Question

The capital of the firm of M and N is Rs. 1,00,000 and the market rate of interest is 15%. The annual salary to partners is Rs. 6,000 each. The profits for the last 3 years were Rs. 30,000 (for 2022); Rs. 36,000 (for 2023) and Rs. 42,000 (for 2024). Goodwill is to be valued at 2 years' purchase of the last 3 years' average super profits or 3 years' purchase of the last 2 years' average super profits, whichever is less. Calculate the goodwill of the firm.

• A. Rs. 36,000
• B. Rs. 30,000
• C. Rs. 24,000
• D. Rs. 18,000

Hint:

Deduct salary from profits, subtract normal profit, compute both values and take the lower.

Answer 1

The Correct Option is D

Step 1: Approach:
Take the normal profit and the partners' salary together as a yearly deduction, then work on the profit left.

Step 2: Yearly deduction:
Normal return is 15,000 and salaries total 12,000. The total deduction is 27,000 every year.

Step 3: Super profit by subtraction:
2022: 30,000 - 27,000 = 3,000. 2023: 36,000 - 27,000 = 9,000. 2024: 42,000 - 27,000 = 15,000.

Step 4: Total for the two rules:
Sum of 3 years = 27,000. So 2 years' purchase of the 3 year average = 2 x 27,000 / 3 = 18,000. Sum of last 2 years = 24,000. So 3 years' purchase of the 2 year average = 3 x 24,000 / 2 = 36,000.

Step 5: Pick the smaller:
The smaller value is 18,000. This is option 4.

Final Answer:
Goodwill is Rs. 18,000. \[ \boxed{18{,}000} \]