Calculate Value of Goodwill on the Basis of Two Years' Purchase of Average Super Profit Earned During the Above-mentioned Three Years. - Accountancy

Sum

A partnership firm earned net profits during the past three years as follows:

 Year ended 31st March, 2019 31st March, 2018 31st March, 2017 Net Profit (₹) 2,30,000 2,00,000 1,70,000

Capital investment in the firm throughout the above-mentioned period has been ₹ 4,00,000. Having regard to the risk involved, 15% is considered to be a fair return on the capital. The remuneration of the partners during this period is estimated to be ₹ 1,00,000 p.a.
Calculate value of goodwill on the basis of two years' purchase of average super profit earned during the above-mentioned three year

Solution

Goodwill = Super Profit x Number of Years' Purchase

Normal Profit = Capital Investment x "Normal Rate of return"/100

= 4,00,000 x 15/100 = Rs. 60,000.

 Year Profit before Partners’ Remuneration – Partners’ Remuneration = Actual Profit after Remuneration 2017 1,70,000 – 1,00,000 = 70,000 2018 2,00,000 – 1,00,000 = 1,00,000 2019 2,30,000 – 1,00,000 = 1,30,000

Average Actual Profit after Remuneration
= [ 70,000 + 1,00,000 + 1,30,000]/3

= [3,00,000]/3 = Rs. 1,00,000

Super Profit = Average Actual Profit after Remuneration - Normal Profit
= 1,00,000 - 60,000 = Rs. 40,000
Number of years’ purchase = 2
∴ Goodwill = Rs. 40,000 x 2 = Rs. 80,000.

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APPEARS IN

TS Grewal Class 12 Accountancy - Double Entry Book Keeping Volume 1
Chapter 3 Goodwill: Nature and Valuation
Exercise | Q 27 | Page 32