Question

Aayush and Krish are partners sharing profits and losses equally. They decided to admit Vansh for an equal share in the profits. For this purpose, the goodwill of the firm was to be valued at four years purchase of super profits.
The balance sheet of the firm on 31.3.2023 before admission of Vansh was as follows: Balance Sheet of Aayush and Krish as on 31.3.2023 \begin{center} \begin{tabular}{|l|r|r|} Liabilities & Amount (\rupee) & Assets & Amount (\rupee)
Capitals: & & Machinery & 75,000
Aayush & 90,000 & Furniture & 15,000
Krish & 50,000 & Stock & 30,000
General Reserve & 20,000 & Debtors & 20,000
Loan & 25,000 & Cash & 50,000
Creditors & 5,000 & &
Total & 1,90,000 & Total & 1,90,000
\end{tabular} \end{center} The normal rate of return is 12\% per annum. Average profit of the firm for the last four years was \rupee 30,000. Calculate Vansh's share of Goodwill.

Hint:

Goodwill valuation based on super profits requires calculation of normal profit first. Subtract it from average profit to derive super profits, and then apply the years' purchase multiplier.

Answer 1

Step 1: Calculate normal profit:
Capital employed = \(\rupee 90,000 + \rupee 50,000 = \rupee 1,40,000\)
Normal profit = \(\rupee 1,40,000 \times \frac{12}{100} = \rupee 16,800\)
Step 2: Calculate super profit:
Super profit = Average profit - Normal profit
= \(\rupee 30,000 - \rupee 16,800 = \rupee 13,200\)
Step 3: Calculate goodwill:
Goodwill = Super profit \(\times\) Years' purchase
= \(\rupee 13,200 \times 4 = \rupee 52,800\)
Step 4: Calculate Vansh's share of goodwill:
Vansh's share = \(\frac{1}{3} \times \rupee 52,800 = \rupee 17,600\)