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Difficulty: EasyTreatment and Valuation of Goodwill

Chidi and Obinna are partners in a firm sharing profits and losses in the ratio of 3:23:2. They admit Farooq into the partnership, and the new profit-sharing ratio among Chidi, Obinna, and Farooq is agreed as 2:2:12:2:1. The goodwill of the firm is valued at N50,000\mathbb{N}50,000, and the partners decide to write off the goodwill account immediately. Which accounting entry correctly records the write-off of goodwill?

  1. Debit Chidi's Capital Account N20,000\mathbb{N}20,000, Debit Obinna's Capital Account N20,000\mathbb{N}20,000, Debit Farooq's Capital Account N10,000\mathbb{N}10,000; Credit Goodwill Account N50,000\mathbb{N}50,000Answer
  2. B
    Debit Chidi's Capital Account N30,000\mathbb{N}30,000, Debit Obinna's Capital Account N20,000\mathbb{N}20,000; Credit Goodwill Account N50,000\mathbb{N}50,000
  3. C
    Credit Chidi's Capital Account N20,000\mathbb{N}20,000, Credit Obinna's Capital Account N20,000\mathbb{N}20,000, Credit Farooq's Capital Account N10,000\mathbb{N}10,000; Debit Goodwill Account N50,000\mathbb{N}50,000
  4. D
    Debit Goodwill Account N50,000\mathbb{N}50,000; Credit Cash Account N50,000\mathbb{N}50,000

Answer

Debit Chidi's Capital Account N20,000\mathbb{N}20,000, Debit Obinna's Capital Account N20,000\mathbb{N}20,000, Debit Farooq's Capital Account N10,000\mathbb{N}10,000; Credit Goodwill Account N50,000\mathbb{N}50,000
When a firm decides not to maintain a goodwill account in its books, goodwill must be written off against all partners' capital accounts in their new profit-sharing ratio. With total goodwill at N50,000\mathbb{N}50,000 and a new ratio of 2:2:12:2:1, Chidi and Obinna are debited with N20,000\mathbb{N}20,000 each, Farooq is debited with N10,000\mathbb{N}10,000, and the Goodwill account is credited with N50,000\mathbb{N}50,000.

Step-by-Step Solution

1
Identify the total value of goodwill and the write-off rule
Total goodwill = N50,000\mathbb{N}50,000. Goodwill written off must be shared among all partners in their new profit-sharing ratio.
When goodwill is not to be retained in the books, it is eliminated by charging it to all partners in the new profit-sharing ratio.
2
Calculate each partner's share using the new profit-sharing ratio (2:2:1)
Chidi: 25×N50,000=N20,000\frac{2}{5} \times \mathbb{N}50,000 = \mathbb{N}20,000; Obinna: 25×N50,000=N20,000\frac{2}{5} \times \mathbb{N}50,000 = \mathbb{N}20,000; Farooq: 15×N50,000=N10,000\frac{1}{5} \times \mathbb{N}50,000 = \mathbb{N}10,000
The sum of the ratio parts is 2+2+1=52 + 2 + 1 = 5 parts.
3
Determine the debit and credit journal entries
Debit each partner's capital account for their calculated share and credit Goodwill Account for N50,000\mathbb{N}50,000
Debiting capital accounts reduces partners' equity to write off the asset, while crediting goodwill closes the asset account.

Key Concept

Writing Off Goodwill in Partnership Accounts
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Topics

Treatment and Valuation of Goodwill

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