Question

Raman and Daman are partners sharing profits in the ratio of 60 : 40 and for the last four years they have been getting annual salaries of ₹ 50,000 and ₹ 40,000 respectively. The annual accounts have shown the following net profit before charging partners' salaries:
Year ended 31st March, 2017 − ₹ 1,40,000; 2018 − ₹ 1,01,000 and ​2019 − ₹ 1,30,000.
​On 1st April, 2019, Zeenu is admitted to the partnership for 1/4th share in profit (without any salary). Goodwill is to be valued at four years' purchase of weighted average profit of last three years (after partners' salaries); Profits to be weighted as 1 : 2 : 3, the greatest weight being given to the last year. Calculate the value of Goodwill.

Answer 1

Year	Profits before charging Salary (₹)	Profits after charging Salary (₹)	Weights	Weighted Profits (₹)
31st March, 2017	1,40,000	1,40,000- 90,000= 50,000	1	50,000
31st March, 2018	1,01,000	1,01,000- 90,000= 11,000	2	22,000
31st March, 2019	1,30,000	1,30,000- 90,000= 40,000	3	1,20,000
Total			6	1,92,000

$$\begin{gathered} \mathrm{Weighted}\mathrm{Average}\mathrm{Profits}=\left(\frac{\mathrm{Total}\mathrm{of}\mathrm{Weighted}\mathrm{Profits}}{\mathrm{Total}\mathrm{Weights}}\right)=₹\left(\frac{1,92,000}{6}\right)=₹32,000 \\ \mathrm{Goodwill}=\mathrm{Weighted}\mathrm{Average}\mathrm{Profits}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{Purchase} \\ =₹(32,000\times 4)=₹1,28,000 \end{gathered}$$​