CHAPTER 4

PARTNERSHIP DISSOLUTION

LEARNING OBJECTIVES

1. Define partnership dissolution and identify the conditions giving rise to it.
2. Understand the accounting procedures to record the admission of a new partner by purchase.
3. Understand the accounting procedures to record the admission of a new partner by
investment.

PREVIEW OF THE CHAPTER

PARTNERSHIP
DISSOLUTION

Causes of Dissolution Admission by Purchase Admission by Investment

 Admission of a new  Sale of interest at  Capital credit equal to
partner book value capital contribution
 Retirement of a  Sale of interest at less  Capital credit not
partner than book value equal to capital
 Death, incapacity, or  Sale of interest at contribution
bankruptcy of a more than book value  Bonus method
partner  Asset revaluation
 Incorporation of a method
partnership

PARTNERSHIP DISSOLUTION

Dissolution is defined in Article 1825 of the Civil Code of the Philippines as the change in the
relation of the partners caused by any partner ceasing to be associated in the carrying out of the
business.
Dissolution refers to the termination of the life of an existing partnership. The dissolution of an
old partnership may be followed by:

1. The formation of a new partnership. This is known as dissolution by change in

ownership structure. The new partnership continues the business activities of the
dissolved partnership without interruption.
2. Liquidation. This refers to the termination of the business activities carried on the
partnership and the winding up of partnership affairs preparatory to going out of business.

Dissolution, therefore, does not always result to liquidation although liquidation is always
preceded by dissolution

CONDITIONS RESULTING TO PARTNERSHIP DISSOLUTION

The following conditions will result to partnership dissolution by a change in ownership

structure:

1. Admission of a new partner

2. Retirement or withdrawal of a partner
3. Death, incapacity or bankruptcy of a partner
4. Incorporation of a partnership

Accounting for admission of a new partner is discussed in this chapter. Accounting for
retirement, withdrawal, incapacity or bankruptcy and death of a partner is discussed in the next
chapter

ADMISSION OF A NEW PARTNER

A new partner, with the consent of all the partners, may be admitted in an existing partnership.
Upon admission of a new partner, the firm is automatically dissolved and a new partnership is
formed. All the partners draw a new contract, Articles of Co-Partnership. The admission of a
new partner gives rise to the following accounting problems:

1. Determination of the profit or loss from the beginning of the accounting period to the
date of admission of a new partner and the distribution of such profit or loss to the old
partners.
2. Connection of accounting errors in prior periods like overstatement of understatement of
inventories, excessive depreciation charges and failure to provide adequately for doubtful
accounts.
 3. Revaluation of accounts which may call for the restatement of the existing assets of the
partnership to appraised or fair market values and recognition of unrecorded liabilities of
the firm. All adjustments to the accounts give rise to profit or loss; such adjustments are
recorded in the partnership books as increase or decrease in capital shared according to
partners' profit and loss ratio,
4. Closing of the partnership books.

TYPES OF ADMISSION OF A NEW PARTNER

A new partner may be admitted into a partnership by:

1. Purchase of interest from one or more of the original (old) partners; or

2. Investment or asset contributions to the partnership

ADMISSION BY PURCHASE

With the consent of all the partners, a new partner may be admitted in an existing partnership by
purchasing a capital equity interest directly from one or more of the old partners. Terms such as
purchases, sells, pays, bought, sold and transferred indicate admission by purchase.

The sale to a new partner of an old partner's interest in an existing partnership is a personal
transaction between the selling partner and the buying partner. The amount paid by the partner
who purchases an interest goes personally to the partner who sells his or her interest; the amount
paid does not go to the partnership.

The only entry required on the partnership books is the recording of the transfer of capital from
the capital account of the selling partner to that of the buying partner. The amount of capital
transferred will be equal to the book value of the interest sold regardless of the amount paid. The
pro-form entry is:

(Name of seller), Capital xxx

(Name of buyer), Capital xxx

The purchase price of the interest sold to the new partner may be:

1. equal to the book value of interest sold

2. less than the book value of interest sold
3. more than the book value of interest sold

The new partner may pay more than or less than the book value of the interest sold by the old
partner resulting in a gain or loss in the transaction. This gain or loss, however, is a
personal gain or loss of the selling partner and not of the partnership. Therefore, no gain or loss
is recognized in the partnership books.

Illustrative Problem A: Coloma and Claudio are partners with capital balances of P100,000 and
P50,000, respectively. They share profits and losses equally. Cordero is a new partner.

