Question

A, B and C share profits in the ratio 14:5:6. The goodwill of the firm is valued at 2 years' purchase of average profits of last 3 years. The profits of last 3 years are : Rs. 50,000; Rs. 55,000; Rs. 60,000. Calculate the value of goodwill.

• A. None of the above
• B. Goodwill Account is credited with the difference of its current value over the book value and all partners’ capital accounts are debited in their old profit sharing ratio
• C. Goodwill Account is debited with the difference of its current value over the book value and all partners’ capital accounts are credited in their new profit sharing ratio
• D. Goodwill Account is debited with the difference of its current value over the book value and all partners’ capital accounts are credited in their old profit sharing ratio

Answer 1

The correct option is B

Goodwill Account is credited with the difference of its current value over the book value and all partners’ capital accounts are debited in their old profit sharing ratio

Average Profits = (50,000 + 55,000 + 60,000) / 3 = Rs 55,000
Goodwill = 2 $\times$ Rs 55,000 =Rs 1,10,000