Mr. Nikhil gives the following particulars in respect of business carried on by him: Particulars Amount (₹) Capital Invested in business 9,00,000…

CA Foundation · Accounting · MTP · January 2025
Mr. Nikhil gives the following particulars in respect of business carried on by him: Particulars Amount (₹) Capital Invested in business 9,00,000 Market rate of interest on investment 8% Rate of risk return on capital invested in business 3% Remuneration per annum from alternative employment of proprietor if he was not engaged in business 36,000 The business earned profits of 2,40,000,2,16,000 and - 3,00,000 in the years2020,2021 and 2023 respectively but made a loss of 36,000 in the year 2022. Compute the value of Goodwill on the basis of 6 years' purchase of super profits of the business, calculated on the basis of average profit of last four years.

Suggested Answer and Working Notes:

(ii) Computation of Goodwill of Mr. Nikhil Particulars ₹ Average maintainable profits: Trading profit during 2020 2,40,000 2021 2,16,000 2023 3,00,000 7,56,000 Less: Loss during 2022 (36, 000) Total 7,20,000 Average Profits (₹ 7,20,000 /4) 1,80,000 Less: Remuneration for the proprietor (36, 000) Average maintainable Profit 1,44,000 Less: Normal Profit (11% on capital employed of 9,00,000) (99, 000) Super Profit 45,000 Goodwill at 6 year’s purchase of Super Profit 2,70,000 Alternative: Particulars ₹ Total profit (₹ 2,40,000+2,16,000+3,00,000-36,000) 7,20,000 Normal Profit (11% on capital employed of 9,00,000) (99, 000) Remuneration for the proprietor (36, 000) (₹ 1,35,000) Average Profits (₹ 7,20,000 /4) 1,80,000 Super Profit 45,000 Goodwill at 6 year’s purchase of Super Profit 2,70,000

Topics: Treatment of Goodwill in Partnership Accounts

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