Question

Need for valuation of goodwill arises in the following circumstances:
(A) Admission of a new partner
(B) Change in profit sharing ratio among the existing partners
(C) Dissolution of the partnership firm involving sale of business as a going concern
(D) Death of a partner
Choose the correct answer from the options given below:

• A. (A), (B) and (D) only
• B. (A), (B) and (C) only
• C. (A), (B), (C) and (D)
• D. (B), (C) and (D) only

Answer 1

The Correct Option is C

Valuation of goodwill is necessary in various circumstances in a partnership firm. Let's analyze each of the provided situations:

Admission of a new partner (A):

• When a new partner is admitted, goodwill is valued to determine the share of the new partner in the business. The existing partners typically share their share of goodwill with the new partner based on the agreed terms.

Change in profit-sharing ratio among the existing partners (B):

• When the profit-sharing ratio among the existing partners is changed, the goodwill needs to be revalued, as the new ratio may impact the distribution of the firm’s value.

Dissolution of the partnership firm involving sale of business as a going concern (C):

• During the dissolution of the partnership, if the business is sold as a going concern, the value of goodwill is considered to determine the value of the business, and it must be adjusted between the partners.

Death of a partner (D):

• When a partner dies, their share of goodwill is calculated and transferred to their legal heirs or the remaining partners, depending on the partnership agreement.

Valuation of goodwill is required in all the given circumstances, making the correct answer (C): (A), (B), (C) and (D).

Answer 2

The need for valuation of goodwill arises in the following situations:
- Admission of a new partner (A): When a new partner is admitted, goodwill is valued to determine the contribution of the new partner and to adjust the capital accounts of existing partners.
- Change in profit sharing ratio among the existing partners (B): When partners decide to change their profit-sharing ratio, the existing goodwill must be valued to adjust the accounts fairly.
- Dissolution of the partnership firm involving sale of business as a going concern (C): In case of dissolution, goodwill needs to be valued to fairly distribute the proceeds among partners.
- Death of a partner (D): Upon the death of a partner, goodwill must be valued to settle the deceased partner’s share and adjust the remaining partners’ capital accounts.
Thus, goodwill valuation is relevant in all four circumstances.