Case 1a – Purchase at book value from one partner only. Cordero purchases a 1/5 interest
from Coloma by paying P20,000.

Coloma, Capital 20,000

Cordero, Capital 20,000
P100,000 X 1/5 = P20,000

The P20,000 paid by the new partner Cordero to the old partner Coloma should not be reflected
in the partnership books because the said amount goes directly to Coloma. What is recorded in
the partnership books is the transfer of 1/5 of the capital of Coloma to Cordero. The amount paid
in the purchase is equal to the book value of the acquired 1/5 interest; hence, the sale of interest
does not give rise to gain or loss to Coloma.

Case 1b – Purchase at book value from more than one partner. Cordero purchases 1/5
interest from the old partners by paying P30,000.

Coloma, Capital 20,000

Claudio, Capital 10,000
Cordero, Capital 30,000
P100,000 X 1/5 = P20,000
P 50,000 X 1/5 = P10,000

The P30,000 paid by Cordero to Coloma and Claudio should not be reflected in the partnership
books because the said amount goes directly to Coloma and Claudio. What is recorded in the
partnership books is the transfer of 1/5 of the capital of the old partners Coloma and Claudio
(P20,000 and P10,000, respectively) to the new partner Cordero. The admission of the new
partner, by purchasing a 1/5 interest from the old partners al book value, does not result in a gain
or loss to the old partners.

Case 2 - Purchase at less than book value. Cordero purchases 1/s interest from the old partners
by paying P25,000

Coloma, Capital 20,000

Claudio, Capital 10,000
Cordero, Capital 30,000
P100,000 X 1/5 = P20,000
P 50,000 X 1/5 = P10,000
The P25,000 paid by Cordero to Coloma and Claudio should not be reflected in the partnership
books because the said amount was paid directly to the partners. What is recorded in the
partnership books is the transfer of 1/5 of the capital of the old partners (20,000 and 10,000,
respectively) to the new partner. The difference of 5,000 is a personal loss of the selling (old)
partners.

Case 3 – Purchase at more than book value. Cordero pays P40,000 for a 1/5 interest of the old
partners.
Coloma, Capital 20,000
Claudio, Capital 10,000
Cordero, Capital 30,000

The P40,000 payment made by Cordero to Coloma and Claudio should not be reflected in the
partnership books. What is recorded in the books of the partnership is the transfer of 1/5 of the
capital of the old partners to the new partner. The 10,000 excess payment is a personal gain of
Coloma and Claudio.
Key Points. In the preceding four cases, 1a, 1b, 2, and 3, the transfer of capital from the old
partners to the new partner is recorded at book value regardless of the amount paid. Payment at
less than book value and at more than book value are recorded as if they were made at book
value.
In addition, the four cases show that the total partnership capital before and after the admission
of the new partner are the same. Thus, the total partnership capital of P150,000 before the
admission of Cordero is also the total partnership capital after his admission. Therefore, the
admission of a new partner by purchase will not affect the total assets and the total capital of the
partnership.

ASSET REVALUATION UPON ADMISSION OF A NEW PARTNER BY PURCHASE

Revaluation of assets of the old partnership, however, is generally undertaken prior to the
admission of a new partner. The effect of the asset revaluation is carried to the capital accounts
of the old partners. The adjusted capital of the old partners becomes the basis for the interest
transferred to the new partner.

The procedures under this approach are as follows:

Step 1 – Compute the new partnership capital using as basis the amount to be paid by the
incoming partner and his fraction if interest.
Step 2 – Deduct the capital of the old partnership from the capital of the new partnership. The
difference is the asset revaluation.
Step 3 – Allocate the asset revaluation among the old partners in accordance with their residual
profit and loss sharing agreement.
Step 4 – Add the share of each partner on the asset revaluation to their capital balances to get the
capital balances after the asset revaluation.
Step 5 – Compute the amount of interest transferred by the old partners to the new partner based
on their capital after the asset revaluation.
Step 6 – Prepare the entry to record the admission of the new partner.

