ACCOUNTING FOR SPECIAL
TRANSACTIONS
(ADVANCED ACCOUNTING 1)
Lecturer:
Prof. Reah M. Gilera
Reference: ACCOUNTING FOR SPECIAL TRANSACTIONS 2021 Edition (by: MILLAN)
Chapter 3
PARTNERSHIP DISSOLUTION
LEARNING OBJECTIVES
• State the causes of partnership dissolution.
• Account for the effects of partnership dissolution on the
partnership equity.
DISSOLUTION
• Dissolution is the change in the relation of the partners caused
by any partner ceasing to be associated in the carrying on of
the business.
CAUSES OF PARTNERSHIP DISSOLUTION
I. Admission of a partner
II. Withdrawal, retirement or death of a partner
III. Incorporation of a partnership
I. ADMISSION OF PARTNER
• The admission of a new partner may be effected
either through:
1. Purchase of interest in the partnership, or
2. Investment in the partnership
1. PURCHASE OF INTEREST
• A personal transaction between and among the
partners
• Any consideration paid or received is not
recorded in the partnership books
• Only a transfer within equity is made to establish
the capital account of the new partner and
decrease the capital account(s) of the selling
partner(s).
• No gain or loss shall is recognized in the
partnership books.
REVALUATION OF ASSETS
• When a partnership is dissolved but not liquidated, a new
partnership is created. The assets and liabilities carried
over to the new partnership are restated to fair values.
• Any adjustment to the assets and liabilities is allocated first
to the existing partners before recording the admission of
the new partner.
2. INVESTMENT IN THE PARTNERSHIP
• The incoming partner invests directly to the
partnership instead of purchasing interest from
an existing partner(s).
• This is a transaction between the new partner
and the partnership. Any consideration paid by
the incoming partner is recorded in the
partnership books.
• No gain or loss shall be recognized
II. WITHDRAWAL, RETIREMENT OR DEATH
OF A PARTNER
• When a partner withdraws, retires or dies, his interest may be
purchased (a) by one or all of the remaining partners or (b) by the
partnership.
• The interest of the withdrawing, retiring, or deceased partner shall
be adjusted for the following:
a. his share of any profit or loss during the period up to the date of
his withdrawal, retirement or death; and
b. his share of any revaluation gains or losses as at the date of his
withdrawal, retirement, or death.
II. WITHDRAWAL, RETIREMENT OR DEATH
OF A PARTNER (CONTINUED)
• Purchase by one or all of the remaining partners
This is a transaction between and among the partners (or
deceased partner’s estate). As such, the settlement amount is not
recorded in the books. The only entry to be made in the partnership
books is a transfer within equity.
• Settlement by the partnership
This is a transaction between the retiring or withdrawing partner (or
deceased partner’s estate) and the partnership. As such, the
settlement amount is recorded in the books.
III. INCORPORATION OF A PARTNERSHIP
• On date of incorporation:
a. The partners’ capital balances are adjusted for
their respective shares in any profit or loss and
revaluation gains or losses as at the date of
incorporation. The adjusted capital balances may
be used in determining the number of shares to be
issued to each partner.
b. Normally, the books of the partnership are closed
and new books are set-up for the corporation.
APPLICATION OF CONCEPT
PARTNERSHIP FORMATION
Reference: ACCOUNTING FOR SPECIAL TRANSACTIONS 2021 Edition (by: MILLAN)
PROBLEM 6: CLASSROOM DISCUSSION (Admission of a New Partner)
Carrot joins the partnership of Apple and Banana. The partnership’s statement of
financial position before Carrot’s admission is as follows:
Cash 30,000 Accounts Payable 80,000
Accounts receivable 140,000 Apple, Capital (60%) 515,000
Inventory 200,000 Banana, Capital (40%) 275,000
Equipment 500,000
TOTAL ASSETS 870,000 TOTAL LIAB. & EQUITY 870,000
The following adjustments are determined:
a) The recoverable amount of accounts receivable is P120,000
b) The inventory has a net realizable value of P160,000
c) The equipment has a fair value of P450,000
d) Unrecorded liabilities amount to P20,000
CASE 1:
Carrot acquires half of Banana’s capital interest for P800,000
REQUIREMENT: Provide the entry and determine the capital balances and P/L ratio of
the partners after Carrot’s admission.
