Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes: 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.
| Partner | Old Ratio | New Ratio |
| Mhaka | 1 | 2 |
| Banda | 4 | 3 |
| Feruka | 2 | 4 |
| Tangwena | 3 | 1 |
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: | |
| Mhaka | 30 000 |
| Banda | 70 000 |
| Feruka | 35 000 |
| Tangwena | 45 000 |
180 000 |
Required:
- Show the necessary entries to record goodwill:
- Where a Goodwill Account is opened
- Where no Goodwill Account is opened
Solution
a) Entries where a Goodwill Account is opened
| Goodwill Account | Details | |||||||||
| Details | Amount($) | Details | Amount($) | |||||||
| Capitals: | Capitals: | |||||||||
| Mhaka | 7 200 | Mhaka | 22 800 | |||||||
| Banda | 28 800 | Banda | 21 600 | |||||||
| Feruka | 14 400 | Feruka | 20 600 | |||||||
| Tangwena | 21 600 | Tangwena | 7 200 | |||||||
72 000 | 72 000 | |||||||||
| Capital Accounts | ||||||||||
| Details | Mhaka | Banda | Feruka | Tangwena | Details | Mhaka | Banda | Feruka | Tangwena | |
| Goodwill | 14 400 | 21 600 | 28 800 | 7 200 | Balance b/d | 30 000 | 70 000 | 35 000 | 45 000 | |
| Balance c/d | 22 800 | 77 200 | 20 600 | 59 400 | Goodwill | 7 200 | 28 800 | 14 400 | 21 600 | |
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 | ||||||||||
| Details | Mhaka | Banda | Feruka | Tangwena | Details | Mhaka | Banda | Feruka | Tangwena | |
| Goodwill Adjustments | 7 200 | 14 400 | Balance b/d | 30 000 | 70 000 | 35 000 | 45 000 | |||
| Balance c/d | 22 800 | 77 200 | 20 600 | 59 400 | Goodwill Adjustments | 7 200 | 14 400 | |||
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 Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes.
