Tab 1

DISSOLUTION
✦Change in the relationship of the partner cause by any of the following :
I.​ Admission of a new Partner
II.​ Withdrawal or retirement of a Partner
III.​ Death of a Partner
✦Dissolution is not always followed by a Liquidation. As distinguished to Liquidation,
Liquidation is the stage wherein there is already a termination of the business activities of the
partnership and winding up of the affairs of the business.
✦Before a Dissolution occurs, the Partnership Books shall be adjusted first for any of the
following:
I.​ Revaluation of Assets
II.​ Profit or Loss for the period

ADMISSION OF A NEW PARTNER

Purchase of interest
-​ New Partner directly purchases all or a portion of one or more of the existing partners
interest.
-​ When a new partner purchases, the Total Partnership Assets and Capital is remained
unchanged there is only a transfer of a capital between the existing Partner and the new
Partner. The amount paid by the new Partner is not recorded in the books because it is
only a personal transaction between the existing and the new partner. So if the
purchased price is greater/less than the capital credited to the new partner at the time of
admission, no gain or loss will be recognised in the Partnership Books.
-​ If the assets are not fairly valued, assets and the capital accounts of the old partners
shall be adjusted first before admission of a new partner. Based on the amount paid by
the partner to purchased the interest, the total implied capital is computed and compared
to the total contributed capital of the Partnership. Any difference pertains to the over or
under valuation of the assets.
PROBLEM :
On January 1, 2019, AB Partnership wants to expand their business by admitting new partners
in the Partnership. Presented below is the statement of Financial Position as of January 1,
2019.
ABC PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
AS OF JANUARY 1, 2019
ASSETS LIABILITIES AND EQUITY

Cash 60,000 Accounts Payable 95,000

Accounts Receivable 150,500 Notes Payable 235,000

Inventory 80,000 A, Capital 115,500

Land 255,000 B, Capital 100,000

TOTAL ASSETS : 545,500 TOTAL LIABILITIES AND EQUITIES: 545,500

A and B share in the profits and losses in the ratio of 60:40. A and B agreed to admit C and will
retain their original share in the net income.

REQUIRED :
Under the following independent cases, compute the capital balances of each partner after
admission of C and give the entries in the books of the partnership.

CASE 1 :
C is to have a 30% interest as well as in the share net income in the partnership and paid
64,650.
Partner’s Capital Balance Interest acquired by C. Partner’s Capital Balance after
before Admission of C. admission of C.

A - 115,500 (34,650) 80,850

B - 100,000 (30,000) 70,000

C- 34,650 + 30,000 64,650

ENTRIES :
A, Capital 34,650
B, Capital 30,000
C, Capital 64,650

CASE 2 :
C is to have a 30% interest as well as in the share in net income in the partnership and paid
75,000. All the assets are fairly valued.
Partner’s Capital Balance Interest acquired by C. Partner’s Capital Balance after
before Admission of C. admission of C.

A - 115,500 (34,650) 80,850

B - 100,000 (30,000) 70,000

C- 34,650 + 30,000 64,650

ENTRIES :
A, Capital 34,650
B, Capital 30,000
C, Capital 64,650
CASE 3 :
C is to have 30% interest as well as in the share net income and paid 75,000. The land is not
fairly valued.

TOTAL IMPLIED CAPITAL = 250,000 (75,000 / 30%)

TOTAL CONTRIBUTED CAPITAL = 215,000
Undervaluation in equipment 34,500
Partner’s Capital Adjustment to Adjusted Capital Interest acquired Partner’s Capital
Balance before the Capital of old Balance before by C. Balance after
Admission of C. partners due to Admission of C. admission of C.
undervaluation
of Equipment.

A - 115,500 +20,700 136,200 (40,860) 95,340

B - 100,000 +13,800 113,800 (34,140) 79,660

C- 40,860 + 34,140 75,000

ENTRIES :
Land 34,500
A, Capital 20,700 A, Capital 40,860
B, Capital 13,800 B, Capital 34,140
C, Capital 75,000

CASE 4 :
C is to have a 30% interest as well as in the share in net income in the partnership and paid
45,000. All the assets are fairly valued.
Partner’s Capital Balance Interest acquired by C. Partner’s Capital Balance
before Admission of C. after admission of C.

A - 115,500 (34,650) 80,850

B - 100,000 (30,000) 70,000

C- 34,650 + 30,000 64,650

ENTRIES :
A, Capital 34,650
B, Capital 30,000
C, Capital 64,650
CASE 5 :
C is to have 30% interest as well as in the share net income and paid 45,000. The Inventory is
not fairly valued.
Partner’s Capital Adjustment to Adjusted Capital Interest acquired Partner’s Capital
Balance before the Capital of old Balance before by C. Balance after
Admission of C. partners due to Admission of C. admission of C.
undervaluation
of Equipment.

A - 115,500 (39,300) 76,200 (22,860) 53,340

B - 100,000 (26,200) 73,800 (22,140) 51,660

C- 22,860 + 22,140 45,000

ENTRIES :

A, Capital 39,300
B, Capital 26,200 A, Capital 22,860
Inventories 65,500 B, Capital 22,140
C, Capital 45,000

ADMISSION OF A NEW PARTNER

INVESTMENT OF ASSETS
-​ New Partner invest assets in the paragraph
-​ When a new partner invests, the asset invested by the new partner is recorded in the
books and there is a credit to the new partner’s capital account and in effect it increases
the total assets and total capital of the partnership.
-​ If the assets are fairly valued, and the capital credited to the new partner is different from
the capital contributed, any difference pertains to a bonus given to the new or old
partners.

