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Question
A business earned an average profit of ₹ 8,00,000 during the last few years. The normal rate of profit in the similar type of business is 10%. The total value of assets and liabilities of the business were ₹ 22,00,000 and ₹ 5,60,000 respectively. Calculate the value of goodwill of the firm by super profit method if it is valued at `2 1/2` years' purchase of super profits.
Solution
Average Profit = Rs. 8,00,000.
Normal Profit = `"Capital Employed" xx "Normal Rate"/100`
= 16,40,000 x `10/100` = Rs. 1,64,000.
Capital Employed = Total Assets - Outside Liabilities
= 22,00,000 - 5,60,000
= Rs. 16,40,000
Super Profit = Average Profit - Normal Profit
= 8,00,000 - 1,64,000
= Rs. 6,36,000
Goodwill = Super Profit x No. of Years' Purchase
= 6,36,000 x 2.5
= Rs. 15,90,000
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