Partnership

Admission

Easy

A business has earned average profits of Rs. 1,00,000 during the last few years and the normal rate of return in a similar business is 25%. Ascertain the value of goodwill by capitalisation of average profits method, given that the value of net assets of the business is Rs. 3,20,000.

Rs. 80,000

Rs. 2,40,000

Rs. 4,00,000

Rs. 2,60,000

✅ Correct Option: 1

Given Information:

Average Profits = Rs. 1,00,000
Normal Rate of Return = 25%
Net Assets = Rs. 3,20,000

Under the Capitalisation of Average Profits Method, the total value of the business is determined by capitalising the average profits at the normal rate of return.

Capitalised Value of Business = Average Profits × $\frac{100}{\text{Normal Rate of Return}}$

Capitalised Value of Business = 1,00,000 × $\frac{100}{25}$

Capitalised Value of Business = 1,00,000 × 4 = Rs. 4,00,000

Goodwill = Capitalised Value of Business - Net Assets

Goodwill = 4,00,000 - 3,20,000 = Rs. 80,000

The capitalised value (Rs. 4,00,000) represents what the business should be worth based on its profit-earning capacity. Since the actual net assets are only Rs. 3,20,000, the difference of Rs. 80,000 represents the value of goodwill - the premium paid for the business's superior earning capacity.

Answer: Option 1 - Rs. 80,000

2026: 21 May Shift 1

Goodwill, if existing in the books of the firm, is written off at the time of admission of a partner, and is:

2022: 20 July Shift 1

A and B are partners sharing profits in the ratio of 5 : 4. C is admitted as a partner and he acquires 25% of his share from A. B surrenders $\frac{1}{4}$ th from his share in favour of C. Calculate C's share in profit.

2022: 16 July Shift 2

Sunil and Ravi are partners in a firm sharing profits in the ratio of 3:1. Amar is admitted for 1/4 share. The Sacrificing ratio of Sunil and Ravi is

2026: 29 May Shift 1

X and Y are partners in a firm sharing profit and loss in the ratio of 2:1. Z is admitted for 1/4 share in profits but could not bring any amount for goodwill. The account that will be debited for this entry will be:

2026: 21 May Shift 2

Any gain or loss arising from Adjustments for Revaluation of Assets and Reassessment of Liabilities shall be distributed among:

2024

The journal entry for treatment of goodwill, when a new partner brings his share of goodwill in cash and one of the old partners gains, involves the following:

A business has earned average profits of Rs. 1,00,000 during the last few years and the normal rate of return in a similar business is 25%. Ascertain the value of goodwill by capitalisation of average profits method, given that the value of net assets of the business is Rs. 3,20,000.

Solution

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