It is very important to note that goodwill at the time of an admission belongs entirely to the existing partners who have created it. Refer to earlier articles on what’s goodwill, how it comes about, etc.
Basically, there are three (3) ways of valuing goodwill on admission of partners.
The first method is as follows:
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Method No. 1: Goodwill is recorded in FULL in the books |
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Accounting entries: Debit: Goodwill Account Credit: Old partners’ Capital Accounts in old profit sharing ratio
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Illustration:
Jim and John are in partnership sharing 50:50. They admitted Alex as a partner and the new profit sharing ratio is 40:40:20. Goodwill is agreed to be valued at $100,000.
Goodwill is recorded as follows ( based on above accounting entries) Goodwill Account
Capital Account
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