BSMA 1 6 Group 2 Chapter 5 PDF

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CHAPTER 5CHANGE IN CAPITAL STRUCTURE BY WITHDRAWAL, RETIREMENT, DEATH ORINCAPACITY OF A PARTNERBiendo, Marielle Bolaños, Nicaella Draoite, Van Adrean Lubong, Christian Dominic Maliwat, Rusell Mae Nazareta, Jereme Roco, Kristine ElaineFebruary 23, 2021Exercise 5 – 1 (Retirement of a Partner: Sale f i...

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CHAPTER 5 CHANGE IN CAPITAL STRUCTURE BY WITHDRAWAL, RETIREMENT, DEATH OR INCAPACITY OF A PARTNER

Biendo, Marielle Bolaños, Nicaella Draoite, Van Adrean Lubong, Christian Dominic Maliwat, Rusell Mae Nazareta, Jereme Roco, Kristine Elaine

February 23, 2021 EXCERCISES Exercise 5 – 1 (Retirement of a Partner: Sale f interest to the Partnership: Payment More Than Capital Interest) Dantes, Dungca and Dee are partners sharing profits in the ratio of 3:2:1, respectively Capital accounts are P50, 000, P30, 000 and P20, 000 on December 31, 2014, When Dee decides to withdraw. The partnership paid Dee P25, 000 for interest. Profits after the retirement of Dee are to be shared equally. Instruction: 1. Give two possible entries to record Dees’ retirement. 2. Which method is to be preferred by Dantes? What is the amount of gain to Dantes through the use of this method as compared with the other alternative? 1.) 

Bonus Method

Dee, Capital 20,000 Dantes, Capital 3,000 Dungca, Capital 2,000 Cash *5000 x 3/5 = 3,000 *5000 x 2/5 = 2,000 

25,000

Asset Revaluation Method

Other Asset 30,000 Dantes, Capital Dungca, Capital Dee, Capital *5000  1/6 = 30,000 Compound Entry: Other Asset 30,000 Dee, Capital 20,000 Cash Dantes, Capital Dungca, Capital

15,000 10,000 5,000

25,000 15,000 10,000

2.

Asset Revaluatio n Capital balances after retirement of Dee under the bonus method

Dantes

Dungca

P47,000

P28,000

Balances after retirement of Dee under asset revaluation method Depreciation on asset rev. – equally Balances after depreciation

P30,000 (30,000) ------

P65,000 ( 15,000) P50,000

P40,000 ( 15,000) P25,000

Dantes will prefer the asset revaluation method (gain of 3,000) while Dungca is bonus method.

Exercise 5 – 2 (Retirement of a Partner: Sale of Interest to the Partnership) Datrit, Dayag, and Diesta are partners in the Triple B partnership. Their capital balances on October 1, 2014 are as follows: in the ratio of 3:1:1. Diesta is retiring from the partnership on this date.

Instructions: Prepare jouranal entries to record Diesta’s Withdrawal according to each of the following independent assumptions:

1.

Diesta is paid P90, 000 and no asser revaluation is recorded.

2.

Diesta is paid P96, 000 and asset revaluation is recorded.

1.

Diesta, Capital

80,000

Dayrit, Capital Dayag, Capital Cash 10,000 x ¾ = 7,500 10,000 x ¼ = 2,500 2.

7,500 2,500 96,000

Other Assets Diesta, Capital Dayrit, Capital Dayag, Capital Cash 16,000  1/5 = 80,000

80,000 80,000 48,000 16,000 96,000

Exercise 5 – 3 (Retirement of a Partner: Sale of Interest to the Partnership) Diara is retiring from the partnership with Ditas and Dulce as of July 1, 2014 and is paid P33, 000. Their capital balances as of January 1, 2014 and share in profits are as follows:

Ditas

P 35, 000

30%

Dulce

50, 000

Daria

30%

25, 000

40%

P 110, 000

100%

Daria’s drawing for the first half of 2014 amounted to 4, 000 and net income for the first half of 2014 amounted to 20,000. The partners share profits and losses equally after the retirement of Daria. Instruction: Make the entry ot entries incidental to the retirement of Daria under each of the following assumptions. 1.

