CA Foundation PDF
CA Foundation PDF
CA Foundation PDF
41
LEARNING OUTCOMES
After studying this unit, you will be able to:
♦ Understand when does the need for valuation of goodwill arise.
♦ Learn the accounting of goodwill.
UNIT OVERVIEW
Annuity
basis
Average Methods of
profit valuation of Super profit
goodwill
Capitalization
basis
2.1 GOODWILL
Goodwill is the value of reputation of a firm in respect of profits expected in future over and
above the normal rate of profits.
In simpler terms, Goodwill is nothing more than the probability that old customer will resort
to old place again and again. The capacity of a business to earn super profits in the future is
basically what is meant by term goodwill. Goodwill is an intangible asset; it cannot be seen;
it cannot be felt; it cannot be transported physically. Even then it is very real. From
accounting point of view, it is necessary that it has some monetary or saleable value. The
implication of the term over and above is that there is always a certain normal rate of profits
earned by similar firms in the same locality. The excess profit earned by a firm may be due to
its locational advantage, better customer service, possession of a unique patent right, personal
reputation of the partner or for similar other reasons. The necessity for valuation of goodwill
in a firm arises in the following cases:
a) When the profit sharing ratio amongst the partners is changed;
b) When a new partner is admitted;
The list is in no way exhaustive but only provides the basic guidelines:
(i) The quality of the goods sold.
(ii) The personal reputation of the owners i.e., their ability to attract the customers.
(iii) The location of the business premises e.g., a good position in a congested market.
(iv) The possession of near monopoly right e.g. main agent for a particular vehicle like,
Maruti car, Bajaj scooter, etc.
(vii) The cost of research and development which enables the production at low cost and
of good quality.
(ii) An intangible asset should be recognized only if the future probable economic
benefits (i.e., increased revenue from sales) will flow to the business enterprise and
not to others. It means that management can make reasonable estimates of future
benefits.
(iii) The cost of the intangible asset can be measured reliably, that is, the cost is
objectively verifiable. If the cost cannot be measured reliably, then it cannot be
recognized as an asset.
It is thus clear that none of the conditions is satisfied by internally generated goodwill or
inherent goodwill. The reasons are simple to explain. First, it is not an identifiable resource
like patent, trademark or copyright. Second, it is very difficult to assess its future benefits.
Finally, the cost of internally generated goodwill cannot be reliably measured in the absence
of any consideration in money or money’ worth. There is no documentary evidence to support
the value of goodwill as a resource.
Goodwill should be recorded in the books only when some consideration in money or money’
worth has been paid for it. Accordingly, on admission or retirement/death of a partner or even
when there is a change in profit sharing ratio amongst the existing partners, goodwill should
not be raised in the books of account of the partnership firm because no consideration in
money or money’ worth has been paid for it. The conclusion is that only purchased goodwill
should be recorded in the books of account whether the payment is made directly in cash or
money’ worth. For example, ‘A’ and ‘B’ purchase the net assets (assets minus liabilities) of ‘C’
amounting to ` 2,50,000 for ` 3,00,000 in cash, the additional payment of ` 50,000 is a payment
for goodwill in cash. It is a case of purchased goodwill (an asset) and can be validly recorded
in the books of A and B. When no payment is made for the purchase of goodwill and goodwill
account is raised in the books, it is a case of internally generated goodwill or inherent goodwill
and as per Accounting Standards, it is not permitted. For example, in the event of
reconstitution of the firm due to admission, or retirement or death of a partner or even a
change in the profit sharing ratio without reconstitution, goodwill of the firm is evaluated. In
such a situation, the value of goodwill should not be brought into books of account because
it is inherent or self-generated goodwill since no money or money’ worth has been paid for
it. The only way out is that the value of goodwill as calculated with the help of different
valuation methods should be adjusted through capital accounts of the partner(s) of the firm.
In no case the goodwill account is to be raised in the books of account, either on the
reconstitution of the firm or change in the profit sharing ratio.
The amount of goodwill is written off over a period of time. In case when the goodwill account
exists at the time of reconstitution of firm, it should be written off immediately whether it is
internally generated or goodwill has been bought for some consideration.
2) Super profit basis,-Number of Year Purchase, Annuity basis, and Capitalization of Super
Profit
3) Capitalization basis- Average Profits
(1) Average Profit Basis: In this case the average profits of past years are adjusted for
any expected change in future. The number of year are decided on the basis of judgement
and negotiation.
