Average profits of a firm during the last few years are Rs. 2,50,000 and the normal rate of return in a similar business is 5%. If the goodwill of the firm is 5,00,000 at 5 years' purchases of super profit, find the amount of capital employed by the firm.
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Rs. 30,00,000
Under the super profit method, goodwill = super profit × years' purchase, and super profit = average profit − normal profit. Working backwards from the goodwill gives the normal profit, and the normal profit at the normal rate gives the capital.
Super profit = Rs. 5,00,000 ÷ 5 = Rs. 1,00,000
Normal profit = Rs. 2,50,000 − Rs. 1,00,000 = Rs. 1,50,000
Capital employed = Rs. 1,50,000 × 100/5 = Rs. 30,00,000
NCERT (2026-27 edition): |