St.

Paul University Philippines

Tuguegarao City, Cagayan 3500

Financial Accounting and Reporting

Topic: Partnership Dissolution –Admission of a New Partner (Asset Revaluation/Goodwill

Method)

Learning Outcome: At the end of the discussion, the student must be able to:

prepare the journal entries needed when there is a dissolution caused by admission of a new
partner under asset revaluation/goodwill method
compute the capital balance of the partners after the dissolution

Lesson Proper:

A new partner may be admitted to the partnership. The admission may be accounted under bonus
method or asset revaluation/goodwill method.

Asset Revaluation/Goodwill Method – Before admission of a new partner, the partners may
make a revaluation of the assets because the book value of the assets may be different from its
market value. The fair market value may be lower or higher than the book value. If the market
value of the asset is higher than the book value, than there is an increase in the capital of the old
partners and vice versa.

Goodwill is an intangible asset that is associated with the purchase of one company by another.
Specifically, goodwill is the portion of the purchase price that is higher than the sum of the net
fair value of all of the assets purchased in the acquisition and the liabilities assumed in the
process. The value of a company’s brand name, solid customer base, good customer relations,
good employee relations, and proprietary technology represent some reasons why goodwill
exists. So if the partners opt to admit a new partner, they may recognize goodwill upon the
admission of a new partner. The recognition of goodwill increase the capital of the old partners
or the new partner.

Example : Samson, and Goliath are partners with capital balances of P800,000 and 400,000
respectively. They share profits and losses in the ratio of 60% and 40% respectively. They
decided to admit Susan in the partnership.

Revaluation of Asset

Total agreed Capital (TAC) > Total Capital Contribution (TCC)

TAC – TCC = Revaluation of Asset

Example 1. Susan is to invest P500,000 for 25% interest in the partnership. Prior to the
admission the partners decided to revalue the asset.
 If total agreed capital is not given, the first thing that you are going to do is to find for the total
agreed capital.

TAC = 500,000/ 25%

TAC=2,000,000

TCC = 800,000+400,000+500,000
TCC = 1,700,000

Increase in Asset = 2,000,000- 1,700,000

= 300,000

The 300,000 will be distributed to the old partners using their profit and loss ratio.

TCC Increase in Asset TAC

Samson P800,000 180,000* 980,000

Goliath 400,000 120,000* 520,000

Susan 500,000 500,000*

Total P1,700,000 300,000 P2,000,000

*300,000 x 60% = 180,000

*300,000 x 40% = 120,000
* 2,000,000 x 25% =500,000

Journal entry:

Cash 500,000
Asset 300,000
Susan , Capital 500,000
Samson, Capital 180,000
Goliath, Capital 120,000

To record the admission of Susan

 The asset could be land, building, equipment, machine, vehicle and other asset.

Goodwill Method – the accounting for goodwill method is just the same as asset revaluation
method.

Total agreed Capital (TAC) > Total Capital Contribution (TCC)

TAC – TCC = Goodwill

Example 2. Susan is to invest P500,000 for 25% interest in the partnership. Total agreed capital
is P2,000,000. Goodwill is to be recognized

The total agreed capital is already given. You do not need to find it.

TAC=2,000,000
TCC = 800,000+400,000+500,000
TCC = 1,700,000

Goodwill = 2,000,000- 1,700,000

= 300,000

The 300,000 will be distributed to the old partners using their profit and loss ratio.

TCC Goodwill TAC

Samson P800,000 180,000* 980,000

Goliath 400,000 120,000* 520,000

Susan 500,000 500,000

Total P1,700,000 300,000 P2,000,000

*300,000 x 60% = 180,000

*300,000 x 40% = 120,000
* 2,000,000 x 25% =500,000

Journal entry:
Cash 500,000
Goodwill 300,000
Susan , Capital 500,000
Samson, Capital 180,000
Goliath, Capital 120,000

To record the admission of Susan

Combination of Assets Revaluation and Bonus Method

Example 3. Susan is to invest P500,000 for 20% interest in the partnership. Prior to the
admission the partners decided to revalue the asset. Total agreed capital is P2,000,000. The
partners agreed to revalue the assets before the admission of Susan.

TAC = 2,000,000

TCC = 1,700,000

Increase in asset = 300,000

The 300,000 will be distributed to the old partners using their profit and loss ratio.

TCC Goodwill Bonus TAC

Samson P800,000 180,000* 60,000* 1,040,000

Goliath 400,000 120,000* 40,000* 560,000

Susan 500,000 (100,000) 400,000

Total P1,700,000 300,000 P2,000,000

*300,000 x 60% = 180,000

*300,000 x 40% = 120,000
* 2,000,000 x 20% =400,000
*100,000 x 60% = 60,000
 *100,000 x 40 % = 40,000

The bonus is given to the old partners

Journal entry:

Cash 500,000
Goodwill 300,000
Susan , Capital 400,000
Samson, Capital 240,000
Goliath, Capital 160,000

To record the admission of Susan

Example 4. Susan is to invest P500,000 for 40% interest in the partnership. Prior to the
admission the partners decided to revalue the asset. The partners agreed to recognize goodwill
before the admission of Susan.