♦ For averaging the past profit, either simple average or weighted average may be
employed depending upon the circumstances. If there exists clear increasing or
decreasing trend of profits, it is better to give more weight to the profits of the recent
years than those of earlier years. But, if there is no clear trend of profit, it is better to
go by simple average.
♦ Let us suppose profits of a partnership firm for the last five years were ` 30,000,
` 40,000,` 50,000, ` 60,000 and ` 70,000. In this case, a clear increasing trend is noticed
and therefore, average profit may be arrived at by assigning appropriate weights as
shown below :
1 2 3 4=2×3
Year Profit Weight Weighted Profit
` `
1 30,000 1 30,000
2 40,000 2 80,000
3 50,000 3 1,50,000
4 60,000 4 2,40,000
5 70,000 5 3,50,000
15 8,50,000
8,50,000
So, Weighted Average Profit = = ` 56,667 (approx)
15
If goodwill is valued at three years’ purchase of profit, then in this case the value of goodwill
is ` 56,667 (approx) × 3 = ` 1,70,000.
However, if any such trend is not visible from the figures of past profits, then one should take
simple average profit and calculate goodwill accordingly. Let us suppose, profits of a
partnership firm for five years were ` 30,000, ` 25,000, ` 20,000, ` 30,000 and ` 28,000. In this
case, there is no clear increasing or decreasing trend of profit. So average profit comes to
` 26,600 (arrived at by taking simple average). If the goodwill is valued by taking three years’
of purchase of profit, the ninth is case, value of goodwill becomes ` 79,800.
Weighted average is used when profit has increasing or decreasing Trend. Highest weight is
always given to current year, as it reflects the more realistic view of the future profitability
Example
The past profits of five years of a partnership firm are: ` 50,000; ` 40,000; ` 52,000; ` 48,000
and ` 56,000 respectively. Calculate the value of goodwill on the basis of 4 years’ purchase of
the average profits of the last five years.
Answer
Total profits for five years = ` (50,000 + 40,000 + 52,000 + 48,000 + 56,000) = ` 2,46,000
Average profit = Sum of profits/No. of years
Average Profit = ` 2,46,000 ÷ 5 = ` 49,200
Value of goodwill (being four years’ purchase of the average profit of five years) = 4 ×
` 49,200 = ` 1,96,800.
(2) Super Profit Basis: In case of super profit method, goodwill is valued on the basis of
super profits earned by the firm.
The rationale for using the super profit is the partner who gains excess earning owing to
reconstitution of firm should compensate to partners sacrificing their share in the
reconstitution. Super profit means, excess profit that can be earned by a firm over and above
the normal profit usually earned by similar firms under similar circumstances. Under this
method, the partner who gains in terms of profit sharing ratio has to contribute only for excess
profit because normal profit he can earn by joining any partnership firm. Under super profit
method, what excess profit a partnership firm can earn is to be determined first.
Calculation of super profit:
(i) Identify the capital employed by the partnership firm;
(ii) Identify the average profit earned by the partnership firm based on past few years’
figures;
(iii) Determine normal rate of return prevailing in the locality of similar firms;
(iv) Apply normal rate of return on capital employed to arrive at normal profit;
(v) Deduct normal profit from the average profit of the firm. If the average profit of the
firm is more than the normal profit, there exists super profit and goodwill.
Let us suppose, total capital employed by a partnership firm was ` 1,00,000 and its average
profit was ` 25,000. Normal rate of return is 22% in case of similar firms working under similar
conditions. So, normal profit is ` 22,000 and average profit is ` 25,000. The partnership firm
earns ` 3,000 super profit.
(a) Number of Years Purchase Method: Goodwill is generally valued by multiplying the
amount of super profit by certain number of years depending upon the expectation
about the maintenance of such profit in future. If it is expected that the super profit
can be maintained for another five years in future, then value of goodwill may be taken
as ` 3,000 × 5 = ` 15,000.
Example
A firm of A, B and C has a total capital investment of ` 4,50,000. The firm earned net
profits during the last four years as: I-` 70,000; II-` 80,000; III-` 1,20,000 and IV-
` 1,00,000. The reasonable expected return is 15 per cent having regard to the risk
involved. The value of goodwill of the business, if it is based on 3 years’ purchase of
the average super profits of the past four years is as follows:
Average Profit = Sum of profits/no. of years
Normal Profit = NRR x Capital Employed
`
Total profits earned during four years : 3,70,000
So, under the annuity method, discounted value of total super profit becomes ` 10,056.60 and
not ` 15,000 as was done under super profit method.
