Question 29 Chapter 3 of +2-A
Table of Contents
29. Varuna and Karuna are partners for equal shares. They admit Lata into a partnership for 1/4th share. It was agreed to value the goodwill of the firm at 4 years’ purchase of super profit. The normal rate of return is 15% of the capital employed. Average profit of the firm is 4,00,000. Balance Sheet of the firm as at 31st March 2019 was as follows:
| Liabilities | Amount | Assets | Amount | |
| Capital A/cs: | Furniture | 4,00,000 | ||
| Varuna | 5,00,000 | Computers | 3,00,000 | |
| Karuna | 5,00,000 | 10,00,000 | Investments Trade | 2,00,000 |
| Long-term Loan | 5,50,000 | Stock | 3,00,000 | |
| Sundry Creditors | 2,00,000 | Sundry Debtors | 3,00,000 | |
| Outstanding Expenses | 50,000 | Bills Receivable | 50,000 | |
| Advances from Customers | 1,50,000 | Cash in Hand | 50,000 | |
| Cash at Bank | 2,00,000 | |||
| Deferred Revenue Expenditure: Advertisement Suspense | 50,000 | |||
| 19,50,000 | 23,00,000 |
Calculate the value of goodwill
The solution of Question 29 Chapter 3 of +2-A:
| Super Profit | = | Actual average Profit- Normal Profit |
| Actual average Profit | = | Average Profit + or -Adjustments (if any) |
| = | 4,00,000- 0 (-) | |
| = | 4,00,000 |
| Normal Profit | = | Capital Employed | X | Normal Rate of Return |
| 100 |
| = | 15,00,000 | X | 15 | |
| 100 | ||||
| = | 2,25,000 |
| Capital Employed | = | Total Assets – Fictitious Assets-Current Liabilities |
| = | 19,50,000-50,000-4,00,000 | |
| = | 15,00,000 | |
| Super Profit | = | 4,00,000 – 2,25,000 |
| = | 1,75,000 |
Number of years’ purchase = 4
| Goodwill | = | Super Profit X number of years of purchase |
| Goodwill | = | 1,75,000 X 4 |
| Goodwill | = | 7,00,000 |
T.S. Grewal’s Double Entry Book Keeping +2 (Vol. I: Accounting for Not-for-Profit Organizations and Partnership Firms)
- Chapter No. 1 – Financial Statement of Not-For-Profit Organisations
- Chapter No. 2 – Accounting for Partnership Firms – Fundamentals
- Chapter No. 3 – Goodwill: Nature and Valuation
- Chapter No. 4 – Change in Profit-Sharing Ratio Among the Existing Partners
- Chapter No. 5 – Admission of a Partner
- Chapter No. 6 – Retirement/Death of a Partner
- Chapter No. 7 – Dissolution of a Partnership Firm
T.S. Grewal’s Double Entry Book Keeping (Vol. II: Accounting for Companies)
- Chapter No. 8 – Company Accounts – Accounting for Share Capital
- Chapter No. 9 – Company Accounts – Issue of Debentures
- Chapter No. 10 – Redemption of Debentures
T.S. Grewal’s Double Entry Book Keeping (Vol. II: Accounting for Companies)
- Chapter No. 1 – Financial Statements of a Company
- Chapter No. 2 – Financial Statement Analysis
- Chapter No. 3 – Tools of Financial Statement Analysis – Comparative Statements and Common- Size Statements
- Chapter No. 4 – Accounting Ratios
- Chapter No. 5 – Cash Flow Statement
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