Goodwill

jackiepowell

Hiya

Exam June 2007 - Task 2.5
What on earth is goodwill all about? Sorry not done FRA for 2 years! 3rd time of sitting it!!!

How do you work out goodwill? Havent a clue what it means!

Jackie :001_unsure:

Rachey

jackiepowell wrote: »

Hiya

Exam June 2007 - Task 2.5
What on earth is goodwill all about? Sorry not done FRA for 2 years! 3rd time of sitting it!!!

How do you work out goodwill? Havent a clue what it means!

Jackie :001_unsure:

Goodwill is usually worked out when either a new partner enters the business or when a partner retires from the business.

For example, if goodwill is valued at £15000 and the current partners have a profit sharing ratio of 2:1, then goodwill for the first partner will be valued at £10000 and for the second partner £5000. This is put into their capital accounts.

If a new partner enters the business, and the profit sharing ratio changes so that all profits are shared equally, then goodwill will be valued at £5000 each.This needs to be debited to the capital accounts, and then balance the accounts to get the new balances.

An overview.... Goodwill is calculated using the OLD profit sharing ratio and is removed using the NEW profit sharing ratio. Then balance the accounts.

Hope i haven't missed anything!! :001_smile:

rachy1975

jackiepowell wrote: »

Hiya

Exam June 2007 - Task 2.5
What on earth is goodwill all about? Sorry not done FRA for 2 years! 3rd time of sitting it!!!

How do you work out goodwill? Havent a clue what it means!

Jackie :001_unsure:

this is the answer in the june 2008 paper

Goodwill is the difference between the value of a business as a whole and the aggregate fair values of its separate assets and liabilities.

It is important to account for goodwill so that existing partners are fairly rewarded for their contribution to the value of the business as at the date of the change in the partnership.