sPARTNERSHIP DISSOLUTION The dissolution of a partnership is the change in re lation of the partners caused by any partner ceasing to be associated in the carrying c arrying on as distinguished from the winding up of the business of the partnership (Civil Code of the Philippines, Article 1828).
CAUSES OF DISSOLUTION:
Admission of a partner Withdrawal or retirement of a partner Death of a partner Incorporation of a partnership
ADMISSION OF A PARTNER A new partner can o nly be admitted into a partnership with the consent o f all the continuing partners. This is based on the principle of DELECTUS PERSONAE
*A person may become a partner in an existing partnership by either of the following: Purchase of an interest from one or more of the existing partners. Investment of assets in the partnership by the new partner.
PURCHASE OF AN INTEREST FROM EXISTING PARTNERS With the consent of all the partners, a new partner may be admitted in an existing partnership by purchasing a capital equity interest directly from one or more of the old partners.
Pro-Forma Entry: (Name of Seller), Capital (Name of Buyer), Capital
xxx xxx
The purchase price of the interest sold to a new partner may be: 1. Equal to the book value of the interest sold. 2. Less than the book value of the interest sold. 3. More than the book value of the interest sold.
ILLUSTRATIVE PROBLEM: Bianca and Shaira are partners with capital balances of P100,000 and P50,000 respectively. They share profits and losses equally. Jam is a new partner.
Case 1a: Purchase at book value from one partner only. Jam purchased a 1/5 interest from Bianca by paying P20,000. ENTRY: Bianca, Capital 20 000 Jam, Capital
20 000
Case 1b: Purchase at book value from more than one partner. Jam purchased 1/5 interest from the old partners by paying P30 000. ENTRY: Bianca, Capital 20 000 Shaira, Capital 10 000 Jam, Capital
30 000
Case 2: Purchase at less than book value. Jam purchases 1/5 interest from the old partners by paying P25, 000. ENTRY: Bianca, Capital 20 000 Shaira, Capital 10 000 Jam, Capital
30 000
Case 3: Purchase at more than book value. Jam pays P 40, 000 for a 1/5 interest of the old partners. ENTRY: Bianca, Capital 20 000 Shaira, Capital 10 000 Jam, Capital
30 000
Asset Revaluation upon Admission of a New Partner by Purchase Bianca and Shaira are partners with c apital balances of P100,00 and P50,000 respectively. They share profits and loses equally. Jam is a new partner who purchase a 1/5 interest from Bianca and Shaira
paying P40,000. However, before the admission of Jam, partnership assets are to be revalued using as basis amount to be paid by Jam.
Step 1- The new partnership capital is equal to the amount paid by the incoming partner divided by his fraction of interest.
New partnership Capital = P40,000 / 1/5 = P200,000
Step 2 - the amount of asset revaluation is equal to the new partnership capital less old partnership capital. Asset revaluation = P200,000 – P150,000 = P50,000
Step 3 – the allocation of the amount of the asset revaluation among the old partners is as follows: P50,000 / 2 = 25, 000 per partner (old) Step 4 – the capital balances of the old partners after asset revaluation is equal to their old capital balances plus their share on asset revaluation. Bianca
Shaira
Capital balances before revaluation
P100,000
P50,000
Share on asset revaluation
25,000
25,000
Capital balances after revaluation
P125,000
P75,000
Step 5 – the amount of interest transferred by the old partners to the new partner is based on the new capital balances (capital balances after asset revaluation). Bianca
Shaira
Capital balances after revaluation
P125,000
P75,000
Interest transferred
1/5
1/5
Capital transferred after revaluation
P25,000
P15,000
Step 6 – the journal entries to record the revaluation of asset and admission of Jam are as follows: ENTRY:
Asset
50 000 Bianca, Capital
25 000
Shaira, Capital
25 000
Bianca, Capital
25 000
Shaira, Capital
15 000 Jam, Capital
40 000
GOODWILL METHOD *Same procedure with the positive asset revaluation* ENTRY Goodwill
50 000
Bianca, Capital
25 000
Shaira, Capital
25 000
Bianca, Capital
25 000
Shaira, Capital
15 000 Jam, Capital
40 000
INVESTMENT OF ASSETS IN A PARTNERSHIP It is a transaction between the original partnership and the new partner. A person may be admitted into a partnership by investing cash or other assets in the business (Invests /Contributes). Increase in Total Assets and Total Partner’s Equity.
