PARTNERSHIP DISSOLUTION

Another occurrence which may bring about the change in partnership ownership is the
removal of an old partner which is caused by his voluntary withdrawal, retirement, his death, or
incapacity of a partner. .

Death, Withdrawal, Retirement or Incapacity of a Partner

This chapter focuses on the accounting for the withdrawal or retirement of a partner. The
books of the partnership, at the date of the retirement or death of a partner should be adjusted
to identify partnership profit or loss during the reporting period up until the date of death or the
retirement of the partner. Similar to the previous chapter in Formation of a Partnership, when
there is a change in the capital structure of a partnership, assets and liabilities are brought to their
fair market value to arrive at the adjusted partner’s equity. The equity of the retiring or deceased
partner should be settled.

For a partner withdrawing or retiring from the partnership, he may, with the consent of
the remaining partners sell his interest to an outsider (new partner), to the remaining partners or
to the partnership. The purchase price or amount of settlement by the partnership to the retiring
partner may be (a) at book value – equal to the interest of the retiring partner; (b) less than the
book value; (c) more than the book value.

Two methods are used to account for the settlement to the retiring partner when the
payment is not equal with the book value or interest of the retiring partner, the (a) Bonus
method, and the (b) Asset Revaluation Method.

ILLUSTRATIVE PROBLEM

KNT Partnership
Statement of Financial Position
September 30, 2019

Assets Liabilities & Capital

Cash P 150,000 Liabilities P 50,000
Other Assets 130,000 Keri, Capital 100,000
Neri, Capital 90,000
Teri, Capital 40,000
Total Assets P 280,000 Total Liabilities & Capital P 280,000

a. Profit and Loss are divided in the ratio 5: 4 : 1

b. Teri decided to withdraw from the partnership.
c. Net Income for January – September 2019 amounted P50,000
d. Each partner withdrew P5,000 each as of September 30, 2019.
e. After the retirement of Teri, the remaining partners will divide profit and loss
equally.

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The first step is to compute for the book value of the retiring partner’s (Teri) Capital.

Keri, Neri, Teri, Total

Capital Capital Capital Capital
Profit and Loss ratio 50% 40% 10%
Capital Balance before retirement P100,000 P 90,000 P 40,000 P 230,000
Share in Net Income 25,000 20,000 5,000 50,000
Withdrawals (5,000) (5,000) (5,000) (15,000)

Adjusted Capital Balances P120,000 P105,000 P40,000 P265,000

Case A –Teri withdraws from the partnership. The remaining partners did not take in any
more partner/s. Teri is paid P40,000 equal to his capital interest.

Teri, Capital 40,000

Cash 40,000

Case B – Teri sells his interest to Beri for P38,000.

Teri, Capital 40,000

Beri, Capital 40,000

The loss of P2,000, which is a personal loss of Teri will not be recorded in the company
books. After the retirement of Teri, the total capital would remain the same.

Case C –Teri withdraws from the partnership and sells his interest to the partnership and is
to be paid P45,000, which is P5,000 more than his capital interest.
(BONUS TO RETIRING PARTNER)

Teri, Capital 40,000

Keri, Capital 2,778
Neri, Capital 2,222
Cash 45,000
P5,000 x 5/9 = P2,778
P5,000 x 4/9 = P2,222

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Case D –Teri withdraws from the partnership and sells his interest to the partnership and is
paid P45,000 which is P5,000 MORE than his capital interest.
(ASSET REVALUATION METHOD)
The entry to record the Revaluation of Assets
Other Assets 50,000
Keri, Capital 25,000
Neri, Capital 20,000
Teri, Capital 5,000
Revaluation P5,000÷ 10% = P50,000
P50,000 x 5/10 = P25,000
P50,000 x 4/10 = P20,000
P50,000 x 1/10 = P 5,000

The P5,000 difference between Teri’s Capital interest and the cash settlement is
his share in the calculated Asset Revaluation, thus by dividing it with his profit and loss
share of 1/5, we get the total Asset revaluation, which is P50,000.

The entry to record the Retirement of Teri

Teri, Capital 45,000
Cash 45,000

Teri receives cash settlement of P45,000 which comprises his capital interest of
P40,000 plus his P5,000 share in the revaluation.

