Question

Yash and Karan were partners in an interior designer firm. Their fixed capitals were ₹ 6,00,000 and ₹ 4,00,000 respectively. There were credit balances in their current accounts of ₹ 4,00,000 and ₹ 5,00,000 respectively. The firm had a balance of ₹ 1,00,000 in General Reserve. The firm did not have any liability. They admitted Radhika into partnership for `1/4`th share in the profits of the firm. The average profits of the firm for the last five years were ₹ 5,00,000. Calculate the value of goodwill of the firm by capitalization of average profits method. The normal rate of return in the business is 10%.

Answer 1

Given:

Capitals (Fixed): Yash = ₹ 6,00,000, Karan = ₹ 4,00,000

Current Accounts: Yash = ₹ 4,00,000 (Cr.), Karan = ₹ 5,00,000 (Cr.)

General Reserve = ₹ 1,00,000

Average Profits = ₹ 5,00,000

Normal Rate of Return (NRR) = 10%

Capital Employed = Fixed Capitals + Current A/c balances + Reserves

= (6,00,000 + 4,00,000) + (4,00,000 + 5,00,000) + 1,00,000

= 10,00,000 + 9,00,000 + 1,00,000

= ₹ 20,00,000

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

= `5,00,000 xx 100/10`

= ₹ 50,00,000

Goodwill = Capitalised Value − Capital Employed

= 50,00,000 − 20,00,000

= ₹ 30,00,000