PARTNERSHIP DISSOLUTION

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 by the partnership and the winding up of partnership affairs preparatory to going out of business

Conditions Resulting to Partnership Dissolution Admission of a new partner Retirement or withdrawal of a partner Death, incapacity or bankruptcy of a partner Incorporation of a partnership

ADMISSION OF A NEW PARTNER

TYPES OF ADMISSION OF A NEW PARTNER Purchase of interest from one or more of the original (old) partners Investment or asset contribution to the partnership

ADMISSION BY PURCHASE The sale of a partner’s interest in an existing partnership is a personal transaction between the selling partner and the buying or new partner. The amount paid by the new partner goes personally to the partner selling interest and not be partnership. The only entry required in the partnership books is to record the transfer of capital from the capital account of the selling partner to that of the buying partner. 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 -Without recognition of implied goodwill -With recognition of implied goodwill

ADMISSION BY PURCHASE Goodwill is an intangible advantage that increases earnings over what is normal. It is the summation of the good attributes of a company that enables that company to earn more than what is normal. The IASB discourages the recognition of goodwill unless there is an excess payment over the fair values of net assets of an acquired company.

ILLUSTRATIVE PROBLEM A and B are partners with capital balances of P100,000 and P50,000. They share profits and losses equally. C is a new partner. Case 1a – Purchase of book value from one partner only. C purchases 1/5 interest from A by paying P20,000. A, Capital20,000 C, Capital20,000

ILLUSTRATIVE PROBLEM Case 1b - Purchase of book value from more than one partner. C purchases 1/5 interest from the old partners by paying P30,000. A, Capital (100,000 x 1/5)20,000 B, Capital (50,000 x 1/5)10,000 C, Capital30,000

ILLUSTRATIVE PROBLEM Case 2 – Purchase at less than book value. C purchases 1/5 interest from the old partners by paying P25,000. A, Capital20,000 B, Capital10,000 C, Capital30,000 The difference of P5,000 is a personal loss of the selling (old) partners.

ILLUSTRATIVE PROBLEM Case 3 – Purchase at more than book value. C pays P40,000 for a 1/5 interest of the old partners. A, Capital20,000 B, Capital10,000 C, Capital30,000 The difference of P10,000 is a personal gain of the selling (old) partners.

ADMISSION BY INVESTMENT

The admission of a new partner by investment is a transaction between the original partnership and the new partner. The investment of the new partner increases the total assets and the total capital of the partnership.

DEFINITION OF TERMS Agreed Capital (AC) – it is the amount of new capital set by the partners for the partnership. Total Contributed Capital (CC) – it is the investment of all the partners. Goodwill – It is the excess of agreed capital over contributed capital Bonus – It is the transfer of capital from one partner to another.

ILLUSTRATIVE PROBLEM: A and B are partners with capital balances of P100,000 and P50,000 respectively. They share profits and losses equally. C is admitted in the partnership.

ILLUSTRATIVE PROBLEM: Case 1 – No goodwill, no bonus. C invests P50,000 for a ¼ interest in the agreed capital of P200,000. Cash50,000 C, Capital50,000 ACCC Old Partner150,000 New Partner 50,000 Total200,000

ILLUSTRATIVE PROBLEM: Case 2 – No bonus, goodwill contributed by the old partners. C invests P50,000 for a 1/5 interest in the new firm capital of P250,000. Cash50,000 C, Capital50,000 Goodwill50,000 A, Capital25,000 B, Capital25,000 ACCCGoodwill Old200,000150,00050,000 New50, ,000200,00050,000

ILLUSTRATIVE PROBLEM: Case 3 – No bonus, goodwill contributed by the new partner. C invests P25,000 for ¼ interest in the new firm capitalization of P200,000. Cash25,000 C, Capital25,000 Goodwill25,000 C, Capital25,000 ACCCGoodwill Old150,000 - New50,00025, ,000175,00025,000

ILLUSTRATIVE PROBLEM: Case 4 – No goodwill, bonus to old partners. C invests P50,000 for a 1/5 interest in the new firm capitalization of P200,000. Cash50,000 C, Capital50,000 C, Capital10,000 A, Capital5,000 B, Capital5,000 ACCCBonus Old160,000150,00010,000 New40,00050,000(10,000) 200,000 -

ILLUSTRATIVE PROBLEM: Case 5 – No goodwill, bonus to new partner. C invests P30,000 for a ¼ interest in the total capitalization of P180,000. Cash30,000 C, Capital30,000 A, Capital7,500 B, Capital7,500 C, Capital15,000 ACCCBonus Old135,000150,000(15,000) New45,00030,00015, ,000 -

ILLUSTRATIVE PROBLEM: Case 6 – Goodwill and bonus to the old partners – C invests P40,000 for a 1/8 interest in the agreed capital ratio of P200,000. Cash40,000 C, Capital40,000 Goodwill10,000 A, Capital5,000 B, Capital5,000 C, capital15,000 A, Capital7,500 B, Capital7,500 ACCCGoodwillBonus Old175,000150,00010,00015,000 New25,00040,000-(15,000) 200,000190,00010,0000

ILLUSTRATIVE PROBLEM: Case 7 – Goodwill and bonus to new partner – C invests P45,000 for a 3/8 interest in the new firm capital of P200,000. Cash45,000 C, Capital45,000 Goodwill5,000 C, Capital5,000 A, Capital12,500 B, Capital12,500 C, Capital25,000 ACCCGoodwillBonus Old125,000150,000(25,000) New75,00045,0005,00025, ,000195,0005,000-