Capital increases through Asset Revaluation account is recorded

2.

The additional payment to the retiree is a bonus from the remaining partners.

3.

Which of the two methods is to be preferred by Ditas?

Answer: Ditas 35,000 6,000 41,000

Capital Balance Jan. 1 2014 Share of Profit from Jan. 1 – July 1 Withdrawals Capital Balance July 1

1. Asset Revaluation Method: Other Assets Daria, Capital Cash Ditas, Capital Dulce, Capital 2. Bonus Method: Daria, Capital Ditas, Capital Dulce, Capital Cash

Dulce 50,000 6,000 56,000

Daria 25,000 8,000 (4,000) 29,000

10,000 29,000 33,000 3,000 3,000

29,000 2,000 2,000 33,000

3. Comparison Assets Revaluation Balances after retirement of Daria under the Bonus Method Balances after retirement of Daria under the

10,000

Ditas, Capital

Dulce, Capital

39,000

54,000

44,000

59,000

Asset Revaluation Method Depreciation on Asset Revaluation method (Divided equally) Balances after Depreciation Net advantage (disadvantage) of using bonus method

(10,000)

(5,000)

(5,000)

-

39,000 -

54,000 -

Based on the analysis above, Ditas and Dulce will either prefer the Bonus method or Asset Revaluation Method.

Exercise 5 – 4 (Retirement of a Partner: Sale of Interest to the Continuing Partners Sale of Interest to the Partnership) The partners of 3D Partnership agree to the withdrawal of Dolor. Prior to the withdrawal of Dolor, the partners had the following capital balances: Damian – P32, 000; Damaso – P48, 000; Dolor – P40, 000. Prior to the withdrawal of Dolor, the partners shared profits and losses in the ratio 3:5:2 Instruction: Prepare the entry on entries necessary to record the withdrawal of Dolor from the partnership under each of the following independent assumptions: 1.

Each of the remaining partners will purchase 50% of the interest of Dolor for P25, 000. Dolor, Capital

2.

40,000

Damian, Capital

20,000

Damaso, Capital

20,000

The partnership will purchase the interest of Dolor for P32, 000; bonus method is used. Dolor, Capital

8,000

Damian, Capital

3,000

Damaso, Capital

5,000

3. The partnership will purchase the interest of Dolor for P46, 000; asset revaluation prior to the retirement of Dolor being recognized.

Asset revaluation: Asset

30,000 Damian, Capital

9,000

Damaso,Capital

15,000

Dolor, Capital

6,000

Entry: Dolor, Capital Cash

46,000 46,000

Exercise 5 – 5 (Retirement of a Partner: Sale of Interest to the Remaining Partners; Sale of Interest to the Partnership) The partne4rship of Dencio, Doctore, Domingo, and Dizon has been in operation for two years with the partners sharing profits and losses in the ratio of 40%, 20%, 20%, 20% respectively. During the past year it has been become apparent that Domingo and Dizon are not compatible and Domingo has decided to withdraw from the partnership as of the end of the year at the urging of Dencio and Doctor. Domingo wants P90, 000 for his share of capital. The balances in the capital accounts at the end of the year are: Dencio

P 102, 000

Doctor

60, 000

Domingo

70, 000

Dizon

48, 000

Instruction: Prepare the journal entry for the withdrawal of Domingo under each of the following assumption: 1. The partners agree to Dizon’s purchasing Domingo’s interest. 2. The partnership will acquire Domingo’s interest for P90, 000, which will use the bonus method. 3. The partnership will acquire Domingo’s interest for P90, 000, which will be paid in five annual instalments of P18, 000, plus interest of 10%. The partners feel that the price Domingo will accept for the capital share is a fair measure of the worth of the business.

