Question

Gupta and Bose had a firm in which they had invested ₹ 50,000. On an average, the profits were ₹ 16,000. The normal rate of return in the industry is 15%. Goodwill is to be valued at four years' purchase of profits in excess of profits @ 15% on the money invested. Calculate the  value goodwill.​

Answer 1

Information provided with us:

• Gupta and Bose had a firm in which they had invested ₹ 50,000
• On an average, the profits were ₹ 16,000.
• Normal rate of return in the industry is 15%.
• No. of years purchase is 4years
• Normal rate of return is 15%

What we have to calculate:

• We have to calculate the value of goodwill

We know that,

Normal profit:-

• Normal profit = Employed capital × Normal rate of return / 100

Goodwill:-

• Goodwill = Average profit × No. of purchase years

Super profit:-

• Super Profit = Average profit – Normal profit

Required calculations:

• Finding out the normal profit by substituting the values in its formula. As we have capital employed is 50000 and normal rate of return is 15%

=> Normal profit = 50000 × (15 / 100)

=> Normal profit = 500 × 15

=> Normal profit = 7500

• Finding out the super profit by substituting the values of average profit and normal profit.

=> Super profit = 16000 - 7500

=> Super profit = 8500

• At last we are calculating the value goodwill by substituting the values of super profit as 8500 and no. of years purchase as 4.

=> Goodwill = 8500 × 4

=> Goodwill = 34000

∴ Value of goodwill is ₹ 34000