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Super Profit Method

A partnership...

Question

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

Year ended 31st March, 2019 31st March, 2018 31st March, 2017

Net Profit (₹) 2,30,000 2,00,000 1,70,000

Capital investment in the firm throughout the above-mentioned period has been ₹ 4,00,000. Having regard to the risk involved, 15% is considered to be a fair return on the capital. The remuneration of the partners during this period is estimated to be ₹ 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.

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Solution

Year

Profit before Partners’ Remuneration

–

Partners’ Remuneration

=

Actual Profit after Remuneration

2017

1,70,000

–

1,00,000

=

70,000

2018

2,00,000

–

1,00,000

=

1,00,000

2019

2,30,000

–

1,00,000

=

1,30,000

Number of years’ purchase = 2

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

year ended	$31^{s t}$ March,2018	$31^{s t}$ March,2017	$31^{s t}$ 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.

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Q. A partnership firm earned net profits during the last three years ended 31st March, as follows: 2017 − ₹ 17,000; 2018 − ₹ 20,000; 2019 − ₹ 23,000.
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Q. From the following information, calculate value of goodwill of the firm:
(i) At three years' purchase of Average Profit.
(ii) At three years' purchase of Super Profit.
(iii) On the basis of Capitalisation of Super Profit.
(iv) On the basis of Capitalisation of Average profit.
Information:
(a) Average Capital Employed is ₹ 6,00,000.
(b) Net Profit/(Loss) of the firm for the last three years ended are:
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(c) Normal Rate of Return in similar business is 10%.
(d) Remuneration of ₹ 1,00,000 to partners is to be taken as charge against profit.
(e) Assets of the firm (excluding goodwill, fictitious assets and non-trade investments) is ₹ 7,00,000 whereas Partners' Capital is ₹ 6,00,000 and Outside Liabilities ₹ 1,00,000.

Q. Profits of a firm for the year ended 31st March for the last five years were:

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Profit (₹)	20,000	24,000	30,000	25,000	18,000

Calculate value of goodwill on the basis of three years' purchase of Weighted Average Profit after assigning weights 1, 2, 3, 4 and 5 respectively to the profits for years ended 31st March, 2014, 2015, 2016, 2017 and 2018.

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