Principles of Accounting: Goodwill: Example entries when a new partner is admitted

////Principles of Accounting: Goodwill: Example entries when a new partner is admitted

Principles of Accounting: Goodwill: Example entries when a new partner is admitted

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:
PartnerBeforeAfter 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

PeterGeorgeMuchineripiCapital AccountsPeterGeorgeMuchineripi
Details$$$Details$$$
Goodwill Adjustment25 00025 000Balance b/d125 000125 000125 000
Balance c/d100 000175 000100 000Goodwill adjustment50 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

ChinjekureMupfumiTendaCapital AccountsChinjekureMupfumiTenda
Details$$$Details$$$
Goodwill60 00080 00020 000Balance b/d120 000180 00
Balance c/d124 000196 00080 000Bank100 000
Goodwill64 00096 000

184 000

176 000

100 000

184 000

176 000

100 000

Goodwill Account
DetailsAmount ($)DetailsAmount($)
Capital:Capital:
Chinjekure64 000Chinjekure60 000
Mupfumi96 000Mupfumi80 000
Tenda20 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.

By |2018-03-16T12:58:59+00:00March 16th, 2018|Notes, Ordinary Level Notes, Principles of Accounts Notes|Comments Off on Principles of Accounting: Goodwill: Example entries when a new partner is admitted

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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