1. Domingo, Capital 70 000 Dizon, Capital 70 000 2. Partners Dencio (40%) Doctore (20%) (Retiring) Dizon (20%)

CC 102 000 60 000

Bonus (10 000) (5 000)

AC 92 000 55 000

48 000

(5 000)

43 000

Domingo (20%)

Payment Domingo, Capital Cash

70 000 280 000

90 000 280 000

90 000 90 000

Bonus Dencio, Capital 10 000 Doctore, Capital 5 000 Dizon, Capital 5 000 Domingo, Capital Compound Dencio, Capital Doctore, Capital Dizon, Capital Domingo, Capital Cash

20 000

20 000

10 000 5 000 5 000 70 000 90 000

3. P18,000 × 5 annual investment = 90,000

Dencio (40%) Doctore (20%) Dizon (20%) (Retiring) Domingo (20%)

CC 102,000 60,000 48,000

Revaluation 40,000 20,000 20,000

AC 142,000 80,000 68,000

70,000

20,000

90,000

100,000

380,000

280,000 *90,000 – 70,000= 20,000 ÷ 20% = 100,000

Revaluation Other Assets 100 000 Dencio, Capital 40 000 Doctore, Capital 20 000 Dizon, Capital 20 000 Domingo, Capital 20 000 Payment of partnership for acquiring Domingo's Capital Domingo, Capital 90 000 Notes Payable 90 000

Compound Other Assets 100 000 Domingo, Capital 70 000 Notes Payable Dencio, Capital Doctore, Capital Dizon, Capital

90 000 40 000 20 000 20 000

Exercise 5 – 6 (Retirement of a Partner: Sale of Interest to the Partnership) Dimla and Distor wish to purchase the partnership interest of their partner Daza at June 30, 2014. Partnership assets are to be used to purchase Daza,s partnership interest. The statement of financial position for the partnership on this date shows the following: Dimla, Distor, and Daza Partnership Statement of the Financial Position June 30, 2014 Liabilities and Capital

Assets Cash

P

21, 600

Liabilities

Receivables (net)

14, 400

Dimla, Capital

48, 000

Inventory

12, 000

Distor, Capital

24, 000

Equipment (net)

54, 000

Daza, Capital

12, 000

P 102, 000

P

18, 000

P 102, 000

The partners share earnings in the ratio of 3:2:1 Instruction: Prepare the entry to record the retirement of Daza under each of the following assumptions: 1. Daza is paid P14, 400 and the excess payment over the amount in Daza’s csapital account is viewed as a bonus to Daza.

Daza, Capital Dimla, Capital Distor, Capital Cash

12,000 01,440 00,960 14,400

2. Daza is paid P9, 600 and the difference is viewed as a bonus to Dimla and Distor. Daza, Capital

12,000

Cash Dimla, Capital Distor, Capital

19,600 01,440 01,960

PROBLEMS Problems 5 – 1 (Retirement of a Partner under Various Assumptions)

Delfin, Diokno, and Decena have been partners for over 20 years, sharing profits and losses equally. Delfin is scheduled to retire from the partnership. Since the partnership agreement does not include any provisions for the retirement of a partner, several alternative payments for Delfin’s interest are being considered. The capital balances of the partners are a follows: Delfin – P200, 000; Diokno – P250, 000; Decena – P150, 000. Instructions: Prepare the entry or entries to record the retirement of Delfin under each of the following independent assumptions: 1. Delfin is paid cash equal to the book value of his interest. 2. Delfin is paid P260, 000 cash for his interest; excess payment is treated as a bonus. 3. Delfin is paid P260, 000 cash for his interest; excess payment is treated as asset revaluation. 4. Delfin is paid P160, 000 cash for his interest; excess of his capital interest over the amount paid is treated as a bonus. Delfin is paid P175, 000 cash for his interest; assets recorded in the books of the partnership should be reduced by the amount relating to all the partners

