Retirement: Bonus and Goodwill Calculations
Ellery Stevens, senior partner in a rapidly growing local CPA firm, has decided to retire. His share in the firm’s profits and losses is 25 percent and his capital account has a balance of $180,000. Total capital of the firm is $800,000. Under the partnership agreement, Stevens will receive $300,000 upon retirement.
c. Calculate the amount of goodwill recognized if the total goodwill approach is used. Prepare the journal entries to record Stevens’ retirement using the total goodwill approach.
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Homework Answers
Share of goodwill to the partner is amount paid in excess of his share in capital.
Working Note for calculating share of Goodwill of Steven's
| Sr. No | Particulars | Calculations | Amount ($) |
| a | Retirement amount to Steven's | $300,000 | |
| b | Less:- Capital of Steven | $180,000 | |
| c = a-b | Steven's Bonus (i.e his share of Goodwill) | (300000 - 180000) | $120,000 |
| d | Steven's share in profit and loss | 25% | |
| e = c/d | Goodwill of the firm as whole (Total Approach) | ($120000 / 25%) | $480,000 |
| f | Total Capital of Firm after Steven's Retirement | ($800000 - $180000) | $620,000 |
.
Answer 1.
| Steven's Bonus (Goodwill) | $120,000 |
| Total Capital of Firm after Steven's Retirement | $620,000 |
.
Answer 2.
Journal Entry to record entries to record Steven's Retirement, if partial goodwill approach is followed.
| Particulars | Debit ($) | Credit ($) |
| Goodwill | $120,000 | |
| To Steven's Capital | $120,000 | |
| (To record Partial Goodwill) | ||
| Steven's Capital | $300,000 | |
| To Cash | $300,000 | |
| (To record Retirement Payment to Stevens) | ||
.
Answer 3
Journal Entry to record entries to record Steven's Retirement, if Total goodwill approach is followed.
| Particulars | Debit ($) | Credit ($) |
| Goodwill | $480,000 | |
| To Steven's, Capital | $120,000 | |
| Other Partners, Capital | $360,000 | |
| ( To record Total Goodwill of firm) | ||
| Steven's Capital | $300,000 | |
| To Cash | $300,000 | |
| (To record Retirement Payment to Stevens) | ||
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