Question

Gupta and Bose had a firm in which they had invested ₹ 50,000. On an average, the profits were ₹ 16,000. The normal rate of return in the industry is 15%. Goodwill is to be valued at four years' purchase of profits in excess of profits @ 15% on the money invested. Calculate the  value goodwill.

Answer 1

Goodwill = Super Profit x Number of Years Purchase

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

= 50,000 x `15/100` = Rs. 7,500.

Actual Profit = Rs. 16,000

Super Profit = Actual Profit - Normal Profit

= 16,000 - 7,500 = Rs. 8,500.

Number of years’ purchase = 4
∴ Goodwill = 8,500 x 4 = Rs. 34,000.