partnership dissolution lupisan

CHAPTER IIICHAPTER III

DISSOLUTION- CHANGES DISSOLUTION- CHANGES IN OWNERSHIPIN OWNERSHIP

1. DEFINITION1. DEFINITION

2. CAUSES OF 2. CAUSES OF DISSOLUTIONDISSOLUTION

3. ADMISSION OF A 3. ADMISSION OF A PARTNERPARTNER

REPORTER: Jomari Cabardo

The dissolution of a partnership is The dissolution of a partnership is the change in relation of the partners the change in relation of the partners caused by any partner ceasing to be caused by any partner ceasing to be associated in the carrying on as associated in the carrying on as distinguished from the winding up of the distinguished from the winding up of the business of the partnership (Civil Code of business of the partnership (Civil Code of the Philippines, Article 1828).the Philippines, Article 1828).

DEFINITION:

LIMITED LIFE LIMITED LIFE is one of the is one of the characteristics of a partnership. Any characteristics of a partnership. Any change in the membership of this form of change in the membership of this form of business organization will result to business organization will result to dissolution. Dissolution of the partnership dissolution. Dissolution of the partnership does not necessarily imply that business does not necessarily imply that business operations will come to an end. Most operations will come to an end. Most changes in the ownership of a partnership changes in the ownership of a partnership are accomplished without interruption of are accomplished without interruption of its normal operation.its normal operation.

DISSOLUTION should be distinguished DISSOLUTION should be distinguished from liquidation of a partnership. A from liquidation of a partnership. A partnership is said to be partnership is said to be liquidatedliquidated when when the businessthe business is terminated; a partnership is terminated; a partnership may be dissolved without being may be dissolved without being terminated but liquidated is always terminated but liquidated is always preceded by dissolution.preceded by dissolution.

CAUSES OF CAUSES OF DISSOLUTION:DISSOLUTION:

1. Admission of a partner1. Admission of a partner

2. Withdrawal or retirement of a partner2. Withdrawal or retirement of a partner

3.Death of a partner3.Death of a partner

4.Incorporation of a partnership4.Incorporation of a partnership

ADMISSION OF A PARTNERADMISSION OF A PARTNER

A new partner can only be admitted into a A new partner can only be admitted into a partnership with the consent of all the partnership with the consent of all the continuing partners. This is based on the continuing partners. This is based on the principle of principle of DELECTUS PERSONAEDELECTUS PERSONAE

No one becomes a member of theNo one becomes a member of thepartnership without the consentpartnership without the consentof all the members. This is becauseof all the members. This is becausea partnership is based on mutuala partnership is based on mutualtrust and confidence of thetrust and confidence of thepartners.partners.

A person may become a A person may become a partner in an existing partner in an existing

partnership by either of partnership by either of the following:the following:

1. Purchase of an interest from one or 1. Purchase of an interest from one or moremore

of the existing partners.of the existing partners.

2. Investment of assets in the partnership2. Investment of assets in the partnership

by the new partner.by the new partner.

Purchase of an Purchase of an Interest From Interest From

Existing PartnersExisting Partners

By: Jennylou Enitorio

With the consent of all the partners, With the consent of all the partners, a new partner may be admitted in an a new partner may be admitted in an existing partnership by purchasing a existing partnership by purchasing a capital equity interest directly from one capital equity interest directly from one or more of the old partners. Terms such or more of the old partners. Terms such as PURCHASES, SELLS, PAYS, as PURCHASES, SELLS, PAYS, BOUGHT,SOLD AND TRANSFERRED BOUGHT,SOLD AND TRANSFERRED indicate admission by purchase. indicate admission by purchase.

Pro-Forma Entry:Pro-Forma Entry:

(Name of Seller), Capital xxx(Name of Seller), Capital xxx (Name of Buyer), Capital(Name of Buyer), Capital xxxxxx

The purchase price of the The purchase price of the interest sold to a new interest sold to a new

partner may be:partner may be:

1. Equal to the book value of the interest 1. Equal to the book value of the interest sold.sold.

2. Less than the book value of the interest 2. Less than the book value of the interest sold.sold.

3. More than the book value of the interest 3. More than the book value of the interest sold.sold.

Illustrative problem A:Illustrative problem A:

Coloma and Claudio are partners Coloma and Claudio are partners with capital balances of P100,000 with capital balances of P100,000 and P50,000 respectively. They share and P50,000 respectively. They share profits and losses equally. Cordero is profits and losses equally. Cordero is a new partner. a new partner.

