Partnership Dissolution PDF

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Summary

Partnership DissolutionDissolution  It is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business.The following are the causes or reasons of partnership dissolution: 1. Admission of a partner 2. Withdrawal, retirement or death of ...

Description

Partnership Dissolution Dissolution  It is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business. The following are the causes or reasons of partnership dissolution: 1. Admission of a partner 2. Withdrawal, retirement or death of a partner 3. Incorporation of a partnership

Now let’s discuss each causes of dissolution and how to account it. 1. Admission of a partner The admission of a new partner may be effected either through: a. Purchase of interest in the partnership, or b. Investment in the partnership

a. Purchase of interest in the partnership • A personal transaction between and among the partners • Any consideration paid or received is not recorded in the partnership books • Only a transfer within equity is made to establish the capital account of the new partner and decrease the capital account(s) of the selling partner(s). • No gain or loss shall is recognized in the partnership books. Revaluation of assets -

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When a partnership is dissolved but not liquidated, a new partnership is created. The assets and liabilities carried over to the new partnership are restated to fair values. Any adjustment to the assets and liabilities is allocated first to the existing partners before recording the admission of the new partner.

b. Investment in the partnership • The incoming partner invests directly to the partnership instead of purchasing interest from an existing partner(s). • This is a transaction between the new partner and the partnership. Any consideration paid by the incoming partner is recorded in the partnership books. • No gain or loss shall be recognized.

2. Withdrawal, retirement or death of a partner • •

When a partner withdraws, retires or dies, his interest may be purchased (a) by one or all of the remaining partners or (b) by the partnership. The interest of the withdrawing, retiring, or deceased partner shall be adjusted for the following: a. his share of any profit or loss during the period up to the date of his withdrawal, retirement or death; and b. his share of any revaluation gains or losses as at the date of his withdrawal, retirement, or death.

Purchase by one or all of the remaining partners This is a transaction between and among the partners (or deceased partner’s estate). As such, the settlement amount is not recorded in the books. The only entry to be made in the partnership books is a transfer within equity.

Settlement by the partnership This is a transaction between the retiring or withdrawing partner (or deceased partner’s estate) and the partnership. As such, the settlement amount is recorded in the books.

3. Incorporation of a partnership  On date of incorporation: a. The partners’ capital balances are adjusted for their respective shares in any profit or loss and revaluation gains or losses as at the date of incorporation. The adjusted capital balances may be used in determining the number of shares to be issued to each partner. b. Normally, the books of the partnership are closed and new books are set-up for the corporation.

Illustration Problem 1: (Admission of a Partner)

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Carrots joins the partnership of Apple and Banana. Before the admission of Carrots, the partnership statement of financial position shows the following information: Cash 30,00 0 Accounts Receivable 140,0 00 Inventory 200,0 00 Equipment 500,0 00 Total Assets 870,0 00 Accounts Payable Apple, Capital (60%) Banana, Capital (40%) Total Liabilities and Capital

80,00 0 515,0 00 275,0 00 870,000

The following adjustments are determined: a. b. c. d.

The recoverable amount of the accounts receivable is P120,000. The inventory has a net realizable value of P160,000. The equipment has a fair value of P450,000. Unrecorded liabilities amount to P20,000.

Case #1: Purchase of interest from one partner Carrots acquires half of Banana's interest for P800,000. To determine the balances of the partners' capital accounts after the admission of Carrots, we must first get the fair value adjustments in the net assets. Carrying amts.

Fair values

30,000 140,000 200,000 500,000 (80,000)

30,000 120,000 160,000 450,000 (80,000) (20,000) 660,000

Cash Accounts receivable Inventory Equipment Accounts payable Accrued liabilities Net assets

790,000

Increase (Decrease) (20,000) (40,000) (50,000) (20,000) (130,000)

After getting the fair value adjustments, let’s get the adjusted capital balances of each partner after affecting the purchase of interest by Carrot from Banana. Apple

Banana

Capital, beg.

515,000

275,000

790,000

Revaluation decrease Adjusted, before admission

(78,000) 437,000

(52,000) 223,000

(130,000) 660,000

Sale from Banana to Carrot

(111,500)

Capital after admission

437,000

111,500

Carrot

Total

111,500

-

111,500

660,000

The journal entry for the purchase of interest: Date

Banana, Capital (223,00 x 1/2) Carrot, Capital (223,00 x 1/2)

111,500 111,500

And to determine the profit or loss sharing ratio of the partners after the admission of Carrots. Partner

Before admission Admission of Carrot

Apple

60%

Banana Carrot

40%

After admission 60%

-20% 20%

20% 20%

100 %

100 %

Case #2: Purchase of interest from more than one partner Carrots purchases 20% of Apple’s and Banana’s capital interest for 800,000. Since we already know the fair value adjustments which is computed in Case 1, now let’s determine the adjusted capital balances of each partner after affecting the purchase of interest by Carrot from Apple and Banana. Apple

Banana

Carrot

Total

Capital, beg.

515,000

275,000

790,000

Revaluation decrease

(78,000)

(52,000)

(130,000)

Adjusted, before admission

437,000

223,000

660,000

Effect of purchase of interest

(87,400)

(44,600)

132,000

-

Capital after admission

349,600

178,400

132,000

660,000

The journal entry for the purchase of interest: Date

87,400 44,600

Apple, Capital (437K adj. cap. see above x 20%) Banana, Capital (223K adj. cap. x 20%) Carrot, Capital

132,000

And to determine the profit or loss sharing ratio of the partners after the admission of Carrots. Partner

Before admission Admission of Carrot

After admission

Apple

60%

-12% (60%x20%)

48%

Banana

40%

-8% (40%x20%)

32%

20%

20%

Carrot

100% 100 %

Case #3: Investment in the partnership – Bonus to new partner Carrots invests 100,000 for a 20% interest in the net assets and profits of the partnership. No goodwill is recognized. Requirements: a. Provide the journal entry to record the admission of Carrots. b. Compute for the capital balances of the partners following the admission of Carrots. First, let’s check if contributed capital and agreed capital of Carrot are equal to see if there is bonus to partners. Adjusted net assets before admission

660,000

Investment of Carrot

100,000

Net assets after admission

760,000

Carrot's interest in net assets Carrot’s Agreed Capital

20% 152,000

Contributed Capital

100,000

Bonus to Carrot

52,000

The journal entry in the admission of Carrot and the bonus to Carrot is as follows: Date Cash Apple, Capital (152K – 100K) x 60% Banana, Capital (152K – 100K) x 40% Carrot, Capital (660K + 100K) x 20%

100,000 31,200 20,800 152,000

And to determine the capital balances of each partner after the admission of Carrot is as follows:

Adj. cap., before admission

Apple

Banana

437,000

223,000

Carrot

Total 660,000...