST

Is Purchase Price = Book Value of Interest Sold? NO

YES

Excess payment to

NO

Record the transfer of capital at book value of i nterest sold as foll ows:

be recorded Debit Capital of Selling Partner

YES

Credit

xxxx

Capital of Buying Partner

xxxx

Specific asset account to be

YES

Adjust the specific asset as follows:

revalued Debit Asset

Credit

xxxx Capital of Old Partners (P&L ratio)

xxxx

Record the revaluation of specific asset prior to the transfer of old partner's capital to buying partner. Record the transfer of adjusted capital at book value of intere st sold as follows: Debit Capital of Selling Partner Capital of Buying Partner

Credit

xxxx xxxx


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`

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by Admission of additional partner(s) purchase of interest of existing partner(s) does not fall under the description of a business combination applying the purchase method as contemplated in I AS/PAS 38.

Accordingly, an agreement between and among the partners to recognized goodwill is not considered as an arm¶s length¶s transaction. Goodwill agreement between or among partners may involve an element of bias, and therefore should not be recognized. To

be recognized, goodwill must be paid for in a business combination by purchase.


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`

`

`

³personal

transaction between the incoming partner and old partner´ Any gain or loss on the transaction is a personal gain or loss of the selling partner. No gain or loss is recorded in the partnership books


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Capital Balances and agreed profit and loss distribution of Ben and Margareth Partnership prior to dissolution. Partners Ben Margareth

Capital Balances 250,000 750,000

P/L Ratio 25% 75%

Marion wants to buy 50% of the interest of Margareth to give her an interest of 37.50% in the partnership's asset and partnership's profit and loss. Margareth

750,000 x 50% =

375,000


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Case 1:

Purchase at Book Value


Marion pay Margareth equal to the i nterest bei ng purchase P375,000 Description

Margareth, Capital Marion, Capital Case 2:

Debit

Credit

375,000 375,000

Purchase Lesser Than Book Value

In

Marion pay Margareth less than the i nterest bei ng purchase P350,000 Description

Margareth, Capital Marion, Capital

Debit 375,000

Credit

375,000

3

Case :

Purchase Method Case 1, 2 and 3 have the same entr y to record the admission of the new partner.

Purchase More Than Book Value Marion pay Margareth more than the intere st bei ng purchase

P400,000 Description

Margareth, Capital Marion, Capital

Debit

Credit

375,000 375,000

The new profit and loss of the new partnership of Ben, Margareth and Marion is computed as follows: Partners Ben Margareth Marion Total

Old P/L Ratio 25% 75% x 50% 100%

P/L Ratio 25.0% 37.5% 37.5% 100.0% 22


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Given:

Capital Balances and agreed profit and loss distribution of Tiara and Xiela Partnership prior to dissoluti on.

Partners Tiara Xiela

Capital Balances 150,000 350,000

P/L Ratio30% 70%

Christian wants to buy 20% of the interest the partnership's assets and partnership's profit and loss by paying di rectly e ach of the e xisti ng partners 20% of their respective interest in the partnership. Tiara Xiela

150,000 x 20% = 350,000 x 20% =

30,000 70,000 100,000


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Case 1:

Purchase at Book Value


Christian paid total amount of P100,000 directly to the partners Description

Debit

Tiara, Capital

30,000

Xiela, Capital

70,000

Christian, Capital Case 2:

Credit

100,000

Purchase Lesser Than Book Value

Christian paid total amount of P60,000 directly to the partners Description Tiara, Capital

Debit 30,000

Xiela, Capital

70,000

Christian, Capital Case 3:

In

Credit

100,000

Purchase Method

Case 1, 2 entr and y3 to have the same record the admission of the new partner.

Purchase More Than Book Value

Christian paid total amount of P150,000 directly to the partners Description

Debit

Tiara, Capital Xiela, Capital

30,000 70,000

Christian, Capital

Credit

100,000


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The new profit and loss of the new partnership of Tiara, Xiela and Christian is: computed as follows: Partners Tiara Xiela

Old P/L Ratio 30% x (100%-20%) 70% x (100%-20%)

Christian Total

P/L Ratio 24.0% 56.0% 20.0%

100%

100.0%

25


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Cash Payment in Case 3:

Amount of transferred capital Excess of cash payment (150,000 - 100,000 = 50,000) Total Cash Distribution

Tiara 30% 30,000 15,000 45,000

Xiela Total 70% 100% 70,000 100,000 35,000 50,000 105,000 150,000

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`

Total 

`

Contributed Capital (TCC)

Total

actual investment made by all partners (both existing and incoming partner/s) to the partnership

Total Agreed 





Capital (TAC)

Refers new amount of partnership capital as agreed by the partners which is indicated in the partnership contract Can be equal to, more than or less than the TCC. Other term for it is Agreed New Capital (ANC)

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A DMISSION

BY INVESTMENT

Partnership's Total Contributed Capital (TCC) = Partnership's Total A greed Capital (TAC) Is the New Partner's A greed Capital Credit equal to his A ctual

Contribution?

