Question

Capital invested in a firm is ₹ 3,00,000. Normal rate of return is 10%. Average profits of the firm are ₹ 41,000 (after an abnormal loss of ₹ 2,000). Calculate goodwill at five times the super profits.

Answer 1

Average profit given = ₹ 41,000, but it is after an abnormal loss of ₹ 2,000.

So, adjusted average profit:

₹ 41,000 + ₹ 2,000 = ₹ 43,000​

1. Normal Profit

Capital invested = ₹ 3,00,000

Normal rate of return = 10%

Normal Profit = `₹ 3,00,000 xx 10/100 = ₹ 30,000`

2. Super Profit

Super Profit = Adjusted Average Profit − Normal Profit

= ₹ 43,000 − ₹ 30,000 = ₹ 13,000​

3. Goodwill

Goodwill is valued at 5 times the super profit:

₹ 13,000 × 5

= ₹ 65,000