Question

Supreet and Shubham are equal partners. They decide to admit Akriti for 1/3rd share. For the purpose of admission of Akriti, goodwill of the firm is to be valued at four years' purchase of super profit. Average capital employed in the firm is ₹ 1,50,000. Normal rate of return may be taken as 15% p.a. Average profit of the firm is ₹ 40,000. Calculate value of goodwill.

Answer 1

Average Profit of the firm = Rs. 40,000
Capital Employed = Rs. 1,50,000

Normal Profits = `("Capital Employed" xx "Normal Rate of Return"/100)`

= Rs. `( 1,50,000 xx 15/100 )` = Rs. 22,500.

Super Profits = Average Profits - Normal Profits

= Rs. ( 40,000 - 22,500) = Rs. 17,500

Goodwill = Super Profits x No. of Years of Purchase
= Rs. ( 17,500 x 4 ) = Rs. 70,000.