Read the following information and answer the following question.
A and B are partners sharing profits equally. Average capital employed of the firm is ₹10,00,000. The normal rate of return is 11%. Salary to each partner for his service to be treated as a charge on profit- 30,000 per year. The asset of the firm excluding goodwill is 11,00,000 and liabilities 1,00,000. The profit of the firm is as follows-
₹1,60,000(2016)
₹1,40,000(2017)
₹2,70,000(2018)
What is the value of goodwill if calculated on the basis of capitalisation of super profit?
Answer & explanation
Correct answer: option 4
The correct answer is option 4- 1,81,818
Normal profit = Average capital employed x (Normal rate of return/100)
= 10,00,000*11/100
= 1,10,000
Average profit = Profits of year (2016 + 2017 + 2018)/Total no of years
Average profit = (1,60,000+1,40,000+2,70,000)/3
= 5,70,000/3
= ₹1,90,000
Average profit = 1,90,000- salary of both partners i.e., 60,000
= ₹1,30,000
Super profit = Average profit - Normal profit
= 1,30,000 - 1,10,000
= ₹20,000
Goodwill = Super profit x (100/ normal rate of return)
= 20,000*100/11
= ₹1,81,818.18