The profits of a firm for the last four years are Rs 80,000, Rs 55,000, Rs (30,000), and Rs 75,000 respectively. The value of the total assets of the firm is Rs 5,50,000 and external liabilities are Rs 2,90,000. The firm expects earn a normal rate of return at 15%. Calculate the value of goodwill of the firm. please explain the answer .
According to the items given in the question, Super Profit method is applied for the calculation of Goodwill.
Step-1 : Calculate average profit
Average Profit =
Step-2: Calculate capital employed
Capital Employed = Total Assets - External Liabilities = 5,50,000 - 2,90,000 = 2,60,000
Step-3: Calculate normal profit on capital employed
Normal Profit =
Step-4: Calculate Super profit
Super Profit = Average Profit - Normal Profit = 45,000 - 39,000 = 6,000
Step-5: Multiply the Super Profits by the Number of Years' Purchase to get the value of goodwill.
The number of years of purchase is not mentioned in the question.
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