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Goodwill

Accountancy

In calculation of Goodwill we use G.W=average profitÃ?no.of yrs of purchase Why we are calling no. of yrs as no. of yrs of purchase

Gowshika LT

CA Final

★ 40K+

02-Jul-20 20:21

368

Answers (1)

Because valuation is happening at the time of some kind of restructuring - new partner coming or old retiring etc. At that time embedded value of GW is calculated and the capital contribution / ratios etc are decided. When a new partner is coming in they are ascribing a value to it and they are purchasing a stake in the partnership by contributing capital. Such purchase price ( which includes value of goodwill) is arrived based on profits / super normal profits etc. hence the phrase no. of years of purchase of average profits