A business earned an average profit of Rs. $8, 00, 000$ during the last few years. The normal rate of profit in the similar type of business is $10$ . The total value of assets and liabilities of the business were Rs. $22, 00, 000$ and Rs. $5, 60, 000$ respectively. Calculate the value of goodwill of the firm by super profit method if it is valued at $2^{\frac{1}{2}}$ years purchase of super profit.

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Solution

Calculation of goodwill under super profit basis:
Net assets or capital employed = Total assets - Total liabilities
Net assets or capital employed = Rs. (2200000 - 560000) = Rs. 1640000
Average profit = Rs. 800000
Normal profit = Capital employed * rate of interest
Normal profit = Rs. 1640000 * 10% = Rs. 164000
Super profit = Average profit - Normal profit
Super profit = Rs. (800000 - 164000) = Rs. 636000
Goodwill = Super profit * No. of year's purchase
Goodwill = Rs. 636000 * 2.5 years
Goodwil = Rs. 1590000

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