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Question

​ Varuna and Karuna are partners for equal shares. They admit Lata into partnership for 1/4th share. It was agreed to value goodwill of the firm at 4 years' purchase of super profit. Normal rate of return is 15% of the capital employed. Average profit of the firm is ₹ 4,00,000. Balance Sheet of the firm as at 31st March, 2019 was as follows:
Liabilities Amount
(₹)
Assets Amount
​(₹)
Capital A/cs: Furniture 4,00,000
Varuna 5,00,000 Computers 3,00,000
Karuna 5,00,000 10,00,000 Electrical Fittings 1,00,000
Long-term Loan 5,50,000 Investments (Trade) 2,00,000
Sundry Creditors 2,00,000 Stock 3,00,000
Outstanding Expenses 50,000 Sundry Debtors 3,00,000
Advances from Customers 1,50,000 Bills Receivable 50,000
Cash in Hand 50,000
Cash at Bank 2,00,000
Deferred Revenue Expenditure:
Advertisement Suspense 50,000
19,50,000 19,50,000

​Calculate the value of goodwill.

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Solution

Average Profits=4,00,000Capital Employed=Total Assets-Fictitious Assets-Current Liabilities=(19,50,000-50,000-4,00,000)=15,00,000Normal Profits=Capital Employed×Normal Rate of Return100=15,00,000×15100=2,25,000Super Profits=Average Profits - Normal Profits=(4,00,000-2,25,000)=1,75,000Goodwill=Super Profits×No. of Years of Purchase=(1,75,000×4)=7,00,000

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