Question

What is the need for valuation of Goodwill?

Hint:

Goodwill valuation protects the partner who is sacrificing a share of future profits.

Answer 1

Step 1: List the events that trigger revaluation of the firm's reputation:
Goodwill must be valued whenever the profit-sharing arrangement among partners changes — admission of a new partner, retirement or death of an existing partner, a change in the existing profit-sharing ratio, or amalgamation/sale of the business.

Step 2: Explain why valuation matters at these points:
At each of these events, some partners gain a larger future share of profit while others sacrifice a share; goodwill valuation lets the firm fairly compensate the partner(s) losing out, using the business's accumulated reputation and earning capacity as the basis.

Final Answer:
Goodwill is valued on admission, retirement/death of a partner, change in profit-sharing ratio, or amalgamation — to fairly compensate the partner(s) sacrificing their share of future profits.