Question

The total capital of the firm of Sakshi, Mehak and Megha is ₹ 1,00,000 and the market rate of interest is 15%. The net profits for the last 3 years were ₹ 30,000; ₹ 36,000 and ₹ 42,000. Goodwill is to be valued at 2 years' purchase of the last 3 years' super profits. Calculate the goodwill of the firm.

Answer 1

$$\begin{gathered} \mathrm{Goodwill}=\mathrm{Super}\mathrm{Profit}\times \mathrm{Number}\mathrm{of}\mathrm{Years}\text{'}\mathrm{Purchase} \\ \mathrm{Super}\mathrm{Profits}=\mathrm{Average}\mathrm{Profit}-\mathrm{Normal}\mathrm{Profit} \\ \begin{array}{c}\begin{array}{rcl}\mathrm{Average}\mathrm{Profits}& =& \frac{\mathrm{Total}\mathrm{Profits}}{\mathrm{Number}\mathrm{of}\mathrm{Years}}\\ & =& \frac{30,000+36,000+42,000}{3}=\mathrm{Rs}36,000\end{array}\end{array} \\ \begin{array}{c}\begin{array}{rcl}\mathrm{Normal}\mathrm{Profits}& =& \mathrm{Capital}\mathrm{Employed}\times \mathrm{Normal}\mathrm{Rate}\mathrm{of}\mathrm{Return}\\ & =& 1,00,000\times \frac{15}{100}=15,000\end{array}\end{array} \\ \mathrm{Super}\mathrm{Profits}=36,000-15,000=21,000 \\ \mathrm{Goodwill}=21,000\times 2=\mathrm{Rs}42,000 \end{gathered}$$