Question

A and B are partners. They admit C for `1/4"th"` share in profits. For this purpose goodwill is to be valued at three year’s purchase of super profits.

Following information is provided to you:

	₹
A’s Capital	5,00,000
B’s Capital	4,00,000
General Reserve	1,50,000
Profit and Loss A/c (Cr.)	30,000
Sundry Assets	12,00,000

The normal rate of return is 15% p.a. Average Profits are ₹ 2,00,000 per year. You are required to calculate C’s share of goodwill.

Hint: Sundry Assets will be ignored.

Answer 1

Calculation of Normal Profit of the firm:

Capital Employed = A’s Capital + B’s Capital + General Reserve + Profit and loss A/c (Cr.)

= ₹ 5,00,000 + ₹ 4,00,000 + ₹ 1,50,000 + ₹ 30,000

= ₹ 10,80,000

Normal Profit = Capital Employed × Normal rate of return

= 10,80,000 × 15%

= ₹ 1,62,000

Calculation of C’s share of goodwill:

Super Profit = Average Profit – Normal Profit

= ₹ 2,00,000 – 1,62,000

= ₹ 38,000

Goodwill of the firm = Super Profit × 3 year’s Purchase

= ₹ 38,000 × 3

= ₹ 1,14,000

C’s share of Goodwill = `1,14,000xx 1/4`

= ₹ 28,500