Title | Pacoac Reviewer |
---|---|
Course | BS Accountancy |
Institution | Angeles University Foundation |
Pages | 72 |
File Size | 1.1 MB |
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GOODLUCK!!!! GOD BLESS SATIN!!!!!!!!!MIDTERMS EXAMS PACOACCHAPTER 4: Change in Ownership (DISSOLUTION)Dissolution- occurs when there is change in ownership.Reasons why there is a change: Partners decide to ADMIT a new partner or partners; A current partner decides to RETIRE or WITHDRAW from the part...
GOODLUCK!!!! GOD BLESS SATIN!!!!!!!!! MIDTERMS EXAMS PACOAC CHAPTER 4: Change in Ownership (DISSOLUTION) Dissolution- occurs when there is change in ownership. Reasons why there is a change: • Partners decide to ADMIT a new partner or partners; • A current partner decides to RETIRE or WITHDRAW from the partnership; • A partner DIES • Partners decide to INCORPORATE Why admit or incorporate? • Expansion • Infusion of more capital • Special Skills • Strengthen competitive position Dissolution - is a change in the relation of the partners ceasing to be associated in carrying on the business (Article 1828 of the NCC). Limited life - One of the characteristics of a partnership. Any change in the membership of this form of business organization will result in dissolution. Dissolution of the partnership does not necessarily imply that business operations will come to an end. Most changes in the ownership of a partnership are accomplished without interruption of its normal operation. There are four cases of dissolution as stated in Articles 1830 and 1831 of NCC, 1. By the acts of the partners- when the partnership objective has already been accomplished. 2. By mutual agreement 3. By operation of law- when an event makes it illegal, or when a partner becomes insolvent or dies, or by civil interdiction 4. By judicial decree- when insanity of a partner occurs or commission of fraud, and even internal dissension among the partners. Causes of dissolution 1. Admission of a partner 2. Withdrawal or retirement of a partner 3. Death of a partner 4. Incorporation of a partnership
Remember: ● Dissolution does not necessarily terminate the basic operation of the partnership except for the change in ownership or in some instances, termination or liquidation.
●
The change in the ownership structure of the partnership dissolves the existing partnership with the creation of a new partnership.
Dissolution vs liquidation -DISSOLUTION should be distinguished from LIQUIDATION of a partnership. A partnership is said to be liquidated when the business is terminated; a partnership may be dissolved without being terminated but liquidated is always preceded by dissolution. Articles of Co-Partnership - the agreement on how the dissolution shall be implemented and may also advise in the structuring of the buy and sell agreement. Changes in ownership 1. New partner is admitted by buying interest directly from a current partner. 2. New partner is admitted by investing directly in the partnership. 3. A partner retires and his interest is bought by an outsider, co-partner, or partnership itself. 4. A partner dies and the partnership settles through the partner’s estate. 5. The partnership is incorporated. ACCOUNTING PROCEDURES JUST BEFORE THE DISSOLUTION With the change in ownership, all adjustments and revaluations of the existing partnership assets should be made before the admission of the new. 1. UPDATE THE CAPITAL ACCOUNT (3)- revaluing the partnership ASSET, determining the PROFIT SHARE of the partners ( From last SFP to Dissolution Date) and closing their DRAWING accounts. 2. Terms and conditions for dissolution should be ascertained. 3. Record the dissolution and revise the partners' equity. Note: If silent, it is understood that the capital accounts have already been updated and therefore, ready for dissolution.
