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Question
A and B are partners sharing profits and losses in the ratio of 5 : 3. On 1st April, 2019, C is admitted to the partnership for 1/4th share of profits. For this purpose, goodwill is to be valued at two years' purchase of last three years' profits (after allowing partners' remuneration). Profits to be weighted 1 : 2 : 3, the greatest weight being given to last year. Net profit before partners' remuneration were: 2016-17 : ₹ 2,00,000; 2017-18 : ₹ 2,30,000; 2018-19 : ₹ 2,50,000. The remuneration of the partners is estimated to be ₹ 90,000 p.a. Calculate amount of goodwill.
Solution
|
Year |
Profit before Partners’ Remuneration |
– |
Partners’ Remuneration |
= |
Profit after Partners’ Remuneration |
|
2016-17 |
2,00,000 |
– |
90,000 |
= |
1,10,000 |
|
2017-18 |
2,30,000 |
– |
90,000 |
= |
1,40,000 |
|
2018-19 |
2,50,000 |
– |
90,000 |
= |
1,60,000 |
|
Year |
Profit |
× |
Weight |
= |
Product |
|
2016-17 |
1,10,000 |
× |
1 |
= |
1,10,000 |
|
2017-18 |
1,40,000 |
× |
2 |
= |
2,80,000 |
|
2018-19 |
1,60,000 |
× |
3 |
= |
4,80,000 |
|
|
Total |
|
6 |
|
8,70,000 |
Weighted Average Profit = `"Total Product of Profits"/"Total of Weights"`
or, Weighted Average Profit = `[8,70,000]/6` = Rs. 1,45,000
Goodwill = Weighted Average Profit x Number of years' Purchase
= 1,45,000 x 2 = Rs. 2,90,000.
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