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1 Partnership: Treatment of Goodwill Reference ： Chapter 5 (p. 89) 21

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2 ADefinition of Goodwill ( 商譽 ) ^Goodwill is the excess of the purchase price of a business as a going concern over the value of all separable net assets. ^Goodwill = Purchase price of - Value of all the business separable assets

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3 BNature of Goodwill zGoodwill is a kind of Intangible Assets. zIntangible assets are those assets without a physical substance. zGoodwill may be generated by good reputation; experienced and efficient employees and management; good relationship with suppliers and customers……

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4 cValuation of Goodwill 1Average sales method ( 平均銷貨法 ) e.g. ： Goodwill is three times the average yearly sales for the last two years. The sales for the last two years are $1,000 and $2,000 。 Goodwill = [($1000+$2000)/2]X3 = $4500 2Annual fees method ( 平均服務費法 ) e.g. ： Goodwill is three times the average annual fees received in the last two years. The annual fees for the last two years are $2,000 and $2,500 。 Goodwill = [($2000+$2500)/2]X3 = $6750

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5 3Average net profits method ( 平均純利法 ) e.g. ： Goodwill is five times the average net profits of the past three years. The net profits for the last three years are $10,000, $15,000 and $20,000 。 Goodwill = [($10000+$15000+$20000)/3]X5 = $75000

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6 DAccounting Treatment of Goodwill 1.Goodwill A/C to be opened / maintained Dr. Goodwill (increasing amount) Cr. Capital – A – B (Using old profit ratio) e.g. Goodwill is valued at $1,200. The profit sharing ratios of A and B is 2:1. Ans. Dr. Goodwill1,200 Cr. Capital – A800 – B400 Ex. 5.6. (a) (p. 98)

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7 2.No Goodwill A/C to be opened / maintained e.g. Goodwill is valued at $2,000. The old profit sharing ratio of A and B is 1:1 and the new profit sharing ratio is 3:1. Preparing a Goodwill adjustment table Draw up the journal entry according the table Dr. Capital – A 500 Cr. Capital – B500 Old RatioNew RatioGain or LossAdjustment A (½) $1000A (¾) $1500Gain $500Dr. Capital:A $500 B (½) $1000B (¼) $500Loss $500Cr. Capital:B $500 Ex. 5.6. (b) (p. 98)

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8 Assignment: Ex. 5.7X (p.98)

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