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Question
Bhaskar and Pillai are partners sharing profits and losses in the ratio of 3 : 2. They admit Kanika into partnership for 1/4th share in profit. Kanika brings in her share of goodwill in cash. Goodwill for this purpose is to be calculated at two years' purchase of the average normal profit of past three years. Profits of the last three years ended 31st March, were:
2017 - Profit ₹ 50,000 (including profit on sale of assets ₹ 5,000).
2018 - Loss ₹ 20,000 (including loss by fire ₹ 30,000).
2019 - Profit ₹ 70,000 (including insurance claim received ₹ 18,000 and interest on investments and Dividend received ₹ 8,000).
Calculate the value of goodwill. Also, calculate goodwill brought in by Kanika.
Solution
Normal Profit for the year ended 31st March,2017 :
= (Total Profit - Profit on sale of assets )
= ₹ ( 50,000 - 5,000) = ₹ 45,000.
Normal Profit for the year ended 31st March,2018 :
= ( Loss by fire - Total Loss )
= ₹ ( 20,000 - 30,000 ) = ₹ 10,000.
Normal Profits for the year ended 31st March,2019 :
= Rs. (Total Profit - Insurance claim received - Interest on investments and Dividend received )
= Rs. ( 70,000 - 18,000 - 8,000) = Rs. 44,000
Average Profits = `("Normal Profit for the year ended 31st March,2017 to 31st March,2019"/3)`
= `([ 45,000 + 10,000 + 44,000 ]/3)`
= Rs. 33,000
Goodwill = Average Profits of last three years x No. of Years of Purchase
Goodwill = Rs.( 33,000 x 2 ) = Rs. 66,000
Kanika's Share of Goodwill = Rs. ( 66,000 x `1/4`) = Rs. 16,500.
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