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Question
Capital of the firm of Sharma and Verma is ₹ 2,00,000 and the market rate of interest is 15%. Annual salary to partners is ₹ 12,000 each. The profits for the last three years were ₹ 60,000; ₹ 72,000 and ₹ 84,000. Goodwill is to be valued at 2 years' purchase of last 3 years' average super profit.
Calculate goodwill of the firm.
Solution
Goodwill = Super Profit x Number of Years' Purchase
Normal Profit = Capital Investment x `"Normal Rate of Return"/100`
= 2,00,000 x `15/100` = Rs. 30,000.
| Year | Profit before Partner’s Salary | – | Partner’s Salary | = | Actual Profit after Salary |
| 1 | 60,000 | – | 24,000 | = | 36,000 |
| 2 | 72,000 | – | 24,000 | = | 48,000 |
| 3 | 84,000 | – | 24,000 | = | 60,000 |
Average Actual Profit after Salary to Partners = `[36,000 + 48,000 + 60,000]/3 = (1,44,000)/3`
= 48,000 - 30,000
= 18,000
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