Goodwill of the firm was valued at ₹6,00,000 being valued at 3 years purchase of super profits. If Normal rate of return was 10% and actual profits amounted to ₹3,50,000. Determine Capital Employed.
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → ₹15,00,000
Goodwill on basis of super profit = ₹6,00,000
Goodwill = Super profits x No of years purchase
6,00,000 = Super profits x 3
Super profits = 6,00,000/3
= 2,00,000
Super profit = Actual profit -Normal profit
2,00,000 = 3,50,000 - Normal profit
Normal profit = 3,50,000 - 2,00,000
= 1,50,000
Normal profit = Capital employed x Rate/100
1,50,000 = Capital employed x 10/100
Capital employed = 1,50,000 x 100/10
= 15,00,000