To illustrate, assume the same data in Illustrative Problem A where Coloma and Claudio are
partners with capital balances of P100,000 and P50,000, respectively. They share profits and
losses equally. Cordero is a new partner who purchases a 1/5 interest from Coloma and Claudio
paying P40,000. However, before the admission of Cordero, partnership assets are to be revalued
using as basis the amount to be paid by Cordero.
Solution:
Step 1 – The new partnership capital is equal to the amount paid by the incoming partner divided
by his fraction of interest.
New partnership capital = 40,000 ÷ 1/5 = P200,000
Step 2 – The amount of asset revaluation is equal to the new partnership capital less old
partnership capital.
Asset revaluation = 200,000 – 150,000 = 50,000
Step 3 – The allocation of the amount of the asset revaluation among the old partner is as
follows: P50,000 / 2 = P25,000 per partner.
Step 4 – The capital balances of the old partners after asset revaluation is equal to their old
capital balances plus their share on asset revaluation.
Coloma Claudio
Capital balances before revaluation P100,000 P50,000
Share on asset revaluation 25,000 25,000
Capital balances after revaluation P125,000 P75,000

Step 5 – The amount of interest transferred by the old partners to the new partner is based on the
new capital balances (capital balances after asset revaluation).
Coloma Claudio
Capital balances after revaluation P125,000 P75,000
Interest transferred 1/5 1/5
 Capital transferred to Cordero P 25,000 P15,000

Step 6 - The journal entries to record the revaluation of asset and the admission of Cordero are as
follows:
Other Assets 50,000
Coloma, Capital 25,000
Claudio, Capital 25,000
Coloma, Capital 25,000
Claudio, Capital 15,000
Cordero, Capital 40,000
Capital balances after the admission of Cordero shall be:
Cordero P100,000 + P25,000 - P25,000 P100,000
Claudio P50,000 + P25,000 - P15,000 60,000
Cordero 40,000

ADMISSION BY INVESTMENT
The admission of a new partner by investment is a transaction between the original partnership
and the new partner. The use of the terms like invests and contributes represent admission of a
new partner by investment. The investment of the new partner increases the total assets and the
total capital of the partnership. The entry to record the admission of the new partner depends
upon the capital interest credited to the partners’ accounts.
DEFINITION OF TERMS
Agreed Capital (AC) - it is the amount of new capital set by the partners for the partnership. It
may be equal to, more than, or less than the total contributions of the partners. Other terms used
for agreed capital are: new firm capital, total capital and agreed capitalization. The terms of the
admission of a new partner may indicate the agreed capital. If agreed capital is not indicated, it
can be computed in either of two ways:
1. Investment of the new partner divided by the new partner's fraction of interest; or
2. Investment of the old partners (equal to the net assets or capital of the partnership) divided by
the old partners' fraction of interest.
Example: Corpus and Carlos are partners with capital balances of P150,000 each. Cabral invests
P100,000 for a 2/5 interest in the new partnership. The agreed capital of the new partnership is
determined as follows:
Computation 1 - The new partner's investment used as a basis
P100,000 ÷ 2/5 = P250,000
Computation 2 - The old partners' investment used as a basis
P300,000 ÷ 3/5 = P500,000

Total Contributed Capital (CC) – it is the investment of all the partners, both old and new, to
the partnership. It is the sum of the capital balances of the old partners (net asset investment) and
the contribution of the new partner.

Using the information in the example given, the total contributed capital is P400,000, the sum of
the old partners' contribution of P300,000 and the new partner's contribution of P100,000.

Bonus – it is the transfer of capital from one partner to another. A bonus to the old partners is
given by the new partner. It is a reduction in the capital of the new partner and an increase in the
capital of the old partners. The capital accounts of the old partners are credited according to their
profit and loss ratio. A bonus to the new partner is given by the old partners. It is a reduction in
the capital of the old partners and an increase in the capital of the new partner. The capital
accounts of the old partners are debited according to their profit and loss ratio.

The following procedures will be helpful in the computation and determination of the ownership
of bonus:
1. Multiply agreed capital (AC) by the fraction of interest of the new partner. The result is the
capital credit of the new partner in the new partnership.
2. Compare the capital credit with the investment of the new partner.
a. If the capital credit is more than the investment of the new partner, the difference is
bonus to the new partner.
b. If the capital credit is less than the investment of the new partner, the difference is
bonus to the old partners.

Asset Revaluation - necessary adjustment in asset values upon admission of a new partner. The
adjustment in assets may be determined as the difference between the agreed capital and the total
contributed capital. Generally, asset revaluations upon partnership formation relate only to the
partners of the old partnership.
Capital Credit- it is the interest or equity of a partner in the firm. It is computed by multiplying
agreed capital by the fraction of interest of a partner.

