Question

The average profit earned by a firm is Rs. 80,000 which includes
undervaluation of stock of Rs. 10,000 on an average basis. The capital
invested in the business is Rs. 8,00,000 and the normal rate of return is
10%, calculate goodwill of the firm on the basis of 5 times the super
profit.​

Answer 1

Explanation:

Step 1: Calculation of Normal Profit:

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

= 630000 * [5/100]

= 31500

Step 2: Calculation of Average Profit:

Average Profit= Profit + Undervaluation of Stock

= 100000+40000

= 140000

Step 3: Calculation of Super Profit:

Super Profit= Average Profit- Normal Profit

= 140000-31500

= 108500

Step 4: Calculation of Goodwill:

Goodwill= 108500* 5

= 542500