highest value is fetched by which goodwill
Answers
Answer:
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Explanation:
Goodwill is a thing easy to describe, but very difficult to define. It is the benefit and advantage of good name, reputation and connection of a business. It is the attractive force which brings in more customers. It is one thing which distinguishes an old established business from a new business at its first start. Goodwill is composed of a variety of elements. It differs in its composition in different trades and different businesses in the same trade.”
“Goodwill is a nebulous term for that part of the value of an asset or business arising from factors and directly associated with the assets or business as such. For instance, goodwill may arise from the good reputation of the business or the fact that it is making profits above the average due to some particular advantages.”
is profitable, on the other hand, it is valueless if the concern is a losing one. It represents the value of a firm’s reputation. It can be sold, though a sale will be possible only along-with the sale of business itself. It is not an independent asset, like cash or stock, which can be sold or transferred.
ADVERTISEMENTS:
2. Goodwill can be sold or purchased with entire business. It is valuable only when entire business is sold or purchased.
3. The value of goodwill and the assessment of its existence is based upon subjective judgement of the valuer, inspite of different methods of its valuation.
4. It is difficult to place an exact value to goodwill since its value fluctuates from time due to changing circumstances of business.
5. It represents a non-physical value, intangible in nature, goodwill does not depreciate by wear and tear. However, the goodwill becomes a fictitious asset if it appears in the books of a losing concern.
Need for Valuation of Goodwill:
Circumstances necessitating ascertainment of goodwill are:
In the case of a Company:
1. When amalgamation and absorption take place.
2. When sales or purchase take place.
3. When shares are to be acquired by a holding Company.
4. When value of share is not quoted in Stock Exchange and shares are to be valued for taxation purposes.
In the case of Partnership Firm:
1. When there is a change in profit sharing ratio.
2. When a partner is admitted.
3. When a partner has died or retired.
4. When two partnership firms are amalgamated.
5. When a firm is sold to a Company.
Accounting Treatment of Goodwill:
Goodwill is always paid for the future. Record of Goodwill in accounting is made only when it has a value. When a business is purchased and an additional amount is paid more than the amount of asset, then the additional amount is called goodwill. It is treated as an asset and the payment made for it is a capital expenditure.
It is treated as an intangible asset and thus depreciation is not charged. The value of goodwill decreases and increases but the fluctuations are not recorded in the books. Presence of goodwill in the books is not necessarily a sign of prosperity. A prospective purchaser would agree to make any payment for the goodwill only when he is convinced that the profit likely to accrue to him from the acquired business would be in excess of the normal return expected in a business of similar nature.
This means that any such payment refers to the future differential earnings and is a premium to the vendor for relinquishing his right thereto in favour of the vendee. The goodwill of a business is the intangible value to it, independent of its visible assets, by reason of the business being a well established one having a good reputation.
But at the same time, it is obvious that goodwill is inseparable from the business to which it adds value. The value of the goodwill of a business will therefore be the value which a reasonable and prudent buyer would give for the business as a going concern minus the value of the tangible assets.