SOLUTION FOR ADVANCED FINANCIAL ACCOUNTING AND REPORTING

(PARTNERSHIP DISSOLUTION AND LIQUIDATION)

PARTNERSHIP DISSOLUTION:

PROBLEM 1: ADMISSION BY PURCHASE (indication: pay, sold, bought and transfers)

REQUIREMENT 1: What is the capital of Josh after admission?

Answer: P 164,000

Solution:
Ivan (50%) Josh (20%) Marie (30%) Total
Capitals 200,000 160,000 120,000 480,000
Net Income 150,000 60,000 90,000 300,000
Drawings (25,000) (15,000) (20,000) (60,000)
Adjusted capital 325,000 205,000 190,000 720,000
X remaining interest (80%) 80% 80% 80%
Remaining Capital P 260,000 P 164,000 P 152,000

Paul’s capital after admission = 720,000 x 20% = P144,000

Take note:
 In computing for the adjusted capital accounts of the partners, we disregard Loans (Due to. and Due from accounts)
regardless if it is an admission by purchase or admission by investment because the admitting partner is buying
only the INTEREST (CAPITAL) not the total interest.

ASSUMPTION:
What is the amount of cash received by Ivan from the amount of P160, 000 paid by Paul?

DISTRIBUTION OF CASH PAYMENT OF NEW PARTNER TO OLD PARTNERS (A Closer Look on Accounting for Special
Transactions by Paul Anthony Dela Fuente De Jesus)

There is no indefinite rule on how to divide the payment of new partner to the old partners. The following procedure is
recommended for fair and equitable distribution of payment among old partners.

1. Determine the amount interest transferred to new partner by the individual old partners.
2. Any excess will be divided based on the original profit and loss agreement of the partners
.

Ivan (50%) Josh (20%) Marie (30%) Total

Adjusted Capital 325,000 205,000 190,000 720,000
Interest Sold (20%) 20% 20% 20% 20%
Capital transferred 65,000 41,000 38,000 144,000
Personal Gain/loss 8,000 3,200 4,800 16,000
Total Cash received by P 73,000 P 44,200 P 42,800 P160,000

ENTRY upon admission:

Ivan, Capital 65,000

Josh, Capital 41,000
Marie, Capital 38,000
Paul, Capital 144,000
#admission by purchase

REQUIREMENT 2: Assuming the partners agreed to revalue (REVALUATION METHOD) the Non-Cash Assets before
admitting Paul as the new partner, what is the TOTAL REMAINING INTEREST of Marie after admission Paul?

Under this scheme (Revaluation Method) the excess amount paid over the book value acquired will be capitalized to
determine the revaluation assets. The effect of the asset revaluation is carried to the capital of the old partner. The

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 adjusted capital of the old partners will be the basis in determining the interest of the new partner. (A closer look on
Accounting for Special Transactions by Paul Anthony Dela Fuente De Jesus)

The following procedures under this scheme are as follows:

Step 1: Determine the new capital of the partnership (TAC) by dividing the amount paid by the new partner to its
interest.

Step 2: Get difference of the old capital of the partnership by the amount computed in step 1. (TAC – TCC).

NOTE: If the new capital (implied capital) is greater than the old capital there is a under revaluation of assets. However,
if it is less than the old capital there is an overvaluation of assets.

Step 3: Allocate the difference computed in step 2 to the old partners’ capital account using the profit and loss
agreement of old partners.

Step 4: Adjust the capital of the old partners by adding the amount computed in step 3 to their old capital account.

Step 5: Compute the interest of the new partner base on the adjusted capital account of the old partners in step 4.

Remember: Under admission by purchase, the partnership’s capitalization does not change.

