Question

The books of Ram and Bharat showed that the capital employed on 31.12.2016 was Rs. 5,00,000 and the profits for the last 5 years : 2015 Rs. 40,000; 2014 Rs. 50,000; 2013 Rs. 55,000; 2012 Rs. 70,000 and 2011 Rs. 85,000. Calculate the value of goodwill on the basis of 3 years purchase of the average super profits of the last 5 years assuming that the normal rate of return is 10%?

Answer 1

Average Actual Profit = `"Sum of given year profit"/"number of given years"`

Year	Profit
2015	40,000
2014	50,000
2013	55,000
2012	70,000
2011	85,000
Sum of 5 years profit	3,00,000

Average Actual Profit =`[3,00,000]/5` = Rs 60,000

Normal Profit = Capital Employed ×  `"Normal Rate of Return"/100`
= Rs 500,000 x `10/100`

= Rs. 50,000

Average Super Profit = Average Actual Profit – Normal Profit
= 60,000 – 50,000
= Rs 10,000

Goodwill = Average Super Profit × Number of year purchase
= 10,000 × 3
= Rs 30,000