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Gupta and Bose had a firm in which they had invested ₹ 50,000. On an average, the profits were ₹ 16,000. The normal rate of return in the industry is 15%. Goodwill is to be valued at four years' purchase of profits in excess of profits @ 15% on the money invested. Calculate the  value goodwill.​

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Answer:
Information provided with us:
  • Gupta and Bose had a firm in which they had invested ₹ 50,000
  • On an average, the profits were ₹ 16,000.
  • Normal rate of return in the industry is 15%.
  • No. of years purchase is 4years
  • Normal rate of return is 15%
What we have to calculate:
  • We have to calculate the value of goodwill
We know that,

Normal profit:-

  • Normal profit = Employed capital × Normal rate of return / 100

Goodwill:-

  • Goodwill = Average profit × No. of purchase years

Super profit:-

  • Super Profit = Average profit – Normal profit
Required calculations:
  • Finding out the normal profit by substituting the values in its formula. As we have capital employed is 50000 and normal rate of return is 15%

=> Normal profit = 50000 × (15 / 100)

=> Normal profit = 500 × 15

=> Normal profit = 7500

  • Finding out the super profit by substituting the values of average profit and normal profit.

=> Super profit = 16000 - 7500

=> Super profit = 8500

  • At last we are calculating the value goodwill by substituting the values of super profit as 8500 and no. of years purchase as 4.

=> Goodwill = 8500 × 4

=> Goodwill = 34000

∴ Value of goodwill is ₹ 34000

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