The partners' capital balances are: A, Capital, P 25,000; B, Capital, P40,000; C, Capital, P50,000. The partner's shareprofits 20%, 30% and 50% respectively. A is the withdrawing partner.Case 1- The partnership purchasedthe interest of the withdrawing partner for P25,000, an amountequal to his capital balance, the entry will be -A, Capital25,000Cash or Payable to A25,000To record withdrawal of ACase 2- The partnership purchases the interest of the withdrawing partner for P35,000, an amountmore thanhis capital balance. A partner who withdrew from a firm that has been quite successful may claim an amount that exceeds his capital balance.The remaining partners may agree to settle on this basis instead of terminating the business. Under such a case, thepartners may agree that (1) the excess amount paid shall be treated as bonus to be absorbed by the remaining partnersor (2) the excess amount paid is due to under valuation of assets.Assume that the partnership paid P35,000 in cash for A's interest. The excess of P10,000 may be regarded as a as a bonusto A (Case 2.1) or due to under valuation of properties of the partnership (Case 2.2). 2.1 The fair market value of an asset is equal to its book value. No revaluation of asset. The excess payment is treated as a bonus to A because the fair value of allidentifiable assets is already equal to its book value. The journal entries are:a. To record the bonus of AB, Capital3,759
Partnership and Corporation – Illustrative Approach86C, Capital6,250A, Capital10,000To record withdrawal of A.P10,000 x (30% / 80%) = P 3,759 bonus from BP10,000 x (50% / 80%) = P 6,250 bonus from Cb. To record payment to AA, Capital35,000Cash35,0002.2 There is a revaluation of asset.The excess payment is due to a revaluation of an equipment with a book value of P200,000 but according to a qualified expert appraiser, the fair value is P250,000. The journal entries are:a. Record first the revaluation of the equipmentb. After posting the journal entry above, record the payment to AAccumulated depreciation – equipment50,000A, Capital (50,000 x 20%)10,000B, Capital (50,000 x 30%)15,000C, Capital (50,000 x 50%)25,000A, Capital35,000Cash35,000Case 3 - The partnership purchases the interest of the withdrawing partner at an amount less thanhis capital balance.A withdrawing partner who is anxiously needing money may be willing to accept less than the balance reported in his capitalaccount. His willingness to accept such a reduced amount may arise from his realization that a forced sale of a firm's assetsmay result in a loss and a decrease in his interest as great as or greater than that which can be effected through agreement.When the withdrawing partner agreed to accept less than the amount reported in his capital, such difference may be viewedas a bonus accruing to the remaining partners.Assume that A agreed to sell their interest to the partnership for P20,000 or P5,000 less than his capital. The entry will be: A, Capital5,000B, Capital (3/8)1,875C, Capital (5/8)3,125Note: A partner who wrongfully dissolved the partnership by his withdrawal prior to the term may be held liable for thedamages. (See Art. 1837).
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- Fall '19
- Corporation, Limited partnership, Types of business entity, Managing Partner