TCC - 1700,000

TAC – 2,000,000 (1200,000/60%)

GW = 300,000

TCC Goodwill Bonus TAC

Samson P800,000 180,000* (180,000) 800,000

Goliath 400,000 120,000* (120,000) 400,000

Susan 500,000 300,000 800,000

Total P1,700,000 300,000 P2,000,000

Example 5. Susan is to invest P500,000 for 25% interest in the partnership. Prior to the
admission the partners decided to revalue the asset. Total agreed capital is P2,200,000. The
partners agreed to revalue the assets before the admission of Susan.
TCC = 1,700,000
TAC = 2,200,000
Increase in Assets =500,000
Interest of Susan (2,200,000x .25) = 550,000
TCC Inc. in Bonus TAC
Asset

Samson P800,000 300,000* (30,000) 1,070,000

Goliath 400,000 200,000* (20,000) 580,000

Susan 500,000 50,000 550,000

Total P1,700,000 500,000 P2,200,000

Journal entry:

Cash 500,000
Asset 500,000
Susan , Capital 550,000
Samson, Capital 270,000
Goliath, Capital 180,000

To record the admission of Susan

END OF THE DISCUSSION

Activity 3 Partnership Dissolution – Asset Revaluation or Goodwill Method)

Maxi and Muning are partners with capital balances of P400,000, and 200,000 respectively.
They share profits and losses in the ratio of in the ratio of their capital balances. They decided to
admit Zizan in the partnership.

Required:

Record the journal entries of the Admission of Zizan.

Compute for the capital balances of the partners after the admission of Zizan

under the following assumptions: (The capital balances are balances in the TAC column)

Zizan is to invest P400,000 for 20% interest. Admission is to be accounted under asset
revaluation method

TAC = 400,000/ 20%

TAC=2,000,000

TCC = 400,000+200,000+400,000
TCC = 1,000,000

Increase in Asset = 2,000,000- 1,000,000

= 1,000,000

TCC Increase in Asset TAC

Maxi P400,000 666,666.67* 1,066,666.67

Muning 200,000 333,333.33* 533,333.33

Zizan 400,000 400,000*

Total P1,000,000 1,000,000 P2,000,000

*1,000,000 x 4/6 = 666,666.67

*1,000,000 x 2/6 = 333,333.33
* 2,000,000 x 20% =400,000

Journal entry:
Cash 400,000
Asset 1,000,000
Zizan , Capital 400,000
Maxi, Capital 666,666.67
Muning, Capital 333,333.33

To record the admission of Zizan

Zizan is to invest P400,000 for 20% interest. Admission is to be accounted under asset goodwill
method

TAC = 400,000/ 20%

TAC=2,000,000

TCC = 400,000+200,000+400,000
TCC = 1,000,000

Goodwill = 2,000,000- 1,000,000

= 1,000,000

TCC Goodwill TAC

Maxi P400,000 666,666.67* 1,066,666.67

Muning 200,000 333,333.33* 533,333.33

Zizan 400,000 400,000*

Total P1,000,000 1,000,000 P2,000,000

*1,000,000 x 4/6 = 666,666.67

*1,000,000 x 2/6 = 333,333.33
* 2,000,000 x 20% =400,000

Journal entry:

Cash 400,000
Goodwill 1,000,000
Zizan , Capital 400,000
Maxi, Capital 666,666.67
 Muning, Capital 333,333.33

To record the admission of Zizan

Zizan is to invest P200,000 for 15% interest. Total agreed capital is 1,100,000. Admission is to
be accounted under asset revaluation method and bonus method.

TAC = 1,100,000

TCC = 1,000,000

Increase in asset =100,000

The 100,000 will be distributed to the old partners using their profit and loss ratio.

TCC Goodwill Bonus TAC

Maxi P400,000 66,666.67* 223,333.33* 690,000

Muning 200,000 33,333.33* 111,666.67* 345,000

Susan 200,000 (335,000) 165,000

Total P1,700,000 300,000 P2,000,000

*100,000 x 4/6 = 66,666.67

*100,000 x 2/6 = 33,333.33
* 1,100,000 x 15% =165,000
*335,000 x 4/6 = 223,333.33
*335,000 x 2/6 = 111,666.67

The bonus is given to the old partners

Journal entry:

Cash 500,000
Goodwill 300,000
Susan , Capital 400,000
Samson, Capital 240,000
 Goliath, Capital 160,000

To record the admission of Susan

Zizan is to invest P200,000 for 25% interest. Total agreed capital is 1,100,000. Admission is to
be accounted under asset revaluation method and bonus method.

Congratulations! You have finished this module!