Question

Average net profit expected in future by XYZ firm is ₹ 36,000 per year. Average capital employed in the business by the firm is ₹ 2,00,000. The normal rate of return from capital invested in this class of business is 10%. Remuneration of the partners is estimated to be ₹ 6,000 p.a.  Calculate the value of goodwill on the basis of two years' purchase of super profit.

Answer 1

Goodwill = Super Profit x Number of Years' Purchase

∴ Normal Profit
= Expected Capital Employed x `"Normal Rate Of Return"/100`

= 2,00,000 x `10/100` = Rs. 20,000

Actual Expected Profit = 36,000 - 6,000 = Rs. 30,000

Super Profit = Actual Expected Profit - Normal Expected Profit

= 30,000 - 20,000 = Rs. 10,000

Number of years’ purchase = 2
∴ Goodwill = 10,000 x 2 = Rs. 20,000.