Accounting Online Program Certification Practice Test

What is the value of goodwill determined at the retirement of Paul from the partnership?

1. £96,000

2. £80,000

3. £100,000

4. £120,000

The correct answer is: £96,000

Goodwill is an intangible asset that represents the excess value of a business over its tangible assets and liabilities. In the context of a partnership, goodwill is typically assessed when a partner retires, as it reflects the value attributed to the brand, customer relationships, and potential future earnings that are not captured in the tangible assets. To determine the value of goodwill at the retirement of Paul from the partnership, one must consider several factors, including the profitability of the partnership, the anticipated future income, and the general market conditions. In this scenario, identifying £96,000 as the value of goodwill implies that this figure was likely calculated based on an appraisal or agreement among the remaining partners regarding the value that Paul contributed to the partnership. This amount would reflect the goodwill attributed to the ongoing business, which assumes that the remaining partners will continue operating profitably after Paul's retirement. Understanding goodwill valuation helps in managing partner exits, ensuring fair compensation for retiring partners, and maintaining business continuity. Therefore, recognizing £96,000 signifies a thorough appraisal process in line with industry standards for valuing a partner’s share in the intangible value of the partnership.