goodwil for partnership notes pdf, ppt.
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Transcript of goodwil for partnership notes pdf, ppt.
Goodwill = Selling price as a going concern – Fair value of separate net assets
Goodwill = Selling price – (Assets – Liabilities)
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Buyer may be willing to pay more for a business as a going concern because of:
- Good location- Good customer relations- Good reputation- Well-known products- Experienced and efficient employees and
management team- Good relation with suppliers
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Inherent Goodwill Purchased Goodwill
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• Goodwill generated internally because of the above advantages
• Inherent goodwill is only an estimation. Therefore, it should not be brought into the books, and no accounting entry is required
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•It is the goodwill generated during the acquisition of a business•It is the difference between the selling price of a business as a going concern and the total value of its separable net assets•It can be treated as an intangible fixed asset.•Some companies may write it off immediately against reserves, or amortized through the profit and loss account over its useful economic life
Subjective Judgement Average Sales/Fees/Profits Method Super Profit Method
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Estimate the value of goodwill with reference to some intangible factors and according to their professional judgement
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It can be calculated on gross average or weight averageGoodwill = Average annual sales/fees/profits over a stated number of years * a factor
The factor is usually stated as a certain number of years’ purchase of the average sales/fees/profits
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All questions are welcomed through email only.
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Year Annual Sales$
1995 100000 1996 200000 1997 300000
(a) Goodwill is valued at 3 years’ purchase of the average annual sales of the past3 years:
Average annual sales = ($100000+200000+300000 ) /3 = $200000
Goodwill = $200000 X3 = $600000
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(b) Goodwill is valued at the 3 years’ purchase of the weighted average of the annual sales of the past 3 years
Weighted average annual sales = (100000 x 1 + 200000 x 2 + 300000 x 3)
1+2+3 = 1400000 6 = 233333 (Calculation to the nearest dollar)
A business with goodwill is expected to be able to earn more profit than a business without goodwill
The extra profit earned is called the super profit
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Statement Calculating Super Profit
Average annual net profit X
Less: Reasonable remuneration to the owner X
Reasonable return on the capital employed in the
tangible assets X X
Super profit X
Ben is leaving the partnership, and goodwill is to be revalued at 3 years’ purchase of the super profit. The expected rate of return on net tangible assets is 10 %, after paying a management fee of $500. The calculation of the super profit is to be based on the average profits of the last four years.
Net profit from 1994-1997 is $5000, $6500, $6500, $7000
Expected return on net tangible assets = Net tangible assets * 10%. Expected return is $5000.
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AnswerStatement Calculating Super Profit
$ $Average net profit(5000+6500+6500+7000)/4 6250Less: Management fee 500
Expected rate of returnon net tangible assets 5000 5500
Super profit 750
Goodwill= $750 X 3 = $2250
All questions are welcomed through email only.
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Only purchased goodwill is to be brought into the accounts. In sole trader’s accounts, goodwill is to be recognized and recorded in the books only if the business is acquired as a going concern
In partnerships, however, goodwill is brought into the books whenever there is a change in the partnership such as:o Admission of a new partnero Retirement of an old partnero Change of the profit-sharing ratio
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Each partner has a share of the profit-sharing ratio. At a change in the partnership, goodwill must be taken into account and shared among the existing partners, according to the existing profit-sharing ratio
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The mind is not a vessel to be filled but a fire to be ignited
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The new partner is required to pay for his share of the tangible assets as well as the goodwill, according to the profit-sharing ratio
On the admission of a new partner, goodwill must be revalued
However, not all business keep a goodwill account in their books. Goodwill adjustments can be done:o Goodwill account openedo Goodwill account not opened
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The value of the goodwill will be credited to the old partners’ capital accounts, which represents an increase in the resources they own, while the new partner will not have a share of the goodwill
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Dr Goodwill account
Cr Capital account ( old partners only
With the value of goodwill
With their share of goodwill in old ratio
Dr Goodwill account
Cr Capital account ( old partner
With the increase in the value of goodwill, share in the old ratio
Dr Capital account (old partner)
Cr Goodwill account
With the decrease in the value of goodwill, share in the old artio
Goodwill is intangible in nature. It cannot be disposed of separately. Therefore, some businesses prefer not to maintain a goodwill account
The new partner may be required to pay extra cash, or have his capital balance reduced, for his share of goodwill
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Dr Goodwill account
Cr Capital account (old partners only)
Share goodwill among old partners in old profit-sharing ratio
Dr Capital account ( all partners)
Cr Goodwill account
Written off goodwill among all partners in the new profit-sharing ratio
Don’t limit yourself. Many people limit themselves to what they think
they can do. You can go as far as your mind lets you. What you believe, you can achieve.
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Klotey and Elorm were partners sharing profits and losses equally.
On 1 January 1998, they admitted Ben as a new partner who was required to introduce $600 as capital. The profits are now to be shared among Klotey, Elorm and Ben equally.
Goodwill is valued at $300. The balance sheet before the admission of the new partner is shown as follows:
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Chan and WongBalance Sheet as at 31 December 1997
Assets 1,200 Capital Klotey 600 Elorm 600
1,200 1,200
Goodwill
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Capital: Klotey (1/2) 150 Elorm (1/2) 150
300 300
Capital
Chan Wong Lee Chan Wong Lee
Balance c/f 750 750 600 Goodwill 150 150
Cash 600
750 750 600 750 750 600
Balance c/f 300
Balance b/f 600 600
Balance Sheet as at 31 December 1998
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AssetsGoodwill 300
CapitalKlotey 750
Other Assets (1,200 + 600) 1,800 Elorm 750Ben 600
2,100 2,100New capital balance
Before admission After admission
Partner Old ratio Share of goodwill
New ratio Share of goodwill
Gain/loss
Klotey 1/2 $150 1/3 $100 $50 loss
Elorm 1/2 $150 1/3 $100 $50 loss
Ben 1/3 $100 $100 gain
$300 $300 28
CapitalKlotey Elorm Ben Klotey Elorm Ben
Goodwill : new ratio 100 100 100
Goodwill: old ratio 150 150Cash 600
750 750 600 750 750 600
Balance c/f 650 650 500
Balance b/f 600 600
Balance Sheet as at 31 December 1998
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Assets CapitalKlotey 650Elorm 650Ben 500
1,800 1,800
Assets (1,200 + 600) 1,800
Education is what survives when what has been learned has
been forgotten.
