Question

The profits and losses for the last years are : 2001-02 Losses Rs.8,000; 2002-03 Losses Rs.4,500; 2003-04 Profits Rs.1,00,000 & 2004-05 Profits Rs.74,000.The average capital employed in the business is Rs.2,40,000. The rate of return expected from capital invested as 10%. The remuneration of partners is estimated to be Rs.1,000 per month. Calculate the value of goodwill on the basis of two years' purchase of super profits base on the average of four years.

• A. $Rs.9,000$
• B. $Rs.8.750$
• C. $Rs.8,500$
• D. $Rs.8,250$

Answer 1

The correct option is B $Rs.8.750$

Goodwill arises when a company acquires another entire business. The amount of goodwill is the cost to purchase the business minus the fair market value of the tangible assets, the intangible assets that can be identified, and the liabilities obtained in the purchase.

Year	Profit before partner’s remuneration	Partner’s remuneration Per annum	Profit after partner’s remuneration
2001-02	(8000)	12000	20000
2002-03	(4500)	12000	16500
2003-04	100000	12000	88000
2004-05	74000	12000	62000

Average profit = (88000 + 62000 - 20000 - 16500)/ 4

= 113500/4

= 28375

Normal profit =( capital employed * normal rate )/ 100

=( 240000 * 10)/100

= 24000

Super profit = Average profit - normal profit

= 28375 - 24000

= 4375

Goodwill = Super profit * No. of year's purchase

= 4375 * 2

= 8750