1. Delfin, Capital Cash 2. Bonus Method: Delfin, Capital Diokno, Capital Decena, Capital Cash

200,000 200,000

200,000 30,000 30,000 260,000

3. Asset Revaluation Method: Other Assets 180,000 Delfin, Capital 200,000 Cash 260,000 Diokno, Capital 60,000 Decena, Capital 60,000 4. Bonus Method: Delfin, Capital Cash Diokno, Capital Decena, Capital

200,000 160,000 20,000 20,000

5. Asset Revaluation Method: Diokno, Capital 25,000 Decena, Capital 25,000 Delfin, Capital 200,000 Cash 175,000 Other Assets 75,000 Problem 5 – 2 (Retirement of a Partner; Sale of Interest to the partnership; Adjustment to Asset Values) Dahlia is to retire from the partnership of Danao and Associates as of July 31, 2014, the end of the fiscal year. After closing the books, the capital balances of the partners are as follows: Danao

P

40, 000

Daylan

30, 000

Dahlia

25, 000

They share net income and losses in the ratio of 2:1:1. The partners agree that the merchandise inventory be increased by P7, 000 and that the allowance for doubtful accounts be reduced by P1, 000. Dahlia agrees to accept an interest bearing note for P25, 000 in partial settlement of her ownership equity. The remainder of her claim is to be paid in cash. Danao and Daylan are to share equally in the net income or loss of the new partnership. Instructions: Presents entries in the journal form to record: 1. The adjustments of the assets to bring them into agreement with current fair price. 2. The withdrawal of Dahlia. Answer: 1. Merchandise Inventory Capital. Allowance for Doubtful Accounts. Capital.

7,000 7,000 1,000 1,000

Capital Balance Share of Net income and losses

Danao 40,000 4,000

Daylan 30,000 2,000

Dahlia 25,000 2,000

Capital Balance

44,000

32,000

27,000

2. Dahlia, Capital Cash

27,000 2,000

Notes payable

25,000

Problem 5-3 – (Retirement of a Partner; Sale Interest to the Partnership) Partners, Damo, Dayan, Datu have capital balances of P120, 000, P70, 000, and P80, 000 respectively on December 31, 2014. The partners share profits and losses in the ratio of 3:2:5, respectively. During the calendar year 2015, the partnership suffered a loss of P40, 000 and each partner had withdrawn P25, 000 in cash from the partnership. Dayan is unhappy with the operations of the partnership and has decided to withdraw as of December 31, 2015. Instructions: 1. Determine the balance of the partners’ capital accounts prior to the withdrawal of Dayan. Damo Damo, Capital 120,000 Less Net Loss 12,000 Less Damo Drawing 25,000 Damo, Capital 83,000 Dayan Dayan, Capital Less Net Loss Less Dayan Drawing Dayan, Capital

70,000 8,000 25,000 37,000

Datu Datu, Capital Less Net Loss Less Datu Drawing Datu, Capital

80,000 20,000 25,000 35,000

2. Dayan will accept P30, 000 for his interest from the partnership. Prepare the journal entry for the withdrawal of Dayan if the reason for Dayan being willing to accept less than his capital balance is that the inventory of the partnership is overvalued. Dayan, Capital Cash

30,000 30,000

3. The partners agree to the partnership buying Dayan’s interest for P47, 000. Prepare journal entries for the withdrawal of Dayan under each of the following independent assumptions: a. Increase in capital balances for the asset revaluation.

Asset Damo, Capital Dayan, Capital Datu, Capital

50,000 15,000 10,000 25,000

b. Dayan is receiving a bonus. Damo, Capital

3,750

Datu, Capital

6,250

Dayan, Capital

10,000

Problem 5-4 (Retirement of a Partner under Various Cases) On January 1, 2014 Dancel decided to retire from the partnership of Daet, Dais, and Dancel, who share profits and loses in the ratio 3:2:1, respectively. The condensed statement of financial position shown on the next page presents the account balances immediately before and, for seven independent cases, after Dancel’s retirement.

