FA – Nov 2013 – L1 – SA – Q12 – Partnership Accounts

Understanding the implications of a purchase consideration paid by a company.

Question

Kowope Nigeria Limited paid purchase consideration of N900,000 for an existing partnership which has assets and liabilities valued as follows: Leasehold building – N500,000; Motor vehicles – N150,000; Furniture – N240,000; Inventory of stationery – N50,000 and Trade payables – N200,000. It means:

A. The company gained N160,000 as capital reserve
B. The company anticipates profit of N160,000
C. The partnership assets and liabilities are inflated by N160,000
D. The partnership is undervalued by N160,000
E. The company is paying N160,000 as goodwill

Answer

E. The company is paying N160,000 as goodwill

Explanation:
The total value of the partnership’s net assets is N740,000 (N940,000 – N200,000). Since the company paid N900,000 for the partnership, the difference of N160,000 represents the goodwill paid.

Tags: Goodwill, Partnerships, Purchase Consideration
Level: Level 1

Topic: Partnership Accounts (Including Profit Sharing, Capital and Current Accounts)
Series: NOV 2013

Uploader: Theophilus