Partnership: Treatment of Goodwill

21 Partnership:Treatment of Goodwill Reference：Chapter 5 (p. 89)

Definition of Goodwill (商譽) • Goodwill is the excess of the purchase price of a business as a going concern over the value of all separable net assets. • Goodwill = Purchase price of - Value of all the business separable assets

B Nature of Goodwill • Goodwill is a kind of Intangible Assets. • Intangible assets are those assets without a physical substance. • Goodwill may be generated by good reputation; experienced and efficient employees and management; good relationship with suppliers and customers……

c Valuation of Goodwill 1 Average sales method (平均銷貨法) e.g.：Goodwill is three times the average yearly sales for the last two years. The sales for the last two years are $1,000 and $2,000。 Goodwill = [($1000+$2000)/2]X3 = $4500 2 Annual fees method (平均服務費法) e.g.：Goodwill is three times the average annual fees received in the last two years. The annual fees for the last two years are $2,000 and $2,500。 Goodwill = [($2000+$2500)/2]X3 = $6750

3 Average net profits method (平均純利法) e.g.：Goodwill is five times the average net profits of the past three years. The net profits for the last three years are $10,000, $15,000 and $20,000。 Goodwill = [($10000+$15000+$20000)/3]X5 = $75000

D Accounting Treatment of Goodwill 1. Goodwill A/C to be opened / maintained Dr. Goodwill (increasing amount) Cr. Capital – A – B (Using old profit ratio) e.g. Goodwill is valued at $1,200. The profit sharing ratios of A and B is 2:1. Ans. Dr. Goodwill 1,200 Cr. Capital – A 800 – B 400 Ex. 5.6. (a) (p. 98)

e.g. Goodwill is valued at $2,000. The old profit sharing ratio of A and B is 1:1 and the new profit sharing ratio is 3:1. • Preparing a Goodwill adjustment table • Draw up the journal entry according the table 2. No Goodwill A/C to be opened / maintained Dr. Capital – A 500 Cr. Capital – B 500 Ex. 5.6. (b) (p. 98)

Assignment: Ex. 5.7X (p.98)

Partnership: Treatment of Goodwill