1. Advanced Financial Accounting FIN-611
Mian Ahmad Farhan
Lecture-19
Partnership

2. Admission of Partners (Issues)
Change of profit sharing ratio
Salary
Interest on capital

3. Methods for Goodwill Calculation
Average profit method
Super profit method
Market capitalization method

4. Average Profit Method Years Profit 1st year 20,000 2nd year 40,000
3rd year
50,000
4th year
70,000
Total
180,000
Average profit = 180,000 / 4 = Rs. 45,0000
Goodwill = 45,000 x 3 = 135,000

5. Super Profit Method

6. Super Profit Method Normal profit = 200,000 x 18% = 36,000
Super profit = Average profit – Normal profit
= 45,000 – 36,000
= 9,000
Goodwill = 9,000 x 3 = 27,000

7. Market Capitalization Method
Amount in absolute terms
= Given information in absolute terms
% of given information
x % of required amount
Goodwill = 45,000 / 18 x 100 = 250,000
= 250, ,000
= 50,000

8. Goodwill Raised Scenario-1
Journal Entry
Goodwill A/c 135,000
A’s capital A/c 81,000
B’s capital A/c 45,000
Working
A’s share = 135,000 x 3/5 = 81,000
B’s share = 135,000 x 2/5 = 54,000

9. Goodwill Raised & Written-Off Scenario-2
Journal Entry (Goodwill raised)
Goodwill A/c 135,000
A’s capital A/c 81,000
B’s capital A/c 45,000
Journal Entry (Goodwill raised & written off )
A’s capital A/c 67,500
C’s capital A/c 22,500
Goodwill A/c 135,000

10. A’s benefit
Old ratio (Cr) 81,000
New ratio (Dr) 67,500
(Cr) 13,500
B’s benefit
Old ratio (Cr) 54,000
New ratio (Dr) 45,000
(Cr) 9,000

11. A’s benefit + B’s benefit
13, ,000 = 22,500
C’s share = 22,500
C’s share = 135,000 x 1/6 = 22,500

12. Goodwill Brought in Cash Scenario-3
Bank A/c 22,500
C’s goodwill A/c 22,500
Distribution of goodwill (sacrifice ratio)
A’s capital A/c 13,500
B’s capital A/c 9,000

13. Working
A’s share = 22,500 x 3/5 = 13,500
B’s share = 22,500 x 2/5 = 9,000

14. Goodwill Brought in Cash & Withdrawn Scenario-4
Bank A/c 22,500
C’s goodwill A/c 22,500
Distribution of goodwill (sacrifice ratio)
A’s capital A/c 13,500
B’s capital A/c 9,000
Goodwill withdrawn
A’s capital A/c 13,500
B’s capital A/c 9,000
Bank A/c 22,500

15. Goodwill Brought in Cash & Withdrawn Scenario-4
Bank A/c 22,500
C’s goodwill A/c 22,500
Distribution of goodwill (sacrifice ratio)
A’s capital A/c 13,500
B’s capital A/c 9,000
Goodwill withdrawn
A’s capital A/c 13,500
B’s capital A/c 9,000
Bank A/c 22,500