Question

The average profit of a business over the last five years amounted to Rs60,000 . The normal commerical yield on capital invested in such a business is deemed to be `10%` p.a. The net capital invested in the business is Rs5,00,000. Amount of goodwikll, if it is based on 3 years purchase of last 5 years super profits will be:

Answer 1

Answer:

Valuation of Goodwill = 30,000

Explanation:

Goodwill = Super profit x No. of years of purchase

Super profit = Average profit - Normal Profit

Normal Profit = Capital Employed x Rate of Return  

                                                          ----------------------

                                                                  100

                                50,000 x 10

                           =                    ------

                                                 100

                          =    Rs.   50,000

Super profit = 60,000 - 50,000

                    = 10,000

Goodwill = 10,000 x 3 = 30,000