Case 1a: Purchase at book Case 1a: Purchase at book value from one partner value from one partner

only.only.

Cordero purchases a 1/5 interest from Coloma Cordero purchases a 1/5 interest from Coloma by paying P20,000. by paying P20,000.

ENTRY:ENTRY:Coloma, CapitalColoma, Capital 20 00020 000

Cordero, CapitalCordero, Capital 20 00020 000

Case 1b: Purchase at book Case 1b: Purchase at book value from more than one value from more than one

partner.partner.Cordero purchases 1/5 interest from the old Cordero purchases 1/5 interest from the old

partners by paying P30 000.partners by paying P30 000.

ENTRY:ENTRY:

Coloma, CapitalColoma, Capital 20 00020 000

Claudio, CapitalClaudio, Capital 10 00010 000


Case 2:Purchase at less Case 2:Purchase at less than book value.than book value.

Cordero purchases 1/5 interest from the old Cordero purchases 1/5 interest from the old partners by paying P25,000.partners by paying P25,000.

ENTRY:ENTRY:




Case 3: Purchase at more Case 3: Purchase at more than book value.than book value.

Cordero pays P 40, 000 for a 1/5 interest of the Cordero pays P 40, 000 for a 1/5 interest of the old partners.old partners.

ENTRY:ENTRY:

Coloma, Capital Coloma, Capital 20 00020 000


Cordero, CapitalCordero, Capital 30 000 30 000

Asset Revaluation upon Asset Revaluation upon Admission of a New Partner by Admission of a New Partner by

PurchasePurchase

Coloma and Claudio are partners with Coloma and Claudio are partners with capital balances of P100,00 and P50,000 capital balances of P100,00 and P50,000 respectively. They share profits and loses respectively. They share profits and loses equally. Cordero is a new partner who equally. Cordero is a new partner who purchase a 1/5 interest from Coloma and purchase a 1/5 interest from Coloma and Claudio paying P40,000. However, before the Claudio paying P40,000. However, before the admission of Cordero, partnership assets are to admission of Cordero, partnership assets are to be revalued using as basis amount to be paid be revalued using as basis amount to be paid by Cordero.by Cordero.

Step 1- the new partnership capital is equal to the Step 1- the new partnership capital is equal to the amount paid by the incoming partner divided by his amount paid by the incoming partner divided by his fraction of interest.fraction of interest.

New partnership Capital =New partnership Capital = P40,000 / 1/5P40,000 / 1/5

P200,000P200,000

Step 2 = the amount of asset revaluation is equal Step 2 = the amount of asset revaluation is equal to the new partnership capital less old to the new partnership capital less old partnership capital.partnership capital.

Asset revaluation = Asset revaluation = P200,000 – P150,000P200,000 – P150,000

== P50,000P50,000

Step 3 – the allocation of the amount of the asset Step 3 – the allocation of the amount of the asset revaluation among the old partners is as revaluation among the old partners is as follows:follows:

P50,000 / 2 per partner.P50,000 / 2 per partner.

Step 4 – the capital balances of the old partners Step 4 – the capital balances of the old partners after asset revaluation is equal to their old after asset revaluation is equal to their old capital balances plus their share on asset capital balances plus their share on asset revaluation.revaluation.

ColomaColoma ClaudioClaudioCapital balances before revaluationCapital balances before revaluation P100,000P100,000 P50,000P50,000

Share on asset revaluationShare on asset revaluation 25,00025,000 25,00025,000

Capital balances after revaluationCapital balances after revaluation P125,000P125,000 P75,000P75,000

Step 5 – the amount of interest transferred by the Step 5 – the amount of interest transferred by the old partners to the new partner is based on the old partners to the new partner is based on the new capital balances (capital balances after new capital balances (capital balances after asset revaluation).asset revaluation).

ColomaColoma ClaudioClaudioCapital balances after revaluationCapital balances after revaluation P125,000P125,000 P75,000P75,000

Interest transferredInterest transferred 1/5 1/5 1/5 1/5

Capital transferred after revaluationCapital transferred after revaluation P25,000P25,000 P15,000P15,000

Step 6 – the journal entries to record the revaluation of Step 6 – the journal entries to record the revaluation of asset and admission of Cordero are as follows:asset and admission of Cordero are as follows:

ENTRY:ENTRY:

AssetAsset 50 00050 000






Investment of Investment of Assets in a Assets in a PartnershipPartnership

By: Cecille Shyne Deseo

It is a transaction between the original It is a transaction between the original partnership and the new partner. A person partnership and the new partner. A person may be admitted into a partnership by may be admitted into a partnership by investing cash or other assets in the business.investing cash or other assets in the business.

