Question

Kaul and Moin are partners sharing profits and losses in the ratio of 5 : 4. On 1.04.2024, they want to admit Cora as a partner for 1/5th share in the business. Goodwill at the time of Cora’s admission on the basis of Capitalisation of Average Profits of the last three years is valued at ₹ 60,000.

Firm, as on that date, has a Capital Employed of ₹ 4,40,000. The Normal Rate of Return expected from this kind of business is 13%. What will be the value of goodwill under Capitalisation of Super Profits Method?

Answer 1

On the basis of Capitalisation of Average Profit Method:

\[\begin{aligned} \text{Goodwill} = & \text{ Capitalised Value of Average Profit} \\ & - \text{Actual Capital Employed} \end{aligned}\]

$$\begin{aligned} ₹60,000 = & \text{ Average Profit} \times \frac{100}{\text{Normal Rate of Return}} \\ & - \text{Actual Capital Employed} \end{aligned}$$

$$₹60,000 = \text{ Average Profit} \times \frac{100}{13} - ₹4,40,000$$

$$\therefore \text{ Average Profit} = (60,000 + 4,40,000) \times \frac{13}{100} = ₹65,000$$

$$\begin{aligned} \text{Normal Profit} & = \text{ Capital Employed} \times \frac{\text{Normal Rate of Return}}{100} \\ \\ & = ₹4,40,000 \times \frac{13}{100} = ₹57,200 \end{aligned}$$

$$\begin{aligned} \text{Super Profit} & = \text{ Average Profit} - \text{Normal Profit} \\ & = ₹65,000 - ₹57,200 = ₹7,800 \end{aligned}$$

On the basis of Capitalisation of Super Profit Method:

$$\begin{aligned} \text{Goodwill} & = \text{ Super Profit} \times \frac{100}{\text{Normal Rate of Return}} \\ \\ & = 7,800 \times \frac{100}{13} = ₹60,000 \end{aligned}$$