Question

A partnership firm earned net profit during the past three years as follows:

year ended	${31}^{st}$March,2018	${31}^{st}$March,2017	${31}^{st}$March,2016
Net Profit(Rs.)	$2,30,000$	$2,00,000$	$1,70,000$

Capital investment in the firm throughout the above mentioned period has been Rs. $4,00,000$. Having regard to the risk involved, $15$ is considered to be return on the capital. The remuneration of the partners during this period estimated to be Rs. $1,00,000$p.a
Calculate value of goodwill on the basis of two years purchase of average super profit earned during the above mentioned three years.

Answer 1

Step 1: Calculation of Normal profit:

Normal Profit = Capital employed*[ Normal rate of return/100]

= 400000 *[15/100]

= 60000

Step 2: Calculation of Average Profit

2016-- 170000-100000= 70000

2017-- 200000-100000= 100000

2018-- 230000-100000= 130000

Hence, Average Profit= [130000+100000+70000]/3

= 100000

Step 3: Calculation of Super Profit:

Super Profit = Average profit - Normal Profit

Super Profit= 100000-60000

= 40000

Step 4: Calculation of Goodwill:

Goodwill= 40000* 2

= 80000