Question

The capital employed as shown by the books of ABC Ltd is Rs.5,00,000 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
2010	Rs.1,00,000
2011	Rs.1,22,500
2012	Rs.74,500
2013	Rs.54,000

Answer 1

Total profits for the last four years = 1,00,000 + 1,22,500+ 74,500 + 54,000 = Rs.3,51,000

Average Profits = (3,51,000 / 4) = Rs.87,750

Normal Profits = (5,00,000 x 10/100) = Rs.50,000

Super Profits = Average Profits − Normal Profits = 87,750 – 50,000 = $ 37,750

Goodwill = 37,750 × 3 = Rs. 1,13,250