ACCOUNTING FOR PARTNERSHIP DISSOLUTION
~ 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 of the business.
~dissolution terminates all authority of any partner to act for the partnership. When the partnership is dissolved, the union of partners to continue the business as a going concern is put to an end.
~does not necessarily mean an automatic termination of the business activities ~does not always lead to liquidation while liquidation is always a result of dissolution
~accounting process requires that the existing partners' capital accounts be updated first before dissolution; 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. The increase or decrease of assets is allocated among them based on their profit and loss ratios or capital ratios.
ADMISSION OF A NEW PARTNER: 2 METHODS
1. By purchase of interest of existing partners = is a personal transaction between them. As such, any gain or loss on the transaction is a personal gain or loss of the selling partner.
a. Equal to book value of his interest being sold b. Less than the book value of his interest being sold c. More than the book value of his interest being sold
2. By direct investment to partnership [should be w/o prejudice to the requirement that all existing partners should give mutual consent to the acceptance of the new partner]
= this manner of admitting a new partner is a transaction between the incoming partner and the partnership. = the incoming partner directly invests cash or other noncash assets to the partnership, thereby increasing the
total assets of the partnership.
a. Investment equals capital credits = there is no accounting problem in this method because all partners will be given a capital credit exactly the same as their respective asset contributions to the partnership. The total capital contributions of the partners are the same as the total agreed capital of the new partnership.
b. Bonus method = net assets contributed are not equal to capital credit of incoming partner, but the total partnership agreed capital is equal to total net assets contribution of the partners.
* to the NEW partner = when the NEW partner's agreed capital credit is GREATER than his actual capital contribution ~its primary causes are: admission of a new partner, withdrawal, retirement or death of a partner, insolvency of a partnership
or insolvency of a partner, conversion of the partnership into a corporation
* to OLD partners = when NEW partner's capital credit is LESSER than his actual capital contribution
NOTE: ** If, after the admission of a new partner, it is determined that the old partners' capital balances are more than their agreed capital balances, the partnership will pay their excess capital contribution.
If there is deficit capital contribution of old partner(s), he will give additional investment ot the partnership to meet his agreed capital balances.
WITHDRAWAL OR RETIREMENT OF A PARTNER
By reason of insolvency or incapacity, a partner may voluntarily withdraw or retire from the partnership. He must obtain the consent of his fellow partners and determine among them the amount of his capital refund in the absence of a stipulated amount in the part-nership agreement.
1) Withdrawal at adjusted book value - no Bonus
2) Withdrawal at Lesser Than book value - with bonus to the remaining partners 3) Withdrawal at more than book value - with bonus to the withdrawing partner
The accounting procedures commonly used when the partnership purchased the interest of a withdrawing partner would be: 1. Adjust the assets of the partnership to their current fair market value before accounting for the retirement of the partner
2. Record the retirement.
INSOLVENCY OF PARTNERSHIP OR A PARTNER
investments in inventories or in plant assets. It arises when a business (or individual) cannot pay outstanding debts as they mature. A person is deemed insolvent when the aggregate of his property at a fair valuation is less in amount than his total liabilities. The insolvency of a partner practically dissolves the partnership because it impairs the mutual agency principle. The law provides that an insolvent partner shall have no legal authority to act on behalf of the partnership, and the other partners have no authority to act for him.
The withdrawing partner may sell his interest to the: Outside Party, Remaining Partner(s), or Partnership
~ dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying
~accounting process requires that the existing partners' capital accounts be updated first before dissolution; assets and liabilities of the
CLASSROOM RULES & REGULATIONS
1 3-column journal/columnar notebook is the official notebook to
be used by Accounting II students under my class throughout
the whole semester. Needless to say that this official notebook
shall be brought to my class AT ALL TIMES.
2 Cellphones should be turned off or put to silent mode
through-out the whole period.
3 NO SPECIAL EXAM or QUIZ shall be given to any student at all
times unless previously arranged with me. However, in cases of
health concerns, special consideration is accorded upon
pre-sentation of medical certificates; in cases of school activities,
an excuse letter duly signed by authorized personnel may be
considered.
