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Question
A Partnership firm earned net profits during the last three years as follows:
|
Years |
Net Profit Rs |
|
2007-2008 |
1,90,000 |
|
2008-2009 |
2,20,000 |
|
2009-2010 |
2,50,000 |
The capital employed in the firm throughout the above mentioned period has been Rs 4,00,000. Having regard to the risk involved,
15% is considered to be a fair return on the capital. The remuneration of all the partners during this period is estimated to be Rs 1,00,000 per annum.
Calculate the value of goodwill on the basis of (i) two year’s purchased of super profits earned on a average basis during the above mentioned three years and (ii) by capitalization method.
Solution
Profit for 3 years = Rs 1,90,000 + Rs 2,20,000 + Rs 2,50,000
= Rs 6,60,000
`"Avarage Profit"= "Profit for 3 years"/3= " Rs " (6,60,000)/3= " Rs "2,20,000`
Average Profit after partners remuneration = Average Profit − Partners’ Remuneration.
= Rs 2,20,000 − Rs 1,00,000
= Rs 1,20,000
Normal Profit = Capital Employed × Fair Return on the Capital
=`4,00,000xx15/100= "Rs" 60,000`
Super Profit = Average profit after partners’ remuneration − Normal Profit
= Rs 1,20,000 − Rs 60,000 = Rs 60,000
Goodwill = Super Profit × No. of years purchases
= Rs 60,000 × 2 = Rs 1,20,000
(ii) Valuation of Goodwill by Capitalization Method
`"Capitalised Value of the firm" = "Average Profit after patners'Remuneration"/ "Normal Rate of Return"xx100`
Goodwill = Capitalised Value − Capital Employed
= Rs 8,00,000 − Rs 4,00,000
= Rs 4,00,000
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