Question 17 Chapter 3 of +2-A
17. Dinesh and Mahesh are partners sharing profits and losses in the ratio of 3 : 2. They admit Ramesh into partnership for 1/4th share in profits. Ramesh brings in his share of goodwill in cash. Goodwill for this purpose shall be calculated at two years' purchase of the weighted average normal profit of past three years. Weights being assigned to each year 2017−1;
2018−2 and 2019−3. Profits of the last three years were:
2017 − Profit 50,000 including profits on sale of assets 5, 000.
2018 − Loss 20,000 including loss by fire 35, 000.
2019 − Profit 70,000 including insurance claim received 18,000 and interest on investments and dividend received 8, 000.
Calculate the value of goodwill. Also, calculate the goodwill brought in by Ramesh.
| Year |
Adjusted Profit A |
Weight |
Product (E = C * D) |
|---|---|---|---|
| 2017 | 45,000 | 1 | 45,000 |
| 2018 | 15,000 | 2 | 30,000 |
| 2019 | 44,000 | 3 | 1,32,000 |
| Total | 6 | 2,07,000 | |
Note: - For calculation of Adjusted profit see the working note at the end of the question.
|
Average Profit |
= | Total Profit for past given years |
| Number of years |
| = | 2,07,000 |
| 6 | |
| = | 34,500 |
Number of years’ purchase = 2
| Goodwill | = | Weighted Average Profit X Number of years of purchase |
| Goodwill | = | 34,500 X 2 |
| Goodwill | = | 69,000 |
Working Note: -
*1Calculation of Adjusted Profit
| Adjusted profit for the year ended 31st March 2017 | = | Total Profit − Gain on Sale of Fixed Assets |
| = | 50,000 - 5,000 | |
| = | 45,000 | |
| Adjusted profit for the year ended 31st March 2018 | = | Total Profit + Loss by fire |
| = | 35,000 - 20,000 | |
| = | 15,000 | |
| Adjusted profit for the year ended 31st March 2019 | = | Total Profit + Loss by fire |
| = | 70,000 - 18,000 - 8,000) | |
| = | 44,000 |
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Accounting & Commerce Educator
Sarbjit Singh holds a B.Com and M.Com degree and has over 12 years of teaching experience in double entry bookkeeping, financial accounting, and business studies.
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