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Super Profit Method

A and B are e...

Question

A and B are equal partners. They decide to admit C for 1/3rd share. For the purpose of admission of C, goodwill of the firm is to be valued at four years' purchase of super profit. Average capital employed in the firm is ₹ 1,50,000. Normal rate of return may be taken as 15% p.a. Average profit of the firm is ₹ 40,000. Calculate value of goodwill.

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Solution

Number of years’ purchase = 4

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A

B

are equal partners. They decide to admit

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{\frac{1}{3}}^{r d}

share. for the purpose of admission of

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Q. Varuna and Karuna are partners for equal shares. They admit Lata into partnership for 1/4th share. It was agreed to value goodwill of the firm at 4 years' purchase of super profit. Normal rate of return is 15% of the capital employed. Average profit of the firm is ₹ 4,00,000. Balance Sheet of the firm as at 31st March, 2019 was as follows:


Liabilities		Amount (₹)	Assets	Amount (₹)
Capital A/cs:			Furniture	4,00,000
Varuna	5,00,000		Computers	3,00,000
Karuna	5,00,000	10,00,000	Electrical Fittings	1,00,000
Long-term Loan		5,50,000	Investments (Trade)	2,00,000
Sundry Creditors		2,00,000	Stock	3,00,000
Outstanding Expenses		50,000	Sundry Debtors	3,00,000
Advances from Customers		1,50,000	Bills Receivable	50,000
			Cash in Hand	50,000
			Cash at Bank	2,00,000
			Deferred Revenue Expenditure:
			Advertisement Suspense	50,000
		19,50,000		19,50,000

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Q. Capital of the firm of Sharma and Verma is ₹ 2,00,000 and the market rate of interest is 15%. Annual salary to partners is ₹ 12,000 each. The profits for the last three years were ₹ 60,000; ₹ 72,000 and ₹ 84,000. Goodwill is to be valued at 2 years' purchase of last 3 years' average super profit.
Calculate goodwill of the firm.

Q. Average net profit expected in future by XYZ firm is ₹ 36,000 per year. Average capital employed in the business by the firm is ₹ 2,00,000. The normal rate of return from capital invested in this class of business is 10%. Remuneration of the partners is estimated to be ₹ 6,000 p.a. Calculate the value of goodwill on the basis of two years' purchase of super profit.

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