A Partnership Firm Earned Net Profits During the Past Three Years As Follows :- Goodwill
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 partnership firm earned net profits during the past three years as follows:
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 :
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.
Year ended | 31st March, 2019 | 31st March, 2018 | 31st March, 2017 |
Net Profit (₹) | 2,30,000 | 2,00,000 | 1,70,000 |
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 :
Year | Profit before Partners’ Remuneration | – | Partners’ Remuneration | Actual Profit after Remuneration |
2017 | 1,70,000 | – | 1,00,000 | 70,000 |
2018 | 2,00,000 | – | 1,00,000 | 1,00,000 |
2019 | 2,30,000 | – | 1,00,000 | 1,30,000 |
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.
Join the conversation