The capital employed as shown by the books of ABC Ltd is Rs 5,00,00,000. And the normal rate of return is 10 %. Goodwill is to be calculated on the basis of 3 years purchase of super profits of the last four years. Profits for the last four years are:

Year Profit/Loss (Rs)

2005 - Rs. 1,00,00,000

2006 - Rs. 1,22,50,000

2007 - Rs. 74,50,000

2008 - Rs. 54,00,000

Calculate goodwill.

Rs 2,11,29,400

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Rs 3,31,74,700

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Rs 2,11,71,500

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Rs 1,13,25,000

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Solution

The correct option is D
Rs 1,13,25,000

Total profits for the last four years = Rs. 1,00,00,000 + Rs. 1,22,50,000 + Rs. 74,50,000 + Rs. 54,00,000 = Rs 3,51,00,000

Average Profits = Rs. 3,51,00,000 / 4 = Rs 87,75,000

Normal Profits = Rs. 5,00,00,000 X 10/100 = Rs 50,00,000

Super Profits = Average − Normal Profits = Rs. 87,75,000 − Rs. 50,00,000 = Rs 37,75,000

Goodwill = Rs. 37,75,000 × 3 = Rs 1,13,25,000

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