Question

Average profit earned by a firm is 80,000 which includes undervaluation of stock of 8,000 on an
average basis. The capital invested in the business is 3800000 and the normal rate of return is 8%

Calculate goodwill of the firm on the basis of 7 times the super profit.​

Answer 1

average profit =80000 undervaluation of stock =8000

adjusted average profit =80000+8000

= 88000

normal profit= 3800000×8÷100

= 304000

super profit =

Answer 2

Average profit  80,000

Undervaluation of stock  8,000

Adjusted profit 80000+8000 = 880000

Normal profit = 3800000 X 8/100 = 304000

Super profit = 880000 - 304000 = 576000

Since goodwill profit is 7 times super profit  then

goodwill =  576000 X 7 = 4032000