1. Accounting 1for goodwill


Osei Benjamin Mireku (ICAG)
notes by
phlixter@aol.com

2. Goodwill = Selling price as a going concern – Fair value of
separate net assets
Goodwill = Selling price – (Assets – Liabilities)
2

3. 
Buyer may be willing to pay more for a business as a going
concern because of:
-
Good location
Good customer relations
Good reputation
Well-known products
Experienced and efficient employees and management
team
Good relation with suppliers
-
3

4. 

Inherent Goodwill
Purchased Goodwill
4

5. •
•
Goodwill generated internally because of the above
advantages
Inherent goodwill is only an estimation. Therefore, it
should not be brought into the books, and no accounting
entry is required
5

6. •It is the goodwill generated during the acquisition of a
business
•It is the difference between the selling price of a business as
a going concern and the total value of its separable net assets
•It can be treated as an intangible fixed asset.
•Some companies may write it off immediately against
reserves, or amortized through the profit and loss account
over its useful economic life
6

7. 


Subjective Judgement
Average Sales/Fees/Profits Method
Super Profit Method
7

8. 
Estimate the value of goodwill with reference to some
intangible factors and according to their professional
judgement
8

9. 
It can be calculated on gross average or weight average
Goodwill = Average annual sales/fees/profits over a stated
number of years * a factor
The factor is usually stated as a certain number of
years’ purchase of the average sales/fees/profits
9

10. 
10

All questions are welcomed through email only.

11. Year
Annual Sales
$
1995
1996
1997
100000
200000
300000
(a) Goodwill is valued at 3 years’ purchase of the average annual sales of the past
3 years:
Average annual sales = ($100000+200000+300000 ) /3
= $200000
Goodwill = $200000 X3
= $600000
11

12. (b) Goodwill is valued at the 3 years’ purchase of the weighted average
of the annual sales of the past 3 years
Weighted average annual sales
= (100000 x 1 + 200000 x 2 + 300000 x 3)
1+2+3
= 1400000
6
= 233333 (Calculation to the nearest dollar)
12

13. 

A business with goodwill is expected to be able to earn
more profit than a business without goodwill
The extra profit earned is called the super profit
Statement Calculating Super Profit
Average annual net profit
Less: Reasonable remuneration to the owner
X
X
Reasonable return on the capital employed in the
tangible assets
Super profit
X
X
X
13

14. All questions are welcomed through email only.

14

Phlixter@aol.com

15. 


Ben is leaving the partnership, and goodwill is to be
revalued at 3 years’ purchase of the super profit.
The expected rate of return on net tangible assets
is 10 %, after paying a management fee of $500.
The calculation of the super profit is to be based on
the average profits of the last four years.
Net profit from 1994-1997 is $5000, $6500,
$6500, $7000
Expected return on net tangible assets = Net
tangible assets * 10%. Expected return is $5000.
15

16. Answer
Statement Calculating Super Profit
$
Average net profit
(5000+6500+6500+7000)/4
Less: Management fee
500
Expected rate of return
on net tangible assets
5000
Super profit
Goodwill= $750 X 3
= $2250
$
6250
5500
750
16

17. 
17

All questions are welcomed through email only.

18. 

Only purchased goodwill is to be brought into the
accounts. In sole trader’s accounts, goodwill is to
be recognized and recorded in the books only if the
business is acquired as a going concern
In partnerships, however, goodwill is brought into
the books whenever there is a change in the
partnership such as:
o Admission of a new partner
o Retirement of an old partner
o Change of the profit-sharing ratio
18

19. 
Each partner has a share of the profit-sharing ratio. At a
change in the partnership, goodwill must be taken into
account and shared among the existing partners, according
to the existing profit-sharing ratio
19

20. 
20

The mind is not a vessel to be filled but a fire to be ignited

21. 


