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.
Top Questions on Goodwill
- 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
Chandan retired from the firm on 1st April, 2024 on the following terms:Liabilities Amount (₹) Assets Amount (₹) Capitals: Fixed Assets 27,00,000 Chandan 7,00,000 Stock 3,00,000 Deepak 5,00,000 Debtors 2,00,000 Elvish 3,00,000 Cash 1,00,000 General Reserve 4,50,000 Creditors 13,50,000 Total 33,00,000 Total 33,00,000
[(i)] Fixed assets were to be depreciated by 10%.
[(ii)] Debtors of ₹ 30,000 were to be written off as bad debts.
[(iii)] Goodwill of the firm was valued at ₹ 6,00,000 and the retiring partner’s share is adjusted through the capital accounts of the remaining partners.
[(iv)] Chandan was paid through cash brought in by Deepak and Elvish in such a way so as to make their capitals proportionate to their new profit sharing ratio. Prepare Revaluation Account and Partners’ Capital Accounts. - The capital of the firm of Rajat and Karan is ₹ 15,00,000 and the market rate of interest is 12%. Annual salary of Rajat and Karan is ₹ 20,000 and ₹ 30,000 respectively. The profits for the last three years were ₹ 2,40,000, ₹ 2,80,000 and ₹ 3,20,000. Goodwill of the firm is to be valued on the basis of two years’ purchase of last three years’ average super profits. Calculate the goodwill of the firm.
- Which of the following is not the main factor affecting the value of Goodwill?
- Write any two factors affecting Goodwill.
- Define Goodwill.
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