Question

A and B are partners sharing profits and losses in the ratio of 5 : 3. On 1st April, 2018, C is admitted to the partnership for 1/4th share of profits. For this purpose, goodwill is to be valued at two years purchase of last three years profits (after allowing partners remuneration). Profits to be weighted 1 : 2 : 3, the greatest weight being given to last year. Net profit before partners remuneration were: 2015-16: ₹ 2,00,000; 2016-17: ₹ 2,30,000; 2017 -2018: ₹ 2,50,000. The remuneration of the partners is estimated to be ₹ 90,000 p.a. Calculate amount of goodwill.

Answer 1

Explanation:

Working Notes:

Weighted Average Profit  = $\frac{Total Product of Profits}{Total of Weights}$

or,

Weighted Average Profit  = $\frac{8,70,000}{6}= 1,45,000$

Goodwill =  $Weighte Average Profit \times Number of years' purchase$

Goodwill  = $1,45,000 \times 2=22,90,000$