1. CAPITAL ADJUSTMENT ACCOUNT AND CALCULATION OF GOODWILL
LECTURE 12
CAPITAL ADJUSTMENT ACCOUNT AND CALCULATION OF GOODWILL

2. LECTURE OUTLINE Recap – Previous lecture Capital Adjustment Account
Definition
Journal Entries
Goodwill

3. CAPITAL ADJUSTMENT ACCOUNT
The changes in the value of the items would be shown in a special account known as a capital adjustment account.
Function
Is to record any necessary adjustment to the capital of the existing partners, when the ownerships changes.
A+E = L + P + R

4. Journal Entries As Follows: 1. Increase Assets Dr Assets XX
Cr Capital Adjustment Account 2.
Decrease Assets
Dr Capital Adjustment Account
Cr Assets 3.
Increase Liabilities
Cr Liabilities 4.
Decrease Liabilities
Dr Liabilities

5. INTRODUCTION OF ASSETS AND LIABILITIES
When a partner joins a partnership business, he or she can also bring cash with other assets and liabilities.
Note : Cash amount is credited to CRJ and Assets and Liabilities are taken in the General Journal.

6. BAD DEBTS AND PROVISION FOR DOUBTFUL DEBTS
Should it be necessary to write off bad debts during capital adjustment then this can done through the capital adjustment account in the same manner as writing down any other assets

7. Cont… 1. DR Capital Adjustment Accounts XX CR Debtors
Journal Entries: 1. DR
Capital Adjustment Accounts XX CR
Debtors
(Bad debts written off) 2.
Provision for doubtful debts
(To increase the provision for doubtful debts)

8. GOODWILL DR Goodwill XX CR Capital Adjustment Account
There are two possible alternatives for the treatment of goodwill in the books.
Alternative 1
When goodwill is suppose d to appear in the books
In order to increase this existing goodwill to its agreed fair value, the journal entry would be: DR
Goodwill XX CR
Capital Adjustment Account
(Raising the amount of goodwill)

9. Cont…
Alternative 2
No Goodwill account is to appear in the books
Even though the existing owners decide not to open the goodwill account in the books, they might still expect the new partner to pay an agreed amount of goodwill. The goodwill still has a value even though there is no existing account for it. If goodwill is sold then the new partner becomes entitled to future profits during/ after the sale of goodwill.

10. Cont…
Now the existing partners expect the share of goodwill from the new partner, which he is entitled to. That is, the new partner is expected to pay bonus to the existing partner for the share of business goodwill.
Recording the BONUS (From new partner to existing partner)
This is transferred to capital from the new partner’s capital accounts to the existing partners capital account.

11. Cont…
Journal Entries
The existing partners may decide themselves what they want to do with the bonus i.e either leave it in the business capital account or withdraw it.
Note: in this alternative, the capital adjustment account is not affected DR
Capital Account- New Partner XX CR
Capital Account - Existing Partner

12. Measuring goodwill
It is possible to measure the value of goodwill given the following:
Fair value of assets and liabilities
New partner contribution
Profit sharing ratio
Goodwill = Purchase Price +Liabilities – Assets
Or Purchase Price – Fair value (where FV= A-L)

13. Capital Adjustment Account Definition Journal Entries Goodwill
SUMMARY
Capital Adjustment Account
Definition
Journal Entries
Goodwill

14. Dissolution of partnership
NEXT LECTURE
Dissolution of partnership