Jeevan and Kavi were partners in a firm with capitals of ₹12,00,000 and ₹15,00,000 respectively. Annual salary of the partners was ₹2,00,000 each. The market rate of interest was 10%. During the previous three years the profits were ₹8,00,000, ₹9,00,000 and ₹7,00,000. The goodwill of the firm is to be valued at 2 years’ purchase of the last 3 years’ average super profits.
Calculate the goodwill of the firm.
Calculate the goodwill of the firm.
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Solution and Explanation
Total profit of 3 years = ₹8,00,000 + ₹9,00,000 + ₹7,00,000 = ₹24,00,000
Average profit = ₹24,00,000 $\div$ 3 = ₹8,00,000
Step 2: Calculate normal profit
Capital employed = ₹12,00,000 + ₹15,00,000 = ₹27,00,000
Normal rate of return = 10%
Normal profit = ₹27,00,000 × 10% = ₹2,70,000
Step 3: Adjust for partner’s salaries
Total salaries = ₹2,00,000 + ₹2,00,000 = ₹4,00,000
Normal profit after salary = ₹2,70,000 + ₹4,00,000 = ₹6,70,000
Step 4: Calculate super profit
Super profit = Average profit – Normal profit
$\Rightarrow$ Super profit = ₹8,00,000 – ₹6,70,000 = ₹1,30,000
Step 5: Calculate goodwill
Goodwill = Super profit × Number of years’ purchase
$\Rightarrow$ Goodwill = ₹1,30,000 × 2 = ₹2,60,000
Top Questions on Goodwill Valuation
Asha, Ashish and Naman were partners in a firm sharing profits and losses in the ratio of 2 : 5 : 3. The firm closes its books on 31st March every year. On 31st December, 2024 Ashish died. On the date of his death, there was a balance of ₹3,00,000 in his capital account and ₹2,00,000 in General Reserve.
The partnership deed provided that on the death of a partner, his representatives will be entitled to the following:
(i) Balance in the capital account and interest on the same @ 10% p.a.
(ii) His share in the goodwill of the firm. The goodwill of the firm on Ashish’s death was valued at ₹6,00,000.
(iii) His share in the profits of the firm to be calculated on the basis of previous year’s profit. The profit of the firm for the year ended 31st March, 2024 was ₹3,60,000.
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On 31st March, 2024 their Balance Sheet was as follows:
Balance Sheet of Mita and Vihaan as at 31st March, 2024
Liabilities Amount (₹) Assets Amount (₹) Sundry Creditors 2,00,000 Cash 50,000 Capitals: Sundry Debtors 2,00,000 Mita 4,00,000 Less: Provision for Doubtful Debts (7,000) Vihaan 3,00,000 1,93,000 Stock 2,50,000 Plant and Machinery 3,50,000 Patents 57,000 Total 9,00,000 Total 9,00,000 On the above date, Zen was admitted as a new partner for 4/15 share in the profits on the following terms:
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- Stock will be valued at ₹2,00,000, plant and machinery at ₹4,00,000 and patents at ₹1,20,000.
- There was a bill of ₹30,000 for goods purchased which was omitted from the books.
Pass necessary journal entries for the above transactions in the books of the firm on Zen’s admission
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