C hapter 6: Goodwill on admission and

withdrawal of partners
Contents of chapter
This chapter shows how the admission of a new partner or the withdrawal of an old partner affects the
ownership of goodwill and the adjustments that are made in the partners’ capital accounts accordingly.

Notes for teachers

A new partner has to pay for his share of the old partnership’s goodwill by whatever means.
1

An outgoing partner will also want to be paid back for his share of the old partnership’s goodwill.
2

To find the adjustments needed:

3
Value of goodwill divided among old partners in the old profit and loss sharing ratio compared with the
value of goodwill divided among new partners in the new profit and loss sharing ratio
= Gains shown: These partners will somehow have to pay or their capital accounts will be debited for gains.
Losses shown: These partners will receive money or their capital accounts will be credited for losses.

Entries needed depend on which payment method is used.

4
(i) For payment is made to losing partners privately, no entries will be needed in the partnership books.
(ii) If payment is made into the partnership bank account by partner(s) gaining, adjustments are to be
made via capital accounts.
(iii) If no cash is paid, adjustments are to be made via capital accounts.

Section 6.4 of this edition is completely new material written to make it easier for students to understand
5
the procedure for settling the outgoing partners’ capital accounts.

58
Answers to MCQs and exercises
6.1 C 6.2 C 6.3 C 6.4 B 6.5 D

6.6
Capital
Chan Dai Lam Chan Dai Lam
$ $ $ $ $ $
Goodwill adjustment — — 2,000 Balances b/f 60,000 40,000 —
Balances c/f 61,200 40,800 18,000 Bank — — 20,000
Goodwill adjustment 1,200 800 —
61,200 40,800 20,000 61,200 40,800 20,000

Workings:
Goodwill shared Goodwill shared Gain or loss
Partners Old ratio New ratio
in old ratio in new ratio in new ratio
$ $ $
3 3
Chan 7,200 6,000 1,200 loss
5 6
2 2
Dai 4,800 4,000 800 loss
5 6
1
Lam — — 2,000 2,000 gain
6
12,000 12,000

6.7X
(a)
Goodwill shared Goodwill shared
Gain or loss Adjustment
in old ratio in new ratio
$ $ $ $
2 3
Lee ( ) 2,000 ( ) 3,000 Gain 1,000 Dr Lee’s capital account 1,000
10 10
5 4
Mok ( ) 5,000 ( ) 4,000 Loss 1,000 Cr Mok’s capital account 1,000
10 10
3 2
Siu ( ) 3,000 ( ) 2,000 Loss 1,000 Cr Siu’s capital account 1,000
10 10
1
Ray — ( ) 1,000 Gain 1,000 Dr Ray’s capital account 1,000
10
10,000 10,000

Capital
Lee Mok Siu Ray Lee Mok Siu Ray
$ $ $ $ $ $ $ $
Goodwill adjustment 1,000 — — 1,000 Balances b/f 3,000 5,000 4,000 —
Balances c/f 2,000 6,000 5,000 3,000 Goodwill adjustment — 1,000 1,000 —
Cash — — — 4,000
3,000 6,000 5,000 4,000 3,000 6,000 5,000 4,000

59
 (b) Lee, Mok, Siu and Ray
Balance Sheet
$ $
Assets (other than cash) 11,000
Cash ($2,500 + $4,000) 6,500
17,500
Capital: Lee 2,000
Mok 6,000
Siu 5,000
Ray 3,000 16,000
Creditors 1,500
17,500

6.8
Capital
Au Fung Yuen Hong Ding Au Fung Yuen Hong Ding
$ $ $ $ $ $ $ $ $ $
Goodwill
adjustment — — 1,200 3,000 1,500 Balances b/f 3,000 5,000 4,000 — —
Balances c/f 7,500 6,200 2,800 — — Bank — — — 3,000 —
Goodwill
adjustment 4,500 1,200 — — —
Balance c/f — — — — 1,500
7,500 6,200 4,000 3,000 1,500 7,500 6,200 4,000 3,000 1,500

