Goodwill arises due to good name and reputation of the business and partners. It is calculated by subtracting the book value and the value of investment made by the new partner. This method is used when the existing partners do not agree to reduce their capital.
Journal Entry
| Description | Debit | Credit |
| Cash | xxx | |
| Goodwill | xxx | |
| Donald’s capital | xxx | |
| (To record the admission of new partner Donald’s in the firm.) |
Example Question
Donald is admitted to the partnership firm as new partner. For this Donald invests $600,000 in the form of cash. The book value of the interest he is acquiring in the firm is $700,000. The above transaction for admission of partner via goodwill method would be recorded as follows:
Answers
| Description | Debit | Credit |
| Cash | 600,000 | |
| Goodwill | 100,000 | |
| Donald’s capital | 700,000 | |
| (To record the admission of new partner Donald’s in the firm.) |
Example 2
Adam and Bevan is running a partnership firm of consultancy services since 05 years. According to the partnership deed, they share profit &loss in 1:1 ratio. The balance sheet of the firm is as follows:
Balance Sheet
| CashOther assets | 50,0001,000,000 | Accounts payableAdam’s capitalBevan’c capital | 50,000500,000500,000 |
| 1,050,000 | 1,050,000 |
Both the partner of the firm has decided to admit a new partner William for ¼ interest in the firm in order to increase the annual revenue.
W invests $ 333,334 for acquiring ¼ interests.
Requirement
You are required to record general entries to record the admission of William and prepare the balance sheet of the firm after admission.
Solution
Interest of W = ¼
Interest of Adam & Bevan = 1 – ¼ = ¾
Total capital of Adam & Bevan = 500,000 + 500,000 = 1,000,000
Total capital of new partnership = 1,000,000 x 4/3 = 1,333,333
Book value of William’s capital = 1,333,333 x ¼ = 333,334
Goodwill calculation
Investment of William = 333,334
Book value of William = 333,334
Goodwill = zero
General Journal Entries
| Description | Debit | Credit |
| CashWilliam’s capital | 333,334 | 333,334 |
Balance Sheet
| CashOther assets | 383,3341,000,000 | Accounts payableAdam’s capitalBevan’s capitalWilliam’s capital | 50,000500,000500,000333,334 |
| 1,383,334 | 1,383,334 |