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%.
Goodwill is -
Answer & explanation
Correct answer: option 1
The correct answer is option 1- ₹20,000.
Capital employed = ₹5,00,000
Normal rate of return = 10%
Normal profit = Capital employed x Normal rate of return/100
= 5,00,000 x 10/100
= 50,000
Average profit = Profit of year (2020+2021+2022+2023+2024)/5
= (₹40,000 + ₹50,000 + ₹55,000 + ₹70,000 + ₹85,000)/5
= 3,00,000/5
= 60,000
Super profit = Average profit - Normal profit
= 60,000 - 50,000
= 10,000
Goodwill = Super profit x No of years purchase
= 10,000 x 2
= 20,000