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Difficulty: EasyTreatment and Valuation of Goodwill

Ada and Babatunde are existing partners in a firm sharing profits and losses in the ratio of 3:23:2. Upon the admission of a new partner, the firm's goodwill is valued at ₦50,000\text{₦}50,000 and is to be raised in the accounts. How much goodwill should be credited to the capital accounts of Ada and Babatunde respectively?

  1. Ada: ₦30,000; Babatunde: ₦20,000Answer
  2. B
    Ada: ₦25,000; Babatunde: ₦25,000
  3. C
    Ada: ₦20,000; Babatunde: ₦30,000
  4. D
    Ada: ₦50,000; Babatunde: ₦50,000

Answer

Ada's capital account should be credited with ₦30,000 and Babatunde's capital account should be credited with ₦20,000.
When goodwill is raised in partnership accounts, the Goodwill Account is debited with the total value and the existing partners' Capital Accounts are credited in their old profit-sharing ratio (3:23:2). Therefore, Ada receives 35×₦50,000=₦30,000\frac{3}{5} \times \text{₦}50,000 = \text{₦}30,000 and Babatunde receives 25×₦50,000=₦20,000\frac{2}{5} \times \text{₦}50,000 = \text{₦}20,000.

Step-by-Step Solution

1
Determine the total ratio shares for the existing partners
The total ratio shares equal 3+2=53 + 2 = 5 parts.
Profit sharing ratio is 3:2 between Ada and Babatunde.
2
Calculate Ada's share of the goodwill
Ada’s share=35×₦50,000=₦30,000\text{Ada's share} = \frac{3}{5} \times \text{₦}50,000 = \text{₦}30,000
Ada receives 3 out of 5 shares of the raised goodwill.
3
Calculate Babatunde's share of the goodwill
Babatunde’s share=25×₦50,000=₦20,000\text{Babatunde's share} = \frac{2}{5} \times \text{₦}50,000 = \text{₦}20,000
Babatunde receives 2 out of 5 shares of the raised goodwill.

Key Concept

Accounting Treatment for Raising Goodwill in Partnership Accounts
Estimated Time:45s
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Topics

Treatment and Valuation of Goodwill

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