PROBLEMS RELATING TO ADMISSION OF A NEW PARTNER BY INVESTMENT

Situations relating to admission of a new partner by investment may fall under any of the
following:
1. Agreed capital is given. When agreed capital is given, the admission of a new partner by
investment will give rise to any of the following cases:
a. No Bonus, no Asset Revaluation
b. Bonus to old partners, no Asset Revaluation
c. Bonus to new partner, no Asset Revaluation
d. Asset Revaluation, no Bonus

2. Agreed capital is not given. When agreed capital is not given, the problem calls for two
alternative solutions.
a. Bonus method
b. Asset revaluation method

3. Agreed capital is not given but the basis for its computation is indicated in the terms of
admission.

4. The amount of contribution of the new partner is not given.

5. No fraction of interest for either the new or old partners is given.

The following are the illustrations of the various problems involving admission of a new partner
by investment.

AGREED CAPITAL IS GIVEN

Illustrative Problem B: Calma and Castro are partners with capital balances of P200,000 and
P100,000, respectively. They share profits and losses equally. Conde is to be admitted in the
partnership.
Case 1 – No Bonus, no Asset Revaluation. Conde invests P100,000 for a % interest in the
agreed capital of P400,000.
Cash 100,000
Conde, Capital 100,000

Solution:
Step 1 Fill in the given data in the table
a. Partners, old and new
b. AC column, with the total written first
c. CC column
AC CC
Old P 300,000
New 100,000
P400,000 P 400,000
Step 2 Compare AC and CC. In this case, AC = CC
(P400,000 = P400,000), therefore, there is no asset revaluation
Step 3 Determine if there is bonus.
a. Compute for the capital credit of the new partner
AC x fraction of interest; P400,000 x 1/4 = P100,000
b. Write this amount in the AC column of the new partner.
c. Compare the new partner's AC with his CC. In this case, AC and CC are the
same, therefore, there is no bonus.
Step 4 The above table will be completed as follows:
a. AC or capital credit of the old partners
AC x fraction of interest (4/4 – 1/4 = 3/4)
P400,000 x 3/4 = 300,000
b. A completed table appears as follows:
AC CC
Old. P300,000 P300,000
 New P100,000 100,000
P400,000 P400,000
c. Conclusion based on the table:
(i) AC = CC, therefore, there is no asset revaluation
(ii) New partner: AC = CC, therefore, there is no bonus
(iii) Old partners: AC= CC, therefore, there is no bonus either.
In actual problem solving, only one table is prepared. The missing items are filled as
they are needed.

Case 2 - Bonus to the old partners, no Asset Revaluation. Conde invests PI00,000 for a 1/5
interest in the new firm capitalization of P400,000.
Cash 100,000
Conde, Capital 100,000