The word annuity is used to mean identical annual amount of super profit. So, for discounting
it is possible to refer to annuity table. As per the annuity table, present value of ` 1 to be
received at the end of each year for 5 years @15% interest p.a. is 3.3522. So value of goodwill
under annuity method is ` 3,000×3.3522 = ` 10,056.60.
Example
Calculate the goodwill by annuity method of super profit from the following facts:
(a) Annual maintainable profit after tax is ` 65,000.
(b) Capital employed is ` 4,00,000.
(c) Normal rate of return is expected at 12% p.a.
(d) Present value of an annuity of ` 1 for five years @ 12% interest is 3.604776.
Answer
The present value of annuity of ` 17,000 for five years at 12% compound interest = 17,000 x
3.604776 = ` 61,281 (Approx.)
Capitalization of Super Profit:
Super Profit 17, 000
Goodwill = = = ` 14,1667
Normal Rate of Return (NRR) 12%
3 Capitalization Basis: Under this basis, value of whole business is determined applying
normal rate of return. If such value (arrived at by applying normal rate of return) is higher than
the capital employed in the business, then the difference is goodwill. The steps to be followed
under this method are given below:
c. Determine the capital employed by the partnership firm for which goodwill is to be
determined.
d. Find out normal value of the business by dividing average profit by normal rate of
return.
e. Deduct average capital employed from the normal value of the business to arrive at
goodwill.
Above methods are explained below with the help of following illustrations:
ILLUSTRATION 1
Lee and Lawson are in equal partnership. They agreed to take Hicks as one-fourth partner. For
this it was decided to find out the value of goodwill. M/s. Lee and Lawson earned profits during
2019-2022 as follows:
On 31.12.2022 capital employed by M/s. Lee and Lawson was ` 5,00,000. Rate of normal profit
is 20%.
Required
Find out the value of goodwill following various methods.
SOLUTION
Average Profit:
` 1,36,000 = ` 6,80,000
Normal Value of business: × 100
20
Less: Capital Employed in M/s. Lee and Lawson = (` 5,00,000)
Goodwill = ` 1,80,000
ILLUSTRATION 2
The following particulars are available in respect of the business carried on by Rathore
You are required to compute the value of goodwill on the basis of 5years’ purchase of super
profit of the business calculated on the average profits of the last four years.
SOLUTION
1,26,000
[ ]
Nigam 1 1 1 2 1 1 1 –1 =1 –
2 2 1– 3 = 3 × 2 = 3 2 3 6
[ ]
Dhameja 1 1 1 2 1 1 1 –1 =1 –
2 2 1– 3 = 3 × 2 = 3 2 3 6
Ghosh – – 1
3
In other words, one-third share of Ghosh was borne by Nigam and Dhameja at their old profit
sharing ratio. By this process Nigam sacrificed 1/2–1/3 = 1/6 in share and Dhameja sacrificed
But if the new profit sharing ratio of Nigam, Dhameja and Ghosh becomes 4:2:3, then profit
sacrificed by Nigam and Dhameja on Ghosh’s admission is not at the old profit sharing ratio.
In this case profit sacrificing ratio is as follows:
If Ghosh pays goodwill of ` 24,000, then in the first case, Nigam and Dhameja should share it
equally; but in second case Nigam should get ` 4,000 and Dhameja should get ` 20,000.
Take another example: Nigam and Dhameja are equal partners. They agreed to take Ghosh as
one-third partner. The new profit sharing ratio is 4:2:3. Nigam and Dhameja agreed ` 27,000
as value of goodwill.
Journal Entry
As per the Accounting Standards, it is not recommended to raise goodwill account but
to show the adjustment of goodwill through partners’ capital accounts.
Example 2: A & B are equal partners. They wanted to take C as a third partner and for this
purpose goodwill was valued at ` 1,20,000. The journal entry for adjustment of value of
goodwill through partners’ capital accounts will be:
The net effect in partners’ capital accounts is shown on the basis of profit sacrificing ratio:
A = 1/6 × ` 1,20,000 = ` 20,000 (Cr.)
B = 1/6 × ` 1,20,000 = ` 20,000 (Cr.)
C = 1/3 × ` 1,20,000 = ` 40,000 (Dr.)