Admission of a
Carrying Fair New Partner
Inc (Dec)
Amount values CASE #1
Cash 30,000 30,000 - Solution
Accounts receivable 140,000 120,000 (20,000)
Inventory 200,000 160,000 (40,000)
Equipment 500,000 450,000 (50,000)
Accounts payable (80,000) (80,000) -
Accrued liabilities (20,000) (20,000)
Net assets 790,000 660,000 (130,000)
Apple Banana Carrot Total
60% 60%
Capital, beg. 515,000 275,000 790,000
Revaluation decrease (78,000) (52,000) (130,000)
Adjusted, before admission 437,000 223,000 660,000
Sale from Banana to Carrot (111,500) 111,500 -
Capital after admission 437,000 111,500 111,500 660,000
Journal Entry : Dr. Banana, Capital (223,00 x 1/2) 111,500
Cr. Carrot, Capital (223,00 x 1/2) 111,500
Partner Before admission Admission of Carrot After admission
Apple 60% - 60%
Banana 40% -20% 20%
Carrot - 20% 20%
100% 100%
PROBLEM 6: CLASSROOM DISCUSSION (Admission of a New Partner)
Carrot joins the partnership of Apple and Banana. The partnership’s statement of
financial position before Carrot’s admission is as follows:
Cash 30,000 Accounts Payable 80,000
Accounts receivable 140,000 Apple, Capital (60%) 515,000
Inventory 200,000 Banana, Capital (40%) 275,000
Equipment 500,000
TOTAL ASSETS 870,000 TOTAL LIAB. & EQUITY 870,000
The following adjustments are determined:
a) The recoverable amount of accounts receivable is P120,000
b) The inventory has a net realizable value of P160,000
c) The equipment has a fair value of P450,000
d) Unrecorded liabilities amount to P20,000
CASE 2:
Carrot purchases 20% of Apple’s and Banana’s capital interest
for P800,000
REQUIREMENT: Provide the entry and determine the capital balances of the partners
after Carrot’s admission.
Admission of a
Carrying Fair New Partner
Inc (Dec)
Amount values CASE #2
Cash 30,000 30,000 - Solution
Accounts receivable 140,000 120,000 (20,000)
Inventory 200,000 160,000 (40,000)
Equipment 500,000 450,000 (50,000)
Accounts payable (80,000) (80,000) -
Accrued liabilities (20,000) (20,000)
Net assets 790,000 660,000 (130,000)
Apple Banana Carrot Total
60% 60%
Capital, beg. 515,000 275,000 790,000
Revaluation decrease (78,000) (52,000) (130,000)
Adjusted, before admission 437,000 223,000 660,000
Debit (Credit) – 20% from each (87,400) (44,600) 132,000 -
Capital after admission 349,600 178,400 132,000 660,000
Journal Entry : Dr. Apple, Capital (437,000 x 20%) 87,400
Dr. Banana, Capital (223,000 x 20%) 44,600
Cr. Carrot, Capital (660,00 x 20%) 132,000
PROBLEM 6: CLASSROOM DISCUSSION (Admission of a New Partner)
Carrot joins the partnership of Apple and Banana. The partnership’s statement of
financial position before Carrot’s admission is as follows:
Cash 30,000 Accounts Payable 80,000
Accounts receivable 140,000 Apple, Capital (60%) 515,000
Inventory 200,000 Banana, Capital (40%) 275,000
Equipment 500,000
TOTAL ASSETS 870,000 TOTAL LIAB. & EQUITY 870,000
The following adjustments are determined:
a) The recoverable amount of accounts receivable is P120,000
b) The inventory has a net realizable value of P160,000
c) The equipment has a fair value of P450,000
d) Unrecorded liabilities amount to P20,000
CASE 3:
Carrot wants to invest for a 20% in the net assets and profits of the
partnership
REQUIREMENT: If no bonus is allowed, how much should Carrot invest, and what would
be the new P/L ratio of the partners after Carrot’s admission?
