A and B are partners in a firm. Their capitals are: A - 6,00,000 and B - 4,00,000. During the year ended 31 st March, 2024 the firm earned a profit…
CA Foundation · Accounting · RTP · September 2024
A and B are partners in a firm. Their capitals are: A - 6,00,000 and B - 4,00,000. During the year ended 31 st March, 2024 the firm earned a profit of 3,00,000. Assuming that the normal rate of return is 20%, calculate the value of goodwill on the firm: (i) By Capitalization Method; and (ii) By Super Profit Method if the goodwill is valued at 2 years’ purchase of Super Profit.
Suggested Answer and Working Notes:
Capitalisation Method: Total Capitalised Value of the firm = Average Profit x 100 / Normal Rate of Return = 3,00,000 x 100 /20 = 15,00,000 Goodwill = Total Capitalised Value of Business – Capital Employed = 15,00,000 - 10,00,000 [i.e.,6,00,000 (A) +4,00,000 (B)] Goodwill = 5,00,000
Topics: Treatment of Goodwill in Partnership Accounts
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