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Question : Cake and Muffin are partners sharing profits and losses in the ratio of 5: 4. On 1st April, 2016, they admit Cookie as a new partner for 1/6th share in the profits of the firm and the new ratio agreed upon is 3: 2: 1.

Goodwill, at the time of Cookie's admission is to be valued on the basis of capitalisation of the average profits of the last three years. Profits for the last three years were :
Year ended 31st March, 2014 Rs.39,000 (including an abnormal loss of Rs. 9,000).
Year ended 31st March, 2015 Rs.83,000 (including an abnormal gain of Rs.8,000).
Year ended 31st March, 2016 Rs.72,000.

On 1st April, 2016, the firm had assets of Rs.8,00,000. Its creditors amounted to Rs.3,60,000. The firm had a Reserve Fund of Rs. 40,000 while Partners' Capital Accounts showed a balance of Rs.4,00,000.

The normal rate of return expected from this class of business is 13%.

Cookie brings in Rs.2,00,000 for her capital but is unable to bring in cash for her share of goodwill.

The amount of cookie brought his share of goodwill will be .....

Option 1: Rs 60,000

Option 2: Rs 50,000

Option 3: Rs 10,000

Option 4: None of the above


Team Careers360 4th Jan, 2024
Answer (1)
Team Careers360 23rd Jan, 2024

Correct Answer: Rs 10,000


Solution : Answer = Rs 10,000
(i) Calculation of Cookie's Share of Goodwill in the firm :

Calculation of Average Normal Profit:

Year ended Profit Rs.
31st March, 2014 (Rs. 39,000+Rs .9,000) 48,000
31st March, 2015 (Rs 83,000- Rs 8,000) 75,000
31st March, 2016 72,000
1,95,000

Average normal profit=$\frac{71,95,000}{3}$= Rs 65,000

Capitalised value of average profits= $\frac{\text { Average Normal Profit }}{\text { Normal Rate of Return }} \times 100$= $\frac{3,65,000}{13}$×100= Rs 5,00,000.

Capital employed (Net assets)= Total assets - Outside liabilities = Rs 8,00,000 - Rs 3,60,000= Rs 4,40,000.

Goodwill = Capitalised Value of Average Profits - Net Assets = Rs 5,00,000-Rs 4,40,000= Rs 60,000.

Cookie's share of goodwill= Rs 60,000×$\frac{1}{6}$= Rs 10,000.
Hence, the correct option is 3.

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