NO

YES

There is

No Bonus

Bonus

Bonus to the NEW partner if hi s Capital Credit is GREATER THAN his actual contributi on Bonus to the OLD partners if the ne w partner's Capital Credi t is LESSER THAN his actual

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Admission of additional partner(s) by investment in the partnership wi ll not fall under the description of a business combination applying the purchase method as contemplated in IFRS 3.

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An agreement between and among the partners to recognized goodwill may involve bias and is not considered as an arm¶s length¶s transaction .

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1.

2.

case there is no T AC, the TCC shall be followed by the partners If T AC is not mentioned in the partnership In

contract but capitalization, an agreementthe is made for new partnership T AC is computed using the following formula: a) b)

New partner¶s investment / New partner¶s interest Old partner¶s investment / Old partner¶s interest

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Given:

Triple A partnership has the fol lowing adjusted accounts prior to the acceptance of Nimrod as a new partner: (amounts in PHP) Assets: Cash

10,000

Acccounts receivable Allowance of bad debts Merchandise inventory Total assets

200,000 -10,000 300,000 500,000

Liability and partner's Capital: Accounts payable Aaron, Capital Ahab, Capital Ananias, Capital Total liabilities and equities

50,000 150,000 150,000 150,000 500,000

P&L distribution is equally. On May 31 the partners approve the admission of Ni mrod provided that he will contribute the following to the partnership. Equipment with FMV of P100,000 and Cash worth P50,000 They agreed that they would received capital interest equal to their actual contributions to the partnership.

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Date

Description

Debit

31-May Cash Equipment Nimrod, Capital to record investment of new partner

Credit

50,000 100,000 150,000

Therefore: Aaron, Capital Ahab, Capital Ananias, Capital Nimrod, Capital Total

TCC 150,000

TAC 150,000

150,000 150,000 150,000 600,000

150,000 150,000 150,000 600,000

Each partner¶s TCC

= T AC therefore there is NO BONUS.

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`

`

The

total contributed capital is equal to the total partnership agreed capital But some individual partners¶ contribution is not

equal to their respective capital credit ` Because there is a transfer of capital from one partner to another 1. Bonus to new partner 2.

Bonus to old partner

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Given:

The capital balance and agree d profit and loss distribution ratio of the partners prior to dissolution are as foll ows: Job

Capital Balances Profit and loss ratio

Noah

Seth

Total

120,000

240,000

240,000

600,000

20%

40%

40%

100%

Enoch is admitted by investing cash of P200,000 for 30% i nterest in the partnership. Therefore: TCC Job

Noah

120,000 240,000

Seth

240,000

Enoch Total

Old Partners

200,000 New Partner 800,000

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1. The BONUS is for the new partner. Agreed Capital for Enoch (P800,000 Less: Actual Contribution of Enoch

x

30%)

Excess Capital credit over capital contributed

240,000 200,000

40,000

2. The de crease of P40,000 will be shouldered by old partners using the Decrease i n respective old Job

20%

Noah

40%

Seth

40%

3. Analysis

partner's capital 8,000 Multi ply by P40,000

16,000

16,000

40,000

of BONUS to new partner. TCC

TAC

Bonus

Job

120,000

112,000

(8,000)

Noah

240,000

224,000

(16,000)

Seth

240,000

224,000

(16,000)

240,000

40,000

Enoch Total

200,000 800,000

800,000

0

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The new profit and loss of the new partnership is computed as follows: Partners Job Noah Seth Enoch

Total Date

Old P/L Ratio 20% x (100%-30%) 40% x (100%-30%)

P/L Ratio 14.0% 28.0%

40% x (100%-30%)

28.0% 30.0% 100.0%

100%

Description

31-May Cash Job, Capital Noah, Capital Seth, Capital Enoch, Capital to record admission of Enoch.

Debit

Credit

200,000 8,000 16,000 16,000 240,000

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Given:

Assume the following data of A and S partnership:

1 Agreed

Partners A S Totals

Capital Balances 600,000 400,000 1,000,000

240,000 240,000 -

Capital for Enoch (P1,200,000 x 20%)

Less: Actual Contribution of Enoch

P/L Ratio 60% Excess Capital credit over capital contributed 40% 2 0 100%

N is accepted in the partnership with the followi ng agreement: Cash contribution P240,000 N will be given a 20% interest in the partnership TAC of the partnership is P1,200,000

Entry to record N investment to the partnership. Date Description 31-May Cash

Debit 240,000

N, Capital to record admission of Enoch.