CAPITAL CONTRIBUTED = CAPITAL CREDITED → NO BONUS

CAPITAL CONTRIBUTED > CAPITAL CREDITED → With bonus coming from new partner to
old partners
CAPITAL CONTRIBUTED < CAPITAL CREDITED → With bonus coming from old partner to
new partners

If the assets are not fairly valued, assets and the capital accounts of the old partners shall be
adjusted first before admission of a new partner. Based on the amount paid by the partner to
purchased the interest, the total implied capital is computed and compared to the total
contributed capital of the Partnership. Any difference pertains to the over or under valuation of
the assets.
CASE 1 : C invest 53,875 cash for 20% interest as well as in the share in net income in the
partnership. All assets are fairly valued.
A B C

Partner’s Capital before admission of C. 115,500 100,000

Investment of C. 53,875

Capital Balances after admission of C. 115,500 100,000 53,875

TOTAL CONTRIBUTED CAPITAL → 115,500 + 100,000 + 53,875 = 269,375

Capital that should be credited to C → 269, 375 x 20% interest = 53,875
CAPITAL CONTRIBUTED = CAPITAL CREDITED → No Bonus

53,875 = 53,875
ENTRIES :
Cash 53,875
C,Capital 53,875

CASE 2 : C invest 70,000 cash for 20% interest as well as in the share in net income in the
partnership. All assets are fairly valued.
A (60%) B (40%) C

Partner’s Capital before 115,500 100,000

admission of C.

Investment of C. 70,000

Bonus to old partners 7,740 5,160

Capital Balances after 123,240 105,160 57,100

admission of C.

TOTAL CONTRIBUTED CAPITAL → 115,500 + 100,000 + 70,000 = 285,500

Capital that should be credited to C → 285,500 x 20% interest = 57,100
CAPITAL CONTRIBUTED > CAPITAL CREDITED → Bonus coming from new partner to old
partner
70,000 > 57,100 → 12,900
ENTRIES :
Cash 70,000
C, Capital 70,000

C, Capital 12,900
A, Capital 7,740
B, Capital 5,160
CASE 3 : C invest 70,000 cash for 20% interest as well as in the share in net income in the
partnership. The Land is not fairly valued.
A (60%) B (40%) C

Partner’s Capital before 115,500 100,000

admission of C.

Investment of C. 70,000

Undervaluation of Land 38,700 25,800

Capital Balances after 154,200 125,800 70,000

admission of C.

TOTAL IMPLIED CAPITAL → 70,000 / 20% = 350,000

TOTAL CONTRIBUTED CAPITAL → 115,500 + 100,000 + 70,000 = 285,500
Undervaluation in equipment 64,500

ENTRIES :
Land 64,500
A, Capital 38,700
B, Capital 25,800

Cash 70,000
C, Capital 70,000

CASE 4 : C invest 40,000 cash for 20% interest as well as in the share in net income in the
partnership. All assets are fairly valued.
A (60%) B (40%) C

Partner’s Capital before 115,500 100,000

admission of C.

Investment of C. 40,000

Bonus to new partners (6,660) (4,440) 11,100

Capital Balances after 108,840 95,560 51,100

admission of C.

TOTAL CONTRIBUTED CAPITAL → 115,500 + 100,000 + 40,000 = 255,500

Capital that should be credited to C → 255,500 x 20% interest = 51,100
CAPITAL CONTRIBUTED < CAPITAL CREDITED → Bonus coming from old partner to new
partner
40,000 < 51,500 → 11,100

ENTRIES :
Cash 40,000
C, Capital 40,000

A, Capital 6,660
B, Capital 4,440
C, capital 11,100

CASE 5 : C invest 40,000 cash for 20% interest as well as in the share in net income in the
partnership. The Land is not fairly valued.

A (60%) B (40%) C

Partner’s Capital before 115,500 100,000

admission of C.

Investment of C. 40,000

Overvaluation of Land 33,300 22,200

Capital Balances after 82,200 77,800 40,000

admission of C.

TOTAL IMPLIED CAPITAL → 40,000 / 20% = 200,000

TOTAL CONTRIBUTED CAPITAL → 115,500 + 100,000 + 40,000 = 255,500
Undervaluation in equipment 55,500

ENTRIES :
A, Capital 33,300
B, Capital 22,200
Land 55,500

Cash 40,000
C, Capital 40,000
 RETIREMENT / WITHDRAWAL / DEATH OF A PARTNER
-​ At the time of Retirement / Withdrawal / Death of a partner, the partnership has the
obligation to settle the interest of the partner by either :
a.​ Payment thru Cash
b.​ Payment thru non-cash assets
c.​ By recognition first of a liability for the unpaid interest of the retiring partner.
-​ Before retirement / withdrawal, the partnership books shall be adjusted first for profit or
loss for the period as well as any asset revaluation.

●​ If Settlement Value = Book Value → no bonus or no asset revaluation

●​ Is Settlement Value ≠ Book Value → with bonus or asset revaluation

Causes :
1.​ Assets are not fairly valued
2.​ Bonus given to remaining / retiring partner
→ Settlement Value > Book Value of Capital → Bonus to retiring partner / Asset is
Undervalued.
→ Settlement Value < Book Value of Capital → Bonus to remaining partner / Asset is
Overvalued.

-​ At the time of Retirement / Withdrawal / Death of a partner, total assets and total equity
decreases. If the Settlement Value is not paid at the time of retirement, the total liabilities
of the partnership increases while total equity decreases.