Arden and Blake: Admission of a Partner with Goodwill and Revaluation
Arden and Blake is a partnership sharing profits 3:2. On 1 October 2024 they admit Chloe as a partner. Capital balances before admission are Arden £150,000 and Blake £90,000. The partnership's net assets have a carrying amount of £240,000. A revaluation agrees a factory uplift of £18,000 and an inventory write-down of £6,000. Goodwill is valued at £60,000, but the partners decide not to retain a goodwill account. Chloe pays £70,000 into the partnership bank account. Her capital is to be the balance after her share of goodwill. The new profit-sharing ratio is Arden 9/20, Blake 6/20 and Chloe 5/20. The partners ask how the admission should be recorded, whether Chloe's capital is fair, and what would happen if the goodwill were retained as an asset.
1. Calculate the net revaluation gain and show how it is allocated between the partners. Explain why Chloe does not share in the revaluation gain.
Read the worked answer
Net revaluation gain. Factory uplift £18,000 less inventory write-down £6,000 = £12,000 gain.
Allocation. The gain arises before Chloe is admitted, so it belongs to the existing partners in their old profit-sharing ratio 3:2. Arden: 3/5 × £12,000 = £7,200. Blake: 2/5 × £12,000 = £4,800. Total £12,000.
Journal. Debit factory £18,000; credit inventory £6,000; credit Arden capital £7,200; credit Blake capital £4,800. The journal balances: debits £18,000, credits £18,000.
Why Chloe does not share. Chloe is not a partner at the revaluation date and has not borne the risk of holding those assets before admission. She joins on the basis of the revalued net assets, so she pays for a share of the post-revaluation value. If she shared in the gain, the old partners would give away part of the value built up before she arrived. A revaluation loss would be treated in the same way: allocated only to the old partners.
2. Prepare the partners' capital accounts to record the admission, including the goodwill adjustment without retaining a goodwill account. Calculate total capital after admission.
Read the worked answer
Goodwill adjustment. Raise goodwill: debit goodwill £60,000; credit Arden £36,000 (3/5) and Blake £24,000 (2/5). Write it off in the new ratio 9:6:5: debit Arden £27,000, Blake £18,000 and Chloe £15,000; credit goodwill £60,000. The net effect is Arden +£9,000, Blake +£6,000 and Chloe −£15,000.
Cash. Debit bank £70,000; credit Chloe capital £70,000. Chloe's goodwill share is £15,000, leaving capital of £55,000.
Capital accounts.
| Partner | Opening | Revaluation | Goodwill raised | Goodwill written off | Cash | Closing |
|---|---|---|---|---|---|---|
| Arden | 150,000 | 7,200 | 36,000 | (27,000) | - | 166,200 |
| Blake | 90,000 | 4,800 | 24,000 | (18,000) | - | 100,800 |
| Chloe | - | - | - | (15,000) | 70,000 | 55,000 |
| Total | 240,000 | 12,000 | 60,000 | (60,000) | 70,000 | 322,000 |
Check. Net assets before admission £240,000 plus revaluation £12,000 plus cash £70,000 = £322,000. Goodwill is raised and written off, so no goodwill asset remains. Total capital £322,000 agrees.
3. A colleague proposes crediting the whole £70,000 to Chloe's capital and retaining the £60,000 goodwill as an asset. Evaluate this proposal and explain its effect on the balance sheet and future profit shares.
Read the worked answer
Retaining goodwill overstates assets. If the £60,000 is retained, the balance sheet shows an intangible asset of £60,000 and total capital of £382,000. Arden and Blake are credited with £36,000 and £24,000, and Chloe with £70,000. The balance sheet still balances, but the goodwill is internally generated and is not a separable asset. IAS 38 prohibits recognising internally generated goodwill, and partnership goodwill is usually written off to avoid overstating capital.
Effect on future profits. If goodwill remains as an asset, it must still be written off or impaired later. That future charge would fall on the partners in the then-current profit-sharing ratio, which may include Chloe, rather than being settled on admission. Retaining the account therefore postpones the cost and can make the partnership look stronger than it is.
Fairness. Chloe pays £70,000 for a 1/4 share of the post-revaluation net assets plus goodwill. Crediting the whole £70,000 to her capital without a goodwill adjustment means she receives a share of goodwill built up by the old partners without paying for it. The preferred treatment is to raise and immediately write off goodwill, or adjust capitals directly, so that only net assets are reported.