Question

From the following details, calculate the value of goodwill at 2 years purchase of super profit:

1. Total assets of a firm are Rs. 5,00,000 

2. The liabilities of the firm are Rs. 2,00,000 

3. Normal rate of return in this class of business is 12.5 %. 

4. Average profit of the firm is Rs. 60,000.

Answer 1

Capital employed = fixed assets + current assets – current liabilities 

= 5, 00, 000 – 2, 00, 000 

= 3, 00, 000 

Normal profit = Capital employed x Normal rate of return 

= 3,00,000 x 12.8/100

= 3, 75, 000 

Super profit = Average profit – Normal profit 

= 60, 000 – 37, 500 

= 22, 500

 Goodwill = Super profit x Number of years of purchase 

= Rs. 22,500 x 2 

= Rs. 45,000