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Question
Explain the treatment of goodwill at the time of retirement or on the event of death of a partner?
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Solution
At the time of retirement or at the event of death of a partner, the goodwill is adjusted among the partners in gaining ratio with the share of goodwill of the retiring or the deceased partner. As per Para 16 of Accounting Standard 10, it is mandatory to record goodwill in the books only when consideration in money or money’s worth has been paid for it.
In case of retirement and death of a partner, goodwill account cannot be raised. There are namely two probable situations on which the treatment of goodwill rests.
1. If goodwill already appears in the books of the firm.
2. If no goodwill appears in the books of the firm.
Situation 1: If goodwill already appears in the books of the firm.
Step 1: Write off the existing goodwill
If goodwill already appears in the old balance sheet of the firm (if mentioned in the question), then first of all, this goodwill should be written off and should be distributed among all the partners of the firm including the retiring or the deceased partner in their old profit sharing ratio. The following Journal entry is passed to write off the old/existing goodwill.
All Partners' Capital A/c Dr.
To Goodwill A/c
(Goodwill written of among all the partners in their old ratio)
Step 2: Adjusting goodwill through partner's capital account.
After writing off the old goodwill, the goodwill need to be adjusted through the partner's capital account with the share of the goodwill of the retiring or the deceased partner. The following Journal entry is passed.
Remaining Partner's Capital A/c Dr.
To Retiring/Deceased Partner's Capital A/c
(Gaining Partner's Capital A/c is debited in their gaining share and retiring/deceased partner's capital account in credited for their share of goodwill)
Situation 2: If no goodwill appears in the books of the firm.
As no goodwill appears in the books of the firm, so the goodwill is adjusted through the partner's capital account with the share of the goodwill of the retiring or the deceased partner. The following Journal entry is passed.
Remaining Partner's Capital A/c Dr.
To Retiring/Deceased Partner's Capital A/c
(Gaining partner's capital account is debited in their gaining share and retiring/deceased partner's capital account in
credited for their share of goodwill)
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RELATED QUESTIONS
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Pass necessary journal entries in the books of the firm on Viney's death.
On1.4.2014 the Balance Sheet of Anant, Sampat and Gunvant was as follows :
| Liabilities |
Amount Rs |
Assets |
Amount Rs |
|
Sundry Creditors General Reserve Capital Reserve Anant 30,000 Sampat 15,000 Gunvant 15,000 |
9,000 9,600
60,000 |
Bank Bills Receivables Stock Tools Furniture
|
15,600 18,000 18,000 3,000 24,000
|
| 78,600 | 78,600 |
Gunvant died on 30.9.2014. Under the terms of Partnership Deed, the executors of the deceased partner were entitled to:
(a) The amount standing to the credit of partner's capital account.
(b) Interest on capital @12% per annum.
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(d) A share of profit from the closing of last financial year to the date of death on the basis of last year's profit.
The profits of the last three years were as follows:
| Year | Profit |
| 2011 - 2012 | 18.000 |
| 2012 - 2013 | 21,000 |
| 2013 - 2014 | 24,000 |
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Prepare Gunvant's Capital Account to be presented to his executors
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State 'True' or 'False'
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State ‘True’ or ‘False’:
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State 'True' or 'False'
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Hints:
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Keith, Bina, and Veena were partners in firm sharing profits and losses equally. Their balance sheet as on 31-3-2019 was as follows:
|
Balance Sheet of Keith, Bina, and Veena as on 31-3-2019 |
||||
| Liabilities |
Amount (₹) |
Amount (₹) |
Assets | Amount (₹) |
| Capitals: |
|
3,25,000 |
Plant and Machinery | 2,40,000 |
| Keith | 1,50,000 | Stock | 60,000 | |
| Bina | 1,00,000 | Sundry debtors | 35,000 | |
| Veena |
75,000 |
Cash at bank | 50,000 | |
| General Reserve |
|
30,000 |
||
| Sundry creditors |
|
30,000 |
||
| 3,85,000 | 3,85,000 | |||
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| Amount | 28,000 | 27,000 | 46,900 | 53,810 |
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| Year | (₹) | |
| 2020-21 | Loss | 20,000 |
| 2021-22 | Profit | 34,000 |
| 2022-23 | Profit | 46,000 |
From the year 2020-21 to the year 2022-23, Anish withdrew ₹ 30,000 from the firm for his personal use.
On 1st April, 2023, he admitted Danish into partnership on the following terms:
- Goodwill of the firm to be valued at two years’ purchase of the average profits of the last three years.
- Danish to have a `1/4` share in the future profits.
- Danish’s capital is to be equal to `1/4` of Anish’s capital determined on 1st April, 2023, after the goodwill compensation has been taken into account.
You are required to give:
- The formula to calculate goodwill by the Average Profit Method.
- The value of self-generated goodwill of the firm.
- Danish’s capital contribution.
Choose the components required to calculate goodwill of a firm by capitalisation of average profits method.
P: The normal profits of a similar firm in the industry.
Q: The average profits of the firm.
R: The number of years purchase.
S: The actual capital employed in the business.
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Gross Debtors: ₹ 1,52,000
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- Debtors of ₹ 2,000 to be irrecoverable.
- Provision for doubtful debts to be provided @ 2% of the debtors.
What is the net effect of revaluation of assets and liabilities?
