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Retirement, death or withdrawal of a partner

Goodwill should be valued upon the retirement, death or withdrawal of a partner because the outgoing partner is entitled to a share of the goodwill and the final balance in his capital account has to be ascertained. This involves the revaluation of assets and the necessary adjustments before payments can be made to the outgoing partner. The outgoing partner’s current account is closed and the balance transferred to his capital account, together with all the adjustments and revaluation. It can then be decided how payments are to be made to the outgoing partner. The amount due to him may be settled with one payment. It may be settled by instalment payments or converted into a loan in which case interest on the outstanding amount must be paid when due, usually annually.

  • If goodwill is to be recorded in full

For example, Boo, Coo and Doo have been partners sharing profit and losses equally. There is no goodwill account in the partners’ books. Boo is leaving the partnership. The remaining partners agreed to share equally the outgoing partner’s share of profit. Their capital contributions are: Boo $50,000; Coo $40,000 and Doo $40,000. The goodwill is valued at $45,000.

Goodwill Account

$ $
Boo's capital account 15,000 Balance c/d 45,000
Coo's capital account 15,000
Doo's capital account 15,000
45,000 45,000
Balance b/d 45,000

abc

Boo Capital Account

$ $
Balance c/d 65,000 Balance b/f 50,000
Share of goodwill (1/3) 15,000
65,000 65,000
Balance b/d 65,000

 

Coo Capital Account

$ $
Balance c/d 55,000 Balance b/f 40,000
Share of goodwill (1/3) 15,000
55,000 55,000
Balance b/d 55,000

 

Doo Capital Account

$ $
Balance c/d 55,000 Balance b/f 40,000
Share of goodwill (1/3) 15,000
55,000 55,000
Balance b/d 55,000

 

  • If goodwill is to be recorded only in outgoing partner's account

Goodwill Account

$ $
Boo's capital account 15,000 Balance c/d 15,000
15,000 15,000
Balance b/d 15,000

 

Boo Capital Account

$ $
Balance c/d 65,000 Balance b/f 50,000
Share of goodwill (1/3) 15,000
65,000 65,000
Balance b/d 65,000

 

  • If no goodwill account is opened

Boo Capital Account

$ $
Balance c/d 65,000 Balance b/f 50,000
Share of goodwill (1/3):
Coo capital account 7,500
Doo capital account 7,500
65,000 65,000
Balance b/d 65,000

 

Coo Capital Account

$ $
Boo capital account: Goodwill (1/2) 7,500 Balance b/f 40,000
Balance c/d 32,500
40,000 40,000
Balance b/d 32,500

 

Doo Capital Account


$

$
Boo capital account: Goodwill (1/2) 7,500
Balance b/f 40,000
Balance c/d 32,500



40,000

40,000



Balance b/d 32,500

 


Last Updated (Wednesday, 08 September 2010 18:53)