Admission of a
New Partner
CASE #3
Solution
Adjusted capital before admission 660,000
Divide by: (100% - 20%) 80%
Grossed-up amount 825,000
Multiply by: 20%
Amount of investment 165,000
Before Admission of After
Partner admission Carrot admission
Apple 60% 60% (100% - 20%) 48%
Banana 40% 40% (100% - 20%) 32%
Carrot - 20% 20%
100% 100%
PROBLEM 6: CLASSROOM DISCUSSION (Admission of a New Partner)
Carrot joins the partnership of Apple and Banana. The partnership’s statement of
financial position before Carrot’s admission is as follows:
Cash 30,000 Accounts Payable 80,000
Accounts receivable 140,000 Apple, Capital (60%) 515,000
Inventory 200,000 Banana, Capital (40%) 275,000
Equipment 500,000
TOTAL ASSETS 870,000 TOTAL LIAB. & EQUITY 870,000
The following adjustments are determined:
a) The recoverable amount of accounts receivable is P120,000
b) The inventory has a net realizable value of P160,000
c) The equipment has a fair value of P450,000
d) Unrecorded liabilities amount to P20,000
CASE 4:
Carrot invests P100,000 for a 20% interest in the net assets and profits of
the partnership. No goodwill is recognized.
REQUIREMENT: Provide the entry and compute for the capital balances of the partners
after Carrot’s admission.
Admission of a
New Partner
CASE #4
Solution
Adjusted net assets before admission 660,000
Investment of Carrot 100,000
Net assets after admission 760,000
Carrot's interest in net assets 20%
Carrot’s capital credit 152,000
Investment of Carrot 100,000
Bonus to Carrot 52,000
Journal Entry : Dr. Cash 100,000
Dr. Apple, Capital (152,000 – 100,000 x60%) 31,200
Dr. Banana, Capital (152,000 – 100,000x40%) 20,800
Cr. Carrot, Capital (660,00 x 20%) 152,000
Apple Banana Carrot Total
Capital, beg. 515,000 275,000 790,000
Revaluation decrease (78,000) (52,000) (130,000)
Adjusted, before admission 437,000 223,000 660,000
Carrot Investment 100,000 100,000
Bonus to Carrot (31,200) (20,800) 52,000 -
Capital after admission 408,500 202,200 152,000 760,000
PROBLEM 6: CLASSROOM DISCUSSION (Admission of a New Partner)
Carrot joins the partnership of Apple and Banana. The partnership’s statement of
financial position before Carrot’s admission is as follows:
Cash 30,000 Accounts Payable 80,000
Accounts receivable 140,000 Apple, Capital (60%) 515,000
Inventory 200,000 Banana, Capital (40%) 275,000
Equipment 500,000
TOTAL ASSETS 870,000 TOTAL LIAB. & EQUITY 870,000
The following adjustments are determined:
a) The recoverable amount of accounts receivable is P120,000
b) The inventory has a net realizable value of P160,000
c) The equipment has a fair value of P450,000
d) Unrecorded liabilities amount to P20,000
CASE 5:
Carrot invests P180,000 for a 20% interest in the net assets and profits of
the partnership. No goodwill is recognized.
REQUIREMENT: Provide the entry and compute for the capital balances of the partners
after Carrot’s admission.
Admission of a
New Partner
CASE #5
Solution
Adjusted net assets before admission 660,000
Investment of Carrot 180,000
Net assets after admission 840,000
Carrot's interest in net assets 20%
Carrot’s capital credit 168,000
Investment of Carrot 190,000
Bonus to Carrot (12,000)
Journal Entry : Dr. Cash 180,000
Cr. Apple, Capital (12,000 x 60%) 7,200
Cr. Banana, Capital (152,000 x 40%) 4,800
Cr. Carrot, Capital (660,00 + 180,000 x 20%) 168,000
Apple Banana Carrot Total
Capital, beg. 515,000 275,000 790,000
Revaluation decrease (78,000) (52,000) (130,000)
Adjusted, before admission 437,000 223,000 660,000
Carrot Investment 180,000 180,000
Bonus to Carrot 7,200 4,800 (12,000) -
Capital after admission 444,200 227,800 168,000 840,000
PROBLEM 6: CLASSROOM DISCUSSION
(Withdrawal, retirement or death of a partner)
Partners A, B and C had the following capita balances on January 1, 2021: A, Capital
(50%) P320,000; B, Capital (30%) P192,000; and C, Capital (20%) P128,000. Partner A
decided to retire on September 1, 2021. The partnership earned profit of P800,000 from
Jan. 1 to Aug. 31, 2021 and the partners had the following capital withdrawals during the
period: A, P40,000; B, 60,000; and C, P30,000.
CASE 1: Partner B purchases Partner A’s interest for P700,000
REQUIREMENT: Provide the entry and compute for the capital balances and P/L ratio of
the partners after A’s retirement.
CASE 2: The partnership pays Partner A P700,000 for his interest
REQUIREMENT: Provide the entry and compute for the capital balances and P/L ratio of
the partners after A’s retirement.