A compound journal entry can be used instead–

Other Assets 50,000
Teri Capital 40,000
Keri, Capital 25,000
Neri, Capital 20,000
Cash 45,000

Case E –Teri withdraws from the partnership and sells his interest to the partnership and is
paid P38,000 which is P2,000 LESS than his capital interest.
(BONUS TO REMAINING PARTNERS)

Teri, Capital 40,000

Keri, Capital 1,111
Neri, Capital 889
Cash 38,000
P2,000 x 5/9 = P1,111
P2,000 x 4/9 = P 889

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Case F–Teri withdraws from the partnership and sells his interest to the partnership and is
paid P38,000 which is P2,000 LESS than his capital interest.
(NEGATIVE ASSET REVALUATION)

The entry to record the Revaluation of Assets and settlement (compound entry)
Teri, Capital 40,000
Keri, Capital 10,000
Neri, Capital 8,000
Other Assets 20,000
Cash 38,000
Revaluation P2,000÷ 10% = P20,000
P20,000 x 5/10 = P10,000
P20,000 x 4/10 = P 8,000
P20,000 x 1/10 = P 2,000

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 EXERCISES

5.1 Maria, Leonora and Teresa are partners with adjusted capital balances of P165,000,
P150,000 and P180,000 respectively and divide profit and loss equally. At the end of the
year, Maria decides to withdraw from the partnership. Maria will receive cash settlement
of P150,000
Instruction: Give the entry to record the withdrawal of Maria assuming –

a. Bonus Method is used

b. Revaluation of Asset method is used

5.2 Mercedes, Melinda and Julieta are partners sharing profit and loss 40%, 30% and 30%
respectively. Capital balances of the partners before the retirement of Mercedes were at
P450,000, P425,000 and P400,000. The company sustained a net loss of P45,000 during
the year. The partners were allowed to withdraw P10,000 each.
Instruction: Give the entry to record the retirement of Mercedes, assuming no
Bonus or Revaluation will be recorded

5.3 Santino is to withdraw from Mariposa Partnership, owned by partners Macario, Policarpio
and Santino, with capital balances of P200,000, P250,000 and P100,000. Macario
purchased 60% of Santino’s interest for P65,000 while Policarpio paid Santino P50,000 for
the remainder.
Instruction: Give the entry to record the withdrawal of Santino from the
Partnership.

5.4 After closing the books of the partnership of Mutya and Associates, Lakambini announced
his retirement of from the partnership. Shown below are the partners’ capital balances
and the profit and loss ratio:
Capital Balance P/L ratio
LamAng, Capital P 50,000 30%
Lakandula, Capital 65,000 25%
Lakambini, Capital 40,000 23%
LaLuna, Capital 45,000 22%

The partners agreed to the following before the cash settlement toLakambini.
a. The merchandise inventory will be increased by P4,500
b. Allowance for bad debts will be decreased by P2,100
c. Prepaid insurance worth P1,200 have expired.

Instruction: Give the entries to record the following:

1) Adjustments in the books of the partnership
2) Withdrawal of Lakambini from the Partnership assuming the remaining partners
will give Lakambini a bonus of P10,000.
3) Withdrawal of Lakambini from the partnership assuming Lakambini receives
P5,000 share in asset revaluation.

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5.5 The partners Macopa, Sineguelas and Ashitaba have capital balances of P300,000,
P450,000 and P200,000 respectively, while profit and loss was divided in the ratio 4:4:2.

On December 1, 2017, Macopa announced his intention to leave the partnership

at the end of the year. During the year the partnership gained a Net Income of P250,000
which was distributed as follows: 5% interest on their individual capital, salaries of P6,000
to Partners Sineguelas and Ashitaba, 4% Bonus on Net income after salaries and interest
on capital was allowed to partner Macopa.

Instruction:
1) Compute for the distribution of Net Income at the end of the year.

2) Give the entry to record the withdrawal of Macopaat the end of the year assuming
a) Macopa cash settlement was P20,000 less than her capital interest and the bonus
method was used.
b) Macopa’s cash settlement was P10,000 more than her capital interest and the
asset revaluation method was used
c) Macopa’s cash settlement was equal to her capital interest.

5.6 The following information was taken from the books of SAMPALOC and SONS
PARTNERSHIP.
Capital Balance Profit & Loss Ratio
Sampaloc, Capital P5,000,000 35%
Kamatchili, Capital 2,500,000 33%
Kaimito, Capital 1,500,000 32%

Kaimito is to withdrew from the partnership by selling 30% of his capital interest
to Sampaloc at 2% more than his capital interest, and will sell 70% of his capital to
Kamatchili at book value. After the withdrawal of Kaimito, the remaining partners will
divide their profit and loss equally.

Instruction:
1. Give the entry to record the retirement of Kaimito.
2. If the remaining partners were to have equal capital interest and share in profit
and loss, how much additional cash should one of the partners invest?

5.7 Nilupak, Biko andMaja Blancaare partners with capital balances of P324,300, P207,000
and P158,700. After being a partner for 30 years, Biko decided to withdraw from the
partnership. Upon his withdrawal, assets were revaluated, and Biko’s share was debited
for P27,000.

Instruction:
1. Give the entry to record the revaluation of the other assets
2. Give the entry to record the withdrawal of Biko from the partnership.

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