Advanced Financial Accounting FIN-611 Mian Ahmad Farhan Lecture-19 Partnership

Admission of Partners (Issues) Change of profit sharing ratio Salary Interest on capital

Methods for Goodwill Calculation Average profit method Super profit method Market capitalization method

Average Profit Method Years Profit 1st year 20,000 2nd year 40,000 3rd year 50,000 4th year 70,000 Total 180,000 Average profit = 180,000 / 4 = Rs. 45,0000 Goodwill = 45,000 x 3 = 135,000

Super Profit Method

Super Profit Method Normal profit = 200,000 x 18% = 36,000 Super profit = Average profit – Normal profit = 45,000 – 36,000 = 9,000 Goodwill = 9,000 x 3 = 27,000

Market Capitalization Method Amount in absolute terms = Given information in absolute terms % of given information x % of required amount Goodwill = 45,000 / 18 x 100 = 250,000 = 250,000 -200,000 = 50,000

Goodwill Raised Scenario-1 Journal Entry Goodwill A/c 135,000 A’s capital A/c 81,000 B’s capital A/c 45,000 Working A’s share = 135,000 x 3/5 = 81,000 B’s share = 135,000 x 2/5 = 54,000

Goodwill Raised & Written-Off Scenario-2 Journal Entry (Goodwill raised) Goodwill A/c 135,000 A’s capital A/c 81,000 B’s capital A/c 45,000 Journal Entry (Goodwill raised & written off ) A’s capital A/c 67,500 C’s capital A/c 22,500 Goodwill A/c 135,000

A’s benefit Old ratio (Cr) 81,000 New ratio (Dr) 67,500 (Cr) 13,500 B’s benefit Old ratio (Cr) 54,000 New ratio (Dr) 45,000 (Cr) 9,000

A’s benefit + B’s benefit 13,500 + 9,000 = 22,500 C’s share = 22,500 C’s share = 135,000 x 1/6 = 22,500

Goodwill Brought in Cash Scenario-3 Bank A/c 22,500 C’s goodwill A/c 22,500 Distribution of goodwill (sacrifice ratio) A’s capital A/c 13,500 B’s capital A/c 9,000

Working A’s share = 22,500 x 3/5 = 13,500 B’s share = 22,500 x 2/5 = 9,000

Goodwill Brought in Cash & Withdrawn Scenario-4 Bank A/c 22,500 C’s goodwill A/c 22,500 Distribution of goodwill (sacrifice ratio) A’s capital A/c 13,500 B’s capital A/c 9,000 Goodwill withdrawn A’s capital A/c 13,500 B’s capital A/c 9,000 Bank A/c 22,500

Goodwill Brought in Cash & Withdrawn Scenario-4 Bank A/c 22,500 C’s goodwill A/c 22,500 Distribution of goodwill (sacrifice ratio) A’s capital A/c 13,500 B’s capital A/c 9,000 Goodwill withdrawn A’s capital A/c 13,500 B’s capital A/c 9,000 Bank A/c 22,500