### ZIMSEC O Level Principles of Accounting: Accounting for Partnerships: Goodwill: Example entries when a new partner is admitted

• We have looked at entries to be made in the books when a new partner is admitted into the business
• Now it is time to look at a simple example of the entries involved

#### Example Question

Partners Chinjekure and Mupfumi share profits and losses in the ratio  2:3. They decide to admit Partner Tenda after which they will then share profits in the ratio 3:4:1. The partners have agreed to value goodwill at \$160 000.

The partners capital balances before the admission of Tenda are as follows:

• Chinjekure \$120 000
• Mupfumi  \$180 000

Tenda is to bring in capital contribution of \$100 000

Required:

1. Show the entries to be made in the books of the partnership with regards to this change without using a Goodwill Account
2. Show the entries to be made in the books of the partnership with regards to this change using a goodwill account

#### Solution

1. Without using a Goodwill Account
• First wee need to calculate the share of Goodwill for each partner before and after the admission of Tenda into the partnership:
 Partner Before After Gain/(Loss) Chinjekure \$64 000 \$60 000 (\$4 000) Mupfumi \$96 000 \$80 000 (\$16 000) Tenda \$0 \$20 000 \$20 000

If you did this right the sum of the amounts in the Gain/(Loss) column ought to be \$0. These are workings and are not part of the solution

 Peter George Muchineripi Capital Accounts Peter George Muchineripi Details \$ \$ \$ Details \$ \$ \$ Goodwill Adjustment 25 000 25 000 Balance b/d 125 000 125 000 125 000 Balance c/d 100 000 175 000 100 000 Goodwill adjustment 50 000 125 000 175 000 125 000 125 000 175 000 125 000

No goodwill account is opened and Tenda’s capital is reduced in line with the losses in goodwill share suffered by Chinjekure and Mupfumi

2 Using a Goodwill Account

 Chinjekure Mupfumi Tenda Capital Accounts Chinjekure Mupfumi Tenda Details \$ \$ \$ Details \$ \$ \$ Goodwill 60 000 80 000 20 000 Balance b/d 120 000 180 00 Balance c/d 124 000 196 000 80 000 Bank 100 000 Goodwill 64 000 96 000 184 000 176 000 100 000 184 000 176 000 100 000 Goodwill Account Details Amount (\$) Details Amount(\$) Capital: Capital: Chinjekure 64 000 Chinjekure 60 000 Mupfumi 96 000 Mupfumi 80 000 Tenda 20 000 160 000 160 000

NB As always while it is longer method 2 is to be preferred when answering questions in the examination

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