Q. A and B are partners. They admit C for 1/4th share in profits. For this purpose goodwill is to be valued at three year's purchase of super profits.
Following information is provided to you:
A's Capital ₹5,00,000
B's Capital ₹4,00,000
General Reserve ₹1,50,000
Profit & Loss A/c (Cr.) ₹30,000
Sundry Assets ₹12,00,000
The normal rate of return is 15% p.a. Average Profits are ₹200000 per year. You are required to calculate C's share of goodwill.
Hint - Sundry Assets will be ignored.
Answers
Explanation:
capital employed
add: A's capital + B's capital + General Reserve + profit & loss a/c (Cr.)
=500000+400000+150000+30000
=1080000
normal profits=capital employed ×normal rate of return/100
normal profits = 1080000 × 15/100
=162000
super profits= average profits - normal profits
super profit = 200000 - 162000
=38000
goodwill = super profit × no. of years of purchase
=38000×3
=114000
C's share of goodwill = 114000×1/4
=28500 ans
C's share of goodwill is found to be, ₹ 28500.
Goodwill
Definition:
A goodwill asset is an intangible asset acquired when one company buys another.
Given:
A's Capital ₹5,00,000
B's Capital ₹4,00,000
General Reserve ₹1,50,000
Profit & Loss A/c (Cr.) ₹30,000
Sundry Assets ₹12,00,000
The normal rate of return is 15% p.a.
Average Profits are ₹200000 per year
Step By Step Explanation:
According to the question,
Step 1: Calculate the normal profit
Capital employed to partners,
A's capital + B's capital + General Reserve + profit & loss a/c.
normal profits = capital employed ×normal rate of return
normal profits
Step 2: Calculate the goodwill share of C.
super profits= average profits - normal profits
super profit
goodwill = super profit × no. of years of purchase
C's share of goodwill =114000× 1 / 4
Therefore, the goodwill share of C is ₹ 28500.
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