Question

Average profit earned by a firm is ₹ 80,000 which includes undervaluation of stock of ₹ 8,000 on an average basis. The capital invested in the business is ​₹ 8,00,000 and the normal rate of return is 8%. Calculate goodwill of the firm on the basis of 7 times the super profit.

Answer 1

Average Normal Profits of the Firm = (Average Profits + Undervaluation of Stock ) = Rs. (80,000 + 8,000 ) = Rs. 88,000.

Normal Profits

= Rs. `("Capital Empolyed" xx "Normal Rate of Return"/100)`

= Rs. `( 8,00,000 xx 8/100 )`

= Rs. 64,000

Super Profits = Average Profits - Normal Profits

= Rs. (88,000 - 64,000) = Rs. 24,000

Goodwill = Super Profits x No. of Years of Purchase

= Rs. 24,000 x 7= Rs. 1,68,000