Question

From the following information determine the value of goodwill of partnership firm of three years purchase. Year 2016-17 2012-13 2015-16 2013-14 2014-15 Profit 90000 45000 75000 50000 65000​

Answer 1

Answer:

(i) 3 Years' purchase of Average Profit method:

Step 1: Calculation of Average Profit:

Average Profit=[(200000-100000)+(180000-100000)+(160000-100000)]/3

= 80000

Step 2: Calculation of Goodwill:

Goodwill= 80000 * 3

= 240000

(ii) 3 Years' purchase of Super Profit method:

Step 1: Calculation of Capital Employed:

Capital Employed= total assets- external liabilities

= 700000-100000

= 600000

Step 2: Calculation of Normal Profit:

Normal Profit= 600000* [10/100]

= 60000

Step 3: Calculation of Average Profit:

Average Profit=[(200000-100000)+(180000-100000)+(160000-100000)]/3

= 80000

Step 4: Calculation of Super Profit:

Super Profit= 80000-60000

= 20000

Step 5: Calculation of goodwill:

Goodwill= 20000 * 3

= 60000

(iii) Capitalisation of Super Profit Method:

Step 1: Calculation of Capital Employed:

Capital Employed= total assets- external liabilities

= 700000-100000

= 600000

Step 2: Calculation of Normal Profit:

Normal Profit= 600000* [10/100]

= 60000

Step 3: Calculation of Average Profit:

Average Profit=[(200000-100000)+(180000-100000)+(160000-100000)]/3

= 80000

Step 4: Calculation of Super Profit:

Super Profit= 80000-60000

= 20000

Step 5: Calculation of goodwill:

Goodwill= Super Profit * [100/Normal Rate of return]

= 20000*[100/10]

= 200000

(iv) Capitalisation of Average Profit method:

Step 1: Calculation of Average Profit:

Average Profit=[(200000-100000)+(180000-100000)+(160000-100000)]/3

= 80000

Step 2: Calculation of capitalised value of profit:

Capitalised value of profit= 80000*[100/10]

= 800000

Step 3: Calculation of Capital Employed:

Capital Employed= total assets- external liabilities

= 700000-100000

= 600000

Step 4: Calculation of goodwill:

Goodwill= 800000-600000

1. = 200000