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Question
A partnership firm earned net profits during the last four years as follows:
| Year | ₹ |
| 1 | 56,000 |
| 2 | 64,000 |
| 3 | 60,000 |
| 4 | 62,000 |
The capital investment in the firm throughout the above mentioned period has been ₹ 3,00,000. Having regard to the risk involved, 15% is considered to be a fair return on the capital.
Calculate the value of goodwill on the basis of 3 year’s purchase of average super profits earned during the above-mentioned four years.
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Solution
Given Profits:
Year 1 = ₹ 56,000
Year 2 = ₹ 64,000
Year 3 = ₹ 60,000
Year 4 = ₹ 62,000
Total = 56,000 + 64,000 + 60,000 + 62,000
= 2,42,000
Average Profit = `(2,42,000)/4`
= ₹ 60,500
Capital employed = ₹ 3,00,000
Normal rate of return = 15%
Normal Profit = 3,00,000 × 15%
= 45,000
Super Profit = Average Profit − Normal Profit
= 60,500 − 45,000
= 15,500
Goodwill is to be valued at 3 years’ purchase of average super profits:
Goodwill = 15,500 × 3
= 46,500
