Annuity method under partnership.

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nimra (Querist)
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06 May 2010 Hello.I'm preparing for cpt june 2010 test. Under partnership chapter I unable to value the goodwill in annuity method.plz tell me the clear steps for ascertaining the value of the goodwill under annuity basis.Thank you.

Gajendra R. Tiwari

Gajendra R. Tiwari (Expert)
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06 May 2010 for calculation annuity value please follow these steps:

1) Calculate Average Profit

2) Calculate Normal Profit

3) Calculate Super Profit(Average Profit - Normal Profit)

4) Suppose, Goodwill is to be valued at 5 years' profit purchased and normal rate of return is 15% then goodwill under annuity method will be:

Goodwill = super profit * annuity value after 5 year @ 15% (search in annuity table it will be 3.3522)

you are done. Hope u understand the method.

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