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Question
A business earned an average profit of ₹ 4,00,000 during the last few years. The normal rate of profit in the similar type of business is 10%. The value of assets and liabilities of the business were ₹ 20,00,000 and ₹ 5,00,000 respectively. Calculate the value of goodwill of the firm by Super Profits Method if it is valued at 2 years purchase of super profit.
Numerical
Solution
Super profit = Average profit − Normal profit
Normal profit = Capital employed × NRR
= (20,00,000 − 5,00,000) × 10%
= ₹ 1,50,000
Super profit = 4,00,000 − 1,50,000
= ₹ 2,50,000
Firm's Goodwill = Super profit × Number of years of purchase
= 2,50,000 × 2
= ₹ 5,00,000
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