PARTNERSHIP CHANGES

Revaluation of assets
The need to reflect realistic values of assets in the books normally arises when a new partner has to be
admitted.
A revaluation account should be opened and the appropriate entries shown as follows:-
1. Increase in value of assets
Dr. Asset account Cr. Revaluation account, with the gain on revaluation.
2. Decrease in value of assets
Dr Revaluation account Cr Asset account, with the loss on revaluation.
3. Profit on revaluation of assets
Dr Revaluation account Cr Old Partners capital account
4. Loss on revaluation of assets
Dr Old Partner’s capital account Cr Revaluation account
N.B Revaluation loss or profit should be shared by old partners using the old profit sharing ratio.

Goodwill
It is the value which is over and above the initial value of business.
The admission of a new partner usually involves the valuation of goodwill as the partner is set to benefit
from the existence of well-established business something not possible with a new business.

Treatment of Goodwill
There are 2 ways of accounting for Goodwill which are as follows:-
1. If Goodwill is to be shown in the books
Dr Goodwill Cr Partners Capital Account
2. If Goodwill is not to be shown in the books
Dr Goodwill Cr Partner’s Capital Account (using the old profit sharing ratio)
Dr Partners capital account Cr Goodwill account (using the new profit sharing ratio)

Question 1
Eliza, Felix and Grace have been in business for 5 years. They have always shared profits equally. On 30
June 2012 they agree that Grace will take only a one fifth share of the profits as from 1 July 2012,
because she will be devoting less of her time to the business in the future.
Eliza and Felix will each take two fifths of the profits.
The summarized balance sheet of the business on 30 June 2012 appears as follows:-
$
Total Assets 10 000
Capital - Eliza 3 000
- Felix 4 000
- Grace 2 000

1 Compiled by T T Herbert (0773 038 651 / 0712 560 772)

Liabilities 1 000
10 000
The partners agree that the goodwill should be valued at $4 500.
Required
Show the Goodwill account, capital accounts and balance sheet, assuming that
(i) Goodwill is to be shown in the books.
(ii) Goodwill is not to be shown in the books.

Question 2
Proudie, Slope and Thorne were in partnership sharing profits and losses in the ratio 3:1:1
The draft balance sheet of the partnership as at 31 May 2009 is shown below:-

£000 £000 £000

Cost Depreciation Net book Value
Fixed assets
Land and buildings 200 40 160
Furniture 30 18 12
Motor Vehicles 60 40 20
290 98 192
Current assets
Stocks 23
Trade debtors 42
Less Provision for doubtful debts ( 1)

Prepayments 41
Cash 2
10
76
Less Current Liabilities
Trade Creditors 15
Accruals 3
(18)
58
250

Loan
Proudie (8)
242

Financed by:
Capital accounts
Proudie 100
Slope 60
Thorne 40
200

2 Compiled by T T Herbert (0773 038 651 / 0712 560 772)

Current accounts
Proudie 24
Slope 10
Thorne 8
42
242

Additional information:
1. Proudie decided to retire on 31 May 2009. However, Slope and Thorne agreed to form a new
partnership out of the old one, as from 1 June 2009. They agreed to share profits and losses in the
same ratio as in the old partnership.
2. Upon the dissolution of the old partnership, it was agreed that the following adjustments were
to be made to the partnership balance sheet as at 31 May 2009.
(a) Land and building were to be revalued at £200,000.
(b) Furniture was to be revalued at £5,000.
(c) Proudie agreed to take over one of the motor vehicles at a value of £4,000, the remaining
motor vehicles being revalued at £10 000.
(d) Stocks were to be written down by £5,000
(e) A bad debt of £2,000 was to be written off, and the provision for doubtful debts was then to be
adjusted so that it represented 5 percent of the outstanding trade debtors as at 31 May 2009.
(f) A further accrual of £3,000 for office expenses was to be made.
(g) Professional charges relating to the dissolution were estimated to be £1,000.

3. It has not been the practice of the partners to carry goodwill in the books of the partnership, but on
the retirement of a partner it had been agreed that goodwill should be taken into account.

Goodwill was to be valued at an amount equal to the average annual profits of the three years expiring
on the retirement. For the purpose of including goodwill in the dissolution arrangement when Proudie
retired, the net profits for the last three years were as follows:-
£000
Year to 31 May 2007 130
Year to 31 May 2008 150
Year to 31 May 2009 181

The net profit for the year to May 2009 had been calculated before any of the items listed in 2 above
were taken into account. The net profit was only to be adjusted for items listed in 2(d), 2(e) and 2(f)
above.

4. Goodwill is not to be carried in the books of the new partnership.

3 Compiled by T T Herbert (0773 038 651 / 0712 560 772)

5. It was agreed that Proudie’s old loan of £8,000 should be repaid to him on 31 May 2009, but any
further amount owing to him as a result of the dissolution of the partnership should be left as a long-
term loan in the books of the new partnership.
6. The partners’ current accounts were to be closed any balances on them as at 31 May 2009 were to be
transferred to their respective capital accounts.

Required:
(a) Prepare the journal entries relating to revaluation.
(b) Prepare the revaluation account as at 31 May 2009.
(c) Prepare the goodwill account
(d) Prepare the partners’ capital accounts
(e) Draw up statement of financial position for the new partnership.

4 Compiled by T T Herbert (0773 038 651 / 0712 560 772)