The dissolution of a
partnership is the process during which the affairs of the partnership are
wound up (where the ongoing nature of the partnership relation terminates).
This should not be confused with the term dissolution when applied to a limited
company, which is the event that marks the conclusion of the winding-up.
There are two types of dissolution:
First is the Technical dissolution, it
takes place when the structure of the firm changes. The structure changes when a
partner leaves or replaced or when a new partner is joining the partnership.
The second one is the General dissolution, it happens when a partnership is on
bankruptcy, by death of a partner, agreement by the partners or by legislation.
Example:
Partners
|
A
|
B
|
C
|
TCC
|
Capital
|
100
|
150
|
200
|
450
|
P/L
Percentage
|
20%
|
30%
|
50%
|
100%
|
Here, TCC is 450 but they can agree to have a Total
capital of 500 if they want to through revaluation.
Admission of new Partner
- Purchase of Interest
This is a
personal transaction by the selling partner and incoming partner. This is like
a stockholder selling stocks to potential investor. The only entry here is the
transfer of the capital of the selling partner to incoming partner.
Note:
If no revaluation stated use bonus, if applicable.
Problem 1: D purchases a ¼ interest in
the firm for 112.5.
Answer
Partners
|
A*
|
B**
|
C***
|
D****
|
Total^
|
Capital
Before
|
100
|
150
|
200
|
-
|
450
|
P/L
%
|
20%
|
30%
|
50%
|
-
|
100%
|
Capital
After
|
75
|
112.50
|
150
|
112.5
|
450*
|
P/L
Percentage after
|
15%
|
22.5%
|
37.5%
|
25%
|
100%
|
There is no bonus or
revaluation: By selling 25% interest A, B and C has 75% remaining interest.
Problem 2: D purchases a 20% interest
in the firm for 112.5.
Answer
Partners
|
A*
|
B**
|
C***
|
D****
|
Total^
|
Capital
Before
|
100
|
150
|
200
|
-
|
450
|
P/L
%
|
20%
|
30%
|
50%
|
-
|
100%
|
Capital
After
|
72
|
108
|
180
|
90
|
450*
|
P/L
Percentage after
|
*16%
|
*24%
|
*40%
|
*20%
|
100%
|
Here D bought 20% interest
in the firm for 112,500. 450 x 20% is only 90. So the
Agreed Capital 90
Less Contributed
Capital 112.5
Bonus to old partners 22.5 D payed more than what he should so it’s a bonus to the OLD
*same explanation to
problem 1
Problem 3: D purchases a 25% interest
in the firm for 115. Use revaluation.
Answer: Balance after admission
Partners
|
A
|
B
|
C
|
D
|
TCC
|
TAC
|
Old
Capital
|
100
|
150
|
200
|
-
|
450
|
-
|
P/L
Percentage
|
20%
|
30%
|
50%
|
-
|
100%
|
-
|
Share
on Goodwill
|
2
|
3
|
5
|
-
|
-
|
460*
|
Capital
after Goodwill
|
102
|
153
|
205
|
-
|
-
|
460
|
Capital
after Purchase
|
69**
|
103.5**
|
172.5**
|
115**
|
-
|
460
|
P/L
% After Purchase
|
15%**
|
22.5%**
|
37.5%**
|
25%**
|
100%
|
-
|
*115/25%
= 460
*
TAC 460 – TCC 450 = 10 goodwill
**Same
explanation to Problem 1
2. Admission by Investment
IMPORTANT NOTE:
1. TCC – Total Contributed Capital and
TAC – Total Agreed Capital
2. TCC = TAC no bonus or revaluation (If
TAC is not stated then TCC = TAC)
3. TCC > TAC Revaluation downward or
derecognize an asset
4. TCC < TAC Recognize goodwill
5. CC is contributed capital and AC is
agreed capital
6. CC = AC no bonus, or a revaluation to
old partners
7. CC > AC bonus to old partners
8. CC < AC bonus or share of
revaluation to new partner.
(The agreed capital
is the one that makes things confusing. Sometimes a partnership will agree of
total capital that is more or less than their total contribution or they will
agree of a capital for a new partner that is more or less than the contributed
capital of the new partner)
Problem:
Partners
|
A
|
B
|
C
|
TCC
|
Capital
|
100
|
150
|
200
|
450
|
P/L
Percentage
|
20%
|
30%
|
50%
|
100%
|
Example 1: D invested 125 for 20%
interest in the partnership
Partners
|
A
|
B
|
C
|
D
|
TCC
|
Capital
Before
|
150
|
150
|
200
|
-
|
500
|
P/L
% Before
|
30%
|
30%
|
40%
|
-
|
100%
|
Capital
After
|
150
|
150
|
200
|
125
|
625
|
P/L
% Before
|
24%
|
24%
|
32%
|
20%
|
100%
|
There’s
no bonus or goodwill – see note 3
Example 2: D invested 125 for 25%
interest in the partnership. The total agreed capital after admission is 625.
Using Bonus approach
Partners
|
A
|
B
|
C
|
D
|
TCC
|
TAC
|
Capital
Before
|
150
|
150
|
200
|
-
|
500
|
-
|
P/L
% Before
|
30%
|
30%
|
40%
|
-
|
100%
|
-
|
Investment
|
150
|
150
|
200
|
125
|
625
|
625
|
Capital
After
|
140.625
|
140.625
|
187.5
|
156.25
|
625
|
625
|
P/L
% Before
|
22.5%
|
22.5%
|
30%
|
25%
|
100%
|
-
|
TCC = TAC – see note
3 Entry:
Contributed Capital 125 Cash
125
Less Agreed capital 156.25 (625 x 25%) A, Capital 9.375
Bonus to new partner32.25 B, Capital 9.375
C,
Capital 12.5
D,
Capital 156.25
Example 3: D invested 125 for 20% and
allowed a credit of 130 for his capital. Using Revaluation
Partners
|
A
|
B
|
C
|
D
|
TCC
|
TAC
|
Capital
Before
|
150
|
150
|
200
|
-
|
500
|
-
|
P/L
% Before
|
30%
|
30%
|
40%
|
-
|
100%
|
-
|
Investment
|
150
|
150
|
200
|
125
|
625
|
650
|
Capital
After
|
126
|
126
|
168
|
130
|
650
|
650
|
P/L
% Before
|
24%
|
24%
|
32%
|
20%
|
100%
|
-
|
Total Agreed Capital
(130/ 20%) 650 Entry: Cash 125
Total Contributed
Capital 625 Goodwill 25
Goodwill 25 A, Capital (20 x 30%) 6
Agreed Capital 130 B, Capital (20 x 30%) 6
Contributed Capital 125 C, Capital (20 x 40%) 8
Goodwill to D
5 D, Capital 130
Less Goodwill 25
Goodwill to A, B
& C 20
Bonus or Revaluation?
If
the problem is not specific;
1. Bonus approach if P/L interest >
Capital Interest
2. Revaluation if P/L < Capital
Interest
QUESTIONS? Just comment down below!
QUESTIONS? Just comment down below!
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