Question

Uma and Veena were partners in a firm sharing profits and losses in the ratio of 4 : 5. On 1st April, 2024 they decided to admit Usha as a new partner for $\dfrac{1}{4}$ share in the profits of the firm. On Usha’s admission it was decided that the goodwill of the firm will be valued equal to the previous year’s profit. The profit for the year ended 31st March, 2024 was ₹5,76,000. However, to arrive at this profit, both the opening stock and closing stock were overvalued by ₹50,000. The goodwill of the firm will be:

• A. ₹5,76,000
• B. ₹6,76,000
• C. ₹4,76,000
• D. ₹7,76,000

Hint:

When both opening and closing stock are overvalued, subtract the total overstatement from net profit to find the true profit for goodwill calculation.

Answer 1

The Correct Option is C

The goodwill of the firm is to be valued based on the adjusted profit of the previous year.
Given profit for the year ended 31st March, 2024 = ₹5,76,000

But both the opening and closing stock were overvalued by ₹50,000 each.
Effect of stock overvaluation:
- Opening stock overvalued $\Rightarrow$ Profit was overstated
- Closing stock overvalued $\Rightarrow$ Profit was also overstated
So total overstatement = ₹50,000 + ₹50,000 = ₹1,00,000

Adjusted Profit = Reported Profit – Overvaluation
$\Rightarrow$ Adjusted Profit = ₹5,76,000 – ₹1,00,000 = ₹4,76,000

Therefore, Goodwill of the firm = ₹4,76,000