Question

M/s. Al Hilal LLC started with Capital OMR 800,000, Total Tangible Assets OMR 1,000,000 and Current Liabilities OMR 100,000 and decided to admit a new partner in the business and also to receive the amount of goodwill from the incoming partner. The concern wishes to calculate the value of goodwill on the basis of four years purchase of the firm by different methods, such as Average Profit and Super Profit. The books of accounts revealed some information related to past years’ profits of 2011 - OMR 15,000, 2012 - OMR 20,000, 2013 - OMR 25,000, 2014 - OMR 30,000, 2015 - OMR 35,000, 2017 - OMR 40,000, 2018 - OMR 45,000, 2019 - OMR 50,000. The concern expects the Rate of Return @ 12.5 % normally. Compute the value of goodwill on the basis of 4 years purchase under Capitalization of Average Profit Method and Super Profit Method. Which method of goodwill calculation is beneficial for the firm? Why these two methods showing two different values? Give your comments with the calculated values.