InvestsInvests ContributesContributes

Total Assets

Total Partner’s Equity

Definition of Definition of TERMSTERMS

TOTAL CONTRIBUTED CAPITAL – the sum of TOTAL CONTRIBUTED CAPITAL – the sum of the capital balances of the old the capital balances of the old

partners partners and the actual investment of the and the actual investment of the new new partner.partner.

TOTAL AGREED CAPITAL – it is the total capitalTOTAL AGREED CAPITAL – it is the total capitalof the partnership after considering of the partnership after considering

thethecapital credits given to each of thecapital credits given to each of thepartnerspartners

BONUS – it is the amount of capital or equityBONUS – it is the amount of capital or equitytransferred by one partner to anothertransferred by one partner to anotherpartner.partner.

CAPITAL CREDIT – it is the equity of a partner in theCAPITAL CREDIT – it is the equity of a partner in the

new partnership and is obtained bynew partnership and is obtained by

multiplying the total agreed capital bymultiplying the total agreed capital by

the applicable percentage interest of thethe applicable percentage interest of the

partner.partner.

ASSET REVALUATION – necessary adjustment inASSET REVALUATION – necessary adjustment in

asset values upon admission of a newasset values upon admission of a new

partner. The adjustment in assets may bepartner. The adjustment in assets may be

determined as the difference between thedetermined as the difference between the

agreed capital and the total contributed agreed capital and the total contributed capital.capital.

Problems relating to Problems relating to Admission of a new Partner Admission of a new Partner

by Investmentby Investment

1. Agreed capital is 1. Agreed capital is givengiven

a. No Bonus, No Asset Revaluationa. No Bonus, No Asset Revaluation

b. Bonus to old Partners, No Asset Revaluationb. Bonus to old Partners, No Asset Revaluation

c. Bonus to New Partner, No Asset Revaluationc. Bonus to New Partner, No Asset Revaluation

d. Asset Revaluation (Positive & Negative),d. Asset Revaluation (Positive & Negative),

No BonusNo Bonus

2. Agreed Capital is not given.2. Agreed Capital is not given.

a. Bonus Methoda. Bonus Method

b. Asset Revaluation method (Positive &b. Asset Revaluation method (Positive &

Negative)Negative)

3. Agreed Capital is not given but basis for its 3. Agreed Capital is not given but basis for its computation is indicated in the terms of computation is indicated in the terms of admissionadmission

4. The amount of the Contribution of the New 4. The amount of the Contribution of the New partner is not givenpartner is not given

5. Fraction of Interest is not given.5. Fraction of Interest is not given.

The following are the The following are the illustrations of the illustrations of the various problems various problems

involving admission of a involving admission of a new partner by new partner by

investment..investment..

Agreed Agreed Capital is Capital is

GivenGiven

Case 1 – No Bonus, No Asset RevaluationCase 1 – No Bonus, No Asset Revaluation

Conde invests P100,000 for a ¼ interest in theConde invests P100,000 for a ¼ interest in the

agreed capital of P400,000.agreed capital of P400,000.

Solution:Solution: Contributed CapitalContributed Capital Agreed CapitalAgreed Capital

CalmaCalma P 200,000P 200,000 P200,000P200,000

CastroCastro 100,000100,000 100,000100,000

CondeConde 100,000100,000 100,000100,000

TOTALTOTAL P 400, 000P 400, 000 P 400,000P 400,000

ENTRY:ENTRY:CashCash 100 000100 000

Conde, CapitalConde, Capital 100 000100 000

Case 2 – Bonus to the old partners, no Asset Case 2 – Bonus to the old partners, no Asset revaluationrevaluation

Conde invests P100, 000 for a 1/5 interests in the new firmConde invests P100, 000 for a 1/5 interests in the new firm

capitalization of P400, 000.capitalization of P400, 000.

