Question

The average Net Profits expected in the furture by ABC Firm are Rs 36,000 per year. The average capital employed in the business by the firm is Rs 2,00,000. The rate of Return from capital invested in this class of business is 10%. The remuneration of the partners is estimated to be Rs 6,000 per annum. Find out the value of goodwill on the basis of two years' purchase of Super Profits.

Answer 1

(i) Actual Average Profit: Rs 36,000 -Rs 6,000 = Rs 30,000

(ii) Normal Profit = Capital Invested $\times \frac{\text{Normal Rate of Return}}{100}$

$=Rs2,00,000\times \frac{10}{100}=Rs20,000$

(iii) Super Profit = Actual Average Profit - Normal Profit

= Rs 30,000 - Rs 20,000 = Rs 10,000

(iv) Value of Goodwill = Super Profit $\times$ No. of year's Purchased

$=Rs10,000\times 2=Rs20,000$.