Average profit earned by a firm is Rs. 80,000 which includes undervaluation of stock of Rs. 8,000 on an average basis. The capital invested in the business is Rs. 8,00,000 and the normal rate fo return is `8%`.
Calculate goodwill of the firm on the basis of 7 times the super profit.
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Average profit – Rs. 80,000
(A) Undervalue of stock – Rs. 8,000
Actual Average profit – Rs. 88,000
Normal profit = Capital investment x Normal rate of return
= Rs. 88,000 – Rs. 64,000
= Rs. 24,000
Goodwill = Super profit x 7
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= Rs. 24,000 x 7 = Rs. 1,68,000
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