In the calculation of goodwill for a partnership firm during a change in profit-sharing ratio, the correct method is to use the average profit after accounting for all adjustments, such as partners’ interest on capital. Since the average net profit after interest is ₹12 lakh, goodwill is calculated as ₹12 lakh × 3 years = ₹36 lakh. It is incorrect to add back the interest on capital (₹10 lakh) and use ₹22 lakh × 3, as interest on capital is already appropriated and not part of the residual profit used to value goodwill.
Goodwill related
Understanding of goodwill, I want to ask if partnership firm readjust share ratio. Suppose firm average Net profit 12 lakh after partner's interest on capital ( 10 lakh). So, question is that in goodwill calculation Average Profit X year purchase ( 3 years) ie 12 lakh x 3 year = 36 Lakh Or (Average profit + partners interest on capital) X year purchase ie ( 12 lakh + 10 lakh) X 3 year = 66 lakh Which method is correct. Please solve the query.
Asked 26 days ago in Income Tax
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