4 During exams or quizzes, only CALCULATORS are allowed
when required and NEVER CELLPHONES.
5 Any forms of noise or distraction should be avoided to give
respect to others who may want to learn. Anyone is welcome
to STEP OUT of the class when he/she is not up to listening/
participating in the discussion/lesson.
6 Any form of dishonesty is not tolerated for whatever reason.
7 Basis of grade computation:
Major Exams
50%
Quizzes
20%
Projects/Groupworks, etc
20%
Attendance
10%
Final Grade composition:
Prelim
30%
Midterm
30%
3-column journal/columnar notebook is the official notebook to
the whole semester. Needless to say that this official notebook
Cellphones should be turned off or put to silent mode
7
PARTNERSHIP DISSOLUTION EXERCISES
ASSET REVALUATION
It was agreed among the partners that the following partnership assets should be revalued before the admission of A:
Accumulated Cost Allowances Machine P 200,000 80,000 Merchandise Inventory 100,000 10,000 Land 200,000 Building 300,000 150,000
It was agreed that the new partnership name would be ENA and the profit and loss distribution would be based on the partner's respective adjusted capital balances.
Required:
1. Journalize the asset revaluation 2. Journalize the admission of A
3. Prepare a schedule of new partners' capital balances
PURCHASE OF INTEREST from all existing partners
The capital balances and agreed profit and loss distribution of Clemer Omero and Ronica Elaine Partnership prior to dissolution are as follows:
Partners Capital Balances Profit and Loss Ratio
Clemer Omero P 400,000 40%
Ronica Elaine 600,000 60%
Aira Shane wants to purchase 25% interest in the partnership by paying directly to each of the existing partners. Required:
1. Prepare journal entries assuming assuming Aira Shane purchased her interest from all the partners at the following agreed prices:
a. P250,000 b. P200,000 c. P300,000
2. Compute the new profit and loss of the partners. BONUS METHOD
of the partners are equal to their agreed capital contribution of 40% and 60% which is also their respective profit and loss distribution ratio.
1. Total partnership's capital right after admission of Calim. 2. Total capital credit to Calim.
3. The adjusted capital of Abu after admission of Calim.
4. The total assets of the partnership after the admission of Calim. 5. Total cash of the partnersip after the admission of Calim. WITHDRAWAL OF A PARTNER
Orville, Adalyn and Analyn are partners engaged in book distribution. They share profits and losses in the ratio of were as follows:
Orville Adalyn
Beginning balances 300,000 400,000
Withdrawals 0 100,000
Additional investments 200,000 200,000
Required: Journalize the withdrawal of Analyn from the partnership under each of the following independent cases is Analyn is to receive:
1. P250,000 2. P200,000 3. P275,000
E & N Partnership decided to accept A as a partner with P500,000 cash contribution. The capital balances of E an N are P600,000 and P400,000 respectively.
The partnership of Abu and Bacar shows a total asset of P350,000. Its total available cash is just enough to pay the
P150,000 current liabilities of the partnership. Its noncurrent liabilities amounted to P50,000 and the capital balances
Calim is to be admitted with an agreed investment of P150,000 for 20% interest in the partnership capital and profit. Required: Using the bonus method compute the following:
8 RETIREMENT OF A PARTNER
The existing partnership of Ang, Bat and Choy reported the following immediately prior to the retirement of Choy:
Amount Profit and Loss Ratio
Cash P 150,000 Equipment 300,000 Accounts Payable 150,000 Ang, Capital 75,000 25% Bat, Capital 100,000 30% Choy, Capital 125,000 45%
Choy is to be paid by the partnership at book value of his adjusted interest after the agreed adjustment of its assets and liabilities.
Required:
A. Make the journal entries for the 1. Adjustments 2. Retirement of Choy B. Compute the following:
1. The total assets of the partnership after the agreed adjustment before the retirement of Choy. 2. The adjusted total capital of the partnership after the agreed adjustments before the retirement of
Choy.
