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Question

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:
31st March, 2018 − ₹ 2,00,000, 31st March, 2017 − ₹ 1,80,000, and 31st March, 2016 − ₹ 1,60,000.
(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.

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Solution

(i) Goodwill=Average Profit×No. of years' purchase =80,000×3=Rs 2,40,000

(ii) Goodwill=Super Profit×No. of years' purchase =20,000×3=Rs 60,000

(iii) Goodwill=Super Profit×100Normal Rate of Return =20,000×10010=Rs 2,00,000

(iv) Goodwill=Capitalised Value-Net Assets =8,00,000-6,00,000=Rs 2,00,000

Working Notes:

WN1: Calculation of Average and Super Profits

Average Profit=Total Profits of past years givenNo. of Years=2,00,000+1,80,000+1,60,0003 =Rs 1,80,000, Average Profit (Adjusted) = Rs 1,80,000 - 1,00,000 (Remuneration to partners) = Rs 80,000Normal Profit=Capital Employed×Normal Rate of Return100 =6,00,000×10100=Rs 60,000Super Profit=Average Profit (Adjusted)-Normal Profit =80,000-60,000=Rs 20,000


WN2: Calculation of Capital Employed

Capital Employed=Total Assets-Outside Liabilities =7,00,000-1,00,000=Rs 6,00,000


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