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    3 Partnership Dissolution

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    Armhel Fangon
    This document discusses various aspects of partnership accounting, including partnership dissolution, assignment of partnership interests to third parties, revaluation and bonus approaches to valuation, admission of new partners, and comparing book value and revaluation approaches. Specifically, it defines partnership dissolution as a change in partner relations rather than winding up business, discusses treatment of partner capital accounts and interest in profits/losses. It also covers rules for asset valuation in dissolution depending on partner agreement, treatment of goodwill, and implications of new partner admission and selection of valuation approach.

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    3 Partnership Dissolution

    Uploaded by

    Armhel Fangon
    15 views2 pages
    This document discusses various aspects of partnership accounting, including partnership dissolution, assignment of partnership interests to third parties, revaluation and bonus approaches to valuation, admission of new partners, and comparing book value and revaluation approaches. Specifically, it defines partnership dissolution as a change in partner relations rather than winding up business, discusses treatment of partner capital accounts and interest in profits/losses. It also covers rules for asset valuation in dissolution depending on partner agreement, treatment of goodwill, and implications of new partner admission and selection of valuation approach.

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    3-Partnership-Dissolution

    Original Title

    3-Partnership-Dissolution

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    This document discusses various aspects of partnership accounting, including partnership dissolution, assignment of partnership interests to third parties, revaluation and bonus approaches to valuation, admission of new partners, and comparing book value and revaluation approaches. Specifically, it defines partnership dissolution as a change in partner relations rather than winding up business, discusses treatment of partner capital accounts and interest in profits/losses. It also covers rules for asset valuation in dissolution depending on partner agreement, treatment of goodwill, and implications of new partner admission and selection of valuation approach.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    15 views2 pages

    3 Partnership Dissolution

    Uploaded by

    Armhel Fangon
    This document discusses various aspects of partnership accounting, including partnership dissolution, assignment of partnership interests to third parties, revaluation and bonus approaches to valuation, admission of new partners, and comparing book value and revaluation approaches. Specifically, it defines partnership dissolution as a change in partner relations rather than winding up business, discusses treatment of partner capital accounts and interest in profits/losses. It also covers rules for asset valuation in dissolution depending on partner agreement, treatment of goodwill, and implications of new partner admission and selection of valuation approach.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    Partnership Dissolution

    ● Partnership dissolution is the change in the relation of the partners caused by any
    partner ceasing to be associated in the carrying on as distinguished from the winding
    up of the business.
    ● A partner’s capital interest is a claim against the net assets of the partnership.
    ● An interest in profit or loss determines how the partner’s capital interest will increase or
    decrease as a result of subsequent operations.
    ● Capital balances are historical cost figures.
    Assignment of an Interest to a Third Party
    ● A partnership is not dissolved when a partner assigns his/her interest in the partnership
    to a third party, because such an assignment does not itself change the relationship of
    the partners.
    ● Assignment only entitles the assignee to receive the assigning partner’s interest in
    future partnership profits and assets in the event of liquidation.
    ● The assignee does not obtain the rights of a partner.
    ● The only change required on the partnership books is to transfer the interest of the
    assignor partner to the assignee.
    ● Partnerships commonly deviate from GAAP in the following areas:

    o The use of cash basis instead of accrual basis

    o The use of prior period adjustments

    o The use of current values instead of historical cost

    o The recognition of goodwill

    Revaluation Approach (Goodwill Procedure/Non-GAAP)

    ● The use of fair values provides an equitable measure of each partner’s capital interest in
    the partnership
    ● The practice of recognizing increases in net assets is not in compliance with GAAP. This
    approach results in a marked departure from the historical cost principle.

    Bonus Approach (Book Value-GAAP)


    ● This approach retains the historical cost carrying value.

    The following rules are to be observed in relation to valuation of assets and liabilities on
    dissolution problems:

    1. If there is an agreement among partners that revaluation is allowed, then reflect the
    necessary adjustments before dissolution.

    2. In the absence of an agreement,

    a. Revaluation approach- assets and liabilities should be recorded at their fair value; all
    assets acquired by the new entity, including goodwill, should be recorded
    b. Bonus approach- existing book values should not be adjusted to fair value unless such
    adjustments would have been otherwise allowed by GAAP- Decreases or write-downs in the
    value of assets may be recognized even though they are not realized.
    - Does not prevent the recognition of asset appreciation

    Admission of a New Partner

    • A new partner can be admitted with the consent of all partners in the business. This
    leads to the formation of a new partnership and a dissolution of the previous one.
    • A partnership agreement is binding only when the relationship between the original
    parties to the agreement remains unchanged.

    • The purchase of interest from one or more of the existing partners is a personal
    transaction between the incoming partner and the selling partner/s. No additional money or
    properties are invested in the partnership. The only entry made transfers an amount from the
    selling partner’s capital account to the new

    partner’s capital account.

    Comparison of Book Value and Revaluation Approach


    • Both approaches will yield the same results if:

    1. The new partner’s P/L sharing ratio must be equal to his/her capital interest

    2. The old partners continue to share P/L between themselves in the original ratio
    • Both approaches will not yield the same results if the incoming partner’s share in P/L
    is not identical with the percentage interest allowed in assets. Therefore, the selection
    process for the new partner should be:
    1. Prefer book value approach if P/L interest > Capital interest
    2. Prefer revaluation approach if P/L interest < Capital interest

    • In admission by investment, any gain or loss recognized on sales subsequent to recording


    the admission will be allocated on the basis of the new profit and loss ratio.

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