The average profit earned by a firm is Rs. $7, 50, 000$ which includes overvaluation of stock of Rs. $30, 000$ of an average basis. The capital invested in the business Rs. $42, 00, 000$ and the normal rate of return is $15$ . Calculate goodwill of the firm on the basis of $3$ times the super profit.

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Solution

Step 1: Calculation of Normal Profit:
Normal Profit= Capital Employed * [Normal rate of return/100]
= 4200000 * [15/100]
= 630000

Step 2: Calculation of Average Profit:
Average Profit= Profit- Overvaluation of Stock
= 750000- 30000
= 720000

Step 3: Calculation of Super Profit:
Super Profit= Average Profit- Normal Profit
= 720000-630000
= 90000

Step 4: Calculation of Goodwill:
Goodwill = Super profit * No. of years purchase
Goodwill= 90000* 3
= 270000

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The average profit earned by a firm is Rs.7,50,000 which includes overvaluation of stock of Rs. 30,000 of an average basis. The capital invested in the business Rs. 42,00,000 and the normal rate of return is 15. Calculate goodwill of the firm on the basis of 3 times the super profit.