Question

The following information relates to a partnership firm:

1. Sundry Assets of the firm ₹ 6,80,000. Outside Liabilities ₹ 60,000.
2. Profits and losses for the past years: Profit 2021 ₹ 50,000; Loss 2022 ₹ 10,000; Profit 2023 ₹ 1,64,000 and Profit 2024 ₹ 1,80,000.
3. The normal rate of return in a similar type of business is 12%.

Calculate the value of goodwill on the basis of:

1. Three year’s purchase of average profits.
2. Three year’s purchase of super profits.
3. Capitalisation of average profits.
4. Capitalisation of super profits.

Answer 1

Given:

Sundry Assets = ₹ 6,80,000

Outside Liabilities = ₹ 60,000

Normal Rate of Return (NRR) = 12%

Calculation of Average profit of the firm:

Average profit of the last 4 year’s = `(50,000 − 10,000 + 1,64,000 + 1,80,000)/4`

= `(3,84,000)/4`

= ₹ 96,000

Calculation of Normal profit of the firm:

Capital Employed = Sundry Assets − Outside Liabilities

= 6,80,000 − 60,000

= ₹ 6,20,000

Normal Profit = Capital Employed × Normal Rate of Return

= 6,20,000 × 12%

= ₹ 74,400

i. Calculation of goodwill of the firm:

Goodwill of the firm = Average profit of the last 4 year’s × 3 year’s purchase

= 96,000 × 3

= ₹ 2,88,000

ii. Calculation of goodwill of the firm:

Super profit = Average Profit − Normal Profit

= 96,000 − 74,400

= ₹ 21,600

Goodwill of the firm = Super profit × 3 year’s purchase

= 21,600 × 3

= ₹ 64,800

iii. Calculation of goodwill of the firm:

Capitalised value of Average Profit = `"Average profit" xx "NRR"/100`

= `96,000 xx 12/100`

= ₹ 8,00,000

Goodwill = Capitalised value of Average Profit − Capital Employed

= 8,00,000 − 6,20,000

= ₹ 1,80,000

iv. Calculation of goodwill of the firm:

Goodwill = `"Super profit" xx "NRR"/100`

= `21,600 xx 12/100`

= ₹ 1,80,000