Question 44 of 64intermediate🔧 ApplyNumerical4 marks

The books of Ram and Bharat showed that the firm’s capital on 31.12.2016 was Rs. 5,00,000 and the profits for the last 5 years: 2015 Rs. 40,000; 2014 Rs. 50,000; 2013 Rs. 55,000; 2012 Rs. 70,000 and 2011 Rs. 85,000. Calculate the value of goodwill on the basis of 3 years purchase of the average super profits of the last 5 years assuming that the normal rate of return is 10%?

Correct Answer

Rs. 30,000

Exercise: Questions for Practice | Q: 15 | (Page 53)
For More Understanding

Explanation

This question requires calculation of goodwill using the Super Profits Method. The solution follows the exact pattern shown in Illustration 12 of the textbook context, where similar figures (capital Rs. 5,00,000, normal rate 10%, and identical profit pattern) yield the same result. The key steps involve calculating normal profits on capital employed, finding average profits from the 5-year data, determining super profit as the difference between average and normal profits, and finally multiplying super profit by 3 years' purchase.

Solution Steps

  1. Step 1: Calculate Normal Profits Normal Profits = (Firm's Capital × Normal Rate of Return) / 100 = (Rs. 5,00,000×10000 \times 10) / 100 = Rs. 50,000

  2. Step 2: Calculate Average Profits Total Profits = Rs. 40,000 + Rs. 50,000 + Rs. 55,000 + Rs. 70,000 + Rs. 85,000 = Rs. 3,00,000 Average Profits = Rs. 3,00,000 / 5 = Rs. 60,000

  3. Step 3: Calculate Super Profit Super Profit = Average Profits – Normal Profits = Rs. 60,000 – Rs. 50,000 = Rs. 10,000

  4. Step 4: Calculate Goodwill Goodwill = Super Profit × Number of Years' Purchase = Rs. 10,000×3000 \times 3 = Rs. 30,000

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