Question

The capital of the firm of Anuj and Benu is ₹ 10,00,000 and the market rate of interest is 15%. Annual salary to the partners is ₹ 60,000 each. The profit for the last three years were ₹ 2,80,000, ₹ 3,80,000 and ₹ 4,20,000. Goodwill of the firm is to be valued on the basis of two years purchase of last three years average super profits. Calculate the goodwill of the firm.

Answer 1

Profits of last 3 years: 

= ₹ 2,80,000 + ₹ 3,80,000 + ₹ 4,20,000

= ₹ 10,80,000

Average Profit `= (10,80,000)/3`

= 3,60,000

Capital employed = ₹ 10,00,000

Normal rate of return = 15%

Normal Profit on Capital = 10,00,000 × 15%

= 1,50,000

Add partners’ salaries = ₹ 60,000 + ₹ 60,000 

= 1,20,000

Total Normal Profit = 1,50,000 + 1,20,000

= 2,70,000

Super Profit = Average Profit − Normal Profit

= 3,60,000 − 2,70,000

= 90,000

Goodwill = Super Profit × 2 years’ purchase

= 90,000 × 2

= ₹ 1,80,000