05 Partnership Dissolution

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Dominguez, CPA

[email protected]

Partnership Dissolution and Liquidation


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Distinction Between Dissolution and Liquidation

A partnership is dissolved when the original association

for purposes of carrying on activities has ended. A partnership is liquidated when the business is

terminated.

Partnership dissolution due to changes in ownership

interests occurs for a variety of reasons like:

Withdrawal of a partner

Retirement of a partner

Death of a partner

Admission of a new partner

Incorporation of a partnership


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Admission of a Partner

With the consent of all partners, a new partner may be

admitted dissolving the current partnership and creating anew one. Admission may occur in two (2) ways:

Acquisition of interest from existing partner/s

Partnership assets remain unchanged and no cash or other

assets flow to the partnership. Gain or loss is not recorded inthe partnership books.

Investment of assets by the new partner

Partnership receives cash or other assets thereby increasing

total assets and capital

New partners contributed capital = agreed capital (No Bonus)

New partners contributed capital > agreed capital (Bonus to New)

New partners contributed capital < agreed capital (Bonus to Old)


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Acquisition of Interest from Existing Partner/s

Purchase from ONE partner:Partners Marts Bustos, Raffy Paraiso and Erick Boco have thefollowing capital balances and P&L ratio:

Jed Sazon purchases one-half of the interest of Bustos.

Regardless of the amount paid to Bustos, the entry should be:

Bustos capital 10,000

Sazon capital 10,000

To record admission of partner Sazon to the partnership


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Acquisition of Interest from Existing Partner/s

Purchase from ALL partners:Sazon is admitted into the partnership for a 50% interest in profits and

losses. Capital balances and P&L ratio are as follows:

Old partners are to transfer 50% of their capital to Sazon and retain

their original P&L ratio.

Sazon agreed to pay P50,000 to the old partners. The entry to for the

admission should be:

Bustos capital 10,000

Paraiso capital 10,000

Boco capital 15,000

Sazon capital 35,000To record admission of artner Sazon to the artnershi


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Investment of Assets by New Partner (Bonus Method)

Bonus to OLD partners Partners Vergara and Chua have the following balances:

New partner Maniago is admitted to the partnership with an

investment of P110,000 and a 25% share in P&L. Old partnerswill share the remaining P&L in the ratio of 60:40. Bonus

computation and entry to record admission are as follows:


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Bonus to NEW partner Partners Vergara and Chua have the following balances:

New partner Maniago is admitted to the partnership with an

investment of P90,000 and a 25% share in P&L. Old partnerswill share the remaining P&L in the ratio of 60:40. Bonus

computation and entry to record admission are as follows:


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Bonus method is a transfer of capital balances among partners. Under

this method:

1. Bonus to OLD partners

= New partners investment > agreed capital

2. Bonus to NEW partner

= New partners investment < agreed capital


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Withdrawal/Retirement of a Partner

When a partner retires or withdraws from the partnership, the

partnership is dissolved but the remaining partners may continue

operating the business.

Capital of the withdrawing/retiring partner may be settled by one

of the following:

Purchase by an outsider

Purchase by other partners

Purchase by the partnership

Retiring partners capital account is measured by his current

balance, increased or decreased by his share with the following

adjustments: Partnership P/L from last year-end to retirement date

Changes in assets and liability valuation


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Retirement of a Partner

On January 2, 2011, the capital balances and P&L ratio of BCD are as follows:

On April 30, 2011, Bee withdraws from the partnership. Net income for the four

months ended April 30, 2011 is P14,000.

It is agreed that inventory costing P5,000 has a market value of P7,000 on April30,2011. Assume Bee agrees to accept P18 000. Entries are:


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Liquidation

Liquidation of a partnership means winding up the business

usually by selling the assets, paying the liabilities and distributing

remaining cash to partners.

The process of liquidation consists of:

Selling non-cash assets;

Paying accrued wages, accrued taxes and liquidation expenses;

Settle amounts owed to creditors;

Repay loans payable to partner/s;

Distribute remaining cash to partners based on P&L ratio;

***Offset capital balance of insolvent partner

Lump-sum liquidation performs the above process at once whileinstallment liquidation is done over a certain period of time.


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Exercises

Documents

05 Partnership Dissolution