Rajan and Rajani are partners in a firm. Their capitals were Rajan ₹ 5,00,000, Rajani ₹ 2,00,000. During the year 2025, the firm earned a profit of ₹ 1,50,000. Calculate the value of goodwill of the firm assuming that the normal rate of return is 20%?
Answer (2)
The goodwill of the firm can be calculated as ₹ 50,000 by comparing the actual profit with the expected normal profit based on the partners' total capital and the normal rate of return. The steps involved include calculating total capital, normal profit, excess profit, and then capitalizing the excess profit. This method provides a clear understanding of the firm's value beyond the tangible assets.
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To calculate the goodwill of the firm, we can use the capitalized value method, which involves comparing the actual earnings with the expected normal earnings, given the normal rate of return. Here’s how you can calculate it step by step:
Calculate the Total Capital of the Partners:
Rajan's capital = ₹ 5,00,000
Rajani's capital = ₹ 2,00,000
Total Capital = ₹ 5,00,000 + ₹ 2,00,000 = ₹ 7,00,000
Determine the Normal Profit:
The normal rate of return is 20%.
Normal Profit = 20% of Total Capital
Normal Profit = 100 20 × 7 , 00 , 000 = ₹1 , 40 , 000
Compare Actual Profit with Normal Profit:
The actual profit earned by the firm during 2025 is ₹ 1,50,000.
The excess profit, therefore, is:
Excess Profit = Actual Profit − Normal Profit = 1 , 50 , 000 − 1 , 40 , 000 = ₹10 , 000
Capitalize the Excess Profit to Find Goodwill:
Goodwill is often calculated by capitalizing the excess profit at the normal rate of return. This is calculated as follows:
Goodwill = ( Normal Rate of Return Excess Profit )
Goodwill = 0.20 10 , 000 = ₹50 , 000
The value of goodwill for the firm, based on the provided information and assumptions, is ₹ 50,000 .
