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 years purchase of super profits.
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Solution:
Average Profit = 8,00,000
Capital Employed = Total Assets - outside Liabilities
= 22,00,000 - 5, 60, 000 = 16,40, 000
Normal Profit = Capital Employed x
= 16, 40, 000 x = 1,64,000
Super Profit = Average Profit - Normal Profit
= 8, 00,000 - 1, 64,000 = 6,36,000
Goodwill = Super Profit x No. of Years' Purchase
= 6,36,000 x 2.5 = 15, 90, 000
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