Day: April 20, 2020

Albert, Ben and Catherine are in partnership sharing profits and losses in the ratio Albert 1/2; Ben 1/3rd; and Catherine 1/6th.

On 31 December, Albert retired from the partnership and Dymphna was admitted. The new profit sharing ratio being Ben 2/7ths; Catherine 4/7ths; and Dymphna 1/7th.

For the purposes of these changes, goodwill, which is not to be included in the accounts, is calculated at three times the current year’s net profit of £10,500.

The net adjustment on Ben’s capital account in respect of goodwill is?

Select ONE answer:

1. a net credit of £1,500.
2. a net debit of £7,500.
3. a net debit of £12,750.
4. no adjustment.

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 1

1. Correct – Goodwill = £10,500 x 3 = £31,500, so Ben’s original share = £31,500 x 1/3rd = £10,500. Ben’s new share is £31,500 x 2/7ths = £9,000. The adjustment required is £10,500 – £9,000 = £1,500 reduction. A credit entry is required in the capital account to compensate for this reduction in goodwill.
2. Not correct
3. Not correct
4. Not correct

 

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