Conde, Capital. 20,000

Calma, Capital 10,000
Castro, Capital 10,000
These entries were made to show clearly the transfer of capital from the new partner to the old
partners. However, a compound entry may also be prepared as follows:
Cash. 100,000
Conde. Capital 80,000
Calma, Capital 10,000
Castro, Capital 10,000
Solution:
Step 1 Fill in the table as in Case 1. The completed table after Steps 1 to 4 is shown below:
AC CC Bonus
Old P320,000 P300,000 P20,000
New 80,000 100,000 (20,000)
P400,000 P400,000 -
Step 2 Compare AC and CC. In this case, AC = CC (P400,000 = P400,000).
Therefore, there is no asset revaluation but there may be bonus.
Step 3 Determine if there is bonus.
a. Compute for the capital credit of the new partner.
AC x fraction o interest; P400,000 x 1/5 = P80,000.
b. Write this amount in the AC column of the new partner.
c. Compare the new partner's AC with his CC. In this case, his AC < CC (P80,000 -
P100,000); therefore, the decrease in his contributed capital represents bonus to the old
partners.
Step 4 Complete the table by filling in the missing figures.
a. AC or capital credit of the old partners.
AC x fraction of interest: P400,000 x 4/5 = P320,000 or
CC + Bonus to the old partners; P300,000 + P20,000 = P320,000
The bonus is shared by the old partners according to their profit and loss sharing ratio.
b. A completed table is shown in Step 1.
c. Conclusion based on the table:
(i) AC = CC, therefore, there is no asset revaluation.
(ii) New partner: AC< CC, therefore, he gives the bonus.
(iii) Old partners: AC > CC, therefore, they receive the bonus shared according to
their profit and loss ratio
Case 3 - Bonus to new partner, no Asset Revaluation. Conde invests P60,000 for 1/4 interest
in the total capitalization of P360,000
Cash 60,000
Calma, Capital 15,000
Castro, Capital 15,000
Conde, Capital 90,000
Solution:
Step 1 Fill in the table as in Cases 1 and 2. The completed table after Steps 1 to 4 is shown
below
AC CC Bonus
Old P270,000 P300,000 (P30,000)
New 90,000 60,000 30,000
P360,000 P360,000 -
Step 2 Compare AC and CC. In this case, AC = CC (P360,000 = P360,000).
Therefore, there is no asset revaluation but there may be bonus.
Step 3 Determine if there is bonus.
 a. Compute for the capital credit of the new partner.
AC x fraction of interest; P360,000 x ¼ = P90,000.
b. Write this amount in the AC column of the new partner.
c. Compare the new partner's AC with his CC. In this case, his AC > CC (P90,000 -
P60,000); therefore, the increase in his contributed capital represents bonus from the old
partners.
Step 4 Complete the table by filling in the missing figures.
a. AC or capital credit of the old partners.
AC x fraction of interest
P360,000 x 3/4 P270,000 or
CC - Bonus to old partners
P300,000 - P30,000 P270,000
The bonus given to the new partner is shared by the old partners according to their profit and loss
sharing ratio.
b. A completed table is shown in Step 1.
c. Conclusion based on the table:
(i) AC = CC, therefore, there is no asset revaluation.
(ii) New partner: AC > CC, therefore, he receives the bonus.
(iii) Old partners: AC < CC, therefore, they give the bonus shared according to
their profit and loss ratio.
Case 4-Positive Asset Revaluation, no Bonus. Conde invests P100,000 for a 1/5 interest in the
agreed capital of P500,000.
Other Assets 100,000
Calma, Capital 50,000
Castro, Capital 50,000

Solution:
Step 1 Fill in the table as in Cases I to 3. The completed table after Steps 1 to 4 is shown
below:
AC СС Asset Revaluation
Old P400,000 P300,000 P100,000
d. New P100,000 P100,000 ____-____
P500,000 P400,000 P100,000
Step 2 Compare AC and CC. In this case, AC > CC (P500,000 > P400,000).
Therefore, there is a positive asset revaluation.
Step 3 Determine if there is bonus.
 a. Compute for the capital credit of the new partner.
AC x fraction of interest, P500,000 x 1/5 = 100,000.
b. Write this amount in the AC column of the new partner.
c. Compare the new partner's AC with his CC. In this case, his AC = CC (P100,000);
therefore, there is no bonus.
Step 4 Complete the table by filling in the missing figures.
a. AC or capital credit of the old partners.
AC x fraction of interest
P500,000 x 4/5 = P400,000 or
CC+ Asset Revaluation
P300,000 + P100,000 = P400,000
b. A completed table is shown in Step 1.
c. Conclusion based on the table:
(i) AC > CC, therefore, there is a positive asset revaluation.
(ii) New partner: AC = CC, therefore, there is no bonus.
(iii) Old partners: AC > CC, therefore, they are credited for the asset revaluation
shared according to their profit and loss ratio.
Case 5 - Negative Asset Revaluation, No bonus. Conde invests P60,000 for a 1/5 interest in the
agreed capital of P300,000
Calma, Capital 30,000
Castro, Capital 30,000
Other Assets 60,000

Solution:
Step 1 Fill in the table as in Cases I to 4. The completed table after Steps 1 to 4 is shown
below:
AC CC Asset Revaluation
Old P240,000 P300,000 (P60,000)
New 60,000 60,000 ____-___
P300,000 P360,000 (P60,000)
Step 2 Compare AC And CC. In this case, AC < CC (P300,000 < P360,000).
Therefore, there is a negative asset revaluation.
Step 3 Determine if there is bonus.
a. Compute for the capital credit of the new partner.
AC x fraction of interest; P300,000 x 1/5 = P60,000.
b. Write this amount in the AC column of the new partner.
 c. Compare the new partner's AC with his CC. In this case, his AC = CC (P60,000 =
P60,000); therefore, there is no bonus.
Step 4 Complete the table by filling in the missing figures.
a. AC or capital credit of the old partners.
AC x fraction of interest
P300,000 x 4/5 = P240,000 or
CC- Asset Revaluation
P300,000 - P60,000 = P240,000
b. completed table is shown in Step 1.
c. Conclusion based on the table:
(i) AC < CC, therefore, there is a negative asset revaluation.
(ii) New partner: AC = CC, therefore, there is no bonus.
(iii) Old partners: AC < CC, therefore, they are charged for the asset
revaluation shared according to their profit and loss ratio
In the succeeding illustrations, the tables are summarized for easier comparison.
AGREED CAPITAL IS NOT GIVEN
There are cases when the contributions and the fraction of interest of the new partner are given,
but the agreed capitalization of the new firm is not specified. When such a situation exists, the
admission of the new partner is recorded using any of these two methods:
1. Bonus method
2. Asset Revaluation method

