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Slide 42.1 Wood and Sangster, Frank Wood's Business Accounting Volume 1 Power Points on the Web, 11 th Edition © Pearson Education Limited 2008 Goodwill Goodwill is an intangible asset. It can only exist if the business was purchased and the amount paid was greater than the value of the net assets. Purchased goodwill = Total Price less value of net identifiable assets
Slide 42.2 Wood and Sangster, Frank Wood's Business Accounting Volume 1 Power Points on the Web, 11 th Edition © Pearson Education Limited 2008 Reasons for payment of goodwill A large number of regular customers who will continue to deal with the new owner. The business has a good reputation. It has experienced, efficient and reliable employees. The business is situated in a good location. It has good contacts with suppliers. It has well-known brand names that have not been valued and included as assets.
Slide 42.3 Wood and Sangster, Frank Wood's Business Accounting Volume 1 Power Points on the Web, 11 th Edition © Pearson Education Limited 2008 Methods of calculating goodwill There is no single way of calculating goodwill on which everyone can agree. The following methods are used: Average weekly sales multiplied by a given figure. Gross annual fees multiplied by a given number. Average net annual profit multiplied by an agreed number. Super-profits method.
Slide 42.4 Wood and Sangster, Frank Wood's Business Accounting Volume 1 Power Points on the Web, 11 th Edition © Pearson Education Limited 2008 Changes in profit sharing ratios of existing partners Typical reasons would include: A partner may not work as much as in the past. A partner's skills and ability may have changed. A partner may now be doing much more for the business than in the past.
Slide 42.5 Wood and Sangster, Frank Wood's Business Accounting Volume 1 Power Points on the Web, 11 th Edition © Pearson Education Limited 2008 Accounting entries for goodwill adjustments Goodwill account is opened Debit Goodwill Credit Partners’ capital in old profit sharing ratios Goodwill account not opened DebitGoodwill CreditPartners’ capital in old profit sharing ratio Then: DebitPartners’ capital in new profit sharing ratio CreditGoodwill (to close account)
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