From the following information, identify when goodwill is required to…

The correct answer is Option (3) → (a), (b), (d) only

Goodwill has to be valued whenever the partners' rights in the future profits of the firm change, or the business is handed over as a going concern. This happens on admission, retirement or death of a partner and on amalgamation of firms.

(a) Admission of a Partner — Goodwill is valued. The new partner gets a share of future profits, so he must pay the old partners for their sacrifice, and goodwill is needed to work this out.

(b) Amalgamation of partnership firms — Goodwill is valued. When two firms join, each brings its own reputation and profits into the new firm, so the goodwill of each firm has to be valued.

(c) Dissolution of partnership firm — Not an occasion as stated. Goodwill is valued on dissolution only when the business is sold as a going concern. In an ordinary dissolution the assets are sold off and the firm is closed, so goodwill is not normally valued.

(d) Retirement and Death of any partner — Goodwill is valued. The outgoing partner (or his executors) must be paid for his share of goodwill by the partners who gain his share.

(e) Preparation of Balance sheet — Not an occasion. A balance sheet is prepared every year. Preparing it does not change anyone's share in profits, so no valuation of goodwill is needed.