Question

Ayub and Amit are partners in a firm and they admit Jaspal into partnership w. e. f. 1st April, 2018. They agreed to value goodwill at 3 years' purchase of Super Profit Method for which they decided to average profit of last 5 years. The profit for the last 5 years were:

Year Ended	Net Profit (₹)
31st March, 2014	1,50,000
31st March, 2015	1,80,000
31st March, 2016	1,00,000	( Including abnormal loss of ₹ 1,00,000)
31st March, 2017	2,60,000	(Including abnormal gain (profit) of ₹ 40,000)
31st March, 2018	2,40,000

The firm has total assets of ₹ 20,00,000 and Outside Liabilities of ₹ 5,00,000 as on that date. Normal Rate of Return in similar business is 10%.
Calculate value of goodwill.

Answer 1

$\begin{array}{l}\text{Goodwill}=\text{Super Profit}\times \text{No. of Years' Purchase}\\ =\text{48,000}\times 3=\text{Rs 1,44,000}\end{array}$

Working Notes:

WN: 1 Calculation of Normal Profits:

Year	Profit/(Loss) (Rs)	Adjustment	Normal Profit (Rs)
31 March, 2014	1,50,000	-	1,50,000
31 March, 2015	1,80,000	-	1,80,000
31 March, 2016	1,00,000	1,00,000	2,00,000
31 March, 2017	2,60,000	(40.000)	2,20,000
31 March, 2018	2,40,000	-	2,40,000
		Total Profit	9,90,000

WN2: Calculation of Super Profits

$\begin{array}{l}\text{Average Profit}=\frac{\text{Total Profit of past given years}}{\text{Number of Years}}\\ =\frac{9,90,000}{5}=\text{Rs 1,98,000}\\ \text{Normal Profit}=\text{Capital Employed}\times \frac{\text{Normal Rate of Return}}{100}\\ =\text{15,00,000}\times \frac{10}{100}=\text{Rs 1,50,000}\\ \text{Super Profit}=\text{Average Profit}-\text{Normal Profit}\\ =\text{1,98,000}-\text{1,50,000}=\text{Rs 48,000}\end{array}$

WN3: Calculation of Capital Employed

$\begin{array}{l}\text{Capital Employed}=\text{Total Assets}-\text{Outside Liabilities}\\ =\text{20,00,000}-\text{5,00,000}=\text{Rs 15,00,000}\end{array}$