Question

The following particulars are available in respect of a partnership firm.

1. Partners’ Capitals ₹ 12,00,000, General Reserve ₹ 1,00,000.
2. The profits for the past four years ending on 31st March are as follows:
   

   	₹
   2023	2,10,000
   2024	3,60,000
   2025	(40,000)
   2026	5,60,000

3. On 1st October, 2023, a Printer of ₹ 1,00,000 was purchased and was wrongly debited to Printing and Stationery Expenses A/c. Depreciation is to be charged @ 20% p.a. on reducing balance method.
4. Closing Stock for the year ended 31st March, 2026 was undervalued by ₹ 20,400.
5. Rate of return on capital invested in this type of business 12%.
6. Remuneration from alternative employment of the partners who are engaged full time in this business ₹ 60,000 p.a.

You are required to calculate the value of goodwill on the basis of 3 years’ purchase of super profits of the business calculated on the average profit of the last 4 years.

Answer 1

(i) \[\text{Capital Employed} = \text{Partners' Capital} + \text{General Reserve}\]

$\quad\quad\quad\quad\quad\quad\quad\ = ₹12,00,000 + ₹1,00,000 = ₹13,00,000$

(ii) Calculation of Adjusted Profits (For Valuation of Goodwill) :

Particulars	2022-23	2023-24	2024-25	2025-26
	₹	₹	₹	₹
Profits	2,10,000	3,60,000	(40,000)	5,60,000
Add: Cost of Printer wrongly charged to 'Printing & Stationery Exp. A/c'		1,00,000
Less: Depreciation on Printer (1)		(10,000)	(18,000)	(14,400)
Add: Under Valuation of Closing Stock				20,400
Less: Remuneration of Partners	(60,000)	(60,000)	(60,000)	(60,000)
Adjusted Profits	1,50,000	3,90,000	(1,18,000)	5,06,000

$$\text{Average Profit} = \frac{1,50,000 + 3,90,000 - 1,18,000 + 5,06,000}{4}$$

$$= \frac{9,28,000}{4} = ₹2,32,000$$

$$\text{Normal Profit} = \text{Capital Employed} \times \frac{\text{Normal Rate of Return}}{100}$$

$$= 13,00,000 \times \frac{12}{100} = ₹1,56,000$$

$$\text{Super Profit} = \text{Average Profit} - \text{Normal Profit}$$

$$= ₹2,32,000 - ₹1,56,000 = ₹76,000$$

$$\text{Goodwill} = \text{Super Profit} \times \text{Number of Years' Purchase}$$

$$= 76,000 \times 3 = ₹2,28,000$$

(iii) Depreciation on Printer:

For 2023-24 $= 20\%\text{ on } ₹1,00,000\text{ for 6 months} = ₹10,000$

For 2024-25 $= 20\%\text{ on } ₹90,000 \quad\quad\quad\quad\quad\quad\ \ = ₹18,000$

For 2025-26 $= 20\%\text{ on } ₹72,000 \quad\quad\quad\quad\quad\quad\ \ = ₹14,400$