Average net profit expected in the future by XYZ firm is Rs 36,000

14 :- Average net profit expected in the future by XYZ firm is Rs 36,000 per year. The Average capital employed in the business by the firm is Rs 2,00,000. The normal rate of return from capital invested in this class of business is 10%. The remuneration of the partners is estimated to be Rs 6,000 p.a. Calculate the value of goodwill on the basis of two years’ purchase of super profit.

Solution:-

Calculation of average profit of the firm
Average profit = Average net profit – Partner’s renumeration
                       = 36,000 – 6,000
                       = Rs 30000

Calculation of Normal profit of the firm
Normal profit = Capital employed x Normal rate of return
     = 2,00,000 x 10%
                    = Rs 20,000

Calculation of Super profit
Super profit = Average profit – Normal profit
                    = 30,000 – 20,000  
= Rs 10,000

Calculation of Goodwill of the firm
Goodwill = Super profit x No. of years purchased
               = 10,000 x 2
               = Rs 20,000