Question

Q. 47. The average profit earned by a firm is 75,000 which includes undervaluation of stock of 5,000 on an average basis. The capital invested in the business is 7,00,000 and the normal rate of return is 7%. Calculate goodwill of the firm on the basis of 5 times the super profit.​

Answer 1

Answer:

27000

Explanation:

Step 1: Calculation of Normal Profit:

Normal Profit= Capital Employed * [Normal rate of return/100]

= 4200000 * [15/100]

= 630000

Step 2: Calculation of Average Profit:

Average Profit= Profit- Overvaluation of Stock

= 750000- 30000

= 720000

Step 3: Calculation of Super Profit:

Super Profit= Average Profit- Normal Profit

= 720000-630000

= 90000

Step 4: Calculation of Goodwill:

Goodwill = Super profit * No. of years purchase

Goodwill= 90000* 3

= 270000