Question

How should the goodwill of $30,000 be recorded and allocated to the original partners?

1) As a liability in the books of the partnership
2) As an asset in the books of the partnership
3) As an expense in the books of the partnership
4) As a revenue in the books of the partnership

Answer 1

Goodwill should be recorded as an asset in the partnership's books and allocated to the original partners according to the partnership agreement or a mutually agreed upon formula.

Step-by-step explanation:

The goodwill of $30,000 should be recorded in the books of the partnership as an asset. Goodwill represents the value of the reputation, brand, or commercial advantages that a business possesses over and above its tangible assets. When a partnership is valuing its intangible assets, goodwill often comes into play, especially during the sale of the business, the acquisition of new partners, or other significant changes in the partnership.

In the given scenario, after evaluating the total assets and liabilities, goodwill would be recorded as an intangible asset on the balance sheet. The $30,000 would not be treated as a liability, expense, or revenue. Instead, it reflects the future economic benefits arising from assets that are not capable of being individual identified and separately recognized.

The allocation of goodwill to the original partners would depend on the partnership agreement or, in its absence, by an agreed-upon formula—typically in proportion to the partners' capital balances or their profit-sharing ratios.