Average Profit Earned By a Firm is ₹ 80,000 Which Includes Undervaluation of Stock of ₹ 8,000 on an Average Basis

Average profit earned by a firm is ₹ 80,000 which includes undervaluation of stock of ₹ 8,000 on an average basis. The capital invested in the business is ​₹ 8,00,000 and the normal rate of return is 8%. Calculate goodwill of the firm on the basis of 7 times the super profit.

Average Normal Profits = Average Profits + Under valuation of Stock 

= Rs. (80,000 + 8,000) = Rs. 88,000

Normal Profits

= Rs. `("Capital Employed"xx"Normal Rate of Return"/100)`

= Rs. `(8,00,000 xx 8/100)`

= Rs. 64,000

Super Profits = Average Profits - Normal Profits

= Rs. (88,000 - 64,000) 

= Rs. 24,000

Goodwill = Super Profit x No. of Years of Purchased

= Rs. 24,000 x 7

= Rs. 1,68,000

Chapter-3 Goodwill: Nature and Valuation-TS.Grewal

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