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  • Method 3 of Goodwill

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    The document discusses the capitalization basis method for determining goodwill in partnership accounts. It outlines the steps as determining the normal rate of return, average profit, capital employed, normal value of business by dividing profit by rate of return, and deducting capital employed from normal value to get goodwill. It provides an example where given average profit of Rs. 60,000, capital of Rs. 4,10,000, and return rate of 12%, it shows how to calculate goodwill. A second example calculates goodwill given average profit, capitalization rate, assets, and liabilities.

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    The document discusses the capitalization basis method for determining goodwill in partnership accounts. It outlines the steps as determining the normal rate of return, average profit, capital employed, normal value of business by dividing profit by rate of return, and deducting capital employed from normal value to get goodwill. It provides an example where given average profit of Rs. 60,000, capital of Rs. 4,10,000, and return rate of 12%, it shows how to calculate goodwill. A second example calculates goodwill given average profit, capitalization rate, assets, and liabilities.

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    12 views3 pages

    Method 3 of Goodwill

    Uploaded by

    kalyanikamineni
    The document discusses the capitalization basis method for determining goodwill in partnership accounts. It outlines the steps as determining the normal rate of return, average profit, capital employed, normal value of business by dividing profit by rate of return, and deducting capital employed from normal value to get goodwill. It provides an example where given average profit of Rs. 60,000, capital of Rs. 4,10,000, and return rate of 12%, it shows how to calculate goodwill. A second example calculates goodwill given average profit, capitalization rate, assets, and liabilities.

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    Treatment of Goodwill in Partnership Accounts

    Capitalization Basis:
    Under this basis, value of whole business is determined applying normal rate
    of return. If such value (arrived at by applying normal rate of return) is higher
    than the capital employed in the business, then the difference is goodwill.

    The steps to be followed under this method are given below:


    • Determine the normal rate of return.
    • Find out the average profit of the partnership firm for which goodwill is to
    be determined.
    • Determine the capital employed by the partnership firm for which
    goodwill is to be determined.
    • Find out normal value of the business by dividing average profit by normal
    rate of return.
    • Deduct average capital employed from the normal value of the business
    to arrive at goodwill.
    Goodwill= Normal Capital-Actual Capital
    Normal capital=Average profit/NRR

    Example
    The net tangible assets of a firm are worth ₹4,10,000 and the average profit
    of last four years amounts to ₹60,000. Find out of the value of goodwill If the
    reasonable return on capital invested is 12%.

    Example:
    Average profit of a firm is ₹48,000. The rate of capitalization is 12%. Assets
    and liabilities of the firm are ₹4,00,000 and 1,70,000 respectively.

    AUTHOR: CA ROCHELLE D’sa

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