Answer: P191, 200

Solution:

Ivan (50%) Josh (20%) Marie (30%) Total

Capitals 200,000 160,000 120,000 480,000
Net Income 150,000 60,000 90,000 300,000
Drawings (25,000) (15,000) (20,000) (60,000)
+undervaluation* 40,000 16,000 24,000 80,000
Adjusted Capital 365,000 221,000 214,000 800,000
Remaining Capital/Interest 80% 80% 80%
Remaining Interest P 292,000 P 176,800 P 171,200
+-(loan) 10,000 (5,000) 20,000
Total Interest P 302,000 P 171,800 P 191,200

*Compute for the implied capital/agreed capital:

Use admitting partner’s capital base:

P160, 000 divided by 20% = P 800,000 (implied capital/Total Agreed capital)

(Assumption on this one: Paul anticipated that the partners’ capital is undervalued, so he gave P160, 000 as payment for the
interest he will buy)

ALTERNATIVE FORMULA FOR REVALUATION:

Payment of Partner P160, 000
BV of Interest Acquired (720,000 x 20%) (144, 000)
Difference P 16, 000
Divided by: 20%
Revaluation amount P 80,000

Revaluation of Assets:

Assets 80,000
Ivan , Capital 40,000
Josh, Capital 16,000
Marie, Capital 24,000
#

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Entry upon admission:

Ivan, Capital 73,000

Josh, Capital 44,200
Marie, Capital 42,800
Paul, Capital 160,000
#admission by purchase

PROBLEM 2: ADMISSION BY INVESTMENT (indications: contributes and invest)

Answer: P435, 000

Solution: Problem is silent as to what method to use, hence the method to use is Net Investment Method)
Net investment Method – (TCC=TAC)

CC AC Difference
A, Capital 1,044,000 1,044,000 -
B, Capital 696,000 696.000 -
Total (80%) 1,740,000 1,740,000 -
C, Capital (20%) 435,000 435,000 -
Total 2,175,000 2,175,000 -

If you notice we did not use the “B, loan” account because the admitting partner is aiming for a 20% interest, not the
20% of the TOTAL INTEREST. Remember: There are two types of interest (a) Capital/Interest, and (b) total Interest
inclusive of loans. If the problem is silent, it is TOTAL INTEREST.

PROBLEM 3: ADMISSION BY INVESTMENT (REVALUATION METHOD)

Requirement 1: If the asset revaluation is used is recording the admission of partner C to the Partnership, what is the
capital of Partner B after the admission of C?

Answer: P150, 000

Solution:

REMEMBER: Before a partner is admitted to an existing partnership, the existing partners’ capitals are adjusted
first, including unrecorded net income/unrecorded net loss and revaluation using their P/L ratio. In Revaluation
Method, it is either undervalued (TCC<TAC) or overvalued (TCC > TAC).

Partner CC AC Difference
A 120,000 200,000*
B 180,000 150,000**
Total Prior to C 300,000 350,000
C 150,000 150,000
Total 450,000 500,000 50,000***

***Revaluation = P50,000 undervalued

*Partner A’s agreed Capital = (500,000 x 40%) = P 200, 000
**Partner B’s agreed Capital = (500,000 x 30%) = P 150, 000

Requirement 2: What is the amount of cash received by partner B to conform to his capital interest after admission of
partner C?

Answer: P50,000

Solution:
A B
Unadjusted Capital P120,000 P180,000
undervalued (see solution above)
A – (50,000 x 60%) 30,000
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 B – (50,000 x 40%) 20,000
Adjusted Capital 150,000 200,000
Settlement 50,000 (50,000)
Agreed Capital (see solution above) 200,000 150,000

PROBLEM 4:
Requirement: What is the capital of Partner A on December 31, 2030?

Answer: P 570,000

A (30%) B(50%) C (20%)

Unadjusted Capital 450,000 750,000 230,000
Net Income (300,000/2) = 150,000
A = (150,000 x 30%) 45,000
B = (150,000 x 50%) 75,000
C = (150,000 x 20%) 30,000
Undervalued (2M – 1.8M = 200K)
A = (200,000 x 30%) 60,000
B = (200,000 x 50%) 100,000
C = (200,000 x 20%) 40,000
Adjusted Capital before admission 555,000 925,000 300,000

Partner CC AC Difference
A 555,000 534,000 (21,000)
B 925,000 890,000 (35,000)
C 300,000 286,000 (14,000)
Total 1,780,000 1,710,000 (70,000)
D 500,000 570,000* 70,000
Total 2,280,000 2,280,000 0

Since the problem is silent as to what method will be used upon the admission of a new partner. Always have the
assumption of TAC = TCC (Bonus Method/ Net Investment Method). Hence, it is presumed that the total contributed
capital of P2, 280, 000 is also the Total Agreed Capital.

