C hapter 5: Goodwill: Valuation and entries

in partnership accounts
Contents of chapter
This chapter examines what goodwill is, how it may be valued and what entries may be made in the partnership
accounts.

Notes for teachers

Goodwill can only be entered in the accounts when all the partners agree to its value.
1

If we sell our business to someone, goodwill is the amount that the buyer pays beyond the value of all
2
identifiable net assets. Our calculations may show higher or lower figures, but what matters is what
someone will actually pay for it.

Different professions, industries and businesses often have customary ways of valuing goodwill.
3

Goodwill may be entered in the partnership books:

4
(i) By opening a goodwill account:
• Debit agreed value to goodwill account.
• Credit partners’ capital accounts in old profit and loss sharing ratio.
(ii) Without a goodwill account:
Draw up a table showing ownership of goodwill in both old and new profit and loss sharing ratios.
• Gains in goodwill share: Debit those partners’ capital accounts.
• Losses in goodwill share: Credit those partners’ capital accounts.

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Answers to MCQs and exercises
5.1 C 5.2 D 5.3 D 5.4 A 5.5 A

5.6
(a) Capital
Au King Lee Au King Lee
$ $ $ $ $ $
Balances c/f 12,000 9,300 4,700 Balances b/f 6,000 4,800 3,200
Goodwill 6,000 4,500 1,500
12,000 9,300 4,700 12,000 9,300 4,700

Au, King and Lee

Balance Sheet as at 1 January 20X8
$
Goodwill 12,000
Other net assets 14,000
26,000
Capital
Au 12,000
King 9,300
Lee 4,700
26,000

(b) Share of goodwill

Before After Gain or loss Adjustment
$ $ $ $
4 3
Au ( ) 6,000 ( 10 ) 3,600 Loss 2,400 Cr Au’s capital 2,400
8
3 5
King ( ) 4,500 ( ) 6,000 Gain 1,500 Dr King’s capital 1,500
8 10
2
Lee ( 1) 1,500 ( ) 2,400 Gain 900 Dr Lee’s capital 900
8 10

12,000 12,000

Capital
Au King Lee Au King Lee
$ $ $ $ $ $
Goodwill adjustments — 1,500 900 Balances b/f 6,000 4,800 3,200
Balances c/f 8,400 3,300 2,300 Goodwill adjustments 2,400 — —
8,400 4,800 3,200 8,400 4,800 3,200

Au, King and Lee

Balance Sheet as at 1 January 20X8
$
Net assets 14,000

Capital
Au 8,400
King 3,300
Lee 2,300
14,000

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 5.7X
(a) Capital
Young Chan Long Kut Young Chan Long Kut
$ $ $ $ $ $ $ $
Balances c/f 10,600 8,600 12,200 5,400 Balances b/f 7,000 3,200 5,000 3,600
Goodwill: Old
profit sharing ratio
(see Workings) 3,600 5,400 7,200 1,800
10,600 8,600 12,200 5,400 10,600 8,600 12,200 5,400

Young, Chan, Long and Kut

Balance Sheet as at 1 July 20X8
$ Capital $
Goodwill 18,000 Young 10,600
Other net assets 18,800 Chan 8,600
Long 12,200
Kut 5,400
36,800 36,800

Workings:
2 4
Young: $18,000 × = $3,600; Long: $18,000 × = $7,200
10 10
Chan: $18,000 × 3 = $5,400; Kut: $18,000 × 1 = $1,800
10 10

(b) Share of goodwill

Before After Loss or gain Adjustment
$ $ $ $
2 3
Young ( ) 3,600 ( ) 4,500 Gain 900 Dr Young’s capital 900
10 12
3 4
Chan ( ) 5,400 ( ) 6,000 Gain 600 Dr Chan’s capital 600
10 12
4 3
Long ( ) 7,200 ( ) 4,500 Loss 2,700 Cr Long’s capital 2,700
10 12
1 2
Kut ( ) 1,800 ( ) 3,000 Gain 1,200 Dr Kut’s capital 1,200
10 12
18,000 18,000

Capitals
Young Chan Long Kut Young Chan Long Kut
$ $ $ $ $ $ $ $
Goodwill Balances b/f 7,000 3,200 5,000 3,600
adjustments 900 600 — 1,200 Goodwill
Balances c/f 6,100 2,600 7,700 2,400 adjustments — — 2,700 —
7,000 3,200 7,700 3,600 7,000 3,200 7,700 3,600

