PARTNERSHIP

ACCOUNTING
 Partnership Dissolution
Admission, withdrawal, retirement, death of a partner,
incorporation of a partnership

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Dissolution
The change in the relation of the partners.

• Purchase of interest
Admission • Investment in the partnership

Withdrawal, • Purchase of interest by the partners

• Closing partnership and establishing

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Revaluation of Assets
▷ When a partnership is
dissolved but not liquidated,
the assets and liabilities are
restated to fair values.
▷ The adjustments are allocated
to the existing partners.

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Admission (Purchase of interest)
On July 1, 20x1, C was admitted to the partnership when he purchased a proportionate interest
from A and B representing 20% interest in the net assets and profits of the firm for P100,000.
On this date, the carrying amounts and fair values of the assets and liabilities of the partnership are
as follows:
Capital accounts P/L ratios Equipment 50,000
A, Capital (50,000 x 40%) 20,000
A, Capital 130,000 40% B, Capital (50,000 x 60%) 30,000
B, Capital 220,000 60%
350,000 A, Capital (400,000 x 20% x 40%) 32,000
B, Capital (400,000 x 20% x 60%) 48,000
Carrying Increase/ C, Capital (400,000 x 20%) 80,000
amount Fair value (Decrease)
Cash 20,000 20,000 0 A B C Totals
Equipment 340,000 390,000 50,000 Capital, beg. 130,000 220,000 0 350,000
Accounts 0 Share in revaluation 20,000 30,000 0 50,000
payable 10,000 10,000 Credit 0 0 80,000 80,000
A, Capital 130,000 N/A Debit -32,000 -48,000 0 -80,000
B, Capital 220,000 N/A Capital, end. 118,000 202,000 80,000 400,000

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Admission (Investment in the partnership)
The following are the capital account Bonus Method
balances and profit and loss ratios of the Equipment 80,000
partners in AB Partnership as of July 1, A, Capital [(96k - 80k) x 40%] 6,400
20X1: B, Capital [(96k - 80k) x 60%] 9,600
Capital accounts P/L ratios C, Capital 96,000
A, Capital 150,000 40% Capital Balances after Admission of C
B, Capital 250,000 60% A, Capital (150,000 - 6,400) 143,600
400,000 B, Capital (250,000 - 9,600) 240,400
On July 1, 20X1, C was admitted to the C, Capital 96,000
partnership when he invested equipment Total capital of the new partnership 480,000
with a historical cost of P100,000 and a fair New Profit or Loss Ratios
value of P80,000 to the partnership for a A (100% - 20%) x 40% 32%
20% interest. The net assets of the firm as B (100% - 20%) x 60% 48%
of this date approximate their fair values. C 20%
100%

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Purchase of interest versus Investment
Purchase of interest Investment in the
partnership
The incoming partner's The incoming partner's
contribution is not contribution is recorded in
recorded in the the partnership books.
partnership books.
Partnership capital Partnership capital is
remains the same before increased by the incoming
and after the admission of partner's contribution
the incoming partner.
No gain or loss is No gain or loss is
recognized in the recognized in the
partnership books. partnership books.

