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Simon and Tariq were equal partners in a business, each with capital of $40,000. It was agreed that Vanessa should join the partnership, with all three partners sharing profits equally. For the purpose of admitting the new partner, the value of the goodwill of the business was agreed at $60,000, but goodwill would not be maintained in the accounts. Vanessa introduced capital of $22,000 to the business.
What was the balance on the capital accounts of Simon after the admission of Vanessa to the partnership?
$2,000
$40,000
$50,000
$70,000My answer is 50000. The book states 40000. Please explain.
The rule for the goodwill adjustment, where goodwill is not to be left in the books is:
CR Old partners in the old PSR
DR New partners in the new PSRwith the value of the goodwill.
Simon’s account:
Cr 60,000 x 1/2 = 30,000
Then
Dr 60,000 x 1/3 = 20,000
If Simon started with 40,000 capital then these adjustments make his balance 50,000.
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