Problems relating to Admission of a new Partner by Investment 1. Agreed capital is given a.
No Bonus, No Asset Revaluation
b. Bonus to old Partners, No Asset Revaluation c.
Bonus to New Partner, No Asset Revaluation
d. Asset Revaluation (Positive & Negative), No Bonus 2. Agreed Capital is not given. a.
Bonus Method
b. Asset Revaluation method (Positive & Negative)
3. Agreed Capital is not given but basis for its computation is indicated i n the terms of admission 4. The amount of the Contribution of the New partner is not given 5. Fraction of Interest is not given.
1. Agreed capital is given Case 1 – No Bonus, No Asset Revaluation Ely invests P100,000 for a ¼ interest in the agreed capital of P400,000 Solution:
Contributed
Capital Agreed Capital
Jac
P 200,000
P200,000
Cess
100,000
100,000
Ely
100,000
100,000
TOTAL
P 400, 000
P 400,000
ENTRY: Cash
100 000 Ely, Capital
100 000
Case 2 – Bonus to the old partners, no Asset revaluation Ely invests P100, 000 for a 1 /5 interests in the new firm capitalization of P400, 000. Solution:
Contributed Capital
Agreed Capital
Bonus
Jac
P 200, 000
P 210, 000
P 10, 000
Cess
100, 000
110, 000
10, 000
Ely
100, 000
80, 000
(20, 000)
TOTAL
P 400, 000
P 400, 000
---
100 000
Ely, Capital
20 000
ENTRY: Cash Ely, Capital
100 000
Jac, Capital
10 000
Cess, Capital
10 000
Case 3 – Bonus to new partner, no asset revaluation Ely invests P60,000 for a ¼ intere st in the total capitalization of P360,000. Solution:
Contributed Capital
Agreed Capital
Bonus
Jac
P 200, 000
P 185, 000
(P 15, 000)
Cess
100, 000
85, 000
(15, 000)
Ely
60, 000
90, 000
30, 000
TOTAL
P360, 000
P 360, 000
---
ENTRY: Cash
60 000
Jac, Capital
15 000
Cess, Capital
15 000 Ely, Capital
90 000
Case 4 – Positive Asset Revaluation, no Bonus Ely invests P100, 000 for a 1/5 interest in the agreed capital of P500, 000. Solution:
Contributed Capital
Agreed Capital
Asset Revaluation/Goodwill
Jac
P 200, 000
P 250, 000
P 50, 000
Cess
100, 000
150, 000
50, 000
Ely
100, 000
100, 000
---
TOTAL
P 400, 000
P 500, 000
P 100, 000
ENTRIES: Other assets
100 000
Jac, Capital
50 000
Cess, Capital
50 000
Cash
100 000 Ely, Capital
100 000
*GOODWILL METHOD ENTRY Goodwill
100 000
Cash
Jac, Capital
50 000
Cess, Capital
50 000
100 000 Ely, Capital
100 000
Case 5 – Negative Asset Revaluation, No Bonus Ely invests P60,000 for a 1/5 interest in the agreed capital of P300,000. Solution:
Contributed Capital
Agreed capital
Asset Revaluation
Jac
P 200,000
P170, 000
(P 30,000)
Cess
100,000
70, 000
(30, 000)
Ely
60,000
60, 000
---
TOTAL
P 360, 000
P 300, 000
(P 60, 000)
Jac, Capital
30 000
Cash
60 000
Cess, Capital
30 000
ENTRIES:
Other assets
Ely, Capital
60 000
60 000
2. Agreed Capital is not given. Ely invests P100, 000 for a 1/5 interest
A. Bonus Method Solution:
Contributed Capital
Agreed Capital
Bonus
Jac
P 200, 000
P 215, 000
P 15, 000
Cess
100, 000
105, 000
5,000
Ely
100, 000
80, 000
(20, 000)
TOTAL
P 400, 000
P 400, 000
---
ENTRY:
Cash
100 000 Ely, Capital
80 000
Jac, Capital
15 000
Cess, Capital
5 000
B. Positive Asset Revaluation Method Solution:
Contributed Capital
Agreed Capital
Asset revaluation
Jac
P 200, 000
P 275, 000
P 75, 000
Cess
100, 000
125, 000
25,000
Ely
100, 000
100, 000
---
TOTAL
P 400, 000
P 500, 000
P 100, 000
100 000
Cash
100 000
ENTRIES: Other Assets Jac, Capital
75 000
Cess, Capital
25 000
C.
