Henry and Isa are in partnership sharing profits and losses equally. On 1 January 2025, they admit Jia as a new partner. Statement of financial position at ...
Question 1 Report
Henry and Isa are in partnership sharing profits and losses equally. On 1 January 2025, they admit Jia as a new partner.
Statement of financial position at 31 December 2024 (extract)
| Item | $ |
|---|---|
| Non-current assets (net book value) | 80 000 |
| Current assets | 45 000 |
| Current liabilities | 15 000 |
| Henry: Capital | 60 000 |
| Isa: Capital | 50 000 |
The following was agreed:
- Goodwill is valued at $30 000
- Jia will introduce $40 000 as capital
- The new profit sharing ratio will be Henry 2, Isa 2, Jia 1
- Goodwill is not to be retained in the books
(a) Define the term goodwill. [2]
(b) Prepare the goodwill account. [4]
(c) Prepare the partners' capital accounts in columnar format to record the admission of Jia. [10]
(d) State two factors that may contribute to the goodwill of a business. [4]
Answer Details
(a) Definition of goodwill
Goodwill is an intangible non-current asset. [1] It represents the value of a business above the net value of its identifiable tangible and intangible assets, arising from factors such as the firm's reputation, established customer base, and earning potential. [1]
(b) Goodwill Account
Goodwill is first credited to the existing partners' capital accounts in the old profit-sharing ratio (Henry:Isa = 1:1), then debited to all partners' capital accounts in the new ratio (Henry:Isa:Jia = 2:2:1). Since goodwill is not to be retained in the books, the account opens and closes in the same set of entries.
| Dr (Goodwill) | Cr (Goodwill) | ||||
|---|---|---|---|---|---|
| Details | $ | Details | $ | ||
| Henry capital (1/2) | 15 000 [1] | Henry capital (2/5) | 12 000 [1] | ||
| Isa capital (1/2) | 15 000 [1] | Isa capital (2/5) | 12 000 | ||
| Jia capital (1/5) | 6 000 [1] | ||||
| Total | 30 000 | Total | 30 000 | ||
The debit side credits the old partners for the goodwill they built. The credit side charges all partners (including Jia) in the new ratio, effectively making Jia pay for her share of the existing goodwill.
(c) Partners' Capital Accounts (columnar format)
| Henry ($) | Isa ($) | Jia ($) | |
|---|---|---|---|
| Credit side | |||
| Balance b/d | 60 000 | 50 000 | - [1] |
| Goodwill (old ratio 1:1) | 15 000 | 15 000 | - [1] |
| Bank (capital introduced) | - | - | 40 000 [1] |
| Total credit | 75 000 | 65 000 | 40 000 |
| Debit side | |||
| Goodwill (new ratio 2:2:1) | 12 000 | 12 000 | 6 000 [1] |
| Balance c/d | 63 000 [1] | 53 000 [1] | 34 000 [1] |
| Total debit | 75 000 | 65 000 | 40 000 |
Henry: $60 000 + $15 000 - $12 000 = $63 000
Isa: $50 000 + $15 000 - $12 000 = $53 000
Jia: $40 000 - $6 000 = $34 000
Total capital = $63 000 + $53 000 + $34 000 = $150 000 [1]
Correct columnar format with old and new ratios correctly applied. [1][1]
(d) Factors contributing to goodwill
Good reputation / brand name [1] - a well-known and respected business attracts customers more easily and can generate above-average profits. [1]
Loyal customer base [1] - regular repeat customers provide reliable income and reduce the cost and uncertainty of finding new business. [1]
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