CASE 2: The partnership pays Partner A P650,000 for his capital
REQUIREMENT: Provide the entry and compute for the capital balances and P/L ratio of
the partners after A’s retirement.
Withdrawal,
CASE 1: Partner B purchases Partner A’s interest for P700,000
Retirement or
Death of a Partner
A B C Total CASE #1
Capital - Jan. 1, 2021 320,000 192,000 128,000 640,000 Solution
Profit 400,000 240,000 160,000 800,000
Drawings (40,000) (60,000) (30,000) (130,000)
Capital - before retirement 680,000 372,000 258,000 1,310,000
Sale from A to B (680,000) 680,000 - -
Capital - after retirement - 1,052,000 258,000 1,310,000
Journal Entry: Dr. A, Capital 680,000
Sept. 1, 2021 Cr. B, Capital 680,000
P/L ratio after A’s retirement:
Before Retirement
Partner retirement of A After retirement
A 50% -50% -
B 30% 30% + 50% 80%
C 20% - 20%
100% 100%
Withdrawal,
CASE 2: The partnership pays Partner A P700,000 for his interest
Retirement or
Death of a Partner
A B C Total CASE #2
Capital - Jan. 1, 2021 320,000 192,000 128,000 640,000 Solution
Profit 400,000 240,000 160,000 800,000
Drawings (40,000) (60,000) (30,000) (130,000)
Capital - before retirement 680,000 372,000 258,000 1,310,000
Payment to A (700,000) (700,000)
Bonus to A 20,000 (12,000) (8,000)
Capital - after retirement - 360,000 250,000 610,000
Journal Entry: Dr. A, Capital 680,000
Sept. 1, 2021 Dr. B, Capital (700K – 680K) x 30%/50% 12,000
Dr. C, Capital (700K – 680K) x 20%/50% 8,000
Cr. Cash 700,000
P/L ratio after A’s retirement:
Before
Partner retirement Retirement of A After retirement
A 50% -50% -
B 30% 30%/(30%+20%) 60%
C 20% 20%/(30%+20%) 40%
100% 100%
Withdrawal,
CASE 3: The partnership pays Partner A P650,000 for his capital
Retirement or
Death of a Partner
A B C Total CASE #3
Capital - Jan. 1, 2021 320,000 192,000 128,000 640,000 Solution
Profit 400,000 240,000 160,000 800,000
Drawings (40,000) (60,000) (30,000) (130,000)
Capital - before retirement 680,000 372,000 258,000 1,310,000
Payment to A (650,000) (650,000)
Bonus to B and C (30,000) 18,000 12,000 -
Capital - after retirement - 390,000 270,000 660,000
Journal Entry: Dr. A, Capital 680,000
Sept. 1, 2021 Cr. Cash 650,000
Cr. B, Capital (680K – 650K) x 30%/50% 18,000
Cr. C, Capital (680K – 650K) x 30%/50% 12,000
PROBLEM 6: CLASSROOM DISCUSSION (Incorporation of Partnership)
Partners A, B and C had the following capita balances on January 1, 2021: A, Capital
(50%) P320,000; B, Capital (30%) P192,000; and C, Capital (20%) P128,000.
The partnership earned profit of P800,000 from Jan. 1 to Aug. 31, 2021 and the partners
had the following capital withdrawals during the period: A, P40,000; B, 60,000; and C,
P30,000.
The partnership is converted into a Corporation on August 31, 2021. The Corporation
issued 1,000 preference shares with par value of P200 per share to each of the partners
and even multiples of ordinary shares with par value of P50 per share for their
remaining interests.
REQUIREMENT: Compute for the number of shares issued to each of the partners.
Incorporation of
Partnership
CASE
A B C Total Solution
Capital - Jan. 1, 2021 320,000 192,000 128,000 640,000
Profit 400,000 240,000 160,000 800,000
Drawings (40,000) (60,000) (30,000) (130,000)
Capital - before retirement 680,000 372,000 258,000 1,310,000
Less: Pref. Shares (1,000xP200) (200,000) (200,000) (200,000) (600,000
Remaining Interest 480,000 172,000 58,000 710,000
Divide: Par Value - Ord. Share 50 50 50 50
# of Ordinary Shares 9,600 3,440 1,160 14,200
A B C Total
Preference shares issued 1,000 1,000 1,000 3,000
Ordinary shares issued 9,600 3,440 1,160 14,200
Total shares issued 10,600 4,440 2,160 17,200
