Question

X and Y are partners sharing profits and losses in the ratio of 3 : 2. They admit Z into partnership for 1/4th share in goodwill. Z brings in his share of goodwill in cash. Goodwill for this purpose is to be calculated at two years purchase of the average normal profit of past three years. Profits of the last three years ended 31st March, were:
2016 – Profit ₹ 50,000 (including profit on sale of assets ₹5,000).
2017 – Loss ₹ 20,000 (includes loss by fire ₹ 30,000).
2018 – Profit ₹ 70,000 (including insurance claim received ₹ 18,000 and interest on investments and Dividend received ₹ 8,000).
Calculate value of goodwill. Also, calculate goodwill brought in by Z.

Answer 1

Explanation:

Working Notes:

Goodwill  = $Normal Average Profit \times Number of years' of purchase$

Goodwill = $33,000 \times 2=66,000$

$Z's Share of Goodwill = Goodwill of the Firm \times Z's Share of Profit =66,000 \times \frac{1}{4}=\mathbf{} 16,500$

$\begin{aligned}\text { Normal Average Profit } &=\frac{\text { Normal Profit for last } 3 \text { years }}{3} \\&=\frac{99,000}{3} = 33,000\end{aligned}$