Question

The average profit earned by a firm is ₹ 1,00,000 which includes undervaluation of stock of ₹ 40,000 on an average basis. The capital invested in the business is ₹ 6,30,000 and the normal tare of return is 5%. Calculate goodwill of the firm on the basis of 5 time the super profit.

Answer 1

Solution:

Average Profit earned by a firm = Rs. 1,00,000

Undervaluation of Stock = Rs.40,000

Average Actual Profit = Average Profit earned by a firm + Undervaluation of Stock = 1,00,000 + 40,000 = Rs. 1,40,000  

Normal Profit = Capital Investment x Normal Rate of Return  

                     = 6,30,000 x $\frac{5}{100}$  

                     = 31, 500

Super Profit = Actual Average Profit - Normal Profit

                   = 1,40,000 - 31, 500 = Rs.1,08, 500

Goodwill = Super Profit x Number of Times = 1,08,500 x 5 = Rs.5,42,500