Question

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

Answer 1

Step 1: Calculation of Average Profit:

2016: 110000-30000= 80000

2017: (80000)+110000= 30000

2018: 30000+40000=70000

Average Profit= [80000+30000+70000]/ 3

= 60000

Step 2: Calculation of Goodwill:

Goodwill= 60000* 2

= 120000