Partnership Dissolution (Changes in Ownership)

Partnership dissolution occurs whenever there is a change in ownership

(e.g., the addition of a new partner, or the retirement, withdrawal or death of
an existing partner). We will also include in this handout the incorporation of
a partnership, that is, change from a partnership form of organization to a
coporation. Partnership dissolution should not be confused with partnership
liquidation which is the winding up of partnership affairs and termination of
the business. Under dissolution the partnership business continues, but under
different ownership.
When partnership dissolution occurs, a new accounting entity exists. The
partnership should first adjust its records so that all accounts are properly
stated at the date of dissolution. After the income (loss) has been properly
allocated to the existing partners’ capital accounts, all assets and liabilities
should be adjusted to their fair market value and their present values,
respectively. The latter step is performed because the dissolution results in a
new accounting entity.
After all adjustments have been made, the accounting for dissolution
depends on the type of transaction that caused the dissolution.
These transactions can be broken down into two types:
* Transactions between the partnership and a partner (e.g., a new partner
contributes assets, or a retiring partner withdraws assets).
* Transactions between partners (e.g., a new partner purchases an interest
from one or more existing partners, or a retiring partner sells his/her
interest to one or more existing partners).

a. Transactions Between a Partner and the Partnership

(1) Admission of a New Partner
When a new partner is admitted to the partnership essentially three cases
can result. The new partner can invest assets into the partnership and
receive a capital balance.
(a) Equal to his/her purchase price.
(b) Greater than his/her purchase price.
(c) Less than his/her purchase price.
If the new partner’s capital balance is equal to the assets invested, then
the entry debits the asset(s) contributed and credits the new partner’s capital
account for the fair value of the asset(s) contributed.
If the new partner’s capital balance is not equal to the assets invested (as
in situation (b) and (c) above), then either the bonus or goodwill method must
be used to account for the difference.

Bonus method - The old partnership capital plus the new partner’s asset
contribution is equal to the new partnership capital. The new partner’s
capital is allocated his purchase share (e.g., 40%) and the old partner’s
capital accounts are adjusted as if they had been paid (or as if they paid) a
bonus. The adjustment to the old partners’ capital accounts is made in
accordance with their profit (loss) sharing ratio.
The bonus method implies that the old partners either received a bonus
from the new partner, or they paid a bonus to the new partner. As a result the
old partners’ capital accounts are either debited to reflect a bonus paid, or
credited to reflect a bonus received. The new partner’s capital account is
never equal to the amount of assets contributed in a case where the bonus
method is used.

Goodwill method - The old partnership capital plus the new partner’s
asset contribution is not equal to the new partnership capital. This is because
goodwill is recorded on the partnership books for the difference between the
total identifiable assets of the partnership (not including goodwill) and the
deemed value of the partnership entity (which includes goodwill). An
adjustment is made to the capital accounts of the existing partners to reflect
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the goodwill (whether acquired or given) in their profit (loss) sharing ratio.
Under the goodwill method, valuation of the partnership is the objective.
How the value of the partnership is determined depends on whether the
book value acquired is greater or less than the asset(s) invested. If the book
value acquired is less than the asset(s) invested, the value is determined
based upon the new partner’s contribution, and goodwill is allocated to the
old partners’ accounts. If the book value acquired is greater than the asset(s)
contributed, the value is based upon the existing capital accounts, and
goodwill is attributed to the new partner.
Example: A & B Partnership admit C by investing to the business P50,000 for
a 1/5 interest. The capital balances of A and B before the admission are
P100,000 and P80,000, respectively. The goodwill can be determined as
follows:
Total contributed capital to the business (100,000 + 80,000 + 50,000)
P230,000
Capital interest of C the new partner x
1/5
Book value of the interest acquired P 46,000
The assets contributed is greater than the book value acquired, therefore the
total implied capital must be based on the new partner’s contribution which is
P50,000. The total implied capital in this case must be P250,000, (50,000 ÷
1/5). The goodwill must be P20,000 to old partners. (250,000 – 230,000).
Assuming that the interest of C will be ¼, then the book value acquired
must be P57,500, (230,000 x ¼), greater than the assets contributed by C,
then the total implied capital must be based on the old partners’ contributions
which is P180,000. The implied total capital must be P240,000, (180,000 ÷
¾). The goodwill in this case must be P10,000, (240,000 – 230,000) and the
goodwill will now be given to the new partner. So, it is just like bonus method.
In the above example wherein the interest of C is 1/5, the bonus goes to the
old partners, but inasmuch as no bonus recognized but rather goodwill then
the goodwill goes to the old partners. In the situation wherein C’s interest is
¼ the bonus goes to the new partner but under the goodwill method, then
goodwill and not bonus to new partner.
You can also determine the goodwill by simply dividing the contributed
capital of old partners to their capital interest and also the contributed capital
of the new partner to his/her capital interest. The amount that was computed
which is greater than the total contributed capital would be the implied or
deemed total capital. The goodwill must be the difference between the total
implied or deemed capital over the total contributed capital. If the total
implied capital was based on the old partners’ contribution then goodwill
must be given to the new partner, but if the total implied capital is based on
the new partner’s contribution then the goodwill must be given to the old
partner.
Using the same example above, C’s interest is 1/5, then total implied
capital of business can be determined as follows:
Capital contributed by old partners or new partner divide by their interest
whichever is higher then that should be the total implied capital.
Capital balances of A & B P180,000 Capital contributed by C
P 50,000
Interest of A & B ÷ 4/5 Interest of C ÷ 1/5
Implied total capital P225,000 Implied total capital
P250,000
The amount greater than the total contributed capital must be the total
implied capital which is P250,000. Therefore, if the basis of the agreed capital
is the contribution of the new partner, then the goodwill of P20,000 must be
credited to the old partners. Try it to C’s ¼ interest and you will arrive at the
same conclusion that this time the goodwill goes to the new partner.
The decision as to whether the bonus or goodwill method should be used
rests with partners involved. In other words, the bonus and goodwill methods
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are alternative solutions to the same problem. For CPA Board exam, if the
method is not clearly indicated in the problem then the generally acceptable
and preferable method must be the bonus method.

