Question 10 of 64intermediate🔧 ApplyNumerical4 marks

A firm’s profits during 2013, 2014, 2015 and 2016 were Rs. 16,000; Rs. 20,000; Rs. 24,000 and Rs. 32,000 respectively. The firm has capital investment of Rs. 1,00,000. A fair rate of return on investment is 18% p.a. Compute goodwill based on three years’ purchase of the average super profits for the last four years.

Correct Answer

Rs. 15,000

Exercise: Do It Yourself | Q: 2 | (Page 29)
For More Understanding

Explanation

This question requires calculation of goodwill using the Super Profits Method. The context from Illustration 12 shows the standard formula: Normal Profits = Firm's Capital × Normal Rate of Return / 100, and Super Profit = Average Profits – Normal Profits. Goodwill is then calculated as Super Profit × Number of years' purchase.

Solution Steps

  1. Step 1: Calculate Average Profits Total Profits = Rs. 16,000 + Rs. 20,000 + Rs. 24,000 + Rs. 32,000 = Rs. 92,000 Average Profits = Rs. 92,000 / 4 years = Rs. 23,000

  2. Step 2: Calculate Normal Profits Normal Profits = (Firm's Capital × Normal Rate of Return) / 100 = (Rs. 1,00,000×18000 \times 18) / 100 = Rs. 18,000

  3. Step 3: Calculate Super Profits Super Profit = Average Profits – Normal Profits = Rs. 23,000 – Rs. 18,000 = Rs. 5,000

  4. Step 4: Calculate Goodwill Goodwill = Super Profit × Number of years' purchase = Rs. 5,000×3000 \times 3 = Rs. 15,000

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