Lesson Note on Partnership Account: Admission of New Partner and Goodwill for SSS 2

Class: Senior Secondary School 2 (SS2 / SSS2)
Term: 2nd Term
Week: 4
Age: 16 years
Duration: 45 minutes
Subject: Financial Accounting
Curriculum Theme: Accounting Principles
Previous Lesson: Partnership Account: Current Account and Balance Sheet Preparation.
Topic: Partnership Account
Subject Matter: Admission of new partners (meaning, reasons for admission), goodwill (meaning, valuation of goodwill)

Specific Objectives

By the end of the lesson, pupils should be able to:

Cognitive Domain:

• Define admission of new partners.
• State at least three reasons for admitting new partners.
• Define goodwill in the context of partnership.
• Explain at least two methods for valuing goodwill.

Affective Domain:

• Appreciate the importance of proper accounting for changes in partnership.
• Show willingness to participate in discussions about partnership adjustments.

Psychomotor Domain:

• Calculate goodwill using the average profit method.
• Calculate goodwill using the super profit method.
• Prepare basic journal entries for the admission of a new partner and treatment of goodwill.

Social Domain:

• Collaborate effectively in group activities related to partnership account adjustments.
• Share ideas and solutions with peers during problem-solving sessions.

Reference Materials

The following resources were used in planning this lesson:

• Senior Secondary Schools Education Curriculum
• State Unified Scheme of Work
• Financial Accounting for Senior Secondary Schools by O. A. Longe
• https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-resources/f3/technical-articles/introduction-partnerships.html
• https://corporatefinanceinstitute.com/resources/accounting/goodwill/

Instructional Materials

The teacher will teach this lesson with the aid of:

• Charts showing formats for goodwill calculation.
• Flashcards of key accounting terms like “goodwill,” “super profit,” “capital employed.”
• A chart illustrating journal entries for partner admission.

Rationale for the Lesson

Understanding the admission of new partners and goodwill is important for pupils as it prepares them for higher accounting studies and real-world business scenarios. It helps them to grasp how changes in business ownership are recorded and how intangible assets are valued, which is relevant for future careers in finance and entrepreneurship.

Prerequisite/Previous Knowledge

Pupils should have a basic understanding of partnership formation, partnership deed, and fundamental accounting principles.

Lesson Content/Board Summary

Admission of New Partners and Goodwill

Admission of New Partners

Admission of a new partner occurs when a new person is brought into an existing partnership firm. This change leads to a reconstitution of the partnership, requiring adjustments to the partnership agreement and accounts.

The following are reasons for admitting new partners:

• To increase the firm’s capital.
• To bring in specialized skills or expertise.
• To expand the business operations.
• To reward a loyal employee by making them a partner.
• To enhance the firm’s reputation or influence.

Goodwill

Goodwill is an intangible asset that represents the value of a business’s good reputation, excellent customer relations, superior location, efficient management, or any other advantage that enables it to earn higher profits compared to similar businesses. It cannot be seen or touched but has monetary value.

Methods of Valuing Goodwill

1. Average Profit Method

This method calculates goodwill based on the average profits earned by the business over a specified number of years. It assumes that a new partner is paying for the firm’s ability to generate past average profits.

Formula: Goodwill = Average Profits × Number of Years’ Purchase

Example 1: A firm’s profits for the last four years were N50,000, N60,000, N70,000, and N80,000. Calculate goodwill if it is valued at 3 years’ purchase of average profits.

Solution:

• Step 1: Calculate Total Profits

Total Profits = N50,000 + N60,000 + N70,000 + N80,000 = N260,000

• Step 2: Calculate Average Profits

Average Profits = Total Profits / Number of Years = N260,000 / 4 = N65,000

• Step 3: Calculate Goodwill

Goodwill = Average Profits × Number of Years’ Purchase = N65,000 × 3 = N195,000

2. Super Profit Method

Super profit is the excess of actual average profit over the normal profit that a similar business would earn on the capital employed. Goodwill under this method is valued based on the firm’s ability to earn these extra profits.

Formulas:

• Super Profit = Actual Average Profit – Normal Profit
• Normal Profit = Capital Employed × Normal Rate of Return
• Goodwill = Super Profit × Number of Years’ Purchase

Example 2: A firm has an average actual profit of N120,000. The capital employed in the business is N800,000, and the normal rate of return for similar businesses is 10%. Goodwill is to be valued at 4 years’ purchase of super profit.

Solution:

• Step 1: Calculate Normal Profit

Normal Profit = Capital Employed × Normal Rate of Return = N800,000 × 10% = N80,000

• Step 2: Calculate Super Profit

Super Profit = Actual Average Profit – Normal Profit = N120,000 – N80,000 = N40,000

• Step 3: Calculate Goodwill

Goodwill = Super Profit × Number of Years’ Purchase = N40,000 × 4 = N160,000

Accounting Treatment of Goodwill on Admission

When a new partner is admitted, goodwill can be treated in several ways, often involving adjustments to the partners’ capital accounts. Common approaches include:

• Goodwill brought in by the new partner: The new partner pays a premium for their share of goodwill, which is then distributed to the old partners in their sacrificing ratio.
• Goodwill raised in the books: The goodwill account is raised to its full value, and credited to the old partners’ capital accounts in their old profit-sharing ratio. If goodwill is to be written off, it is debited to all partners’ capital accounts (including the new partner) in the new profit-sharing ratio.
• Goodwill not raised in the books (Memorandum Method): Only an adjustment entry is passed through the capital accounts of the partners without opening a goodwill account.

