Question

The Capital of the firm of Ravi and Harish is Rs. 20,00,000 and the market rate of interest is 15%. Annual salary to the partners is Rs. 1,20,000 each. The profit for the last three years were Rs. 6,00,000, Rs. 7,20,000 and Rs. 8,40,000. Goodwill of the firm is to be valued on the basis of two years’ purchase of last three years average super profit. Calculate the goodwill of the firm.​

Answer 1

Given data:

• Ravi and Harish are partners in a firm, having capitals of Rs 20,00,000.
• The market rate is 15%.
• The annual salary to each partner is Rs 1,20,000.
• The profit for the last 3 years were Rs 6,00,000, Rs 7,20,000 and Rs 8,40,000.
• The goodwill of the firm is to be valued at 2 years' purchase of the super profit.

To find: The value of goodwill.

Answer:

Average profit = (Total profit - Annual salary) ÷ Number of years

Average profit = (Rs 6,00,000 + Rs 7,20,000 + Rs 8,40,000 - [Rs 1,20,000 × 2, ∵ there are 2 partners]) ÷ 3

Average profit = Rs 6,40,000

Normal profit = Capital employed × Market rate

Normal profit = (Rs 20,00,000 × 15) ÷ 100

Normal profit = Rs 3,00,000

Super profit = Average profit - Normal profit

Super profit = Rs 6,40,000 - Rs 3,00,000

Super profit = Rs 3,40,000

Goodwill = Super profit × Number of years' purchase

Goodwill = Rs 3,40,000 × 2

Goodwill = Rs 6,80,000

Therefore, the goodwill on the basis of 2 years' purchase of the last 3 years' average super profit is Rs 6,80,000.