Question

A and B are partners sharing profits and losses in the ratio of 5 : 3. On 1st April, 2019, C is admitted to the partnership for 1/4th share of profits. For this purpose, goodwill is to be valued at two years' purchase of last three years' profits (after allowing partners' remuneration). Profits to be weighted 1 : 2 : 3, the greatest weight being given to last year. Net profit before partners' remuneration were: 2016-17 : ₹ 2,00,000; 2017-18 : ₹ 2,30,000; 2018-19 : ₹ 2,50,000. The remuneration of the partners is estimated to be ₹ 90,000 p.a. Calculate amount of goodwill.

Answer 1

Year	Profit before Partners’ Remuneration	–	Partners’ Remuneration	=	Profit after Partners’ Remuneration
2016-17	2,00,000	–	90,000	=	1,10,000
2017-18	2,30,000	–	90,000	=	1,40,000
2018-19	2,50,000	–	90,000	=	1,60,000

 

Year	Profit	×	Weight	=	Product
2016-17	1,10,000	×	1	=	1,10,000
2017-18	1,40,000	×	2	=	2,80,000
2018-19	1,60,000	×	3	=	4,80,000
	Total		6		8,70,000

Weighted Average Profit = `"Total Product of Profits"/"Total of Weights"`

or, Weighted Average Profit = `[8,70,000]/6` = Rs. 1,45,000

Goodwill = Weighted Average Profit x Number of years' Purchase

               = 1,45,000 x 2 = Rs. 2,90,000.