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Difficulty: MediumTreatment and Valuation of Goodwill

Tunde and Wole are partners in a business sharing profits and losses in the ratio of 3:23:2. They agree to admit Musa into the partnership for a 16\frac{1}{6} share of future profits. On Musa's admission, goodwill is valued at ₦60,000\text{₦}60,000. If goodwill is raised in the old profit-sharing ratio and immediately written off in the new profit-sharing ratio, what is the net adjustment to Tunde's capital account?

  1. Net credit of ₦6,000\text{₦}6,000Answer
  2. B
    Net debit of ₦6,000\text{₦}6,000
  3. C
    Net credit of ₦36,000\text{₦}36,000
  4. D
    Net debit of ₦10,000\text{₦}10,000

Answer

Net credit of ₦6,000\text{₦}6,000
When goodwill of ₦60,000\text{₦}60,000 is raised in the old ratio (3:23:2), Tunde's capital account is credited with 35×₦60,000=₦36,000\frac{3}{5} \times \text{₦}60,000 = \text{₦}36,000. When goodwill is written off in the new ratio (3:2:13:2:1), Tunde's capital account is debited with 36×₦60,000=₦30,000\frac{3}{6} \times \text{₦}60,000 = \text{₦}30,000. The net difference is a credit of ₦6,000\text{₦}6,000.

Step-by-Step Solution

1
Calculate the new profit-sharing ratio among Tunde, Wole, and Musa
Musa's share = 16\frac{1}{6}. Remaining share = 1−16=561 - \frac{1}{6} = \frac{5}{6}. Tunde's new share = 35×56=36\frac{3}{5} \times \frac{5}{6} = \frac{3}{6}. Wole's new share = 25×56=26\frac{2}{5} \times \frac{5}{6} = \frac{2}{6}. New ratio = 3:2:13:2:1.
The new ratio is required to write off goodwill across all partners.
2
Calculate Tunde's credit share when raising goodwill in the old ratio (3:23:2)
Tunde's credit = ₦60,000×35=₦36,000\text{₦}60,000 \times \frac{3}{5} = \text{₦}36,000 Credit.
Goodwill raised belongs to existing partners in their old profit-sharing ratio.
3
Calculate Tunde's debit share when writing off goodwill in the new ratio (3:2:13:2:1)
Tunde's debit = ₦60,000×36=₦30,000\text{₦}60,000 \times \frac{3}{6} = \text{₦}30,000 Debit.
When written off, goodwill is debited to all partners in the new profit-sharing ratio.
4
Determine the net adjustment for Tunde
Net position = ₦36,000 (Credit)−₦30,000 (Debit)=₦6,000 Credit\text{₦}36,000 \text{ (Credit)} - \text{₦}30,000 \text{ (Debit)} = \text{₦}6,000 \text{ Credit}.
Comparing the credit and debit amounts yields the net change in Tunde's capital account.

Key Concept

Accounting treatment of goodwill upon admission of a partner by raising and writing off goodwill
Estimated Time:1m 30s
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Topics

Treatment and Valuation of Goodwill

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