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Question
A partnership firm earned net profits during the past three years as follows:
| Year ended | 31st March, 2019 | 31st March, 2018 | 31st March, 2017 |
| Net Profit (₹) | 2,30,000 | 2,00,000 | 1,70,000 |
Capital investment in the firm throughout the above-mentioned period has been ₹ 4,00,000. Having regard to the risk involved, 15% is considered to be a fair return on the capital. The remuneration of the partners during this period is estimated to be ₹ 1,00,000 p.a.
Calculate value of goodwill on the basis of two years' purchase of average super profit earned during the above-mentioned three year
Solution
Goodwill = Super Profit x Number of Years' Purchase
Normal Profit = Capital Investment x `"Normal Rate of return"/100`
= 4,00,000 x `15/100` = Rs. 60,000.
|
Year |
Profit before Partners’ Remuneration |
– |
Partners’ Remuneration |
= |
Actual Profit after Remuneration |
|
2017 |
1,70,000 |
– |
1,00,000 |
= |
70,000 |
|
2018 |
2,00,000 |
– |
1,00,000 |
= |
1,00,000 |
|
2019 |
2,30,000 |
– |
1,00,000 |
= |
1,30,000 |
Average Actual Profit after Remuneration
= `[ 70,000 + 1,00,000 + 1,30,000]/3`
= `[3,00,000]/3` = Rs. 1,00,000
Super Profit = Average Actual Profit after Remuneration - Normal Profit
= 1,00,000 - 60,000 = Rs. 40,000
Number of years’ purchase = 2
∴ Goodwill = Rs. 40,000 x 2 = Rs. 80,000.
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