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.