12
Goodwill = $3,000 × = $18,000
2

Workings:
Share of Share of Gain or loss
Old ratios New ratios
goodwill goodwill in new ratio
$ $ $
5 4
Au ( ) 9,000 ( ) 4,500 Loss 4,500
10 10
4 4
Fung ( ) 7,200 ( ) 6,000 Loss 1,200
10 12
1 2
Yuen ( ) 1,800 ( ) 3,000 Gain 1,200
10 12
2
Hong — ( ) 3,000 Gain 3,000
12
1
Ding — ( ) 1,500 Gain 1,500
12
18,000 18,000

6.9X
(a) The Journal
Dr Cr
$ $
Goodwill 6,000
Capital: Sheung 3,000
Yan 3,000
Cash 7,000
Capital: Zhang ($4,000 + $3,000) 7,000

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(b) Sheung, Yan and Zhang
Balance Sheet
$ $
Fixed and other assets 15,000
Cash ($7,000 + $2,000) 9,000
Goodwill 6,000
30,000

Capital: Sheung ($8,000 + $3,000) 11,000

Yan ($4,000 + $3,000) 7,000
Zhang 7,000
25,000
Current liabilities 5,000
30,000

(c) The Journal

Dr Cr
$ $
4
Capital: Sheung ( ) 2,400
10
Yan ( 3 ) 1,800
10 3
Zhang ( ) 1,800
10
Goodwill 6,000

6.10
(a) Capital
Fong Ma Kwan Fong Ma Kwan
$ $ $ $ $ $
Bank 28,500 — — Balances b/f 50,000 30,000 20,000
Loan 28,500 — — Goodwill 7,000 4,200 2,800
Balances c/f — 34,200 22,800 — — —
57,000 34,200 22,800 57,000 34,200 22,800

(b)
Workings:
Goodwill shared Goodwill shared Gain or loss
Partners Old ratio New ratio
in old ratio in new ratio in new ratio
$ $ $
5
Fong 7,000 — — Loss 7,000
10
3 4
Ma 4,200 8,000 Gain 3,800
10 7
2 3
Kwan 2,800 6,000 Gain 3,200
10 7
14,000 14,000

Capital
Fong Ma Kwan Fong Ma Kwan
$ $ $ $ $ $
Goodwill adjustment — 3,800 3,200 Balances b/f 50,000 30,000 20,000
Bank 28,500 — — Goodwill adjustment 7,000 — —
Loan 28,500 — —
Balances c/f — 26,200 16,800
57,000 30,000 20,000 57,000 30,000 20,000

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 6.11
(a) Capital
Chiu Ho Kan Chiu Ho Kan
$ $ $ $ $ $
Current — 2,350 — Balances b/f 80,000 60,000 20,000
Bank — 63,650 22,000 Goodwill 8,000 6,000 2,000
Balances c/f 88,000 — —
88,000 66,000 22,000 88,000 66,000 22,000
(b)
Workings:
Goodwill shared Goodwill shared Gain or loss
Partners Old ratio New ratio
in old ratio in new ratio in new ratio
$ $ $
4 4
Chiu 8,000 12,800 Gain 4,800
8 5
3
Ho 6,000 — — Loss 6,000
8
1 1
Kan 2,000 3,200 Gain 1,200
8 5
16,000 16,000

Capital
Chiu Ho Kan Chiu Ho Kan
$ $ $ $ $ $
Goodwill adjustment 4,800 — 1,200 Balances b/f 80,000 60,000 20,000
Current — 2,350 — Goodwill adjustment — 6,000 —
Bank — 63,650 18,800
Balances c/f 75,200 — —
80,000 66,000 20,000 80,000 66,000 20,000

6.12X
(a) Goodwill calculation
$ $
Profit for 20X2 270,000
Profit for 20X3 325,000
Profit for 20X4 365,000
960,000
Less Increase in depreciation (3 years × $20,000) 60,000
Increase in bad debts provision in 20X4 36,000 96,000
864,000

Average profits $864,000 ÷ 3 = $288,000, this taken as value of goodwill.

(b)
Workings:
Old ratio New ratio Loss/Gain Adjustment
$ $ $ $
1
Han ( ) 96,000 — Loss 96,000 Cr Han’s capital account 96,000
3
1 3
Mok ( ) 96,000 ( ) 86,400 Loss 9,600 Cr Mok’s capital account 9,600
3 10
1 3
Poon ( ) 96,000 ( ) 86,400 Loss 9,600 Cr Poon’s capital account 9,600
3 10
4
Wong — ( ) 115,200 Gain 115,200 Dr Wong’s capital account 115,200
10
288,000 288,000

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 The Journal
Dr Cr
$ $
Capital: Wong 115,200
Capital: Han 96,000
Capital: Mok 9,600
Capital: Poon 9,600
Adjustments for goodwill on the retirement of Han and the admission of Wong on 31 December 20X4.

