Question

Kriti and Atif are partners sharing profits and losses equally. On 31st March, 2024, they admitted David as a third partner for `1/5` share in the profits.

It is decided that on David’s admission:

• Atif would retain his original share
• Goodwill would be valued by the super profit method on the basis of the following information:

1. 
   

   Balance Sheet of Kriti and Atif (an extract) As at 31st March, 2024
   Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)
   General Reserve		25,000	Current A/c:
   Capital A/c:		4,25,000	Atif	10,000
   Kriti	2,50,000
   Atif	1,75,000
   Current A/c:
   Kriti		40,000

2. The normal rate of return is 12% per annum.
3. Average profits of the firm for the last four years are ₹ 74,000.

You are required to calculate:

1. The sacrificing ratio of the partners.
2. The value of goodwill of the firm at four years’ purchase of the super profit.

Answer 1

i. Sacrificing Ratio of Partners:

Sacrificing Ratio = `1/5 : 0`

 ii. Calculation of Value of Goodwill:

Capital Employed in the Firm = Capital of Kriti and Atif + Current A/c balance of Kriti − Debit Balance of Atif’s Current A/c + General Reserve

= 2,50,000 + 1,75,000 + 40,000 − 10,000 + 25,000

= 4,80,000

Normal profit = `"Capital employed" xx "Normal Rate of Return"/100`

Normal profit = `4,80,000 xx 12/100`

= ₹ 57,600

Super profit = Average Profit − Normal Profit

= 74,000 − 57,600

= ₹ 16,400

Goodwill = 16,400 × 4

= ₹ 65,600