Principles of Accounting: Goodwill: Changes in Profit Sharing Ratio Example

////Principles of Accounting: Goodwill: Changes in Profit Sharing Ratio Example

Principles of Accounting: Goodwill: Changes in Profit Sharing Ratio Example

ZIMSEC O Level Principles of Accounting: Accounting for Partnerships: Goodwill and Partnership businesses: Changes in Profit Sharing Ratio Example

  • This is an example of a question where there are changes in the profit sharing ratio of a partnership
  • We have already looked at the entries involved in such cases here

Example question

Mhaka, Banda, Feruka and Tangwena run an Accounting firm in Harare. They are now changing their profit/loss sharing ratios as shown in the table below.

PartnerOld RatioNew Ratio
Mhaka12
Banda43
Feruka24
Tangwena31

They decide to bring in a goodwill amount of $72 000 on the change. The last Statement of Financial position before any element of goodwill has been introduced was as follows:

Statement of Financial Position as at 30 April 20×7
$
Net Assets (no goodwill is included here)180 000

180 000

Financed By:
Capitals:
Mhaka30 000
Banda70 000
Feruka35 000
Tangwena45 000

180 000

Required:

  1. Show the necessary entries to record goodwill:
    1. Where a Goodwill Account is opened
    2. Where no Goodwill Account is opened

Solution

a) Entries where a Goodwill Account is opened
Goodwill AccountDetails
DetailsAmount($)DetailsAmount($)
Capitals:Capitals:
Mhaka7 200Mhaka22 800
Banda28 800Banda21 600
Feruka14 400Feruka20 600
Tangwena21 600Tangwena7 200

72 000

72 000

Capital Accounts
DetailsMhakaBandaFerukaTangwenaDetailsMhakaBandaFerukaTangwena
Goodwill14 40021 60028 8007 200Balance b/d30 00070 00035 00045 000
Balance c/d22 80077 20020 60059 400Goodwill7 20028 80014 40021 600

37 200

98 800

49 400

66 600

37 200

98 800

49 400

66 600

NB:

  • Some texts like Frank Wood do not include last entry of not writing off Goodwill by crediting it using the new entries
  • While that is acceptable there is no need to keep the Goodwill Asset and it should therefore be removed using the new ratios
b) Entries where no Goodwill Account is opened
Capital Accounts
DetailsMhakaBandaFerukaTangwenaDetailsMhakaBandaFerukaTangwena
Goodwill Adjustments7 20014 400Balance b/d30 00070 00035 00045 000
Balance c/d22 80077 20020 60059 400Goodwill Adjustments7 20014 400

37 000

72 000

35 000

59 400

37 000

72 000

35 000

59 400

NB:

  • Take note of the capital balances c/d and compare them with those of method 1 and you will note they are similar.

To access more topics go to the Principles of Accounts Notes.

By |2018-03-08T12:13:49+00:00March 8th, 2018|Notes, Ordinary Level Notes, Principles of Accounts Notes|Comments Off on Principles of Accounting: Goodwill: Changes in Profit Sharing Ratio Example

About the Author:

He holds an Honours in Accountancy degree from the University of Zimbabwe. He is passionate about technology and its practical application in today's world.
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