Example 3: A & B are equal partners. They wanted to admit C as 1/6th partner who brought
` 60,000 as goodwill. The new profit sharing ratio is 3:2:1. Profit sacrificing ratio is to be
computed as follows:
Old Share – New Share = Share Sacrificed
A = 1/2 – 3/6 = 0
B = 1/2 – 2/6 = 1/6
ILLUSTRATION 3
The following is the Balance Sheet of Yellow and Green as at 31st December, 2022:
Liabilities ` Assets `
65,000 65,000
The partners shared profits and losses in the ratio 3:2. On the above date, Black was admitted
as partner on the condition that he would pay ` 20,000 as Capital. Goodwill was to be valued
at 3 years’ purchase of the average of four years’ profits which were:
` `
SOLUTION
` `
Liabilities ` ` Assets `
Trade payables 20,000 Cash at Bank 30,000
Capital: Sundry Assets 55,000
Yellow 33,100
Green 23,150
Black 8,750 65,000
85,000 85,000
Calculation of Goodwill
9,000 + 14,000 + 12,000 + 13,000
Average profit = = 12,000
4
ILLUSTRATION 4
With the information given in illustration 3, let us give journal entries and prepare balance sheet
assuming that goodwill is brought in cash.
SOLUTION
Goodwill brought in cash
Liabilities ` ` Assets `
Trade payables 20,000 Cash at Bank 41,250
Capital: Sundry Assets 55,000
Yellow 33,100
Green 23,150
Black 20,000 76,250
96,250 96,250
ILLUSTRATION 5
Continuing with the same illustration 3, let us give journal entries and prepare balance sheet
assuming that goodwill is brought in cash, but withdrawn.
SOLUTION
Goodwill brought in cash, but withdrawn
In addition to the treatment under Illustration 3 the following additional entry will be made:
Liabilities ` ` Assets `
85,000 85,000
ILLUSTRATION 6
On the basis of information given in illustration 3, let us give journal entries and prepare balance
sheet assuming that goodwill is paid privately.
SOLUTION
There will be no entry for goodwill but Black will pay ` 8,100 to Yellow and ` 3,150 to Green.
For capital brought in by Black, the entry is:
Liabilities ` ` Assets `
85,000 85,000
ILLUSTRATION 8
A, B and C are in partnership sharing profits and losses in the ratio of 4:3:3. They decided to
change the profit sharing ratio to 7:7:6. Goodwill of the firm is valued at ` 20,000. Calculate the
sacrifice / gain by the partners and make the necessary journal entry.
SOLUTION
Thus, B gained 1/20th share while A sacrificed 1/20th share i.e. ` 20,000 x = ` 1,000. For C
1
20
there was no loss no gain.
Journal Entry
` `
ILLUSTRATION 9
A, B, C and D are in partnership sharing profits and losses equally. They mutually agreed to
change the profit sharing ratio to 3:3:2:2. Goodwill of the firm is valued at ` 20,000. Give
necessary journal entry.
SOLUTION
3 1 1
A gains by – =
10 4 20
3 1 1
B gains by – =
10 4 20
1 2 1
C loses by – =
4 10 20
1 2 1
D loses by – =
4 10 20
ILLUSTRATION 10
Antoo, Bantoo and Chintoo were in partnership sharing profits and losses 3:4:3 respectively. The
accounts of the firm are made up to 31st March every year. The partnership provided, interalia,
that: On the retirement of a partner the goodwill was to be valued at three years’ purchase of
average profits of the past four years up to the date of the retirement after deducting interest
@12%p.a. on capital employed and remuneration of ` 2,000 p.m.to each partner. On 1st April
2022, Antoo retired and it was agreed on his retirement to adjust goodwill in the capital accounts
without showing any amount of goodwill in the Balance Sheet. It was agreed that the capital
employed would be ` 6,50,000. Bantoo and Chintoo were to continue the partnership, sharing
profits and losses equally after the retirement of Antoo. The following were the amounts of
profits of earlier years before charging salary to partners and interest on capital employed.
Year Profit
2018-19 2,60,000
2019-20 2,75,000
2020-21 2,65,000
2021-22 2,80,000
You are required to compute the value of goodwill and show the adjustment there of in the
books of the firm.
