A Partnership Firm Earned Net Profits During The Last three Years Ended 31st March

A partnership firm earned net profits during the last three years ended 31st March, as follows: 2017 − ₹ 17,000; 2018 − ₹ 20,000; 2019 − ₹ 23,000.

The capital investment in the firm throughout the above-mentioned period has been ₹ 80,000. Having regard to the risk involved, 15% is considered to be a fair return on the capital. Calculate value of goodwill on the basis of two years' purchase of average super profit earned during the above-mentioned three years.

Average Actual Profit = `frac\{17,000+20,000+23,000}{3}`

= `frac\{60,000}{3}`

= Rs. 20,000.

Normal Profit = Capital Employed x `frac\{15}{100}`

= Rs. 80,000 x `frac\{15}{100}`

Super Profit = Average Profit - Normal Profit

= Rs. (20,000-12,000)

= Rs. 8,000.

Goodwill = Average Profits of last years `\times` No. of years Purchase

Goodwill = Rs. 8,000 `\times` 2

= Rs. 16,000.

Chapter-3 Goodwill: Nature and Valuation-TS.Grewal

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