Question

Bharat and Bhushan are partners sharing profits in the ratio of 3 : 2. They decided to admit Manu as a partner from 1st April, 2019 on the following terms:

1. Manu will be given 2/5th share of the profit.
2. Goodwill of the firm will be valued at two years' purchase of three year’s normal average profit of the firm.

Profits of the previous three years ended 31st March, were:

2019 - Profit ₹ 30,000 (after debiting loss of stock by fire ₹ 40,000).

2018 - Loss ₹ 80,000 (includes voluntary retirement compensation paid ₹ 1,10,000).

2017 - Profit ₹ 1,10,000 (including a gain (profit) of ₹ 30,000 on the sale of fixed assets).

​Calculate the value of goodwill.

Answer 1

Normal Profit for the year ended 31st March, 2019:

= (Total Profit + Loss by fire)

= ₹ (30,000 + 40,000)

= ₹ 70,000

Normal Profit for the year ended 31st March, 2018:

= (Total Loss - Voluntary retirement compensation paid)

= ₹ (80,000 – 1,10,000)

= ₹ 30,000

Normal Profits for the year ended 31st March, 2017:

= Rs. (Total Profit – Gain on sale of Fixed Assets)

= Rs. (1,10,000 – 30,000)

= Rs. 80,000

Average Profits = `("Normal Profit for the year ended 31st March, 2017 to 31st March, 2019"/5)`

= `([ 70,000 + 30,000 + 80,000 ]/3)`

= Rs. 60,000

Goodwill = Average Profits of last three years × No. of Years of Purchase

Goodwill = Rs. (60,000 × 2) 

= Rs. 1,20,000