Example: Admission of a New Partner - Bonus Method

Total old capital for ABC Partnership is P600,000.
Partner A B C
Capital Balances P100,000 P200,000 P300,000
P&L Ratio 40% 40% 20%
Case I
D is admitted to the partnership and is given a 20% interest in the capital
in return for a cash contribution of P300,000. The entry to record the
admission of D should be
Cash P300,000
D, capital P180,000
A, capital 48,000
B, capital 48,000
C, capital 24,000

The total partnership capital to be shown on the books is P900,000

(P600,000 + P300,000) of which D is entitled to a 20% interest, or a capital
balance of P180,000. The remaining P120,000 is treated as a bonus to the old
partners and is allocated to their capital accounts in accordance with their
P&L ratio.

Case 2
D is admitted to the partnership and is given a 20% interest in the capital
in return for a cash contribution of P100,000. The entry to record the
admission of D in this case should be
Cash P100,000
A, capital 16,000
B, capital 16,000
C, capital 8,000
D, capital P140,000

The total partnership capital to be shown on the books is P700,000

(P600,000 + P100,000) of which D is admitted to a 20% interest, or a capital
balance of P140,000. The difference of P40,000 (P100,000 - P140,000) is
allocated to the old partners’ capital accounts as if they had paid a bonus to
the new partner.

Example: Admission of a New Partner - Goodwill Method

Use the same original data as given above

Case I
D is admitted to the partnership and is given a 20% interest in the capital
in return for a cash contribution of P200,000. The partners elect to record
goodwill. The book value acquired (P600,000 + P200,000) x 20% = P160,000
is less than the asset contributed.
The value of the partnership is determined based upon the contribution of
the new partner. In this case it is assumed that the partnership value is
P1,000,000 (P200,000/20%). The resulting goodwill is P200,000 (P100,000 -
P800,000). The P800,000 represents the total current capital exclusive of
goodwill, P600,000 of which is attributable to the old partners and P200,000
of which is attributable to the new partner. The entry to record the admission
of D should be:
Goodwill P200,000 Cash P200,000
A, capital P80,000 D, capital P200,000
B, capital 80,000
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C, capital 40,000
Goodwill was allocated to the old partners in their P&L ratio. Also note
that the capital balance of D represents 20% of the total capital of the
partnership.

Case 2
D is admitted to the partnership and is given a 20% interest in the capital
in return for a cash contribution of P100,000. The partners elect to record
goodwill. The book value acquired (P600,000 + P100,000) x 20% = P140,000
is greater than the asset contributed.
The partnership value is based upon the capital accounts of the existing
partners. Because D is entitled to a 20% interest, the P600,000 capital of the
old partners must represent 80% of the capital. This means that the total
value of the partnership is P750,000 (P600,000/80%). D’s total contribution
consists of the P100,000 in cash and P50,000 of goodwill. The goodwill is
determined as the difference between the cash contribution and the 20% of
the partnership capital.
Cash P100,000
Goodwill 50,000
D, capital P150,000
Note that in this last case no adjustment is made to the capital accounts of
partners A, B, and C
To summarize the above explanations, under the goodwill method, goodwill
can be determined by simply dividing the capital contributions of either the
new partner or the old partners, to get an amount higher than the total
contributed capital. The higher amount is now called the total implied capital
after goodwill or otherwise known as total agreed capital. The total agreed
capital is then compared to the total contributed capital to get the total
amount of implied goodwill that should be recognized in the books. If the new
partner’s contribution was used to get the total agreed capital, then goodwill
should be credited to the old partners’ capital in accordance with their P&L
ratio. But if the old partners’ capital was used to get the agreed capital then
goodwill should be credited to the new partner’s capital.

The table below summarizes the bonus and goodwill situations discussed
above:
When to Apply Bonus Method
New Partnership Capital = Old Partners Capital + New Partner’s Asset
Investment
Which Partner(s) Receive Bonus
New Partner
New Partner’s Capital Credit > New Partner’s Asset Investment
Old Partners
New Partner’s Capital Credit < New Partner’s Asset Investment
(The difference represents the bonus allocated to old partners in their P&L
ratio.)

When to Apply Goodwill Method

New Partnership Capital > Old Partners Capital + New Partner’s Asset
Investment
Which Partner’s Goodwill is Recognized
New Partner’s Goodwill
New Partner’s Capital Credit > New Partner’s Asset Investment
(The difference represents goodwill)
Old Partners’ Goodwill
New Partner’s Capital Credit = New Partner’s Asset Investment
(Goodwill is allocated to old partners in their P&L ratio)

Total Capital Agreed After Admission

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Sometimes partners agreed as to the total capital of the partnership after
the admission of a new partner that might either result in:
(1) goodwill to old partners only or new partner only or both, or
(2) bonus to old partners only or new partner only but it can never
be both, or
(3) goodwill and bonus to either old partners or new partner.
Situations wherein goodwill to old partners only or new partners only and
bonus to old partners only or new partner only were already discussed above
except that the total agreed capital was not specified in the example. It was
assumed using the bonus method or goodwill method. Cases explained below
pertain to situations wherein goodwill and at the same time bonus were either
credited to old partners’ capital based on their P&L ratio or to new partner’s
capital.

