goodwil for partnership notes pdf, ppt.

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goodwil for partnership notes pdf, ppt.

  1. 1. Accounting 1for goodwill   Osei Benjamin Mireku (ICAG) notes by phlixter@aol.com
  2. 2. Goodwill = Selling price as a going concern – Fair value of separate net assets Goodwill = Selling price – (Assets – Liabilities) 2
  3. 3.  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 - 3
  4. 4.   Inherent Goodwill Purchased Goodwill 4
  5. 5. • • 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 5
  6. 6. •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 6
  7. 7.    Subjective Judgement Average Sales/Fees/Profits Method Super Profit Method 7
  8. 8.  Estimate the value of goodwill with reference to some intangible factors and according to their professional judgement 8
  9. 9.  It can be calculated on gross average or weight average Goodwill = 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 9
  10. 10.  10  All questions are welcomed through email only.
  11. 11. Year Annual Sales $ 1995 1996 1997 100000 200000 300000 (a) Goodwill is valued at 3 years’ purchase of the average annual sales of the past 3 years: Average annual sales = ($100000+200000+300000 ) /3 = $200000 Goodwill = $200000 X3 = $600000 11
  12. 12. (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) 12
  13. 13.   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 Statement Calculating Super Profit Average annual net profit Less: Reasonable remuneration to the owner X X Reasonable return on the capital employed in the tangible assets Super profit X X X 13
  14. 14. All questions are welcomed through email only.  14  Phlixter@aol.com
  15. 15.    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. 15
  16. 16. Answer Statement Calculating Super Profit $ Average net profit (5000+6500+6500+7000)/4 Less: Management fee 500 Expected rate of return on net tangible assets 5000 Super profit Goodwill= $750 X 3 = $2250 $ 6250 5500 750 16
  17. 17.  17  All questions are welcomed through email only.
  18. 18.   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 partner o Retirement of an old partner o Change of the profit-sharing ratio 18
  19. 19.  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 19
  20. 20.  20  The mind is not a vessel to be filled but a fire to be ignited
  21. 21.    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 opened o Goodwill account not opened 21
  22. 22.  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 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 22
  23. 23.   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 Dr Goodwill account Share goodwill among old partners in old Cr Capital account (old profit-sharing ratio partners only) Dr Capital account ( all Written off goodwill among all partners partners) in the new profit-sharing ratio Cr Goodwill account 23
  24. 24.  24  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.
  25. 25.    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: Chan and Wong Balance Sheet as at 31 December 1997 Assets 1,200 1,200 Capital Klotey Elorm 600 600 1,200 25
  26. 26. Goodwill 150 Balance c/f 150 Capital: Klotey (1/2) Elorm (1/2) 300 300 300 Capital Chan Balance c/f Wong Lee 750 750 600 750 600 Wong Balance b/f 600 600 Goodwill Cash 750 Chan 150 Lee 150 600 750 750 600 26
  27. 27. Balance Sheet as at 31 December 1998 Assets Goodwill Other Assets (1,200 + 600) 300 1,800 2,100 Capital Klotey Elorm Ben New capital balance 750 750 600 2,100 27
  28. 28. Capital Klotey Goodwill : new ratio Balance c/f Elorm Ben Klotey Elorm Balance b/f 100 650 100 650 100 500 750 750 600 600 Before admission Goodwill: old ratio 150 Cash 750 Ben 600 150 750 600 600 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 1/3 $100 $100 gain Ben $300 $300 28
  29. 29. Balance Sheet as at 31 December 1998 Assets Assets (1,200 + 600) 1,800 1,800 Capital Klotey Elorm Ben 650 650 500 1,800 29
  30. 30.  30  Education is what survives when what has been learned has been forgotten.
  31. 31.   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 31
  32. 32.  32  Education costs money, but then so does ignorance.
  33. 33.     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 Fafa, Eli and Awotwe follows: Balance Sheet as at 31 December 1997 Goodwill Other Assets 1,000 41,000 42,000 Capital Fafa Eli Awotwe 14,000 14,000 14,000 42,000 33
  34. 34.  Balance b/f Capital: Fafa (1/3) Eli (1/3) Awotwe (1/3) 1,000 3,000 3,000 3,000 Balance c/f 10,000 9,000 10,000 10,000 Capital o Fafa Eli Bank Balance c/f Awotwe 17,000 17,000 17,000 17,000 17,000 17,000 Fafa Balance b/f Goodwill Eli Awotwe 14,000 14,000 14,000 3,000 3,000 3,000 17,000 17,000 17,000 34
  35. 35. Fafa and Eli Balance Sheet as at 31 December 1998 Goodwill Other Assets (41000-17000) 1,000 24,000 34,000 Capital Fafa Eli 17,000 17,000 34,000 35
  36. 36. Capital Bank Goodwill: new ratio Balance c/f Fafa Eli 5,000 12,000 17,000 17,000 Balance b/f Fafa 14,000 Eli Awotwe 14,000 14,000 Goodwill : old ratio 5,000 12,000 17,000 Awotwe 17,000 3,000 3,000 17,000 Fafa and Eli Balance Sheet as at 31 December 1998 Assets (41,000 – 17,000) 24,000 Capital: Fafa Eli 24,000 3,000 17,000 17,000 12,000 12,000 24,000 36
  37. 37. Treat people as if they were what they ought to be, and you help them become what they are capable of becoming
  38. 38.  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. 38
  39. 39.  39  Optimism is the faith that leads to achievement; nothing can be done without hope and confidence.
  40. 40.     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 profitsharing ratio to 1:1:1. The goodwill is revalued at $9,000. The firm’s balance sheet on 31 December 1997 was: Goodwill Other Assets Bless, Grace and Eyi Balance Sheet as at 31 December 1997 1,000 Capital: Bless 79,000 Grace Eyi 80,000 30,000 30,000 20,000 80,000 40
  41. 41. Goodwill Balance b/f Capital: Bless (3/8) Grace (3/8) Eyi (2/8) 1,000 Balance c/f 3,000 3,000 2,000 9,000 8,000 9,000 9,000 Capital Bless Grace Balance c/f Eyi 33,000 33,000 22,000 Balance b/f Goodwill 33,000 33,000 22,000 Bless Grace Eyi 30,000 30,000 20,000 3,000 3,000 2,000 33,000 33,000 22,000 41
  42. 42. Balance Sheet as at 31 December 1998 Goodwill Other Assets 9,000 79,000 88,000 Capital Bless Grace Eyi 33,000 33,000 22,000 88,000 42
  43. 43. Capital Bless Goodwill: new ratio Balance c/f Grace Eyi 3,000 3,000 3,000 30,000 30,000 19,000 33,000 33,000 22,000 Bless Balance b/f Goodwill: old ratio Grace Eyi 30,000 30,000 20,000 3,000 3,000 2,000 33,000 33,000 22,000 43
  44. 44. Assets Bless, Grace & Eyi Balance Sheet as at 31 December 1998 79,000 Capital: Bless Grace Eyi 79,000 30,000 30,000 19,000 79,000 44
  45. 45. 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 65,000 Cash 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.
  46. 46. Valuation of Goodwill : 25,000 x1 + 40,000x2 + 75,000 x3 + 60,000 x 4 1 + 2 + 3 + 4 57,000

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