Question

Rajan and Rajani are partners in a firm. Their capitals were : Rajan Rs 3,00,000; Rajani Rs 2,00,000. During the year ended 31st March, 2016 the firm earned a profit of Rs 1,50,000. Calculate the value of goodwill of the firm on the basis of capitalisation of profits assuming that the normal rate of return is 20%.

Answer 1

Capitalised Value of Average Profits = Average Profits $\times \frac{100}{\text{Normal Rate of Return}}$

$=1,50,000\times \frac{100}{20}=Rs7,50,000$

Capital Employed = 3,00,000 + 2,00,000 = Rs 5,00,000

Goodwill = Capitalised Value of Average Profits - Capital Employed

= Rs 7,50,000 - Rs 5,00,000 =Rs 2,50,000.