Question

how goodwill is recorded at time of addmission of partner explain with example​

Answer 1

Answer:

When admitting a new partner to a partnership a lot of accounting adjustments need to be made. One such major adjustment is the valuation and the treatment of goodwill.

Methods of Valuation

1] Average Profits Method

i) Simple Average: Goodwill = Average Profit × No. of years’ of purchase

i) Weighted Average: Goodwill = Weighted Average Profit  × No. of years’ of purchase

2] Super Profits Method:

Goodwill = Super Profit × No. of years’ of purchase

Super Profit = Actual/ Average profit – Normal Profit

Normal Profit = Capital Employed * Normal Rate of Return/100

3] Capitalization Method:

i) Capitalization of Average Profits:

Goodwill = Capitalized Average profits – Actual Capital Employed .

Capitalized Average profits = Average Profits × 100/Normal Rate of Return.

Actual Capital Employed = Total Assets (excluding goodwill) – Outside Liabilities

(ii). Capitalization of Super Profits:

Goodwill = Super Profits × 100/ Normal Rate of Return

Solved Example for You

Q: M/s Mehta and sons earn an average profit of rupees 60,000 with a capital of rupees 4,00,000. The normal rate of return in the business is 10%. Using capitalization of super profits method, calculate the value the goodwill of the firm.

Solution:

Goodwill = Super profits × 100/ Normal Rate of Return

= 20,000 × 100/10

= 2,00,000.

Working notes:

(i). Normal Profit = Capital employed * Normal Rate of Return/100

=  4,00,000 × 10/100

=  40,000

(ii) Super Profit = Average Profit – Normal Profit

= 60,000 – 40,000

= 20,000

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