Question

Calculate value of goodwill form the following information Total capital employed in the business Rs. 4,00,000 Net profit for the past three years were Rs. 53,800, Rs. 45,350 , Rs. 56,250Normal Rate of Return at 10%Goodwill is to be valued at three years purchase of super profit​

Answer 1

Given:

• Capital employed - Rs 4,00,000
• The profit for the last 3 years were Rs 53,800, Rs 45,350 and Rs 56,250.
• NRR [Normal Rate of Return] - 10%
• The goodwill is to be valued at 3 years' purchase of the super profit.

To find: The value of goodwill.

Answer:

Average profit = Total profit ÷ Number of years

• Total profit = Rs 53,800 + Rs 45,350 + Rs 56,250 = Rs 1,55,400
• Number of years = 3

Average profit = Rs 1,55,400 ÷ 3

Average profit = Rs 51,800

Normal profit = Capital employed × (NRR ÷ 100)

Normal profit = Rs 4,00,000 × (10 ÷ 100)

Normal profit = Rs 40,000

Super profit = Average profit - Normal profit

Super profit = Rs 51,800 - Rs 40,000

Super profit = Rs 11,800

Goodwill = Super profit × Number of years' purchase

Goodwill = Rs 11,800 × 3

Goodwill = Rs 35,400

Therefore, the value of goodwill is Rs 35,400.