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