Accounting 3.2 – Partnership Agreement Clauses
* What goodwill represents in Lucy and Gemma’s new partnership agreement for ‘Awesome Catering’. As Lucy and Gemma start there new partnership agreement from Lucy’s old business called ‘Lucy’s Catering and combine their assets and liabilities to form a new partnership called ‘Awesome Catering’, Lucy’s old business, ‘Lucy’s Catering’ will have Goodwill as an asset. Goodwill is the monetary value given to the reputation or customer loyalty of Lucy’s old catering business, Lucy’s Catering and is an intangible asset contributing to catering sales. During the formation of Lucy’s catering where assets and liabilities are joined with the assets and liabilities of Gemma, the goodwill of Lucy’s catering is also included in the formation with a value of $31,000 which means Lucy’s catering has an excellent reputation and customer loyalty to the value of $31000, and this may contribute to why Lucy’s Catering was so successful for Lucy as well as contributing to the future success of Awesome Catering. As Lucy takes on Gemma as her new partner for Awesome Catering a new accounting entity will be formed for Awesome Catering and as a result goodwill can be recognised by each of the partners and agreed upon by Lucy and Gemma at an arm’s length transaction which means the amount for goodwill for Awesome Catering will be true and free from bias. Goodwill can therefore be recognised in Awesome Caterings statement of financial position as it means all the characteristics and criteria of an asset. Goodwill can be gained for awesome catering or the old business, Lucy’s catering through increasing customer loyalty or excellent reputation. For example, Lucy’s catering may have completed a catering job for a new client who had heard about Lucy’s Catering and their good reputation from a friend who said they present excellent food at functions which may be why this new customer has decided to choose Lucy’s Catering above over catering companies for her function. After Lucy had the completed the catering job to a high standard the client may be so happy with the quality of the food and service that she continues to use Lucy’s catering again and again as well as recommending it to all of her friends. This is goodwill for Lucy’s Catering and it will help the new partnership entity of Awesome Catering as the goodwill from Lucy’s Catering will be contributed to Awesome Catering during the formation of the new business on the 1st on January 2012. As a result, existing and loyal customers of Lucy’s Catering will now use Awesome catering for their catering needs having had quality service from Lucy before. Any new customers who had heard about Lucy’s Catering’s excellent reputation will also be inclined to use the new Awesome Catering because of the existing reputation carried over. The catering jobs and sales gained from the goodwill of Lucy’s Catering, now Awesome Catering will contribute to the catering fees received by them which totalled $400,000 as at 31st of December 2013, and the amount of $400,000 may be greater due to this goodwill. As well as this the future profits of Awesome Catering will also benefit from future goodwill as loyalty customers will continue to return to use Awesome Catering’s services, fees will increase because of this therefore ensuring that the viability of Awesome Catering remains and it continues to be a going concern in the future. If Awesome Catering continues to offer excellent catering food and customer service as Lucy did with Lucy’s Catering, then the profitability of Awesome catering with both Gemma and Lucy can increase as can the reputation and regular customers as the business continues to grow. Both Lucy and Gemma will enjoy the benefits of increased catering fees revenue which will mean a greater profit share for both girls and a greater bonus for Lucy for catering fees earned over $350,000. Similarly, greater profit from catering fees can mean that...
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