From the following information, calculate value of goodwill of M/s Sharma & Gupta:
(i) At three Years' purchase of Average Profit.
(ii) At three years' purchase of Super Profit.
(iii) On the basis of Capitalisation of Super Profit.
On the basis of Capitalisation of Average Profit.
information:
(a) Average Capital Employed - Rs. 10,00,000.
(b) Net Profit/Loss of the firm for the past years: 2017 - Rs. 1,60,000 (Profit), 2018 - Rs. 1,40,000 (Profit), 2019 - Rs. 2,70,000 (Profit).
(c) Normal Rate of Return on Capital is `11%`.
(d) Remuneration to each partner for his service to be treated as a charge on Profit - Rs. 2,500 per month.
(e) Assets (excluding goodwill) - Rs. 11,00,000, Liabilities - Rs. 1,00,000.

Explanation

(i) Calculation of Goodwill at three years' purchase of Average Profit:
Average Profit `= (Rs. 1,60,000 + Rs. 1,40,000 + Rs. 2,72,000 )/(3)`
`= (Rs. 5,70,000 )/(3) = Rs. 1,90,000`
Average Normal Profit ` =Rs. 1,90,000 - `Remuneration of Partners
` " " = Rs. 1,90,000 - (Rs. 2,500 xx 2xx 12)`
` " " = Rs. 1,90,000 - Rs. 60,000 = Rs. 1,30,000 `
`"Goodwill" = "Average, Normal Profit"xx"No. of years' Purchase" `
` " " = Rs. 1,30,000 xx 3 = Rs. 3,90,000.`
(ii) Calculation of Goodwill at three years' purchase fo Super Profit:
` "Normal Profit" = "Capital Employed " xx "Normal Rate of Return/100" `
` " " = Rs. 10,00,000 xx 11//100=Rs. 1,10,000`
`"Super Profit"="Average Profit" - "Normal Profit" `
` " " = Rs. 1,30,000 - Rs. 1,10,000 = Rs. 20,000`
` "Goodwill"="Super Profit" xx "No. Of Years' Purchase" `
` " " = Rs. 20,000 xx 3 = Rs. 60,000.`
(iii) Calculation of Goodwill under Capitalisation of Super Profit:
` "Goodwill"="Super Profit" xx (100)/("Normal Rate of Return")`
` " " = Rs. 20,000 xx 100//11 = Rs. 1,81,818.18 " or " RS. 1,81,818.`
Calculation of Goodwill under Capitalisation of Average Profit:
` "Goodwill" = "Total Capitalised Value of Business" - "Net Assets" `
Total Capitalised Value of the Firm `= ("Average Normal Profit"xx 100)/("Normal Rate of Return")`
` " " = (Rs. 1,30,000 xx 100)/(11) = Rs. 11,81,818 " or " Rs. 11,81,818`
Net Assets `= "Total Assets (encluding goodwill)" - "Outside Liabilities" `
` " " = Rs. 11,00,000 - Rs. 1,00,000 = Rs. 10,00,000`
Goodwill ` = Rs. 11,81,818 - Rs. 10,00,000 = Rs. 1,81,818. `