The profits and losses for the previous years are:2022 Profit - 5,000,2023 Loss - 8,500,2024 Profit - 25,000,2025 Profit - 38,500. The average…
CA Foundation · Accounting · RTP · May 2026
The profits and losses for the previous years are:2022 Profit - 5,000,2023 Loss - 8,500,2024 Profit - 25,000,2025 Profit - 38,500. The average Capital employed in the business is 1,00,000. The rate of interest expected from capital invested is 10%. The remuneration from alternative employment of the proprietor - 3,000 p.a. Calculate the value of goodwill on the basis of 2 years’ purchases of Super Profits based on the average of 4 years.
Suggested Answer and Working Notes:
Total Profit for4 years = 5000+ ₹ (8, 500) +25,000 +38,500 = 60,000. Average profits = Total Profit / No. of years = 60,000 / 4 = 15,000 Average Profits for Goodwill = 15,000 – Proprietor Remuneration = 15,000 - 3,000 = 12,000 Normal Profit = Interest on Capital employed = 10,000 (i.e.1,00,000 x 10/100) = 10,000 Super Profit = Average Profit-Normal Profit = 12,000 - 10,000 = 2,000 Goodwill = Super Profit x No of years purchases = 2,000 x 2 = 4,000
Topics: Treatment of Goodwill in Partnership Accounts
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