The capital of the firm of M and N is Rs. 1,00,000 and the market rate of interest is 15%. The annual salary to partners is Rs. 6,000 each. The profits for the last 3 years were Rs. 30,000 (for 2022); Rs. 36,000 (for 2023) and Rs. 42,000 (for 2024). Goodwill is to be valued at 2 years' purchase of the last 3 years' average super profits or 3 years' purchase of the last 2 years' average super profits, whichever is less. Calculate the goodwill of the firm.
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Rs. 18,000
Goodwill is found by both methods and the lesser figure is taken. The partners’ salaries are a charge on the firm’s profit, so they are added to the normal return on capital to get the normal profit.
Normal profit:
Return on capital = 15% of Rs. 1,00,000 = Rs. 15,000
Salaries = Rs. 6,000 × 2 = Rs. 12,000
Normal profit = Rs. 15,000 + Rs. 12,000 = Rs. 27,000
Method 1 (2 years’ purchase of the 3 years’ average super profit):
Average profit = (Rs. 30,000 + Rs. 36,000 + Rs. 42,000) ÷ 3 = Rs. 36,000
Super profit = Rs. 36,000 − Rs. 27,000 = Rs. 9,000
Goodwill = Rs. 9,000 × 2 = Rs. 18,000
Method 2 (3 years’ purchase of the last 2 years’ average super profit):
Average profit = (Rs. 36,000 + Rs. 42,000) ÷ 2 = Rs. 39,000
Super profit = Rs. 39,000 − Rs. 27,000 = Rs. 12,000
Goodwill = Rs. 12,000 × 3 = Rs. 36,000
Goodwill = the lesser of Rs. 18,000 and Rs. 36,000 = Rs. 18,000.
Note: This question is from NCERT (2026-27). NTA sets numerical questions from NCERT too, so do not ignore NCERT while practising numericals.
NCERT (2026-27 edition):
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