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 = 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 - 10,000

   Super Profit = 2,000

3) Calculation of VALUE OF GOODWILL:

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

   Goodwill = 2,000 x 2

   Goodwill = 4,000