Average profit earned by a firm is Rs 7,50,000 which includes

23 :- Average profit earned by a firm is Rs 7,50,000 which includes overvaluation of stock of Rs 30,000 on an average basis. The capital invested in the business is Rs 42,00,000 and the normal rate of return is 15%. Calculate the goodwill of the firm on the basis of 3 times the super profit.

Solution:-

Calculation of Actual average profit
Actual average profit = Average profit – Overvaluation of stock
                                 = 7,50,000 – 30,000
                                  = Rs 7,20,000

Calculation of Normal profit
Normal profit = Capital employed x Normal rate of return
                      = 42,00,000 x 15%
                      = Rs 6,30,000

Calculation of Super profit
Super profit = Average profit – Normal profit
                   = 7,20,000 – 6,30,000
                   = Rs 90,000

Calculation of Goodwill of the firm
Goodwill = Super profit x No. of years purchased
               = 90,000 x 3
              = Rs 2,70,000