Question

X and Y are partners sharing profits and losses in the ratio of 3 : 2. They admit Z into partnership for 1/4th share in goodwill. Z brings in his share of goodwill in cash. Goodwill for this purpose is to be calculated at two years' purchase of the average normal profit of past three years. Profits of the last three years ended 31st March, were:
2016 – Profit ₹ 50,000 (including profit on sale of assets ₹5,000).
2017 – Loss ₹ 20,000 (includes loss by fire ₹ 30,000)
2018 – Profit ₹ 70,000 (including insurance claim received ₹ 18,000 and interest on investments and Dividend received ₹ 8,000).
Calculate value of goodwill. Also, calculate goodwill brought in by Z.

Answer 1

Year	Actual Profit	+	Abnormal Loss Non-recurring	–	Abnormal Gain Non-recurring	=	Normal Profit
2016	50,000	+	Nil	–	5,000	=	45,000
2017	(20,000)	+	30,000	–	Nil	=	10,000
2018	70,000	+	Nil	–	18,000+8,000	=	44,000
Normal Profit for 3 Years							99,000

Number of years’ purchase = 2