Question

The capital of the firm of Seema and Avi is ₹ 12,00,000 and the market rate of interest is 10%. Salary of each partner is ₹ 10,000 per annum. The profits for the last four years were ₹ 3,00,000, ₹ 4,00,000, ₹ 5,00,000 and ₹ 4,00,000 respectively. Goodwill of the firm is to be valued on the basis of three years purchase of last four years average super profits. Calculate the goodwill of the firm.

Hint:

When calculating goodwill using the Super Profit Method, always deduct the normal profit from average profit. Salary is included in profit if not specified otherwise.

Answer 1

Goodwill Valuation Using Super Profit Method

Step 1: Calculate Average Profit for Last 4 Years
The average profit for the last four years is calculated as ₹ (3,00,000 + 4,00,000 + 5,00,000 + 4,00,000) divided by 4, resulting in ₹ 4,00,000.

Step 2: Calculate Normal Profit
With a Capital Employed of ₹ 12,00,000 and a Normal Rate of Return of 10%, the Normal Profit is computed as 10% of ₹ 12,00,000, which equals ₹ 1,20,000.

Step 3: Calculate Super Profit
Super Profit is determined by subtracting Normal Profit from Average Profit: ₹ 4,00,000 – ₹ 1,20,000 = ₹ 2,80,000.

Step 4: Calculate Goodwill
Goodwill is calculated by multiplying Super Profit by 3: 3 × ₹ 2,80,000 = ₹ 8,40,000.

Note: Partner salaries have been accounted for within the provided profit figures, thus requiring no further adjustments.