Solution:Solution: Contributed Contributed CapitalCapital

Agreed Agreed CapitalCapital BonusBonus

CalmaCalma P 200, 000P 200, 000 P 210, 000P 210, 000 P 10, 000P 10, 000

CastroCastro 100, 000100, 000 110, 000110, 000 10, 00010, 000

CondeConde 100, 000100, 000 80, 00080, 000 (20, 000)(20, 000)

TOTALTOTAL P 400, 000P 400, 000 P 400, 000P 400, 000 ------

ENTRY:ENTRY:CashCash 100 000100 000

Conde, CapitalConde, Capital 100 000100 000

Conde, CapitalConde, Capital 20 00020 000Calma, CapitalCalma, Capital 10 00010 000Castro, CapitalCastro, Capital 10 00010 000

Case 3 – Bonus to new partner, no asset Case 3 – Bonus to new partner, no asset revaluationrevaluation

Conde invests P60,000 for a ¼ interest in the total capitalizationConde invests P60,000 for a ¼ interest in the total capitalization

of P360,000.of P360,000.


AgreedAgreed

CapitalCapital BonusBonus

CalmaCalma P 200, 000P 200, 000 P 185, 000P 185, 000 (P 15, 000)(P 15, 000)

CastroCastro 100, 000100, 000 85, 00085, 000 (15, 000)(15, 000)

CondeConde 60, 00060, 000 90, 00090, 000 30, 00030, 000

TOTALTOTAL P 360, 000P 360, 000 P 360, 000 P 360, 000 ------

ENTRY:Cash 60 000Calma, Capital 15 000Castro, Capital 15 000

Conde, Capital 90 000

Case 4 – Positive Asset Revaluation, no BonusCase 4 – Positive Asset Revaluation, no Bonus

Conde invests P100, 000 for a 1/5 interest in the agreedConde invests P100, 000 for a 1/5 interest in the agreed

capital of P500, 000.capital of P500, 000.


AgreedAgreed

CapitalCapital

AssetAsset

RevaluationRevaluation


CastroCastro 100, 000100, 000 150, 000150, 000 50, 00050, 000

CondeConde 100, 000100, 000 100, 000100, 000 --- ---

TOTALTOTAL P 400, 000P 400, 000 P 500, 000P 500, 000 P 100, 000P 100, 000

ENTRIES:Other assets 100 000

Calma, Capital 50 000Castro, Capital 50 000

Cash 100 000Conde, Capital 100 000

Case 5 – Negative Asset Revaluation, No Case 5 – Negative Asset Revaluation, No BonusBonus

Conde invests P60,000 for a 1/5 interest in the agreed capitalConde invests P60,000 for a 1/5 interest in the agreed capital

of P300,000.of P300,000.

SolutionSolution::

ContributedContributed

CapitalCapital

AgreedAgreed

capitalcapital

AssetAsset

RevaluationRevaluation

CalmaCalma P 200,000P 200,000 P170, 000P170, 000 (P 30,000)(P 30,000)

CastroCastro 100,000100,000 70, 00070, 000 (30, 000)(30, 000)

CondeConde 60,00060,000 60, 00060, 000 ------

TOTALTOTAL P 360, 000P 360, 000 P 300, 000P 300, 000 (P 60, 000)(P 60, 000)

ENTRIES:Calma, Capital 30 000Castro, Capital 30 000

Other assets 60 000


Agreed Agreed Capital is Not Capital is Not

GivenGiven

When such a situation exists, the admissionWhen such a situation exists, the admission

of the new partner is recorded using any ofof the new partner is recorded using any of

These 2 methods:These 2 methods:

1. Bonus Method1. Bonus Method

2. Asset Revaluation Method2. Asset Revaluation Method

Positive Asset Revaluation Positive Asset Revaluation Method (Ac > CC)Method (Ac > CC)

&&Negative Asset Revaluation Negative Asset Revaluation

Method (Ac < CC)Method (Ac < CC)

The Agreed capitalization is computed asThe Agreed capitalization is computed as

follows:follows:

AC = New partner’s CC AC = New partner’s CC ÷ new partner’s÷ new partner’s

fraction of interestfraction of interest

1. Bonus Method1. Bonus Method

Solution:Solution: ContributedContributed

CapitalCapital

AgreedAgreed



CastroCastro 100, 000100, 000 105, 000105, 000 5,0005,000

CondeConde 100, 000100, 000 80, 00080, 000 (20, 000)(20, 000)

