Question

Rita, Nina and Mita are partners in a firm sharing profits and losses in the ratio of 3 :2 : 1. Mita dies on 1st April, 2017. On the date of her death, it was decided to value goodwill on the basis of two years’ purchase of weighted average profits of the firm for the last three years.

The profits of the last three years and weights assigned were :

You are required to : 

(i) Calculate the firm’s goodwill on the date of Mita’s death (show the working with the formula). 

(ii) Pass the necessary journal entry to credit Mita’s Capital Account with her share of goodwill.

Answer 1

Number of Year's Purchase = 2

∴ value of Goodwill= Weighted Average Profit x Number of Year's Purchase

⇒ Rs 80, 000 x 2

⇒ Rs 26, 667 x 1/6

= Rs  26, 667