Question

The books of a business showed that the capital employed on December 31, 2006, Rs. 5,00,000 and the profits for the last five years were: 1997 Rs. 40,000: 1998 - Rs. 50,000; 1999 - Rs. 55,000; 2000 - Rs. 70,000 and 2001 - Rs. 85,000. You are required to find out the value of goodwill based on 3 years of the purchase of the super-profits of the business, given that the normal rate of return is 10%.

Options

• Rs. 30,000

• Rs. 40,000

• Rs. 50,000

• None of the above

Answer 1

Rs. 30,000

Explanation:

Normal Profits = `"Capital Employed × Normal Rate of Return"/100`

= `("Rs". 5,00,000 × 10)/100 = 50000`

Average Profits = `("Rs". 3,00,000)/5` = Rs. 60,000

Super Profit = Rs. 60,000 - Rs 50,000 = Rs. 10,000 Goodwill,

= Rs. 10,000 × 3 = Rs. 30,000