Question

Capital employed in a business is 2,00,000. The normal rate of return on capital employed is 15%. During the year 2002, the firm earned a profit of Rs. 48,000. Calculate goodwill on the basis of 3 years purchase of super profit?

Answer 1

Capital Employed = Rs. 2,00,000

Actual Profit = Rs. 48,000

Normal Rate of Return 15%

Normal profit = Capital Employed x Normal Rate of Return/100

Super profit = Actual profit – Normal profit 

= 48,000 – 30,000 = Rs. 18,000 

Goodwill = Super Profit × Number of Years Purchase 

= 18,000 × 3 = Rs.54,000.