Read the passage carefully and answer the next 5 questions.
The books of a business showed that the firm's capital employed on December 31, 2024, ₹5,00,000 and the profits for the last five years were: 2020-₹40,000: 2021-₹50,000; 2022-₹55,000; 2023- ₹70,000 and 2024-₹85,000. You are required to find out the value of goodwill based on 2 years purchase of the super profits of the business, given that the normal rate of return is 10%.
In this case, Normal profit is -
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Rs. 50,000
Normal profit is the profit a firm of this size is expected to earn at the normal rate of return in that line of business. It is worked out on the capital employed, not on the past profits.
Normal Profit = Capital Employed × Normal Rate of Return ÷ 100
= Rs. 5,00,000 × 10 ÷ 100
= Rs. 50,000
The profits of 2020-2024 are needed only for the average profit (next step of the super profits method), not for the normal profit.
NCERT (2026-27 edition):
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