A partnership firm earned net profits during the last three years

 15 :-  A partnership firm earned net profits during the last three years ended 31^st March, as follows:

2023 – Rs 17,000; 2024 –Rs  20,000; 2025 – Rs 23,000

Capital investment in the firm throughout the above mentioned period has been Rs 80,000. Having regard to the risk involved, 15% is considered to be a fair return on the capital. Calculate value of goodwill on the basis of two years of purchase of average super profit earned during the above mentioned three years.

Solution:-

Calculation of Average profit of the firm
Average profit = 17,000 + 20,000 + 23,000/3
                       = 60,000/3
                      = Rs 20,000

Calculation of Normal profit
Normal profit = Capital employed x Normal rate of return
                     = 80,000 x 15%
                     = Rs 12,000

Calculation of Super profit
Super profit = Average profit – Normal profit
                    = 20,000 – 12,000
                    = Rs 8,000

Calculation of Goodwill of the firm
Goodwill = Super profit x No. of years purchased
                = 8,000 x 2
                = Rs 16,000