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Question
If three partners A, B & C are sharing profits as 5:3:2, then on the death of a partner A, how much B & C will pay to A's executor on account of goodwill. Goodwill is to be calculated on the basis of 2 years' purchase of the last 3 years average profits. Profits for the last three years are: 6,58,000; 6,92,000; and 8,10,000.
If three partners A, B & C are sharing profits as 5:3:2, then on the death of a partner A, how much B & C will pay to A's executor on account of goodwill. Goodwill is to be calculated on the basis of 2 years' purchase of the last 3 years average profits. Profits for the last three years are: 6,58,000; 6,92,000; and 8,10,000.
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Solution
The correct option is A 4,32,000 & 2,88,000
Average profit = (6,58,000+6,92,000+8,10,000)/3 = 7,20,000
Goodwill = Average profit * No. of years' Purchase
= 7,20,000 * 2 = 14,40,000
A's share of goodwill = (5/10) * 14,40,000 = 7,20,000
A's share of goodwill is to be distributed between B & C in the ratio 3:2
B's = (3/5) * 7,20,000 = 4,32,000
C's = (2/5) * 7,20,000 = 2,88,000
4,32,000 and 2,88,000
4,32,000 & 2,88,000
Average profit = (6,58,000+6,92,000+8,10,000)/3 = 7,20,000
Goodwill = Average profit * No. of years' Purchase
= 7,20,000 * 2 = 14,40,000
A's share of goodwill = (5/10) * 14,40,000 = 7,20,000
A's share of goodwill is to be distributed between B & C in the ratio 3:2
B's = (3/5) * 7,20,000 = 4,32,000
C's = (2/5) * 7,20,000 = 2,88,000
4,32,000 and 2,88,000
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