Question

Capital investment in a firm is 3,00,000 and normal return on Capital is 10%. Value of goodwill calculated on the basis of three year's purchase of average super profit is 2,10,000. Average profits will be .......​

Answer 1

Average Profit will be 1,00,000

Explanation:

Let the Average Profit will be  x

if Goodwill is calclated on the basis of Super profit method = 2,10,000

Steps

Average Profit =   X

Normal profit  = Investment x  rate of return /100 (300000x10/100=30000)

Super Profit = Average profit - Normal Profit    (x-30000)

Goodwill = Super profit x  Number of year purchased

210000 = (x-30000) x 3

210000/3  = x-30000

Solving on the right side

70000 = x-30000

70000+30000 = x

100000 = x

So X is the Average Profit

and Average Profit = 100000

Answer 2

Answer:

Average super profit = 40,000

Explanation:

Given:

Capital investment = 300,000

Normal return on Capital = 10%

Goodwill = 210,000

Find:

Average super profit

Computation:

Profit = 300,000 × 10%

Profit = 30,000

Goodwill  / 3 = Average super profit - profit

Average super profit = 40,000