(Super profit Method when Past Adjustments are Made).
Alok and Aakash are partners in M/s Mega Enterprises . They admit Ashish as partner w.e.f. 1st April, 2019. They agreed to value goodwill at 3 years' purchase by Super Profit Method for which they decided to take average fo last 5 years profits. The profits for the last five years were:
`{:("Year Ended",,"Rs.",,),("31st March, 2015",,"2,00,000",,"(Including gain of Rs. 25,000 from sale of fixed asset),"),("31st March, 2016",,"1,70,000",,"(Including abnormal loss of Rs. 50,000),"),("31st March, 2017",,"2,10,000,",,),("31st March, 2018",,"2,30,000,",,),("31st March, 2019",,"2,50,000".,,):}`
Capital employed in the firm is Rs. 15,00,000 and normal rate of return in similar business is `10%` . Calculate value of goodwill.
Answers
Answer:
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Solution!!
Let's calculate actual normal profit.
Year ended 31st March, 2015:-
Profit = 2,00,000
Adjustment = (25,000)
Normal Profit = Rs 1,75,000
Year ended 31st March, 2016:-
Profit = 1,70,000
Adjustment = 50,000
Normal Profit = Rs 2,20,000
Year ended 31st March, 2017:-
Profit = 2,10,000
Normal Profit = Rs 2,10,000
Year ended 31st March, 2018:-
Profit = 2,30,000
Normal Profit = Rs 2,30,000
Year ended 31st March, 2019:-
Profit = 2,50,000
Normal Profit = Rs 2,50,000
Total Normal Profit = Rs 10,85,000
Actual Average Profit = Total Normal Profit ÷ Number of years
Actual Average Profit = 10,85,000 ÷ 5
Actual Average Profit = Rs 2,17,000
Now, let's calculate Normal Profit and Super Profit.
Capital Employed = Rs 15,00,000
Normal Rate of Return = 10%
Normal Profit = 15,00,000 × 10/100 = Rs 1,50,000
Super Profit = Actual Average Profit - Normal Profit
Super Profit = 2,17,000 - 1,50,000
Super Profit = Rs 67,000
Goodwill = Super Profit × Number of years' purchase
Goodwill = 67,000 × 3
Goodwill = Rs 2,01,000