MOUNT KENYA UNIVERSITY

THIKA MAIN COMPUS

NAME:ABDUB FUGICHA
REG NO:CHRM/2020/61373
UNIT CODE:CAF 1301
UNIT TITTLE:FUNDERMENTAL OF ACCOUNTING II
TASK: CAT

1.List down the contents of a partnership agreement

(4mrks)
Basic Provisions.The first sections in the partnership agreement cover basic information
such as the name of the partnership, the members, their ownership interests and the term, or
duration, of the partnership. The members section can be a simple list. To save space, the
members section may also list the ownership percentage next to each member. The term of the
agreement is especially important. State laws generally hold that the partnership dissolves
automatically when one partner leaves the business; if the partners desire another
arrangement, this can be specified in the term of the partnership.
Capital Requirements. The next section of the agreement should describe any capital
requirements and any restrictions on membership transfers. Capital requirements typically
describe what type of capital is acceptable (money or property), the amount of the initial
contribution each partner must provide and the requirements under which more capital can be
called for.

Membership Transfers. After describing the term and setting forth the capital
requirements, the agreement should describe limitations on membership transfers.
Membership transfer limitations often prevent a partner from unilaterally selling his interest in
the business to a third party. Instead, the clause generally requires the member to offer the
partnership the option to buy the membership interest before selling it.

Management and Rights. The partnership agreement should also describe any specifics
regarding management of the business and also any other rights the partners have. The
management section may be specific, setting forth specific duties to specific partners, or broad,
such as including a blanket statement that all members have an equal say in management
decisions. Rights may cover the right to receive partnership profits. Other provisions include
whether the partners receive a salary, the times in which partners can call a meeting to bring
on new partners or existing members and what to do in the event of a deadlock.

2.Explain ways through which goodwill can be treated.(6marks).

Goodwill is an intangible asset it is very difficult to accurately calculate its value. Various
methods have been advocated for the valuation of goodwill of a partnership firm includes:-

(i). Average Profits Method: Under this method, the goodwill is valued at agreed
number of ‘years’ purchase of the average profits of the past few years. It is based on the
assumption that a new business will not be able to earn any profits during the first few years of
its operations.

(ii).Supper Profits Method: The basic assumption in the average profits (simple or
weighted) method of calculating goodwill is that if a new business is set up, it will not be able to
earn any profi Its during the first few years of its operations. Hence, the person who purchases
an existing business has to pay in the form of goodwill a sum equal to the total profits he is
likely to receive for the first‘few years’.
(iii). Capitalisation Methods: Under this method the goodwill can be calculated in two
ways: 1. by capitalizing the average profits, or 2. by capitalizing the super profits.

(a) Capitalisation of Average Profits: Under this method, the value of goodwill is ascertained by
deducting the actual capital employed (net assets) in the business from the capitalized value of
the average profits on the basis of normal rate of return.

This involves the following steps: 1. Ascertain the average profits based on the past few years’
performance.

2. Capitalize the average profits on the basis of the normal rate of return to ascertain the
capitalised value of average profits as follows: Average Profits × 100/Normal Rate of Return

3. Ascertain the actual capital employed (net assets) by deducting outside liabilities from the
total assets (excluding goodwill). Capital Employed = Total Assets (excluding goodwill) –
Outside Liabilities

4. Compute the value of goodwill by deducting net assets from the capitalised value of average
profits.