Consider the following information and ascertain the value of Goodwill

1.	Consider the following information and ascertain the value of Goodwill. Total Capital Employed Rs. 5,00,000 Normal Rate of Return 8% Average Profit the last 5 years Rs. 60,000 Remuneration to partners Rs. 15,000 Goodwill is estimated at 3 years purchase of super-profits.
Answer» Average profit = 60000 Remuneration to partner = 15000 Average actual profit = 60000 – 15000 = 45000 Normal profit = Capital employed x Normal rate of Return = 500000×8/100 = 40000 Super profit = Average Actual profit – Normal Profit = 45000 – 40000 = 5000 Goodwill = Super profit x No. of years purchase = 5000×3 = 15000

Consider the following information and ascertain the value of Goodwill. Total Capital Employed Rs. 5,00,000 Normal Rate of Return 8% Average Profit the last 5 years Rs. 60,000 Remuneration to partners Rs. 15,000 Goodwill is estimated at 3 years purchase of super-profits.

Answer»

Average profit = 60000

Remuneration to partner = 15000

Average actual profit = 60000 – 15000 = 45000

Normal profit = Capital employed x Normal rate of Return = 500000×8/100 = 40000

Super profit = Average Actual profit – Normal Profit = 45000 – 40000 = 5000

Goodwill = Super profit x No. of years purchase = 5000×3 = 15000