Question

Dinesh and Mahesh are partners sharing profits and losses in the ratio of 3 : 2. They admit Ramesh into partnership for 1/4th share in profits. Ramesh brings in his share of goodwill in cash. Goodwill for this purpose shall be calculated at two years' purchase of the weighted average normal profit of past three years. Weights being assigned to each year 2017−1; 2018−2 and 2019−3. Profits of the last three years were:
2017 − Profit ₹ 50,000 (including profits on sale of assets ₹ 5,000).
2018 − Loss ₹ 20,000 (including loss by fire ₹ 35,000).
2019 − Profit ₹ 70,000 (including insurance claim received ₹ 18,000 and interest on investments and dividend received ₹ 8,000).
​Calculate the value of goodwill. Also, calculate the goodwill brought in by Ramesh.

Answer 1

Normal Profits for the year 2017
= ( Total Profits - Profit on Sale of Assets) = Rs. ( 50,000 - 5000 ) = Rs. 45,000.

Normal Profits for the year 2018
= (Loss by Fire - Total Loss) = Rs. (35,000 - 20,000) = Rs. 15,000

Normal Profits for the year 2019
= Rs.(Total Profit - Insurance Claim Received - Dividend Received)
= Rs.(70,000 - 18,000 - 8,000)
=Rs. 44,000

Year	Normal Profits (₹)	Weights	Weighted Profits (₹)
2017	45,000	1	45,000
2018	15,000	2	30,000
2019	44,000	3	1,32,000
Total		6	2,07,000

Weighted Average Profits = `("Total of Weighted Profits"/"Total of Weights")`
= Rs. `([2,07,000]/6)` = Rs. 34,500.

Goodwill = Weighted Average Profits x No. of years of Purchase
= Rs. ( 34,500 x 2 ) = Rs. 69,000

Ramesh's Share of Goodwill = Rs. ( 69,000 x `1/4`) = Rs. 17,250