Question

The capital of the firm of Seema and Avi is ₹ 12,00,000, and the market rate of interest is 10%. The salary of each partner is ₹ 10,000 per annum. The profits for the last four years were ₹ 3,00,000, ₹ 4,00,000, ₹ 5,00,000, and ₹ 4,00,000 respectively. Goodwill of the firm is to be valued on the basis of three years’ purchase of the last four years’ average super profits. Calculate the goodwill of the firm.

Answer 1

Total Profit = ₹ 3,00,000 + ₹ 4,00,000 + ₹ 5,00,000 + ₹ 4,00,000

= ₹ 16,00,000

Average Profit = `(16,00,000)/4`

= ₹ 4,00,000

Actual Average Profit = ₹ 4,00,000 – (₹ 10,000 × 2)

= ₹ 3,80,000

Normal Profit = `"Capital Employed" xx "Normal Rate of Return"/100`

= `12,00,000 xx 10/100`

= ₹ 1,20,000

Super Profit = Actual Average Profit – Normal Profit

= ₹ 3,80,000 – ₹ 1,20,000

= ₹ 2,60,000

Goodwill = Super Profit × Number of Years’ Purchase

₹ 2,60,000 × 3

=  ₹ 7,80,000