Question

A partnership firm earned net profits during the last three years ended 31st March, as follows: 2017 − ₹ 17,000; 2018 − ₹ 20,000; 2019 − ₹ 23,000.
The capital investment in the firm throughout the above-mentioned period has been ₹ 80,000. Having regard to the risk involved, 15% is considered to be a fair return on the capital. Calculate value of goodwill on the basis of two years' purchase of average super profit earned during the above-mentioned three years.

Answer 1

Goodwill = Super Profit x Number of Years' Purchase

Average Actual Profit = `[ 17,000 + 20,000 + 23,000 ]/3`

= `[60,000]/3` = Rs. 20,000.

Normal Profit = Capital Employed x `"Fair Rate of Return"/100`

= 80,000 x `15/100` = Rs. 12,000.

Super Profit = Average Actual Profit - Normal Profit

= 20,000 - 12,000 = Rs. 8,000.

Number of years’ purchase = 2
∴ Goodwill = 8,000 x 2 = Rs. 16,000.