PARTNERSHIP DISSOLUTION

Dissolution
• the change in the relation of the partners caused by any partner being disassociated from the
business or change in agreement of the partners.
• causes of dissolution:
R – Retirement
A – Admission
I – Incorporation
D – Death
Note: Keep in mind that dissolution is not the same thing as termination. Dissolution serves as the
beginning of the termination process for the partnership.

I. Admission of a New Partner

• Dissolution doesn’t only mean a partner will go out of the partnership, if a new partner will
be admitted, dissolution also occur. We call this as admission of a new partner by:

1. Purchase of Capital Interest

• the new partner purchases a certain percentage of the selling partner/s capital interest.

Illustration 1:
Presented below is the condensed balance sheet of the partnership of Kevin, Kit, and Kenneth who
share profits and losses in the ratio of 6:3:1, respectively:

Cash P 85,000 Liabilities P 80,000

Other Assets 415,000 Kevin, Capital 252,000
Kit, Capital 126,000
__________ Kenneth, Capital 42,000
Total P500,000 Total P500,000

The partners agreed to sell KT 20% of their respective capital and profit and loss interest for a total
payment of P90,000. The payment of KT is to be made directly to the individual partners.

What are the capital balances of each partner immediately after the admission of KT?

Suggested solution:
TIC TAC
Kevin 252,000 20% (50,400) 201,600
Kit 126,000 20% (25,200) 100,800
Kenneth 42,000 20% (8,400) 33,600
KT - 84,000 84,000
420,000 420,000

TIC – Total Invested Capital (Old partner’s capital + New partner’s investment)
TAC – Total Agreed Capital (Total capital agreed by the partners)

Note:
✓ Admission by purchase of interest is a personal transaction between the new partner and
the selling partner/s.
✓ No cash nor gain/loss will be recorded in the partnership books.
✓ Only the interest purchased is to be recorded in the partnership books (it is simply a transfer
of capital).
✓ Interest purchased = Selling partner’s equity x Ownership interest purchased

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Journal Entry:
Kevin, Capital 50,400
Kit, Capital 25,200
Kenneth, Capital 8,400
KT, Capital 84,000

2. Investment of Assets
• the new partner invests or contributes asset into the partnership

Illustration 2:
Shaq and Kobe are partners sharing profits and losses in the ratio of 6:4 respectively. The capital
investments of Shaq and Kobe are as follows; Shaq – P300,000; and Kobe – P200,000. The partners
decided to admit Jordan as a new partner. Jordan invests P100,000 for a 1/5 interest in an agreed
total capitalization of P600,000.

What are the capital balances of each partner immediately after the admission of Jordan?

Suggested solution:
TIC Bonus TAC
Shaq 300,000 (12,000) 288,000
Kobe 200,000 (8,000) 192,000
Jordan 100,000 20,000 120,000* 1/5
600,000 600,000

*Multiply the TAC by the fraction of interest of the new partner to get the capital credit of the new
partner (P600,000 x 1/5 = P120,000)

Journal entries:
(1) Cash 100,000
Jordan, Capital 100,000

(2) Shaq, Capital 12,000

Kobe, Capital 8,000
Jordan, Capital 20,000

Illustration 3:
On December 31, 2021, the capital balances of partners Cuz, Driff, and Elv of SMP Partnership are
P2,000,000, P5,000,000 and P1,000,000, respectively with profit or loss agreement ratio of 1:4:5,
respectively. On January 1, 2022, Finn was admitted into the partnership upon investment of
P3,000,000 for 25% interest in the partnership with total agreed capitalization of P16,000,000.

a. How much is the total asset upward revaluation?

b. What is the capital balances of each partner immediately after the admission of Finn?

Suggested solution:
Asset
TIC Bonus TAC
Revaluation
Cuz 2,000,000 500,000 (100,000) 2,400,000
Driff 5,000,000 2,000,000 (400,000) 6,600,000
Elv 1,000,000 2,500,000 (500,000) 3,000,000
Finn 3,000,000 - 1,000,000 4,000,000 25%
11,000,000 5,000,000 16,000,000

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Journal entries:
(1) Cash 3,000,000
Finn, Capital 3,000,000

(2) Other assets 5,000,000

Cuz, Capital 500,000
Driff, Capital 2,000,000
Elv, Capital 2,500,000

(3) Cuz, Capital 100,000

Driff, Capital 400,000
Elv, Capital 500,000

Guide:
1. If TIC = TAC – Bonus
▪ If the Invested Capital (IC) of the new partner is not equal to its Agreed Capital
(AC)
✓ IC < AC (Bonus to new partner)
✓ IC > AC (Bonus from new partner)

2. If TIC ≠ TAC
▪ TAC is given - there is an Asset revaluation/Goodwill AND Bonus
▪ TAC is not given - there is an Asset revaluation/Goodwill OR Bonus

-But remember, no Goodwill if TIC > TAC)

-If it is an Asset Revaluation:
✓ TIC < TAC (Upward/Positive asset revaluation)
✓ TIC > TAC (Downward/Negative asset revaluation)

II. Retirement of a Partner

Illustration 4:
III. The partnership balances as of October 31, 2021 for the Partnership of Domingo, Roque, and
Ballada were as follows:

Cash P 80,000 Liabilities P 24,000

Non-cash Assets 664,000 Domingo, Loan 36,000
Domingo, Capital 168,000
Roque, Capital 156,000
_____________ Ballada, Capital 360,000
Total P 744,000 Total P 744,000

Domingo has decided to retire from the partnership on October 31, 2021. Partners agreed to adjust
the non-cash assets to their fair market value of P784,000. The partnership profit on October 31,
2021 is P160,000. Domingo will be paid P276,800 for his partnership interest inclusive of his loan
which is to be paid in full. Their profit and loss ratio is 3:4:3 to Domingo, Roque, and Ballada,
respectively.

