Question

A, B and C are the partners sharing profits in the ratio 7 : 5 : 4. C died on 30th June. It was decided to value the goodwill on the basis of three year's purchased of last five year average profits. If the Profits are Rs. 53,600; Rs. 57,400; Rs.57,800; Rs. 48,000 and Rs. 26,800. What will be C's share of goodwill?

• A. Rs. 9135
• B. Rs. 55,200
• C. Rs. 1,65,600
• D. Rs. 54,000

Answer 1

The correct option is A Rs. 9135

Goodwill is created in the ledger accounts, as it is an asset the opening entry in theGoodwill account is a debit. The credit entries for this are entered into the Capitalaccounts for the existing partners using the old profit sharing ratio.

calculation of C's share of goodwill:

(a) Average of last five year's profit and losses:

( Rs. 53,600; Rs. 57,400; Rs.57,800; Rs. 48,000 and Rs. 26,800)/5

= 243600/5

= Rs.48720

(b) Goodwill at 3 year's purchase = Average profit * Year's purchase

= Rs. 48720 * 3

= Rs. 146160

C's share of goodwill for the period of 3 months (April to june)

= Rs. 146160 * 3/12 * 4/16

= Rs. 9135