SOLUTION
Valuation of Goodwill
Calculation of Average Profit
2018-19 2,60,000
2019-20 2,75,000
2020-21 2,65,000
2021-22 2,80,000
Total 10,80,000
Average Profit (10,80,000/4) 2,70,000
Less: Interest on capital @ 12%p.a. 78,000
Less: Salaries of partners’(3 x 12 x 2,000) 72,000
Adjusted Average profit 1,20,000
Goodwill (3 years purchase =3 x 1,20,000) 3,60,000
Antoo’s Share of Goodwill (3/10) i.e. 1,08,000
Adjustment Journal entry for Goodwill
Working Note:
Antoo 0 – 3/ 10 = –3/ 10
Bantoo 1/ 2 – 4/ 10 = 1/ 10
Chintoo 1/ 2 – 3/ 10 = 2/ 10
ILLUSTRATION 11
Cu and Au were in partnership sharing profits and losses in the ratio 5:3. On 1st April 2022, they
decided to admit Ag the partnership on the following terms:
1. Ag will bring ` 2,00,000/- as capital for ¼ share.
2. New profit sharing ratio shall be 2:1:1 among Cu, Au and Ag.
3. Cu was entitled to salary of ` 2,000/- p.m., it was revised to ` 3,000 p.m. from
1st October 2020.
4. Interest on capital was paid at 8% p.a.
5. Capitals as on 31st March 2022 were Cu ` 4,00,000 Au ` 3,00,000, which had remained
unchanged since last four years.
6. Goodwill was to be valued on the basis of 3 years purchase of average adjusted weighted
average profits of past 4 years. The profits of previous four years, before charging interest
on capital and salary to Cu were as follows:
Year Profit
2018-19 2,10,000
2019-20 2,60,000
2020-21 2,10,000
2021-22 3,05,000
These profits were subject to following rectification
(a) A machine costing ` 40,000 purchased on 1st October, 2020 was wrongly charged
to revenue. The machinery was depreciated at 20% p.a. on written down value
method
(b) Stock on 31st March 2020 was over valued by ` 20,000/-
(c) There was a loss by fire amounting to ` 10,000/- in the year 2018-19 which was
not considered in trading account but correctly debited in the Profit & Loss a/c
for that year.
(d) Debtors as on 31st March 2022 included bad debts of ` 5 ,800/-
7. Ag shall bring his share of goodwill in cash.
You are required to calculate amount of goodwill Ag is supposed to bring and journal entry for
the same.
SOLUTION
Valuation of goodwill
Working Note:
SUMMARY
♦ Goodwill is the value of reputation of a firm in respect of profits expected in future
over and above the normal rate of profits.
♦ Necessity for valuation of goodwill in a firm arises in the following cases:
When the profit sharing ratio amongst the partners is changed;
When a new partner is admitted;
When a partner retires or dies, or
When the business is dissolved or sold.
♦ Methods for valuation of goodwill:-
(1) Average profit basis :
Average Profit = Total profit/Number of years
Goodwill = Average Profit x No. of Years’ purchased
The profits taken into consideration are adjusted with abnormal losses,
abnormal gains, return on non-trade investments and errors. The average can
be simple average or weighted average depending upon the circumstances.
2. Goodwill is valued whenever there is change in the profit sharing ratio among the
partners.
3. Goodwill is the value of reputation of a firm in respect of profits expected in future over
and above the normal rate of profits.
4. At the time of admission or retirement of a partner, goodwill can be raised in the books
of accounts and shown as an asset.
5. Only simple average method can be used for valuation of goodwill.
6. Super profit means excess of actual average profit over normal profit.
7. Normal profit means profit earned by similar companies in the same industry.
8. Normal profit depends upon Normal Rate of Return and past profits.
9. At the time of admission/retirement of a partner, since goodwill can not be raised in the
books of accounts is recorded through capital accounts of the partners.
10. At the time of admission of a partner, goodwill brought in by the new partner is shared
equally by old partners.
(b) Equally.
(c) In the ratio of loans given by them to the partnership firm.
6. The profits and losses for the last 4 years are 2018-19 Losses ` 10,000; 2019-20 Losses `
2,500; 2020-21 Profits ` 98,000 & 2021-22 Profits ` 76,000. The average capital
employed in the business is ` 2,00,000. The rate of interest expected from capital invested
is 12%.
The remuneration of partners is estimated to be ` 1,000 per month not charged in the
above losses/profits. Calculate the value of goodwill on the basis of two years purchase
of super profits based on the average of four years.