6.13
(a) Only net profit could increase the total value of capital and current accounts. To find this out, we do the following
calculation:

Total of capital and current accounts as at 31.12.20X5 as per balance sheet 435,300
Add Net profit (B) ?
(A) ?
Less Drawings ($38,000 + $49,000) 87,000
Total of capital and current accounts as at 30.6.20X6
(i.e. same as assets $466,000 – liabilities $11,700) 454,300

By arithmetical deduction (A) is $454,300 + $87,000 = $541,300. Then, $435,300 + (B) = (A) $541,300.
Therefore (B) = $106,000.

(b) Capital
Leung Chak Poon Leung Chak Poon
$ $ $ $ $ $
Bank 284,000 — — Balances b/f 220,000 180,000 —
Loan from Leung 22,000 — — Current 26,000 — —
Goodwill adjustment — 10,000 50,000 Bank — — 100,000
Balances c/f — 170,000 100,000 Bank: goodwill — — 50,000
Goodwill adjustment 60,000 — —
306,000 180,000 150,000 306,000 180,000 150,000

Current
Leung Chak Poon Leung Chak Poon
$ $ $ $ $ $
Drawings 38,000 49,000 — Balances b/f 21,600 13,700 —
Capital 26,000 — — Profit and loss: Net profit 42,400 63,600 —
Balance c/f — 28,300 —
64,000 77,300 — 64,000 77,300 —

Workings 1:
Partners Old ratio New ratio Gain/Loss
$ $ $
2
Leung 60,000 — Loss 60,000
5
3 2
Chak 90,000 100,000 Gain 10,000
5 3
1
Poon — 50,000 Gain 50,000
3
150,000 150,000

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 (c) Chak and Poon
Balance Sheet as at 1 July 20X6
Fixed Assets $ $ $
Buildings 282,800
Fixtures 56,400
339,200
Current Assets
Stock 29,550
Debtors 41,790
71,340
Less Current Liabilities
Creditors 11,700
Bank overdraft (Workings 2) 78,540 90,240
Net current assets (18,900)
320,300
Less Long-term Liabilities
Loan from Leung 22,000
298,300
Financed by:
Capital Accounts
Chak 170,000
Poon 100,000 270,000
Current Account
Chak 28,300
298,300
Workings 2: Bank $55,460 + Paid in by Poon $100,000 + $50,000 – Paid to Leung $284,000 = –$78,540.

6.14X
(a) Chung, Won and Tang
Profit and Loss Appropriation Account for the year ended 31 December 20X6
$ $ $
Net profit (W1) 175,800
Interest on current accounts:
Chung 1,710 (W3)
Won 660 (W4)
Tang 3,480 (W5) 5,850
181,650
Less Salary: Tang 36,000
Interest on capital:
Chung ($60,000 × 8%) 4,800
Won ($40,000 × 8%) 3,200
Tang ($20,000 × 8%) 1,600 9,600 45,600
136,050
Share of balance of profit:
4
Chung ( ) 54,420
10
3
Won ( ) 40,815
10
3
Tang ( ) 40,815 136,050
10

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 W1: $
Net profit before adjustments 180,000
Add Sales omitted 3,600
" Insurance overstated 2,000
185,600
Less Purchases omitted 9,800
Corrected net profit for accounts 175,800

W2: Goodwill adjustment

Old ratio New ratio Gain/Loss
$ $ $
2 4
Chung 24,000 14,400 Loss 9,600
3 10
1 3
Won 12,000 10,800 Loss 1,200
3 10
3
Tang — 10,800 Gain 10,800
10
36,000 36,000

W3: Interest on current account — Chung

$
Apr – Jun ($60,000 – $37,600 – $9,600 (W2)) × 10% × 3 months = 320
Jul – Sep ($12,800 + $10,000) × 10% × 3 months = 570
Oct – Dec ($22,800 + $10,000) × 10% × 3 months = 820
1,710
W4: Interest on current account — Won
($7,800 – $1,200 (W2)) × 10% × 12 months = $660

