A and B were partners in a firm sharing profits equally

13 :-  A and B were partners in a firm sharing profits equally. Their capitals were: A – Rs 1,20,000 and B – Rs 80,000. The annual rate of interest is 20%. Profits of the firm for the last three years were Rs 34,000; Rs 38,000 and Rs 30,000. They admitted C as a new partner. On C’s admission the goodwill of the firm was valued at 2 years’ purchase of the super profits.
Calculate the value of goodwill of the firm on C’s admission.

Solution:-

Calculation of the normal profit of the firm
Capital Employed = Capitals of A and B
                             = 1,20,000 + 80,000
                             = Rs 2,00,000

Normal profit = Capital employed x Normal rate of return
                        = 2,00,000 x 20%
                        = Rs 40,000

Calculation of Average profit of the firm
Average profit of last 3 years = 34,000 + 38,000 + 30,000/3
                                                = 1,02,000/ 3
                                                = Rs 34,000

Calculation of Super profit of the firm
Super profit = Average profit – Normal profit
                   = 34,000 – 40,000
                   = (6,000)

Since the firm have negative super profit, the firm does not have any goodwill.