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.

Answer 1

$$\begin{gathered} \mathrm{Average}\mathrm{Profits}=₹4,00,000 \\ \mathrm{Capital}\mathrm{Employed}=\mathrm{Total}\mathrm{Assets}-\mathrm{Fictitious}\mathrm{Assets}-\mathrm{Current}\mathrm{Liabilities}=₹(19,50,000-50,000-4,00,000)=₹15,00,000 \\ \mathrm{Normal}\mathrm{Profits}=\left(\mathrm{Capital}\mathrm{Employed}\times \frac{\mathrm{Normal}\mathrm{Rate}\mathrm{of}\mathrm{Return}}{100}\right)=₹\left(15,00,000\times \frac{15}{100}\right)=₹2,25,000 \\ \mathrm{Super}\mathrm{Profits}=\mathrm{Average}\mathrm{Profits}-\mathrm{Normal}\mathrm{Profits}=₹(4,00,000-2,25,000)=₹1,75,000 \\ \mathrm{Goodwill}=\mathrm{Super}\mathrm{Profits}\times \mathrm{No}.\mathrm{of}\mathrm{Years}\mathrm{of}\mathrm{Purchase}=₹(1,75,000\times 4)=₹7,00,000 \end{gathered}$$