Goodwill realeted
This query is : Resolved
PARESH AHUJA
(Querist)
02 May 2025
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.
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.
12 August 2025
You should NOT add back interest on capital if the profit given is already after interest on capital.
Doing so will double count the interest, leading to an overstatement of goodwill.
✔️ Conclusion:
The correct goodwill calculation = ₹12L × 3 = ₹36L
Doing so will double count the interest, leading to an overstatement of goodwill.
✔️ Conclusion:
The correct goodwill calculation = ₹12L × 3 = ₹36L
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