Using the bonus approach, what will be the balance of Roque’s capital account after the
retirement of Domingo?

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Suggested solution:
Domingo Roque Ballada
Capital balance 168,000 156,000 360,000
Increase in FV of NCA* 36,000 48,000 36,000
Share in net income 48,000 64,000 48,000
Adjusted capital balance 252,000 268,000 444,000
Loan to Domingo 36,000
Total capital interest 288,000
Cash paid to Domingo 276,800
Bonus from Domingo 11,200 6,400 4,800
Total capital balance 274,400 448,800

*Increase of FV of NCA = P784,000 – P664,000 = P120,000 (allocate using P/L ratio)

Note:
✓ To account for retirement, the capital should be updated first by the increase/decrease of
the value of the partnership assets, share in net income/loss, and any loan to/from partner.
✓ Under the bonus approach:
• If Cash Payment > Total Interest = Bonus to Retiring Partner
• If Cash Payment < Total Interest = Bonus from Retiring Partner

Journal entries:
(1) Non-cash Assets 120,000
Domingo, Capital 36,000
Roque, Capital 48,000
Ballada, Capital 36,000

(2) Income and expense summary 160,000

Domingo, Capital 48,000
Roque, Capital 64,000
Ballada, Capital 48,000

(3) Domingo, Capital 252,000

Domingo, Loan 36,000
Cash 276,800
Roque, Capital 6,400
Ballada, Capital 4,800

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DISCUSSION EXERCISES

I. The following accounts were provided by the partnership of Keena, Anica, and March, who share
profits and losses in the ratio of 4:3:3, respectively:

Cash 85,000
Other Assets 415,000
Accounts payable 80,000
Keena, Capital 252,000
Anica, Capital 126,000
March, Capital 42,000

The partners agreed to sell Ralph 10% of their respective capital and profit and loss interest for a
total payment of P60,000. The payment of KT is to be made directly to the individual partners.

a. What is the amount of capital to be credited to Ralph?

b. The capital balance of March after the admission of Ralph is?

II. The RMW Partnership shows the following profit and loss ratios and capital balances:

Roy 60% P 252,000

Mandy 30% 126,000
Warren 10% 42,000

Partner Roy and Warren decided to sell to Homer 20% of their respective capital and profit and loss
interests for a total payment of P70,000. Homer will pay the money directly to the partners.

1. What are the capital balances of the partners after Homer's admission?
2. How much cash should Roy and Warren, respectively, receive from Homer?

III. Charity and Cherry are partners sharing profits and losses in the ratio of 7:3 respectively. The
capital investments of Charity and Cherry are as follows; Charity – P300,000; and Cherry – P100,000.
The partners decided to admit Charmaine as a new partner.

Compute the capital balances of each partner immediately after the admission of Charmaine
under each of the following independent cases:
a. Charmaine invests P200,000 for a 40% interest.
b. Charmaine invests P400,000 for a 30% interest.
c. Charmaine invests P300,000 for a 1/4 interest in an agreed total capitalization of P800,000
and goodwill is to be recorded.
d. Charmaine invests P200,000 for a 1/5 interest in the capital of the firm and asset
revaluation is to be recorded.
e. Charmaine invests P100,000 for a 20% interest in the capital of the firm with an agreed total
capitalization of P400,000 and asset revaluation is to be recorded.

IV. Partners Jackie and Jeremy have a capital of P240,000 and P460,000 respectively. They share
profit and loss in the ratio of 3:7. After admitting Jin, they agreed to have a total capital of P1,000,000.
The new partner invested P300,000 for a 25% interest in the partnership.

a. What is the capital of Jeremy after admitting Jin to the partnership?

b. How much is the amount of Bonus to or (from) Jackie?

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V. Pao and Pat are partners who share profits and losses in a 7:3 basis. Currently, Pao have a capital
balance of P120,000 and Pat have P40,000. Zeb wants to join the partnership but Pao and Pat would
only admit him in the business upon investing P60,000 for a 20% interest in the capital firm. Zeb
agreed with the condition and the Land account is to be revalued upon his admission.
Determine the capital of Pat after Zeb’s admission.

