PARTNERSHIP DISSOLUTION

EXERCISES

TRUE OR FALSE

1. A partnership is dissolved when a new partner is admitted to the partnership.

2. When a partner withdraws from a partnership and the value of the assets paid to the
partner by the partnership is greater than the balance in his capital account, the partnership
is, in effect, paying the withdrawing partner a bonus.

3. The dissolution of the partnership discharges the existing liability of any partner.

5. When a new partner enters an existing partnership by purchasing a partner’s interest, the
cash paid to the selling partner for the partnership interest is always equal to the new
partner’s capital balance.

6. When new partners invest more than the equity interest they are to receive in the net
assets of an existing partnership, part of the entry to record the new partners’ investments
is an increase in the capital accounts of the old partners.

7. A new partner may be admitted into the partnership with the consent of the majority of the
old partners.

8. Garnet directly purchased Diamond’s P60,000 partnership interest for P75,000. The entry
to record the transaction is for P75,000.

9. Partner Samantha purchases Partner Carrie’s P10,000 interest from partner Miranda for
P12,000. The entry to record the transaction is for P10,000.

10. A partnership may be dissolved without being liquidated.

11. The sale of a partner’s interest in an existing partnership is a personal transaction between
the selling partner/partners and the buying or new partner.

12. Eugene purchased directly from Richard’s his P40,000 partnership interest for P50,000.
The entry to record the transaction is for P40,000.

13. When Betty purchased Cynthia’s P70,000 capital interest for P70,000, the ensuring entry
on the books of the partnership would contain a debit to Cynthia’s Capital for P70,000.

14. The total assets of the partnership will increase upon admission of a new partner by
purchase of interest.

15. When a new partner is given 30% interest in a partnership, he or she will not necessarily
receive 30% of all future profits and losses.

1. True 6. True 11. True

2. True 7. False 12. True
3. False 8. False 13. True
4. 9. True 14. False
5. False 10. True 15. True

MULTIPLE CHOICE

1. The following instances dissolve a partnership except

a. admission of a new partner
b. change of the name of the partnership
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c. conversion of a partnership to a corporation

d. revaluation of partnership assets

2. Before the effectivity of the dissolution, assets and liabilities should be restated at their
a. fair market values
b. realizable values
c. liquidating values
d. historical values

3. The following transactions will affect the balance of the total partnership capital except
a. retirement of a partner by settlement equal to his interest
b. the partnership generates net income for the year
c. admission by purchase with bonus
d. permanent withdrawals by partners

4. Which is least likely a valid reason for partnership dissolution?

a. admission of a new partner
b. retirement of a partner
c. declaration of partner’s insolvency
d. sustained loss of the partnership for the year

5. Which of the following is not a cause of partnership dissolution?

a. retirement of one of the partners
b. admission of new partner
c. death of a partner
d. change in the civil status of a partner

6. Upon dissolution, the partners may agree to adjust the partnership assets and liabilities. The
net effect of such restatement of partnership assets and liabilities must be adjusted to
respective partners capital balances based on their
a. ending capital balances
b. old profit and loss ratio
c. new profit and loss ratio
d. beginning capital balances

7. Which of the following is not correct with regard to the admission of new partner?
a. admission of new partner needs consent of each of the old partners
b. admission by purchase of interest of one of the existing partners need not have the
consent of remaining partners
c. admission of new partner by direct investment in the partnership must have the consent of
all the existing partners
d. admission of new partner either by purchase or by direct investment in the partnership will
result to dissolution of the existing partnership

8. When Tic retired from the Tic-Tac-Toe Partnership, the final settlement of Tic’s partnership
interest exceeds his capital balance. Under the bonus method, the excess
a. reduced the capital balance of Tac and Toe
b. has no effect to the capital balance of Tac and Toe
c. was recorded as a liability
d. was recorded as an expense

9. 1st: As a rule, the personal assets of the partners shall first be applied to their respective
personal creditors
2nd: In general, insolvency arises when a business cannot pay outstanding obligations as they
mature
a. Only 1st statement is correct
b. Only 2nd statement is correct
c. Both statements are correct
d. Both statements are wrong
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10. If bonus is traceable to the existing partners, it is allocated among them according to the
a. Profit and loss agreement of the existing partnership
b. Profit and loss agreement of the new partnership
c. Capital ratio of existing partners
d. Capital ratio of all the partners, including the new one

Problem Solving

Problem 1

Krypton Partnership had a net income of P8,000 for the month ended September 30, 2009. Clark
purchased an interest in Krypton Partnership of Louise and Kent by paying Louise P32,000 for half
of her capital and half of her 50% profit sharing interest on October 1, 2009.

At this time, Louise’s capital balance was P24,000 and Kent’s capital balance was P56,000.

Questions:
1. What amount should Clark receive as credit to his capital account?

Problem 2

There is an admission of a new partner to a 20% interest in a partnership for an investment of

P18,000, with total agreed capital to be P75,000.

Question:
1. How much would be the bonus to the old partners?

Problem 3

Ebony and Ivory are partners who have capital balances of P600,000 and P480,000, and sharing
profits in the ratio of 3:2.

Platinum is admitted as a partner upon investing P220,000 for a 25% interest in the firm. Profits
are to be shared equally.

Questions:
Assuming all assets are fairly valued,
1. What would be the bonus to the new partner if the bonus method will be used?
2. What would be the capital credit of Platinum?

Assuming there is a need for an upward revaluation of assets;

3. What would be the amount of upward revaluation?

4. What would be the amount of capital credit to Platinum?
5. What is the amount of bonus to the new partner?

Problem 4. Mark and Isaiah have capital balances of P560,000 and P450,000 respectively. Both
decided to admit Elijah into their partnership. He invested enough cash to have a 20% interest
in the partnership. The profit and loss ratio of the old partners is 3:2 respectively. After the
admission of Elijah, the capital balance of Isaiah amounted to P495,000. How much cash was
invested by Eliah