Firm’s Capital in a business is Rs. 2,00,000. The normal rate of return on firm’s capital is 15%. During the year 2015 the firm earned a profit of Rs. 48,000. Calculate goodwill on the basis of 3 years purchase of super profit?
Rs. 54,000
Explanation
This question tests the student's understanding of calculating goodwill using the Super Profit Method. The student needs to first calculate Normal Profit by applying the normal rate of return on the firm's capital. Then, Super Profit is determined by deducting Normal Profit from the actual profit earned. Finally, Goodwill is calculated by multiplying the Super Profit by the number of years' purchase. The textbook context provides a clear illustration (Illustration 12) showing this exact methodology.
Solution Steps
Step 1: Calculate Normal Profit = (Firm's Capital × Normal Rate of Return) / 100 = (Rs. 2,00,) / 100 = Rs. 30,000
Step 2: Calculate Super Profit = Actual Profit – Normal Profit = Rs. 48,000 – Rs. 30,000 = Rs. 18,000
Step 3: Calculate Goodwill = Super Profit × Number of Years' Purchase = Rs. 18, = Rs. 54,000