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Withdrawal, retirement or death
The capital account balances of the
partners in ABC Partnership on July 1, 20x1 Case #1: Purchase of C’s interest by remaining
before any necessary adjustments are as partners for P620,000 cash.
follows: C, Capital 550,000
Capital accounts P/L ratios A, Capital (550,000 x 20%/50%) 220,000
A, Capital 150,000 20% B, Capital (550,000 x 30%/50%) 330,000
B, Capital 250,000 30%
C, Capital 100,000 50%
500,000 Case #2: Purchase of C’s interest by partnership for
P620,000 cash.
The partnership reported profit of
P900,000 for the first six months ended C, Capital 550,000
July 1, 20x1. A, Capital (620k – 550k) x 20%/50%) 28,000
B, Capital (620k – 550k) x 30%/50%) 42,000
A 150,000 + (900,000 x 20%) = 330,000
Cash 620,000
B 250,000 + (900,000 x 30%) = 520,000
C 100,000 + (900,000 x 50%) = 550,000
1,400,000
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Withdrawal, retirement or death
The capital account balances of the Case #3: Purchase of C’s interest with payment of
partners in ABC Partnership on July 1, 20x1 cash of P500,000 and equipment with carrying
before any necessary adjustments are as amount of P100,000 and fair value of P300,000.
follows: Equipment (300k - 100k) 200,000
Capital accounts P/L ratios A, Capital (200,000 x 20%) 40,000
A, Capital 150,000 20% B, Capital (200,000 x 30%) 60,000
B, Capital 250,000 30% C, Capital (200,000 x 50%) 100,000
C, Capital 100,000 50% A 330,000 + (200,000 x 20%) = 370,000
500,000 B 520,000 + (200,000 x 30%) = 580,000
The partnership reported profit of C 550,000 + (200,000 x 50%) = 650,000
P900,000 for the first six months ended 1,600,000
July 1, 20x1. C, Capital 650,000
A 150,000 + (900,000 x 20%) = 330,000 A, Capital [(800k - 650k) x 20%/50%)] 60,000
B 250,000 + (900,000 x 30%) = 520,000 B, Capital [(800k - 650k) x 30%/50%)] 90,000
C 100,000 + (900,000 x 50%) = 550,000 Cash 500,000
1,400,000 Equipment 300,000
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Withdrawal, retirement or death
The capital account balances of the
partners in ABC Partnership on July 1, 20x1
Case # 4: Purchase of C’s interest by partnership with
before any necessary adjustments are as
payment of cash of P500,000 and equipment with
follows:
carrying value of P200,000 and fair value of
Capital accounts P/L ratios
P300,000, upon C’s death
A, Capital 150,000 20%
B, Capital 250,000 30% C, Capital 650,000
C, Capital 100,000 50% A, Capital (150,000 x 20%/50%) 60,000
500,000 B, Capital (150,000 x 30%/50%) 90,000
The partnership reported profit of Liability to the estate of C 800,000
P900,000 for the first six months ended Liability to the estate of C 800,000
July 1, 20x1. Cash 500,000
A 150,000 + (900,000 x 20%) = 330,000 Equipment 300,000
B 250,000 + (900,000 x 30%) = 520,000
C 100,000 + (900,000 x 50%) = 550,000
1,400,000
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Purchase by partners vs by partnership
Purchase by remaining Purchase by partnership
partners
The payment to the The payment to the
outgoing partner is not outgoing partner is
recorded in the recorded in the partnership
partnership books. books.
Partnership capital Partnership capital is
remains the same before decreased by the incoming
and after the admission of partner's contribution
the incoming partner.
No gain or loss is No gain or loss is
recognized in the recognized in the
partnership books. partnership books.

