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Question
Ajeet and Baljeet are partners in a firm. Their capitals are ₹ 9,00,000 and ₹ 6,00,000 respectively. During the year ended 31st March, 2019 the firm earned a profit of ₹ 4,50,000. Assuming that the normal rate of return is 20%, calculate value of goodwill of the firm:
(i) By Capitalisation Method; and
(ii) By Super Profit Method if the goodwill is valued at 2 years' purchase of super profit.
Solution
Capital Employed = `( Total Liabilities - Current Liabilities)
= Rs. ( 9,00,000 + 6,00,000) = Rs. 15,00,000
Normal Profits = `("Capital employed" xx "Normal Rate of Return"/100)`
= Rs. 15,00,000 x `20/100` = Rs. 3,00,000
Average Profit = Rs. 4,50,000
Super Profits = Average Profit - Normal Profits
= Rs. 4,50,000 - 3,00,000 = Rs. 1,50,000
(i) As per Capitalisation Method,
Goodwill = `("Super Profits" xx 100/"Normal Rate of Return")`
= Rs. 1,50,000 x `100/20` = Rs. 7,50,000
(ii) As per Super Profit Method,
Goodwill = Super Profit x No. of years of Purchase
= Rs. 1,50,000 x 2 = Rs. 3,00,000.
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