Question

The capital of the firm of Rajat and Karan is ₹ 15,00,000, and the market rate of interest is 12%. The annual salaries of Rajat and Karan are ₹ 20,000 and ₹ 30,000, respectively. The profits for the last three years were ₹ 2,40,000, ₹ 2,80,000, and ₹ 3,20,000. Goodwill of the firm is to be valued on the basis of two years’ purchase of the last three years’ average super profits. Calculate the goodwill of the firm.

Answer 1

Total Profit = 2,40,000 + 22,80,000 + 3,20,000

= ₹ 8,40,000

Average Profit = `(8,40,000)/3`

= ₹ 2,80,000

Actual Average Profit = ₹ 2,80,000 – (₹ 20,000 + ₹ 30,000)

= ₹ 2,30,000

Normal Profit = `"Capital employed" xx "Normal Rate of Returns"/100`

= `15,00,000 xx 12/100`

= ₹ 1,80,000

Super Profit = Actual Average Profit – Normal Profit

= 2,30,000 – 1,80,000

= 50,000

Goodwill = Super profit × Number of Years’ Purchase

= ₹ 50,000 × 2

= ₹ 1,00,000