Rita and Mohit were partners in a firm sharing profits and losses in the ratio of 7:3. Their capitals were Rs 7,00,000 and Rs 3,00,000 respectively. The normal rate of return was 10%.
The profits of the last four years were:
Year Profit (Rs) 2021-22 3,30,000 2022-23 4,00,000 2023-24 (70,000) 2024-25 5,00,000
The closing stock for the year 2024-25 was undervalued by Rs 40,000. Goodwill is to be valued at two years' purchase of last four years' average super profits. Calculate the value of goodwill of the firm.
Rita and Mohit were partners in a firm sharing profits and losses in the ratio of 7:3. Their capitals were Rs 7,00,000 and Rs 3,00,000 respectively. The normal rate of return was 10%.
The profits of the last four years were:
| Year | Profit (Rs) |
| 2021-22 | 3,30,000 |
| 2022-23 | 4,00,000 |
| 2023-24 | (70,000) |
| 2024-25 | 5,00,000 |
The closing stock for the year 2024-25 was undervalued by Rs 40,000. Goodwill is to be valued at two years' purchase of last four years' average super profits. Calculate the value of goodwill of the firm.
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Solution and Explanation
Goodwill is valued at 2 years purchase of the average super profit. Super profit = Average profit - Normal profit.
Normal profit is the normal rate of return on the capital employed. The profit of the last year must first be corrected.
Step 2: Correct the profit of 2024-25:
Closing stock was undervalued by Rs. 40,000. Undervaluation of closing stock lowers the profit of that year.
So the correct profit is Rs. 5,00,000 + Rs. 40,000 = Rs. 5,40,000.
Step 3: Find the average profit:
Profits to be taken: 3,30,000, 4,00,000, a loss of 70,000 and 5,40,000.
Total profit = 3,30,000 + 4,00,000 + (70,000) + 5,40,000 = Rs. 12,00,000.
Average profit = Rs. 12,00,000 / 4 = Rs. 3,00,000.
Step 4: Find the capital employed:
Capital employed = Rs. 7,00,000 + Rs. 3,00,000 = Rs. 10,00,000.
Step 5: Find the normal profit:
Normal profit = Rs. 10,00,000 x 10/100 = Rs. 1,00,000.
Step 6: Find the super profit:
Super profit = Rs. 3,00,000 - Rs. 1,00,000 = Rs. 2,00,000.
Step 7: Find the goodwill:
Goodwill = Rs. 2,00,000 x 2 = Rs. 4,00,000.
| Item | Amount (Rs.) |
|---|---|
| Average profit | 3,00,000 |
| Less: Normal profit | 1,00,000 |
| Super profit | 2,00,000 |
| Goodwill (2,00,000 x 2) | 4,00,000 |
Final Answer:
The value of goodwill of the firm is Rs. 4,00,000.
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