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Question
Rakesh and Ashok earned a profit of ₹ 5,000. They employed capital of ₹ 25,000 in the firm. It is expected that the normal rate of return is 15% of the capital. Calculate amount of goodwill if goodwill is valued at three years' purchase of super profit.
Solution
Actual Profits of the Firm = Rs. 5,000
Normal Profits
= `( "Capital Employed" xx "Normal Rate of Return"/100)`
= Rs. `(25,000 xx 15/100)` = Rs. 3,750
Super Profits = Actual Profits - Normal Profits
= Rs. 5000 - 3,750
= Rs. 1,250
Goodwill = Super Profits x No. of Years of Purchase
= Rs. ( 1,250 x 3)
= Rs. 3,750.
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