Question

P, Q and R share profits in the ratio of 5 : 3 : 2. S is entitled for `1/5`th share in profits, which he acquires equally from P, Q and R. Goodwill of the firm is to be valued at three years’ purchase of the last four years’ profits, which are ₹ 50,000, ₹ 60,000, (−) ₹ 30,000 and ₹ 40,000. S cannot bring his share of goodwill in cash. Credit will be given to ______.

Options

• P ₹ 30,000; Q ₹ 30,000; R ₹ 30,000

• P ₹ 6,000; Q ₹ 6,000; R ₹ 6,000

• P ₹ 45,000; Q ₹ 27,000; R ₹ 18,000

• P ₹ 9,000; Q ₹ 9,000; R ₹ 9,000

Answer 1

P, Q and R share profits in the ratio of 5 : 3 : 2. S is entitled for `1/5`th share in profits, which he acquires equally from P, Q and R. Goodwill of the firm is to be valued at three years’ purchase of the last four years’ profits, which are ₹ 50,000, ₹ 60,000, (−) ₹ 30,000 and ₹ 40,000. S cannot bring his share of goodwill in cash. Credit will be given to P ₹ 6,000; Q ₹ 6,000; and R ₹ 6,000.

Explanation:

Calculate the Average Profits:

Determine the average profits of the last four years:

Average profits = `("Year"  1  + "Year"  2  + "Year"  3  + "Year"  4)/4`

Average profits = `(50,000 + 60,000 - 30,000 + 40,000)/4`

Average profits = `(1,20,000)/4`

= 30,000

Goodwill is valued at three years' purchase of the average profits:

Firm’s Goodwill = Average profits × Years’ purchase

= 30,000 × 3

= 90,000

Determine S’s Share of Goodwill:

S is admitted for a `1/5` share in profits

 S’s Share of Goodwill = `90,000 xx 1/5`

= 18,000

Credit the Goodwill to the Sacrificing Partners:

Amount credited to P = `18,000 xx 1/3`

= 6,000

Amount credited to Q = `18,000 xx 1/3`

= 6,000

Amount credited to R = `18,000 xx 1/3`

= 6,000