Case 1
Using the previous example for ABC Partnership, wherein D invested
P300,000, but this time all partners agreed that the total capital after D’s
admission should be P1,000,000 and D’s interest in the parrtnership net
assets is 20%.
The partnership should therefore recognized goodwill of P100,000
(P1,000,000 agreed capital minus P900,000 contributed capital; P600,000
attributable to old partners and P300,000 attributable to new partner). D
should be credited for P200,000 (P1,000,000 x 20%) only, inspite of his
contribution of P300,000. Therefore, the old partners in this case should
receive the goodwill of P100,000 and the bonus from the new partner of
P100,000 distributed based on their P&L ratio. The entry to record the
admission of D should be:
Goodwill P100,000 Cash P300,000
A, capital P40,000 D, capital P200,000
B, capital 40,000 A, capital 40,000
C, capital 20,000 B, capital 40,000
C, capital 20,000
Case 2
Using the previous example in case 1 above, except, this time D invested
P250,000, and all partners agreed that the total capital after D’s admission
should be P900,000 and D’s interest in the partnership’s net assets is 40%.
The partnership should recognized goodwill of P50,000 (P900,000 agreed
capital minus P850,000 contributed capital). D should be credited for
P360,000 (40% x P900,000).
If the capital credit to D is P360,000 but his capital contribution is just
P250,000, then the goodwill of P50,000 should be credited to him as well as a
bonus of P60,000 from the old partners (to make the total capital of D
P360,000) deducted from them based on their P&L ratio. The entry to record
the admission of D should be:
Goodwill P50,000 A, capital P24,000
D, capital P50,000 B, capital 24,000
Cash P250,000 C, capital 12,000
D, capital P250,000 D, capital P60,000
Case 3
Using again the above example in case 1 and this time D invested
P200,000 but he should be credited for P250,000 a 25% interest in the
partnership net assets. The partners also agreed that the total capital should
be P1,000,000 after D’s admission.
The goodwill therefore in this case is P200,000 (P1,000,000 agreed capital
minus P800,000 contributed capital), and D should be credited for P250,000
(25% x P1,000,000). Inasmuch as the amount of identifiable assets
contributed by D is just P200,000, but he should be credited for P250,000,
then it is implied that D is bringing in goodwill of P50,000. Therefore, the
goodwill should be distributed as follows: P50,000 to D and the balance of
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P150,000, is the implied goodwill of the business prior to D’s admission and
should be credited to old partners based on their P&L ratio. The entry to
record D’s admission should be
Goodwill P200,000 Cash P200,000
A, capital P60,000 D, capital P200,000
B, capital 60,000
C, capital 30,000
D, capital 50,000

Partner’s Interest Different From P&L Sharing Ratio

Normally, the partner’s interest in the partnership’s net assets is equal to
his or her P&L ratio. If in case, the interest in net assets differs from the
share in the profit or loss of the partnership, then the use of either bonus
method or the goodwill method might be advantageous to the new partner in
recording his or her admission.

Example: Interest Greater Than P&L Ratio

Case 1
Using the same information of ABC Partnership above except that D was
admitted into the partnership for a 25% interest and D’s P&L ratio is only
20%, after investing P300,000.
Using the bonus method D should be credited for P225,000 (P900,000 x
25%) and based on this you can now say that D, the new partner is giving
bonus to old partners of P75,000 (P300,000 - P225,000), distributed to A, B &
C based on their P&L ratio.
Using the goodwill method, D’s capital contribution will be the basis of
computing the agreed capital of P1,200,000 (P300,000/25%). The goodwill of
P300,000 (P1,200,000 - P900,000) will be credited to old partners based on
their P&L ratio. Under the goodwill method, the goodwill determined is
normally recorded in the books. The goodwill once recorded in the books
should be written off for a period of not exceeding 40 years (GAAP rule) and
thus the effect is reduction in the capital of all partners. Since D’s P&L ratio
is just 20%, D’s share on the goodwill amortization would be P60,000 (20% x
P300,000), and D’s capital will reduce to P240,000. Therefore, it will be
advantageous for D to use the goodwill method because the capital is still
P240,000, rather than the bonus method wherein the capital is only P225,000,
and the advantage will be P15,000, or to simplify the computation, just get
the difference between the interest and P&L share, then multiply by the
amount of goodwill. (25% - 20%) = 5% of P300,000 goodwill. To summarize
the above explanations the following computations were made.
Bonus method:
Capital credit to D (25% x P900,000 agreed capital)
P225,000
Goodwill method:
Capital credit to D initially (25% x P1,200,000)
equal to his capital contribution P300,000
Less: Share on the goodwill amortization
(20% x P300,000) 60,000
240,000
Advantage of goodwill method over bonus method P
15,000
OR simply the difference between the interest and P&L multiply by the
goodwill recognized under the goodwill method. (5% x P300,000) = P15,000.

