Question

The profits and losses for the last years are 2001-02. Loss Rs. 10,000; 2002-03 Loss Rs. 2,500; 2003-04 Profit Rs. 98,000 & 2004-05 Profit Rs. 76,000. The average capital employed in the business is Rs. 2,00,000. The rate of interest expected from capital invested is 12%. Calculate the value of goodwill on the basis of two years purchase of super profits based on the average of four years.

• A. Rs 82,500
• B. Rs 32,750
• C. Rs 87,500
• D. Rs 92,500

Answer 1

The correct option is B

Rs 32,750

Normal Profits = Capital employed x Normal Rate of Return = Rs. 2,00,000 X 12% = Rs 24,000

Total Profits = . - 10,000 - 2,500 +98,000 +76,000 = Rs 1,61,500/4

Average Profits = Rs. 1,61,500/4 = Rs. 40,375

Super profits = Rs. 40,375 - Rs. 24,000 = Rs. 16,375

Goodwill = Rs. 16,375 x 2 = Rs. 32,750