The new partner is required to pay for his share of
the tangible assets as well as the goodwill,
according to the profit-sharing ratio
On the admission of a new partner, goodwill must
be revalued
However, not all business keep a goodwill account
in their books. Goodwill adjustments can be done:
o Goodwill account opened
o Goodwill account not opened
21

22. 
The value of the goodwill will be credited to the old
partners’ capital accounts, which represents an
increase in the resources they own, while the new
partner will not have a share of the goodwill
Dr Goodwill account
Cr Capital account ( old partners
only
With the value of goodwill
With their share of goodwill in old
ratio
Dr Goodwill account
Cr Capital account ( old partner
With the increase in the value of
goodwill, share in the old ratio
Dr Capital account (old partner)
Cr Goodwill account
With the decrease in the value of
goodwill, share in the old artio
22

23. 

Goodwill is intangible in nature. It cannot be disposed of
separately. Therefore, some businesses prefer not to
maintain a goodwill account
The new partner may be required to pay extra cash, or have
his capital balance reduced, for his share of goodwill
Dr Goodwill account
Share goodwill among old partners in old
Cr Capital account (old profit-sharing ratio
partners only)
Dr Capital account ( all Written off goodwill among all partners
partners)
in the new profit-sharing ratio
Cr Goodwill account
23

24. 
24

Don’t limit yourself. Many people limit themselves to what they think they can do. You
can go as far as your mind lets you. What you believe, you can achieve.

25. 


Klotey and Elorm were partners sharing profits and losses
equally.
On 1 January 1998, they admitted Ben as a new partner who was
required to introduce $600 as capital. The profits are now to be
shared among Klotey, Elorm and Ben equally.
Goodwill is valued at $300. The balance sheet before the
admission of the new partner is shown as follows:
Chan and Wong
Balance Sheet as at 31 December 1997
Assets
1,200
1,200
Capital
Klotey
Elorm
600
600
1,200
25

26. Goodwill
150
Balance c/f
150
Capital: Klotey (1/2)
Elorm (1/2)
300
300
300
Capital
Chan
Balance c/f
Wong
Lee
750
750
600
750
600
Wong
Balance b/f
600
600
Goodwill
Cash
750
Chan
150
Lee
150
600
750
750
600
26

27. Balance Sheet as at 31 December 1998
Assets
Goodwill
Other Assets (1,200 + 600)
300
1,800
2,100
Capital
Klotey
Elorm
Ben
New capital balance
750
750
600
2,100
27

28. Capital
Klotey
Goodwill :
new ratio
Balance c/f
Elorm
Ben
Klotey Elorm
Balance b/f
100
650
100
650
100
500
750
750
600
600
Before admission
Goodwill: old ratio 150
Cash
750
Ben
600
150
750
600
600
After admission
Partner
Old ratio
Share of
goodwill
New ratio
Share of
goodwill
Gain/loss
Klotey
1/2
$150
1/3
$100
$50 loss
Elorm
1/2
$150
1/3
$100
$50 loss
1/3
$100
$100 gain
Ben
$300
$300
28

29. Balance Sheet as at 31 December 1998
Assets
Assets (1,200 + 600)
1,800
1,800
Capital
Klotey
Elorm
Ben
650
650
500
1,800
29

30. 
30

Education is what survives when what has been learned has been forgotten.

31. 

When a partner wants to withdraw from a partnership, the
partnership should revalue all the assets which belongs to
the leaving partner in order to compute the total amount of
money that he can withdraw from the partnership
Goodwill adjustment should be calculated in order to
compensate the leaving partner
31

32. 
32

Education costs money, but then so does ignorance.

33. 



Fafa, Eli and Awotwe were partners sharing profits and losses
equally.
On 31 December 1997, Awotwe left the partnership. The other
two partners agreed to share profits and losses equally.
The goodwill is revalued at $10,000. Awotwe received cash from
the partnership for the amount due to him on 31 December
1997.
The balance sheet before Awotwe’s retirement is shown as
Fafa, Eli and Awotwe
follows:
Balance Sheet as at 31 December 1997
Goodwill
Other Assets
1,000
41,000
42,000
Capital
Fafa
Eli
Awotwe
14,000
14,000
14,000
42,000
33

34. 
Balance b/f
Capital: Fafa (1/3)
Eli (1/3)
Awotwe (1/3)
1,000
3,000
3,000
3,000
Balance c/f
10,000
9,000
10,000
10,000
Capital
o
Fafa
Eli
Bank
Balance c/f
Awotwe
17,000
17,000 17,000
17,000 17,000 17,000
Fafa
Balance b/f
Goodwill
Eli
Awotwe
14,000 14,000 14,000
3,000 3,000 3,000
17,000 17,000 17,000
34