*D’s Agreed Capital = (2,280,000 x 25%) = 570,000

Based on the solution above, the new partner will receive a bonus of P70, 000. Hence, there is a transfer of capital
to the new partner, and it will be distributed using the P/L ratio of the old partners. Remember that the P/L will
only be used in distributing BONUS, NET INCOME/NET LOSS, and/or REVALUATION.

The bonus to the new partner will be taken from the capitals of A, B, and C. Thus,

A (70,000 x 30% ) = 21,000

B (70,000 x 50%) = 35,000
C (70,000 x 20%) = 14, 000

Entry:
A, Capital 21,000
B, Capital 35,000
C, Capital 14,000
D, Capital 70,000
#Transfer of Capital

A (24%) B(40%) C (16%) D(20%)

Capital 534,000 890,000 286,000 570,000
Income (June 30 – December 31.)
A = (150,000 x 24%) 36,000
B = (150,000 x 40%) 60,000
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 C = (150,000 x 16%) 24,000
D = (150,000 x 20%) 30,000
Capital, December 31, 2030 P 570,000 P 950,000 P 310,000 P 600,000

New P/L ratio:

A = (30% x 80%) = 24%
B = (50% x 80%) = 40%
C = (20% x 80%) = 16%
D = 20%

PROBLEM 5: RETIREMENT OF A PARTNER/WITHDRAWAL OF A PARTNER

Requirement 1: Partner C will receive P892,000 cash for his TOTAL INTEREST in the partnership. What is the
REMAINING TOTAL INTEREST OF PARTNER A after retirement of Partner C?

Answer: P40,154

Solution:

A (20%) B (45%) Retiring - C (35%)

Capital 400,000 800,000 600,000
Net loss (600,000) (120,000) (270,000) (210,000)
Revaluation (20,000) (4,000) (9.000) (7,000)
Drawings (40,000) (30,000) (15,000)
Capital P 236,000 P 491,000 P 368,000
Loan 50,000
Total Interest P 236,000 P 491,000 P 418,000
Payment - - 892,000
Bonus to retiring (P/L) (145,846) (328,154) 474,000
Loans (50,000) 100,000
Total Remaining Interest P 40, 154 P 262,846

Entry upon retirement:

A, Capital 145,846
B, Capital 328,154
C, Capital 474,000
#Transfer of Capital

C, loan 50,000
C, Capital 842,000
Cash 892,000
#Retirement of Partner C

Requirement 2: Partner B capital after retirement of C becomes P923, 000 and the partnership equipment is also
revalued. How much did partner C receive at the time of his retirement for the settlement of his TOTAL INTEREST
IN THE PARTNERSHIP?

Answer: P754, 000

Solution:

A (20%) B (45%) Retiring - C (35%)

Capital 400,000 800,000 600,000
Net loss (600,000) (120,000) (270,000) (210,000)
Revaluation (20,000) (4,000) (9.000) (7,000)
Drawings (40,000) (30,000) (15,000)
Capital P 236,000 P 491,000 P 368,000
Revaluation (Equipment) 192,000 432,000 336,000
Adjusted Capital before retirement 428,000 P 923,000 P 704,000
Loan - - 50,000
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 Total P 428,000 P 923,000 P 754,000
Loan (50,000) 100,000
Total Remaining Interest P378,000 P 1,023,000

LIQUIDATION

Problem 1: (INSTALMENT LIQUIDATION)

Requirement 1: P 330,000

Requirement 2: P 0

Requirement 3: P 214,000

Solution: Requirement 1

March 2030
Beginning Cash 500,000
Cash Realized 500,000
Additional Investment -
Payment of Liquidation Expense (20,000)
Payment of Liability -outside (400,000)
Cash withheld for unpaid liability –outside (110,000) (590,000 – 400,000 – 80,000)
Cash withheld for Possible loss* (220,000)
Cash Available To Partners P 250,000

*CASH WITHHELD FOR POSSIBLE LOSS – cash intended as future liquidation expenses, and unrecorded liability

The “CASH WITHHELD” account will be the beginning cash balance for the next instalment of liquidation (April 1,
2030). Hence, the “CASH WITHHELD FOR UNPAID LIABILITY” and “CASH WITHHELD FOR POSSIBLE LOSS” with a total
amount of P 330, 000 is the amount to be considered as beginning cash balance available for the next instalment
of liquidation.

