Abhay, Babu, and Charu are Partners Sharing Profits and Losses Equally :- Accountancy

Abhay, Babu, and Charu are partners sharing profits and losses equally. They agree to admit Daman for an equal share of profit. For this purpose, the
Abhay, Babu, and Charu are partners sharing profits and losses equally. They agree to admit Daman for an equal share of profit. For this purpose, the value of goodwill is to be calculated on the basis of four years' purchase of the average profit of the last five years. These profits for the year ended 31st March were:

 Year 2015 2016 2017 2018 2019 Profit/(Loss) (₹) 1,50,000 3,50,000 5,00,000 7,10,000 (5,90,000)

On 1st April 2018, a car costing ₹ 1,00,000 was purchased and debited to Travelling Expenses Account, on which depreciation is to be charged @ 25%. The interest of ₹ 10,000 on Non-trade Investments is a credit to income for the year ended 31st March 2018 and 2019.

Normal Profits for the year ended 31st March, 2018

= Total Profits+Purchase of car wrongly debited - Depreciation on Car - Income from Non-trade Investments

= (7,10,000 + 1,00,000 - 25,000 - 10,000)

= 7,75,000

Normal Profits for the year ended 31st March, 2019

= (Total Loss + Income from Non-Trade Investments)

= (5,90,000 + 10,000)

= 6,00,000

Average Profit

= [("Normal Profits for the year ended 31st March 2019")]/5

= [1,50,000+3,50,000+5,00,000+7,75,000 - (6,00,000) ]/5

= Rs.2,35,500

Goodwill = Average Profits of last years \times No. of years Purchase

Goodwill = Rs. 2,35,500 \times 4

= Rs. 9,40,000.

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