ADMISSION OF A NEW PARTNER -A new partner cannot be admitted without the unanimous consent of all partners. -A new partner can only be admitted into a partnership with the consent of all the continuing partners. This is based on the principle of DELECTUS PERSONAE. Delectus Personae No one becomes a member of the partnership without the consent of all the members. This is because a partnership is based on mutual trust and confidence of the partners. Two ways to admit: 1) PURCHASING an interest from one or more existing partners. 2) INVESTING cash or other assets in the partnership. PURCHASING AN INTEREST
A capital account is set up for the new partner by transferring interest equal to the portion purchases from the existing one. ● PERSONAL transaction ● Partnership ASSETS are not affected. Example: Alex and Toni decided to admit Bianca to their partnership on March 31. The following were agreed by the partners: 1. Revalue the land by 262,500 2. Distribute the profit for the first quarter amounting to 300,000 3. Cash withdrawals for 1st quarter: 25,000 each. ● P&L Ratio ● Alex 40% ● Toni 60% 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. Personal transaction between the old and new partners. Pro-Forma Entry: (Name of Seller/Old), Capital xxx (Name of Buyer/New), Capital xxx The purchase price of the interest sold to a new partner may be: I. Equal to the book value of the interest sold. II. More than the book value of the interest sold. III. Less than the book value of the interest sold. I. Equal to the book value of the interest sold. 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. ● Cordero purchases a 1/5 interest from Coloma and Cordero by paying P30,000. ENTRY: Coloma, Capital 20 000 Claudio, Capital 10 000 Cordero, Capital 30 000 II. MORE than the book value of the interest sold. 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. ● Cordero purchases 1/5 interest from the old partners by paying P40 000. ENTRY: Coloma, Capital 20 000 Claudio, Capital 10 000 Cordero, Capital 30 000 III. less than the book value of the interest sold. 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.
● Cordero purchases 1/5 interest from the old partners by paying P25,000. ENTRY: Coloma, Capital 20 000 Claudio, Capital 10 000 Cordero, Capital 30 000 ASSET REVALUATION Current Values is not equal to the Recorded Value or Book Value, thus, asset revaluation is agreed upon. Asset Revaluation- is a requirement to update capital accounts of partners before admitting a new partner. ●
UPWARD ADJUSTMENT should be made to increase assets and partners' equity, in case the book value is undervalued.
●
DOWNWARD ADJUSTMENT should be made to decrease both asset and equity since the current value of the asset is lower than the book value (Asset Impairment).
Asset Revaluation upon admission -When the current values of the partnership assets are greater or less than the recorded values, the partners may agree to revalue the assets. Example ● Leah paid Sarah 15 000 to purchase half of her interest in the partnership with Apple ● Sarah’s Capital – 20 000 ● Apple’s Capital – 30 000 ● P&L – 40%, 60% respectively In this case,Payment is higher then the book value (by 5 000),Partnership assets are undervalued Partner
Existing Equity
Asset Equity After Transfer Revaluation Revaluation Interest
Apple
30 000
15 000
45 000
Sarah
20 000
10 000
30 000
Leah Total
50 000
25 000
75 000
Land
of Revised Equity
45 000 (15 000)
15 000
15 000
15 000
-
75 000
25 000 Apple, Capital Sarah ,Capital
Sarah, Capital Leah, Capital
15 000 10 000 15 000 15 000
B. Investment of Assets in a Partnership -It is a transaction between the original partnership and the new partner. A person may be admitted into a partnership by investing cash or other assets in the business. ● Total Asset will increase
●
Total Partner’s Equity will increase
Definition of TERMS TOTAL CONTRIBUTED CAPITAL – the sum of the capital balances of the old partners and the actual investment of the new partner. TOTAL AGREED CAPITAL – it is the total capital of the partnership after considering the capital credits given to each of the partners. BONUS – it is the amount of capital or equity transferred by one partner to another partner. CAPITAL CREDIT – it is the equity of a partner in the new partnership and is obtained by multiplying the total agreed capital by the applicable percentage interest of the partner. 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. Admission of a new Partner by Investment 1. Agreed capital is given 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 (Positive & Negative), No Bonus 2. Agreed Capital is not given a. Bonus Method b. Asset Revaluation method (Positive & Negative) 3. Agreed Capital is not given but basis for its computation is indicated in the terms of admission 4. The amount of the Contribution of the New partner is not given 5. Fraction of Interest is not given New partner’s investment is equal to his capital credit, total contributions equal to agreed equity ● Leah will invest 25 000 cash and will be given 1/3 interest in the partnership agreed equity of 75 000. Partners
Existing Equity
New Contribution
Revised Equity
Apple
30 000
30 000
Sarah
20 000
20 000
Leah Total
50 000
25 000
25 000 (1/3)
25 000
75 000
Cash
25 000 Leah, Capital
25 000
New partner’s investment is equal to his capital credit, Current partners agreed to revalue the assets Leah will invest 30 000 cash and will be given 30% interest in the net asset of the partnership. Partnership asset should be revalued by 20 000.
