The profits and losses for the previous years are: 2020 Profit - 10,000, 2021 Loss - 17,000, 2022 Profit - 50,000, 2023 Profit - 75,000. The average…
CA Foundation · Accounting · MTP · June 2024
The profits and losses for the previous years are: 2020 Profit - 10,000, 2021 Loss - 17,000, 2022 Profit - 50,000, 2023 Profit - 75,000. The average Capital employed in the business is 2,00,000. The rate of interest expected from capital invested is 10%. The remuneration from alternative employment of the proprietor - 6,000 p.a. Calculate the value of goodwill on the basis of 2 years’ purchases of Super Profits based on the average of 3 years.
Suggested Answer and Working Notes:
Total Profit for 3 years = (17, 000) +50,000 +75,000 = 1,08,000. Average profits = (Total Profit / No. of years) = (₹ 1,08,000 / 3) = 36,000 Average Profits for Goodwill = 36,000 – Proprietor Remuneration = 36,000 - 6,000 = 30,000 Normal Profit = Interest on Capital employed = 20,000 (i.e.2,00,000 x 10/100) = 20,000 Super Profit = Average Profit - Normal Profit = 30,000 - 20,000 = 10,000 Goodwill = Super Profit x No of years purchases = 10,000 x 2 = 20,000
Topics: Treatment of Goodwill in Partnership Accounts
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