A Partnership Firm Earned Net Profits During the Past Three Years As Follows :- Goodwill

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


Year ended31st March, 201931st March, 201831st March, 2017
Net Profit (₹)2,30,0002,00,0001,70,000
Capital investment in the firm throughout the above-mentioned period has been ₹ 4,00,000. Having regard to the risk involved, 15% is considered to be a fair return on the capital. The remuneration of the partners during this period is estimated to be ₹ 1,00,000 p.a.
Calculate value of goodwill on the basis of two years’ purchase of average super profit earned during the above-mentioned three year.





Calculation For Actual Profit after Remuneration :

YearProfit before Partners’ RemunerationPartners’ RemunerationActual Profit after Remuneration
20171,70,0001,00,00070,000
20182,00,0001,00,0001,00,000
20192,30,0001,00,0001,30,000

Calculation For Normal Profit :

Normal Profit = Capital Investment x `"Normal Rate of Return"/100`

= Rs. 4,00,000 x `frac{15}{100}`

= Rs. 60,000

Calculation for Average Actual Profit Remuneration

= `frac{70,000+1,00,000+1,30,000}{3}`

= `frac{3,00,000}{3}`

= Rs. 1,00,000.

Super Profit = Average Actual Profit after Remuneration - Normal Profit

= Rs. (1,00,000 - 60,000)

= Rs. 40,000.


Goodwill = Rs. 40,000 `\times` 2

= Rs. 80,000.




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