Question

Quinn and Kinsella are in partnership, sharing profits in the ratio 60:40 respectively.

	€/£000
Non-current Assets Property Motor Vehicles Current Assets	300 60 80 440
Capital Accounts Quinn Kinsella Current Accounts Quinn Kinsella	210 180 40 10 440

A new partner is being admitted to the partnership. Murphy will contribute €150,000, which will be split 80:20 between the capital and current accounts. The existing partners believe the goodwill of the partnership is valued at €60,000; they do not want to present goodwill in the partnership’s statement of financial position.

The new profit-sharing ratio is 40:30:30 (Quinn:Kinsella:Murphy).

a)Prepare the journal to recognise goodwill in the statement of financial position of Quinn and Kinsella.

b)Prepare the capital and current accounts after goodwill has been recognised.

c)Prepare the statement of financial position of Quinn, Kinsella and Murphy after goodwill has been recognised.

Statement of Financial Position

	€/£000
Non-current Assets Property Motor Vehicles Current Assets (80 + 150) – Murphys introduction of cash	300     60    230    590
Capital Accounts Quinn Kinsella Murphy Current Accounts Quinn Kinsella Murphy	222 186 102     40     10   30 590

I wanna ask what is this mean"they do not want to present goodwill in the partnership’s statement of financial position."

and in Sofp why current assets is (80+150) i think 150 is include only 30 in current acc. that 120 is capital 80 has already include 30 from Murphy???

Answer 1

As you have asked your doubt only at the end of the question, only that will be answered and not all the requirements of the question. Please post the entire question once again if you want it to be solved fully. Hope my answer helps you.Thank you.

1.They do not want to show goodwill in the books of accounts means, goodwill will not be shown in the Sofp as an asset. Goodwill has to be adjusted between the partners in their current account i.e., goodwill raised that is €60,000 will be first debited to old partners in old ratio and then its once again credited to new partners in the new ratio .

This is only one method of making this adjustment, this could be done using ratio's also directly.

Particulars	Quinn	Kinsella	Murphy
Goodwill debited to Quinn and Kinsella in 60:40	36000	24000	0
Goodwill debited to Quinn, Kinsella & Murphy in 40:30:30	24000	18000	18000
Net adjustment of goodwill( That is journal entry to be passed for)	12000(debit)	6000(debit)	18000(Credit)

Quinn Current account Debit 12000

Kinsella Current account Debit 6000

Murphy Current account Credit 18000

2.And now coming to your second doubt that is why 150 is added to current assets. It is told in the question that Murphy brings in  €150,000, that is it is brought by way of cash or through bank, but cash/bank is being received by company, cash/ bank forms part of Current assets thus Current assets is increased by  €150,000. The following jounal entry will make you understand better.

Cash/ Bank account Debit   €150,000

Murphy Capital account Credit €120,000 (150,000*80/100)

Murphy Current account Credit    €30,000 (150,000*20/100)