Partners
Existing Equity
Asset Equity after New Revaluation Revaluation Contribution
Apple
30 000
12 000 42 000 (60%)
42 000
Sarah
20 000
8000 (40%)
28 000
28 000
Leah Total
50 000
20 000
70 000
Land
30 000
30 000 (30%)
30 000
100 000
20 000 Sarah Capital
Cash
Apple, Capital
12 000
8 000 30 000
Leah, Capital
30 000
Capital credit for the new partner is less than the actual contribution. Bonus capital for the existing partners Leah will invest 30 000 cash and will be given 25% interest in the net asset of the partnership. A bonus of 10 000 will be given to the existing partners Partners
Existing Equity
Apple
30 000
6 000
36 000
Sarah
20 000
4 000
24 000
(10 000)
20 000 (25)
Leah
New Contribution
30 000
Bonus
Total
50 000
30 000
-
80 000
Cash
30 000 Apple, Capital 6 000 Sarah, Capital 4 000 Leah, Capital 20 000 Capital credit for the new partner is Higher than the actual contribution. Bonus capital for the new partners Leah will invest 30 000 cash and will be given 50% interest in the net asset of the partnership. Bonus is given to the new partner Partners
Existing Equity
Apple
30 000
(6 000)
24 000
Sarah
20 000
(4 000)
16 000
30 000
10 000
40 000 (50)
30 000
-
80 000
Leah Total
50 000
New Contribution
Bonus
Cash 30 000 Apple, Capital 6 000 Sarah, Capital 4 000 Leah, Capital 40 000 ASSET REVALUATION OR BONUS MAY BE IMPLIED First View: Asset Revaluation Leah will invest 15 000 cash and will be given 15% interest in the assets in the profit of the business. Partners
Existing Equity
Asset Equity after New Revaluation Revaluation Contribution
Apple
30 000
21 000
51 000
Sarah
20 000
14 000
34 000
Leah Total
50 000
35 000
85 000
Land
15 000
15 000
100 000
35 000 Apple, Capital Sarah Capital
Cash
15 000
21 000 14 000 15 000
Leah, Capital
15 000
ASSET REVALUATION OR BONUS MAY BE IMPLIED Second View: Bonus Method Leah will invest 15 000 cash and will be given 15% interest in the assets in the profit of the business. Partners
Existing Equity
Investment
Equity after Bonus Investment Distribution
Apple
30 000
30 000
3 150
33 150
Sarah
20 000
20 000
2 100
22 100
15 000
(5 250)
9 750
Leah Total
50 000
Cash
15 000
65 000
65 000
15 000 Apple, Capital 3 150 Sarah, Capital 2 100 Leah, Capital 9 750
ASSET REVALUATION and BONUS Leah contributed 40 000 for a ¼ interest. Agreed total partner’s equity should be 120,000. Partne Existing Revalu Equity rs Equity ation after Revalu ation
Invest ment
Equity Bonus after Distrib Investm ution ent
Apple
30 000
18 000 48 000
48 000
6 000
54 000
Sarah
20 000
12 000 32 000
32 000
4 000
36 000
40 000
(10 000) 30 000
Leah
40 000
Total
50 000
30 000 80 000
Asset
40 000
120 000
120 000
30 000 Apple, Capital Sarah, Capital
Cash
18 000 18 000 40 000
Apple, Capital Sarah, Capital Leah , Capital
6 000 4 000 30 000
Withdrawal and Retirement of a Partner The partnership may allow any of its partners to withdraw or retire from the firm. The business may continue after such withdrawals; on the other hand, the interest of the retiring or withdrawing partner may be: 1. sold to a new partner (outsider) 2. sold to continuing (remaining) partners 3. sold to the partnership Retirement of a partner 1. Capital balance of the retiring partner must be updated as of retirement date to be used as a basis for settlement. (Asset revaluation, Profit distribution) 2. Revaluation will affect all the partners. 