TOTALTOTAL P 400, 000P 400, 000 P 400, 000P 400, 000 ------

ENTRY:Cash 100 000

Conde, Capital 80 000Calma, Capital 15 000Castro, Capital 5 000

2. Positive Asset 2. Positive Asset Revaluation MethodRevaluation Method


CapitalCapital

AgreedAgreed

CapitalCapital

AssetAsset

revaluationrevaluation


CastroCastro 100, 000100, 000 125, 000125, 000 25,00025,000

CondeConde 100, 000100, 000 100, 000100, 000 ------

TOTALTOTAL P 400, 000P 400, 000 P 500, 000P 500, 000 P 100, 000P 100, 000

ENTRIES:Other Assets 100 000



1. Bonus Method1. Bonus MethodSolution:Solution: ContributedContributed

CapitalCapital

AgreedAgreed


CalmaCalma P 200, 000P 200, 000 P 188, 750P 188, 750 (P 11, 250)(P 11, 250)

CastroCastro 100, 000100, 000 96, 25096, 250 (3, 750)(3, 750)

CondeConde 80, 00080, 000 95, 00095, 000 15, 00015, 000

TOTALTOTAL P 380, 000P 380, 000 P 380, 000P 380, 000 ------

ENTRY:Cash 80 000Calma, Capital 11 250Castro, Capital 3 750

Conde, Capital 95 000

2. Negative Asset 2. Negative Asset Revaluation MethodRevaluation Method


CapitalCapital

AgreedAgreed

CapitalCapital

AssetAsset

revaluationrevaluation

CalmaCalma P 200, 000P 200, 000 P155, 000P155, 000 (P 45, 000)(P 45, 000)

CastroCastro 100, 000100, 000 85 , 00085 , 000 (15,000)(15,000)

CondeConde 80, 00080, 000 80, 00080, 000 ------

TOTALTOTAL P 380, 000P 380, 000 P 320, 000P 320, 000 (P 60, 000)(P 60, 000)ENTRIES:


Other Assets 60 000


Withdrawal and Withdrawal and Retirement of a Retirement of a

PartnerPartner

The partnership may allow any of its The partnership may allow any of its partners to withdraw or retire from the firm. partners to withdraw or retire from the firm. The business may continue after such The business may continue after such withdrawals; on the other hand, the interest of withdrawals; on the other hand, the interest of the retiring or withdrawing partner may be:the retiring or withdrawing partner may be:

1. sold to a new partner (outsider)1. sold to a new partner (outsider)

2. sold to continuing (remaining) partners2. sold to continuing (remaining) partners

3. sold to the partnership 3. sold to the partnership

SALE OF INTEREST TO A NEW PARTNERSALE OF INTEREST TO A NEW PARTNER

* With the consent of the remaining partners, the * With the consent of the remaining partners, the retiring partner may sell his interest to an retiring partner may sell his interest to an outsider. The sale is recorded in the same outsider. The sale is recorded in the same manner as in the admission of a new partner manner as in the admission of a new partner by purchase. The partnership recognizes only by purchase. The partnership recognizes only the transfer of capital interest from the the transfer of capital interest from the retiring partner to the new partner. Any gain retiring partner to the new partner. Any gain or loss from the sale is a personal gain or loss or loss from the sale is a personal gain or loss of the retiring partner.of the retiring partner.

SALE OF INTEREST TO SALE OF INTEREST TO CONTINUING PARTNERSCONTINUING PARTNERS

* The interest of the retiring partner may be * The interest of the retiring partner may be acquired by any of the continuing partners. acquired by any of the continuing partners. The transaction is recorded in the same The transaction is recorded in the same manner as in the sale of interest to a new manner as in the sale of interest to a new partner. The partnership recognizes only the partner. The partnership recognizes only the transfer of capital interest from the retiring transfer of capital interest from the retiring partner to the acquiring partner or partners.partner to the acquiring partner or partners.

SALE OF INTEREST TO THE SALE OF INTEREST TO THE PARTNERSHIPPARTNERSHIP

*A retiring partner may sell his capital interest to *A retiring partner may sell his capital interest to the continuing partners through the partnership. the continuing partners through the partnership. The partnership has the obligation to make The partnership has the obligation to make payment to the retiring partner either by:payment to the retiring partner either by:

1.1. Payment in cash;Payment in cash;

2.2. Transfer of none cash assets; orTransfer of none cash assets; or

3. Recognition of a liability for the full or the 3. Recognition of a liability for the full or the balance of the unpaid interest of the retiring balance of the unpaid interest of the retiring partner.partner.