3. The amount of payment to Choy for his retirement.
4. The total capital of the partnership after the retirement of Choy.
5. The new profit and loss ratio of Ang and Bat after the retirement of Choy in the absence of specific agreement.
INSOLVENCY OF PARTNERS AND PARTNERSHIP
The financial conditionsof the partnership and the individual general partners are the following:
Partnership General Partner Debit Credit Assets
Cash P 200,000 Receivable from E 50,000 Accounts Payable P 400,000 Payable to T 100,000 Z, Capital (30%) 200,000 P 200,000 T, Capital (30%) 150,000 350,000 E, Capital (40%) 300,000 350,000 Required:
1. Prepare a schedule of the settlement of each partner's personal obligation. 2. Prepare a schedule of the partnership settlement of obligations.
3. Journalize the dissolution of the partnership.
DISSOLUTION DUE TO DEATH OF A PARTNER
NBK Partnership is engaged in leasing activities. In year 2009, the business has a monthly rent cash revenue of Assume the following additional information:
Na Bu
1. Partners' beginning capital P 500,000 300,000
3. On October 1, 2009, Na died due to car accident. 4. Income tax rate is 30% of the net income.
5. Due to liquidity problem, the remaining partners and the heirs of Na agreed that the final settlement of Na's capital interest will be on June 30, 2010 subject to 12% interest per year.
Required:
1. Compute the adjusted partners capital for dissolution purposes.
2. Journalize the related entries of dissolution and the payment of Na's capital balance. ANSWER THE FOLLOWING EXERCISES:
1
of Lix's interest in the firm?
The partners agreed that the equipment is overstated by P50,000. Accrued salaries of P10,000 is to be recognized.
P100,000 and monthly cash operating expenses of P60,000, excluding a monthly depreciation expense of
2. Total liabilities, P500,000. Land and building are undervalued by P1,000,000.
Ro and Que are partners who share profits and losses equally. Each has a capital balance of P40,000
respectively. They agreed to admit Lix as a new partner upon investiment of land costing P50,000, but which is appraised at P60,000. Profits and losses are to be shared equally after the admission of Lix. What is the percentage
9
a) 40% c) 33.33%
b) 33.71% d) 35.71%
2 Based on the above case, what is the capital balance of Ro, Que and Lix in the partnership?
a) c)
b) d)
pectively 3
in the partnership under bonus method, the new partnership's accounting elements would be
Net Assets Total Capital Net Assets
a) P125,000 P125,000 c) P110,000 b) P125,000 P110,000 d) P100,000
4
described as
Net Assets Total Capital Net Assets
a) P500,000 P600,000 c) P625,000 b) P600,000 P600,000 d) P625,000
5
Partners Capital Profit and Loss Ratio
A P 200,000 40%
B 300,000 60%
and loss ratio of the new partnership without specific agreement between A and B would be
A B A B a) 40% 60% c) 32% 48% b) 48% 32% d) 33% 33% 6 a) b) c) d) 7
effect under bonus method? The above transaction will effect a
a) b) c)
d) All of the above
8 The capital balances and profit/loss sharing of X, Y, and Z before the retirement of X are
Partners Capital Profit & Loss Ratio
X P 150,000 30%
Y 160,000 30%
Z 200,000 40%
capital balance after retirement of X would be
a. 360,000 c. 295,000 b. 345,000 d. 290,000
9 The existing capital balances of Abnoy, Bitoy and Caloy prior to retirement of Abnoy were as follows:
Partners Capital Profit & Loss Ratio
Abnoy P 150,000 20%
Bitoy 200,000 30%
Caloy 250,000 50%
P50,000 each P40,000, P50,000 and P50,000 respectively P40,000, P50,000 and P60,000 res- P46,667 each
If the original partnership capital is P100,000 and the new partner is admitted by investing P10,000 for
If the total assets of the existing partnership is P500,000, and the new partner is admitted by investing
for 20% interest in the partnership, under bonus method the new basic accounting elements of the partnership is
Suppose that the old partnership of A & B reported the following:
If C is to be admitted for 20% interest in the partnership's asset and profit by investing P125,000, then the new profit
If an existing partnership admits a new partner for a 1/5 interest in the partnership's total agreed capital of for an investment of P10,000, the admission of the new partner will result in the recognition of
bonus to the old partners if the total net assets contributed amounted to P40,000 bonus to the new partner if the total net assets contributed were valued at P40,000
bonus to the new partner if the total net assets contributed by old partners amounted to P30,000 no bonus if the total net assets contributed by the old partners were appraised at P30,000
Before the admission of C, the partnership of A and B reported a net asset of P180,000 which A an B partners contributed equally. C is admitted by investing P60,000 for a capital credit of P80,000. Which of the following is the
decrease on the capital balances of the old partner amounting to P10,000 each bonus of P20,000 to the new partner
balance of P80,000 capital to all of the partners.
