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Question
Ayub and Amit are partners in a firm and they admit Jaspal into partnership w.e.f. 1st April, 2019. They agreed to value goodwill at 3 years' purchase of Super Profit Method for which they decided to average profit of last 5 years. The profits for the last 5 years were:
| Year Ended | Net Profit (₹) | |
| 31st March, 2015 | 1,50,000 | |
| 31st March, 2016 | 1,80,000 | |
| 31st March, 2017 | 1,00,000 | (Including abnormal loss of ₹ 1,00,000) |
| 31st March, 2018 | 2,60,000 | (Including abnormal gain (profit) of ₹ 40,000) |
| 31st March, 2019 | 2,40,000 |
The firm has total assets of ₹ 20,00,000 and Outside Liabilities of ₹ 5,00,000 as on that date. Normal Rate of Return in similar business is 10%. Calculate value of goodwill.
Solution
Goodwill = Super Profit x No. of Years' Purchase
= 48,000 x 3 = Rs. 1,44,000.
Working Notes:
WN: 1 Calculation of Normal Profits:
|
Year |
Profit/(Loss) (Rs) |
Adjustment |
Normal Profit (₹) |
|
31 March, 2015 |
1,50,000 |
- |
1,50,000 |
|
31 March, 2016 |
1,80,000 |
- |
1,80,000 |
|
31 March, 2017 |
1,00,000 |
1,00,000 |
2,00,000 |
|
31 March, 2018 |
2,60,000 |
(40.000) |
2,20,000 |
|
31 March, 2019 |
2,40,000 |
- |
2,40,000 |
|
|
|
Total Profit |
9,90,000 |
WN2: Calculation of Super Profits
table attributes columnalign left end attributes row cell text Average Profit end text equals fraction numerator text Total Profit of past given years end text over denominator text Number of Years end text end fraction end cell row cell text end text equals fraction numerator 9 comma 90 comma 000 over denominator 5 end fraction equals text ₹ 1,98,000 end text end cell row cell text Normal Profit end text equals text Capital Employed end text cross times fraction numerator text Normal Rate of Return end text over denominator 100 end fraction end cell row cell text end text equals text 15,00,000 end text cross times 10 over 100 equals text ₹ 1,50,000 end text end cell row cell text Super Profit end text equals text Average Profit end text minus text Normal Profit end text end cell row cell text end text equals text 1,98,000 end text minus text 1,50,000 end text equals text ₹ 48,000 end text end cell end table.
WN3: Calculation of Capital Employed
Capital Employed = Total Assets - Outside Liabilities
= 20,00,000 - 5,00,000 = Rs. 15,00,000.
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