The firm of P,Q and R earned Rs.4,00,000 average profits during the last three years. The capital employed in the business was Rs.6,00,000. Normal rate of return of the industry is 8%. Calculate the goodwill of the firm by capitalising the super profits.
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Given data:
- P, Q and R are partners in a firm, earning Rs 4,00,000 as average profit for the last 3 years.
- The capital employed is Rs 6,00,000.
- The NRR is 8%.
To find: The goodwill of the firm by capitalizing the super profit.
Answer:
The average profit has already been provided to us, i.e., Rs 4,00,000.
- Capital employed = Rs 6,00,000
- NRR = 8%
Normal profit = (Capital × NRR) ÷ 100
Normal profit = (Rs 6,00,000 × 8) ÷ 100
Normal profit = Rs 48,000
Super profit = Average profit = Normal profit
Super profit = Rs 4,00,000 - Rs 48,000
Super profit = Rs 3,52,000
Goodwill = (Super profit × 100) ÷ NRR
Goodwill = (Rs 3,52,000 × 100) ÷ 8
Goodwill = Rs 3,52,00,000 ÷ 8
Goodwill = Rs 44,00,000
Therefore, the goodwill of the firm by capitalization of super profit is Rs 44,00,000.
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