Ely, Capital
100 000
Negative Asset Revaluation Method
Solution:
Contributed Capital
Agreed Capital
Asset revaluation
Jac
P 200, 000
P155, 000
(P 45, 000)
Cess
100, 000
85 , 000
(15,000)
Ely
80, 000
80, 000
---
TOTAL
P 380, 000
P 320, 000
(P 60, 000)
Cash
80 000
ENTRIES: Jac, Capital
45 000
Cess, Capital
15 000
Ely, Capital
80 000
Other Assets
60 000
GOODWILL METHOD *whichever is higher between new partner’s investment and old part ners’ investment by dividing their
respective interest ratio to their capital investments. New Partner (ELY)
Old partners (JAC & CESS)
100 000 / 1/5 = 500 000
300 000/ 4/5 = 375 000
In goodwill method, agreed capital must be gr eater than the contributed capital. Therefore, agre ed capital is 500 000. Solution:
Contributed Capital
Agreed Capital
Goodwill
Jac
P 200, 000
P 275, 000
P 75, 000
Cess
100, 000
125, 000
25,000
Ely
100, 000
100, 000
---
TOTAL
P 400, 000
P 500, 000
P 100, 000
100 000
Cash
100 000
ENTRIES: Goodwill Jac, Capital
75 000
Cess, Capital
25 000
Ely, Capital
100 000
WITHDRAWAL AND RETIREMENT OF A PARTNER The partnership may allow any of its partners to withdraw or retire from the firm. The business may continue after such withdrawals; on the other hand, the interest of the retiring or withdrawing partner may be: 1. sold to a new partner (outsider) 2. sold to continuing (remaining) partners 3. sold to the partnership *The purchase price or amount of settlement by the partnership to the retiring partner may be: a.
Equal to the interest of the retiring partner (at book value)
b. Less than the interest of the retiring partner (at less than book value) c.
More than the interest of the retiring partner (at more than the book value)
* When the payment to the retiring partner is less than or more than his capital interest, the differe nce between the purchase price and the capital interest may be acco unted for using: 1. bonus method 2. asset revaluation method 3. goodwill method CALCULATION OF RETIRING PARTNER’S INTEREST
Investment - Withdrawals + Share in partnership profits to date of retirement or - Share in partnership losses to date of retirement + Loans and advances to the partnership or - Loans and advances from the partnership + Revaluation of assets increasing their recorded values or - Revaluation of assets decreasing their recorded values Interest upon retirement Illustrative Problem A: The statement of financial position of the partnership of Bea, Biboy, and Bill on December 31, 2016 follows: Asset Liabilities and Capital Cash 110,000 Liabilities 20, 000 Other Asset 30,000 Bea , Capital 20, 000 Biboy, Capital 40, 000 Diaz, Capital 60, 000 P140,000
Total Liabilities and Capital
P 140,000
The partners share profits and losses in the ratio of 4:2:4. On July 1, 2017, Bill asked to be allowed to withdraw from the partnership. The partners decided to close the books as of these date so as to determine the capital interest of Bill. Profit for 6 months ended amounted P60,000 while drawings of Bea, Biboy and Bill amount to P4,000 , P6,000 and P2,000, respectively. Profits and losses are to be shared equally after the retirement of Bill. The following entries will be prepared prior to the retirement of Bill from the partnership: Income Summary Bea, Capital Biboy, Capital Bill, Capital
60,000 24,000 12, 000 24, 000
Bea, Capital 4,000 Biboy, Capital 6,000 Bill, Capital 2,000 Bea, Drawing Biboy, Drawing Bill, Drawing
4,000 6,000 2,000
After considering the preceding entries, the capital interest as of the partners as of July 1,2017 may now be computed as follows: Bill Bea Biboy Capital balance, Dec. 31,2016 P 60,000 P 20,000 P 40,000 Share in profit from Jan. 1 – June 30 24,000 24,000 12,000 Withdrawals ( 2,000 ) ( 4,000 ) ( 6,000 ) P 82,0000
P 40,000
P 46,000
Assumption 1- Sale of interest to a new partner. Bill sold his interest to Doque for P 100,000. Bill, Capital 82,000 Doque, Capital 82,000
Assumption 2 – Sale of interest to the continuing partners . Bill sold his interest to Bea and Biboy for P75,000; the interest being divided e qually by the remaining partners. Profits and losses after the retirement of Bill will be divided equally. Bill, Capital Bea, Capital Biboy, Capital
82,000 41,000 41,000
Assumption 3 – Sale of interest to the partnership. Bill sold his interest to the partnership. The partners agreed to make immediate cash settlement to the retiring partner. Profits and losses after the retiring of Bill will be divided equally. Case A – Settlement to retiring partner is equal to his capital interest. The partnership paid Bill P82,000. Bill, Capital 82,000 Cash 82,000 Case B – Settlement is less than the capital interest of the retiring partner (at less than book value). The partnership paid Bill P76,000 which is P6,000 less than his capital interest of P82,000.
