Question

A and B are partners sharing profits in the ratio of 3 : 2. They decided to admit C as a partner from 1st April, 2018 on the following terms:
(i) C will be given 2/5th share of the profit.
(ii) Goodwill of the firm be valued at two years' purchase of three years' normal average profit of the firm.
profits of the previous three years ended 31st March, were:
2018 – Profit ₹ 30,000 ( after debiting loss of stock by fire ₹ 40,000).
2017 – Loss ₹ 80,000 (includes voluntary retirement compensation paid ₹ 1,10,000).
2016 – Profit ₹ 1,10,000 (including a gain (profir) of ₹ 30,000 on the sale of fixed assets).
you are required to value the goodwell.

Answer 1

Goodwill = Normal Average Profit × Number of years' purchase

Year	Actual Profit	+	Abnormal Loss Non-recurring	–	Abnormal Gain Non-recurring	=	Normal Profit
2018	30,000	+	40,000	–	Nil	=	70,000
2017	(80,000)	+	1,10,000	–	Nil	=	30,000
2016	1,10,000	+	Nil	–	30,000	=	80,000
Normal Profit for 3 Years							1,80,000

Number of years’ purchase is 2

Goodwill = 60,000 × 2 = Rs 1,20,000