Question

The total capital of the firm of Sakshi, Mehak and Megha is ₹ 1,00,000 and the market rate of interest is 15%. The net profits for the last 3 years were ₹ 30,000; ₹ 36,000 and ₹ 42,000. Goodwill is to be valued at 2 years' purchase of the last 3 years' super profits. Calculate the goodwill of the firm.

Answer 1

Goodwill = Super Profit x Number of Years' Purchase

Super Profits = Average Profit - Normal Profit

Average Profits = ` "Total Profits"/"Number of Years"`

                        = `[30,000 + 36,000 + 42,000]/3` = Rs. 36,000.

Normal Profits = Capital Employed x Normal Rate of Return

                        = 1,00,000 x `15/100` = 15,000

Super Profits = 36,000 - 15,000 = 21,000

Goodwill = 21,000 x 2 = Rs. 42,000.