10
ment of Abnoy will result in the total partnership's assets and capital as:
Net Assets Total Capital Net Assets a. 450,000 450,000 c. 600,000 b. 480,000 480,000 d. 720,000
10 The existing capital balances of Ali, Billy and Clay prior to retirement of Ali were as follows:
Partners Capital Profit & Loss Ratio
Ali P 100,000 25%
Billy 200,000 35%
Clay 300,000 40%
retirement of Ali will result in the total partnership's assets and capital as:
Net Assets Total Capital Net Assets a. 480,000 480,000 c. 600,000 b. 500000 500,000 d. 720,000
11
the total agreed capital of the partnership?
a. 180,000 c. 270,000 b. 240,000 d. 150,000
12 Ba and Ka are partners who share profit and losses in the ratio of 7:3, respectively. On December 31, 2009, their respective capital accounts were as follows:
Ba P 350,000
Ka 300,000
Total Capital P 650,000
On that date, they agreed to admit Daw as a partner with a one third interest in the capital and profits and losses, immediately after the admission of Daw?
Ba, Capital Ka, Capital Daw, Capital a. 350,000 P 300,000 325,000 b. 315,000 285,000 300,000 c. 316,667 283,333 300,000 d. 350,000 300,000 250,000
13 The existing capital balances of old partners prior to admission of D are as follows:
Partners A B C
Capital Balances 100,000 200,000 300,000
Profit and Loss Ratio 20% 30% 50%
The net assets of the parnership right after the admission of D would be:
a. 340,000 c. 600,000 b. 300,000 d. 480,000
14 The existing capital balances of old partners prior to admission of D are as follows:
Partners A B C
Capital Balances 200,000 280,000 320,000
ship for his investment. The assets of the partnership are not to be revalued. Under the bonus method, the total partnership's capital after admission of D is
a. 800,000 c. 1,000,000 b. 975,610 d. 650,000 15 in admitting Irish is a. 100,000 c. 37,500 b. 75,000 d. 15,000
Abnoy retired from the partnership by selling his whole interest in the partnership to Doy for P120,000.
Ali retired from the partnership by selling his whole interest in the partnership to Billy and Clay for P120,000.
Gerry and Narda are partners who have a capital of P90,000 each and share profits and losses equally. They offer to admit Art for a one third interest int the firm upon his investment of P60,000. Under the bonus method, what is
and upon his investment of P250,000. Under the bonus method, what are the capital balances of Ba, Ka and Daw
D is to be admitted to the partnership by direct purchase of 20% each of the existing partners' capital for
D is to be admitted into the partnership by investing P200,000 for 18% interest in capital and profits of the
partner-The capital balances in the FSH are Farrah's capital P600,000, Sarrah's capital P500,000, and Hannah's capital
P400,000, and income ratios are 5:3:2 respectively. The FISH Partnership is formed by admitting Irish into the
11
PARTNERSHIP DISSOLUTION EXERCISES
It was agreed among the partners that the following partnership assets should be revalued before the admission of A:
Fair Value 150,000
80,000 300,000 200,000
It was agreed that the new partnership name would be ENA and the profit and loss distribution would be based on
The capital balances and agreed profit and loss distribution of Clemer Omero and Ronica Elaine Partnership prior to
Profit and Loss Ratio
Aira Shane wants to purchase 25% interest in the partnership by paying directly to each of the existing partners. 1. Prepare journal entries assuming assuming Aira Shane purchased her interest from all the partners at the
of the partners are equal to their agreed capital contribution of 40% and 60% which is also their respective profit and
Orville, Adalyn and Analyn are partners engaged in book distribution. They share profits and losses in the ratio of
Analyn 300,000
50,000 0
Journalize the withdrawal of Analyn from the partnership under each of the following independent cases E & N Partnership decided to accept A as a partner with P500,000 cash contribution. The capital balances of E an
The partnership of Abu and Bacar shows a total asset of P350,000. Its total available cash is just enough to pay the current liabilities of the partnership. Its noncurrent liabilities amounted to P50,000 and the capital balances
Calim is to be admitted with an agreed investment of P150,000 for 20% interest in the partnership capital and profit.
