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