Question

Rishi and Suman were partners in a firm. Their capitals were ₹ 1,20,000 and ₹ 80,000, respectively. The normal rate of return in similar business is 12\%. The profits of the last four years were: \[ \begin{array}{|c|c|} \hline Year & Profits (₹)
\hline 2019–20 & 33,000
2020–21 & 22,000
2021–22 & 31,000
2022–23 & 34,000
\hline \end{array} \] Calculate goodwill of the firm based on: (i) Three years’ purchase of the last four years’ average profits. (ii) Capitalisation of super profit.

Hint:

Goodwill can be calculated using various methods like average profits, super profits, or capitalization based on the firm’s profitability and normal return expectations.

Answer 1

1. Average Profit: \[ \text{Average Profit} = \frac{33,000 + 22,000 + 31,000 + 34,000}{4} = ₹ 30,000. \] 2. Goodwill (Three Years’ Purchase): \[ \text{Goodwill} = \text{Average Profit} \times 3 = ₹ 30,000 \times 3 = ₹ 90,000. \] 3. Normal Profit: \[ \text{Normal Profit} = \text{Capital Employed} \times \frac{\text{Normal Rate of Return}}{100}. \] Capital Employed = ₹ 1,20,000 + ₹ 80,000 = ₹ 2,00,000. \[ \text{Normal Profit} = ₹ 2,00,000 \times \frac{12}{100} = ₹ 24,000. \] 4. Super Profit: \[ \text{Super Profit} = \text{Average Profit} - \text{Normal Profit} = ₹ 30,000 - ₹ 24,000 = ₹ 6,000. \] 5. Goodwill (Capitalisation of Super Profit): \[ \text{Goodwill} = \text{Super Profit} \times \frac{100}{\text{Normal Rate of Return}} = ₹ 6,000 \times \frac{100}{12} = ₹ 50,000. \] Final Answers: (i) Goodwill (Three Years’ Purchase) = ₹ 90,000. (ii) Goodwill (Capitalisation of Super Profit) = ₹ 50,000.