Question

A business earned an average profit of ₹ 8,00,000 during the last few years. The normal rate of profit in the similar type of business is 10%. The total value of assets and liabilities of the business were ₹ 22,00,000 and ₹ 5,60,000 respectively. Calculate the value of goodwill of the firm by super profit method if it is valued at `2 1/2` years' purchase of super profits.

Answer 1

Average Profit = Rs. 8,00,000.

Normal Profit = `"Capital Employed" xx "Normal Rate"/100`
                       = 16,40,000 x `10/100` = Rs. 1,64,000.

Capital Employed = Total Assets - Outside Liabilities
                             = 22,00,000 - 5,60,000
                             = Rs. 16,40,000

Super Profit = Average Profit - Normal Profit
                    = 8,00,000 - 1,64,000
                    = Rs. 6,36,000

Goodwill = Super Profit x No. of Years' Purchase
               = 6,36,000 x 2.5
               = Rs. 15,90,000