Third Method. Under this method of handling good-will, the extra $2,500 invested by R is treated as a bonus for distribution among the members of the old firm, their capital interests in the new firm remaining the same as in the old and R’s appearing at $10,000. There is no objection to this method if R is satisfied.
Of the three methods, the second usually proves the most satisfactory.
A similar problem involving the handling of good-will is encountered when a member of an existing firm sells out his interest, including a share of the good-will, to one who takes his place in the firm. Here the transaction may be looked upon as a private deal between buyer and seller, in which case the buyer merely succeeds to the seller’s interest in the firm, his capital appearing on the books at the same amount as the seller’s former capital figure even though the new partner pays more for it; or the good-will may be brought onto the books and the capitals of all the partners be shown at increased figures, as under the second method discussed above.
Consolidation of Partnerships.—There are various reasons why the consolidation of partnerships may be of mutual advantage to the individual firms concerned. When two or more firms consolidate, the competition which formerly existed between them is eliminated and co-operation takes its place. Also by uniting their businesses, many of the operations which were formerly performed separately are now amalgamated with resulting savings. Many other advantages may result from such consolidations.
From the standpoint of the accountant, the consolidation of partnerships is essentially the same as the admission of new partners, the same principles applying to both. Before actual consolidation takes place, it is necessary for each of the partnerships to place a new valuation upon its assets and for all concerned to agree upon the new figures. In almost all cases good-will is an important factor. The valuation of good-will requires an investigation of the profits and profit-earning capacity of the member firms. Conditions affecting the profits of the various firms must be equalized as nearly as possible so that the earning capacity of each can be compared on an equitable basis. Such questions as the way in which partners’ salaries, interest on capitals, withdrawals, and loans have been handled; the relation of outside sources of income, if any, to the profit of any of the member firms; and whether the consolidation contemplates taking over such source of profits—these and similar questions must be considered and treated equitably for all concerned.
The following illustration is given to indicate the bookkeeping problems incident to consolidations:
Problem. A and B, equal partners in an established business, consolidate with C and D, equal owners of an allied business. A and B are each to have a one-third, and C and D each a one-sixth interest in the new firm. The following balance sheets show their financial positions:
| Balance Sheet of A & B | |||
| Cash | $ 2,500.00 | Notes Payable | $ 5,000.00 |
| Notes Receivable | 1,000.00 | Accounts Payable | 8,000.00 |
| Accounts Receivable | 22,000.00 | Mortgage on Real Estate | 4,000.00 |
| Merchandise | 10,000.00 | ||
| Furniture and Fixtures | 2,500.00 | A, Capital | 16,000.00 |
| Delivery Equipment | 1,500.00 | B, Capital | 16,000.00 |
| Real Estate | 9,500.00 | ||
| $49,000.00 | $49,000.00 | ||
| Balance Sheet of C & D | |||
| Cash | $ 5,000.00 | Notes Payable | $ 5,000.00 |
| Accounts Receivable | 15,000.00 | Accounts Payable | 7,750.00 |
| Merchandise | 8,000.00 | C, Capital | 9,000.00 |
| Furniture & Fixtures | 2,000.00 | D, Capital | 9,000.00 |
| Horse & Wagon | 750.00 | ||
| $30,750.00 | $30,750.00 | ||
A careful valuation of the various properties shows the figures of the balance sheet of C & D to be conservatively estimated. In regard to A & B’s figures, however, it is decided to allow $2,000 for possible bad debts, and to value their merchandise at $9,000, delivery equipment at $1,000, and real estate at $9,000. Furthermore, it is agreed that C & D’s good-will is to be valued at $5,000, and A & B’s at $10,000.