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Incorporation of partnership
On January 1, 20x1, the partners of ABC Case # 1: Total par value and number of shares issued
Partnership decide to admit other investors As a Assume that the adjusted capital balances of the
result, the partnership shall be converted to a partners are used in determining the number of
corporation. The following information was shares to be issued to each partners.
determined:
Partnership books:
Carrying Fair Increase
amounts values (Decrease) Equipment 130,000
Cash 20,000 20,000 0 Receivables 20,000
Receivables 60,000 40,000 (20,000) Inventory 10,000
Inventory 80,000 70,000 (10,000) A, Capital (100,000 x 20%) 20,000
Equipment 540,000 670,000 130,000 B, Capital (100,000 x 30%) 30,000
Payables 50,000 50,000 0 C, Capital (100,000 x 50%) 50,000
A, Capital (20%) 150,000 N/A A, Capital (150,000 + 20,000) 170,000
B, Capital (30%) 200,000 N/A B, Capital (200,000 + 30,000) 230,000
C, Capital (50%) 300,000 N/A C, Capital (300,000 + 50,000) 350,000
100,000 Payables 50,000
Cash 20,000
The corporation has an authorized capitalization Receivables 40,000
of P2,000,000 divided into 200,000 ordinary Inventory 70,000
shares with par value of P10 per share. Equipment 670,000
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Incorporation of partnership
On January 1, 20x1, the partners of ABC Case # 1: Total par value and number of shares issued
Partnership decide to admit other investors As a Assume that the adjusted capital balances of the
result, the partnership shall be converted to a partners are used in determining the number of
corporation. The following information was shares to be issued to each partners.
determined:
No. of shares
Carrying Fair Increase A 170,000/10 = 17,000
amounts values (Decrease)
B 230,000/10 = 23,000
Cash 20,000 20,000 0
Receivables 60,000 40,000 20,000 C 350,000/10 = 35,000
Inventory 80,000 70,000 10,000 75,000
Equipment 540,000 670,000 -130,000
Corporation books:
Payables 50,000 50,000 0
A, Capital (20%) 150,000 N/A
B, Capital (30%) 200,000 N/A Cash 20,000
C, Capital (50%) 300,000 N/A Receivables 40,000
100,000 Inventory 70,000
The corporation has an authorized capitalization Equipment 670,000
of P2,000,000 divided into 200,000 ordinary Payables 50,000
shares with par value of P10 per share. Share capital 750,000

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Incorporation of partnership
On January 1, 20x1, the partners of ABC Case # 2: Share premium
Partnership decide to admit other investors As a Assume that partners A, B and C agreed to be
result, the partnership shall be converted to a issued14,000, 21,000 and 35,000 shares, respectively.
corporation. The following information was How much is the share premium account?
determined:
Adjusted net assets 750,000
Carrying Fair Increase Less: Total par value of shares issued
amounts values (Decrease)
[(14,000 + 21,000 + 35,000) x P10] (700,000)
Cash 20,000 20,000 0
Receivables 60,000 40,000 20,000 Share premium 50,000
Inventory 80,000 70,000 10,000
Equipment 540,000 670,000 -130,000
Corporation books:
Payables 50,000 50,000 0
A, Capital (20%) 150,000 N/A Cash 20,000
B, Capital (30%) 200,000 N/A Receivables 40,000
C, Capital (50%) 300,000 N/A Inventory 70,000
100,000 Equipment 670,000
The corporation has an authorized capitalization Payables 50,000
of P2,000,000 divided into 200,000 ordinary Share capital 700,000
shares with par value of P10 per share. Share premium 50,000
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Incorporation of partnership
On January 1, 20x1, the partners of ABC Case # 3: Preference share
Partnership decide to admit other investors As a Assume that the corporation was authorized to issue
result, the partnership shall be converted to a P100 par preference shares and P10 par ordinary
corporation. The following information was shares. The partners agreed to receive 1,000 ordinary
determined: shares each, plus even multiples of 10 shares for their
Carrying Fair Increase remaining interest. How many ordinary and
amounts values (Decrease) preference shares did each partner receive?
Cash 20,000 20,000 0
A B C
Receivables 60,000 40,000 20,000 Adjusted capital balances 170,000 230,000 350,000
Inventory 80,000 70,000 10,000 Less: Allocation to ordinary
Equipment 540,000 670,000 -130,000 shares (1,000 x P10 par) - 10,000 - 10,000 - 10,000
Payables 50,000 50,000 0 Amount allocated to
A, Capital (20%) 150,000 N/A preference shares 160,000 220,000 340,000
B, Capital (30%) 200,000 N/A Divide by: Par value per share
of preference shares 100 100 100
C, Capital (50%) 300,000 N/A
Number of preference shares
100,000 issued 1,600 2,200 3,400
The corporation has an authorized capitalization A B C
of P2,000,000 divided into 200,000 ordinary Preference shares issued 1,600 2,200 3,400
shares with par value of P10 per share. Ordinary shares issued 1,000 1,000 1,000
Total shares issued 2,600 3,200 4,400
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