Question

A partnership firm earned net profits during the last three years as follows: 

The capital employed in the firm throughout the above period was ₹8,00,000. Considering the risk involved, 15% is regarded as a fair return on capital. The remuneration of all the partners during this period is estimated at ₹2,00,000 per annum. Calculate the value of Goodwill on the basis of Super Profit Method (3 years’ purchase).

Hint:

Super Profit = Adjusted Average Profit − Normal Profit, Goodwill = Super Profit × Number of years’ purchase.

Answer 1

Step 1: Calculate Average Profit \[ \text{Average Profit} = \frac{3,80,000 + 4,40,000 + 5,00,000}{3} = ₹4,40,000 \] Step 2: Calculate Adjusted Average Profit \[ \text{Adjusted Profit} = 4,40,000 - 2,00,000 = ₹2,40,000 \] Step 3: Calculate Normal Profit \[ \text{Normal Profit} = 8,00,000 \times \frac{15}{100} = ₹1,20,000 \] Step 4: Calculate Super Profit \[ \text{Super Profit} = 2,40,000 - 1,20,000 = ₹1,20,000 \] Step 5: Calculate Goodwill \[ \text{Goodwill} = 1,20,000 \times 3 = ₹3,60,000 \]