35. Fafa and Eli
Balance Sheet as at 31 December 1998
Goodwill
Other Assets
(41000-17000)
1,000
24,000
34,000
Capital
Fafa
Eli
17,000
17,000
34,000
35

36. Capital
Bank
Goodwill:
new ratio
Balance c/f
Fafa
Eli
5,000
12,000
17,000
17,000
Balance b/f
Fafa
14,000
Eli
Awotwe
14,000 14,000
Goodwill :
old ratio
5,000
12,000
17,000
Awotwe
17,000
3,000
3,000
17,000
Fafa and Eli
Balance Sheet as at 31 December 1998
Assets (41,000 – 17,000)
24,000 Capital: Fafa
Eli
24,000
3,000
17,000 17,000
12,000
12,000
24,000
36

37. Treat people as if they were what they ought to be, and you help them become what
they are capable of becoming

38. 
When there is a change in the profit-sharing ratio, the value
of goodwill should also be re-assessed, so as to ascertain
the amount of resources a partner has to give up ( in terms
of a reduction in the relative capital balance) for the gain in
his share of profits/loss.
38

39. 
39

Optimism is the faith that leads to achievement; nothing can be done without hope
and confidence.

40. 



Bless, Grace and Eyi are partners in a trading firm and
share profits and losses in the ratio 3:3:2.
On 31 December 1997, they wanted to change the profitsharing ratio to 1:1:1.
The goodwill is revalued at $9,000.
The firm’s balance sheet on 31 December 1997 was:
Goodwill
Other Assets
Bless, Grace and Eyi
Balance Sheet as at 31 December 1997
1,000 Capital: Bless
79,000
Grace
Eyi
80,000
30,000
30,000
20,000
80,000
40

41. Goodwill
Balance b/f
Capital: Bless (3/8)
Grace (3/8)
Eyi (2/8)
1,000
Balance c/f
3,000
3,000
2,000
9,000
8,000
9,000
9,000
Capital
Bless Grace
Balance c/f
Eyi
33,000 33,000 22,000
Balance b/f
Goodwill
33,000 33,000 22,000
Bless Grace
Eyi
30,000 30,000 20,000
3,000
3,000
2,000
33,000 33,000 22,000
41

42. Balance Sheet as at 31 December 1998
Goodwill
Other Assets
9,000
79,000
88,000
Capital
Bless
Grace
Eyi
33,000
33,000
22,000
88,000
42

43. Capital
Bless
Goodwill:
new ratio
Balance c/f
Grace
Eyi
3,000 3,000
3,000
30,000 30,000 19,000
33,000 33,000 22,000
Bless
Balance b/f
Goodwill:
old ratio
Grace
Eyi
30,000 30,000 20,000
3,000
3,000
2,000
33,000 33,000 22,000
43

44. Assets
Bless, Grace & Eyi
Balance Sheet as at 31 December 1998
79,000 Capital: Bless
Grace
Eyi
79,000
30,000
30,000
19,000
79,000
44

45. Elorm and Ben were in partnership. They shared profits and losses
in ratio of 3:2 On 1 January 2001, they decided to admit Klotey.
Goodwill is valued at one year’s purchase of the average annual
profits (weighted average) of the past four years. Goodwill is not to
be brought into the partnership’s book. Klotey brought $40,000 cash
into the business for capital. No extra cash is paid for goodwill. The
new profit-sharing ratio is 3:2:1.
The balance sheet as at 31 December2000 before the admission of
Klotey is as follows:
Assets
110,000
Capital : Elorm
65,000
Cash
25,000
Ben
70,000
Annual net profits for 1997 to 2000 were $25,000,$40,000, $75,000
and $60,000 respectively.
Record the above change in the partnership in the partners’ capital
accounts in columnar form, and show the balance sheet after the
admission of Klotey.

46. Valuation of Goodwill :
25,000 x1 + 40,000x2 + 75,000 x3 + 60,000 x 4
1 + 2 + 3 + 4
57,000