Bonus Method Bill, Capital 82,000 Cash 76,000 Bea, Capital(6,000 x 4/6) 4,000 Biboy, Capital(6,000 x 2/6) 2,000 Negative Asset Revaluation Method Bea, Capital (15,000 x 4/10) 6,000 Biboy, Capital(15,000 x 2/10) 3,000 Bill, Capital(15,000 x 4/10) 6,000 Other Assets 15,000 After the preceding entry, the capital balance of Bill is P76,000 and payment to him will be recorded as follows: Bill, Capital Cash
76,000 76,000
Case C – Settlement is more than the capital interest of the retiring partner (at more than book value). The partnership paid Bill P85,000 which is P3,000 more than his capital interest of P82 ,000. Bonus Method Bill, Capital 82,000 Bea, Capital 2,000 Biboy, Capital 1,000 Cash 85,000 Positive Asset Revaluation Method Other Assets 7,500 Bea, Capital 3,000 Biboy, Capital 1,500 Bill, Capital 3,000 After the entry recording the asset revaluation, the capital balance of Bill is P85,000 and payment to him will be recorded as follows: Bill, Capital Cash
85,000 85,000
Goodwill method
Bill, Capital Bea, Capital Biboy, Capital
Adjusted Capital Balances 82 000 40 000 46 000
Agreed Capital Balances 85 000 43 000 47 500
Goodwill 3000 3 000 1 500
TOTAL
168 000
175 500
*7 500
* 3000/ 40% = 7 500 Entry Goodwill Bea, Capital Biboy, Capital Bill, Capital
7,500 3,000 1,500 3,000
Bill, Capital Cash
85,000 85,000
INCORPORTION OF PARTNERSHIP Partners Barron and Britz, who share profits and losses equally, have the following balance sheet as of December 31, 2016: Cash Accounts Receivable Inventory Equipment
120 000 100 000 140 000 80 000
Accounts Payable Accumulated Depreciation Barron, Capital Britz, Capital
172 000 8 000 140 000 120 000
TOLTAL
440 000
TOTAL
440 000
They agree to incorporate their partnership with the new corporation absorbing the net assets after the following adjustments: provisions of allowance for bad debts of 10 000; restatement of the inventory at its current fair value of 160 000; and recognition of further depreciation on the equipment of 3 000. The corporation’s capital stock to have a par value of 100, and the partners are to be issued corresponding total shares equivalent to their adjusted capital balances.
Adjusting Entry Inventory 20 000 Accumulated Depreciation Allowance for Doubtful Account Barron, Capital Britz, Capital
3 000 10 000 3 500 3 500
Closing Entry
Accounts Payable 172 000 Accumulated Depreciation 11 000 Cash Accounts Receivable Inventory Equipment
120 000 90 000 160 000 80 000
Recording the incorporation Cash 120 000 Accounts Receivable 90 000 Inventory 160 000 Equipment 80 000 Accounts payable 172 000 Accumulated Depreciation 11 000 Barron, Capital 143 500 Britz, Capital 123 500 *267 000/ 100 = 2670 shares Barron, Capital 143 500 Ordinary Share Capital 143 500 Britz, Capital 123 500 Ordinary share Capital 123 500
