Average Profit Earned By a Firm is ₹ 1,00,000 Which Includes Undervaluation of Stock of ₹ 40,000 On an Average Basis

Average profit earned by a firm is ₹ 1,00,000 which includes undervaluation of stock of ₹ 40,000 on an average basis. The capital invested in the business is ₹ 6,30,000 and the normal rate of return is 5%. Calculate goodwill of the firm on the basis of 5 times the super profit.




Average profit earned by a firm = Rs.1,00,000

= Rs. (1,00,000 + 40,000)

= Rs. 1,40,000

Normal Profit = Capital Investment `\times` `"Normal Rate of Return"/100`

= Rs. 6,30,000 x `frac{5}{100}`

= Rs. 31,500.

Super Profit = Actual Average Profit - Normal Profit

= Rs. (1,40,000 - 31,500)

= Rs. 1,08,500

Goodwill = Super Profit x Number of Times

= Rs. (1,08,500 `\times` 5)

= Rs. 5,42,500

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

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