Couple of quick qus

System

I just have a couple of questions before I go off on study leave!! Could someone explain good will and show me the T a/c's that would be required in an exam.

Also can someone explain to me why absorption and margianl costing give different stock valuations. I thought stock valuation was based on the LIFO FIFO stuff??? Thanks

System

Re:Couple of quick qus

lgarside wrote:

I just have a couple of questions before I go off on study leave!! Could someone explain good will and show me the T a/c's that would be required in an exam.

Goodwill is the difference between the value of a business, and the net value of it's assets and liabilities. For example, a company may have net assets of £500,000, but due to it's built up trade, reputation in the marketplace, location of the business), may be valued at £1.2 million. Therefore, it's goodwill is £700,000.

In the exam, you will not be required to calculate the value of goodwill, but you will need to enter it into the books for the admission of a new partner/retirement of an old partner. Whichever of these you are asked to do, the entries are exactly the same:

Goodwill is created by
-debiting the goodwill account with the amount of goodwill
-crediting the partners' capital accounts in their OLD profit-sharing ratio.

Goodwill is then written off by
-debiting the partners' capital accounts in their NEW profit-sharing ratio.
-crediting the goodwill account with the amount of goodwill.

EXAMPLE
Amy and Ben are in partnership. They decide to allow Chris to enter their partnership. Chris will invest £50,000 into the business as his capital, part of which includes a premium for goodwill.
-Goodwill has been valued at £80,000.
-The old profit-sharing ratio was Amy 50%, Ben 50%
-The new profit-sharing ratio is to be Amy 40%, Ben 40%, Chris 20%.

The entries will be
-GOODWILL CREATED
Debit Goodwill account £50,000
Credit Capital accounts (in old PSR) Amy £25,000; Ben £25,000

-GOODWILL WRITTEN OFF
Debit Capital accounts (in new PSR) Amy £20,000; Ben £20,000; Chris £10,000
Credit Goodwill account £50,000

The accounts will look something like this:
Click me

lgarside wrote:

Also can someone explain to me why absorption and margianl costing give different stock valuations. I thought stock valuation was based on the LIFO FIFO stuff???

For a manufacturing business, closing stock will consist of raw materials, part-finished goods and finished goods. LIFO/FIFO/AVCO can only be used to value stock of raw materials. Finished/Part-finished goods must be valued using a costing method.
In marginal costing, the stock will be valued at variable production cost, but in absorption costing, the stock value will include a share of the fixed production overheads in addition to variable costs. In order to comply with SSAP 9, which states that stock valuation must be based on costs of direct materials, direct labour, direct expenses and production overheads, absorption costing must be used for stock valuation.

System

Re:Couple of quick qus

I agree

If you go further with your studies you will look at FIFO etc in relation to part-finished and finished stock, but this can become rather more complex than AAT intermediate

sandy.hood@chichester.ac.uk