BONUS METHOD (AC = CC)

Under this method, the agreed capitalization of the new partnership is equal to the total amount
of contribution of all the partners, both old and new. No asset revaluation is recognized but there
will be transfer of capital called bonus. Bonus to the new partner is given by the old partner.
Bonus to the old partners comes from the new partner.

ASSET REVALUATION METHOD

An asset revaluation is made to properly value the assets of the partnership prior to admission of
a new partner. An asset revaluation will result either an increase or decrease in the recorded
amount of the partnership's assets and the partners' capital. An asset revaluation increase
(positive asset revaluation) indicates that some partnership assets are undervalued. On the other
hand, an asset revaluation decrease (negative asset revaluation) indicates that some partnership
asset is overvalued. Under the asset revaluation method, the balances of partnership's asset and
partner's capital must be adjusted prior to the admission of a new partner. These adjustments
must be recorded prior to admission of the new partner.

POSITIVE ASSET REVALUATION METHOD (AC > CC)

A positive revaluation increases the old partnership assets and the capital accounts of the old
partners. The increase is shared by the old partners based on their profit and loss ratio. Here the
agreed capitalization of the new partnership is more than the total amount of contributions of
both the old and new partners.

Under this method, the agreed capitalization is computed as follows:

AC = New partner's CC ÷ new partner's fraction of interest

NEGATIVE ASSET REVALUATION METHOD (AC < CC )

A negative revaluation decreases the old partnership assets and the capital accounts of the old
partners. The decrease is shared by the old partners based on their profit and loss ratio. Here, the
agreed capitalization of the new partnership is less than the total amount of distribution of both
the old and new partners.
The agreed capitalization is computed under this method in the same manner as in positive asset
revaluation.
Illustrative Problem C: Conde invests P100,000 for a 1/5 interest in the partnership of Calma
and Castro. The contributions of Calma and Castro are P200,000 and P100,000 respectively, and
they share profits and losses in the ratio of 3:1. After the admission of Conde, profits and losses
will be divided equally.

1. Bonus Method
Cash 100,000
Conde, Capital 80,000
Calma, Capital 15,000
Castro, Capital 5,000

AC CC Bonus
Old (4/5) P 320,000 P 300,000 P 20,000
New (1/5) 80,000 100,000 (20,000) g
P 400,000 P 400,000 - 1

The agreed capital of the partnership is equal to the capital contribution. The capital credit of the
old and new partners is computed as follows:
New = P400,000 x 1/5 = P80,000
Old = P400,000 x 4/5 = P320,000

The capital credit for the new partner is less than his capital contribution, therefore, the new
partner gives the bonus. The bonus is shared by the old partners according to their profit and loss
ratio.
2. Positive Asset Revaluation Method
Other Assets 100,000
Calma, Capital 75,000
Castro, Capital 25,000

Cash 100,000
Conde, Capital 100,000

AC CC Revaluation
Old (4/5) P 400,000 P 300,000 P 100,000
New (1/5) 100,000 100,000 - h
P 500,000 P 400,000 P 100,000 j
The agreed capital of the new partnership is computed by dividing the new partner's contribution
by his fraction of interest (100,000 ÷ 1/5 = 500,000).
An agreed capital of more than the contributed capital indicates that there is an understatement in
the some assets of the partnership upon admission of the new partner. The agreed capital of
P500,000 when compared with the contributed capital of P400,000 indicates a P100,000 increase
on asset and capital for the asset understatement. The AC or the capital credit of the old partners
which is P400,000 (500,000 x 4/5) is P100,000 more than their contributed capital. Therefore the
old partners are credited for the revaluation of assets. The old partners share on the revaluation
according to their profit and loss ratio.
Illustrative Problem D: Conde invests P80,000 for a 1/4 interest in the partnership of Calma
and Castro. The contributions of Calma and Castro are P200,000 and P100,000 respectively and
they share profits and losses in the ratio of 3:1. After the admission of Conde, profits and losses
will be divided equally.

