Question

Sara, Tara and Zara are partners in a firm sharing profits and losses in the ratio of 3 : 2 : 1. They decide to take Dara into partnership from 1st April, 2019 for 1/4th share in the profits. For this purpose, goodwill is to be valued at twice the average annual profit of the previous three or four years, whichever is higher.
The annual profits for the purpose of goodwill for the past four years were:
`{:("Year Ended",,"Rs."),("31st March, 2019",," 48,000,"),("31st March, 2018",," 30,000,"),("31st March, 2017",," 31,200,"),("31st March, 2016",," 42,000".):}`
Calculate value of goodwill.

Answer 1

Given:

• Sara, Tara and Zara are partners in a firm, sharing profits and losses in the ratio 3:2:1.
• Dara is admitted into the firm for 1/4th share of profits.
• The goodwill is to be valued at 2 times the average profit of the previous 3 or 4 years, whichever is higher.
• The profits for the last 4 years were Rs 48,000, Rs 30,000, Rs 31,200 and Rs 42,000.

To find: The value of goodwill.

Answer:

Calculation of the average profit for the last 3 years:

Average profit = Total profit ÷ Number of years

• Total profit = Rs 48,000 + Rs 30,000 + Rs 31,200 = Rs 1,09,200
• Number of years = 3

Average profit = Rs 1,09,200 ÷ 3

Average profit = Rs 36,400

Calculation of the average profit for the last 4 years:

Average profit = Total profit ÷ Number of years

• Total profit = Rs 48,000 + Rs 30,000 + Rs 31,200 + Rs 42,000 = Rs 1,51,200
• Number of years = 4

Average profit = Rs 1,51,200 ÷ 4

Average profit = Rs 37,800

Since the average profit of the last 4 years is higher, the goodwill will be calculated based on it.

Goodwill = Average profit × Number of years' purchase

Goodwill = Rs 37,800 × 2

Goodwill = Rs 75,600

Therefore, the value of goodwill is Rs 75,600.