A partnership firm earned net profits during the last 3 years as follows:

YearNet Profit (Rs.)

The capital employed in the firm throughout the above-mentioned period has been Rs. 4,00,000/-.  Having regard to the risk involved, 15% is considered to be a fair return on the capital.  The remuneration of all the partners during this period is estimated to be Rs. 1,00,000 per annum.

Calculate the value of goodwill on the basis of

  • 2 years’ purchase of super profits earned on average basis during the above-mentioned 3 years and
  • By Capitalization method