12 The existing partnership of Ang, Bat and Choy reported the following immediately prior to the retirement of Choy:
Profit and Loss Ratio
Choy is to be paid by the partnership at book value of his adjusted interest after the agreed adjustment of its assets
1. The total assets of the partnership after the agreed adjustment before the retirement of Choy. 2. The adjusted total capital of the partnership after the agreed adjustments before the retirement of
5. The new profit and loss ratio of Ang and Bat after the retirement of Choy in the absence of specific
General Partner Liabilities
300,000 300,000 50,000
NBK Partnership is engaged in leasing activities. In year 2009, the business has a monthly rent cash revenue of
Ko
200,000
5. Due to liquidity problem, the remaining partners and the heirs of Na agreed that the final settlement of Na's capital interest will be on June 30, 2010 subject to 12% interest per year.
The partners agreed that the equipment is overstated by P50,000. Accrued salaries of P10,000 is to be recognized.
and monthly cash operating expenses of P60,000, excluding a monthly depreciation expense of P20,000.
Ro and Que are partners who share profits and losses equally. Each has a capital balance of P40,000 and P50,000 respectively. They agreed to admit Lix as a new partner upon investiment of land costing P50,000, but which is
13 Total Capital P110,000 P100,000 Total Capital P625,000 P600,000
The existing capital balances of Abnoy, Bitoy and Caloy prior to retirement of Abnoy were as follows:
P40,000, P50,000 and P50,000 respectively
P100,000 and the new partner is admitted by investing P10,000 for 20% interest
If the total assets of the existing partnership is P500,000, and the new partner is admitted by investing P100,000 interest in the partnership, under bonus method the new basic accounting elements of the partnership is
interest in the partnership's asset and profit by investing P125,000, then the new profit
If an existing partnership admits a new partner for a 1/5 interest in the partnership's total agreed capital of P40,000
bonus to the new partner if the total net assets contributed by old partners amounted to P30,000 no bonus if the total net assets contributed by the old partners were appraised at P30,000
Before the admission of C, the partnership of A and B reported a net asset of P180,000 which A an B partners contributed equally. C is admitted by investing P60,000 for a capital credit of P80,000. Which of the following is the
14 Total Capital 600,000 720,000 Total Capital 600,000 720,000
Ba and Ka are partners who share profit and losses in the ratio of 7:3, respectively. On December 31, 2009, their
On that date, they agreed to admit Daw as a partner with a one third interest in the capital and profits and losses,
ship for his investment. The assets of the partnership are not to be revalued. Under the bonus method, the total Abnoy retired from the partnership by selling his whole interest in the partnership to Doy for P120,000. This
retire-Ali retired from the partnership by selling his whole interest in the partnership to Billy and Clay for P120,000. This
Gerry and Narda are partners who have a capital of P90,000 each and share profits and losses equally. They offer to admit Art for a one third interest int the firm upon his investment of P60,000. Under the bonus method, what is
Under the bonus method, what are the capital balances of Ba, Ka and Daw
D is to be admitted to the partnership by direct purchase of 20% each of the existing partners' capital for P100,000.
D is to be admitted into the partnership by investing P200,000 for 18% interest in capital and profits of the
partner-The capital balances in the FSH are Farrah's capital P600,000, Sarrah's capital P500,000, and Hannah's capital respectively. The FISH Partnership is formed by admitting Irish into the