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- 20 Marks
Question
BIN Partnership is an existing partnership consisting of two partners, Bode and Igere, sharing profits and losses equally. On January 1, 2023, they decided to admit Ngor as a new partner into the partnership.
Additional Information: (i) The existing partnership’s statement of financial position before Ngor’s admission is as follows:
| Capital: | Property, plant, and equipment | ₦2,400,000 |
|---|---|---|
| Bode: ₦1,750,000 | Inventory | ₦700,000 |
| Igere: ₦1,750,000 | Accounts Receivable | ₦900,000 |
| Loan Notes: ₦1,000,000 | Cash | ₦800,000 |
| Accounts Payable: ₦300,000 | ||
| Total Liabilities: ₦4,800,000 | Total Assets: ₦4,800,000 |
(ii) Goodwill of the partnership is valued at ₦200,000.
(iii) Ngor invests ₦1,500,000 in cash and acquires a 30% share in the partnership’s profits and losses.
(iv) ₦600,000 from the cash contributed by Ngor will be used to reduce the existing partnership’s long-term liabilities.
(v) The partnership follows a policy of not recording goodwill on its financial statements.
Required: a. In the books of BIN partnership, prepare the following to give effect to the admission of Ngor:
- i. Goodwill account (2 Marks)
- ii. Partners’ capital accounts (4 Marks)
- iii. Statement of financial position after the admission of Ngor (10 Marks)
b. Discuss two methods of goodwill valuation in a partnership. (4 Marks)
(Total 20 Marks)
Answer
i. Goodwill Account:
| Particulars | Debit (₦) | Credit (₦) |
|---|---|---|
| Goodwill | 200,000 | |
| Capital – Bode | 100,000 | |
| Capital – Igere | 100,000 | |
| Total | 200,000 | 200,000 |
ii. Partners’ Capital Account:
| Particulars | Bode (₦) | Igere (₦) | Ngor (₦) |
|---|---|---|---|
| Goodwill | 100,000 | 100,000 | |
| Cash | 1,500,000 | ||
| Balance b/d | 1,750,000 | 1,750,000 | |
| Loan Repayment | (600,000) | ||
| Balance c/d | 1,780,000 | 1,780,000 | 1,440,000 |
iii. Statement of Financial Position after Admission of Ngor:
| Assets | ₦ | Liabilities and Equity | ₦ |
|---|---|---|---|
| Property, plant, and equipment | 2,400,000 | Capital: Bode | 1,780,000 |
| Inventory | 700,000 | Capital: Igere | 1,780,000 |
| Accounts receivable | 900,000 | Capital: Ngor | 1,440,000 |
| Cash | 1,700,000 | Loan Notes | 400,000 |
| Accounts payable | 300,000 | ||
| Total Assets | 5,700,000 | Total Liabilities & Equity | 5,700,000 |
b. Methods of Goodwill Valuation in a Partnership:
i. Average Profit Method:
This method involves calculating the average profit of the firm over a specific number of years and multiplying it by a number of years’ purchase to determine the value of goodwill.
ii. Super Profit Method:
Goodwill is calculated by determining the firm’s super-profits, which is the excess of actual profits over normal profits, and then multiplying this by a number of years’ purchase.
- Tags: Capital Accounts, Financial Statements, Goodwill, Partnership
- Level: Level 1
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