A business has earned an average profit ₹60,000 in last 3 years. Capital Employed of the business is of ₹5,00,000. Normal Rate of Return for same kind of business is 10%. Calculate the value for Goodwill of the partnership firm.
Answer & explanation
Correct answer: option 3
The correct answer is option 3- ₹1,00,000.
Goodwill is calculated by the method of capitalisation of super profit.
Normal profit = 5,00,000 x 10/100
= ₹50,000
Average Profit = ₹60,000
Super profit = Average profit - Normal profit
= 60,000 - 50,000
= 10,000
Goodwill = Super Profit x 100 / Normal rate of return
Goodwill = 10,000 x 100/10
= ₹1,00,000