Help with goodwill

Help with goodwill

Hi Sindy.<BR><BR>Goodwill is apportioned based on the capital invested unless otherwise stated.<BR><BR>So, when a partner sells his interest in the business (or retires etc) he is paid for the goodwill he helpred to build up. Afterwards, the new partners share the goodwill between them on the basis of their investment, but watch the question as it will tell you if goodwill is to be written off immediately, which seems to be the case at Intermediate level!<BR><BR>Say you have 2 partners, A and Band each puts in £50, 000. They decide to take introduce a new partner. Between them they decide that the goodwill is worth £220,000. Say we are to apportion the goodwill earned according to the investment. That's £220,000 ÷ (50,000 + 50,000) = £220,000 ÷ 100,000 = £2.20 per £1 invested. So, the current partners have earned £110,000 each in goodwill. We Credit the Partners' Current Accounts (A and with £110,000 each. Next, we credit partner C's account with, say, £100,000 that he is paying into the business.<BR><BR>Now, let's say that they decide to apportion the goodwill so that the new partner gets half of what the current partners get. That's 40:40:20. We now calculate £220,000 ÷ 100 * 40 for A and B (£88,000) and £220,000 ÷ 100 * 20 for C (£44,000). Debit these figures to the partners' current accounts.<BR><BR>Next, balance the accounts. You will see that Partners A and B have a balancing figure of £72,000 each, increasing their share of the capital, as you would expect if they were paid for the goodwill. Partner C has a balancing figure of £56,000, less than he paid in, but correct, since he has paid for his share of the goodwill.<BR><BR>Therefore, the partners' balances now stand at A = £72,000, B = £72,000 and C = £56,000.<BR><BR>This example is taken from the AAT Dec 04 exam. You can get the past paper and answers from the website.<BR><BR>The basic concept is that a new partner has to pay for the goodwill he's buying and leaving, or existing partners have to be paid for the goodwill they've earned.<BR><BR>Hope this helps.<BR><BR>Mike<BR>