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.
Answers
Answered by
2
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.
Similar questions