Read the following information and answer the following question.
A and B are partners sharing profits equally. Average capital employed of the firm is ₹10,00,000. The normal rate of return is 11%. Salary to each partner for his service to be treated as a charge on profit- 30,000 per year. The asset of the firm excluding goodwill is 11,00,000 and liabilities 1,00,000. The profit of the firm is as follows-
₹1,60,000(2016)
₹1,40,000(2017)
₹2,70,000(2018)
Calculate goodwill at 2 years purchase of average profit?
Answer & explanation
Correct answer: option 2
The correct answer is option 2- ₹2,60,000.
Average profit = Profits of year (2016 + 2017 + 2018)/Total no of years
Average profit = (1,60,000+1,40,000+2,70,000)/3
= 5,70,000/3
= ₹1,90,000
Average normal profit = 1,90,000- salary of both partners i.e., 60,000
= ₹1,30,000
GOODWILL = Average normal profit x No of years purchase
= 1,30,000*2
= ₹2,60,000