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Question
Average net profit expected in future by XYZ firm is ₹ 36,000 per year. Average capital employed in the business by the firm is ₹ 2,00,000. The normal rate of return from capital invested in this class of business is 10%. Remuneration of the partners is estimated to be ₹ 6,000 p.a. Calculate the value of goodwill on the basis of two years' purchase of super profit.
Solution
Goodwill = Super Profit x Number of Years' Purchase
∴ Normal Profit
= Expected Capital Employed x `"Normal Rate Of Return"/100`
= 2,00,000 x `10/100` = Rs. 20,000
Actual Expected Profit = 36,000 - 6,000 = Rs. 30,000
Super Profit = Actual Expected Profit - Normal Expected Profit
= 30,000 - 20,000 = Rs. 10,000
Number of years’ purchase = 2
∴ Goodwill = 10,000 x 2 = Rs. 20,000.
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