- We have already examined the entries required to record Goodwill in the books upon the death or retirement of one of the partners here
- We will now look at an example to demonstrate the stages involved
Death/Retirement Example
Peter, George and Muchineripi have been in partnership for the past five years. They own a retail shop in Harare’s CBD where they sell groceries. They share their profits/losses equally. On 31 December 20×8 George decided to retire due to old age. Peter and Muchineripi have decided they will continue with the businesses and continue to share profits equally.
The partners agree that goodwill is to be valued at $150 000 and is to be written off immediately in the new partnership.
The partner’s capital balance on 31 December 20×8:
- Peter $125 000
- George $125 000
- Muchineripi $125 000
Required:
- Show the Goodwill entries required to show this change using without using a Goodwill Account
- Show the Goodwill entries required to show the retirement of George using a Goodwill Account
Solution
a. Entries without using a Goodwill Account
| 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 |
b. Entries using the Goodwill Account
| Peter | George | Muchineripi | Capital Accounts | Peter | George | Muchineripi | ||
| Details | $ | $ | $ | Details | $ | $ | $ | |
| Goodwill | 75 000 | 75 000 | Balance b/d | 125 000 | 125 00 | 125 000 | ||
| Balance c/d | 100 000 | 175 000 | 100 000 | Goodwill | 50 000 | 50 000 | 50 000 | |
175 000 000 | 175 000 000 | 175 000 000 | 175 000 000 | 175 000 000 | 175 000 000 |
|||
| Goodwill Account | ||||||||
| Details | Amount ($) | Details | Amount($) | |||||
| Capital: | Capital: | |||||||
| Peter | 50 000 | Peter | 75 000 | |||||
| George | 50 000 | Muchineripi | 75 000 | |||||
| Muchineripi | 50 000 | |||||||
150 000 | 150 000 | |||||||
NB:
- Both methods yield the same result but as always the second method is to be preferred when answering examination questions unless of course when told otherwise
To access more topics go to the Principles of Accounts Notes.
