Question

Capital employed by a firm is 1,00,000. Normal return of
business is expected at 10%. Average profit of last three years is
* 12,000. According to partnership deed, goodwill is valued at two
years' purchase of super-profit. Calculate the value of goodwill.​

Answer 1

VALUE OF GOODWILL = Rs. 4,000

Explanation:

• Goodwill = Super Profit x No. of year's of purchase

• Super Profit = Actual or Average profit – Normal Profit

• Normal Profit = Capital Employed x (Normal Rate of Return/100)

1) Calculation of NORMAL PROFIT:

     Normal Profit = Capital Employed x (Normal Rate of Return/100)

     Normal Profit = 1,00,000 x ( 10/100)

    Normal profit = 10,000

2) Calculation of SUPER PROFIT:

    Super Profit = Actual or Average profit – Normal Profit

    Super Profit = 12,000 (given) - 10,000 ( from 1 )

    Super Profit = 2,000

3) Calculation of VALUE OF GOODWILL:

   Goodwill = Super Profit x No. of year's of purchase

   Goodwill = 2,000 ( from 2 ) x 2 (given)

   Goodwill = 4,000