1. Bonus Method
Cash 80,000
Calma, Capital 11,250
Castro, Capital 3,750
Conde, Capital 95,000
AC CC Bonus
Old (3/4) P 285,000 P 300,000 (P 15,000)
New (1/4) 95,000 80,000 15,000 g
P 380,000 P 380,000 - g

The agreed capital of the partnership is equal to the capital contribution. The capital
contributions of the old and new partners are computed as follows:
New 380,000 x 1/4 = 95,000
Old 380,000 x 3/4 = 285,000

The capital credit of the new partner is greater than his capital contribution, therefore, he
receives a bonus. The bonus is shared by the old partners according to their profit and loss ratio.
2. Negative Asset Revaluation Method

Calma, Capital 45,000

Castro, Capital 15,000
Conde, Capital 60,000
 Cash 80,000
Conde, Capital 80,000

AC CC Revaluation
Old (3/4) P 240,000 P 300,000 (P 60,000)
New (1/4) 80,000 80,000 - f
P 320,000 P 380,000 (P 60,000) g

The agreed capital of the new partnership is computed by dividing the new partner's capital
contribution by his fraction of interest (80,000 ÷ 1/4 = P320,000).
An agreed capital that is less than the contributed capital indicates that there is an overstatement
in some assets of the partnership upon the admission of a new partner. The agreed capital of
P320,000 when compared with the contributed capital of P380,000 indicates a P60,000 reduction
in assets and capital for the asset overstatement. The AC or capital credit of the old partners
which is P240,000 (P320,000 x 3/4) is 60,000 less than their contributed capital. Therefore, the
old partners are charged for the revaluation of assets. The old partners share on the revaluation of
assets according to their profit and loss ratio.
COMPARISON OF BONUS AND ASSET REVALUATION METHOD
In Illustrative Problem C, Conde is given 1/5 interest in the partnership and a 1/3 share of profits
upon admission. Both the bonus method and the asset revaluation method can be used in
determining the required interest for the new partner, but the two methods may not offer the
same ultimate results. Based on the information and assumptions given, the comparison between
the bonus method and the asset revaluation method may be illustrated as shown below.

Asset Calma, Castro, Conde,

Revaluation Capital Capital Capital

Balances under the bonus method P 215,000 P 105,000 P 80,000 h

Balances under the asset
revaluation method P,100,000 P 275,000 P 125,000 P 100,000
Share on the additional
depreciation on asset
revaluation (equally) (100,000) (33,333) (33,333) (33,334) g
Balances after the add'l
depreciation on asset
revaluation - P 241,667 P 91,667 P 66,666
g
Net advantage (disadvantage) of
using the asset revaluation
method P 26,667 (P 13,333) (P 13,334)
g

Based on the above analysis, Calma will prefer the asset revaluation method while Conde will
prefer bonus method.
AGREED CAPITAL IS NOT GIVEN BUT BASIS FOR ITS COMPUTATION IS
INDICATED IN THE TERMS OF ADMISSION

Using the same data in Illustrative Problem D, where Calma and Castro have capital balances of
P200,000 and P100,000, respectively and sharing profits and losses in the ratio of 3:1, Conde
invests P100,000 in the firm and is credited for P50,000 which is to be 1/8 of the new firm
capital

The entry to record the admission of Conde into the partnership is

Cash 100,000
Conde, Capital 50,000
Calma, Capital 37,500
Castro, Capital 12,500
AC CC Bonus
Old (7/8) P 350,000 P 300,000 P 50,000
New (1/8) P 50,000 P 100,000 (50,000) f
P400,000 P 400,000 - f

The agreed capital is not given but the basis for its computation is indicated In the problem. The
new partner is to be credited for P50,000 which is 1/8 of the new firm capital. Thus, 50,000 ÷ 1/8
= P800,000 agreed capital. The agreed capital (400,000) is equal to the total contributed capital,
therefore, there is no asset revaluation. But there might be bonus. The capital credit of the new
partner is less than his contribution, therefore he gives the bonus. The bonus is share by the old
partners in ther profit and loss ratio.