3. Only the capital of the retiring partner may be updated for profit or loss share through estimation. 4. The drawing account of the retiring partner must also be closed against the capital account. CALCULATION OF RETIRING PARTNER’S INTEREST The following schedule are helpful in determining the interest of a retiring partner: Investment -Withdrawals + Share in partnership profits to date of retirement or -Share in partnership losses to date of retirement + Loans and advances to the partnership or Loans and advances from the partnership + Revaluation of assets increasing their recorded values or -Revaluation of assets decreasing their recorded values -Interest upon retirement Example Capital Balances as of December 31, 2019 A – 400 000 B – 500 000 C – 300 000 P&L Ratio: 5:3:2 C decided to leave the business and withdraw his interest over the partnership on June 30, 2020. They agreed not to close the books and estimate the share of Carlos based on the average estimated net income
which is 27 000. Carlos cash withdrawal amounts to 15 000. 1.Update the capital balance. Net Income 27 000 Drawings (15 000) End 312 000 Income Summary C, Drawings C, Drawings C, Capital
Beginning
300 000
27 000 27 000 12 000 12 000
Revised Equity A – 400 000 B – 500 000 =900 000 Receives a cash settlement more than the book value C will receive 362 000 1. Asset Revaluation Part Existing ner Equity
Revaluat Equity after Retireme ion Revaluation nt
A
400 000
125 000
525 000
525 000
B
500 000
75 000
575 000
575 000
C
312 000
50 000
362 000
(362 000)
1 462 000
(362 000) 1 100 000
Total 1 212 000 250 000
Asset
250 000 A, Capital 125 000 C, Capital 50 000 C, Capital 362 000 Cash 362 000
B, Capital
Receives a cash settlement more than the book value C will receive 362 000 2. Bonus Par Existing tne Equity r
Bonus
Equity after Retirement Bonus
A
400 000
(31 250)
368 750
368 750
B
500 000
(18 750)
481 250
481 250
75 000
C
312 000
Tot 1 212 000 al
50 000
362 000
(362 000)
-
1 212 000
(362 000)
A, Capital B, Capital C, Capital
850 000
31 250 18 750 312 000 Cash 362 000
Receives a cash settlement less than the book value C will receive 300 000 1. Asset Revaluation/Impairment Partner Existing Equity
Revaluatio Equity n after Revaluatio n
Retireme nt
A
400 000
(30 000)
370 000
370 000
B
500 000
(18 000)
482 000
482 000
C
312 000
(12 000)
300 000
(300 000)
Total
1 212 000
(60 000)
1 152 000
(300 000)
A, Capital C, Capital Asset
852 000
30 000 12 000
B, Capital
18 000
60 000
C, Capital 300 000 Cash 300 000 Receives a cash settlement less than the book value C will receive 300 000 2. Bonus Retirement
Par Existing tne Equity r
Bonus
Equity after Bonus
A
400 000
7 500
407 500
407 500
B
500 000
4 500
504 500
504 500
C
312 000
(12 000) 300 000
(300 000)
-
(300 000)
Tot 1 212 000 al
C, Capital
1 212 000
912 000
312 000 Cash 300 000 A, Capital 7 500 B, Capital 4 500
Incorporation of a partnership 1. Adjust and close the books using the statement of financial position 2. Reflect the gains and losses on the appropriation account (similar to income summary) 3. Close the partnership books 4. Open the book of the corporation Share Capital (Capital account for Corporation)
5. Record the additional investments
OTHER NOTES: CASE 3: ASSET REVALUATION (UPWARD ADJU...