Purchased goodwill or lease?
I have picked up two new clients and both are new start-ups. How do I deal with the initial cost of purchase?
- Retail Shop selling clothes – The client paid £30,000 for the 2 year lease renewable. The lease is purchased from previous occupant with permission from the landlord and the client pays market rent of £2,000 per month to the landlord; At renewal the client will pay just the legal costs of renewing the lease for further 5 years. The client bought all his stock from his suppliers, (no stock was bought from previous occupants). The client sets up a new company under new name. (previously same trade carried out in the premises under different name).
Is the £30,000 treated as goodwill? Or a lease? And how is this depreciated? 2 year?
Just to add to the twist, The company was setup in April 2011 with YE 31 March 2012.On 30May 2012, the client sold the business for £55,000 1 year lease including £15,000 stock, I don’t have the full details, however, client will keep trading under same name as wholesaler from different premises.
- Chips shop – The client paid £19,000 upfront for the shop, this includes all catering equipment and pays market rent of £800 per month, rental agreement is 4 years. Again client will trade under new name. How is the £19,000 treated in the accounts?
I am assuming in both cases the initial amount is a goodwill. However, both companies are trading under new name and have not used previous occupants brand/reputation/colouring scheme etc. I appreciate all your comments.