DISSOLUTION - PURCHASE OF INTEREST

Dissolution – A change in partnership structure; effect is as if a new partnership is being established

FIVE CASES TO BE DISCUSSED:
1. The new partner purchases some of the capital of the old partners (interest)
2. New partner invests assets to the partnership
3. Retirement of a partner
4. Partner dies – settlement through estate
5. Incorporation of a partnership
ACCOUNTING PROCEDURES BEFORE DISSOLUTION
1.) Revalue assets
2.) Distribute profits (from last SFP to dissolution date)
3.) Close drawing accounts
ENTRIES TO UPDATE PARTNERS’ EQUITY
1.) Adjusting the asset value and charging the increase or decrease to the capital accounts
2.) Distribution of profit – close income summary balance and credit to partner drawing accounts
3.) Closing the drawing accounts to the capital accounts
CASE 1. Purchase of Interest. Dito, bibilhin lang nung bagong partner yung capital ng isang existing
partner. PERSONAL ang transaction, hindi tayo magdedebit ng cash kasi ang magbubulsa nung cash
ay yung kung sino ang nagbebenta ng capital nya.
CASE 1A. Amount Paid = Capital or Interest Purchased. Kapag ganito, wala naman masyadong
problema kasi equal naman pala. So wala kailangan irevalue. In short, babawasan mo ang capital nung
partner na nagbebenta with the amount paid and dadagdagan (icecredit) mo naman ang capital ni
bagong partner with the same amount.
CASE 1B. Amount Paid > Capital or Interest Purchased, no asset reval. Dito, mas mataas ang binayad
ni ateng new partner compared sa binibili nya. Pwedeng maraming factor. Sikat si new partner,
magaling sumayaw, ewan haha basta kapag ganito, same entry pa rin naman with Case 1A. Tandaan
nyo na personal transaction yung purchase, lipatan lang din ng capital ang magaganap. Yung excess,
ibubulsa na din ni ateng new partner. Wala yung effect sa partnership assets.
CASE 1C. Assets need revaluation. Ito na yung madugo, pero di na kayo bago dito. May example na
rin naman sa libro. Minsan, si bagong partner, mas mataas ang ibabayad compared sa actual amount
ng capital na pinupurchase kasi yun pala, sa partnership books, hindi pala updated yung capital ni old
partner. Kaya pala babayad ng mas mataas kasi tumaas din yung value ng assets nila. Tandaan na lang
ang mga formula, in addition sa formula na nasa libro nyo na.
Total Revised Partners’ Equity = Amount paid / New partner’s P/L ratio
How to determine new partner’s P/L ratio?
New partner’s P/L Ratio = Old partner’s P/L ratio (seller’s orig ratio) * % being purchased by new
partner
Lucas’s P/L ratio = Sarah’s P/L Ratio * % being purchased by Lucas
Lucas’s P/L ratio = 2/5 * ½ (half)
Luca’s P/L ratio = 1/5 or 20%
Total Revised Partners’ Equity = Amount paid / New partner’s P/L ratio
Total Revised Partners’ Equity = 15,000/20%
Total Revised Partners’ Equity = 75,000
Revaluation amount = Revised Partners’ Equity – Original Partners’ Equity
Revaluation amount = 75,000 – (30,000 + 20,000)
Revaluation amount = 25,000
Partner’s share in revaluation = revaluation amount * P/L ratio
Partner’s revised equity, individual = Original capital + Partner’s share in revaluation
(If revaluation LOSS, deduct instead of adding)
Entries
1.) Revaluation of the asset involved – charge to old partners’ capital
2.) Transfer of capital, using the ACTUAL AMOUNT PAID (not the original capital share).
Again, partnership assets are not affected by the sale itself.
Revised Profit and Loss Ratio – if these is no P/L agreement, distribution after dissolution is based on
original capital ratios.