TOPIC 3: ADMISSION OF NEW PARTNERS

1. TOPIC 3: ADMISSION OF NEW PARTNERS There are two important aspect need to be considered when there are an admission of new partners in the partnerships: a. Revaluation of assets b. Goodwill valuation ** The revaluation process is important in order to keep and give the interest of old partners before the admission of new partners and to charge certain amount to the new partners. Revaluation of assets Looking at the differences between the net book value of assets with the market value of an assets..

2. The impact of revaluation of assets: • If there is no differences: • - no action taken • If there are differences: • - adjust the differences in the profit and loss account • Example: • Aiman and Asyraf have set up a partnerships as at 1 January • 2000. On 1 July 2002 they admit Aidid in the businesses. • Before the admission of Aidid, the partnerships assets need to be • revalued

3. Recording the asset revaluation : • Increase in the value of asset: • Debit Asset • Credit Revaluation account

4. Decrease in the value of asset : • Debit Revaluation account • Credit Asset • Unrecorded expenses : • Debit Revaluation account • Credit Accounts Payable • Unrecorded revenue: • Debit Accounts Receivable • Credit Revaluation account

5. Profit in revaluation account: • Debit Revaluation account • Kredit Capital/ Current account (old partners) • Loss in revaluation account: • Debit Capital/ Current account (old partners) Kredit Revaluation account

6. Example: Jati and Cengal partners in timber businesses. In the current they agree to admit Meranti as a new partners. Below is a balance sheet of the partnerships: Jati and Cengal Balance Sheet as at 31 December 2002 Fixed Asset:Capital: Land 65,000 Jati 70,000 Equipment 15,000 Cengal 50,000 Current Asset: Stock 20,000 Debtors 12,000 Bank 8,000 120,000120,000

7. The profit and loss ratio between Jati and Cengal is 2: 1. • As an admission of Meranti, the assets are being value as below: Land RM 90,000 • Equipment RM 11,000 • Other asset No changes • You are required: • The revaluation account • Other asset account • The capital account

8. Revaluation account Equipment 4,000 Land 25,000 Profit sharing: Jati 14,000 Cengal 7,000 25,000 25,000 Land Account Bal b/d 65,000 Balc/d 90,000 Revaluation 25,000 90,00090,000

9. Equipment Bal b/d 15,000 Revalution 4,000 Bal c/d 11,000 15,00015,000 Capital Account

10. Goodwill: Goodwill is an intangible asset. Goodwill exist in the business as a strength of a business such as the skill and the experience of the business. FRS 138 recognised a purchased goodwill because this goodwill can be calculated as follows: Purchase Goodwill = Total purchase price – (all asset – liability ) Example: If ABY bought a business of Y Enterprise as a going concerc businesses with a price of RM120,000. Y owned an asset value RM100,000, liability RM30,000 and capital RM50,000, so the goodwill will be recorded as RM50,000 (RM120,000 – (RM100,000 – RM30,000))

11. Goodwill: • Goodwill exist in the business as positive and negative goodwill, • In which the goodwill is distributed among the old partners before • the admission of new partners. • The purpose of goodwill same like revaluation of asset. • If the partners have right over ½ of the profit. The partners also • have rights over ½ of the goodwill owned by the partnerships. • The recognition of goodwill must be done when three situations • happen: • Changes in the profit sharing ratio • Admission of new partner • Retirement of old partners

12. Example : If ABY sharing profit and loss 3:2:1. They agree to change the ratio to 1:2:3 started on 1 January 2003. Goodwill agreed value is RM12,000. The accounting policy of the business not allowed the goodwill account to be opened. ABY Partnerships Balance Sheet as at 31 December 2002 Asset 100,000 100,000 Liability 30,000 Capital A 30,000 B 20,000 Y 20,000 70,000 100,000

13. Situation A: The goodwill account not opened. Table A: Before and after the goodwill adjustment

14. Journal Entry: Open the goodwill account: Debit Goodwill 12,000 Credit Capital – A 6,000 Capital – B 4,000 Capital – Y 2,000 Close the goodwill account: Debit Capital – A 2,000 B 4,000 Y 6,000 Credit Goodwill 12,000 Summarization of both account: Debit Capital Y 4,000 Kredit Capital A 4,000

15. Capital Account

16. Situation B: Open a goodwill account (Assume ABY being sold at a value of RM82,000) Table B: Before the adjustment

17. Table C: After the adjustment

18. How to record and presentation of goodwill: • FRS 138: • A business entity are not allowed to record a goodwill except a purchased goodwill. • To be fair the interest and rights of the partners in the partnerships. • Dissolution of partnerships goodwill will be recognised, recorded and presented in the book of partnerships. • Goodwill: will be recorded in the goodwill account in the books of new partnerships or recognised and written off in the partnerships books

19. GOODWILL: FRS 138: Intangible Assets FRS 3 FRS 138 Purchased Internally generated GOODWILL Not recog. IA with indefinite useful life IA not yet avail. for use IA with finite useful life No amortizations Amortization

20. Importance of goodwill: • Revaluation of goodwill is very important when there are a changes • in the partnerships due to the: • Admission of new partners • Retirement • Death of partner