Calculate the value of goodwill on basis of 3 years' purchase of the super profit if average profit is ₹20,000 and capital investment of the firm is ₹60,000. The normal return on capital is 10%.
Answer & explanation
Correct answer: option 2
The correct answer is option 2- ₹42,000.
Normal profit = 60,000 X 10/100
= ₹6,000
Super profit = Average profit - Normal profit
= 20,000 - 6,000
= ₹14,000
Goodwill = 14,000 X 3
= ₹42,000