Accounts Case 2 Asset

Balances prior to Dancel’s Retirement Case 3

Balances after Dancel’s Retirement Case 1

Cash Other Assets Total Assets Liabilities and Capital

P200, 000 P400, 000 P600, 000

P 40, 000 400, 000 P440, 000

P 200, 000 400, 000 P 600, 000

Liabilities Daet, Capital Dais, Capital Dancel, Capital Total Liabilities and Capital

P 120, 000 160, 000 180, 000 140, 000 P 600, 000

P 120, 000 148, 000 172, 000 -0P440, 000

Case 4

Case 5

Case 6

Cash Other Assets Total Assets Liabilities and Capital

P 32, 000 468, 000 P 500, 000

P 120, 000 440, 000 P 560, 000

P 120, 000 P 200, 000 400, 000 400, 000 P 600, 000 P 600, 000

Liabilities

P 120, 000

P120, 000

P120, 000 300, 000 180, 000 -0P600, 000

P 70, 000 400, 000 P 470, 000 P120, 000 166, 000 184,000 -0P470, 000

Case 7

Assets

P120, 000

P120, 000

Daet, Capital Dais, Capital Dancel, Capital Delia, Capital Total Liabilities and Capital

184, 000 196, 000 -0-0P 500, 000

220, 000 220, 000 -0-0P560, 000

160, 000 320, 000 -0-0P600, 000

160, 000 180, 000 -0140, 000 P600, 000

Problem 5 – 5 (Retirement of a Partner; Sale of Interest to the Partnership) David, Dizon and Duque have been partners in a law office for 15 years. Dizon has decided to retire and wishes to withdraw from the partnership. To facilitate Dizon’s withdrawal, the partnership closed its books and prepares the statement of financial position shown below: Assets Cash Accounts Receivable (net) Books Other Assets 150, 000 Total Assets

P318, 000 72, 000 120, 000 90, 000

Accounts Payable David, Capital Dizon, Capital Duque, Capital

P 60,000 150, 000 240, 000

P600, 000

Total Liabilities & Capital

P600, 000

David, Dizon and Duque share profits and losses in the ratio of 3:4:3, respectively Instructions: Prepare the necessary journal entries on the books of the partnership to record the withdrawal of Dizon under each of the following assumptions: 1. The partnership agrees that the Books and Other Assets are undervalued by P72, 000 and P 48, 000 respectively. Dizon is to receive a lump sum cash payment. 2. Dizon is to receive P120, 000 now and P 108, 000 in monthly instalment of P12, 000 each. Use the bonus method. 3. Dizon is to receive P180, 00 now and P18, 000 at the end of each of the nest six months. a. Use the bonus method. b. Use the asset revelation method. 1. CC

David (Retiring) Dizon Duque Total

150 000 240 000 150 000 540 000

Lump sum Cash Payment Dizon, Capital 288 000

Books

21 600 28 800 21 600 72 000

Other Assets

Books + Other Assets

14 400 19 200 14 400 48 000

36 000 48 000 36 000 120 000

CC + Books + Other Asssets 186 000 288 000 186 000 660 000

Cash Books

72 000 David, Capital Dizon, Capital Duque, Capital

288 000

21 600 28 800 21 600

Other Assets 48 000 David, Capital 14 400 Dizon, Capital 19 200 Duque, Capital 14 400

Compound Books 72 000 Other Assets 48 000 Dizon, Capital 240 000 Cash 288 000 David, Capital 36 000 Duque, Capital 36 000

2. Payment Dizon, Capital Cash

120 000 120 000

Bonus Dizon, Capital 12 000 David, Capital 6 000 Duque, Capital 6 000 Payable Dizon, Capita...