Question

$A$ and $B$ are equal partners. They decide to admit $C$ for ${\frac{1}{3}}^{rd}$ share. for the purpose of admission of $C$, goodwill of the firm is to be valued at four years purchase of super profit. Average capital employed in the firm is Rs.$1,50,000$. Normal rate of return may be taken as $15$ p.a. Average profit of the firm Rs.$40,000$. Calculate value of goodwill.

Answer 1

Step 1: Calculation of Normal Profit:

Normal profit= Capital Employed* [ Normal Rate Of Return/100]

= 150000* [15/100]

= 22500

Step 2: Calculation of Average Profit:

Average Profit= 40000

Step 3: Calculation of Super Profit:

Super Profit= 40000- 22500

= 17500

Step 4: Calculation of Goodwill:

Goodwill= 17500* 4

= 70000