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Question
A and B were partners in a firm sharing profits equally. Their capitals were : A ₹ 1,20,000 and B ₹ 80,000. The annual rate of interest is 20%. The profits of the firm for the last three years were ₹ 34,000; ₹ 38,000 and ₹ 30,000. They admitted C as a new partner. On C's admission the goodwill of the firm was valued at 2 years purchase of the super profits.
Calculate the value of goodwill of the firm on C's admission.
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Solution
Goodwill =No. of Years' Purchase x Super Profit
Super Profit = Actual Profit - Normal Profit
Average Profit = Average Profit of 3 years
Average Profit =`(34,000 + 38,000 +30,000)/3 = ₹ 34,000`
Normal Profit = 20% of total capital
= `20% xx2,00,000 = ₹ 40,000 `
Super Profit `= 34,000 - 40,000 = -6,000`
This firm is having negative super profit.So, no goodwill is possible.
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