Young, Chan, Long and Kut

Balance Sheet as at 1 July 20X8
$ Capital $
Net Assets 18,800 Young 6,100
Cha 2,600
Long 7,700
Kut 2,400
18,800 18,800

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5.8
(a) Calculation of goodwill:
Average ($60,000 + $70,000 + $52,000 + $88,000) ÷ 4 = $67,500
2 years’ purchase: 2 × $67,500 = $135,000

(b) (i) Capital

Fung Kwan Shen Fung Kwan Shen
$ $ $ $ $ $
Balances c/f 117,000 92,500 94,500 Balances b/f 63,000 52,000 54,000
Goodwill 54,000 40,500 40,500
117,000 92,500 94,500 117,000 92,500 94,500

4 $
Goodwill shared: Fung ( 10 ) 54,000
3
Kwan ( ) 40,500
10
Shen ( 3 ) 40,500
10
135,000

Fung, Kwan and Shen

Balance Sheet as at 1 January 20X6
$
Goodwill 135,000
Other net assets 169,000
304,000
Capital
Fung 117,000
Kwan 92,500
Shen 94,500
304,000
(ii) Workings
Before After Loss/Gain Adjustment
$ $ $ $
4 2
Fung ( ) 54,000 ( ) 30,000 Loss 24,000 Cr Fung’s capital 24,000
10 9
3 4
Kwan ( ) 40,500 ( ) 60,000 Gain 19,500 Dr Kwan’s capital19,500
10 9
3 3
Shen ( ) 40,500 ( ) 45,000 Gain 4,500 Dr Shen’s capital 4,500
10 9
135,000 135,000

Capital
Fung Kwan Shen Fung Kwan Shen
$ $ $ $ $ $
Goodwill adjustments — 19,500 4,500 Balances b/f 63,000 52,000 54,000
Balances c/f 87,000 32,500 49,500 Goodwill adjustments 24,000 — —
87,000 52,000 54,000 87,000 52,000 54,000

Fung, Kwan and Shen

Balance Sheet as at 1 January 20X6
$ $
Net assets 169,000
Capital
Fung 87,000
Kwan 32,500
Shen 49,500 169,000

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 5.9X
Working 1:
2
Goodwill = ($35,000 + $45,000 + $44,000 + $40,000 + $46,000) × = $84,000
5

(a) Capital
20X6 Jenny Sandy 20X6 Jenny Sandy
$ $ $ $
Jan 1 Balances c/f 407,000 407,000 Jan 1 Balances b/f 365,000 365,000
Goodwill 42,000 42,000
407,000 407,000 407,000 407,000

Jenny and Sandy

Balance Sheet as at 1 January 20X6
Fixed Assets $ $ $
Premises 600,000
Plant and equipment 100,000
700,000
Intangible Assets
Goodwill 84,000
784,000
Current Assets
Stock 15,000
Debtors 35,000
Cash at bank 20,000 70,000
Less Current Liabilities
Creditors 40,000
Net current assets 30,000
814,000
Financed by:
Capital: Jenny 407,000
Sandy 407,000
814,000
(b) Working 2:
Old ratio New ratio Loss/Gain Adjustment
$ $ $
1 2
Jenny ( ) 42,000 ( ) 56,000 Gain 14,000 Dr Jenny’s capital account
2 3
1 1
Sandy ( ) 42,000 ( ) 28,000 Loss 14,000 Cr Sandy’s capital account
2 3
84,000 84,000

Capitals
Jenny Sandy Jenny Sandy
20X6 $ $ 20X6 $ $
Jan 1 Goodwill adjustment 14,000 — Jan 1 Balances b/f 365,000 365,000
" 1 Balances c/f 351,000 379,000 " 1 Goodwill adjustment — 14,000
365,000 379,000 365,000 379,000

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 Jenny and Sandy
Balance Sheet as at 1 January 20X6
Fixed Assets $ $ $
Premises 600,000
Plant and equipment 100,000
700,000
Current Assets
Stock 15,000
Debtors 35,000
Cash at bank 20,000 70,000
Less Current Liabilities
Creditors 40,000
Net current assets 30,000
730,000
Financed by:
Capital: Jenny 351,000
Sandy 379,000
730,000

57