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 years purchase of super profits.

Answer 1

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  $\frac{Normal Rate}{100}$  

                      = 16, 40, 000 x $\frac{10}{100}$  = 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  

Answer 2

Explanation:

full explanation of this question