Question

Rakesh and Ashok earned a profit of ₹ 5,000. They employed capital of ​₹ 25,000 in the firm. It is expected that the normal rate of return is 15% of the capital. Calculate amount of goodwill if goodwill is valued at three years' purchase of super profit.

Answer 1

Actual Profits of the Firm = Rs. 5,000

Normal Profits

= `( "Capital Employed" xx "Normal Rate of Return"/100)`

= Rs. `(25,000 xx 15/100)` = Rs. 3,750

Super Profits = Actual Profits - Normal Profits 
= Rs. 5000 - 3,750
= Rs. 1,250

Goodwill = Super Profits x No. of Years of Purchase
= Rs. ( 1,250 x 3)

= Rs. 3,750.