# ​Calculate the Value of Goodwill. - Accountancy

Sum

​ Varuna and Karuna are partners for equal shares. They admit Lata into partnership for 1/4th share. It was agreed to value goodwill of the firm at 4 years' purchase of super profit. Normal rate of return is 15% of the capital employed. Average profit of the firm is ₹ 4,00,000. Balance Sheet of the firm as at 31st March, 2019 was as follows:

 Liabilities Amount(₹) Assets Amount​(₹) Capital A/cs: Furniture 4,00,000 Varuna 5,00,000 Computers 3,00,000 Karuna 5,00,000 10,00,000 Electrical Fittings 1,00,000 Long-term Loan 5,50,000 Investments (Trade) 2,00,000 Sundry Creditors 2,00,000 Stock 3,00,000 Outstanding Expenses 50,000 Sundry Debtors 3,00,000 Advances from Customers 1,50,000 Bills Receivable 50,000 Cash in Hand 50,000 Cash at Bank 2,00,000 Deferred Revenue Expenditure: Advertisement Suspense 50,000 19,50,000 19,50,000

​Calculate the value of goodwill.

#### Solution

Average Profit = Rs. 4,00,000

Capital Employed = Total Assets - (Non - Trade Investment) - Outside Liabilities
= Rs. ( 19,50,000 - 50,000 - 4,00,000) = Rs. 15,00,000.

Normal Profits = ("Capital Employed" xx "Normal Rate of Return"/100)

= Rs. ( 15,00,000 xx 15/100 ) = Rs. 2,25,000.

Super Profits = Average Profits - Normal Profits

= Rs. ( 4,00,000 - 2,25,000) = Rs. 1,75,000

Goodwill = Super Profits x No. of Years of Purchase
= Rs. ( 1,75,000 x 4 ) = Rs. 7,00,000.

Is there an error in this question or solution?

#### APPEARS IN

TS Grewal Class 12 Accountancy - Double Entry Book Keeping Volume 1
Chapter 3 Goodwill: Nature and Valuation
Exercise | Q 29 | Page 33