Goodwill represents the reputation of a firm which provides some extra benefits/profits in the future in comparison to other firms. This is treated as intangible assets in accounts. It is not a fictitious asset. Let us learn about the treatment of goodwill after the retirement or death of a partner.
Accounting Treatment of Goodwill- Death of a Partner
The need for the valuation of goodwill in a firm arises in the following cases:
- When the profit-sharing ratio of partners is changed;
- In case a new partner is admitted;
- In case of death or retirement of a partner;
- When the entire business is sold;
In each of the above situations, we require to adjust the Goodwill. So, we value Goodwill by selecting any of the following methods.
Browse more Topics under Treatment Of Goodwill
- Concept of Goodwill
- Methods of Goodwill Valuation
- Accounting Treatment of Goodwill in case of Admission of Partner
- Accounting Treatment of Goodwill – Change in PSR
Methods for valuation of the Goodwill:
- Average profit method
- Super profit method
- Capitalization method
Accounting treatment, in case of death of a partner
The retiring or deceased partner is entitled to his share of goodwill at the time of retirement or death because the goodwill earned by the firm is the result of the efforts of all the partners in the past. Since in future profits will arise because of the present goodwill.
The retiring or the deceased partner will not be sharing future profits. Therefore all continuing partners pay to retiring partner the share of Goodwill in gaining ratio. It is fair to compensate the retiring or deceased partner for the same. At the time of retirement or death of a partner, we value the goodwill on the basis of agreement among the partners.
After Goodwill valuation, The adjustment for goodwill will be made through the partner’s capital accounts. Following is the journal entry:
|Date||Particular||Amount (Dr.)||Amount (Cr.)|
|Continuing Partner’s capital A/c||Dr.||(in the gaining ratio)|
|To Retiring /Deceased Partner’s capital A/c||(with his share of goodwill)|
|(Being goodwill adjusted through partner’s capital account)|
Note:- On the death of a partner; the amount payable to him is to be paid to his legal representatives.
Solved Question on Death of a Partner
Q: A, B, and C are partners sharing profits and losses in the ratio of 4:3:3 respectively. The accounts of the firm are made up to 31st December each year.
The partnership deed provides: In case of the death of a partner, the goodwill was to be valued at three year’s purchase of average profits of the three years up to the date of the death of the partner, after deducting interest @8 percent on capital employed and fair remuneration of each partner. It is assumed, the profits are to be earned evenly during the whole of the year.
On 30th June 2016, A died. The remaining partners agree to adjust goodwill in the capital account. There is no amount of goodwill in the balance sheet.
Partners agree that for the purpose of valuation of goodwill the fair remuneration for work done by each partner will be ₹30,000 per annum and capital employed will be ₹3,12,000. B and C were to continue the partnership, sharing profits and losses equally after the death of A. The following are the profits of the earlier years before charging interest on capital employed.
Calculate the value of the goodwill and show the necessary adjustment thereof in the books of the partnership firm.
Ans: Computation of the value of goodwill:
|(I)||Average profit for three years, ending 30th June; before death:||Amount||Amount|
|Year ending 30th June 2014|
|1/2of 2013 profits||67200|
|1/2 of 2014 profits||75600||142800|
|Year ending 30th June 2015|
|1/2of 2015 profits||72000||147600|
|Year ending 30th June 2016|
|1/2of 2016 profits||62400||134400|
|(ii)||Average future maintainable profits|
|Average profits earner|
|Less: partner’s earned||90000|
|Less: 8%on capital employed||24960||(114960)|
|(iii)||[email protected] years purchase||79920|
Adjustment entry for Goodwill:
|Date||Particular||Amount Dr.||Amount Cr.|
|B’s capital account||Dr.||15984|
|C’s capital account||Dr.||15984|
|To A’s capital account||31968|
|Partner||New share||(+/-)||Old share||Difference|