Question : Aayush and Aarushi are partners sharing profits and losses in the ratio of 3:2, They admitted Naveen into partnership for 1/4 share. Goodwill of the firm was to be valued at three years’ purchase of super profits. Average net profit of the firm was $ 20,000, Capital investment in the business was $ 50,000 and Normal Rate of Return was 10%. Calculate the amount of Goodwill premium brought by Naveen.

The correct answer is -First, let’s calculate the super profit of the firm:

Normal Rate of Return = 10% Average net profit of the firm = $20,000 Capital investment in the business = $50,000

Therefore, Normal Profit = Capital investment x Normal Rate of Return Normal Profit = $50,000 x 10% = $5,000

Super Profit = Average net profit of the firm – Normal Profit Super Profit = $20,000 – $5,000 = $15,000

Now, the value of Goodwill can be calculated as three years’ purchase of super profits:

Goodwill Value = 3 x Super Profit Goodwill Value = 3 x $15,000 = $45,000

Since Naveen is being admitted for 1/4 share, his share in the goodwill premium will be:

Naveen’s Share in Goodwill = 1/4 x $45,000 = $11,250

Therefore, the amount of Goodwill premium brought by Naveen is $11,250.