9 :- Raman and Daman are partners sharing profits in the ratio of 60 : 40 and for the last four years they have been getting annual salaries of Rs 50,000 and Rs 40,000 respectively. The annual accounts have shown the following net profit before charging partner’s salaries:
Year ended 31st March, 2023 – Rs 1,40,000; 2024 – Rs 1,01,000 and 2025 – Rs 1,30,000.
On 1st April, 2025, Zeenu is admitted to the partnership for 1/4th share in profit (without any salary). The Goodwill is to be valued at four years’ purchase of weighted average profit of the last three years (after partner’s salaries); Profits are to be weighted as 1, 2, and 3, the greatest weight being given to the last year. Calculate the value of Goodwill.
Solution:- Calculation of normal profit after adjustments
Actual normal profit after partner’s salaries
2023 = 1,40,000 – (50,000 + 40,000) = Rs 50,000
2024 = 1,01,000 – (50,000 + 40,000) = Rs 11,000
2025 = 1,30,000 – (50,000 + 40,000) = Rs 40,000
Weighted average profit = Total weighted profits/Total weights
Weighted average profits = 1,92,000/6
= Rs 32,000
Calculation of goodwill of the firm
Goodwill = Weighted Average Profit x No. of years purchased
= 32,000 x 4
= Rs 1,28,000