*The purchase price or amount of settlement by *The purchase price or amount of settlement by the partnership to the retiring partner may be:the partnership to the retiring partner may be:

1.1. Equal to the interest of the retiring partner (at Equal to the interest of the retiring partner (at book value)book value)

2.2. Less than the interest of the retiring partner Less than the interest of the retiring partner

( at less than book value)( at less than book value)

3. More than the interest of the retiring partner 3. More than the interest of the retiring partner ( at more than the book value) ( at more than the book value)

* When the payment to the retiring partner is * When the payment to the retiring partner is less than or more than his capital interest, the less than or more than his capital interest, the difference between the purchase price and the difference between the purchase price and the capital interest may be accounted for using :capital interest may be accounted for using :

1. bonus method1. bonus method

2. asset revaluation method2. asset revaluation method

ACCOUNTING PROBLEMS INVOLVED IN ACCOUNTING PROBLEMS INVOLVED IN THE RETIREMENT OF A PARTNERTHE RETIREMENT OF A PARTNER

Following are the accounting problems involved in determining the capital Following are the accounting problems involved in determining the capital interest of the retiring partner:interest of the retiring partner:

1.1. Determination of the profit or loss from the beginning of the accounting Determination of the profit or loss from the beginning of the accounting period to the date of withdrawal or retirement and the distribution of such period to the date of withdrawal or retirement and the distribution of such profit or loss.profit or loss.

2.2. Closing of the partnership books.Closing of the partnership books.

3.3. Correction of accounting errors in prior periods like overstatement or Correction of accounting errors in prior periods like overstatement or understatement of inventories, excessive depreciation charges and failure understatement of inventories, excessive depreciation charges and failure to provide adequately for doubtful accounts.to provide adequately for doubtful accounts.

4.4. Revaluation partnership assets to current values. Revaluation partnership assets to current values.

5.5. Recording of bonus brought by the retirement of a partnerRecording of bonus brought by the retirement of a partner

6.6. Settlement of the interest of the retiring partner.Settlement of the interest of the retiring partner.

CALCULATION OF RETIRING CALCULATION OF RETIRING PARTNER’S INTERESTPARTNER’S INTEREST

The following schedule are helpful in determining the interest of a retiring The following schedule are helpful in determining the interest of a retiring partner:partner:

InvestmentInvestment

- Withdrawals- Withdrawals

+ Share in partnership profits to date of retirement or+ Share in partnership profits to date of retirement or

- Share in partnership losses to date of retirement- Share in partnership losses to date of retirement

+ Loans and advances to the partnership or + Loans and advances to the partnership or

- Loans and advances from the partnership- Loans and advances from the partnership

+ Revaluation of assets increasing their recorded values + Revaluation of assets increasing their recorded values oror

- Revaluation of assets decreasing their recorded values- Revaluation of assets decreasing their recorded values

Interest upon retirementInterest upon retirement

Illustrative Problem A: The statement of financial position of the partnership Illustrative Problem A: The statement of financial position of the partnership of Dy, David, and Diaz on December 31, 2009 follows:of Dy, David, and Diaz on December 31, 2009 follows:

AssetAsset Liabilities and CapitalLiabilities and Capital

CashCash P110,000 Liabilities P110,000 Liabilities P 20, 000 P 20, 000

Other Asset 30,000Other Asset 30,000 Dy , Capital Dy , Capital 20, 000 20, 000

David, Capital David, Capital 40, 000 40, 000

Diaz, CapitalDiaz, Capital 60, 000 60, 000 P140,000 P140,000 Total Liabilities and Capital P 140,000 Total Liabilities and Capital P 140,000

The partners share profits and losses in the ratio of 4:2:4. On July 1, 2010, The partners share profits and losses in the ratio of 4:2:4. On July 1, 2010, Diaz asked to be allowed to withdraw from the partnership. The partners Diaz 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 decided to close the books as of these date so as to determine the capital interest of Diaz. Profit for 6 months ended amounted P60,000 while interest of Diaz. Profit for 6 months ended amounted P60,000 while drawings of Dy, David and Diaz amount to P4,000 , P6,000 and P2,000, drawings of Dy, David and Diaz amount to P4,000 , P6,000 and P2,000, respectively. Profits and losses are to be shared equally after the retirement respectively. Profits and losses are to be shared equally after the retirement of Diaz. of Diaz.

