The average profit earned by a firm is Rs. $1, 00, 000$ which includes undervaluation of stock of Rs. $40, 000$ on an average basis. The capital invested in the business is Rs. $6, 30, 000$ and the normal rate of return is $5$ . Calculate goodwill of the firm on the basis of $5$ times the super profit.

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Solution

Step 1: Calculation of Normal Profit:
Normal Profit= Capital employed * [ Normal rate of return/100]
= 630000 * [5/100]
= 31500
Step 2: Calculation of Average Profit:
Average Profit= Profit + Undervaluation of Stock
= 100000+40000
= 140000
Step 3: Calculation of Super Profit:
Super Profit= Average Profit- Normal Profit
= 140000-31500
= 108500
Step 4: Calculation of Goodwill:
Goodwill= 108500* 5
= 542500

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The average profit earned by a firm is Rs. 1,00,000 which includes undervaluation of stock of Rs. 40,000 on an average basis. The capital invested in the business is Rs.6,30,000 and the normal rate of return is 5. Calculate goodwill of the firm on the basis of 5 times the super profit.