A firm had ₹5,00,000 capital employed and profits earned during last five years were: ₹90,000-2015, ₹30,000-2016, ₹20,000 (loss)-2017, ₹80,000-2018, ₹90,000-2019. What will be value of goodwill based on 3 years' purchase of super profits of business, given that normal rate of return is 10% ?
Answer & explanation
Correct answer: option 2
The correct answer is Option 2 - ₹12,000.
Average profit = Total profits/ no of years
Total profits = (profit of 2015 + profit of 2016 - loss of 2017 + profit of 2018 + profit of 2019)/5
= (₹90,000 + ₹30,000 - ₹20,000 + ₹80,000 + ₹90,000)/5
= 2,70,000/5
= 54,000
Normal profit = Capital employed x Rate of return/100
= 5,00,000 x 10/100
= 50,000
Super profit = Average profit - normal profit
= 54,000 - 50,000
= 4,000
Goodwill = Super profit x No of years purchase
= 4,000 X 3
= 12,000