The following entries will be prepared prior to the retirement of Diaz from the The following entries will be prepared prior to the retirement of Diaz from the partnership:partnership:

a.a. Income SummaryIncome Summary 60,00060,000

Dy, CapitalDy, Capital 24,00024,000

David, CapitalDavid, Capital 12, 00012, 000

Diaz, CapitalDiaz, Capital 24, 00024, 000

b. Dy, Capitalb. Dy, Capital 4,0004,000

David, CapitalDavid, Capital 6,000 6,000

Diaz, Capital 2,000Diaz, Capital 2,000

Dy, DrawingDy, Drawing 4,0004,000

David, DrawingDavid, Drawing 6,0006,000

Diaz, DrawingDiaz, Drawing 2,0002,000

After considering the preceding entries, the After considering the preceding entries, the capital interest as of the partners as of July capital interest as of the partners as of July 1,2010 may now be computed as follows:1,2010 may now be computed as follows:

Diaz Diaz DyDy DavidDavid

Capital balance, Dec. 31,2009Capital balance, Dec. 31,2009 P 60,000P 60,000 P 20,000P 20,000 P 40,000P 40,000

Share in profit from Jan. 1 – June 30Share in profit from Jan. 1 – June 30 24,00024,000 24,00024,000 12,00012,000

WithdrawalsWithdrawals ( 2,000 )( 2,000 ) ( 4,000 )( 4,000 ) ( 6,000 )( 6,000 )

P 82,0000P 82,0000 P 40,000P 40,000 P 46,000P 46,000

Assumption 1- sale of interest to a new partner. Assumption 1- sale of interest to a new partner. Diaz sold his interest to Doque for P 100,000.Diaz sold his interest to Doque for P 100,000.

Diaz, CapitalDiaz, Capital 82,00082,000

Doque, CapitalDoque, Capital 82,00082,000

Assumption 2 – Sale of interest to the continuing Assumption 2 – Sale of interest to the continuing partners. Diaz sold his interest to Dy and partners. Diaz sold his interest to Dy and David for P75,000; the interest being divided David for P75,000; the interest being divided equally by the remaining partners. Profits and equally by the remaining partners. Profits and losses after the retirement of Diaz will be losses after the retirement of Diaz will be divided equally.divided equally.



David, CapitalDavid, Capital 41,00041,000

Assumption 3 – Sale of interest to the partnership. Diaz Assumption 3 – Sale of interest to the partnership. Diaz sold his interest to the partnership. The partners sold his interest to the partnership. The partners agreed to make immediate cash settlement to the agreed to make immediate cash settlement to the retiring partner. Profits and losses after the retiring of retiring partner. Profits and losses after the retiring of Diaz will be divided equally.Diaz will be divided equally.

Case A – Settlement to retiring partner is Case A – Settlement to retiring partner is equal to equal to his capital interest. The partnership paid Diaz his capital interest. The partnership paid Diaz P82,000.P82,000.


CashCash 82,00082,000

Case B – Settlement is less than the capital Case B – Settlement is less than the capital interest of the retiring partner (at less than interest of the retiring partner (at less than book value). The partnership paid Diaz book value). The partnership paid Diaz P76,000 which is P6,000 less than his capital P76,000 which is P6,000 less than his capital interest of P82,000.interest of P82,000.

Bonus MethodBonus Method


CashCash 76,00076,000



P6,000 x 4/6 = P4,000P6,000 x 4/6 = P4,000

P6,000 x 2/6 = P2,000P6,000 x 2/6 = P2,000

Asset Revaluation MethodAsset Revaluation Method

Dy, CapitalDy, Capital 6,0006,000David, CapitalDavid, Capital 3,0003,000Diaz, CapitalDiaz, Capital 6,0006,000

Other AssetsOther Assets 15,00015,000

Dy = P15,000 x 4/10 = P6,000Dy = P15,000 x 4/10 = P6,000

David = P15,000 x 2/10 = P3,000David = P15,000 x 2/10 = P3,000Diaz = P15,000 x 4/10 = P6,000Diaz = P15,000 x 4/10 = P6,000

After the preceding entry, the capital balance of Diaz After the preceding entry, the capital balance of Diaz is P76,000 and payment to him will be recorded as is P76,000 and payment to him will be recorded as follows:follows:

Diaz, CapitalDiaz, Capital 76,00076,000CashCash 76,00076,000

A compound entry may be made as follows:A compound entry may be made as follows:

Dy, CapitalDy, Capital 6,0006,000David, CapitalDavid, Capital 3,000 3,000Diaz, CapitalDiaz, Capital 82,00082,000

CashCash 76,00076,000Other AssetsOther Assets 15,00015,000

Case C – Settlement is more than the capital interest Case C – Settlement is more than the capital interest of the retiring partner (at more than book value). of the retiring partner (at more than book value). The partnership paid Diaz P85,000 which is The partnership paid Diaz P85,000 which is P3,000 more than his capital interest of P82,000.P3,000 more than his capital interest of P82,000.

