What is meant by purchased Goodwill?

Solution:-

Purchased Goodwill:-

Purchased Goodwill is that goodwill for which the firm has paid consideration in cash or kind.

For example, when a business is purchased and purchase consideration is more than the value of net assets (i.e., Assets – Liabilities), the difference amount is the value of purchased goodwill.

Let us take an example:-

AB Business House acquires Mahagun Business for a net consideration of ₹ 10,00,000.

Assets acquired were valued at ₹ 20,00,000 and liabilities taken over were of ₹ 12,00,000. ₹ 2,00,000 paid in excess of net assets, i.e., ₹ 8,00,000 (₹ 20,00,000 – ₹ 12,00,000) is towards goodwill. It is purchased goodwill.

AS-26 Intangible Assets prescribes that purchased goodwill may be recognized in the books of account and written off at the earliest but with the estimated useful life.