Question

A and B are partners sharing profits in the ratio of 3 : 2. They decided to admit C as a partner from 1st April, 2018 on the following terms:
(i) C will be given 2/5th share of the profit.
(ii) Goodwill of the firm be valued at two years purchase of three years normal average profit of the firm.
profits of the previous three years ended 31st March, were:
2018 – Profit ₹ 30,000 ( after debiting loss of stock by fire ₹ 40,000).
2017 – Loss ₹ 80,000 (includes voluntary retirement compensation paid ₹ 1,10,000).
2016 – Profit ₹ 1,10,000 (including a gain (profir) of ₹ 30,000 on the sale of fixed assets).
you are required to value the goodwell.

Answer 1

Explanation:

Working Notes:

Goodwill = $Normal Average Profit \times Number of years purchase$

Normal Average Profit = $60,000 Number of years purchase is 2$

∴$\text { Goodwill }=60,000 \times 2=z 1,20,000$

Normal Average Profit  = $\frac{\text { Normal Profit for last } 3 \text { years }}{3} =\frac{1,80,000}{3}$

= 60,000