Bonus MethodBonus Method

Diaz, CapitalDiaz, Capital 82,00082,000Dy, CapitalDy, Capital 2,000 2,000David, CapitalDavid, Capital 1,000 1,000

CashCash 85,00085,000

Asset Revaluation MethodAsset Revaluation Method

Other AssetsOther Assets 7,500 7,500




After the entry recording the asset revaluation, the After the entry recording the asset revaluation, the capital balance of Diaz is P85,000 and payment to him capital balance of Diaz is P85,000 and payment to him will be recorded as follows:will be recorded as follows:

Diaz, CapitalDiaz, Capital 85,00085,000CashCash 85,00085,000

A compound entry may be made as follows:A compound entry may be made as follows:

Other AssetsOther Assets 7,500 7,500Diaz, CapitalDiaz, Capital 82,000 82,000

CashCash 85,00085,000Dy, CapitalDy, Capital 3,000 3,000David, CapitalDavid, Capital 1,500 1,500

COMPARISON BETWEEN the BONUS COMPARISON BETWEEN the BONUS AND ASSET REVALUATION METHODAND ASSET REVALUATION METHOD

Asset Asset RevaluationRevaluation

Dy, Dy, CapitalCapital

David, David, CapitalCapital

Balances after retirement of Diaz Balances after retirement of Diaz under the bonus methodunder the bonus method P 38,000P 38,000 P 45,000P 45,000

Balances after retirement of Diaz Balances after retirement of Diaz under the asset revaluation methodunder the asset revaluation method P 7,500P 7,500 P 43,000P 43,000 P 47,500P 47,500

Depreciation on asset revaluation Depreciation on asset revaluation (divided equally)(divided equally) ( 7,500 )( 7,500 ) ( 3,750 )( 3,750 ) ( 3,750 )( 3,750 )

Balances after depreciationBalances after depreciationP 39,250P 39,250 P 43,750P 43,750

Net advantage (disadvantage) of using Net advantage (disadvantage) of using the bonus methodthe bonus method ( P 1,250 )( P 1,250 ) P 1,250P 1,250

CHANGE IN CAPITAL STRUCTURE CHANGE IN CAPITAL STRUCTURE BY DEATH OR INCAPACITY OF A BY DEATH OR INCAPACITY OF A

PARTNERPARTNERThe death or incapacity of a partner legally dissolves the old The death or incapacity of a partner legally dissolves the old

partnership since the partner ceases to be associated in the partnership since the partner ceases to be associated in the carrying on of the business. The remaining partners may carrying on of the business. The remaining partners may continue operations based on a new contract or Articles of Co-continue operations based on a new contract or Articles of Co-Partnership. The interest of the deceased or incapacitated Partnership. The interest of the deceased or incapacitated partner must be determined by the partnership in order to partner must be determined by the partnership in order to make necessary settlement with his legal representatives. In make necessary settlement with his legal representatives. In case the business is continued without immediate settlement, case the business is continued without immediate settlement, the legal representative of the deceased is considered as an the legal representative of the deceased is considered as an ordinary creditor and is to received an amount equal to the ordinary creditor and is to received an amount equal to the interest and profits attributable to this interest.interest and profits attributable to this interest.

The following accounting problems are encountered in case of The following accounting problems are encountered in case of death or incapacity of a partner:death or incapacity of a partner:

1.1. Determination of the profit or loss from the beginning of the Determination of the profit or loss from the beginning of the accounting period to the date of death or incapacity and the accounting period to the date of death or incapacity and the distribution of such profit or loss.distribution of such profit or loss.

2.2. Closing of the books of the partnership. Partnership Closing of the books of the partnership. Partnership agreement, however, may provide thaSt the books need to be agreement, however, may provide thaSt the books need to be closed and net income for the fraction of the accounting period closed and net income for the fraction of the accounting period to the date of date or incapacity be determined.to the date of date or incapacity be determined.

3.3. Correction of prior year’s income, if there is any.Correction of prior year’s income, if there is any.4.4. Revaluation of partnership assets to arrive at current values.Revaluation of partnership assets to arrive at current values.5.5. Recording of bonus.Recording of bonus.6.6. Settlement of the interest of the deceased or incapacitated Settlement of the interest of the deceased or incapacitated

partner. partner.

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