Question

A and B are equal partners. They decide
to admit C for 1/3rd share. For the
purpose of admission of C, goodwill of
the firm is to be valued at four years
purchase of super profit. Average capital
employed in the firm is 1,50,000.
Normal rate of return may be taken as
15% p.a. Average profit of the firm is
40,000. Calculate value of goodwill.
​

Answer 1

Answer:

Partner = A and B

New Partner = C for $\frac{1}{3}$ share

Normal Profit = 0.15 x 150000

Normal Profit = 22500

Super Profit = Average Profit - Normal Profit

Super Profit = 40000-22500

Super Profit = 17500

Goodwill of the firm = 4 x Super Profit

= 4 x 17500

Goodwill = 70,000

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Answer 2

Information provided with us:

• A and B are equal partners
• They decided to admit C for 1/3rd share
• Goodwill of the firm is to be valued at four years
• Average capital employed in the firm is 1,50,000
• Normal rate of return is 15%
• Average profit is 40000

What we have to calculate:

• Value of goodwill?

Using Formulas:

• Normal profit = Capital employed × Normal rate of return / 100
• Super profit = Average profit - Normal profit
• Goodwill = Super Profit × No. of years purchased

Performing Calculations:

Finding out normal profit:-

• Putting the values of capital employed that is 1,50,000 and normal rate of return that is 15% in the formula of normal profit.

➺ Normal profit = 150000 × 15/100

➺ Normal profit = 1500 × 15

➺ Normal profit = 22500

Finding out super profit:-

• Putting the values of average profit that is 40000 and normal profit that is 22500 in the formula of calculating the super profit.

➺ Super profit = 40000 - 22500

➺ Super profit = 17500

Finding out goodwill:-

• Putting the values of no. of years purchased that is 4 and super profit that is 17500 in the formula of it.

➺ Goodwill = 17500 × 4

➺ Goodwill = 70000

• Henceforth, value of goodwill is 70000