Q.15.The books of Ram and Bharat showed that the capital employed on 31.12.2016 was Rs. 5,00,000 and the profits for the last 5 years : 2015 Rs. 40,000; 2014 Rs. 50,000; 2013 Rs. 55,000; 2012 Rs. 70,000 and 2011 Rs. 85,000. Calculate the value of goodwill on the basis of 3 years purchase of the average super profits of the last 5 years assuming that the normal rate of return is 10%?

SOLUTION

Given,

Capital employed = Rs 5,00,000

Normal rate of return = 10%

Normal Profit = 5,00,000 x 10

100

=Rs 50,000

Average profit of last five years

=40,000 + 50,000 + 55,000 + 70,000 + 85,000

                          5

= 3,00,000

       5

=Rs 60,000

Super profit = Actual profit – Normal profit

=Rs 60,000 – Rs 50,000

=Rs 10,000

Goodwill = Super profit X Number of year’s purchased

= Rs 10,000 X 3

= Rs 30,000