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When a partner wants to withdraw from a partnership, the partnership should revalue all the assets which belongs to the leaving partner in order to compute the total amount of money that he can withdraw from the partnership
Goodwill adjustment should be calculated in order to compensate the leaving partner
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Education costs money, but then so does ignorance.
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Fafa, Eli and Awotwe were partners sharing profits and losses equally.
On 31 December 1997, Awotwe left the partnership. The other two partners agreed to share profits and losses equally.
The goodwill is revalued at $10,000. Awotwe received cash from the partnership for the amount due to him on 31 December 1997.
The balance sheet before Awotwe’s retirement is shown as follows:
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Fafa, Eli and AwotweBalance Sheet as at 31 December 1997
Goodwill 1,000 Capital Fafa 14,000 Eli 14,000
Other Assets 41,000
Awotwe 14,00042,000 42,000
Balance b/f 1,000
o Fafa Eli Awotwe Fafa Eli Awotwe
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Capital
Balance b/f 14,000 14,000 14,000Goodwill 3,000 3,000 3,000
17,000 17,000 17,000
Capital: Fafa (1/3) 3,000Eli (1/3) 3,000Awotwe (1/3) 3,000 9,000
10,000 10,000
Balance c/f 17,000 17,000
17,000 17,000 17,000
Bank 17,000
Balance c/f 10,000
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Fafa and EliBalance Sheet as at 31 December 1998
Goodwill 1,000 Capital Fafa 17,000 Eli 17,000
Other Assets (41000-17000) 24,000
34,000 34,000
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Capital
Fafa Eli Awotwe Fafa Eli AwotweBank 17,000
Goodwill :old ratio 3,000 3,000 3,000
17,000 17,000 17,000
Balance c/f 12,000 12,000
17,000 17,000 17,000
Goodwill: new ratio 5,000 5,000
Fafa and EliBalance Sheet as at 31 December 1998
Assets (41,000 – 17,000) 24,000 Capital: Fafa 12,000 Eli 12,000
24,000 24,000
Balance b/f 14,000 14,000 14,000
Treat people as if they were what they ought to be, and you help them become what they are capable of becoming
When there is a change in the profit-sharing ratio, the value of goodwill should also be re-assessed, so as to ascertain the amount of resources a partner has to give up ( in terms of a reduction in the relative capital balance) for the gain in his share of profits/loss.
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Optimism is the faith that leads to achievement; nothing can be done
without hope and confidence.
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Bless, Grace and Eyi are partners in a trading firm and share profits and losses in the ratio 3:3:2.
On 31 December 1997, they wanted to change the profit-sharing ratio to 1:1:1.
The goodwill is revalued at $9,000. The firm’s balance sheet on 31 December 1997
was:
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Bless, Grace and EyiBalance Sheet as at 31 December 1997
Goodwill 1,000 Capital: Bless 30,000 Grace 30,000
80,000 80,000
Other Assets 79,000 Eyi 20,000
GoodwillBalance b/f 1,000
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Capital
Bless Grace Eyi Bless Grace Eyi
Balance c/f 33,000 33,000 22,000Goodwill 3,000 3,000 2,000
33,000 33,000 22,000
Capital: Bless (3/8) 3,000Grace (3/8) 3,000Eyi (2/8) 2,000 8,000
9,000 9,000
33,000 33,000 22,000
Balance b/f 30,000 30,000 20,000
Balance c/f 9,000
Balance Sheet as at 31 December 1998
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Goodwill 9,000 CapitalBless 33,000Grace 33,000Eyi 22,000
Other Assets 79,000
88,000 88,000
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Capital
Bless Grace Eyi Bless Grace Eyi
Balance b/f 30,000 30,000 20,000Goodwill: old ratio 3,000 3,000 2,000
33,000 33,000 22,000
Balance c/f 30,000 30,000 19,000
33,000 33,000 22,000
Goodwill:new ratio 3,000 3,000 3,000
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Bless, Grace & EyiBalance Sheet as at 31 December 1998
Assets 79,000 Capital: Bless 30,000 Grace 30,000
79,000 79,000 Eyi 19,000
Elorm and Ben were in partnership. They shared profits and losses in ratio of 3:2 On 1 January 2001, they decided to admit Klotey. Goodwill is valued at one year’s purchase of the average annual profits (weighted average) of the past four years. Goodwill is not to be brought into the partnership’s book. Klotey brought $40,000 cash into the business for capital. No extra cash is paid for goodwill. The new profit-sharing ratio is 3:2:1.
The balance sheet as at 31 December2000 before the admission of Klotey is as follows:Assets 110,000 Capital : Elorm 65,000Cash 25,000 Ben 70,000
Annual net profits for 1997 to 2000 were $25,000,$40,000, $75,000 and $60,000 respectively.
Record the above change in the partnership in the partners’ capital accounts in columnar form, and show the balance sheet after the admission of Klotey.
Valuation of Goodwill :
25,000 x1 + 40,000x2 + 75,000 x3 + 60,000 x 4
1 + 2 + 3 + 4
57,000