W5: Interest on current account — Tang

Jan – Jun $10,800 (W2) × 10% × 6 months = 540
Jul – Dec ($10,800 + $48,000) × 10% × 6 months = 2,940
3,480

(b) Current: Chung

20X6 $ 20X6 $
Apr 1 Drawings 60,000 Jan 1 Balance b/f 37,600
Jul 1 Drawings 10,000 " 1 Goodwill adjustment (W2) 9,600
Oct 1 Drawings 10,000 Dec 31 Interest on capital 4,800
Dec 31 Interest on current a/c 1,710 " 31 Profit and loss: Share of profit 54,420
" 31 Balance c/f 24,710
106,420 106,420

Current: Won
20X6 $ 20X6 $
Jan 1 Balance b/f 7,800 Jan 1 Goodwill adjustment (W2) 1,200
Dec 31 Interest on current a/c 660 Dec 31 Interest on capital 3,200
" 31 Balance c/f 36,755 " 31 Profit and loss: Share of profit 40,815
45,215 45,215

Current: Tang
20X6 $ 20X6 $
Jan 1 Goodwill adjustment (W2) 10,800 Dec 31 Interest on capital 1,600
Jul 1 Drawings 48,000 " 31 Profit and loss: Share of profit 40,815
Dec 31 Interest on current a/c 3,480 " 31 Salary 36,000
" 31 Balance c/f 16,135
78,415 78,415

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 6.15
(a) Capital
Chan Cheung Poon Lo Chan Cheung Poon Lo
$ $ $ $ $ $ $ $
Goodwill adj. — — 21,000 21,000 Balances b/f 188,000 126,000 66,000 —
Current: Cheng — 14,900 — — Goodwill adj. 42,000 — —
Bank — 38,275 — — Bank (capital) — — — 60,000
Loan from Cheung — 114,825 — — Bank (goodwill) — — — 21,000
Balances c/f 188,000 — 45,000 60,000
188,000 168,000 66,000 81,000 188,000 168,000 66,000 81,000

Current
Chan Cheung Poon Chan Cheung Poon
$ $ $ $ $ $
Balance b/f — 14,000 — Balances b/f 35,000 — 13,500
Profit adjustment (W1) 1,350 900 450 Capital: Cheung — 14,900 —
Balances c/f 33,650 — 13,050
35,000 14,900 13,500 35,000 14,900 13,500
Workings:
(W1) Adjustment of net profit for the year ended 31 March 20X5:
Net profit was overstated by $2,700 (= $7,300 – $4,600).
The current account balances of the old partners need to be adjusted as follows:
Debit: Current accounts
$
— Chan 1,350
— Cheung 900
— Poon 450

(W2)
Goodwill shared Goodwill shared Gain or loss
Partners Old ratio New ratio
in old ratio in new ratio in new ratio
$ $ $
3 3
Chan 6 63,000 63,000 —
6
2
Cheung 42,000 — — Loss 42,000
6
1 2
Poon 21,000 42,000 Gain 21,000
6 6
Lo — — 1 21,000 Gain 21,000
6
126,000 126,000

(b) Chan, Poon and Lo

Balance Sheet as at 1 April 20X5
Fixed assets (at net book value) $ Capital accounts $ $
($396,000 – $7,300) 388,700 Chan 188,000
Current assets Poon 45,000
($35,200 + $4,600 + $81,000 – $38,275) 82,525 Lo 60,000 293,000
Current account
Chan 33,650
Poon 13,050 46,700
Long-term liabilities
Loan from Cheung 114,825
Current liabilities 16,700
471,225 471,225

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(c) The amount of capital repayable to Cheung $153,100 would be the same as if a goodwill account was to be opened.

Capital
Chan Cheung Poon Lo Chan Cheung Poon Lo
$ $ $ $ $ $ $ $
Current: Cheung — 14,900 — — Balances b/f 188,000 126,000 66,000 —
Bank — 38,275 — — Goodwill 63,000 42,000 21,000 —
Loan from Cheung — 114,825 — — Bank (Capital) — — — 60,000
Balances c/f 251,000 — 87,000 60,000
251,000 168,000 87,000 60,000 251,000 168,000 87,000 60,000

Lo would not have a share of the goodwill of the old partnership and therefore, he does not need to pay extra for
goodwill.

67