Question

The following information relates to a partnership firm:

1. Profits/Losses for the last six years:
   

   1st year	₹ 20,000 Profit
   2nd year	₹ 60,000 Profit
   3rd year	₹ 10,000 Loss
   4th year	₹ 60,000 Profit
   5th year	₹ 50,000 Profit
   6th year	₹ 72,000 Profit

2. Average Capital Employed is ₹ 2,00,000.
3. Rate of normal profit is 15%.

Find out the value of goodwill on the basis of:

1. Four years’ purchase of average profits.
2. Four years’ purchase of super profits.
3. Capitalisation of average profits.
4. Capitalisation of super profits.

Answer 1

Total Profit = 20,000 + 60,000 − 10,000 + 60,000 + 50,000 + 72,000

= ₹ 2,52,000

Average Profit `= (2,52,000)/6`

= 42,000

Average Capital Employed = ₹ 2,00,000

Normal Rate of Return (NRR) = 15%

Normal Profit = Capital Employed `xx "NRR"/100`

`= 2,00,000 xx 15/100`

= 30,000

Super Profit = Average Profit − Normal Profit

= ₹ 42,000 − ₹ 30,000

= ₹ 12,000

i. Goodwill = 4 years’ purchase of average profits

= 4 × ₹ 42,000

= ₹ 1,68,000

ii. Goodwill = 4 years’ purchase of super profits

= 4 × ₹ 12,000

= ₹ 48,000

iii. Capitalisation of Average Profits:

Capitalised Value = `"Average Profit" xx 100/"Normal Rate of Return"`

= `42,000 xx 100/15`

= ₹ 2,80,000
Goodwill = Capitalised Value − Capital Employed

= ₹ 2,80,000 − ₹ 2,00,000

= ₹ 80,000

iv. Capitalisation of Super Profits:

Goodwill = `"Super Profit" xx 100/"Normal Rate of Return"`

= `12,000 xx 100/15`

= ₹ 80,000