Dominguez, CPA

dominguezc@dlsu.edu.ph
Partnership Dissolution and Liquidation
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


Admission of a Partner
With the consent of all partners, a new partner may be
admitted dissolving the current partnership and creating a
new 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 in
the 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)



Acquisition of Interest from Existing Partner/s
Purchase from ONE partner:
Partners Marts Bustos, Raffy Paraiso and Erick Boco have the
following 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

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 35,000
To record admission of partner Sazon to the partnership
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 partners
will share the remaining P&L in the ratio of 60:40. Bonus
computation and entry to record admission are as follows:






Investment of Assets by New Partner (Bonus Method)
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 partners
will share the remaining P&L in the ratio of 60:40. Bonus
computation and entry to record admission are as follows:






Investment of Assets by New Partner (Bonus Method)
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







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

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 April
30,2011. Assume Bee agrees to accept P18,000. Entries are:













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 April
30,2011. Assume Bee agrees to accept P13,000. Entries are:













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 April
30,2011. Assume Bee agrees to accept P23,000. Entries are:













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 while
installment liquidation is done over a certain period of time.
Exercises