Question

Bhaskar and Pillai are partners sharing profits and losses in the ratio of 3 : 2. They admit Kanika into partnership for 1/4th share in profit. Kanika brings in her share of goodwill in cash. Goodwill for this purpose is to be calculated at two years' purchase of the average normal profit of past three years. Profits of the last three years ended 31st March, were:
2017 - Profit ₹ 50,000 (including profit on sale of assets ₹ 5,000).
2018 - Loss ₹ 20,000 (including loss by fire ₹ 30,000).
2019 - Profit ₹ 70,000 (including insurance claim received ₹ 18,000 and interest on investments and Dividend received ₹ 8,000).
​Calculate the value of goodwill. Also, calculate goodwill brought in by Kanika.

Answer 1

$\mathrm{Normal}\mathrm{Profits}\mathrm{for}\mathrm{the}\mathrm{year}\mathrm{ended}31\mathrm{st}\mathrm{March},2017=(\mathrm{Total}\mathrm{Profits}-\mathrm{Profit}\mathrm{on}\mathrm{Sale}\mathrm{of}\mathrm{Assets})=₹(50,000-5,000)=₹45,000$
$\mathrm{Normal}\mathrm{Profits}\mathrm{for}\mathrm{the}\mathrm{year}\mathrm{ended}31\mathrm{st}\mathrm{March},2018=(\mathrm{Loss}\mathrm{by}\mathrm{fire}-\mathrm{Total}\mathrm{Loss})=₹(20,000-30,000)=₹10,000$
$$\begin{gathered} \mathrm{Normal}\mathrm{Profit}\mathrm{for}\mathrm{the}\mathrm{year}\mathrm{ended}31\mathrm{st}\mathrm{March},2019=(\mathrm{Total}\mathrm{Profit}-\mathrm{Insurnace}\mathrm{Claim}\mathrm{Received}-\mathrm{Interest}\mathrm{on}\mathrm{Invetsment}-\mathrm{Dividend}\mathrm{Received}) \\ =₹(70,000-18,000-8,000)=₹44,000 \end{gathered}$$
$\mathrm{Average}\mathrm{Profits}=₹\left(\frac{\mathrm{Normal}\mathrm{Profits}\mathrm{from}\mathrm{the}\mathrm{year}\mathrm{ended}31\mathrm{st}\mathrm{March},2017\mathrm{to}31\mathrm{st}\mathrm{March},2019}{3}\right)=₹\left(\frac{45,000+10,000+44,000}{3}\right)=₹33,000$
$\mathrm{Goodwill}=\mathrm{Average}\mathrm{Profits}\mathrm{for}\mathrm{the}\mathrm{last}\mathrm{three}\mathrm{years}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{Purchase}=₹(33,000\times 2)=₹66,000$
$\mathrm{Kanika}\text{'}\mathrm{s}\mathrm{Share}\mathrm{of}\mathrm{Goodwill}=₹\left(66,000\times \frac{1}{4}\right)=₹16,500$