Solution: Requirement 2

A (30%) B (50%) C (20%) TOTAL

Capital 480,000 620,000 310,000 1,410,000
Due to (Due From) 30,000 (90,000) 60,000 -
Total Interest 510,000 530,000 370,000 1,410,000
Total gain or loss (348,000) (580,000) (232,000) (1,160,000)
CAFD 162,000 (50,000) 138,000 250,000
Absorb (30,000) 50,000 (20,000) -
Cash Received P 132,000 P0 P 118,000 P250,000

You may also compute using the concept given under Cash Priority Program:

Solution: Requirement 3

Remaining NCA 850,000

CW for Possible loss 220,000
Total Possible Loss P 1 ,070,000
X P/L ratio of C 20%
C’s share in the Maximum Possible loss P 214,000

PROBLEM 2: (LUMP-SUM LIQUIDATION)

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Requirement 1: P 310,000

Solution:

A (45%) B (35%) C (20%) TOTAL

Capital 800,000 720,000 230,000 1,750,000
Loan from (Rec.from) (150,000) 100,000 - (50,000)
Total Interest 650,000 820,000 230,000 1,700,000
Total loss (562,500) (437,500) (250,000) (1,250,000)
Received 87,500 382,500 (20,000) 450,000
Add: Investment - - 20,000 20,000
Received 87,500 382,500 - 470,000

ASSUMPTIONS:
 Problem 2 is a Lump-sum Liquidation:
 Partner C has a capital deficiency of P20, 000. So, we will adhere step no. 4 (elimination of capital deficiency).
 Under a lump sum liquidation, if a partner status is not stated it presumed as solvent unless otherwise.

Beginning Cash 800,000

Cash Realized 310,000
Additional Investment 20,000
Payment of Liquidation Expense (10,000)
Payment of Liability -outside (650,000)
Cash withheld for unpaid liability –outside -
Cash withheld for Possible loss* ______-_
Cash Available To Partners P 470,000

Requirement 2: P (1,240,000)
Solution

Basic Accounting Equation = (A = L + E)

ASSETS LIABILITY CAPITALS

Cash NCA Receivable = Liability Loan, B A B C
800,000 ? 150,000 = 650,000 100,000 800,000 720,000 230,000

THEREFORE, NCA = P 1, 550, 000

Selling Prince 310,000

Book Value P(1, 550, 000)
Loss on Realization P(1, 240, 000)

Or

Gain on realization 0
Loss on realization (1,240,000)
Payment of liquidation expense ( 10,000)
Condone liability 0
Remaining Non-Cash 0
Cash withheld for possible loss 0__
Total Loss (1, 250,000)

PROBLEM 3:

Answer: P 197, 500

Solution:
Paul (30%) Mike (30%) Bong (40%) Total
Capital ? ? ? ?
+-Loan - - - -
Total Interest ? ? ? ?
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Total loss ? ? ? ?
Amount received/Cash Payment to 225,000 (150,000) (250,000) P (175,000)
Additional investment (Bong) - - 175,000 P 175,000
Capital Balance 225,000 (150,000) (75,000) 0
Additional Investment (MIKE) - 97,500 - P 97,500
Capital Balance 225,000 (52,500) (75,000) P 97,500
Additional Investment (Bong) 75,000 P 75,000
Capital Balance 225,000 (52,500) 0 P 172,500
Absorbed by remaining partners using their P/L (22,500) 52,500 (30,000) -
Capital Balance 202,500 - (30,000) P 172,500
Additional Investment - - 25,000 P 25,000
Balance 202,500 - (5,000) P 197,500
Absorbed by Paul (5,000) - 5,000 -
Balance P 197,500 - - P 197,500

MARSHALLING OF ASSETS
Personal assets Personal liabilities Solvent up to (insolvent
Paul 200,000 225,000 (25,000)
Mike 250,000 152,500 97,500
Bong 475,000 200,000 275,000

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