Question

Sunny and Rohan were partners in a firm, sharing profits and losses in the ratio of 2 : 1. Their books showed that the capital employed on 31^st March, 2023 was ₹ 7,00,000. The average profits earned by the firm were ₹ 90,000. Calculate the value of goodwill on the basis of 5 years' purchase of super profits, assuming that the normal rate of return is 10%.

Answer 1

Normal profit = `"Capital employed" xx "NRR"/100`

= `7,00,000 xx 10/100`

= ₹ 70,000

Actual average profit = ₹ 90,000

Super Profit = Actual average profit − Normal profit

= 90,000 − 70,000

= ₹ 20,000

Goodwill = Super profit × No. of year's purchase

= 20,000 × 5

= ₹ 1,00,000