A partnership firm earned net profit during the last three years ended $31^{s t}$ March, as follows:
2016 - Rs. $17, 000$ 2017 - Rs. $20, 000$ 2018 - Rs. $23, 000$ . The capital investment in the firm throughout the above mentioned period has been Rs. $80, 000$ . Having regard to the risk involved, $15$ is considered to be a fair return on the capital. Calculate value of goodwill on the basis of two years purchase of average super profit earned during the above mentioned three years.

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Solution

Step 1: Calculation of Normal Profit:
Normal profit= Capital employed * [ Normal rate of return/100]
= 80000* [15/100]
= 12000

Step 2: Calculation of Average Profit:
Average Profit= [ 17000+20000+23000]/3
= 20000

Step 3: Calculation of Super Profit:
Super Profit= Average Profit- Normal Profit
= 20000-12000
= 8000

Step 4: Calculation of Goodwill:
Goodwill= 8000* 2
= 16000

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