THE AMOUNT OF CONTRIBUTION OF THE NEW PARTNER IS NOT GIVEN

Example 1: Calma and Castro have capital balances of P200,000 and P100,000 respectively.
They share profits and losses in the rario 3:1. Conde invests sufficient amount for a 1/3 interest.

The journal entry to record the admission of Conde follows:

Cash 150,000
Conde, Capital 150,000

Solution:

Computations similar to those who made in the previous cases are no longer necessary.
To arrive at the amount contributed by the new partner,
1. the new firm capital (AC) is computed by dividing the old partners’ contribution by
their fraction of interest (300,000 ÷ 2/3) = P450,000, and
 2. the investment of the new partner is computed by multiplying AC by his fraction f
interest (P450,000 x 1/3 = P150,000). Conde has to invest P150,000 in order to have
1/3 interest in the firm.

Example 2: Coral, Cielo and Camu are partners with capital balances of P112,000, P130,000,
and 58,000, respectively, sharing profits and losses equally. Cuevas is admitted as a new partner
bringing with him his expertise and good reputation. He is to invest cash for a 25% interest in the
assets of the partnership which includes a credit of P18,750 for bonus upon admission.

The journal entry to record the admission of the new partner is as follows:

Cash 75,000
Coral, Capital 6,250
Cielo, Capital 6,250
Camu, Capital 6,250
Cuevas, Capital 93,750

Solution:

Follow the same procedure as in Example 1. The P18,750 bonus given by the old partners to the
new partner has to be deducted frm the total capital of the old partners to get their 75% interest.
Thus:
P112,000 + P130,000 + P58,000 – P18,750 = P281,250\
P281,000 / 75% = P375,000).

The amount to be contributed by the new partner is computed by deducting the P18,750 bonus
received from the old partners from the 25% interest acquired from the old partners. Thus:
P375,000 x 25% = P93,750
P93,750 – P18,750 = P75,000

FRACTION OF INTEREST IS NOT GIVEN

Conde invests P50,000 in the firm. However, upon his admission P10,000
bonus is allowed by the old partners.

The entry to record the admission of the new partner is:

Cash 50,000
Calma, Capital 7,500
Castro, Capital 2,500
Conde, Capital 60,000
 REVIEW of the LEARNING OBJECTIVES

1. Define partnership dissolution and identify the conditions giving rise to it. Partnership
dissolution is the change in the relation of partners caused by any partner ceasing to be
associated in the carrying out of the business. Dissolution of a partnership may be caused
by any of the following conditions: (1) admission of a new partner; (2) retirement or
withdrawal of a partner; (3) death, incapacity, bankruptcy of a partner; and (4)
incorporation of a partnership.

2. Understand the accounting procedures to record the admission of a new partner by

purchase. A new partner may be admitted into the partnership by purchasing a capital
equity interest from one or more of the old partners. Admission of new partner by
purchase represents a transfer of capital from old partner/partners to the new partners.
The transfer of capital is recorded at the book value of the interest sold regardless of the
amount paid for the interest. Any gain or loss indicated in the transaction is a personal
gain or loss of the selling partner. Asset revaluation, however, may be undertaken by the
old partnership before admission of a new partner. In such case, a positive or negative
asset revaluation will always accrue to the old partners.

3. Understand the accounting procedures to record the admission of a new partner by

investment. The admission of a new partner by investment is a transaction between the
original partnership and the new partner. The new partner’s contribution increases the
total assets and the total capital of the partnership. When the capital contribution of the
new partner is not equal to his capital credit in the new partnership or when the capital
contributions of the old partner is not equal to their capital credit in the new partnership.,
the difference is announce for and by any of the following methods: (1) bonus method
(bonus to the old partners from the new partner or bonus to the new partner from the old
partners); (2) asset revaluation method either positive or negative revaluation.
 GLOSSARY OF ACCOUNTING TEMINOLOGIES

Agreed Capital – the amount set by the partners as new partnership capital which may
not necessarily contributed capital.

Asset Revaluation – the necessary adjustment in assets before the admission of a new
partner because of some partnership assets which may not be properly valued.

Bonus – the transfer of capital from one partner to another partner.

Contributed Capital – the sum the net assets (capital of the old partners) of the original
partnership and the contribution of the new partner.

Partnership Dissolution – a change in the relation of the partners caused by any

partnerceasing to be associated in the carrying out of the business.