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Question
The books of Ram and Bharat showed that the capital employed on 31.12.2016 was Rs. 5,00,000 and the profits for the last 5 years : 2015 Rs. 40,000; 2014 Rs. 50,000; 2013 Rs. 55,000; 2012 Rs. 70,000 and 2011 Rs. 85,000. Calculate the value of goodwill on the basis of 3 years purchase of the average super profits of the last 5 years assuming that the normal rate of return is 10%?
Solution
Average Actual Profit = `"Sum of given year profit"/"number of given years"`
|
Year |
Profit |
|
2015 |
40,000 |
|
2014 |
50,000 |
|
2013 |
55,000 |
|
2012 |
70,000 |
|
2011 |
85,000 |
|
Sum of 5 years profit |
3,00,000 |
Average Actual Profit =`[3,00,000]/5` = Rs 60,000
Normal Profit = Capital Employed × `"Normal Rate of Return"/100`
= Rs 500,000 x `10/100`
= Rs. 50,000
Average Super Profit = Average Actual Profit – Normal Profit
= 60,000 – 50,000
= Rs 10,000
Goodwill = Average Super Profit × Number of year purchase
= 10,000 × 3
= Rs 30,000
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