Question

A partnership firm earned net profits during the last three years ended 31st March, as follows: 2016 – ₹ 17,000; 2017 – ₹ 20,000; 2018 – ₹ 23,000.
The capital investment in the firm throughout the above-mentioned period has been ₹ 80,000. Having regard to the risk involved, 15% is considered to be a fair return on the capital. Calculate value of goodwill on the basis of two years purchase of average super profit earned during the above-mentioned three years.

Answer 1

Solution:

Goodwill = Super Profit x Number of Years Purchase

Average Actual Profit = $\frac{17, 000 + 20, 000+ 23, 000 }{60,000}$

                                    = 20,000  

Normal Profit= Capital Employed x  $\frac{Fair Rate Return}{100}$

                    = 80, 000 x $\frac{15}{100}$  

                   =12,000  

Super Profit  = Average Actual Profit - Normal Profit

                     = 20,000- 12, 000

                     = 8,000

Number of years purchase = 2  

Super profit = 8000

∴ Goodwill = Super profit x Number of years purchase

∴ Goodwill = 8000 * 2 = 16,000