Question

From the following details, calculate the value of goodwill at 2 years purchase of super profit:

1. Total assets of a firm are ₹ 5,00,000
2. The liabilities of the firm are ₹ 2,00,000
3. Normal rate of return in this class of business is 12.5%.
4. Average profit of the firm is ₹ 60,000.

Answer 1

Capital employed = fixed assets + current assets – current liabilities

= 5,00,000 – 2,00,000

= ₹ 3,00,000

Normal profit = Capital employed × Normal rate of return

= `3,00,000 xx 12.5/100`

= ₹ 37,500

Super profit = Average profit – Normal profit

= 60,000 – 37,500

= ₹ 22,500

Goodwill = Super profit × Number of years of purchase

= ₹ 22,500 × 2

= ₹ 45,000