Question

Ritesh and Somesh are partners in a firm sharing profits and losses equally. They admit Satvik on 1st April, 2021, for `1/5` share in the profits of the firm; the future profit-sharing ratio between Ritesh and Somesh would be 3 : 2. At the time of reconstitution of a partnership firm, goodwill was valued at two years’ purchase of the average profits of the preceding four years, which were as follows: Year Profit/Loss   2017−18 Profit ₹ 70,000 (after debiting loss of stock by fire ₹15,000) 2018−19 Profit ₹ 50,000 (including insurance claim of ₹ 5,000) 2019−20 Loss ₹ 40,000 (after debiting voluntary retirement compensation paid ₹ 20,000) 2020−21 Profit ₹ 60,000 (excluding insurance premium of ₹ 10,000 on insurance of assets)

The value of goodwill of the firm on Satvik’s admission was:

विकल्प

• ₹ 60,000

• ₹ 80,000

• ₹ 75,000

• ₹ 1,20,000

Answer 1

₹ 80,000

Explanation:

Particulars	Amount (₹)
Profit for 2011-18 : ₹ 70,000 + ₹ 15,000	85,000
2018-19 : ₹ 50,000 − ₹ 5,000	45,000
2019-20 : (₹ 40,000) + ₹ 20,000	(20,000)
2020-21 : ₹ 60,000 − ₹ 10,000	50,000
	1,60,000

Average profits = `(1,60,000)/4`

= 40,000

Goodwill is valued at two years’ purchase of the average profits.

Goodwill = Average Adjusted Profit × Number of Years’ Purchase.

Goodwill = 40,000 × 2

= ₹ 80,000