average profit earned by firm is 100000 which includes undervaluation of stock of 40000 on an average basic . the capital invested in the business 630000 the normal rate of return is 5% . calculate Goodwill of the firm on the basis of 5 time the super profit .
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Given:
- The average profit earned by a firm is Rs 1,00,000.
- Undervaluation of stock exists at Rs 40,000.
- The capital of the business is Rs 6,30,000.
- The NRR [Normal Rate of Return] is 5%.
- The goodwill is to be valued at 5 times the super profit.
To find: The value of goodwill.
Answer:
Undervaluation of stock is to be added to the profit.
Average profit = Rs 1,00,000 + Rs 40,000 = Rs 1,40,000
Normal profit = Capital × (NRR ÷ 100)
Normal profit = Rs 6,30,000 × (5 ÷ 100)
Normal profit = Rs 31,500
Super profit = Average profit - Normal profit
Super profit = Rs 1,40,000 - Rs 31,500
Super profit = Rs 1,08,500
Goodwill = Super profit × 5
Goodwill = Rs 1,08,500 × 5
Goodwill = Rs 5,42,500
Therefore, the goodwill is Rs 5,42,500.
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