Example: Interest Less Than P&L Ratio

Case 2
Using the same information, but this time the interest is 20% and D’s P&L
ratio is 25%.
Bonus method:
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Capital credit to D (20% x P900,000)
P180,000
Goodwill method:
Capital credit to D (20% x P1,500,000) P300,000
Less: Share on the goodwill amortization
(25% x P600,000) 150,000
150,000
Advantage of Bonus method over Goodwill method P
30,000
OR simply the difference between the interest and P&L multiply by the
goodwill recognized under the goodwill method (5% x P600,000) = P30,000.
The table below summarizes the situations discussed above.
Bonus method advantageous and the amount of advantage.
Partner’s interest in the net assets < Partner’s P&L ratio, difference
x Goodwill.
Goodwill method advantageous and the amount of advantage
Partner’s interest in the net assets > Partner’s P&L ratio, difference x
Goodwill.
Neither bonus nor goodwill advantageous (general rule)
Partner’s interest in the net assets = Partner’s P&L ratio, difference x
Goodwill.

(2) Partner Death or Withdrawal or Retirement

The death or withdrawal or retirement of a partner is treated in much the
same manner as the admission of a new partner. However, there is no new
capital account to be recorded; we are dealing only with the capital accounts
of the original partners. Either the bonus or goodwill method may be used.
The key thing to remember in regard to a partner’s withdrawal from the
partnership is that the withdrawing partner’s capital account must be
adjusted to the amount that the withdrawing partner is expected to receive.
Example: Partner Withdrawal
Assume the same partnership data as given for the ABC partnership
earlier.
Case 1
Assume that A withdraws from the partnership after reaching an
agreement with partners B & C that would pay him P160,000. The remaining
partners elect not to record goodwill. The entry to record the withdrawal of A
should be:
B, capital P40,000 A, capital P160,000
C, capital 20,000 Cash P160,000
A, capital P60,000
The P60,000 bonus is determined as the difference between the current
balance of A’s capital account and the amount of his buyout agreement. This
“bonus” is then allocated between the remaining partners’ capital accounts in
proportion to their P&L ratios.
Case 2
Assume again that A withdraws from the partnership pursuant to the same
agreement except that this time the partners elect to record goodwill.
The first step is to determine the amount of goodwill to be recorded. In
this case we know that A’s capital account must have a balance of P160,000,
the agreed buyout payment A is to receive. In order to accomplish this the
total partnership assets must be increased by some amount of which P60,000
represents 40%, A’s P&L ratio. Therefore, the amount of goodwill to be
recorded is P150,000 (P60,000/40%). The entry therefore, to record A’s
withdrawal should be:
Goodwill P150,000 A, capital P160,000
A, capital P60,000 Cash P160,000
B, capital 60,000
C, capital 30,000
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Note that in this case all of the partners’ capital accounts are adjusted to
record the goodwill in accordance with their P&L ratios.
Case 3
Sometimes partners wish to record only the goodwill paid to A and not the
total goodwill, which is known as the “alternative goodwill method”. In this
case, using the information in case 2 above, the entry to record A’s
withdrawal should be:
Goodwill P60,000 A, capital P160,000
A, capital P60,000 Cash P160,000

b. Transactions between Partners

The sale of a partnership interest is a transaction only between the
partners. Thus, the treatment accorded the transaction is determined by the
partners involved.
There are two means of dealing with such a transaction. The first is to
simply transfer a portion of the existing partners’ capital to a new capital
account for the buying partner.

Example: Sale of a Partnership Interest - No Goodwill Recorded

Assume the following for the AB partnership:
Partner A B
Capital P500,000 P500,000
P&L ratio 60% 40%
Case 1
Assume that C wishes to enter the partnership by buying 50% of the
partnership interest from both A and B for a total of P800,000. It is important
to note that the P800,000 is being paid to the individual partners and not to
the partnership. Thus, we are only concerned with the proper adjustment
between the capital accounts, not the recording of the cash. This approach
ignores the price that C paid for the partnership interest. The entry to record
C’s capital should be:
A, capital P250,000
B, capital 250,000
C, capital P500,000
The other method available for recording a transaction between partners
is the recording of implied goodwill.

Example: Sale of Partnership Interest - Recording Goodwill

Assume the same facts presented above for the sale of the partnership
interest except that in this case the partners elect to record goodwill.
Case 2
Assuming that C paid P800,000 for a 50% interest in the partnership, the
implied value of the partnership assets is P1,600,000 (P800,000/50%).
Because total capital prior to the purchase is only P1,000,000, the amount of
goodwill that must be recorded is P600,000. The goodwill is allocated to the
partners’ capital accounts in proportion to their P&L ratios. Note that this
entry is made before an adjustment is made to reflect C’s admission to the
partnership.
Goodwill P600,000
A, capital P360,000
B, capital 240,000
Now we can record the sale of the partnership interest to C. The capital
balance of A is now P860,000 (P500,000 + P360,000) while the capital
balance of B is P740,000 (P500,000 + P240,000). Recall that C is to receive
50% of each balance.
A, capital P430,000
B, capital 370,000
C, capital P800,000
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Notice that in this situation the capital balance of C after the purchase is
equal to the amount of the purchase price. Again no entry is made to record
the receipt of cash because the cash goes directly to the individual partners,
A and B.

