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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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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(i) 4 years purchase of avg. profits
(ii) Super profit capitalisation @10% - Chandan, Deepak and Elvish were partners in a firm sharing profits and losses in the ratio of 1 : 2 : 2. Their Balance Sheet as at 31st March, 2024 stood as follows:
Balance Sheet of Chandan, Deepak and Elvish as at 31st March, 2024
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The profits of the last three years were ₹ 3,00,000, ₹ 2,60,000 and ₹ 4,00,000 respectively.
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