Atul and Bipul had a firm in which they had invested Rs 50,000

 11 :-  Atul and Bipul had a firm in which they had invested Rs 50,000. On average, the profits were Rs 16,000. The normal rate of return in the industry is 15%. Goodwill is to be valued at four years’ purchase of profits in excess of profits @ 15% on the money invested. Calculate the value of goodwill.

Solution:-

Calculation of normal profit
Normal profit = Capital employed x Normal rate of return
                       = 50,000 x 15%
                       = Rs 7,500

Calculation of Super profit
Super profit = Average profit – Normal profit
                    = 16,000 – 7,500
                    = Rs 8,500

Calculation of Goodwill of the firm
Goodwill of the firm = Super profit x No. of years purchased
                                = 8,500 x 4
                                = Rs 34,000