Credit

240,000

3

The new profit and loss of the new partnership is computed as follows:

Therefore:

TCC A

S N

Total

600,000 400,000 Old Partners 240,000 New Partner 1,240,000

Partners A

S

Old P/L Ratio 60% x (100%-20%) 40% x (100%-20%)

N

Total

100%

P/L Ratio 48.0% 32.0% 20.0% 100.0%

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4 Partner's Capital balances and adjustments are to be computed as fol lows: Adjustment Contributed Agreed Increase

Capital 576,000 384,000 240,000 1,200,000

(Decrease) (24,000) (16,000) (40,000)

TAAC is computed as follows: N's capital Divided by: N's interest in the total capitalization TAC

240,000 20% 1,200,000

A

S N Total

Capital 600,000 {P1,200,000 x 48%} 400,000 {P1,200,000 x 32%} 240,000 {P1,200,000 x 20% } 1,240,000

5

6 Entry to record adjust the capital excess of the old partners. Date Description Debit 31-May A, Capital 24,000 S, Capital 16,000 Cash to adjust paartner's capital balances

Credit

40,000

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Can occur at the same time when the partnerships assets are adjusted

`

and the new partner¶s capital credit is different from his actual contribution

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Given:

Assume the following data of A and B Partnership: A (60%) B (40%) Capital balances before dissolution 600,000 400,000 C is accepted in the partnership with the foll owing agreement: Cash contribution P500,000 for a P400,000 capital credit representing 20% interest

in the new partnership's total capital C will also recei ve 20% P&L ratio. Value of partneship's existing land be adjusted for the difference of TAC and TCC. Required: 1. Compute the new partnership TAC. 2. Prepare an analysis of bonus and asset revaluation. 3. Make a compounded journal entry for the bonus and asset revaluation.

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Partners:

Asset Revaluation Accountingfor PartnershipDissolution_Jan 3-slidepdf.com

5/11/2018

Answers: 1 The new partnership agreed capital is computed as follows: Agreed Capital Credit of C 400,000 Divided by: capital interest and P/L ratio 20% New partnership agreed capital 2,000,000

1

TCC

A (60%)

600,000

e B (40%) t C s

400,000 500,000 1,500,000

Partners:

TCC

TAC

Asset Bonus Revaluation

New P/L Ratio

C

4 pA (60%) e t B (40%) s

Partners:

TAC

Asset Bonus Revaluation

New P/L Ratio

C

960,000 640,000 400,000 2,000,000

TCC

TAC

600,000 400,000 500,000 1,500,000

C

5 pA (60%) e t B (40%) s

TAC

600,000 400,000 500,000 1,500,000

Partners:

2 the table analysis for bonus and asset revaluation would be: Partners:

3 pA (60%) e t B (40%) s

TCC

960,000 640,000 400,000 2,000,000

TCC

TAC

600,000 400,000 500,000 1,500,000

960,000 640,000 400,000 2,000,000

Bonus

0

Asset Revaluation

0

Asset Revaluation 300,000 200,000 500,000

New P/L Ratio

0

Bonus

60,000 40,000 (100,000) 0

Bonus

60,000 40,000 (100,000) 0

48% 32% 20% 100%

New P/L Ratio 48% 32% 20% 100%

New P/L Ratio 48% 32% 20% 100%

2

A (60%) e t B (40%) s C

600,000 400,000 500,000 1,500,000

0

0

0

48% 32% 20% 100%

3 The compound entry to record the admission of C, bonus and asset revaluation method. Date

Description

31-May Cash Land

Credit

500,000 500,000 A, Capital B, Capital C, Capital


Debit

360,000 240,000 400,000 41

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Any questions?

`

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1. 2. 3.

Interest

is sold to outside party Interest is sold to the remaining partners Interest is sold to the partnership a. b. c.

Book value (No Bonus) Less than book value (with bonus to the remaining partners) More than book value (with bonus to the withdrawing partner)

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INSOLVENT PARTNERSHIP DISSOLUTION PROCEDURES A re all general partners solvent?

NO

YES

The solvent general partner will absorb the

The general partners must invest additional

required payment to outside creditors and

amount to pay the outside creditors.

will have existing claim against the general partners.

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1.

2.

3.

4.

5.

Determine the deceased partner¶s P and L share from the beginning of the accounting period to the date of death. Adjust the capital accounts (include profit and loss and asset revaluation as of time of death). Close the adjusted capital account of the deceased partner to the liability account. Accrue the interest on the said recognized liability from the date of death to the settlement date Close the liability account at the settlement date.

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`

Using

Partnership Books

1. Adjust assets and liabilities directly to partners¶ capital 2. Close (debit) partners¶ capital and credit the appropriate capital stock accounts `

Using 

In

New Sets of Books

the Partnership Books

1. Close all nominal accounts to the capital accounts. 2. Adjust the assets and liabilities directly to the capital accounts 3. Close the book of the partnership by closing all real accounts 

In

1.

the Books of the Corporation Transfer

all assets and liabilities of the partnership to the books of the corporation and credit the appropriate capital stock accounts to the equity

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ACCOUNTING FOR INCORPORA TING A PARTNERSHIP

Is revaluation of partnership asset to be recorded? NO

YES

Issue equivalent number of shares of stock to

Adjust the specific asset account in

the partners based on the book value of their

accordance with the valuation made by the

respective share in the partnership

apppraiser's expert opinion. Issue equivalent number of shares of stock to the partners based on their adjusted capital balance.

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