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:
|Long-term Loan||5,50,000||Investments (Trade)||2,00,000|
|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:|
Calculate the value of goodwill.
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.