Average capital employed in Sathya Ltd is Rs. 35,00,000 whereas net trading profits before tax for the last three years have been Rs. 14,75,00; Rs. 14,55,000 and 15,25,000. In these three years, the managing director was paid a salary of Rs. 10,000 P.M. But now he would be paid a salary of Rs. 12,000 P.M. Normal rate of return expected in the industry in which Sathya Ltd is engaged is 18%. Rate of tax is 50%. Calculate goodwill on the basis of three years’ purchase of the super profits.
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Answer:
The Answer is 15 290233 ×17^87
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Answer: Goodwill on the basis of three years’ purchase of the super-profits will be Rs. 7,95,000.
Explanation:
Calculation of Goodwill on the basis of three years’ purchase of the super-profits -
- Normal Profit = Firm's Capital × Normal Rate of Return ÷ 100
- Average Profit = Sum of Past year profit ÷ No. of year for which profit is given.
- Super Profit = Normal Profit - Average Profit
- Goodwill on the basis of years' purchase of the Super profit
⇒ Super Profit × No. of years for Purchase of the super profit.
Calculation
- Normal Profit = 35,00,000 × 50% = 17,50,000
- Average Profit of Past 3 year
⇒ (1475000 + 1455000 + 1525000) ÷ 3
⇒ 14,85,000
- Super Profit = (1750000 - 1485000) = 2,65,000
- Goodwill on the basis of three years' purchase of the Super profit
⇒ 265000 × 3
⇒ Rs. 7,95,000
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