Presentation on theme: "Good will for proprietors and partnerships Chapter 42."— Presentation transcript:
Good will for proprietors and partnerships Chapter 42
Goodwill Imagine Big C wanted to sell the company. They value all of their assets: Buildings 1,000,000 Vehicles 500,000 Stock 100,000 Total = 1,600,000 However, Big C wouldn’t sell their business for 1,600,000 they would sell it for more, because they have a good reputation. Businesses value their reputation, it is an INTANGIBLE ASSET Goodwill = Total selling price – value of tangible assets
Goodwill & sole proprietor’s books Good will is only entered in a sole proprietor’s accounts if the business was bought as a going concern (the owner bought the business). Otherwise, if a sole proprietor started their own business, they would not include good will in their accounts. Goodwill & partnership’s books Partners will own a share of the goodwill in the same ratio as they share profits
3 partners sharing profits equally On Dec 31 2012 they decide to change this to Dave – 50%, Anne – 25% and Tom 25%. On Dec 31 2012, the partnership valued goodwill at 60,000. So now if they sold the business, Dave would receive 30,000, Anne – 15,000 and Tom 15,000 Dave Anne Tom
Dave, Anne and Tom own a partnership equally for 10 years and no goodwill account has ever existed. On Dec 31 2013 they agree that from Jan 1 2013 Tom will only take 1/5 share of the profits because he will be devoting less time to the partnership. Dave and Anne will each take 2/5 of the profits each. Capital Dave – 30,000 Anne – 18,000 Tom – 22,000 The partners agree that goodwill should be valued at 30,000 If the good will account is opened before Jan 1 2013, then goodwill will be split equally. Each partner receives an 10,000. 10,000 will be credited to each partner's account If there is no goodwill account, then it would not be fair, because if the business is sold, each partner would not get what they deserve. Goodwill = 30,000 Dave = 2/5 of 30,000 = 12,000 Anne = 2/5 of 30,000 = 12,000 Tom = 1/5 of 30,000 = 6,000 So Tom is only getting 6,000 for the 10 year’s worth of work, whereas the others are getting 12,000. therefore to make this fair, Debit Dave’s and Anne’s capital account by 2,000 and credit Tom’s capital account by 4,000.