Question

Jeevan and Kavi were partners in a firm with capitals of ₹ 12,00,000 and ₹ 15,00,000 respectively. Annual salary of the partners was ₹ 2,00,000 each. The market rate of interest was 10%. During the previous three years the profits were ₹ 8,00,000, ₹ 9,00,000 and ₹ 7,00,000. The goodwill of the firm is to be valued at 2 years' pruchase of last 3 years' average super profits.

Calculate the goodwill of the firm.

Answer 1

1. Calculation of Average Actual Profit

Total Profits = 8,00,000 + 9,00,000 + 7,00,000 = 24,00,000

Average Actual Profit = `(24,00,000)/(3  "years") = 8,00,000`

2. Calculation of Normal Profit

Total Capital Employed: 12,00,000 (Jeevan) + 15,00,000 (Kavi) = 27,00, 000

Interest on Capital (Market Rate): 27,00,000 × 10% = 2,70,000

Total Partners' Salary: 2,00,000 × 2 partners = 4,00,000

Total Normal Profit Required: 

Normal Profit = Interest on Capital + Partners’ Salary

Normal Profit = 2,70,000 + 4,00,000 = 6,70,000

3. Calculation of Super Profit

Super Profit = Average Actual Profit − Normal Profit

Super Profit = 8,00,000 − 6,70,000 = 1,30,000

4. Calculation of Goodwill

Goodwill = Super Profit x Number of Years’ Purchase

Goodwill = 1,30,000 × 2 = 2,60,000