Geet and Meet are Partners In a Firm. They Admit Jeet Into Partnership For Equal Share :- Accountancy

Geet and Meet are partners in a firm. They admit Jeet into partnership for equal share. It was agreed that goodwill will be valued at three years’ purchase of average profit of last five years. Profits for the last five years were:​

Year Ended	31st March, 2015	31st March, 2016	31st March, 2017	31st March, 2018	31st March, 2019
Profits (₹)	90,000 (Loss)	1,60,000	1,50,000	65,000	1,77,000

Books of Account of the firm revealed that:
(i) The firm had gain (profit) of ₹ 50,000 from sale of machinery sold in the year ended 31st March, 2016. The gain (profit) was credited in Profit and Loss Account.
(ii) There was an abnormal loss of ​₹ 20,000 incurred in the year ended 31st March, 2017 because of a machine becoming obsolete in accident.
(iii) Overhauling cost of second hand machinery purchased on 1st July, 2017 amounting to ₹ 1,00,000 was debited to Repairs Account. Depreciation is charged @ 20% p.a. on Written Down Value Method.
Calculate the value of goodwill.

Calculation for Normal Profit

Particulars	31st Mar., 2015	31st Mar., 2016	31st Mar., 2017	31st Mar., 2018	31st Mar., 2019
Profit/Loss	(90,000)	1,60,000	1,50,000	65,000	1,77,000
Less: Gain on Sale of Machinery		50,000
Add: Abnormal Loss			20,000
Add: Overhaul of existing machinery
Debited to Repairs A/c				1,00,000
Less: Depreciation @20% p.a.				15,000	17,000
Normal Profit/Loss	(90,000)	1,10,000	1,70,000	1,50,000	1,60,000

Average Profits

= `("Normal Profits for the year ended 31st March , 2015 to 31st March , 2019"/5)`

= `([ -90,000 + 1,10,000 + 1,70,000 + 1,50,000 + 1,60,000]/5)`

= Rs. 1,00,000.

Goodwill = Average Profits of last years ❌ No. of years Purchase

Goodwill = Rs. 1,00,000 ❌ 3

= Rs. 3,00,000.

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

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