Question

6.Explain the need for valuation of goodwill and also
explain the methods of calculating goodwill.​

Answer 1

Explanation:

Need for valuation of goodwill

the need for valuation of goodwill arises at the time of sale of a business. But, in the context of a partnership firm it may also arise in the following circumstances

1. change in the profit sharing ratio amongst the existing partners

2. Admission of new partner

3. retirement of a partner

4. Death of a partner

5.Dissolution of a firm involving sale of Business as a going concern

6. amalgamation of partnership firm

The method of calculating

goodwill

Average profit = total profit of last 5 years÷ no. of years

Goodwill = Average profit × no. of years purchased