c. Incorporation of a Partnership
PROCEDURE:
1. Adjust the assets and liabilities of the partnership to their fair market
values and allocate the difference to the partners’ capital accounts
according to their profit and loss ratio.
2. Compute for and record the goodwill by comparing the total par value
of the stocks to be issued to the partners with the total adjusted
partners’ capital accounts. If the total par value of the stocks issued is
greater than the adjusted partners’ capital accounts, the difference
represents goodwill. If the par value of the stocks issued is less than
the adjusted partners’ capital accounts, the difference is considered as
additional paid in capital.
3. Close the partnership books because a new book will be used for the
new entity.
4. Record in the new set of books by debiting the assets at their fair
market values, crediting the liabilities at their current values, and
crediting capital stock for the total par value of the stocks issued to the
partners.
ILLUSTRATION:
Assume that Danny, Amy and Perry are partners dividing profits and losses
in the ratio of 3:2:1, respectively. They decided to incorporate the partnership
and call it DAP Corporation. The partnership books were closed and a balance
sheet was prepared in July 1, 2002:
Cash P 350,000 Accounts Payable P 100,000
Accounts Receivable 500,000 Notes Payable
250,000
Inventories 750,000 Danny, Capital
750,000
Furniture & Fixtures 800,000 Amy, Capital
500,000
Accum. Depreciation (300,000) Perry, Capital
500,000
Total P2,100,000 Total P2,100,000
The DAP Corporation is authorized to issue 10,000 shares of common stock
with a par value of P500 per share. Two more friends were invited as
incorporators who paid cash for a total of 3,000 shares at P500 par. The
partners were issued 4,000 shares for their net assets, subject to the following
revaluation:
a. 5% provision for doubtful accounts.
b. 10% write down on inventories.
c. Furniture and fixtures has a fair market value of P360,000.
Corporation’s books:
Cash P350,000
Accounts Receivable 500,000
Inventories 675,000
Furniture and Fixtures 360,000
Goodwill 490,000
Allowance for Bad Debts P 25,000
Accounts Payable 100,000
Notes Payable 250,000
Capital Stock 2,000,000
Cash 1,500,000
Capital Stock 1,500,000
PROBLEMS:
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1. AA and BB are partners who have capitals of P300,000 and P200,000 and who
share profits 75% and 25%, respectively. They agree to admit CC as a partner
upon payment of P300,000.
Questions: 1.Assume that one third of the capital balances of the old partners
are transferred to the new partner with AA and BB dividing the cash
between themselves. How much are the capital balances of AA, BB
and CC, after the admission of CC?
2.Assume that one third of the capital balances of the old partners are
transferred to the new partner, with AA and BB dividing the cash
between themselves. However, before recording the admission of the
new partner, goodwill is recorded on the firm books so that CC's
capital may be equal to the amount paid for the interest. How much
are the capital balances of AA, BB, and CC after the admission of
CC?
3. Assume that the cash is invested in the business and CC is admitted
with a one fourth interest in the firm, with the bonus method being
used in recording the investment. How much are the capital balances
of AA, BB and CC, after the admission of CC?
4. Assume that the cash is invested in the business and CC is credited
with the full amount of the investment, which is to be 25 percent of
the new firm capital. How much are the capital balances of AA, BB,
and CC, after the admission of CC?
5. Assume that the cash is invested in the business and CC, is credited
for P400,000, which is to be one third of the new firm capital. How
much are the capital balance of AA, BB, and CC, after the admission
of CC?

