Question

Sunny and Rohan were partners in a firm sharing profits and losses in the ratio of 2 : 1. Their books showed that the capital employed on 31^st March, 2023 was Rs.7,00,000.
The average profits earned by the firm were Rs.90,000.
Calculate the value of goodwill on the basis of 5 years purchase of super profits assuming that the normal rate of return is 10%.

Hint:

Goodwill based on super profits measures the additional value generated over normal profits and is calculated by multiplying the super profits by the number of years of purchase.

Answer 1

Step 1: Calculate Normal Profits \[ {Normal Profits} = {Capital Employed} \times {Normal Rate of Return} \] \[ = Rs.7,00,000 \times \frac{10}{100} = Rs.70,000 \] Step 2: Calculate Super Profits \[ {Super Profits} = {Average Profits} - {Normal Profits} \] \[ = Rs.90,000 - Rs.70,000 = Rs.20,000 \] Step 3: Calculate Goodwill \[ {Goodwill} = {Super Profits} \times {Years of Purchase} \] \[ = Rs.20,000 \times 5 = Rs.1,00,000 \]