Question:
The capital of the firm of Seema and Avi is ₹ 12,00,000 and the market rate of interest is 10%. Salary of each partner is ₹ 10,000 per annum. The profits for the last four years were ₹ 3,00,000, ₹ 4,00,000, ₹ 5,00,000 and ₹ 4,00,000 respectively. Goodwill of the firm is to be valued on the basis of three years purchase of last four years average super profits. Calculate the goodwill of the firm.
The capital of the firm of Seema and Avi is ₹ 12,00,000 and the market rate of interest is 10%. Salary of each partner is ₹ 10,000 per annum. The profits for the last four years were ₹ 3,00,000, ₹ 4,00,000, ₹ 5,00,000 and ₹ 4,00,000 respectively. Goodwill of the firm is to be valued on the basis of three years purchase of last four years average super profits. Calculate the goodwill of the firm.
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When calculating goodwill using the Super Profit Method, always deduct the normal profit from average profit. Salary is included in profit if not specified otherwise.
Updated On: Jul 4, 2025
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Solution and Explanation
Goodwill Valuation Using Super Profit Method
Step 1: Calculate Average Profit for Last 4 Years
₹ (3,00,000 + 4,00,000 + 5,00,000 + 4,00,000) ÷ 4 = ₹ 4,00,000
Step 2: Calculate Normal Profit
Capital Employed = ₹ 12,00,000
Normal Rate of Return = 10%
Normal Profit = 10% of ₹ 12,00,000 = ₹ 1,20,000
Step 3: Calculate Super Profit
Super Profit = Average Profit – Normal Profit = ₹ 4,00,000 – ₹ 1,20,000 = ₹ 2,80,000
Step 4: Calculate Goodwill
Goodwill = 3 × Super Profit = 3 × ₹ 2,80,000 = ₹ 8,40,000
Note: Partner salaries are already included in profit figures, so no further deduction is needed.
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