2. A condensed balance sheet for the AA, BB and CC partnership at December 31,
2004, and their profit and loss sharing percentages on that date are as follows:
Cash P Liabilities P50,00
15,000 0
Other assets 185,00 AA, Capital (50%) 75,00
0 0
BB, Capital (30%) 50,00
0
CC, Capital (20%) 25,00
0
P200,00 P200,0
0 00
On January 1, 2005 the partners decided to bring DD into the partnership for
a one-fourth interest in the capital and profits of the partnership.
Questions: 1. Assuming that DD would purchase one-half of AA's capital and
right to future profits directly from AA for P60,000, how much
capital is to be credited to DD?
2. Assuming that DD would purchase one-fourth of each of the
partner's capital and rights to future profits by paying a total of
P45,000 directly to the partners, the partnership net assets are to
be revalued. How much will be the capital balance of BB after DD's
admission?
3. Assuming that DD would invest P55,000 cash in the partnership
for a 25 percent interest in capital. Future profits would be divided
37-1/2 percent, 22-1/2 percent, 15 percent and 25 percent for AA,
BB, CC and DD respectively. Partnership net assets are not to be
revalued. How much capital is to be credited to DD?
3. X and Y are partners with capital balances of P200,000 and P100,000
respectively. They share profits in the ratio 3:1. They admit Z as partner and
contribute P125,000 for a 1/5 interest in the firm. Parties agree that the total
firm capital after Z's admission is to be P500,000 and the profit and loss ratio
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is 1:1:1. How much are the capital balances of the partners after Z's
admission?
4. Partners S and T share profits in the ratio of 6:4 respectively. On December
31, 2004, their respective accounts were S, P120,000 and T, P100,000. On
that date, U was admitted as partner with a one-third interest in capital and
profits for an investment of P80,000. The new partnership began 2005 with
total capital of P300,000. Immediately after U's admission, how much are the
capital balances of S, T and U?
5. G and H are partners who have capitals of P60,000 and P48,000 and who
share profits in the ratio of 3:2. I is admitted as a partner upon investing cash
of P50,000 with profits to be shared equally.
Questions: a. Assume that I is allowed a 25 percent interest in the firm, which
method (goodwill or bonus) will benefit I, and how much?
b. Assume that I is allowed a 40 percent interest in the firm, which
method (goodwill or bonus) will benefit I, and how much?
6. M and N have capital balances of P65,000 and P35,000 and share profits 3:2.
O is admitted as a partner and is given a 25% interest in the firm upon
investing P40,000 cash. Profits are to be shared 5:3:2 by M, N and O. P
subsequently enters the partnership by investing P25,000 for a 20% interest
in assets and a 20% share of the firm's profits. Former partners share the
balance of profits in their origUl ratio. M has difficulty getting along w/ P &
withdraws from the partnership. The partnership pays P73,000 cash for M's
interest.
Question: a. Assuming the bonus method is used, how much should be the
capital balances of all partner's after M's withdrawal?
b. Assuming that goodwill method is used, how much should be the
capital balances of all partners after M's withdrawal?
7. F, G and H are partners with capital balances on June 30, 2006, of P300,000,
P300,000 and P200,000, respectively. Profits are shared equally. H withdraws
from the partnership. The partners agree that H is to take certain furniture
and fixtures at their secondhand value of P12,000 and a note for the balance
of her interest. The furniture and fixtures are carried on the books as fully
depreciated.
Questions: a. How much is the note payable issued to H?
b. Is there an effect on the capital accounts of F, and G, regarding H's
taking of furniture and fixtures at their second hand value of
P12,000?
8. I, J and K are partners dividing profits and losses in the ratio of 5:3:2 and
whose capital balances as of January 1, 2006 were P600,000, P400,000 and
P300,000, respectively. K is retiring from the partnership as of July 1, 2006.
The partnership agreement provides that the books of accounts need not be
closed upon the retirement of a partner. Net income is to be considered as
having been realized proportionately during the period. The partnership
estimated net income from 2006, P480,000. Prior to her retirement, K paid
personal expenses of P15,000 from the partnership funds. The partnership, on
the other hand, collected P50,000 from personal receivable of K and
deposited the same for the account of the partnership. How much cash K
should received as of the date of her retirement?
9. L, M, and N are partners sharing profits in the ratio of 3:2:1, respectively.
Capital accounts are P500,000, P300,000 and P200,000 on December 31,
2006, when N decides to withdraw. It is agreed to pay P300,000 for N's
interest. Profits after the withdrawal of N are to be shared equally.
Questions: a. Using the bonus approach, how much are the capital balances
of L and M after N's withdrawal?
b. Using the goodwill approach, how much are the capital balances of
L and M after N's withdrawal?
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10. O, P and Q share profits in the ratio of 5:3:2. S is permitted to withdraw from the
firm on December 31, 2006. Profits after the withdrawal of Q are to be shared 3:2.
The partnership balance sheet on this date is as follows:
Receivable from P10,000 Liabilities P80,00
Q 0
Goodwill 80,000 Payable to P 30,00
0
Other assets 190,000 O, capital 70,00
0
P, capital 60,00
0
Q, capital 40,00
0
P280,000 P280,0
00
Questions: 1. Assuming that Q is paid P44,000 in full settlement of the capital
interest and P10,000 claim balance, using the bonus method of
recording the withdrawal of Q, how much are the capital balances
of O and P after Q's withdrawal?
2. Using the data in no. 1, using the goodwill method of recording Q's
withdrawal, how much are the capital balances of O and P after Q's
retirement?
3. Which method is preferred by GAAP in recording Q's withdrawal
and why?
4. Assuming that Q is paid P24,000 in full settlement of the capital
interest and P10,000 claim balance, using the bonus method, how
much are the capital balances of O and P after withdrawal of Q?
5. Using the data in no. 4, using the goodwill method, how much are
the capital balances of O and P after Q's withdrawal?
6. In relation to nos. 4 and 5, which method is preferable by GAAP?
And why?
11. The balance sheet of R and S, a partnership appears as follows:
R AND S PARTNERSHIP
Balance Sheet
October 31, 2006
ASSETS
Current Assets:
Cash P 41,100
Accounts Receivable P212,160
Allowance for bad debts 8,000 204,160
Inventories 241,100
Prepaid expenses 10,140
P496,500
Plant Assets:
Furniture and Fixtures P241,000
Accumulated Depreciation 68,200
172,000
Total assets P669,300
LIABILITIES AND CAPITAL
Current Liabilities:
Accounts payable P161,400
Accrued expenses 20,000
P182,200
Partner’s capital:
R, capital P260,350
S, capital 226,750 487,100
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Total Liabilities and capital
P669,300
R and S share profits and losses equally.
The partners incorporate as H & G Corporation with an authorized capital of
5,000 shares at P100 par stock, of which 4,400 are issued to the partners in
exchange for their interest in the net assets of R and S, and the remainder are
issued at P120 per share for cash. The partners agree that the following
adjustment should be recorded:
Allowance for bad debts decreased by P 4,000
Inventories increased by 12,000
Accumulated depreciation decreased by 6,200
Goodwill is to be recognized in an amount which will cause the net assets of
the partnership to equal the cash issuance price of the shares to be issued
therefore.
Questions: 1. How much is the additional paid-capital contributed by R
and S to the new corp.?
2. How much goodwill is to be recognized in the corporation’s
books?
3. How many shares R will receive?
12. The partnership of T, U and V is being absorbed by ACE Corp. The latter
will issue 19,000 shares of P100 par value capital stock in exchange for the
net assets of the partnership. As of this date, the net assets of the partnership
amount to P1,500,000 and the capital balances of T, U and V are
proportionate to their profit sharing ratio of 5:3:2. It has been agreed upon by
all parties that the merchandise inventory of the partnership should be
adjusted upwards by P150,000.
Questions: 1. How much is the partnership goodwill as implied in the
above transactions?
1. How much are the capital account balances of T, U and V, respectively,
immediately before the turnover of the net assets to the corporation?

