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Question
Average profit of GS & Co. is ₹ 50,000 per year. Average capital employed in the business is ₹ 3,00,000. If the normal rate of return on capital employed is 10%, calculate goodwill of the firm by:
(i) Super Profit Method at three years' purchase; and
(ii) Capitalisation of Super Profit Method.
Solution
(i) Goodwill = Super Profit x No. of Years Purchase
= 20,000 x 3 = Rs. 60,000
(ii) Goodwill = Super Profit x
= 20,000 x
Working Notes:
WN1: Calculation of Super Profits
Average Profit =
= Rs. 50,000
Normal Profit = Capital Employed x
= 3,00,000 x
Super Profit = Average Profit - Normal Profit
= 50,000 - 30,000 = Rs. 20,000.
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