Teaching Methods/Instructional Techniques

Discussion, Lecture, Demonstration, Question and Answer, Visual Aids

Instructional Procedures

Step 1: Introduction

Time: 5 minutes
Teaching Skill: Set Induction
Teacher’s Activity: The teacher greets the pupils, reviews the previous lesson on partnership formation, and asks pupils about changes that can occur in a partnership.
Pupils’ Activity: Pupils respond to the greetings and questions, recalling previous knowledge.
Learning Point: Pupils recall prior knowledge and are introduced to the lesson’s context.

Step 2: Admission of New Partners

Time: 7 minutes
Teaching Skill: Explanation/Discussion
Teacher’s Activity: The teacher explains the meaning of admitting a new partner and discusses various reasons why a partnership might decide to admit a new member.
Pupils’ Activity: Pupils listen attentively, take notes, and contribute to the discussion by suggesting possible reasons for admitting a new partner.
Learning Point: Pupils understand the concept of admission of new partners and its underlying reasons.

Step 3: Goodwill – Meaning

Time: 5 minutes
Teaching Skill: Explanation
Teacher’s Activity: The teacher defines goodwill as an intangible asset and explains its significance in partnership accounting, especially during the admission of a new partner.
Pupils’ Activity: Pupils listen, ask questions for clarity, and write down the definition of goodwill.
Learning Point: Pupils grasp the definition and importance of goodwill in business.

Step 4: Valuation of Goodwill (Average Profit Method)

Time: 8 minutes
Teaching Skill: Demonstration/Problem Solving
Teacher’s Activity: The teacher explains the average profit method for valuing goodwill, writes the formula on the board, and solves Example 1 from the board summary step-by-step.
Pupils’ Activity: Pupils observe the steps, copy the formula and the worked example into their notebooks, and ask questions where necessary.
Learning Point: Pupils learn how to calculate goodwill using the average profit method.

Step 5: Valuation of Goodwill (Super Profit Method)

Time: 8 minutes
Teaching Skill: Demonstration/Problem Solving
Teacher’s Activity: The teacher explains the super profit method, outlining its components (normal profit, capital employed), writes the formulas, and solves Example 2 from the board summary step-by-step.
Pupils’ Activity: Pupils pay close attention to the explanation, copy the formulas and the second worked example, and ensure they understand each step.
Learning Point: Pupils learn how to calculate goodwill using the super profit method.

Step 6: Accounting Treatment of Goodwill

Time: 5 minutes
Teaching Skill: Explanation/Illustration
Teacher’s Activity: The teacher briefly discusses the various ways goodwill can be treated in the partnership accounts upon admission of a new partner, focusing on the impact on capital accounts.
Pupils’ Activity: Pupils listen and note the different approaches to accounting for goodwill.
Learning Point: Pupils understand the basics of accounting for goodwill during partner admission.

Step 7: Evaluation/Review

Time: 5 minutes
Teaching Skill: Questioning/Assessment
Teacher’s Activity: The teacher evaluates the learning by asking the following questions:

1. Define “admission of a new partner.”
2. State three reasons why a partnership may admit a new partner.
3. What is goodwill?
4. Calculate goodwill using the average profit method if average profits are N80,000 and years’ purchase is 2.
5. Calculate goodwill using the super profit method if super profit is N30,000 and years’ purchase is 3.

Pupils’ Activity: Pupils answer orally and in writing.

Learning Point: Pupils demonstrate understanding of the lesson.

Step 8: Conclusion

Time: 2 minutes
Teaching Skill: Summarization
Teacher’s Activity: The teacher summarizes the key points of the lesson, emphasizing the importance of understanding partner admission and goodwill valuation. The teacher then assigns homework from the textbook.
Pupils’ Activity: Pupils listen to the summary, ask any final questions, and note down the homework assignment.
Learning Point: Pupils consolidate their learning and prepare for further practice.

Lesson Keywords

• Partnership – A business owned by two or more individuals who agree to share profits or losses.
• Goodwill – An intangible asset representing the value of a business’s reputation and customer loyalty.
• Average Profit – The total profit earned over a period divided by the number of years.
• Super Profit – The excess of actual average profit over normal profit.
• Capital Employed – The total funds invested in a business.
• Years’ Purchase – A multiplier used in goodwill calculation, representing the number of years the super or average profit is expected to continue.

Differentiation

For pupils who grasp concepts quickly, the teacher will provide additional complex problems involving goodwill adjustment entries. For pupils who need more support, the teacher will offer simplified examples and one-on-one guidance, focusing on the definitions and basic calculation methods.

Note for teachers using this lesson plan

Encourage pupils to actively participate in calculations and discussions. Use real-life examples of businesses that might have high or low goodwill to make the concept more relatable. Ensure that pupils understand the difference between the average profit method and the super profit method for goodwill valuation.