VI. The balance sheet of TVJ partnership at October 31, 2018 follows:
Assets P1,200,000 Tom, Loan P 25,000
Tom, Capital (40%) 520,000
Vien, Capital (30%) 355,000
Junnie, Capital (30%) 300,000
Total Assets P1,200,000 Total Liab. & Capital P1,200,000

Tom is retiring from the partnership. By mutual agreement, the assets are to be adjusted to their fair
value of P1,160,000. On October 31, 2018, the income summary account has a credit balance of
P82,000. Moreover, Vien and Junnie agreed that the partnership will pay Tom cash for his
partnership interest including his loan. The bonus method is used to account for the retirement.

a. What is the balance of Vien’s capital upon Tom’s retirement?

b. What is the total payment to Tom upon his retirement?

VII. Burnhil, Germ and Jophet are partners with capital balances on January 2, 2018 of P100,000
P150,000, and P200,000, respectively. Their profit and loss sharing ratio is 5:3:2. On July 1, 2018,
Burnhil retires from the partnership. On the date of retirement, the partnership had net income of
P140,000 and the partners agreed that inventories are to be revalued at P70,000 from its original
cost of P50,000. The partners agreed further to pay Burnhil P195,000 in settlement of his interest.

How much is the capital balance of Germ after Burnhil's retirement?

VIII. The partnership of Quty, Rasty, Tamy is suffering cash shortage during 2018. Because of that
reason, Q loaned the partnership P60,000 cash last July 2022. The partnership suffered net loss of
P40,000 during 2022. The capital balances of the partners before distribution of net loss are
P240,000, P310,000, and P230,000, respectively. They share profits and losses in the ratio of 2:3:5,
respectively.
Due to disagreement, Quty wanted out of the partnership. Before withdrawal, the value of the land
increased from P200,000 to P300,000. Quty will be paid P360,000 by the partnership for his total
interest and loan in the partnership.
What is the capital balance of Rasty after Quty’s withdrawal?

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MULTIPLE CHOICE QUESTIONS

1. A person may become a partner in a partnership by all of the following methods except
a. Investing in the partnership with a bonus to the new partner
b. Making a loan to the partnership
c. Investing in the partnership with a bonus to the old partners
d. Purchasing a partner’s interest

2. In which condition a partnership firm is deemed to be dissolved?

a. On a partner’s admission
b. On retirement of a partner
c. On expiry of the period of partnership
d. On loss in partnership

3. Appreciate the following statements:

Statement 1 - Loans given by the partnership to the partners, as recorded on the partnership books,
reduces the interest of the retiring partner.

Statement 1 - Withdrawal by a partner at less than book value of his capital interest results in an
increase to the other partners interest allocated according to their profit and loss ratio.

a. True, False
b. True, True
c. False, True
d. False, False

For Numbers 4-7

Partners Rizz and Meta’s capital is 480,000 and 520,000, respectively. They share profit and loss
equally in their merchandising business. After admitting Pao, they agreed to have a total capital of
P2,500,00. The new partner invested P 500,000 for 30% interest in the business.

4. What is the capital of Rizz and Meta after admitting Pao?

a. 500,000; 750,000
b. 750,000; 855,000
c. 855,000; 855,000
d. 895,000; 855,000

5. What is the capital of Pao after admission?

a. 500,000
b. 750,000
c. 855,000
d. 895,000

6. How much is the amount of Bonus to or (from) Lea?

a. 0
b. 125,000
c. (125,000)
d. (250,000)

7. How much is the amount of revaluation credited of Aira?

a. 0
b. 250,000
c. 375,000
d. 500,000

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For Numbers 8-10
D, E and F are partners sharing profits and losses of 50%, 30% and 20%, respectively. The December
31, 2024 balance sheet of the partnership before any profit allocation was summarized as follows:

Assets Liabilities and Capital

Cash P120,000 Accounts payable P 8,000
Inventories 80,000 F, loan 6,000
Furniture and fixtures 100,000 D, capital 140,000
Patent 30,000 E, capital 120,000
F, capital 60,000
___________ F, drawings (4,000)
Total assets P330,000 Total liabilities and capital P330,000

The partnership net income for the year amounted to P60,000. On January 1, 2025, F has decided to
retire from the partnership and by mutual agreement among partners, the following have been
arrived at:

• Inventories amounting to P10,000 is considered obsolete and must be written-off.

• Furniture and fixtures should be adjusted to their current value of P130,000.
• Patents are considered worthless and must be written-off immediately before the retirement
of F.

It was agreed that the partnership will pay F for his interest in the partnership inclusive of loan
balance.

8. The interest of F immediately before his retirement amounted to

a. P48,000
b. P70,000
c. P72,000
d. P74,000

9. If F retires by receiving P69,000 cash, using bonus method, the capital balances of D and E after the
retirement of F
a. D, P165,625 and E, P135,375
b. D, P165,000 and E, P135,000
c. D, P166,875 and E, P136,125
d. D, P168,125 and E, P136,875

10. If F retires by receiving P76,000 cash, using bonus method, the capital balances of D and E after
the retirement of F
a. D, P162,500 and E, P133,500
b. D, P163,750 and E, P134,250
c. D, P165,000 and E, P135,000
d. D, P167,500 and E, P136,500

Prepared by: Bernard Rodney D. Alvarez, CTT, RCA, MRITax

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