Question

Ajeet and Baljeet are partners in a firm. Their capitals are ₹ 9,00,000 and ₹ 6,00,000 respectively. During the year ended 31st March, 2019 the firm earned a profit of ₹ 4,50,000. Assuming that the normal rate of return is 20%, calculate value of goodwill of the firm:
(i) By Capitalisation Method; and
(ii) By Super Profit Method if the goodwill is valued at 2 years' purchase of super profit.

Answer 1

$$\begin{gathered} \mathrm{Capital}\mathrm{Employed}=(\mathrm{Total}\mathrm{Liabilities}-\mathrm{Current}\mathrm{Liabilities})=₹(9,00,000+6,00,000)=₹15,00,000 \\ \mathrm{Normal}\mathrm{Profits}=\left(\mathrm{Capital}\mathrm{Employed}\times \frac{\mathrm{Normal}\mathrm{Rate}\mathrm{of}\mathrm{Return}}{100}\right)=₹\left(15,00,000\times \frac{20}{100}\right)=₹3,00,000 \\ \mathrm{Average}\mathrm{Profits}=₹4,50,000 \\ \mathrm{Super}\mathrm{Profits}=\mathrm{Average}\mathrm{Profits}-\mathrm{Normal}\mathrm{Profits}=₹(4,50,000-3,00,000)=₹1,50,000 \\ \left(\mathrm{i}\right)\mathrm{As}\mathrm{per}\mathrm{Capitalisation}\mathrm{Method}, \\ \mathrm{Goodwill}=\left(\mathrm{Super}\mathrm{Profits}\times \frac{100}{\mathrm{Normal}\mathrm{Rate}\mathrm{of}\mathrm{Return}}\right)=₹\left(1,50,000\times \frac{100}{20}\right)=₹7,50,000 \\ \left(\mathrm{ii}\right)\mathrm{As}\mathrm{per}\mathrm{Super}\mathrm{Profit}\mathrm{Method}, \\ \mathrm{Goodwill}=\mathrm{Super}\mathrm{Profit}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{purchase}=₹(1,50,000\times 2)=₹3,00,000 \end{gathered}$$