(a) ` 9,000.
(b) ` 8,750.
(c ) ` 8,250.
7. A, B and C are partners sharing profits and losses in the ratio 3:2:1. They decide to change
their profit sharing ratio to 2:2:1. To give effect to this new profit sharing ratio they decide
to value the goodwill at ` 30,000. Pass the necessary journal entry if Goodwill not
appearing in the old balance sheet and should not appear in the new balance sheet.
(a) B’s Capital Account Dr. ` 2,000
C’s Capital Account Dr. ` 1,000
Theory questions
1. Write short note on methods for valuation of goodwill.
2. Explain Accounting treatment of goodwill in case of change in profit sharing ratio.
Distinguish between Super profit basis and Capitalisation Basis.
Practical questions
1. Wise, Clever and Dull were trading in partnership sharing profits and losses 4:3:3
respectively. The accounts of the firm are made upto 31st December every year.
The partnership provided, interalia, that:
On the death of a partner the goodwill was to be valued at three years’ purchase of average
profits of the three years upto the date of the death after deducting interest @8 percent
on capital employed and a fair remuneration of each partner. The profits are assumed to
be earned evenly throughout the year.
On 30th June, 2022, Wise died and it was agreed on his death to adjust goodwill in the
capital accounts without showing any amount of goodwill in the Balance Sheet.
It was agreed for the purpose of valuation of goodwill that the fair remuneration for work
done by each partner would be ` 15,000 per annum and that the capital employed would
be ` 1,56,000. Clever and Dull were to continue the partnership, sharing profits and losses
equally after the death of Wise.
The following were the amounts of profits of earlier years before charging interest on
capital employed.
2019 67,200
2020 75,600
2021 72,000
2022 62,400
You are required to compute the value of goodwill and show the adjustment there of
in the books of the firm.
ANSWERS/HINTS
True and False
1. False: Even though Goodwill is intangible asset it can be valued in terms of money.
3. True: Goodwill is the brand image the firm has in the market due to which it enjoys an
advantageous position over the other players in the market.
4. False: At the time of admission or retirement of a partner, goodwill should not be raised
in the books of account of partnership firm because no consideration in money or
money worth has been paid for it.
5. False: Weighted average profit method, capitalisation method, super profits methods
also can be used for valuation of Goodwill.
6. True: Super profit means excess profit that can be earned by the firm over and above
the normal profit usually earned by similar firms under similar circumstances.
7. True: The rate of return is considered as an average for the industry, which is applied
to the capital employed in the concerned firm.
8. False: Normal profit depends upon Normal rate of return only and not on past profits.
9. True: Generally, the goodwill at the time of admission is adjusted through the capital
accounts and not shown in the books of the firm.
10. False: Goodwill brought in by new partner is shared by old partners in sacrificing ratio
and not equally.
7. (a)
Theoretical Questions
1. There are three methods for valuation of goodwill
(ii) Super profit basis - Number of Year Purchase, Annuity basis, and Capitalization
of Super Profit
2. In case of change in profit sharing ratio, the value of goodwill should be determined
and preferably adjusted through capital accounts of the partners on the basis of profit
sacrificing ratio.
3. Super Profit Basis: In case of average profit basis, goodwill is calculated on the basis
of average profit multiplied by certain number of years.
Actual Profit is average profit and Normal Profit = Normal rate of Return (NRR)
Capitalization Basis: Under this basis, value of whole business is determined applying
normal rate of return. If such value (arrived at by applying normal rate of return) is
higher than the capital employed in the business, then the difference is goodwill.
Practical Questions
1. Computation of the value of goodwill:
(i) Average Profit for three years, ending 30th June; before death:
Year ending 30th June, 2020: ` `
Total 2,12,400
Average Profits
Alternatively it can be calculated as below :
1/2 profit of 2019 + profit of 2020 + profit of 2021 + 70,800
33,600+75,600+72,000+31,200
profit of 2022 = =
3
70,800
(ii) Average future maintainable profit :
Average profits earned 70,800
Less : Partner’s remuneration 45,000
Less: 8% on capital employed 12,480 (57,480)
13,320
(iii) Goodwill of the firm @ three years’ purchase 39,960
(iv) Wise's share of Goodwill = 4/10 of 39,960 =15,984
Dr. ` Cr. `
Working Note:
There is no change in profit sharing ratio of containing partners therefore gain ratio
will be same as profit sharing ratio.