How would you calculate the interest on capital to a new partner who has joined the firm half way through the year?
Would it be on the balance in their capital account at year end after goodwill, and would it just be for 6 months?
And how would you calculate goodwill for a partner who retires at the same time as new partner joins and has their balance put into a loan account after goodwill?
The retiring partner has more capital after benefiting from goodwill from the new partner joining.
The new partner has less in their capital account.
Completely bamboozled.
Any help much appreciated if someone has dealt with this before.
Thank you.
-- Edited by Oasis83 on Tuesday 30th of July 2013 04:08:51 PM
They really ought to have thought about this a bit more!
Absent any specific agreement about goodwill in these circumstances, I would ask the partners what they think and get them to write it down. I imagine goodwill represents the excess contributed by the incoming partner over the value of the part of the firm he has bought; this is usually calculated by the firm's accountants.
Given that they want to pay themselves 5%, I would be inclined to calculate the interest on a daily basis. This would enable you to reflect the new partner's joining halfway through the year, and the existing partners' increased level of capital from that time, accurately and fairly. Again, ask them for guidance.
It all depends on what the partners agree. Otherwise, refer to the Partnership Act, 1890.