MULTIPLE CHOICE:
1. Terry and Arvin are partners having capital balances of P100,000 and P150,000, respectively. They
admit Ben to a 1/3 interest in the partnership capital and profits for an investment of P130,000. If
the goodwill procedure is used in recording Ben’s admission to the partnership:
a. Ben’s capital will be P126,667 c. Arvin’s capital will be P156,000.
b. Goodwill be recorded at P30,000 d. Total capital will be P380,000
2. Partners Pat, Paul and Pam share profits and losses 50:30:20, respectively.
The balance sheet as at April 30, 2003 follows:
Cash P 80,000 Accounts Payable P200,000
Other Assets 720,000 Pat, Capital 148,000
Paul, Capital 260,000
________ Pam, Capital 192,000
P800,000 P800,000
The assets and liabilities are recorded and presented at their respective fair values. Pete is to be
admitted as a new partner with a 20% capital interest and a 20% share of profits and losses in
exchange for a cash contribution. No goodwill or bonus is to be recorded. How much cash should
Pete contribute?
a. P120,000 b. P144,000 c. P150,000 d. P160,000
3. The capital accounts of the partnership of Knur, Shane and Jack on June 1,
2003 are presented along with their respective profit and loss ratios:
Knur, Capital (1/2) P278,000
Shane, Capital (1/3) 417,600
Jack, Capital (1/6) 192,400
P888,000
On June 1, 2003 Sid was admitted to the partnership when he purchased for
P264,000 a proportionate interest from Knur and Shane in the net assets and profits
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of the partnership. As a result of this transaction, Sid acquired a 1/5 interest in the
net assets and profits of the firm. Assuming that implied goodwill is not to be
recorded, what is the combined gain realized by Knur and Shane upon the sale of a
portion of their interest in the partnership to Sid?
a. P0 b. P86,400 c. P124,800 d. P154,000
4. Chris, Yo, and Thompson are partners with capital balances on December 31, 2002 of P300,000,
P300,000, and P200,000, respectively. Profits are shared equally. Thompson wishes to withdraw
and it is agreed that he is to take certain furniture and fixtures with second hand value of P50,000
and a note for the balance of his interest. The furniture and fixtures are carried on the books at
P65,000. Brand new, the furniture and fixtures may cost P80,000. How much is the value of the
note that Thompson will get from the partnership’s liquidation?
a. P145,000 b. P150,000 c. P195,000 d. P120,000
5. The following is the condensed balance sheet of the partnership of Renee,
Ernie and Bob as of December 31, 2003. The partners share profits in the
ratio of 4:3:3, respectively:
Cash P 180,000 Accounts Payable P 420,000
Renee, Receivable 40,000 Bob, Loan 60,000
Other Assets 1,660,000 Renee, Capital 620,000
Ernie, Capital 400,000
_________ Bob, Capital 380,000
P1,880,000 P1,880,000
Assume that the assets and liabilities of the partnership are fairly valued and that the
partners decided to admit Julius as a partner with a 20% interest, but with neither
bonus nor goodwill to be recorded. How much should Julius contribute in cash or
other assets?
a. P280,000 b. P284,000 c. P350,000 d. P355,000
6. Partners Bark, Dark, and Hark share profits and losses 5:3:2, respectively,
and their balance sheet on October 31, 2003 follows:
Cash P 240,000 Accounts payableP 600,000
Other assets 2,160,000 Bark, capital 444,000
Dark, capital 780,000
Hark, capital 576,000
P2,400,000 P2,400,000
The assets & liabilities are recorded at their current fair value. Lark is to be admitted
as a new partner w/ a 1/5 interest in capital & earnings. Bark was credited a bonus of
P15,000. How much should Lark contribute?
a. P456,000 b. P450,000 c. P480,000 d. P487,500
7. Dick and Nick are partners who have capital balances of P900,000 and P720,000, respectively, and
share profits and losses in the ratio of 3:2, respectively. Rick is admitted as a partner upon
investing P750,000 for a 20% interest in the firm, profits are to be shared 3:3:2, to Dick, Nick, and
Rick, respectively. Given the choice between goodwill and bonus method, Rick will:
a. Prefer goodwill method due to Rick’s gain of P276,000.
b. Prefer bonus method due to Rick’s gain of P69,000.
c. Prefer goodwill method due to Rick’s gain of P157,500.
d. Be indifferent for the goodwill and bonus method are the same
8. Barry and Garry are partners who share profits and losses equally in a highly successful
partnership. The capital accounts of Barry and Garry have tripled in five years and at present stand
at P270,000 and P180,000, respectively. Harry desires to join the firm and offers to invest
P150,000 for a 1/3 interest in capital and in income and loss of the firm. Barry and Garry declined
the offer but extended a counter- offer to Harry of P210,000 for a ¼ interest in capital and in
income and loss of the firm. If Harry accepted the counter- offer and goodwill is recorded, what
should be the balances in the capital accounts of Barry and Garry, respectively, after Harry’s
admission?
a. P270,000 and P180,000. c. P292,500 and P202,500.
b. P300,000 and P210,000. d. P360,000 and P270,000.
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9. The balance sheet for the partnership of Larry, Monte, and Nardo at April 30,
2003, follows. The partners share profits and losses in the ratio of 2:2:6,
respectively.
Assets, at cost P100,000 Larry, Loan P 9,000
Larry, Capital 15,000
Monte, Capital 31,000
_______ Nardo, Capital 45,000
P100,000 P100,000
Larry is retiring from the partnership. By mutual agreement, the assets are to be
adjusted to their fair value of P130,000 at April 30, 2003. Monte and Nardo agree
that the partnership will pay Larry P37,000 cash for his partnership interest,
exclusive of his loan which is to be paid in full. No goodwill is to be recorded.
What is the balance of Nardo’s capital account after Larry’s retirement?
a. P51,000 b. P53,000 c. P59,000 d. P63,000
10. Dunk, Sunk and Punk shared profits and losses based on a 5:3:2 ratio.
Punk was allowed to withdraw from the partnership on December 31, 2003
with P1,200,000 cash as full settlement. The condensed balance sheet of the
partnership as of that date was as follows:

