Raja brothers earn an average profits of Rs 30,000

34 :- Raja brothers earn an average profits of Rs 30,000 with a capital of Rs 2,00,000. The normal rate of return in the business is 10%. Using capitalization of super profit method, workout the value of the goodwill of the firm.

Solution:-

Calculation of Normal profits
Normal profit = Capital employed x Normal rate of return
                      = 2,00,000 x 10/100
                      = Rs 20,000

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

Calculation of Goodwill by capitalization of super profit
Goodwill = Super profit/Normal rate of return
               = 10,000 x 100/10
                = Rs 1,00,000