38 :-  From the following information, calculate value of goodwill of the firm:

  • At three years purchase of Average profit
  • At three years purchase of Super profit
  • On the basis of capitalization of Super profit
  • On the basis of capitalization of Average profit.

Information:-

  • Average capital employed is Rs 6,00,000
  • Net profit/(loss) of the firm for the last three years ended are:

31st March, 2025- Rs 2,00,000, 31st March, 2024 – Rs 1,80,000 and 31st March, 2023 – Rs 1,60,000

  • Normal rate of return in similar business is 10%
  • Renumeration of Rs 1,00,000 to partners is to be taken as charge against profit.
  • Assets of the firm (excluding goodwill, fictitious assets and non-trade investments) is Rs 7,00,000 whereas Partner’s capital is Rs 6,00,000 and outside liabilities Rs 1,00,000

Solution: Calculation of Actual profits after partner’s renumeration
31st March 2023 = 1,60,000 – 1,00,000 = Rs 60,000
31st March 2024 = 1,80,000 – 1,00,000 = Rs 80,000
31st March 2025 = 2,00,000 – 1,00,000 = Rs 1,00,000

Calculation of Average profit
Average profit = 60,000 + 80,000 + 1,00,000/3
                       = 240,000/3
                       = Rs 80,000

Calculation of Normal profit
Normal profit = Capital employed x Normal rate of return
                      = 6,00,000 x 10/100
                      = Rs 60,000

CASE 1 : Calculation of goodwill as per average profit method

Goodwill = Average profit x No. of years purchased
               = 80,000 x 3
              = Rs 2,40,000

CASE 2 : Calculation of goodwill as per super profit method

Calculation of Super profit
Super profit = Average profit – Normal profit
                   = 80,000 – 60,000
                 = Rs 20,000

Goodwill = Super profit x No. of years purchased
                = 20,000 x 3
                = Rs 60,000

CASE 3: Calculation of goodwill on the basis of capitalization of super profit method

Goodwill = Super profit/Normal rate of return
              = 20,000 x 100/10
               = Rs 2,00,000

CASE 4: Calculation of Goodwill on  the basis of capitalization of average profit

Calculation of Capitalized value of average profit
Capitalized value of Average profit = Average profit/Normal rate of return
                                                       = 80,000 x 100/10
                                                     = Rs 8,00,000

Calculation of Capital employed of the firm
Capital employed = Total assets – Total liabilities
                            = 7,00,000 – 1,00,000
                           = Rs 6,00,000

Calculation of Goodwill of the firm
Goodwill = Total capitalized value of the average profit – Capital employed
                = 8,00,000 – 6,00,000
               = Rs 2,00,000