Question

Rakesh and Ashok earned a profit of ₹ 5,000. They employed capital of ​₹ 25,000 in the firm. It is expected that the normal rate of return is 15% of the capital. Calculate amount of goodwill if goodwill is valued at three years' purchase of super profit.

Answer 1

$$\begin{gathered} \mathrm{Actual}\mathrm{Profits}\mathrm{of}\mathrm{the}\mathrm{firm}=₹5,000 \\ \mathrm{Normal}\mathrm{Profits}=\left(\mathrm{Capital}\mathrm{Employed}\times \frac{\mathrm{Normal}\mathrm{Rate}\mathrm{of}\mathrm{Return}}{100}\right)=₹\left(25,000\times \frac{15}{100}\right)=₹3,750 \\ \mathrm{Super}\mathrm{Profits}=\mathrm{Actual}\mathrm{Profits}-\mathrm{Normal}\mathrm{Profits}=₹(5,000-3,750)=₹1,250 \\ \mathrm{Goodwill}=\mathrm{Super}\mathrm{Profits}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{Purchase}=₹(1,250\times 3)=₹3,750 \end{gathered}$$