Question

The capital of the firm of Sumit and Asha is ₹ 20,00,000, and the market rate of interest is 12%. The salary of each partner is ₹ 20,000 per annum. The profits of the last three years were ₹ 3,00,000, ₹ 2,60,000, and ₹ 4,00,000, respectively. Goodwill of the firm is to be valued on the basis of four years’ purchase of the last three years’ average super profits. Calculate the goodwill of the firm.

Answer 1

Total Profit = ₹ 3,00,000 + ₹ 2,60,000 + ₹ 4,00,000

= ₹ 9,60,000

Average Profit = `(9,60,000)/3`

= ₹ 3,20,000

Actual Average Profit = ₹ 3,20,000 – (₹ 20,000 × 2)

= ₹ 3,20,000 – 40,000

= ₹2,80,000

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

= `20,00,000 xx 12/100`

= ₹ 2,40,000

Super Profit = Actual Average Profit – Normal Profit

= ₹ 2,80,000 – ₹ 2,40,000

= ₹ 40,000

Goodwill = Super Profit × Number of Years’ Purchase

= ₹ 40,000 × 4

= ₹ 1,60,000