AFAR: A Fastrack of Partnership Dissolution

PARTNERSHIP DISSOLUTION: CHANGES IN OWNERSHIP(Quick Notes)

·Capital interest vs. Profit and Loss Interest

Capital interest is a claim against the net assets of the partnership as shown by the balance in the partner’s capital account, while interest in profit or loss determines how the partner’s capital interest will increase or decrease as a result of subsequent operations.
·

 ASSIGNMENT OF AN INTEREST TO A THIRD PARTY

A partnership is not dissolved when a partner assigns his or her interest in the partnership to a third party.

VALUATION

A. REVALUATION APPROACH

   --- The use of fair values provides an equitable measure of each partner’s capital interest in the partnership.
--- Basis of valuation is fair value
----results in a marked departure from the historical principle

B. ABSENCE OF REVALUATION

   ---this approach would retain the historical cost/changing value (BOOK VALUE APPROACH).

I. ADMISSION OF A NEW PARTNER

 A.      Admission by purchase interest

Case 1: Purchase of interest for one partner
A, Capital       xx
        B, Capital                xx

Case 2: Purchase of interest from all partners

Assumption 1 Purchase at Book Value

Assumption 2 Purchase at more than Book Value
        
         Alternative 1: BOOK VALUE APPROACH
          Amount paid                        xx
          Less: BV of interest acquires      xx
          Excess                             xx
                   
                  Alternative 2: REVALUATION APPROACH
                   Goodwill xx
                       A, Capital               xx
                       B, Capital                xx
               

                Amount paid      xx/.xx     xx
                Less: BV interest Acquired (xx)         xx
                Excess                                  xx
                Divided by: Interest Acquired           xx
                Revaluation of Asset Upward             xx                                              
A, Capital (old+goodwill*interest acquires)    xx
B, Capital (old+goodwill*interest acquires)    xx
                         F, Capital                                xx

             Assumption 3: Purchase at less than Book Value

        In the Book Value approach, the same format but is loss, while, in the Revaluation approach, the same format but is downward.

·         Prefer Book Value if Profit and Loss interest > capital interest, otherwise, use revaluation approach.

II. ADMISSION BY INVESTMENT

--any gain or loss are recognized on sales subsequent to recording the admission will be allocated on the basis of the new profit and loss ratio.

TCC=TAC- No Adjustment
TCC>TAC- overstatement of the asset or diminution in partner’s capital
TCC<TAC- unrecorded net assets or the required additional investment in partner’s capital

CC=AC- No transfer of capital
CC>AC- Capital transfer or bonus to old partners
CC<AC- Additional Capital credit (either bonus or goodwill) from the old partners.


TOTAL AGREED CAPITAL                           XX
LESS: TOTAL CONTRIBUTED CAPITAL                XX
DIFFERENCE                                     XX                    

In bonus, if there’s a revaluation of assets, they cannot be recognized. But if the revaluation method is used, they affected the partner’s capital account.
In the absence of an approach to be used, a bonus approach should apply.


III. WITHDRAWAL/RETIREMENT OF A PARTNER
***SAME APPLICATION BECAUSE IT USES TWO APPROACHES***


IV.                DEATH OF A PARTNER

A.       In the absence of specific provision
1.       P and L should be summarized
2.       The partnership should be appraised
3.       The descendant’s interest in the partnership should be established as of the date of the death.

B.       Partner’s may agree to settle for the interest of the deceased partner
1.       By payment from partnership’s assets
2.       By payment from partnership insurance proceeds with surviving partner’s acquiring the deceased partner’s interest.

V.                  INCORPORATION OF PARTNERSHIP

A.       Partnership book are retained

1.       Change in assets and liability values in the partner’s interest prior to the corporation
2.       The change in the form of proprietorship. A revaluation account may be debited to losses and credited with gains from revaluation, and the balance may subsequently be closed into the capital accounts in the Profit and Loss Ratio.

B.       New books for the corporation.

1.       In the accounting record of partnership
a.        Prepare J.E. for revaluation of assets, including recognition of goodwill.
b.       Record any cash withdrawal necessary to adjust parties capital account balances to round amounts
c.        Record the transfer of assets and liabilities to the corporation, the receipt of the corporation’s common stock by the partnership, and the distribution of the common stock to the partners in settlement of the balances of their capital accounts.
2.       In the accounting records of the corporation
a.        Record the acquisition of assets and liabilities from the partnership at current fair values.
b.       Record the issuance of common stock at current fair value in payment of the obligation to the partnership.



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