Due from Punk P 500,000 Liabilities P4,000,000

Goodwill 4,000,000 Due to Sunk 1,500,000
Other assets 9,500,000 Dunk, capital 3,500,000
Sunk, capital 3,000,000
Punk, capital 2,000,000

P14,000,000 P14,000,000
Under the goodwill method of accounting Punk’s withdrawal, the capital balances of
the remaining partners Dunk and Sunk, respectively, are:
a. P2,750,000 and P2,550,000. c. P1,500,000 and P1,800,000.
b. P3,500,000 and P3,000,000. d. P3,500,000 and P4,500,000.
Items 11 and 12 are based on the following:
Art, Bart & Dart are partners with capital balances on December 31, 2003 of
P600,000, P600,000 & P400,000, respectively. Profits are shared equally.
Dart wishes to withdraw and it is agreed that he is to take certain furniture &
fixtures at their second hand value of P24,000 and note for the balance of his
interest. The furniture and fixtures are carried on the books as fully
depreciated. Brand new, furniture and fixtures may cost P40,000.
11. How much is the value of the note that Dart will get from the partnership?
a. P373,333 b. P384,000 c. P400,000 d. P360,000
12. Dart’s acquisition of the second hand furniture will result to:
a. Increase in the capital of P8,000 each for Art, Bart, and Dart.
b. Increase in the capital of P12,000 each for Art and Bart.
c. Increase in the capital of P20,000 each for Art and Bart.
d. Decrease in the capital of P16,000 for Dart.
13. Partners Carrie and Dennis, who share equally in profits and losses, have
the following balance sheet as of December 31, 2003:
Cash P120,000 Accounts Payable P172,000
Accounts Receivable 100,000 Carrie, Capital
140,000
Merch. Inventory 140,000 Dennis, Capital
120,000
Equipment- net 72,000 ________
P432,000 P432,000
They agreed to incorporate their partnership, with the new corporation taking
over all the assets and assuming all the liabilities after the following
adjustments:
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1. Provision of allowance for bad debts of P10,000.
2. Recording the inventory at fair value of P160,000.
3. Additional depreciation on the equipment of P3,000.
The corporation’s capital stock is to have a par value of P100. Carrie and Dennis
were to be issued the corresponding shares of stock equivalent to their adjusted
capital balances. The total par value of shares issued to the partners is:
a. P267,000 b. P273,000 c. P277,000 d. P280,000
14. Jay and Kay Partnership’s balance sheet at December 31, 2002, reported
the following:
Total Assets P100,000
Total Liabilities 20,000
Jay, Capital 40,000
Kay, Capital 40,000
On January 2, 2003, Jay and Kay dissolve their partnership and transferred all assets
and liabilities to a newly formed corporation. At the date of incorporation, the fair
value of the net assets was P12,000 more than the carrying amount on the partnership
books, of which P7,000 was assigned to tangible assets and P5,000 was assigned to
goodwill. Jay and Kay were each issued 5,000 shares of the corporation’s P1 par
value common stock. Immediately following incorporation, additional paid in
capital in excess of par should be credited for:
a. P68,000 b. P70,000 c. P77,000 d. P82,000
15. Dave, Edgar, and Ford are partners with a profit and loss ratio of 5:3:2,
respectively. They decided to incorporate. The partnership’s trial balance
shows the following information:
Book Values Market Values
Cash in bank P 40,000 P 40,000
Accounts receivable- net 26,000 26,000
Inventories 34,000 60,000
Land 20,000 60,000
Building 50,000 70,000
Equipment 80,000 60,000

P250,000
Accounts payable P 30,000 P 30,000
A/D- building 20,000
A/D- equipment 30,000
Loan payable- Edgar 40,000
Dave, capital 60,000
Edgar, capital 20,000
Ford, capital 50,000

P250,000
Capital stock in the amount of P250,000 is to be issued in the ratio of 4:3:3 for Dave,
Edgar, and Ford, respectively. The partners are either to receive cash or to pay
amounts of cash into the partnership sufficient to bring their capital accounts in the
ratio of 4:3:3, respectively, for a total capital of P250,000, after any required
revaluation of assets. The incorporation will result to:
a. Dave contributing cash of P18,000 to increase his capital.
b. Edgar will contribute additional cash of P19,800 to increase his capital.
c. Ford will withdraw cash of P1,800 to reduce his capital.
d. The total cash will be reduced by P36,000

**** Thought is creative, Fear attracts like energy, Love is all there is ****
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